<PAGE> 1
EQUITY OFFICE LOGO
November 19, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Equity Office Properties Trust ("EOP") to be held on December 19, 1997, at 8:00
a.m., Chicago time, at One North Franklin Street, 3rd Floor, Chicago, Illinois.
At the Special Meeting, you will be asked to approve EOP's merger with
Beacon Properties Corporation. EOP will be the surviving company in the Merger,
with each outstanding share of common stock of Beacon converted into the right
to receive 1.4063 common shares of EOP. Approval of the Merger requires the
affirmative vote of the holders of a majority of EOP's outstanding common
shares.
The Board of Trustees unanimously supports this strategic combination with
Beacon and believes it will solidify EOP's leadership position in the office
properties industry. We enthusiastically recommend that you approve it.
The investment banking firm of J.P. Morgan Securities Inc. has issued an
opinion to the Board that, as of the date thereof and based upon and subject to
certain matters stated therein, the consideration to be paid by EOP in the
Merger is fair from a financial point of view to EOP. A copy of J.P. Morgan's
fairness opinion is attached as Annex II to the accompanying Joint Proxy
Statement/Prospectus.
The accompanying Joint Proxy Statement/Prospectus provides detailed
information concerning the proposed Merger, the reasons for your Board's
recommendation of the Merger and certain additional information, including that
set forth under the heading "RISK FACTORS" which describes, among other items,
potential adverse effects of the Merger. We urge you to carefully consider all
of the information in the Joint Proxy Statement/Prospectus.
IT IS IMPORTANT THAT YOUR EOP SHARES BE REPRESENTED AT THE SPECIAL MEETING,
REGARDLESS OF THE NUMBER OF SHARES YOU HOLD. THEREFORE, PLEASE COMPLETE, SIGN,
DATE AND RETURN YOUR PROXY CARD AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING.
Sincerely,
SAMUEL ZELL
SAMUEL ZELL
Chairman of the Board
TIMOTHY H.
CALLAHAN
TIMOTHY H. CALLAHAN
President and Chief Executive Officer
EQUITY OFFICE PROPERTIES TRUST
Two North Riverside Plaza - Chicago, Illinois 60606 - Phone: 312.466.3300 - Fax:
312.454.0332 - http://www.equityoffice.com
<PAGE> 2
EQUITY OFFICE PROPERTIES TRUST
TWO NORTH RIVERSIDE PLAZA, SUITE 2200
CHICAGO, ILLINOIS 60606
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 19, 1997
To the Shareholders of Equity Office Properties Trust:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Equity
Office Properties Trust, a Maryland real estate investment trust ("EOP"), will
be held at 8:00 a.m., Chicago time, on December 19, 1997, at One North Franklin
Street, 3rd Floor, Chicago, Illinois (the "Special Meeting") for the following
purposes:
1. To consider and vote upon a proposal to approve the merger (the
"Merger") of Beacon Properties Corporation, a Maryland corporation
("Beacon") with and into EOP, and the Agreement and Plan of Merger, dated
as of September 15, 1997, as amended (the "Agreement"), by and between EOP,
EOP Operating Limited Partnership, a Delaware limited partnership, Beacon
and Beacon Properties, L.P., a Delaware limited partnership. Pursuant to
the Agreement, Beacon will merge with and into EOP, with EOP being the
surviving company. In the Merger, each outstanding share of common stock of
Beacon will be converted into the right to receive 1.4063 common shares of
EOP. A copy of the Agreement is attached as Annex I to the Joint Proxy
Statement/Prospectus accompanying this Notice; and
2. To transact any other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Trustees of EOP has fixed the close of business on November
14, 1997 as the record date for the determination of the holders of EOP common
shares entitled to notice of, and to vote at, the Special Meeting. The Merger,
the Agreement and other related matters are more fully described in the
accompanying Joint Proxy Statement/Prospectus, and the Annexes thereto, which
form a part of this Notice.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY SHAREHOLDER ATTENDING
THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT SHAREHOLDER HAS RETURNED A
PROXY.
BY ORDER OF THE BOARD OF TRUSTEES OF
EQUITY OFFICE PROPERTIES TRUST
STANELY M. STEVENS
STANLEY M. STEVENS
Secretary
November 19, 1997
- --------------------------------------------------------------------------------
<PAGE> 3
JOINT PROXY STATEMENT/PROSPECTUS
EQUITY OFFICE PROPERTIES TRUST SPECIAL MEETING
TO BE HELD ON DECEMBER 19, 1997
BEACON PROPERTIES CORPORATION SPECIAL MEETING
TO BE HELD ON DECEMBER 19, 1997
EQUITY OFFICE PROPERTIES TRUST
COMMON SHARES OF BENEFICIAL INTEREST
This Joint Proxy Statement/Prospectus is being furnished to shareholders of
Equity Office Properties Trust, a Maryland real estate investment trust
(together with its subsidiaries, "EOP") and shareholders of Beacon Properties
Corporation, a Maryland corporation (together with its subsidiaries, "Beacon"),
in connection with the solicitation of proxies by the Board of Trustees of EOP
(the "EOP Board") for use at a Special Meeting of Shareholders of EOP (including
any adjournments or postponements thereof, the "EOP Special Meeting") and by the
Board of Directors of Beacon (the "Beacon Board") for use at a Special Meeting
of Shareholders of Beacon (including any adjournments or postponements thereof,
the "Beacon Special Meeting" and, together with the EOP Special Meeting, the
"Shareholder Meetings"), each to be held on Friday, December 19, 1997 at the
time and place set forth in the accompanying notice.
The purpose of the Shareholder Meetings is to consider and vote upon an
Agreement and Plan of Merger, dated as of September 15, 1997, as amended (the
"Agreement"), among EOP, EOP Operating Limited Partnership, a Delaware limited
partnership ("EOP Partnership"), Beacon and Beacon Properties, L.P., a Delaware
limited partnership ("Beacon Partnership"). The Agreement is attached to this
Joint Proxy Statement/Prospectus as Annex I.
The Agreement provides for a merger of Beacon with and into EOP (the
"Merger") and a merger of Beacon Partnership with and into EOP Partnership (or
into a limited liability company or limited partnership wholly owned directly or
indirectly by EOP Partnership) (the "Partnership Merger" and, together with the
Merger, the "Mergers"). At the effective time of the Mergers, (i) each
outstanding share of common stock, $0.01 par value per share, of Beacon ("Beacon
Common Share") will be converted into the right to receive 1.4063 common shares
of beneficial interest, $0.01 par value per share, of EOP ("EOP Common Shares"),
with cash in lieu of issuance of any fractional interests, (ii) each share of
8.98% Series A Cumulative Redeemable Preferred Stock, liquidation preference
$25.00 per share, of Beacon ("Beacon Preferred Share") will be converted into
the right to receive one 8.98% Series A Cumulative Redeemable Preferred Share,
liquidation preference $25.00 per share, of EOP ("EOP Preferred Share"), (iii)
each common partnership unit of Beacon Partnership ("Beacon Partnership Unit")
will be converted into the right to receive 1.4063 Class A Units of EOP
Partnership ("EOP Partnership Unit"), with cash in lieu of issuance of any
fractional interests, and (iv) each 8.98% Series A Preferred Unit of Beacon
Partnership ("Beacon Preferred Unit") will be converted into the right to
receive one 8.98% Series A Preferred Unit of EOP Partnership. As of November 17,
1997, there were 56,269,234 Beacon Common Shares, 8,000,000 Beacon Preferred
Shares, and 6,938,900 Beacon Partnership Units (excluding those held by Beacon)
outstanding.
Based on the closing price of EOP Common Shares on the New York Stock
Exchange (the "NYSE") of $31 9/16 per share on November 17, 1997, if the
Agreement is approved and the Mergers are consummated, the total market value of
EOP and EOP Partnership would be approximately $8.8 billion. Based on the number
of EOP Common Shares and Beacon Common Shares outstanding on that date,
approximately 33% of the EOP Common Shares expected to be outstanding after the
Mergers would be issued to Beacon shareholders. Based on the exchange ratio and
the closing price of EOP Common Shares on the NYSE on November 17, 1997, each
Beacon shareholder would receive in the Merger EOP Common Shares worth $44.39
for each Beacon Common Share owned on that date. For a description of the
Mergers and the Agreement, see "THE MERGERS."
This Joint Proxy Statement/Prospectus also constitutes a prospectus of EOP
in respect of the EOP Common Shares to be issued to Beacon shareholders in the
Merger. The outstanding EOP Common Shares are, and the EOP Common Shares offered
hereby will be, listed on the NYSE and traded under the symbol "EOP."
This Joint Proxy Statement/Prospectus and the accompanying proxy cards are
first being mailed to shareholders of EOP and Beacon on or about November 21,
1997.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER,
THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, SEE "RISK FACTORS"
BEGINNING ON PAGE 16. SUCH MATTERS INCLUDE:
- Possible changes in the market prices of EOP Common Shares and Beacon
Common Shares prior to the time the Merger becomes effective.
- Possible failure of EOP to manage rapid growth after the Merger.
- Reduction in distributions per share to Beacon shareholders after the
Merger.
- Conflicts of interest due to the fact that certain members of the Beacon
Board and management of Beacon have interests that are different from, or
in addition to, the interests of Beacon shareholders generally, including
payments and rights pursuant to various existing Beacon compensation,
severance and option plans.
- Possible payment by Beacon of a break-up fee and payment by Beacon or EOP
of expenses if the Merger is not consummated.
- Shareholders of EOP and Beacon do not have appraisal rights in connection
with the Merger under Maryland law.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
The date of this Joint Proxy Statement/Prospectus is November 19, 1997.
<PAGE> 4
AVAILABLE INFORMATION
Both EOP and Beacon are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by EOP and Beacon with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices at Suite 1400, 500 West Madison Street, Chicago, Illinois
60661 and Suite 1300, 7 World Trade Center, New York, New York 10005. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the prescribed fees. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding EOP and Beacon
and other registrants that have been filed electronically with the Commission.
The address of such site is http://www.sec.gov. In addition, the EOP Common
Shares, the Beacon Common Shares and the Beacon Preferred Shares are listed on
the New York Stock Exchange (the "NYSE"), and reports and other information
filed by EOP and Beacon with the NYSE can be inspected and copied at the NYSE,
20 Broad Street, New York, New York 10005.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN
DOCUMENTS REGARDING BEACON WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
THESE DOCUMENTS (EXCEPT FOR EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE
WITHOUT CHARGE UPON WRITTEN REQUEST FROM BEACON PROPERTIES CORPORATION, MAILED
TO KATHLEEN MCCARTHY, BEACON PROPERTIES CORPORATION, 50 ROWES WHARF, BOSTON,
MASSACHUSETTS 02110 (FAX (617) 261-0151). TELEPHONE REQUESTS MAY BE DIRECTED TO
MS. MCCARTHY AT (617) 330-1400. IN ORDER TO ALLOW ADEQUATE TIME FOR DELIVERY OF
THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY DECEMBER 1, 1997.
This Joint Proxy Statement/Prospectus is part of a registration statement
on Form S-4 (together with all amendments and exhibits, the "Registration
Statement") filed by EOP with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"). This Joint Proxy Statement/Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules of the
Commission. For further information, reference is made to the Registration
Statement.
All information contained in this Joint Proxy Statement/Prospectus with
respect to EOP, EOP Partnership and EOP's subsidiaries has been supplied by EOP,
and all information with respect to Beacon, Beacon Partnership and Beacon's
subsidiaries has been supplied by Beacon.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE OFFER
CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES,
NOR DOES IT CONSTITUTE AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY
JURISDICTION TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
THE DELIVERY OF THIS JOINT PROXY STATEMENT/ PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
Information contained in or delivered in connection with this Joint Proxy
Statement/Prospectus contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of management for
future operations and projections of revenue and other financial items, which
can be identified by the use of forward-looking terminology such as "may,"
"will," "should," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
cautionary statements set forth under the caption "RISK FACTORS" and elsewhere
in this Joint Proxy Statement/Prospectus identify important factors with respect
to such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in such
forward-looking statements, including, but not limited to, the timely
consummation of the Mergers and integration of EOP's and Beacon's businesses,
EOP's ability to successfully manage rapid growth (including that resulting from
the Mergers), general economic conditions, financial and capital market
conditions, local real estate conditions, the timely reletting of occupied
square footage upon expiration of leases, the timely acquisition of additional
income-producing properties and development sites, and the timely development
and lease-up of other properties.
<PAGE> 5
TABLE OF CONTENTS
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........... vi
SUMMARY..................................................... 1
Parties to the Agreement.................................. 1
Terms of the Merger; Exchange Ratio....................... 2
Shareholder Meetings...................................... 2
Record Dates; Vote Required............................... 2
Approval of Partnership Merger............................ 3
Approval by Preferred Shareholders........................ 3
Recommendations........................................... 3
Opinions of Financial Advisors............................ 5
Effective Time of the Merger.............................. 6
Trustees, Management and Headquarters After the Merger.... 6
Conditions to Consummation of the Mergers................. 6
Anticipated Accounting Treatment.......................... 6
Conduct of Business Pending the Merger.................... 6
Summary Risk Factors...................................... 6
Interests of Certain Persons in the Mergers............... 9
Federal Income Tax Consequences of the Merger; REIT
Qualification.......................................... 9
Resales of EOP Common Shares and EOP Preferred Shares..... 9
Termination............................................... 10
Break-Up Fee and Expenses................................. 10
Acquisition of Beacon Service Companies................... 10
Appraisal Rights.......................................... 10
EQUIVALENT PER SHARE DATA................................... 11
DISTRIBUTION POLICY......................................... 12
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA......... 13
EOP SUMMARY SELECTED CONSOLIDATED AND COMBINED FINANCIAL
DATA...................................................... 14
RISK FACTORS................................................ 16
Share Price Fluctuations Through the Effective Time....... 16
Share Price Fluctuations After the Effective Time......... 16
Failure to Effectively Manage Rapid Growth; Expansion into
New Markets............................................ 16
Status of the Merger as a Tax-Free Reorganization......... 16
Reductions in Distributions Per Share for Beacon
Shareholders After the Merger.......................... 17
Conflicts of Interest Arising from Benefits to Certain
Directors and Officers of Beacon....................... 17
Reduction in Ownership and Voting for Beacon Shareholders
After the Merger....................................... 17
Payments if the Agreement Is Terminated................... 17
Possibility That the Expected Benefits of Merger Will Not
Be Realized............................................ 18
No Appraisal Rights in Connection with the Merger......... 18
Real Estate Risks......................................... 18
Debt Financing............................................ 20
Concentration of Properties in Certain Markets............ 21
Federal Income Tax Risks.................................. 21
Limitations on Changes in Control and of Ownership
Limit.................................................. 23
Managed Property Business and Non-REIT Services........... 24
Conflicts of Interest in Connection with Formation and
Business of EOP........................................ 25
Possible Environmental Liabilities........................ 27
Ownership of EOP Common Shares............................ 28
Dependence on Key Personnel............................... 29
Contingent or Undisclosed Liabilities..................... 29
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i
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THE SPECIAL MEETINGS........................................ 31
EOP Special Meeting....................................... 31
Beacon Special Meeting.................................... 32
THE MERGER.................................................. 35
Background of and Reasons for the Merger.................. 35
Opinions of Financial Advisors............................ 42
Effective Time of the Merger.............................. 51
The Partnership Merger.................................... 52
Exchange Ratios and Exchange of EOP Common Shares, EOP
Preferred Shares and EOP Partnership Units............. 52
Distributions............................................. 53
Effect of Mergers on the Declaration of Trust and the EOP
Bylaws and Agreement of Limited Partnership............ 54
Headquarters.............................................. 54
Trustees and Management................................... 54
Conditions to Consummation of the Mergers................. 54
Representations and Warranties............................ 55
Conduct of Business Pending the Mergers................... 56
No Solicitation........................................... 60
Certain Other Covenants................................... 61
Termination, Extension, Amendment and Waiver.............. 62
Fees and Expenses......................................... 64
Assumption of Beacon's Obligations Under Registration
Rights Agreements...................................... 65
Interests of Certain Persons in the Mergers............... 66
Anticipated Accounting Treatment.......................... 69
Resales of EOP Common Shares and EOP Preferred Shares..... 69
Other Related Transactions................................ 69
APPRAISAL RIGHTS............................................ 70
BUSINESS OF EOP............................................. 71
General................................................... 71
Distribution of EOP Office Properties, Managed Properties
and Parking Facilities by Region (as of September 30,
1997).................................................. 72
Operations................................................ 72
Operational Structure..................................... 72
Formation Transactions.................................... 73
Recent Developments....................................... 74
Business and Growth Strategies............................ 75
Price Range of EOP Common Shares and Distribution
History................................................ 77
EOP SELECTED CONSOLIDATED AND COMBINED FINANCIAL
INFORMATION............................................... 78
EOP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 80
Overview.................................................. 80
General................................................... 80
Results of Operations..................................... 81
Parking Operations........................................ 85
Parking Facilities........................................ 91
Dispositions of Property.................................. 91
Liquidity and Capital Resources........................... 91
Issuance of Common Shares and Units....................... 95
Cash Flows................................................ 95
Capital Improvements...................................... 96
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ii
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Tenant Improvements and Leasing Commission Costs.......... 96
Inflation................................................. 97
Funds from Operations..................................... 98
THE EOP PROPERTIES.......................................... 100
General................................................... 100
EOP Office Properties by Region........................... 100
EOP Office Property Market Sectors and Submarkets -- EOP
Office Property Statistics............................. 101
EOP Parking Facilities.................................... 110
Tenants................................................... 110
Lease Expiration by Region................................ 111
Lease Expirations -- Total Portfolio...................... 112
Lease Distributions....................................... 113
Capital Improvements...................................... 113
Tenant Improvement and Leasing Commission Costs........... 114
Occupancy................................................. 115
Debt Financing............................................ 115
Realty Taxes.............................................. 115
Legal Proceedings......................................... 115
BUSINESS OF BEACON.......................................... 116
General................................................... 116
Operations................................................ 116
Operational Structure..................................... 116
Recent Developments....................................... 116
THE BEACON PROPERTIES....................................... 118
Lease Expirations......................................... 121
Mortgage Indebtedness and Credit Facility................. 123
MARKETS AND COMPETITION OF EOP AND BEACON (ON A COMBINED
BASIS).................................................... 124
MANAGEMENT.................................................. 130
Trustees and Executive and Senior Officers................ 130
Committees of the EOP Board............................... 135
Compensation of the EOP Board; Payment in EOP Common
Shares................................................. 135
Executive Compensation.................................... 136
Option and Restricted Share Plan.......................... 137
401(k) Plan............................................... 137
Supplemental Retirement Savings Plan...................... 137
Employee Share Purchase Plan.............................. 138
Incentive Compensation.................................... 138
Limitation of Liability and Indemnification............... 138
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 140
Sale of EOP Common Shares to Mr. Zell..................... 140
Leases and Parking Operations............................. 140
Equity Group Distributions and Fees....................... 140
Miscellaneous............................................. 141
EOP POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............. 142
Investment Policies....................................... 142
Financing Policies........................................ 143
Lending Policies.......................................... 143
Conflict of Interest Policies............................. 143
Policies with Respect to Other Activities................. 144
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iii
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SHARES OF BENEFICIAL INTEREST............................... 145
General................................................... 145
EOP Common Shares......................................... 145
Preferred Shares.......................................... 146
EOP Preferred Shares...................................... 146
Power to Issue Additional EOP Common Shares and Preferred
Shares................................................. 148
Restrictions on Ownership and Transfer.................... 149
Transfer Agent and Registrar.............................. 150
COMPARATIVE RIGHTS OF SHAREHOLDERS.......................... 151
Capitalization............................................ 151
Voting Rights............................................. 152
Trustees/Directors........................................ 153
Anti-Takeover Provisions.................................. 155
REIT Qualification Provisions............................. 156
Preemptive Rights......................................... 159
Assessment................................................ 160
Conversion; Redemption; Sinking Fund...................... 160
Liquidation Rights........................................ 161
Distributions............................................. 162
Shareholder Meetings...................................... 163
Indemnification........................................... 165
Trustee and Director Liability............................ 167
Amendments to Constituent Documents....................... 167
Mergers; Consolidations; Sales of Assets.................. 168
Character of Assets and Business.......................... 168
CERTAIN PROVISIONS OF MARYLAND LAW AND EOP'S DECLARATION OF
TRUST AND BYLAWS.......................................... 169
Classification and Removal of Board of Trustees; Other
Provisions............................................. 169
Changes in Control Pursuant to Maryland Law............... 169
Amendments to the Declaration of Trust.................... 170
Advance Notice of Trustee Nominations and New Business.... 171
Anti-Takeover Effect of Certain Provisions of Maryland Law
and of the Declaration of Trust and the EOP Bylaws..... 171
Maryland REIT Law Asset Requirements...................... 171
EOP PARTNERSHIP AGREEMENT................................... 172
Capitalization............................................ 172
Issuance of Additional Partnership Interests.............. 172
Capital Contributions..................................... 172
Distributions............................................. 173
Preemptive Rights......................................... 173
Liquidation Preferences................................... 173
Conversion or Redemption of Partnership Interests......... 173
Management................................................ 174
Reimbursement of EOP; Transactions with EOP and Its
Affiliates............................................. 175
Sales of Substantially All of the Assets of EOP
Partnership............................................ 175
Indemnification........................................... 175
Transfer or Pledge of Partnership Interests............... 176
Amendment of the Partnership Agreement.................... 176
Meetings.................................................. 177
Financial Statements and Reports.......................... 177
Term...................................................... 178
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iv
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FEDERAL INCOME TAX CONSIDERATIONS........................... 178
Tax Consequences of the Merger to Beacon Shareholders,
Beacon, and EOP........................................ 179
Pre-Merger Distributions.................................. 180
Taxation of EOP as a REIT -- General...................... 181
Requirements for Qualification as a REIT.................. 182
Taxation of Taxable U.S. Shareholders of EOP Generally.... 189
Backup Withholding for EOP Distributions.................. 191
Taxation of Tax-Exempt Shareholders of EOP................ 192
Taxation of Non-U.S. Shareholders of EOP.................. 192
Tax Aspects of EOP's Ownership of Interests in the ZML
Opportunity Partnerships and EOP Partnership........... 195
Other Tax Consequences for EOP, Its Shareholders and the
Third-Party Service Corporations....................... 196
ERISA CONSIDERATIONS........................................ 197
Status of EOP and EOP Partnership Under ERISA............. 197
EXPERTS..................................................... 199
LEGAL MATTERS............................................... 200
SHAREHOLDER PROPOSALS....................................... 200
OTHER MATTERS............................................... 200
GLOSSARY.................................................... 201
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX I Agreement and Plan of Merger dated September 15,
1997, as amended
ANNEX II Opinion of J.P. Morgan Securities Inc.
ANNEX III Opinion of Morgan Stanley & Co. Incorporated
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v
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by Beacon (File No. 1-2926) with the
Commission under the Exchange Act hereby are incorporated by reference in this
Joint Proxy Statement/Prospectus:
1. Beacon's Annual Report on Form 10-K for the year ended December 31,
1996, filed with the Commission pursuant to the Exchange Act, including all
amendments thereto (the "Beacon Annual Report").
2. Beacon's Quarterly Reports on Form 10-Q for the periods ended March 31,
1997, June 30, 1997 and September 30, 1997, filed with the Commission pursuant
to the Exchange Act, including all amendments thereto.
3. Beacon's Current Reports on Form 8-K dated January 5, 1996, February 15,
1996, July 23, 1996, October 18, 1996, December 18, 1996, December 20, 1996,
March 27, 1997, June 4, 1997, September 15, 1997, October 27, 1997, and November
14, 1997 filed with the Commission pursuant to the Exchange Act, including all
amendments thereto.
4. Beacon's Current Reports on Form 8-K/A dated August 6, 1996 (which
Current Report relates to Beacon's Form 8-K dated July 23, 1996) and April 7,
1997 (which Current Report relates to Beacon's Form 8-K dated March 27, 1997),
filed with the Commission pursuant to the Exchange Act, including all amendments
thereto.
5. The description of Beacon Common Shares contained in Beacon's
Registration Statement on Form 8-A, filed with the Commission pursuant to the
Exchange Act, including all amendments and reports updating such description.
6. The description of Beacon's Preferred Shares contained in Beacon's
Registration Statement on Form 8-A, filed with the Commission pursuant to the
Exchange Act, including all amendments and reports updating such description.
7. The portions of the Beacon 1997 Proxy Statement for the Annual Meeting
of Stockholders held May 22, 1997, filed with the Commission pursuant to the
Exchange Act, including all amendments thereto, that have been incorporated by
reference into the Beacon Annual Report.
All documents filed by Beacon pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act prior to the Shareholder Meetings shall be deemed to be
incorporated by reference herein. Also incorporated by reference herein is the
Agreement which is attached to this Joint Proxy Statement/Prospectus as Annex I.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement/Prospectus to the extent that a
statement contained herein, or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Joint Proxy Statement/Prospectus. As used
herein, "EOP" means Equity Office Properties Trust, a Maryland real estate
investment trust, and one or more of its Subsidiaries (including EOP Operating
Limited Partnership, a Delaware limited partnership ("EOP Partnership")), and
the predecessors thereof or, when describing the Mergers or otherwise as the
context may require, Equity Office Properties Trust only or EOP Partnership
only. As used herein, "Beacon" means Beacon Properties Corporation, a Maryland
corporation and one or more of its Subsidiaries (including Beacon Properties,
L.P., a Delaware limited partnership ("Beacon Partnership")), or, when
describing the Mergers or otherwise as the context may require, Beacon
Properties Corporation only or Beacon Partnership only. See "GLOSSARY" for the
meanings of other terms used herein. Unless otherwise required by the context,
all rental and square footage data is approximate and/or on a weighted average
basis and all property information is presented as of September 30, 1997. All
references to the historical activities of EOP prior to July 11, 1997 refer to
the activities of the EOP Predecessors.
PARTIES TO THE AGREEMENT
EOP. EOP is a fully integrated, self-administered and self-managed real
estate investment trust ("REIT") engaged in owning and operating institutional
quality office buildings and providing a superior level of service to tenants in
central business districts ("CBDs") and suburban markets across the United
States. Institutional quality office buildings generally are considered to be
those that have excellent locations and access, attract high quality tenants,
are well maintained and professionally managed, and achieve among the highest
rent, occupancy and tenant retention rates within their markets. EOP completed
its initial public offering in July 1997. As of September 30, 1997, EOP owned or
had an interest in 93 office properties containing approximately 33.4 million
rentable square feet of office space (the "EOP Office Properties") and owned 16
stand-alone parking facilities containing approximately 16,037 parking spaces
(the "EOP Parking Facilities" and, together with the EOP Office Properties, the
"EOP Properties"). The EOP Properties are located in 48 submarkets in 35 markets
in 20 states and the District of Columbia. The EOP Office Properties, by
rentable square feet, are located 53% in CBDs and 47% in suburban markets. As of
September 30, 1997, the EOP Office Properties were, on a weighted average basis,
93.2% occupied by a total of 3,099 tenants, with no single tenant accounting for
more than 2.3% of annualized rent. An additional 556,000 square feet
(approximately 1.7% of the rentable square footage of the EOP Office Properties)
were leased, with occupancy yet to commence. Since September 30, 1997, EOP has
acquired an additional 21 office properties containing approximately 6.4 million
rentable square feet of office space, thereby increasing the size of its
portfolio to 114 office properties containing approximately 39.8 million
rentable square feet.
All of EOP's assets are owned by, and its operations conducted through, EOP
Partnership and its Subsidiaries. EOP is the managing general partner of EOP
Partnership.
EOP's principal executive offices are located at Two North Riverside Plaza,
22nd Floor, Chicago, Illinois 60606, and EOP's telephone number is (312)
466-3300. For further information concerning EOP, see "BUSINESS OF EOP."
BEACON. Beacon is a fully integrated, self-administered and self-managed
REIT engaged in owning and operating institutional quality office buildings and
certain retail buildings located in CBDs and suburban markets, including Boston,
Atlanta, Chicago, Los Angeles, San Francisco and Washington, D.C. As of the date
hereof, Beacon owns or has an interest in 126 income producing properties
containing approximately 20.7 million rentable square feet of office space (the
"Beacon Properties" and, together with the EOP Properties, the "Properties").
The Beacon Properties are located in 10 submarkets in six markets in five states
and the District of Columbia. The Beacon Properties, by rentable square feet,
are located 68% in suburban markets and 32% in CBDs, primarily Boston and
suburban Boston. As of September 30, 1997, the Beacon Properties were, on a
weighted average basis, approximately 97% leased by a total of approximately
1,280 tenants, with no single tenant accounting for more than 4.0% of annualized
rent.
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All of Beacon's assets are owned by, and its operations conducted through,
Beacon Partnership and its Subsidiaries. Beacon is the sole general partner of
Beacon Partnership.
Beacon's principal executive offices are located at 50 Rowes Wharf, Boston,
Massachusetts 02110, and Beacon's telephone number is (617) 330-1400. For
further information concerning Beacon, see "BUSINESS OF BEACON."
TERMS OF THE MERGER; EXCHANGE RATIO
The Agreement provides for a merger of Beacon with and into EOP (the
"Merger") and a merger of Beacon Partnership with and into EOP Partnership (or
into a limited liability company or limited partnership wholly owned, directly
or indirectly, by EOP Partnership) (the "Partnership Merger" and, together with
the Merger, the "Mergers"). At the Effective Time, (i) each outstanding share of
common stock, $0.01 par value per share, of Beacon ("Beacon Common Share") will
be converted into the right to receive 1.4063 common shares of beneficial
interest, $0.01 par value per share, of EOP ("EOP Common Shares"), with cash in
lieu of issuance of any fractional interests, (ii) each share of 8.98% Series A
Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share,
of Beacon ("Beacon Preferred Share") will be converted into the right to receive
one 8.98% Series A Cumulative Redeemable Preferred Share, liquidation preference
$25.00 per share, of EOP ("EOP Preferred Share"), (iii) each common partnership
unit of Beacon Partnership ("Beacon Partnership Unit") will be converted into
the right to receive 1.4063 Class A Units of EOP Partnership ("EOP Partnership
Units"), with cash in lieu of any fractional interests, and (iv) each 8.98%
Series A Preferred Unit of Beacon Partnership ("Beacon Preferred Unit") will be
converted into the right to receive one 8.98% Series A Preferred Unit of EOP
Partnership ("EOP Preferred Unit"). As of November 17, 1997, there were
56,269,234 Beacon Common Shares, 8,000,000 Beacon Preferred Shares and 6,938,900
Beacon Partnership Units (excluding those held by Beacon) outstanding.
SHAREHOLDER MEETINGS
EOP. The EOP Special Meeting will be held on Friday, December 19, 1997, at
8:00 a.m., Chicago time, at One North Franklin Street, 3rd Floor, Chicago,
Illinois. The purpose of the EOP Special Meeting is to consider and vote upon a
proposal to approve the Merger, the Agreement and the transactions contemplated
thereby.
BEACON. The Beacon Special Meeting will be held on Friday, December 19,
1997, at 9:00 a.m., Boston time, at State Street Bank, 225 Franklin Street,
Boston, Massachusetts. The purpose of the Beacon Special Meeting is to consider
and vote upon a proposal to approve the Merger, the Agreement and the
transactions contemplated thereby. See "THE SPECIAL MEETINGS."
RECORD DATES; VOTE REQUIRED
EOP. Only holders of EOP Common Shares of record at the close of business
on November 14, 1997 (the "EOP Record Date") will be entitled to vote at the EOP
Special Meeting. The affirmative vote of the holders of a majority of all of the
EOP Common Shares entitled to vote on the matter is required to approve the
Merger and the Agreement. Abstentions and "broker non-votes" will have the
effect of votes against the approval of the Merger and the Agreement. As of the
EOP Record Date, there were 161,987,228 EOP Common Shares outstanding and
entitled to vote.
BEACON. Only holders of Beacon Common Shares of record at the close of
business on November 14, 1997 (the "Beacon Record Date" and, together with the
EOP Record Date, the "Record Dates") will be entitled to vote at the Beacon
Special Meeting. The affirmative vote of the holders of two-thirds of the Beacon
Common Shares entitled to vote is required to approve the Merger and the
Agreement. Abstentions and "broker non-votes" will have the effect of votes
against the approval of the Merger and the Agreement. As of the Beacon Record
Date, there were 56,269,234 Beacon Common Shares outstanding and entitled to
vote.
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<PAGE> 13
APPROVAL OF PARTNERSHIP MERGER
By separate Proxy Statement/Prospectus, the Beacon Board, on behalf of
Beacon as the sole general partner of Beacon Partnership, is soliciting proxies
from the holders of Beacon Partnership Units (the "Beacon Unitholders") (other
than Beacon). The Beacon Unitholders are being asked to consider and vote upon
proposals to approve (i) the Partnership Merger and (ii) the transfer by Beacon
of its Beacon Partnership Units to EOP and the withdrawal of Beacon as general
partner of Beacon Partnership which will occur as a result of the Merger. The
Partnership Merger must be approved by the affirmative vote of holders of 85% of
the Beacon Partnership Units entitled to vote thereon. Beacon owns approximately
89% of such Beacon Partnership Units and intends to vote in favor of the
Partnership Merger. The transfer of the Beacon Partnership Units held by Beacon
and its withdrawal as general partner of Beacon Partnership must be approved by
the vote of holders of a majority of the Beacon Partnership Units other than
those held by Beacon. The consummation of the Partnership Merger is conditioned
upon consummation of the Merger, and the Merger will not be consummated if the
Partnership Merger does not receive the required approval of the Beacon
Unitholders. The separate Proxy Statement/Prospectus also constitutes a
Prospectus of EOP Partnership with regard to the EOP Partnership Units to be
issued to the Beacon Unitholders in connection with the Partnership Merger.
APPROVAL BY PREFERRED SHAREHOLDERS
By separate Proxy Statement/Prospectus, the Beacon Board is soliciting
proxies from the holders of Beacon Preferred Shares (the "Beacon Preferred
Shareholders") for use at a special meeting of such shareholders. The Beacon
Preferred Shareholders are being asked to consider and vote upon a proposal to
approve the Merger, the Agreement and the transactions contemplated thereby,
including the conversion of the Beacon Preferred Shares into EOP Preferred
Shares pursuant to the Merger. The Merger and the Agreement must be approved by
the affirmative vote of the holders of two-thirds of all Beacon Preferred Shares
entitled to vote. The consummation of the Merger is conditioned upon receiving
the required approval of the Beacon Preferred Shareholders. The separate Proxy
Statement/Prospectus relating to the special meeting of Beacon Preferred
Shareholders also constitutes a Prospectus of EOP with regard to the EOP
Preferred Shares to be issued to the Beacon Preferred Shareholders pursuant to
the Merger.
RECOMMENDATIONS
EOP. The EOP Board has unanimously approved and adopted, and recommends
that the EOP Shareholders vote FOR approval of, the Merger, the Agreement and
the transactions contemplated thereby. The EOP Board believes that the terms of
the Merger, the Agreement and the transactions contemplated thereby are fair to,
and in the best interests of, EOP, EOP Partnership and their respective security
holders.
In determining to recommend the Merger, the EOP Board considered the
following expected benefits from the Merger: (a) the Merger would solidify EOP's
leadership position in the office properties industry; (b) the Merger would
generate additional operating efficiencies through economies of scale and
anticipated reductions in expenses; (c) the Merger would provide greater access
to the public equity and debt markets; (d) following the Merger, EOP would be a
larger and financially stronger company, which would facilitate additional
growth, including through business combinations with other entities; (e) the
combination of the Beacon Properties with the EOP Properties would enhance EOP's
operations in office markets which EOP believes are attractive, such as
metropolitan Boston, Chicago, Washington, D.C., Atlanta, Los Angeles and San
Francisco; (f) the Merger likely would increase Funds from Operations per EOP
Common Share available for distribution in future periods (as a result of
anticipated reductions in expenses and other factors); (g) the Merger would be
effectuated through the issuance of new equity, rather than through the use of
cash or a public offering of equity or debt securities; and (h) except with
respect to any cash received in lieu of a fractional interest in an EOP Common
Share or with respect to a Pre-Merger Distribution and certain other possible
exceptions, no gain or loss would be recognized by EOP, Beacon or the Beacon
Shareholders who receive EOP Common Shares in exchange for Beacon Common Shares
because the Merger would qualify as a tax-free transaction for federal income
tax purposes. The EOP Board also considered as favorable to its determination
the opinion, analyses and presentations of J.P. Morgan Securities Inc. ("J.P.
Morgan"),
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<PAGE> 14
including the oral opinion, confirmed by a written opinion dated September 15,
1997, of J.P. Morgan, to the effect that, as of the date of such opinion and
based upon and subject to certain matters stated therein, the consideration to
be paid by EOP in connection with the Merger is fair from a financial point of
view to EOP. See "THE MERGER -- Background of and Reasons for the Merger --
EOP's Reasons for the Merger; Recommendation of the EOP Board" and "THE MERGER
- -- Opinions of Financial Advisors -- EOP."
The EOP Board also considered certain potential negative factors and risks
that could arise or would arise from the Merger, including, among other things,
(i) the risk that the anticipated benefits of the Merger to EOP and the EOP
Shareholders may not be realized as a result of possible changes in the real
estate market in general, the inability to achieve the anticipated reductions in
expenses or other potential difficulties in integrating the two companies and
their respective operations, (ii) the fact that the amount of the Merger
Consideration (based upon the closing price of the EOP Common Shares on
September 12, 1997) to be paid by EOP to equity holders of Beacon and Beacon
Partnership represents a 28.4% premium over the closing price of the Beacon
Common Shares on September 12, 1997 (the last trading day prior to the public
announcement of the Merger), (iii) the significant costs involved in connection
with consummating the Mergers, and (iv) the substantial management time and
effort required to effectuate the Mergers and integrate the businesses of EOP
and Beacon. Overall, however, the EOP Board concluded that the expected benefits
significantly outweigh the potential negative factors and risks.
BEACON. The Beacon Board has unanimously approved and adopted, and
recommends that the Beacon Shareholders vote FOR approval of, the Merger, the
Agreement and the transactions contemplated thereby. The Beacon Board believes
that the Merger, the Agreement and the transactions contemplated thereby are
fair to, and in the best interests of, Beacon, Beacon Partnership and their
respective security holders.
In reaching its determination, the Beacon Board consulted with Beacon
management, as well as its financial advisors, legal counsel and accountants and
considered the short-term and long-term interests of Beacon, Beacon Partnership
and their respective security holders. In particular, the Beacon Board
considered the following material factors, all of which it deemed favorable: (a)
the value of the consideration to be received by the Beacon Shareholders in the
Merger would result in a premium as compared to historical and recent market
prices of Beacon Common Shares; (b) the Merger provides an opportunity for
Beacon Shareholders to become equity holders in the largest publicly traded
owner and operator of office properties in the nation, with one of the strongest
management teams in the industry and a combined asset portfolio that will be
more geographically diversified than Beacon's current portfolio; (c) the Merger
would provide increased market capitalization which likely would result in
higher trading volumes for the EOP Common Shares and enhanced liquidity for EOP
Shareholders; (d) the Merger likely would provide cost savings and operating
efficiencies to the surviving company; (e) the Merger is a "stock-for-stock"
rather than a "cash-for-stock" transaction and, thus, will provide Beacon
Shareholders with an opportunity to share in any future appreciation of EOP
Common Shares and will allow Beacon Shareholders to convert their Beacon Common
Shares into EOP Common Shares on a tax-free basis; (f) the Agreement permits the
Beacon Board to receive unsolicited inquiries and proposals concerning other
potential business combinations and to enter into discussions or negotiations
concerning such combinations with third parties to the extent required by the
fiduciary duties of the Beacon Board, and to terminate the Agreement upon
payment to EOP of the Break-Up Fee of up to $75 million if the Beacon Board, in
the exercise of its fiduciary duties, withdraws or amends in any manner adverse
to EOP its approval of the Merger or the Agreement in connection with a Superior
Acquisition Proposal; and (g) Beacon can terminate the Agreement in the event
the average of the closing prices of EOP Common Shares for the twenty
consecutive trading days preceding the seventh trading day prior to the Beacon
Special Meeting is below $27.39. The Beacon Board also considered as favorable
to its determination the opinion, analyses and presentations of Morgan Stanley &
Co. Incorporated ("Morgan Stanley"), including the opinion of Morgan Stanley
dated September 15, 1997, to the effect that, as of the date of such opinion and
based upon and subject to certain matters stated therein, the consideration to
be received by the Beacon Shareholders pursuant to the Agreement is fair from a
financial point of view to the Beacon Shareholders.
The Beacon Board also considered the following potentially negative factors
in its deliberations concerning the Merger: (i) the limited public trading
history and limited public float of EOP; (ii) the
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<PAGE> 15
reduction in distributions per Beacon Common Share for Beacon Shareholders after
the Merger from Beacon's current quarterly distribution of $.50 per Beacon
Common Share to $.42 per Beacon Common Share; (iii) the Exchange Ratio is fixed
and not subject to adjustment and, thus, a decrease in the trading price of EOP
Common Shares prior to the Effective Time would reduce the value of the
consideration paid to Beacon Shareholders in the Merger; (iv) the risk that the
anticipated benefits of the Merger to Beacon Shareholders may not be realized as
a result of possible changes in the real estate market in general, the inability
to achieve the anticipated reductions in expenses or other potential
difficulties in integrating the two companies and their respective operations;
and (v) the significant costs involved in connection with consummating the
Mergers, the substantial management time and effort required to effectuate the
Mergers and integrate the businesses of Beacon and EOP and the related
disruption to Beacon's operations. The Beacon Board also considered the
potential benefits to certain directors and officers discussed in "-- Interests
of Certain Persons in the Mergers" below. Overall, however, the Beacon Board
concluded that the potentially negative factors considered by it were not
sufficient, either individually or collectively, to outweigh the positive
factors considered by the Beacon Board in its deliberations relating to the
Merger.
OPINIONS OF FINANCIAL ADVISORS
EOP. EOP received the oral opinion of J.P. Morgan at the meeting of the EOP
Board on September 14, 1997, which was confirmed in writing on September 15,
1997, to the effect that, as of the respective dates of such opinions, the
consideration to be paid in connection with the Merger is fair from a financial
point of view to EOP.
J.P. Morgan is an internationally recognized investment banking and
financial advisory firm and continually is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
investments for passive and control purposes, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. EOP selected J.P.
Morgan to serve as its financial advisor with respect to the Merger on the basis
of such experience and J.P. Morgan's familiarity with EOP and its operations.
EOP has agreed to pay J.P. Morgan a fee for the delivery of its opinion and
related advisory work, and to indemnify J.P. Morgan against certain liabilities,
including liabilities under the federal securities laws. For additional
information concerning J.P. Morgan and its written opinion, see "THE MERGER --
Opinions of Financial Advisors -- EOP" and J.P. Morgan's written opinion, dated
as of September 15, 1997, attached hereto as Annex II. The written opinion of
J.P. Morgan should be read in its entirety with respect to the assumptions made,
matters considered and limits of the reviews undertaken by J.P. Morgan in
rendering such opinion.
BEACON. Beacon received the oral opinion of Morgan Stanley at the meeting
of the Beacon Board on September 14, 1997, which was confirmed in writing as of
September 15, 1997, to the effect that, as of the respective dates of such
opinions, the proposed consideration to be received by the Beacon Shareholders
pursuant to the Merger is fair from a financial point of view to the Beacon
Shareholders.
Morgan Stanley is an internationally recognized investment banking firm and
is regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
and secondary distributions of listed and unlisted securities, and valuations
for estate, corporate and other purposes. Beacon selected Morgan Stanley as its
financial advisor because of Morgan Stanley's reputation and substantial
experience in transactions such as the Merger and Morgan Stanley's familiarity
with Beacon and its business.
Beacon has agreed to pay Morgan Stanley certain fees, to reimburse Morgan
Stanley for certain of its reasonable out-of-pocket expenses and to indemnify
Morgan Stanley against certain liabilities, including liabilities under the
federal securities laws. For additional information concerning Morgan Stanley
and its written opinion, see "THE MERGER -- Opinions of Financial Advisors --
Beacon" and Morgan Stanley's written opinion, dated September 15, 1997, attached
hereto as Annex III. The written opinion of Morgan Stanley should be read in its
entirety with respect to the assumptions made, matters considered and limits of
the reviews undertaken by Morgan Stanley in rendering such opinion.
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<PAGE> 16
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction or waiver of all conditions to
consummation of the Mergers (see "THE MERGER -- Conditions to Consummation of
the Mergers"), EOP and Beacon will file articles of merger with the State
Department of Assessments and Taxation of Maryland (the "Department"). The
Merger will become effective (the "Effective Time") at such time as will be
specified in the articles of merger, not to exceed 30 days after the articles of
merger are accepted for record by the Department.
TRUSTEES, MANAGEMENT AND HEADQUARTERS AFTER THE MERGER
Following the Effective Time, the trustees of EOP who were trustees
immediately prior thereto will continue to serve for the balance of their
unexpired terms. In addition, Alan M. Leventhal, President, Chief Executive
Officer and a director of Beacon, and Edwin N. Sidman, Chairman of the Beacon
Board, will become trustees of EOP with terms expiring at the first annual
meeting of EOP Shareholders with respect to which notice is mailed subsequent to
the Effective Time. EOP has agreed that Messrs. Leventhal and Sidman will
thereafter be renominated as trustees for terms expiring at the annual meetings
of EOP Shareholders in 2002 and 2001, respectively. Those persons currently
serving as EOP's executive officers and senior management will continue to be
EOP's executive officers and senior management after the Effective Time, and the
location of EOP's principal executive offices will not change. See "THE MERGER
- -- Trustees and Management" and "-- Headquarters."
CONDITIONS TO CONSUMMATION OF THE MERGERS
The consummation of the Mergers is subject to satisfaction or waiver of
certain conditions, including, among other things, obtaining the requisite
approval of the EOP Shareholders, the Beacon Shareholders, the Beacon Preferred
Shareholders and the Beacon Unitholders, and receipt by EOP and Beacon of
opinions of their respective counsel to the effect described in "FEDERAL INCOME
TAX CONSIDERATIONS -- Tax Consequences of the Merger to Beacon Shareholders,
Beacon, and EOP." See "THE MERGER -- Conditions to Consummation of the Mergers."
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method in accordance
with Accounting Principles Board Opinion No. 16. See "THE MERGER -- Anticipated
Accounting Treatment."
CONDUCT OF BUSINESS PENDING THE MERGER
Each of Beacon and Beacon Partnership has agreed that, prior to the
Effective Time, it will, and will cause each of its respective Subsidiaries
which it controls to, conduct its business in the ordinary course, except in
certain circumstances. In addition, each of EOP and EOP Partnership has agreed
that, prior to the Effective Time, it will, and will cause each of its
respective Subsidiaries which it controls to, conduct its business consistent
with certain customary covenants. See "THE MERGER -- Conduct of Business Pending
the Mergers."
SUMMARY RISK FACTORS
In considering whether to approve the Merger, the Agreement and the
transactions contemplated thereby, the EOP Shareholders and the Beacon
Shareholders entitled to vote thereon should carefully consider, in addition to
the other information contained in this Joint Proxy Statement/Prospectus, the
matters discussed under "RISK FACTORS." Such matters include:
- The relative market prices of the EOP Common Shares and the Beacon Common
Shares at the Effective Time may vary significantly from the prices as of
the date of execution of the Agreement, the date hereof or the date on
which the EOP Shareholders and the Beacon Shareholders vote on the Merger
and the Agreement due to changes in the business, operations and
prospects of EOP or Beacon, market assessments of the likelihood that the
Merger will be consummated and the timing
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thereof, general market and economic conditions and other factors such
as market perception of REIT shares and office REIT shares generally.
See "RISK FACTORS -- Share Price Fluctuations Through the Effective
Time."
- There can be no assurance as to the trading volume or market price of the
EOP Common Shares after the Effective Time. Events outside the control of
EOP which could adversely affect the market value of EOP's assets, as
well as the market price of the EOP Common Shares, may occur after the
Effective Time. See "RISK FACTORS -- Share Price Fluctuations After the
Effective Time."
- After the Merger, EOP will own or have an interest in (i) 245 office
properties containing approximately 62.0 million rentable square feet of
office space, representing an approximate 92% increase in the office
space in EOP's portfolio (on a square foot basis) since EOP's IPO in
July 1997, and (ii) 17 stand-alone parking facilities containing
approximately 16,749 parking spaces, representing an approximate 13%
increase in the parking spaces in EOP's portfolio since EOP's IPO. The
failure to effectively manage rapid growth, including growth through the
Mergers, could have a material adverse effect on operating results and
financial condition of EOP and, consequently, on EOP's cash flow and
ability to make expected distributions to shareholders. See "RISK
FACTORS -- Failure to Effectively Manage Rapid Growth; Expansion into
New Markets."
- The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Code, such that neither Beacon nor the Beacon
Shareholders would recognize taxable gain as a result of the Merger
(except in connection with the receipt of cash in lieu of fractional
share interests and the receipt of any Pre-Merger Distributions).
However, in the event that the Merger were not to qualify as a tax-free
reorganization under Section 368(a) of the Code, each Beacon Shareholder
would recognize taxable income. See "RISK FACTORS -- Status of the Merger
as a Tax-Free Reorganization."
- Assuming EOP continues to make regular quarterly distributions at its
current quarterly rate of $.30 per share after the Merger, each Beacon
Shareholder will receive an equivalent quarterly distribution payment of
$.42 per share, as compared to Beacon's most recent quarterly
distribution of $.50 per share. Based on the Exchange Ratio, the Beacon
Shareholders will receive an adjusted annualized distribution of $1.69
per share, representing a 16% decline from the Beacon Shareholders'
current annual distribution of $2.00 per share. See "RISK FACTORS --
Reductions in Distributions Per Share for Beacon Shareholders After the
Merger."
- Conflicts of interest exist due to the fact that certain members of the
Beacon Board and the management of Beacon have certain interests in, and
will receive benefits from, the Merger that are different from, or in
addition to, the interests of, and the benefits to, Beacon Shareholders
generally. Upon, and at various times following, the closing of the
transactions under the Agreement, certain executives of Beacon and its
affiliates will be entitled to receive severance payments (aggregating
approximately $9.7 million), performance bonuses (aggregating
approximately $31.3 million) and payments for taxes (currently estimated
to aggregate approximately $18.8 million) pursuant to various existing
Beacon incentive compensation, severance and other plans, arrangements or
transactions, as well as the full vesting and immediate exercisability of
all outstanding options to acquire Beacon Common Shares with an aggregate
value (net of exercise price and assuming a price of $43 3/8 per Beacon
Common Share (the closing price per share of Beacon Common Shares on
November 17, 1997)) to such persons of approximately $38.8 million. In
addition, certain officers and directors of Beacon and members of their
families will benefit from certain agreements which are intended to
permit such persons to continue to defer federal taxable income that
otherwise might be recognized upon the sale of, or refinancing of
indebtedness with respect to, certain Beacon Properties. See "RISK
FACTORS -- Conflicts of Interest Arising from Benefits to Certain
Directors and Officers of Beacon."
- Immediately after the Merger, Beacon Shareholders will own approximately
33% of EOP. However, in the future, additional EOP Common Shares may be
issued in offerings of EOP Common Shares, in connection with
share-for-share mergers, in connection with redemptions of EOP
Partnership Units, or otherwise, thereby reducing the percentage interest
of Beacon Shareholders in EOP. After the Merger,
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Beacon Shareholders will not have separate approval rights with respect
to any actions or decisions of EOP. See "RISK FACTORS -- Reduction in
Ownership and Voting for Beacon Shareholders After the Merger."
- The Agreement provides for the payment by Beacon of a Break-Up Fee of up
to $75 million if the Agreement is terminated by EOP or Beacon under
certain circumstances, and/or reimbursement of expenses by EOP or Beacon
of up to $10 million if the Merger is terminated by EOP or Beacon under
certain other circumstances. See "RISK FACTORS -- Payments if the
Agreement Is Terminated."
- The Merger Consideration (based upon the closing price of the EOP Common
Shares on September 12, 1997) to be paid by EOP to Beacon Shareholders
and Beacon Unitholders represents a 28.4% premium over the closing price
of the Beacon Common Shares on September 12, 1997 (the last trading day
prior to the public announcement of the Merger). Nevertheless, the Merger
has an accretive (rather than a dilutive) effect on EOP's Funds from
Operations per share on a pro forma basis for 1996 and for the nine
months ended September 30, 1997, and is expected to have an accretive
effect for future periods. However, no assurance can be given that the
Merger will not have a dilutive effect on EOP's Funds from Operations per
share. See "RISK FACTORS -- Possibility That the Expected Benefits of the
Merger Will Not Be Realized."
- The EOP Shareholders and the Beacon Shareholders do not have appraisal
rights in connection with the Merger under Maryland law. See "RISK
FACTORS -- No Appraisal Rights in Connection with the Merger."
- EOP's investments are and will be subject to varying degrees of risk
normally associated with the ownership of real property, including the
need to renew leases or re-lease space upon lease expirations and to pay
renovation and re-leasing costs in connection therewith, the effect of
economic and other conditions on property cash flows and values, the
ability of tenants to make lease payments, the ability of a property to
generate revenue sufficient to meet operating expenses (including future
debt service), the illiquidity of real estate investments and the risk of
material losses in excess of insurance proceeds. Each of these risks
could decrease Cash Available for Distribution. See "RISK FACTORS -- Real
Estate Risks."
- EOP's investments are and will be subject to varying degrees of risk
normally associated with debt financing, including the risk that EOP's
cash flow will be insufficient to pay distributions at expected levels
and meet required payments of principal and interest, the risk that
existing indebtedness on its properties (which in virtually all cases
will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancing will not be as favorable
as the terms of existing indebtedness, and the risk of increases in
interest rates on variable rate indebtedness. In addition, the inability
to refinance outstanding mortgage indebtedness upon maturity or refinance
such indebtedness on favorable terms could result in foreclosures on
properties pledged as collateral for such indebtedness. See "RISK FACTORS
-- Debt Financing."
- Upon consummation of the Merger, approximately 17.6% of the EOP Office
Properties (in number of buildings) and 15.6% (in square footage) will be
located in California, and 14.3% (in number of buildings) and 12.1% (in
square footage) will be located in metropolitan Boston. See "RISK FACTORS
-- Concentration of Properties in Certain Markets."
- EOP would be taxed as a corporation were it to fail to qualify as a REIT
for federal income tax purposes, resulting in liability for certain
federal, state and local income taxes and a decrease in Cash Available
for Distribution. See "RISK FACTORS -- Federal Income Tax Risks."
- EOP's ability to limit, for purposes of maintaining its REIT status, the
actual or constructive ownership of EOP Common Shares to 9.9% of the
outstanding EOP Common Shares, and of certain other provisions contained
in the organizational documents of EOP and EOP Partnership, could have
the effect of delaying, deferring or preventing a transaction or change
in control of EOP that might involve a premium price for the EOP Common
Shares or otherwise would be in the best interests of the EOP
8
<PAGE> 19
Shareholders. See "RISK FACTORS -- Limitations on Changes in Control and
of Ownership Limit."
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Certain directors, executives and employees of Beacon and its affiliates
and certain holders of Beacon Common Shares and/or Beacon Partnership Units have
certain interests in the Mergers that are different from, or in addition to, the
interests generally of the Beacon Shareholders. These interests include
interests in Beacon Stock Options, severance, incentive compensation and other
benefit plans, certain agreements restricting the sale or refinancing of certain
Beacon Properties intended to permit the beneficiaries to defer certain taxes,
the Stock Purchase Agreements, and indemnification. See "THE MERGER -- Interests
of Certain Persons in the Mergers." The Beacon Board and the EOP Board were
aware of these interests and considered them, among other matters, in approving
the Mergers, the Agreement and the transactions contemplated thereby.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER; REIT QUALIFICATION
The Merger is intended to qualify as a reorganization as defined in Section
368(a) of the Code, with the result that the Beacon Shareholders will not
recognize gain or loss on the exchange of Beacon Common Shares for EOP Common
Shares except with respect to the receipt of cash in lieu of fractional stock
interests (and the receipt of any Pre-Merger Distributions, see "FEDERAL INCOME
TAX CONSIDERATIONS -- Pre-Merger Distributions"). A condition to the
consummation of the Merger is the receipt by each of EOP and Beacon of an
opinion of their respective counsel as to the qualification of the Merger as a
reorganization under Section 368(a) of the Code. See "THE MERGER -- Conditions
to Consummation of the Mergers" and "FEDERAL INCOME TAX CONSIDERATIONS -- Tax
Consequences of the Merger to Beacon Shareholders, Beacon, and EOP."
Hogan & Hartson L.L.P., counsel to EOP, will provide to EOP and Beacon an
opinion to the effect that, commencing with its formation on July 11, 1997, EOP
has been organized and has operated in such a manner so as to qualify for
taxation as a REIT under the Code and that, after giving effect to the Merger,
EOP's proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT. Goodwin, Procter & Hoar
LLP, counsel to Beacon, will deliver an opinion to EOP, as a condition to the
Merger, to the effect that for Beacon's taxable year ended December 31, 1994,
and for all subsequent taxable years ending on or before the Effective Time,
Beacon was organized and has operated in conformity with the requirements for
qualification as a REIT under the Code.
RESALES OF EOP COMMON SHARES AND EOP PREFERRED SHARES
The EOP Common Shares and the EOP Preferred Shares to be issued to holders
of the Beacon Common Shares and the Beacon Preferred Shares, respectively, upon
consummation of the Merger, and the EOP Common Shares reserved for issuance upon
redemption of EOP Partnership Units to be issued to holders of Beacon
Partnership Units upon consummation of the Partnership Merger, are registered
under the Securities Act, and will be transferable freely and without
restriction by those holders of Beacon Common Shares, Beacon Preferred Shares
and Beacon Partnership Units who receive such shares or units following the
consummation of the Mergers and who are not deemed to be "affiliates" (as
defined under Rule 145 of the Securities Act generally to include trustees,
directors, certain executive officers and ten percent or more shareholders) of
EOP or Beacon. The EOP Common Shares to be issued in the Merger to affiliates of
Beacon will be tradeable within the volume and manner of sale limitations of
Rule 144 under the Securities Act. Beacon has agreed to use its reasonable best
efforts to cause each person who may be deemed an "affiliate" of Beacon at the
time of the Shareholder Meetings to deliver to EOP a written agreement that such
person will not dispose of EOP Common Shares received by such person in the
Merger except in compliance with the Securities Act. See "THE MERGER -- Resales
of EOP Common Shares and EOP Preferred Shares."
9
<PAGE> 20
TERMINATION
The Agreement may be terminated under certain circumstances at any time
prior to the Effective Time, whether before or after the approval of the Merger
by the EOP Shareholders or the Beacon Shareholders. See "THE MERGER --
Termination, Extension, Amendment and Waiver."
BREAK-UP FEE AND EXPENSES
The Agreement provides for the payment by Beacon of a Break-Up Fee of up to
$75 million if the Agreement is terminated by EOP or Beacon under certain
circumstances. In addition, the Agreement provides for reimbursement to EOP or
Beacon of expenses of up to $10 million if the Agreement is terminated by EOP or
Beacon under certain other circumstances. See "THE MERGER -- Fees and Expenses."
ACQUISITION OF BEACON SERVICE COMPANIES
Beacon manages approximately 2.2 million square feet of commercial and
office space owned by third parties through Beacon Property Management
Corporation, a Massachusetts corporation ("Beacon Management Company"), and
conducts third-party tenant design services through Beacon Design Corporation, a
Massachusetts corporation ("Beacon Design Company"). The holders (which are
certain trusts affiliated with Messrs. Alan Leventhal and Sidman) of 99% of the
voting stock in each of Beacon Management Company, Beacon Design Company and
Beacon Construction Company, Inc., a Massachusetts corporation ("Beacon
Construction Company" and, together with Beacon Management Company and Beacon
Design Company, the "Beacon Service Companies"), have agreed to sell such stock
to Equity Office Properties Management Corp., a Delaware corporation in which
EOP owns a 95% non-voting equity interest ("EOP Management Corp."), or its
designees, upon the consummation of the Mergers pursuant to certain stock
purchase agreements (the "Stock Purchase Agreements"). The remaining interests
in the Beacon Service Companies are held by Beacon Partnership. Upon the
consummation of the Partnership Merger and the transactions contemplated by the
Stock Purchase Agreements, EOP Management Corp. will succeed to Beacon's
third-party management and design businesses. EOP Management Corp. expects to
cease operating Beacon Construction Company's construction business upon the
completion of Beacon Construction Company's existing contracts.
APPRAISAL RIGHTS
Neither holders of EOP Common Shares nor holders of Beacon Common Shares
will have statutory rights to appraisal of their shares in connection with the
Merger. See "APPRAISAL RIGHTS."
10
<PAGE> 21
EQUIVALENT PER SHARE DATA
The following summary presents selected comparative unaudited per share
information for Beacon on a historical basis and EOP and Beacon on a pro forma
combined basis assuming the Mergers had been effective throughout the periods
presented. Such per share amounts allow comparison of historical information
with respect to the value of one Beacon Common Share to the corresponding
information with respect to the projected value of one Beacon Common Share as a
result of the Merger and are computed by multiplying the pro forma combined per
share amounts by the Exchange Ratio.
EOP income statement information for the year ended December 31, 1996 and
balance sheet information as of December 31, 1996 are based on, and should be
read in conjunction with, the consolidated audited financial statements of EOP
included in this Joint Proxy Statement/Prospectus. Beacon income statement
information for the year ended December 31, 1996 and balance sheet information
as of December 31, 1996 are based on, and should be read in conjunction with,
the consolidated audited financial statements of Beacon incorporated herein by
reference. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE." The
remaining financial information is based on the respective historical
consolidated unaudited financial statements of EOP and Beacon and the notes
thereto. In the opinion of the respective managements of EOP and Beacon, all
adjustments necessary to present a fair statement of results of interim periods
of EOP and Beacon (which adjustments were of a normal recurring nature) have
been included. Results for EOP and Beacon for the nine months ended September
30, 1997 are not necessarily indicative of results to be expected for their
entire fiscal years, nor are pro forma amounts necessarily indicative of results
that will be obtained on a combined basis.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
NET INCOME PER COMMON SHARE (A)
EOP.................................................... N/A N/A
Beacon................................................. $ 1.38 $1.21
EOP and Beacon pro forma combined...................... $ .80 $1.02
Beacon pro forma equivalent (B)........................ $ 1.13 $1.43
CASH DISTRIBUTIONS DECLARED PER COMMON SHARE
EOP.................................................... N/A N/A
Beacon................................................. $ 1.425 $1.765
EOP and Beacon pro forma combined(C)................... $ .90 $1.20
Beacon pro forma equivalent (B)........................ $ 1.266 $1.69
SHAREHOLDERS' EQUITY (BOOK VALUE) PER COMMON SHARE
(end of period)
EOP.................................................... $20.78 --
Beacon................................................. $21.88 --
EOP and Beacon pro forma combined...................... $24.64 --
Beacon pro forma equivalent (B)........................ $34.65 --
</TABLE>
- -------------------------
(A) The Merger is not dilutive and, therefore, fully diluted net income per
common share is not presented herein.
(B) The Beacon pro forma equivalent is determined by multiplying the
Exchange Ratio (1.4063) by the EOP and Beacon pro forma combined per share
amounts so that the per share amounts are equated to the comparative values for
each Beacon Common Share.
(C) Based on actual cash distributions declared by EOP, presented on an
annualized basis.
11
<PAGE> 22
The following table presents the weighted average number of common shares
outstanding relevant to the calculation of net income per share as shown in the
preceding table.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
EOP......................................................... N/A N/A
Beacon...................................................... 52,612,891 29,932,327
EOP and Beacon pro forma combined........................... 245,453,137 245,453,137
</TABLE>
MARKET PRICES OF COMMON SHARES
The following table sets forth the price per EOP Common Share and Beacon
Common Share based on the last reported sale prices per share on the NYSE on
September 12, 1997, the last trading day prior to public announcement of the
execution of the Agreement, and on November 17, 1997, the most recent date for
which prices are available prior to mailing this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
PRICE PER SHARE
------------------------------------------------------
HISTORICAL
----------------------------- BEACON
EOP BEACON PRO FORMA EQUIVALENT(a)
--- ------ -----------------------
<S> <C> <C> <C>
September 12, 1997(b).................................... $33 7/16 $36 5/8 $47.02
November 17, 1997........................................ $31 9/16 $43 3/8 $44.39
</TABLE>
- -------------------------
(a) Computed by multiplying the last sale price of EOP Common Shares by the
Exchange Ratio.
(b) The average last reported sale price per EOP Common Share for the five
trading days preceding September 12, 1997 was $32.225. The Beacon pro forma
equivalent, based on such five trading days, would be $45.32.
DISTRIBUTION POLICY
In order to remain qualified as a REIT under the Code, EOP must distribute
to the EOP Shareholders at least 95% of its taxable income (other than net
capital gain) annually. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements
for Qualification as a REIT -- Annual Distribution Requirements Applicable to
REITs."
Holders of EOP Common Shares are entitled to cash distributions when, if
and as declared by the EOP Board. There can be no assurance as to the payment of
distributions on EOP Common Shares in the future because such payment will
depend upon the earnings and financial condition of EOP, as well as other
related factors. The Declaration of Trust permits the issuance of preferred
shares of beneficial interest having the right to receive distributions before
distributions on the EOP Common Shares are declared or paid. The EOP Preferred
Shares will have such preferential distribution rights as described below. The
Maryland REIT Law provides that EOP may not pay distributions if, after giving
effect to the distribution, EOP would be insolvent or if the distribution
exceeds the surplus of EOP. See "COMPARATIVE RIGHTS OF SHAREHOLDERS --
Distributions."
12
<PAGE> 23
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth the summary unaudited pro forma combined
financial data for EOP and Beacon as a combined entity, giving effect to the
Merger as if it had occurred on the dates indicated herein, after giving effect
to the pro forma adjustments and additional adjustments related to certain other
EOP and Beacon transactions, primarily property acquisitions, which have either
occurred or are probable of occurring subsequent to September 30, 1997 as
described in the notes to the pre-Merger unaudited pro forma combined financial
statements for EOP appearing elsewhere in this Joint Proxy Statement/Prospectus,
and for Beacon which are incorporated herein by reference.
The unaudited pro forma combined operating and other data are presented as
if the Merger had been consummated at the beginning of each period presented.
The unaudited pro forma combined balance sheet data at September 30, 1997 is
presented as if the Merger and certain other EOP and Beacon transactions,
primarily property acquisitions, had occurred on September 30, 1997. In the
opinion of management, all adjustments necessary to reflect the effects of these
transactions have been made. The Merger has been accounted for under the
purchase method of accounting in accordance with the Accounting Principles Board
Opinion No. 16.
The pro forma financial information should be read in conjunction with, and
is qualified in its entirety by, the respective historical audited financial
statements and notes thereto of EOP set forth in this Joint Proxy
Statement/Prospectus and of Beacon incorporated by reference into this Joint
Proxy Statement/Prospectus and the unaudited pro forma financial statements and
notes thereto of EOP appearing elsewhere in this Joint Proxy
Statement/Prospectus and of Beacon incorporated herein by reference.
The unaudited pro forma operating data and other data are presented for
comparative purposes only and are not necessarily indicative of what the actual
combined results of operations of EOP and Beacon would have been for the periods
presented, nor does such data purport to represent the results of future
periods.
<TABLE>
<CAPTION>
PRO FORMA FOR THE NINE MONTHS PRO FORMA FOR THE YEAR ENDED
ENDED SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------------------- ----------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA:
Revenue:
Rental................................................. $ 784,519 $ 967,834
Tenant reimbursements.................................. 143,910 166,822
Parking................................................ 43,430 54,314
Other.................................................. 21,294 42,578
Management fees........................................ 6,286 8,125
Interest............................................... 19,930 21,143
------------ -----------
Total revenue...................................... 1,019,369 1,260,816
------------ -----------
Expenses:
Property operating..................................... 362,313 462,286
Interest............................................... 193,032 249,522
Depreciation and amortization.......................... 185,352 244,998
General and administrative............................. 39,612 32,644
------------ -----------
Total expenses..................................... 780,309 989,450
------------ -----------
Income before allocation to minority interests, income
from investment in unconsolidated joint venture, gain
on sale of real estate and extraordinary items......... 239,060 271,366
Discontinued operations:
Loss from operations -- Construction Company........... (2,263) (2,609)
Loss on sale -- Construction Company................... -- (249)
Minority interests:
Operating Partnership.................................. (22,108) (28,302)
Partially owned properties............................. (1,233) (2,142)
Income from investment in unconsolidated joint
ventures............................................... 9,069 9,264
Gain on sale of real estate.............................. -- 21,843
Preferred dividends...................................... (13,470) (17,960)
------------ -----------
Income before extraordinary items........................ 209,055 251,211
Extraordinary items...................................... (12,929) --
------------ -----------
Net income............................................... $ 196,126 $ 251,211
============ ===========
Net income per Common Share.............................. $.80 $1.02
=========== ==========
Weighted average Common Shares outstanding............... 245,453 245,453
============ ===========
Balance Sheet Data:
(at end of period)
Real estate, after accumulated depreciation............ $10,299,868
============
Total assets........................................... $10,720,657
============
Total debt............................................. $ 3,525,303
============
Total liabilities...................................... $ 3,763,481
============
Minority interests..................................... $ 709,710
============
Shareholders' equity................................... $ 6,247,466
============
</TABLE>
13
<PAGE> 24
EOP SUMMARY SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA
The following sets forth summary selected consolidated and combined
financial and operating information on an historical basis for EOP and the EOP
Predecessors. The following information should be read in conjunction with the
consolidated and combined financial statements and notes thereto of EOP and the
EOP Predecessors included elsewhere in this Joint Proxy Statement/Prospectus.
The summary selected consolidated historical financial and operating information
of EOP at September 30, 1997 and for the period from July 11, 1997 to September
30, 1997, has been derived from the historical financial and operating
information of EOP. The summary selected combined historical and operating
information of the EOP Predecessors for the period from January 1, 1997 to July
10, 1997 and the nine months ended September 30, 1996, has been derived from the
historical unaudited combined financial statements of the EOP Predecessors. The
summary selected combined historical financial and operating information of the
EOP Predecessors at December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, has been derived from the historical
combined financial statements of the EOP Predecessors audited by Ernst & Young
LLP, independent auditors, whose report with respect thereto is included
elsewhere in this Joint Proxy Statement/Prospectus. The summary selected
combined historical financial and operating information of the EOP Predecessors
at December 31, 1994, 1993 and 1992, and for each of the two years in the period
ended December 31, 1993, has been derived from the historical unaudited combined
financial statements of the EOP Predecessors.
<TABLE>
<CAPTION>
EOP
EOP FOR THE PREDECESSORS EOP PREDECESSORS
PERIOD FROM FOR THE PERIOD NINE MONTHS
JULY 11, 1997 FROM ENDED
TO JANUARY 1, SEPTEMBER 30,
SEPTEMBER 30, 1997 TO ----------------
1997 JULY 10, 1997 1996
------------- -------------- ----
<S> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental, parking and other............. $ 162,290 $ 327,017 $ 343,660
========== ========= ========
Total Revenue....................... $ 164,568 339,104 353,237
========== ========= ========
Expenses:
Interest.............................. 25,793 80,481 87,551
Depreciation and amortization......... 24,161 66,034 69,193
Property operating expenses(1)........ 62,885 127,285 141,823
General and administrative............ 5,855 17,201 16,278
Provision for value impairment........ 0 0 0
---------- --------- --------
Total Expenses...................... $ 118,694 $ 291,001 $ 314,845
========== ========= ========
Income before (income) loss allocated
to minority interests, income from
investments in unconsolidated joint
ventures, gain on sale of real estate,
and extraordinary items............... $ 45,874 $ 48,103 $ 38,392
Minority interests allocation.......... (2,866) (912) (2,166)
Income from investments in
unconsolidated joint ventures......... 1,426 1,982 1,554
Gain on sale of real estate and
extraordinary items................... (12,930) 12,236 5,262
---------- --------- --------
Net income.......................... $ 31,504 $ 61,409 $ 43,042
========== ========= ========
Net income per common share......... $ .21
==========
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in real estate after
accumulated depreciation.............. $5,000,159 -- --
Total assets........................ 5,355,922 -- --
Mortgage debt, notes payable and
revolving line of credit.............. 1,716,458 -- --
Total liabilities................... 1,892,170 -- --
Minority interests..................... 310,045 -- --
Shareholders'/Owners' equity........... 3,153,707 -- --
OTHER DATA:
General and administrative expenses as
a percentage of total revenues........ 3.6% -- 4.6%
Number of Office Properties owned at
period end(2)(3)...................... 93 -- 78
Net rental square feet of Office
Properties owned at period end (in
millions)(2).......................... 33.4 -- 27.8
Occupancy of Office Properties owned at
period end(2)......................... 93% -- 89%
Number of Parking Facilities owned at
period end............................ 16 -- 3
Number of spaces at Parking Facilities
owned at period end................... 16,037 -- 7,321
Funds from Operations(4)............... $ 70,148 $ 113,022 $ 103,798
Cash flow from operating activities.... $ 59,665 $ 95,960 $ 89,685
Cash flow from investing activities.... $ (85,634) $(571,068) $ (589,340)
Cash flow from financing activities.... $ 158,593 $ 245,851 $ 530,280
Ratio of earnings to fixed charges..... 2.57 1.52 1.41
<CAPTION>
EOP PREDECESSORS (COMBINED HISTORICAL) YEARS ENDED
DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental, parking and other............. $ 493,396 $ 356,959 $ 230,428 $ 150,315 $ 96,787
========== ========== ========== ========== ========
Total Revenue....................... $ 508,124 $ 371,457 $ 240,878 $ 159,246 $107,154
========== ========== ========== ========== ========
Expenses:
Interest.............................. $ 119,595 $ 100,566 $ 59,316 $ 36,755 $ 25,775
Depreciation and amortization......... 96,237 74,156 46,905 29,752 19,266
Property operating expenses(1)........ 201,067 151,488 107,412 74,028 48,856
General and administrative............ 23,145 21,987 15,603 12,012 8,720
Provision for value impairment........ 0 20,248 0 0 0
---------- ---------- ---------- ---------- --------
Total Expenses...................... $ 440,044 $ 368,445 $ 229,236 $ 152,547 $102,617
========== ========== ========== ========== ========
Income before (income) loss allocated
to minority interests, income from
investments in unconsolidated joint
ventures, gain on sale of real estate,
and extraordinary items............... $ 68,080 $ 3,012 $ 11,642 $ 6,699 $ 4,537
Minority interests allocation.......... (2,086) (2,129) 1,437 1,772 1,793
Income from investments in
unconsolidated joint ventures......... 2,093 2,305 1,778 0 0
Gain on sale of real estate and
extraordinary items................... 5,338 31,271 1,705 -- --
---------- ---------- ---------- ---------- --------
Net income.......................... $ 73,425 $ 34,459 $ 16,562 $ 8,471 $ 6,330
========== ========== ========== ========== ========
Net income per common share.........
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in real estate after
accumulated depreciation.............. $3,291,815 $2,393,403 $1,815,160 $1,220,268 $820,805
Total assets........................ 3,912,565 2,650,890 2,090,933 1,318,644 912,631
Mortgage debt, notes payable and
revolving line of credit.............. 1,964,892 1,434,827 1,261,156 798,897 526,830
Total liabilities................... 2,174,483 1,529,334 1,350,552 845,315 552,666
Minority interests..................... 11,080 31,587 9,283 (15,298) (14,133)
Shareholders'/Owners' equity........... 1,727,002 1,089,969 731,098 488,627 374,098
OTHER DATA:
General and administrative expenses as
a percentage of total revenues........ 4.6% 5.9% 6.5% 7.5% 8.1%
Number of Office Properties owned at
period end(2)(3)...................... 83 73 63 48 33
Net rental square feet of Office
Properties owned at period end (in
millions)(2).......................... 29.2 23.1 18.5 13.6 9.1
Occupancy of Office Properties owned at
period end(2)......................... 90% 86% 88% 80% 73%
Number of Parking Facilities owned at
period end............................ 10 3 0 0 0
Number of spaces at Parking Facilities
owned at period end................... 7,321 3,323 0 0 0
Funds from Operations(4)............... $ 160,460 96,104 $ 60,372 -- --
Cash flow from operating activities.... $ 165,975 $ 93,878 $ 73,821 -- --
Cash flow from investing activities.... $ (924,227) $ (380,615) $ (513,965) -- --
Cash flow from financing activities.... $1,057,551 $ 276,513 $ 514,923 -- --
Ratio of earnings to fixed charges..... 1.49 1.21 1.24 1.23 1.24
</TABLE>
(Footnotes on following page)
14
<PAGE> 25
- -------------------------
(1) Includes EOP Property operating expenses, real estate taxes, insurance, as
well as repair and maintenance expenses.
(2) The data at the periods ended September 30, 1997, December 31, 1996 and 1995
includes 28 State Street, a 570,040 square foot EOP Office Property which
recently has undergone major redevelopment and was vacant prior to May 1997.
The weighted average occupancy, excluding 28 State Street, as of September
30, 1997, December 31, 1996 and 1995 was approximately 94%, 92% and 88%,
respectively.
(3) The number of EOP Office Properties owned as of December 31, 1996, as
reflected in the combined historical financial statements, includes Barton
Oaks Plaza II, an EOP Office Property which was sold in January 1997 and
8383 Wilshire, an EOP Office Property which was sold in May 1997.
(4) The White Paper on 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. EOP believes that Funds from Operations is helpful to investors as
a measure of the performance of an 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 EOP to incur and
service debt, to make capital expenditures and to fund other cash needs. EOP
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 does EOP. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income (determined in accordance with
GAAP) as an indication of EOP's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
EOP's liquidity, nor is it indicative of funds available to fund EOP's cash
needs, including its ability to make distributions. For a reconciliation of
net income and Funds from Operations, see "EOP MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Funds from
Operations."
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RISK FACTORS
In considering whether to approve the Merger, the Agreement and the
transactions contemplated thereby, EOP Shareholders and Beacon Shareholders
should carefully consider, in addition to the other information in this Joint
Proxy Statement/Prospectus, the following matters:
SHARE PRICE FLUCTUATIONS THROUGH THE EFFECTIVE TIME
The relative market prices of the EOP Common Shares and the Beacon Common
Shares at the Effective Time may vary significantly from the prices as of the
date of execution of the Agreement, the date hereof or the date on which the EOP
Shareholders and the Beacon Shareholders vote on the Merger and the Agreement
due to changes in the business, operations and prospects of EOP or Beacon,
market assessments of the likelihood that the Merger will be consummated and the
timing thereof, general market and economic conditions and other factors such as
market perception of REIT shares and office REIT shares generally.
The Exchange Ratio was fixed at 1.4063 at the time of execution of the
Agreement by the parties and is not subject to adjustment. Any increase or
decrease of the market price of the EOP Common Shares will correspondingly
increase or decrease the value of the Merger Consideration to be received by the
Beacon Shareholders pursuant to the Merger. In considering whether to approve
the Merger and the Agreement, EOP Shareholders and Beacon Shareholders should
consider the risks associated with a potential change in the price of EOP Common
Shares between the date of this Joint Proxy Statement/Prospectus and the
Effective Time. In this respect, EOP completed its IPO in July 1997 and,
consequently, EOP Common Shares have a limited trading history in the public
market.
SHARE PRICE FLUCTUATIONS AFTER THE EFFECTIVE TIME
There can be no assurance as to the trading volume or market price of the
EOP Common Shares after the Effective Time. Events outside the control of EOP
which could adversely affect the market value of EOP's assets, as well as the
market price of the EOP Common Shares, may occur after the Effective Time. See
"--Ownership of EOP Common Shares" below.
FAILURE TO EFFECTIVELY MANAGE RAPID GROWTH; EXPANSION INTO NEW MARKETS
EOP currently is experiencing a period of rapid growth. After the Merger,
EOP will own or have an interest in (i) 245 office properties containing
approximately 62.0 million rentable square feet of office space, representing an
approximate 92% increase in the office space in EOP's portfolio since EOP's IPO
in July 1997, and (ii) 17 stand-alone parking facilities containing
approximately 16,749 parking spaces, representing an approximate 13% increase in
the parking spaces in EOP's portfolio since EOP's IPO. Additionally, in
connection with the Merger, EOP will significantly expand its operations in
Boston and extend its operations to suburban San Francisco. EOP's ability to
manage this growth effectively will require it to apply successfully its
experience managing its existing portfolio to new markets and to an increased
number of properties. The failure to effectively manage rapid growth, including
the growth resulting from the Mergers, could have a material adverse effect on
the operating results and financial condition of EOP and, consequently, on EOP's
cash flow and ability to make expected distributions to shareholders.
STATUS OF THE MERGER AS A TAX-FREE REORGANIZATION
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Code, such that neither Beacon nor the Beacon Shareholders
would recognize taxable gain as a result of the Merger (except in connection
with the receipt of cash in lieu of fractional share interests and the receipt
of any Pre-Merger Distributions). However, in the event that the Merger were not
to qualify as a tax-free reorganization under Section 368(a) of the Code, each
Beacon Shareholder would recognize (i) a deemed distribution from Beacon as a
result of the gain attributable to the deemed sale of Beacon's assets to EOP,
and (ii) additional gain equal to the amount, if any, by which the value of the
EOP Common Shares received by the Beacon Shareholder in the Merger exceeds the
Beacon Shareholder's adjusted tax basis in its Beacon Common
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Shares. See "FEDERAL INCOME TAX CONSIDERATIONS -- Tax Consequences of the Merger
to Beacon Shareholders, Beacon, and EOP."
REDUCTIONS IN DISTRIBUTIONS PER SHARE FOR BEACON SHAREHOLDERS AFTER THE MERGER
Assuming EOP continues to make regular quarterly distributions at its
current quarterly rate of $.30 per share after the Merger, each Beacon
Shareholder will receive an equivalent quarterly distributions payment of $.42
per share, as compared to Beacon's most recent quarterly distribution of $.50
per share. Based on the Exchange Ratio, the Beacon Shareholders will receive an
adjusted annualized distribution of $1.69 per share, representing a 16% decline
from the Beacon Shareholders' current annual distribution of $2.00 per share.
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN DIRECTORS AND OFFICERS OF
BEACON
In considering the recommendation of the Beacon Board and the EOP Board
with respect to the Mergers, the Agreement and the transactions contemplated
thereby, Beacon Shareholders and EOP Shareholders should be aware that conflicts
of interest exist due to the fact that certain members of the Beacon Board and
the management of Beacon have certain interests in, and will receive benefits
from, the Merger that are different from, or in addition to, the interests of,
and the benefits to, Beacon Shareholders generally. See "THE MERGER -- Interests
of Certain Persons in the Mergers." The Beacon Board and the EOP Board were
aware of these conflicts of interest and benefits and considered them, among
other matters, in deciding whether to approve the Mergers, the Agreement and the
transactions contemplated thereby.
Beacon has entered into Senior Executive Severance Agreements with each of
Alan Leventhal and Lionel Fortin and has an Executive Severance Plan covering
all Senior Vice Presidents of Beacon Properties Corporation that, under certain
circumstances, entitle each officer to receive severance payments (aggregating
approximately $9.7 million), performance bonuses (aggregating approximately
$31.2 million), payments for taxes (currently estimated to aggregate
approximately $18.8 million) and other benefits if the officer's employment is
terminated following a change in control of Beacon. In addition, as of November
17, 1997, Beacon had granted to its executive officers options to purchase a
total of 2,418,333 Beacon Common Shares, of which a total of 343,336 were
vested. According to the terms of such options, all options which are not
currently vested will become fully vested and immediately exercisable in
connection with the Merger. In the event that the executive officers exercise
such options, then, assuming a $43 3/8 per share price of Beacon Common Shares
(the closing price of Beacon Common Shares on November 17, 1997), the aggregate
value (net of exercise prices) to the holders of such options would be
approximately $38.8 million. Certain officers and directors of Beacon and
members of their families also will benefit from certain agreements which are
intended to permit such persons, in their capacity as holders of Beacon
Partnership Units, to continue to defer federal taxable income that otherwise
might be recognized by them upon the sale or refinancing of indebtedness with
respect to certain Beacon Properties. In addition, trusts affiliated with
Messrs. Alan Leventhal and Sidman will receive payments under the Stock Purchase
Agreements for their interests in the Beacon Service Companies. See "THE MERGER
- -- Interests of Certain Persons in the Mergers."
REDUCTION IN OWNERSHIP AND VOTING FOR BEACON SHAREHOLDERS AFTER THE MERGER
Immediately after the Merger, Beacon Shareholders will own approximately
33% of EOP. However, in the future, additional EOP Common Shares may be issued
in offerings of EOP Common Shares, in connection with share-for-share mergers,
in connection with redemptions of EOP Partnership Units, or otherwise, thereby
reducing the percentage interest of Beacon Shareholders in EOP. After the
Merger, Beacon Shareholders will not have separate approval rights with respect
to any actions or decisions of EOP.
PAYMENTS IF THE AGREEMENT IS TERMINATED
No assurance can be given that the Merger will be consummated. The
Agreement provides for the payment by Beacon of a Break-Up Fee of up to $75
million if the Agreement is terminated by EOP or Beacon under certain
circumstances. In addition, the Agreement provides for reimbursement of expenses
by EOP or Beacon of up to $10 million if the Agreement is terminated by EOP or
Beacon under certain other
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circumstances. Such payment obligations may adversely affect the ability of EOP
or Beacon to engage in another transaction in the event the Merger is not
consummated and may have an adverse impact on the financial condition of the
company incurring such payment obligations. See "THE MERGER -- Fees and
Expenses."
POSSIBILITY THAT THE EXPECTED BENEFITS OF MERGER WILL NOT BE REALIZED
The amount of the Merger Consideration (based upon the closing price of the
EOP Common Shares on September 12, 1997) to be paid by EOP to Beacon
Shareholders and Beacon Unitholders represents a 28.4% premium over the closing
price of the Beacon Common Shares on September 12, 1997 (the last trading day
prior to the public announcement of the Merger). Nevertheless, based on
anticipated savings in expenses and other factors, the Merger has an accretive
(rather than a dilutive) effect on EOP's Funds from Operations per share on a
pro forma basis for 1996 and for the nine months ended September 30, 1997 and is
expected to have an accretive effect for future periods. However, no assurance
can be given that the Merger will not have a dilutive effect on EOP's Funds from
Operations per share.
NO APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER
The EOP Shareholders and the Beacon Shareholders do not have appraisal
rights in connection with the Merger under Maryland law.
REAL ESTATE RISKS
GENERAL. Real property investments are subject to varying degrees of risk.
The yields from equity investments in real estate depend on the amount of income
generated and expenses incurred. If EOP's properties do not, in the future,
generate income sufficient to meet operating expenses, debt service and capital
expenditures, EOP's ability to make distributions to its shareholders will be
adversely affected. Income from properties may be adversely affected by the
general economic climate, local conditions such as oversupply of office
properties or a reduction in demand for office properties in the area, the
attractiveness of the properties to tenants, competition from other available
office properties, inability to collect rent from tenants, changes in market
rental rates, the need to periodically repair, renovate and relet space, and the
ability of the owner to pay for adequate maintenance and insurance and increased
operating costs (including real estate taxes). EOP's income also would be
adversely affected if a significant number of tenants were unable to pay rent or
office properties could not be rented on favorable terms. Certain significant
expenditures associated with each equity investment (such as mortgage payments,
if any, real estate taxes and maintenance costs) generally are not reduced when
circumstances cause a reduction in income from the investment. If a property is
mortgaged to secure payment of indebtedness, and if EOP is unable to meet its
mortgage payments, a loss could be sustained as a result of foreclosure on the
mortgage. In addition, income from properties and real estate values also are
affected by such factors as applicable laws, including tax laws, interest rate
levels and the availability of financing.
RENEWAL OF LEASES AND RELETTING OF SPACE. EOP is subject to the risks that
leases may not be renewed, space may not be relet or the terms of renewal or
reletting (including the cost of required renovations) may be less favorable
than current lease terms. As of September 30, 1997, leases will expire prior to
2003 on a total of approximately 55% of the rentable square feet in the EOP
Office Properties and, as of September 30, 1997, on a total of approximately 64%
of the rentable square feet in the Beacon Properties, for a weighted average of
58% for all such properties. If EOP were unable to promptly relet or renew the
leases for all or a substantial portion of this space, if the rental rates upon
such renewal or reletting were significantly lower than expected rates or if its
reserves for these purposes proved inadequate, then the operating results and
financial condition of EOP may be adversely affected and, consequently, EOP's
cash flow and ability to make expected distributions to shareholders may be
adversely affected.
RISK OF ACQUISITION ACTIVITIES. As of November 17, 1997, EOP owned or had
interests in 114 office properties containing approximately 39.8 million
rentable square feet. Upon consummation of the Merger (assuming consummation of
all Probable Acquisitions and no additional acquisitions by either EOP or
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Beacon), EOP will increase its number of office properties to 245 (a 115%
increase) and its rentable square feet of office space to approximately 62.0
million (a 56% increase). Certain of the Beacon Properties to be acquired by EOP
in the Mergers are in markets where EOP has not historically owned and managed a
substantial number of properties, including Boston, suburban Boston, and
suburban San Francisco. Due primarily to the number and expanded geographic
diversity of its properties after the Merger, EOP may not have adequate
management or other personnel or adequate systems or other resources to manage
its portfolio or its properties to the same level of efficiency after the
Merger, which could adversely affect operations and result in less Cash
Available for Distribution. Additionally, one of the anticipated benefits of the
Merger is the elimination of redundant activities in the combined organization
and the resulting savings in costs and expenses. An inability to achieve these
savings could have a material adverse effect on the operating results and
financial condition of EOP and, consequently, on EOP's cash flow and ability to
make expected distributions to shareholders.
EOP intends to actively continue to acquire office and parking properties.
See "BUSINESS OF EOP -- Business and Growth Strategies." Acquisitions of office
and parking properties entail risks that investments will fail to perform in
accordance with expectations. Estimates of the costs of improvements to bring an
acquired property up to standards established for the market position intended
for that property may prove inaccurate. In addition, the general investment
risks described below under "-- Uncontrollable Factors Affecting Performance and
Value" are associated with any new real estate investment. Finally, EOP expects
that there will be significant competition for attractive investment
opportunities from other major real estate investors with significant capital,
including publicly traded REITs, private REITs and private institutional
investment funds. Such competition has resulted in certain markets, and may
result in other markets, in increased prices for office properties. EOP
anticipates that future acquisitions will be financed through secured or
unsecured financing and proceeds from equity or debt offerings by EOP or EOP
Partnership, and its $1.5 billion unsecured credit facility and its $600 million
unsecured revolving line of credit (collectively, the "Credit Facilities"). No
assurance can be given that EOP will have the opportunity in the future to make
suitable property acquisitions on terms favorable to EOP. See "EOP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources."
UNCONTROLLABLE FACTORS AFFECTING PERFORMANCE AND VALUE. EOP Shareholders
bear risks associated with real property investments. The yields available from
equity investments in real estate depend in large part on the amount of income
generated and expenses incurred. The economic performance and value of EOP's
real estate assets will be subject to all of the risks incident to the ownership
and operation of real estate. These include the risks normally associated with
changes in general national, regional and local economic and market conditions.
Such local real estate market conditions may include excess supply and intense
competition for tenants, including competition based on rental rates,
attractiveness and location of the property and quality of maintenance,
insurance and management services. Other factors that may adversely affect the
performance and value of a property include changes in laws and governmental
regulations (including those governing usage, zoning and taxes), changes in
interest rates, the availability of financing and the possibility of
bankruptcies of tenants. To the extent that the value and/or performance of its
properties are adversely affected by any of the foregoing factors, EOP's
financial condition and results of operations would be adversely affected.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Because real estate investments are
relatively illiquid, EOP's ability to vary its portfolio promptly in response to
economic or other conditions is limited. In addition, certain significant
expenditures, such as debt service, real estate taxes, and operating and
maintenance costs generally are not reduced in circumstances resulting in a
reduction in income from the investment. The foregoing and any other factor or
event that would impede the ability of EOP to respond to adverse changes in the
performance of its investments could have an adverse effect on EOP's financial
condition and results of operations, with a consequent adverse effect on EOP's
ability to make expected distributions to shareholders.
UNINSURED LOSS. EOP and Beacon carry comprehensive liability, fire,
extended coverage and rental loss insurance covering all of the EOP Properties
and the Beacon Properties, respectively, and EOP intends to continue to carry
such insurance on all of its properties after the Merger, with policy
specifications and insured
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limits which EOP believes are adequate and appropriate under the circumstances.
There are, however, certain types of losses that generally are not insured
because it is not economically feasible to insure against such losses. Should an
uninsured loss or a loss in excess of insured limits occur, EOP could lose its
capital invested in the applicable property, as well as the anticipated future
revenue from such property and, in the case of debt which is with recourse to
EOP, would remain obligated for any mortgage debt or other financial obligations
related to such property. EOP and Beacon carry earthquake insurance on all of
the EOP Properties and the Beacon Properties, respectively, including those
located in California, subject to coverage limitations which EOP and Beacon,
respectively, believe are commercially reasonable. In light of the California
earthquake risk, California building codes since the early 1970s have
established construction standards for all new buildings. The current and
strictest construction standards were adopted in 1987. Of the 19 EOP Properties
located in California, nine have been built since January 1, 1988 and EOP
believes that all of the EOP Properties were constructed in full compliance with
the applicable standards existing at the time of construction. Of the 24 Beacon
Properties located in California, three have been built since January 1, 1988
and Beacon believes that all of the Beacon Properties were constructed in full
compliance with the applicable standards existing at the time of construction.
No assurance can be given that material losses in excess of insurance proceeds
will not occur in the future.
DEBT FINANCING
DEBT FINANCING AND EXISTING DEBT MATURITIES. EOP is subject to risks
normally associated with debt financing, including the risk that EOP's cash flow
will be insufficient to pay distributions at expected levels and meet required
payments of principal and interest, the risk that existing indebtedness (which
in virtually all cases will not be fully amortized at maturity) will not be able
to be refinanced or that the terms of such refinancing will not be as favorable
as the terms of existing indebtedness. EOP has substantial outstanding
indebtedness (approximately $2.5 billion on a pro forma basis (after giving
effect to the IPO, $180 million of EOP Unsecured Notes issued in September 1997,
borrowings under the Credit Facilities, properties acquired after September 30,
1997 and all Probable Acquisitions)) and, on a pro forma basis after giving
effect to the Merger, will have approximately $3.5 billion in outstanding
indebtedness. See "THE EOP PROPERTIES -- Debt Financing" and "THE BEACON
PROPERTIES -- Mortgage Indebtedness and Credit Facility." If principal payments
due at maturity cannot be refinanced, extended or paid with proceeds of other
capital transactions, such as new equity capital, EOP expects that its cash flow
will not be sufficient in all years to pay distributions at expected levels and
to repay all such maturing debt. Furthermore, if prevailing interest rates or
other factors at the time of refinancing (such as the possible reluctance of
lenders to make commercial real estate loans) result in higher interest rates
upon refinancing, the interest expense relating to such refinanced indebtedness
would increase, which would adversely affect EOP's cash flow and the amount of
distributions it can make to shareholders. If a property is mortgaged to secure
payment of indebtedness and EOP is unable to meet mortgage payments, the
property could be foreclosed by or otherwise transferred to the mortgagee with a
consequent loss of income and asset value to EOP. EOP's mortgages contain
customary negative covenants limiting, among other things, EOP's ability,
without the prior consent of the lender, to enter into new or materially modify
existing leases of a material nature, to transfer interests in the mortgagor
entity (including mortgage interests) and to discontinue insurance coverage.
Nine of EOP's mortgage loans are cross-defaulted to, and cross-collateralized
with, each other. If an event of default were to occur under any of these loans,
EOP could be required to repay the aggregate of all such loans (approximately
$129.7 million), together with any applicable prepayment charges, in order to
avoid foreclosure on all such EOP Properties. Two of Beacon's mortgage loans are
cross-defaulted to, and cross-collateralized with, each other. If an event of
default were to occur under any of these loans after the Merger, EOP could be
required to repay the aggregate of all such loans (approximately $28.6 million),
together with any applicable prepayment charges, in order to avoid foreclosure
on all such Beacon Properties. Foreclosure on such Properties, or EOP's
inability to refinance such loans on terms as favorable as the existing terms,
would negatively impact EOP's financial condition and results of operations.
DEGREE OF LEVERAGE. EOP's Debt to Market Capitalization Ratio is
approximately 29% on a pro forma basis after giving effect to the Merger as of
November 17, 1997. EOP has adopted a policy of incurring debt, either directly
or through EOP Partnership, only if upon such incurrence EOP's Debt to Market
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Capitalization Ratio would be approximately 50% or less. The degree to which EOP
is leveraged could have important consequences to EOP Shareholders, including
affecting EOP's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, development or other general
corporate purposes and making EOP more vulnerable to a downturn in its business
or the economy generally. The Indenture which governs the issuance of the EOP
Unsecured Notes contains financial and operating covenants including, among
other things, limitations on EOP's ability to incur other indebtedness, sell all
or substantially all of its assets and engage in mergers and consolidations and
certain acquisitions. See "EOP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
RISK OF RISING INTEREST RATES AND VARIABLE RATE DEBT. EOP, through EOP
Partnership, entered into the $600 million Credit Facility in July 1997 and
entered into the $1.5 billion Credit Facility in October 1997. Advances under
the Credit Facilities bear interest at a variable rate based upon LIBOR. EOP has
entered into interest rate hedging agreements for approximately $1.0 billion of
its floating rate debt to limit its exposure to rising interest rates. Although
the hedging agreements enable EOP to convert floating rate liabilities to fixed
rate liabilities, they expose EOP to the risk that the counterparties to a hedge
agreement may not perform, which could cause EOP to lose the benefits of the
hedge agreement. The counterparties to such interest rate hedging agreements are
all major financial institutions. EOP, which expects to incur indebtedness
through EOP Partnership, may incur other variable rate indebtedness in the
future. Increases in interest rates on such indebtedness, or the loss of the
benefits of the anticipated hedging agreements, could increase EOP's interest
expense, which would adversely affect EOP's cash flow and its ability to pay
expected distributions to shareholders. Accordingly, EOP may in the future
engage in other transactions to further limit its exposure to rising interest
rates as appropriate and cost effective. See "EOP MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
CONCENTRATION OF PROPERTIES IN CERTAIN MARKETS
Upon consummation of the Merger, approximately 14.3% and 17.6% of EOP's
office properties (in number of buildings) and 12.1% and 15.6% (in square
footage) will be located in Boston (including suburban Boston) and California,
respectively. Of the 43 EOP and Beacon office properties located in California,
16 are located in Southern California. EOP's revenue from, and the value of, its
properties in these markets may be affected by a number of factors, including
the local economic climate (which may be adversely impacted by business layoffs
or downsizing, industry slowdowns, changing demographics and other factors) and
local real estate conditions (such as oversupply of, or reduced demand for,
office and other competing commercial properties). Therefore, EOP's performance
and its ability to make distributions to shareholders will likely be dependent,
in part, on the economic conditions in these markets. California recently began
to recover from an economic recession which affected Southern California in
particular since the early 1990s. Additionally, the Boston area has recently
begun to experience some recovery from a severe economic downturn in real estate
markets that occurred in the late 1980s and early 1990s. No assurances can be
given that economic conditions in these market areas will continue to improve.
FEDERAL INCOME TAX RISKS
ADVERSE CONSEQUENCES OF EOP'S FAILURE TO QUALIFY AS A REIT. EOP believes
that, commencing with its formation on July 11, 1997, it has been organized and
has operated in such a manner so as to qualify for taxation as a REIT under the
Code, and that after giving effect to the Merger, its proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT. Although management believes that EOP has and will
continue to be organized and has and will continue to operate in such a manner
so as to qualify as a REIT, no assurance can be given that EOP has been or will
remain so qualified. Qualification as a REIT involves the satisfaction of
numerous requirements (some on an annual and quarterly basis) established under
highly technical and complex Code provisions for which there are only limited
judicial and administrative interpretations, and involves the determination of
various factual matters and circumstances not entirely within EOP's control. For
example, in order to qualify as a REIT, at
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least 95% of EOP's gross income in any year must be derived from qualifying
sources, and EOP must pay distributions to shareholders aggregating annually at
least 95% of its REIT taxable income (excluding capital gains). The complexity
of these provisions and of the applicable Treasury Regulations that have been
promulgated under the Code is greater in the case of a REIT, such as EOP, that
holds its assets in partnership form. No assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. EOP, however,
is not aware of any pending tax legislation that would adversely affect EOP's
ability to operate as a REIT.
Hogan & Hartson L.L.P., counsel to EOP, will provide to EOP and to Beacon,
as a condition to the Merger, an opinion to the effect that, commencing with its
formation on July 11, 1997, EOP has been organized and has operated in such a
manner so as to qualify for taxation as a REIT under the Code and that after
giving effect to the Merger, EOP's proposed method of operation will enable it
to continue to meet the requirements for qualification and taxation as a REIT
under the Code. Goodwin, Procter & Hoar LLP, counsel to Beacon, will provide to
EOP, as a condition to the Merger, an opinion to the effect that, for Beacon's
taxable year ended December 31, 1994, and for all subsequent taxable years
ending on or before the Effective Time, Beacon was organized and has operated in
conformity with the requirements for qualification as a REIT under the Code. See
"FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of EOP as a REIT -- General."
Such legal opinions, however, will be based on various assumptions and factual
representations by EOP and/or Beacon, as applicable, regarding EOP's or Beacon's
ability to meet the various requirements for qualification as a REIT, and no
assurance can be given that actual operating results will meet these
requirements. Such legal opinions are not binding on the IRS or any court.
Moreover, the qualification and taxation of EOP and Beacon as REITs depends upon
their ability to meet on a continuing basis (through actual annual operating
results, distribution levels and diversity of stock ownership) the various
qualification tests imposed under the Code, compliance with which will not be
reviewed by counsel to EOP or Beacon. Hogan & Hartson's opinion as to the
qualification of EOP as a REIT under the Code is not based upon, or limited by,
an assumption or representation that the ZML REITs qualified as REITs for
federal income tax purposes.
If EOP were to fail to qualify as a REIT in any taxable year, EOP would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. Moreover, unless entitled to
relief under certain statutory provisions, EOP also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. This treatment would significantly reduce the net
earnings of EOP available for investment or distribution to shareholders because
of the additional tax liability to EOP for the years involved. In addition,
distributions to shareholders would no longer be required to be made. See
"FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of EOP as a REIT -- General."
OTHER TAX LIABILITIES. Even if EOP qualifies as a REIT, it will be subject
to certain federal, state and local taxes on its income and property. In
addition, the net taxable income, if any, from the activities conducted through
the Third Party Service Corporations (as defined herein) will be subject to
federal and state income tax. See "FEDERAL INCOME TAX CONSIDERATIONS -- Other
Tax Consequences for EOP, Its Shareholders and the Third Party Service
Corporations."
ADVERSE CONSEQUENCES IF ZML REITS OR BEACON FAILED TO QUALIFY AS REITS. If
one or more of the ZML REITs that merged into EOP in connection with the
formation of EOP failed to qualify as a REIT throughout the duration of its
existence, then it might have had undistributed "C corporation earnings and
profits" that, if not distributed by EOP prior to December 31, 1997, could
prevent EOP from continuing to qualify as a REIT. Similarly, if Beacon has
failed to qualify as a REIT throughout the duration of its existence, then it
might have undistributed "C corporation earnings and profits" that, if not
distributed by EOP prior to December 31, 1997, could prevent EOP from continuing
to qualify as a REIT. Beacon believes that Beacon has qualified as a REIT
throughout the duration of its existence, and EOP, as a condition to the Merger,
will receive an opinion from Goodwin, Procter & Hoar LLP, counsel to Beacon, to
that effect. EOP believes that each of the ZML REITs qualified as a REIT
throughout the duration of its existence and that, in any event, no ZML REIT
should be considered to have had any undistributed "C corporation earnings and
profits" at the time of the
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formation of EOP. In addition, if a ZML REIT or Beacon failed to qualify as a
REIT throughout the duration of its existence, it would have recognized taxable
gain at the time it was merged into EOP (and EOP would be liable for the tax
thereon), even though such merger otherwise qualified as a "tax-free
reorganization" for tax purposes, unless EOP makes a special election that is
available under current law. EOP intends to make such an election as a
protective matter with respect to each of the ZML REITs and Beacon, which would
have the effect of requiring EOP to pay corporate income tax with respect to any
gain existing at the time of acquisition with respect to assets acquired from
the entity that failed to qualify as a REIT if such assets are sold within ten
years after their acquisition by EOP. Finally, if one or more of the ZML REITs
had failed to qualify, or if Beacon has failed to qualify as a REIT, EOP could
be precluded from electing REIT status for up to four years after the year in
which such ZML REIT or Beacon failed to so qualify if EOP were determined to be
a "successor" to that ZML REIT or to Beacon. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of EOP as a REIT" and "-- Requirements for
Qualification as a REIT."
LIMITATIONS ON CHANGES IN CONTROL AND OF OWNERSHIP LIMIT
LIMITATIONS ON CHANGES IN CONTROL CONTAINED IN THE DECLARATION OF TRUST AND
THE EOP BYLAWS. Certain provisions of the Declaration of Trust and the EOP
Bylaws may have the effect of delaying, deferring or preventing a change in
control of EOP or other transaction that could provide the holders of EOP Common
Shares with the opportunity to realize a premium over the then-prevailing market
price of such EOP Common Shares or which might otherwise be in their best
interest. The EOP Ownership Limit (described under "--Possible Adverse
Consequences of Ownership Limit" below) also may have the effect of delaying,
deferring or preventing a change in control of EOP or other transactions even if
such a change in control or transaction were in the best interests of some, or a
majority, of the EOP Shareholders. The EOP Board is divided into three classes,
with each class serving a three-year term. The staggered terms of the members of
the EOP Board may adversely affect the shareholders' ability to effect a change
in control of EOP, even if a change in control were in the best interests of
some, or a majority, of the EOP Shareholders. The Declaration of Trust
authorizes the EOP Board to cause EOP to issue, after giving effect to the
Merger, approximately 505 million additional authorized but unissued EOP Common
Shares and an additional 92 million preferred shares of beneficial interest,
$0.01 par value per share ("Preferred Shares"), and to reclassify any unissued
EOP Common Shares and to classify any unissued Preferred Shares and reclassify
any previously classified but unissued Preferred Shares of any series, and to
establish the preferences, rights and other terms of any such classified or
unclassified shares. See "SHARES OF BENEFICIAL INTEREST -- EOP Preferred
Shares." Prior to the Effective Time, the EOP Board will adopt resolutions
classifying and designating 8,000,000 Preferred Shares as EOP Preferred Shares
and will adopt articles supplementary relating to such EOP Preferred Shares. The
EOP Preferred Shares will have certain provisions that could delay, defer or
prevent a change of control of EOP or other transaction that might involve a
premium price for the EOP Common Shares or otherwise be in the best interests of
the EOP Shareholders. See "SHARES OF BENEFICIAL INTEREST -- EOP Preferred Shares
- -- Voting." Moreover, although the EOP Board has no such intention at the
present time, it could establish another series of Preferred Shares that could
delay, defer or prevent a change in control of EOP or other transaction that
might involve a premium price for the EOP Common Shares or otherwise be in the
best interest of the shareholders. The Declaration of Trust and the EOP Bylaws
also contain other provisions that may delay, defer or prevent a change in
control of EOP or other transaction that might involve a premium price for the
EOP Common Shares or otherwise be in the best interest of the EOP Shareholders.
See "CERTAIN PROVISIONS OF MARYLAND LAW AND EOP'S DECLARATION OF TRUST AND
BYLAWS."
POSSIBLE LIMITATIONS ON CHANGES IN CONTROL PURSUANT TO MARYLAND LAW. Under
provisions (which EOP has elected to opt out of, as described below) of the
Maryland General Corporation Law, as amended ("MGCL"), as generally applicable
to real estate investment trusts, certain "business combinations" (including
certain issuances of equity securities) between a Maryland real estate
investment trust and any person who beneficially owns ten percent or more of the
voting power of the trust's then outstanding shares or an affiliate of the trust
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power of the then
outstanding voting shares of beneficial interest of the trust (an "Interested
Shareholder"), or an affiliate of the Interested Shareholder, are prohibited
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for five years after the most recent date on which the Interested Shareholder
becomes an Interested Shareholder. Thereafter, any such business combination
must be approved by two super-majority shareholder votes unless, among other
conditions, the trust's common shareholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Shareholder for its common
shares. As permitted by the MGCL, the EOP Board has elected to opt out of the
business combination provisions of the MGCL. Consequently, the five-year
prohibition and the super-majority vote requirements will not apply to a
business combination involving EOP; however, the EOP Board may repeal (except
with respect to a shareholder who becomes an Interested Shareholder as a result
of EOP Common Shares received in the Merger) this election and cause EOP to
become subject to these provisions in the future.
POSSIBLE ADVERSE CONSEQUENCES OF OWNERSHIP LIMIT. For EOP to maintain its
qualification as a REIT for federal income tax purposes, not more than 50% in
value of the outstanding shares of beneficial interest of EOP may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code, to
include certain entities) at any time during the last half of EOP's taxable
year. See "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of EOP as a REIT --
General" and "-- Requirements for Qualification as a REIT." To facilitate
maintenance of its qualification as a REIT for federal income tax purposes, the
Declaration of Trust, subject to certain exceptions, prohibits ownership,
directly or by virtue of the attribution provisions of the Code, by any single
shareholder of more than 9.9% (in value or number of shares, whichever is more
restrictive) of the issued and outstanding shares of any class or series of
shares of beneficial interest of EOP (the "EOP Ownership Limit"). The EOP Board
is required to waive or modify the EOP Ownership Limit with respect to one or
more persons who would not be treated as "individuals" for purposes of the Code
if it is satisfied, in its reasonable discretion, based upon information
required to be provided by the party seeking the waiver, that ownership in
excess of this limit will not cause a person who is an individual to be treated
as owning EOP Common Shares or EOP Preferred Shares in excess of the EOP
Ownership Limit, applying the applicable constructive ownership rules, and will
not otherwise jeopardize EOP's status as a REIT for federal income tax purposes.
The EOP Board has granted such an exception for the sole ZML Investor that is
not an "individual" that owned more than 9.9% of the EOP Common Shares
immediately following the Consolidation as a result of receiving such EOP Common
Shares in the Consolidation. Absent any such exemption or waiver, EOP Common
Shares or EOP Preferred Shares acquired or held in violation of the EOP
Ownership Limit will be transferred to a trust for the exclusive benefit of a
designated charitable beneficiary, with the person who acquired such EOP Common
Shares and/or EOP Preferred Shares in violation of the EOP Ownership Limit not
entitled to receive any distributions thereon, to vote such EOP Common Shares or
EOP Preferred Shares, or to receive any proceeds from the subsequent sale
thereof in excess of the lesser of (i) the price paid by the prohibited owner
for the EOP Common Shares and/or EOP Preferred Shares or, if the prohibited
owner did not give value for the EOP Common Shares and/or EOP Preferred Shares
in connection with the event causing the EOP Common Shares and/or EOP Preferred
Shares to be held in the trust (e.g., in the case of a gift, devise or other
such transaction), the market price of the EOP Common Shares and/or EOP
Preferred Shares, as determined pursuant to the Declaration of Trust, on the day
the event causing the EOP Common Shares and/or EOP Preferred Shares to be held
in the trust occurred or (ii) the amount realized from such sale. A transfer of
EOP Common Shares and/or EOP Preferred Shares to a person who, as a result of
the transfer, violates the EOP Ownership Limit may be void under certain
circumstances. See "SHARES OF BENEFICIAL INTEREST -- Restrictions on Ownership
and Transfer." The EOP Ownership Limit may have the effect of delaying,
deferring or preventing a change in control and, therefore, could adversely
affect the shareholder's ability to realize a premium over the then-prevailing
market price for the EOP Shares in connection with such transaction.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
CONTRACT TERMINATION. Risks associated with the management of properties
which are not, and after the Merger will not be, controlled by EOP Partnership
and properties owned by parties other than EOP (including affiliates of the
Equity Group Owners) include the risk that management contracts will be
terminated by the entity controlling the property or in connection with a sale
of such property, that contracts may not be renewed upon expiration or may not
be renewed on terms consistent with current terms, and that the rental revenues
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upon which management fees are based will decline as a result of general real
estate market conditions or specific market factors resulting in decreased
management fee income. EOP Management Corp. has property management contracts
with respect to the Managed Properties and Beacon Management Company has
management contracts with respect to the properties that it manages, including
the Beacon Joint Venture Properties. There can be no assurance, however, that
these management contracts will not be terminated in the future. The management
contracts with respect to the Managed Properties are terminable by the owners
thereof on 30 or 60 days' notice.
LACK OF CONTROL OVER SERVICE BUSINESS. To facilitate maintenance of EOP's
qualification as a REIT for federal income tax purposes, management of any
properties that are not wholly owned by EOP Partnership and its subsidiaries is
conducted through EOP Management Corp. and, after the Merger, will also be
conducted through Beacon Management Company. EOP Partnership owns all of the
non-voting stock (representing a 95% equity interest) and Equity Office
Holdings, L.L.C., a Delaware limited liability company ("EOH"), owns all of the
voting stock (representing a 5% equity interest) of EOP Management Corp. (EOP
does not own any interest in, or otherwise control, EOH.) The current board of
directors of EOP Management Corp. consists of Mr. Zell, together with Arthur
Greenberg and Donald J. Liebentritt, a consultant to and employee of,
respectively, the Equity Group. EOH has the right to elect the directors of EOP
Management Corp. EOP does not control the timing or amount of distributions paid
by EOP Management Corp., nor does EOP have the authority to control the
management and operation of EOP Management Corp. As a result, decisions relating
to the declaration and payment of distributions and the business policies and
operations of EOP Management Corp. could be adverse to the interests of EOP or
could lead to adverse financial results, which could adversely affect EOP's
financial condition and results of operations. Also, certain services for EOP's
tenants that may not be permissibly undertaken by a REIT are conducted through a
service corporation owned entirely by affiliates of the Equity Group Owners. EOP
has no control over, or ownership interest in, such service corporation, which
operates as an independent contractor. Consequently, EOP is not able to assure
that the day-to-day operations of the service corporation are conducted in a
manner consistent with EOP's best interests. EOP may, however, terminate the
services of the service corporation at any time upon 30 days' notice.
CONFLICTS OF INTEREST IN CONNECTION WITH FORMATION AND BUSINESS OF EOP
ABSENCE OF ARM'S LENGTH NEGOTIATIONS IN THE FORMATION TRANSACTIONS. There
were no arm's length negotiations in connection with EOP's Formation
Transactions, in particular with respect to the representations and warranties
made by the contributors of properties to EOP in the Formation Transactions, or
the indemnification provided for breach of such representations and warranties.
Such indemnification is limited generally to an amount equal to 1% of the value
of consideration paid by EOP for such properties and to $15 million with respect
to pre-IPO liabilities in connection with the Equity Group's contribution of the
Management Business. Any losses to EOP resulting from breaches of the
Contribution Agreement in excess of the foregoing indemnification limitations
would have to be satisfied out of EOP's assets, with the potential consequence
of decreasing cash available for distribution to EOP Shareholders. To date, EOP
has no knowledge of any material breaches of the Contribution Agreement.
INFLUENCE OF TRUSTEES, OFFICERS AND SIGNIFICANT SHAREHOLDERS. Upon
consummation of the Merger, Mr. Zell (through the Equity Group and the ZML
Partners) will be deemed to beneficially own approximately 4.0%, Messrs.
Leventhal and Sidman will be deemed to beneficially own approximately 1.4% and
all other trustees and executive officers of EOP will be deemed to beneficially
own approximately 4.0% of the outstanding EOP Common Shares (in each case on a
fully diluted basis, i.e., including EOP Common Shares issuable upon exchange of
EOP Partnership Units). In addition, the ZML Partners may receive distributions
of up to approximately 11.3 million additional EOP Partnership Units
(representing approximately 4.0% of the outstanding EOP Common Shares on a fully
diluted basis) from the ZML Opportunity Partnerships during the two-year period
ending July 11, 1999. All such EOP Partnership Units will be exchangeable for
EOP Common Shares (subject to the Ownership Limit) or, at the option of EOP, for
the cash equivalent of that number of EOP Common Shares, beginning on July 11,
1998 for EOP Partnership Units issued to the Equity Group for the Management
Business and beginning on July 11, 1999 for EOP Partnership Units issued to the
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ZML Partners in liquidation of the ZML Opportunity Partnerships. In addition, in
connection with EOP's IPO, Mr. Zell, Ms. Sheli Z. Rosenberg (one of EOP's
trustees) and the Named Executive Officers of EOP received options to purchase
an aggregate of 1,000,000 EOP Common Shares exercisable at the IPO price of $21
per share. Mr. Zell and Ms. Rosenberg are affiliated with the Equity Group
Owners and, along with Messrs. Leventhal and Sidman, as trustees, will have
influence on the management and operation of EOP and, as shareholders, on the
outcome of any matters submitted to a vote of the shareholders. Such influence
might be exercised in a manner that is inconsistent with the interests of other
shareholders. Although there is no understanding or arrangement for these
trustees, officers and shareholders and their affiliates to act in concert, such
parties would be in a position to exercise significant influence over EOP's
affairs should they choose to do so. If all or a substantial portion of the EOP
Partnership Units were exchanged for EOP Common Shares and such EOP Common
Shares were retained and not sold, subject to the Ownership Limit described
under "--Limitations on Changes in Control and of Ownership Limit -- Possible
Adverse Consequences of Ownership Limit," the influence of the holders thereof
over the affairs of EOP would increase, and the influence of the remaining
shareholders would be diminished accordingly.
EOP MANAGEMENT CORP. CONFLICTS. EOP Management Corp. provides property
management services and, in most cases, asset management services to the EOP
Joint Venture Properties and properties not owned by EOP but which are owned or
controlled by the Equity Group Owners or their affiliates, and, after the
Merger, will provide property management services to the Beacon Joint Venture
Properties and properties not owned by Beacon but currently managed by Beacon
Management Company. A substantial majority of these management contracts were
not negotiated on an arm's length basis. Although EOP believes that the
management fees charged by EOP Management Corp. and Beacon Management Company
are at current market rates, there is no assurance that these management fees
will equal at all times those fees that would be charged by an unaffiliated
third party. In this regard, through the Equity Group Owners, Mr. Zell has a
substantial interest in EOH, which owns the voting stock of EOP Management
Corp., and following the Merger indirectly will control Beacon Management
Company.
CONFLICTS RELATING TO EOP PARTNERSHIP. EOP, as the managing general partner
of EOP Partnership, has fiduciary obligations to the other limited partners in
EOP Partnership, the discharge of which may conflict with the interests of the
EOP Shareholders. In addition, those persons holding EOP Partnership Units
(including the Equity Group and, subsequent to the Merger, former holders of
Beacon Partnership Units, including Messrs. Leventhal and Sidman, who will
receive EOP Partnership Units in the Partnership Merger), as limited partners,
have the right to vote on amendments to the EOP Partnership Agreement (most of
which require approval by a majority in interest of the limited partners,
including EOP) and individually to approve certain amendments that would
adversely affect their rights, which may be exercised in a manner that conflicts
with the interests of the EOP Shareholders.
CONTINUED INVOLVEMENT IN OTHER INVESTMENT ACTIVITIES. Although Mr. Zell
entered into a non-competition agreement with EOP at the time of its IPO, the
Equity Group Owners and their affiliates have and will continue to have a broad
and varied range of investment interests, and companies directly or indirectly
involved in real estate investment activities in which one or more of them has
or may acquire an interest will be owners of real property and will acquire real
property in the future. In addition, Mr. Zell may not have management control
over companies in which he or the Equity Group Owners have or may have an
investment interest and, therefore, he may not be able to control whether any
such company engages in activities that are in competition with activities of
EOP. Consequently, Mr. Zell's continued involvement in other investment
activities could result in competition to EOP as well as management decisions
which do not necessarily reflect the interests of the EOP Shareholders.
In addition, no current officer or director of Beacon will enter into a
noncompetition agreement with EOP in connection with the Merger. Consequently,
after the Merger, any current officer or director of Beacon could engage in
activities in competition with activities of EOP, except Messrs. Leventhal and
Sidman during their tenure on the EOP Board to the extent that such actions
would violate their fiduciary duties to EOP and the EOP Shareholders.
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MONETARY LOSS TO COMPANY UPON FAILURE TO ENFORCE TERMS OF CONTRIBUTIONS.
Through the Equity Group Owners, Mr. Zell has a substantial economic interest
in the Equity Group and controls and has a substantial economic interest in the
ZML Partners. Consequently, Mr. Zell has a conflict of interest with respect to
his obligation as an officer and trustee of EOP to enforce the terms of the
Contribution Agreement. The failure to enforce the material terms of the
Contribution Agreement, particularly the indemnification provisions and the
remedy provisions for breaches of representations and warranties, could result
in a monetary loss to EOP.
CONFLICTS OF INTEREST IN CONNECTION WITH PROPERTIES OWNED OR CONTROLLED BY
THE EQUITY GROUP OWNERS OR THEIR AFFILIATES. The Equity Group Owners or their
affiliates control or share control and have substantial economic interest in
the Managed Properties which were not contributed to EOP at the time of its IPO.
Beacon affiliates have interests in one of the three Beacon Managed Properties
which will not be acquired by EOP in the Merger. EOP believes that these
Managed Properties generally do not directly compete with any of the
Properties; however, it is possible that a Managed Property may compete with
EOP in the future if EOP were to invest in an office property similar to and in
close proximity to such property. Such competition could result in conflicting
demands on management and loss of income to EOP, consequently reducing
distributions to EOP Shareholders. EOP is prohibited by the terms of the EOP
Bylaws from acquiring any properties from the Equity Group Owners or their
affiliates without the approval of a majority of its disinterested trustees.
See "EOP POLICIES WITH RESPECT TO CERTAIN ACTIVITIES -- Conflict of Interest
Policies."
CONFLICTS OF INTEREST IN CONNECTION WITH LEASE AGREEMENT WITH AN AFFILIATE
OF EQUITY GROUP OWNERS. EOP leases office space from an entity controlled by an
affiliate of the Equity Group Owners, at Two North Riverside Plaza, Chicago,
Illinois. EOP believes that the rental rates and other terms of such lease are
on current market terms.
POSSIBLE ENVIRONMENTAL LIABILITIES
GENERAL. Under federal, state and local laws and regulations relating to
protection of the environment ("Environmental Laws"), a current or previous
owner or operator of real estate may be required to investigate and clean up
hazardous or toxic substances or petroleum product releases at such property and
may be held liable to a governmental entity or to third parties for property
damage and for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. In addition,
the owner or operator of a site may be subject to claims by third parties based
on damages and costs resulting from environmental contamination emanating from a
site.
Environmental Laws also govern the presence, maintenance and removal of
asbestos-containing building materials ("ACBMs"). Such laws require that ACBMs
be properly managed and maintained, that those who may come into contact with
ACBMs be adequately apprised or trained and that special precautions, including
removal or other abatement, be undertaken in the event ACBMs would be disturbed
during renovation or demolition of a building. Such laws may impose fines and
penalties on building owners or operators for failure to comply with these
requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
EOP. In connection with EOP's IPO, independent environmental consultants
conducted or updated comprehensive environmental assessments at the EOP
Properties then owned and have conducted or updated such assessments at all EOP
Properties acquired since EOP's IPO. These assessments included, at a minimum, a
visual inspection of the EOP Properties and the surrounding areas, an
examination of current and historical uses of the EOP Properties and the
surrounding areas and a review of relevant state, federal and historical
documents. Where appropriate, on a property by property basis, additional
testing has been conducted, including sampling for asbestos, for lead in
drinking water, for soil contamination where underground storage tanks are or
were located or where other past site usages create a potential for site
impact, and for contamination in groundwater.
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These environmental assessments have not revealed any environmental
liabilities at the EOP Properties that EOP believes would have a material
adverse effect on EOP's business, assets, financial condition or results of
operations taken as a whole, nor is EOP aware of any such material environmental
liability. ACBMs have been detected through sampling in approximately half of
the EOP Office Properties. Most of these buildings contain only minor amounts of
ACBMs in good condition and nearly all of it is non-friable. All ACBMs are
currently being properly managed and maintained and other requirements relating
to ACBMs are being followed. The presence of ACBMs should not present a
significant risk as long as compliance with these requirements continues. For a
few of the EOP Properties, potential offsite sources of contamination, such as
underground storage tanks ("USTs"), are noted. For some of the EOP Properties,
previous uses, such as the former presence of USTs, have been noted; in these
cases, follow-up soil and/or groundwater sampling has not identified evidence of
significant contamination.
EOP believes that the EOP Properties are in compliance in all material
respects with applicable Environmental Laws. EOP believes that the issues
identified in its environmental reports will not have a material adverse effect
on EOP if it continues to comply with Environmental Laws and with the
recommendations set forth in these reports. No assurance can be given, however,
that unidentified environmental liabilities will not arise with respect to the
EOP Properties which could have an adverse effect on EOP's financial condition.
BEACON. Phase I environmental site assessments have been conducted at all
of the Beacon Properties by independent environmental consultants. These
assessments have included, at a minimum, a visual inspection of the Beacon
Properties and the surrounding areas, an examination of current and historical
uses of the Beacon Properties and the surrounding areas and a review of relevant
state, federal and historical documents. Where appropriate, on a property by
property basis, additional testing has been conducted, including sampling for
asbestos, for lead in drinking water, for soil contamination where underground
storage tanks are or were located or where other past site usages create a
potential for site impact, and for contamination in groundwater.
Beacon believes that the Beacon Properties are in compliance in all
material respects with applicable Environmental Laws. Beacon believes that the
issues identified in its environmental reports would not (assuming that the
Mergers are not completed) have a material adverse effect on Beacon if it
continues to comply with Environmental Laws and with the recommendations set
forth in these reports. Beacon has not been notified by any governmental
authority, and has no other knowledge of, any material non-compliance, liability
or claim relating to hazardous or toxic substances or other environmental
substances in connection with any Beacon Property, except as previously
disclosed in documents incorporated herein by reference. No assurance can be
given, however, that unidentified environmental liabilities will not arise with
respect to the Beacon Properties which could have an adverse effect on Beacon's
financial condition prior to the Mergers or on EOP's financial condition after
the Mergers.
OWNERSHIP OF EOP COMMON SHARES
EFFECT ON EOP COMMON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Sales
of a substantial number of Restricted EOP Common Shares, or the perception that
such sales could occur, could adversely affect prevailing market prices of the
EOP Common Shares. A substantial portion of EOP's outstanding equity is
Restricted EOP Common Shares or EOP Partnership Units which may be converted
into Restricted EOP Common Shares. EOP Common Shares issued upon redemption of
EOP Partnership Units (including EOP Partnership Units to be issued in the
Partnership Merger to Beacon Unitholders) may be sold in the public market
pursuant to registration rights (subject to the terms and conditions thereof)
that EOP granted to certain ZML Investors, the ZML Partners and the Equity Group
or that Beacon granted to certain Beacon Unitholders, or pursuant to Rule 144
under the Securities Act or other available exemptions from registration. In
addition, EOP has reserved a number of EOP Common Shares for issuance pursuant
to EOP's employee benefit plans, and such EOP Common Shares will be available
for sale from time to time. Options to purchase additional EOP Common Shares
have been granted to certain executive officers, employees, trustees and
consultants. In addition, all of the EOP Common Shares to be issued in
connection with the Merger to the Beacon Shareholders, other than affiliates of
Beacon, will be freely tradeable. The EOP Common Shares to be
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issued in the Merger to affiliates of Beacon will be tradeable within the volume
and manner of sale limitations of Rule 144 under the Securities Act. No
prediction can be made about the effect that future sales of EOP Common Shares,
or the perception that such sales could occur, will have on the market prices of
the EOP Common Shares.
EFFECT ON EOP COMMON SHARE PRICE OF MARKET CONDITIONS. As with other
publicly traded equity securities, the value of the EOP Common Shares depends
upon various market conditions, which may change from time to time. Among the
market conditions that may affect the value of the EOP Common Shares are the
following: the extent of institutional investor interest in EOP; the reputation
of REITs and office REITs generally and the attractiveness of their equity
securities in comparison to other equity securities (including securities issued
by other real estate-based companies); EOP's financial performance; and general
stock and bond market conditions.
EFFECT ON EOP COMMON SHARE PRICE OF EARNINGS AND CASH DISTRIBUTIONS. It is
generally believed that the market value of the equity securities of a REIT is
based primarily upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, whether from operations,
sales or refinancings, and is secondarily based upon the real estate market
value of the underlying assets. For that reason, EOP Common Shares may trade at
prices that are higher or lower than the net asset value per EOP Common Share.
To the extent EOP retains operating cash flow for investment purposes, working
capital reserves or other purposes, these retained funds, while increasing the
value of EOP's underlying assets, may not correspondingly increase the market
price of the EOP Common Shares. The failure of EOP to meet the market's
expectation with regard to future earnings and cash distributions likely would
adversely affect the market price of the EOP Common Shares. If the market price
of the EOP Common Shares declined significantly, EOP might breach certain
covenants with respect to future debt obligations which breach might adversely
affect EOP's liquidity and EOP's ability to make future acquisitions.
EFFECT ON EOP COMMON SHARE PRICE OF MARKET INTEREST RATES. One of the
factors that influences the price of the EOP Common Shares is the distribution
rate on the EOP Common Shares (as a percentage of the price of the EOP Common
Shares) relative to market interest rates. Thus, an increase in market interest
rates may lead prospective purchasers of EOP Common Shares to expect a higher
distribution rate, which would adversely affect the market price of the EOP
Common Shares.
DEPENDENCE ON EXTERNAL SOURCES OF CAPITAL. In order to qualify as a REIT
under the Code, EOP generally is required to distribute to its shareholders each
year at least 95% of its net taxable income (excluding any net capital gain).
See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification as a
REIT -- Annual Distribution Requirements Applicable to REITs." In part, because
of these distribution requirements, it is unlikely that EOP will be able to fund
all future capital needs, including capital needs in connection with
acquisitions, from cash retained from operations. As a result, to fund future
capital needs, EOP likely will have to rely on third-party sources of capital,
which may or may not be available on favorable terms or at all. EOP's access to
third-party sources of capital will depend upon a number of factors, including
the market's perception of EOP's growth potential and its current and potential
future earnings and cash distributions and the market price of the EOP Common
Shares. Moreover, additional equity offerings may result in substantial dilution
of shareholders' interests in EOP, and additional debt financing may
substantially increase EOP's leverage. See "EOP POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES -- Financing Policies."
DEPENDENCE ON KEY PERSONNEL
EOP is dependent on the efforts of its executive officers, particularly
Messrs. Zell and Callahan. The loss of their services could have an adverse
effect on the operations of EOP. Neither of these officers has an employment
agreement with EOP.
CONTINGENT OR UNDISCLOSED LIABILITIES
In EOP's Formation Transactions, pursuant to the Contribution Agreement,
EOP (through EOP Partnership) acquired all the assets of the ZML Opportunity
Partnerships and certain assets of the Equity
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Group subject to existing liabilities. Such liabilities became the obligations
of EOP because EOP acquired the assets, subject to the liabilities, of the ZML
Opportunity Partnerships, each of which will liquidate over the two-year period
ending July 11, 1999, and the EOP Partnership Units and other assets (including
cash from distributions), net of liabilities, will be distributed to the ZML
Partners and the limited partners of the ZML Opportunity Partnerships (EOP and
one other Person) during such time period. EOP's recourse against the Equity
Group with respect to liabilities in connection with the Management Business
existing at the time of the Formation Transactions is limited to $15 million,
and EOP's recourse with respect to any unknown liabilities in connection with
the contribution of EOP Properties in the Formation Transactions is limited to
1% of the value of the consideration paid for those assets and must be asserted
prior to July 11, 1999. Unknown liabilities might include liabilities for
cleanup or remediation of undisclosed environmental conditions, claims of
tenants, vendors or other persons dealing with the entities prior to EOP's IPO
(that had not been asserted prior to the IPO), accrued but unpaid liabilities
incurred in the ordinary course of business, and claims for indemnification by
ZML Partners of the ZML Opportunity Partnerships, the Equity Group, its
directors and officers, and others indemnified by such entities. See "--
Possible Environmental Liabilities" above as to the possibility of undisclosed
environmental conditions. Similarly, EOP succeeded to any liabilities that the
ZML REITs may have had for periods prior to EOP's IPO and to any liabilities,
including claims for property transfer taxes, arising out of the contribution
to EOP Partnership of the EOP Properties in the Formation Transactions.
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THE SPECIAL MEETINGS
EOP SPECIAL MEETING
GENERAL. This Joint Proxy Statement/Prospectus is being furnished to the
holders of EOP Common Shares as of the EOP Record Date and is accompanied by a
form of proxy, which is being solicited by the EOP Board for use at the EOP
Special Meeting to be held on Friday, December 19, 1997, at 8:00 a.m., Chicago
time, at One North Franklin Street, 3rd Floor, Chicago, Illinois, and any
adjournments thereof. At the EOP Special Meeting, holders of record of EOP
Common Shares will consider and vote upon a proposal to approve the Merger and
the Agreement. See "THE MERGER." This proposal will be approved if it receives
the affirmative vote of the holders of a majority of the EOP Common Shares
entitled to vote on the matter. Proxies may be voted on such other matters as
may properly come before the EOP Special Meeting, or any adjournments thereof,
in the best judgment of the proxy holders named therein.
EACH EOP SHAREHOLDER IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO EOP IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE OR BY FACSIMILE. FAILURE TO RETURN YOUR PROPERLY EXECUTED PROXY OR TO
VOTE AT THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AND
THE AGREEMENT.
VOTING AND REVOCATION OF PROXIES. All EOP Common Shares represented by duly
executed proxies will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated in such proxies. IF NO
INSTRUCTIONS ARE INDICATED, SUCH EOP COMMON SHARES WILL BE VOTED FOR APPROVAL OF
THE MERGER AND THE AGREEMENT AND WILL BE VOTED IN THE DISCRETION OF THE PROXY
HOLDERS ON ANY OTHER MATTERS PROPERLY PRESENTED FOR CONSIDERATION AT THE EOP
SPECIAL MEETING OR ANY ADJOURNMENT THEREOF. An EOP Shareholder who has executed
and delivered a proxy may revoke it at any time before it is voted by giving
written notice of revocation or submitting a signed proxy bearing a later date
to the Secretary of EOP (provided such notice or proxy is actually received by
EOP prior to the vote of the EOP Shareholders), or by voting in person at the
EOP Special Meeting; however, mere attendance at the EOP Special Meeting will
not in and of itself have the effect of revoking the proxy. EOP Shareholders may
vote via facsimile by sending the executed proxy to (212) 929-0308. A proxy will
not be revoked by the death or incapacity of the shareholder executing it
unless, before the shares are voted, notice of such death or supervening
incapacity is filed with the Secretary of EOP or other person authorized to
tabulate the votes on behalf of EOP.
SOLICITATION OF PROXIES. EOP will bear the costs of soliciting proxies from
the EOP Shareholders. In addition to use of the mails, proxies may be solicited
personally or by telephone or facsimile by trustees, officers and other
employees of EOP, who will not be specially compensated for such solicitation
activities. Arrangements also will be made with brokerage firms and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of EOP Common Shares held of record by such
persons, and such persons will be reimbursed for their reasonable expenses
incurred in that effort by EOP. MacKenzie Partners, Inc. has been engaged by EOP
to act as proxy solicitors and will receive a fee of $7,500, plus expenses and
overtime charges, if any.
VOTE REQUIRED. To be approved, the Merger and the Agreement must be
approved by the affirmative vote of the holders of a majority of the EOP Common
Shares entitled to vote at the EOP Special Meeting. Abstentions and "broker
non-votes" will have the effect of votes against the approval of the Merger and
the Agreement. The holders of a majority of the EOP Common Shares entitled to
vote, present in person or by proxy, constitute a quorum for purposes of the EOP
Special Meeting. A holder of an EOP Common Share will be treated as being
present at the EOP Special Meeting if the holder of such share is (i) present in
person at the meeting, or (ii) represented at the meeting by a valid proxy,
whether the instrument granting such proxy is marked as casting a vote or
abstaining, is left blank or does not empower such proxy to vote with respect to
some or all matters to be voted upon at the EOP Special Meeting.
EOP has fixed the close of business on November 14, 1997 as the record date
(the "EOP Record Date") for determining holders entitled to notice of and to
vote at the EOP Special Meeting. Only holders of EOP Common Shares at the close
of business on the EOP Record Date will be entitled to notice of and to vote at
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the EOP Special Meeting. As of the EOP Record Date, there were 161,987,228 EOP
Common Shares entitled to vote at the EOP Special Meeting, with each share being
entitled to one vote. As of the EOP Record Date, the members of the EOP Board
and the executive officers of EOP and their affiliates are deemed to
beneficially own a total of 2,568,420 EOP Common Shares (excluding EOP Common
Shares issuable as of the EOP Record Date upon the exercise of vested options),
representing approximately 1.6% of the outstanding EOP Common Shares, all of
which are expected to be voted in favor of the Merger and the Agreement.
Moreover, in connection with the Agreement, certain trusts established for the
benefit of members of the family of Mr. Zell and certain EOP Predecessors
entered into the EOP Voting Agreement pursuant to which such entities, holding
in the aggregate 2,327,267 EOP Common Shares or approximately 1.4 % of the
outstanding EOP Common Shares as of the EOP Record Date, have agreed, among
other things, to vote their EOP Common Shares to approve the Merger, the
Agreement and any other matter which requires their vote in connection with the
transactions contemplated by the Agreement.
RECOMMENDATION. For the reasons described herein, the EOP Board unanimously
approved the Merger and the Agreement. THE EOP BOARD BELIEVES THE MERGER IS FAIR
TO, AND IN THE BEST INTERESTS OF, EOP AND THE EOP SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE EOP SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER, THE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. In making its
recommendation, the EOP Board considered, among other things, the opinion of
J.P. Morgan that the consideration to be paid is fair to EOP from a financial
point of view. See "THE MERGER -- Background of and Reasons for the Merger" and
"-- Opinions of Financial Advisors."
OTHER MATTERS. At the present time, it is not anticipated that any other
matters will be brought before the EOP Special Meeting for consideration and
vote by the holders of EOP Common Shares, including, without limitation, any
motion to adjourn such meeting. Pursuant to the Agreement, if on the date of the
Shareholder Meetings, either EOP or Beacon has not received duly executed
proxies for a sufficient number of votes to approve the Merger and the Agreement
(but less than one-third of the Beacon Common Shares entitled to vote at the
Beacon Special Meeting, or less than a majority of the EOP Common Shares
entitled to vote at the EOP Special Meeting, as the case may be, have voted
against the Merger and the Agreement), then both EOP and Beacon shall recommend
the adjournment of their respective meetings. In the event of any vote to
adjourn the EOP Special Meeting in order to allow EOP or Beacon to solicit votes
in favor of the Merger and the Agreement, proxies voting AGAINST the Merger and
the Agreement will be voted AGAINST the motion to adjourn the EOP Special
Meeting.
BEACON SPECIAL MEETING
GENERAL. This Joint Proxy Statement/Prospectus is being furnished to the
holders of Beacon Common Shares as of the Beacon Record Date and is accompanied
by a form of proxy, which is being solicited by the Beacon Board for use at the
Beacon Special Meeting to be held on Friday, December 19, 1997, at 9:00 a.m.,
Boston time, at State Street Bank, 225 Franklin Street, Boston, Massachusetts,
and any adjournments thereof. At the Beacon Special Meeting, holders of record
of Beacon Common Shares will consider and vote upon a proposal to approve the
Merger and the Agreement. See "THE MERGER." This proposal will be approved if it
receives the affirmative vote of holders of two-thirds of the Beacon Common
Shares entitled to vote on the matter. Proxies may be voted on such other
matters as may properly come before the Beacon Special Meeting, or any
adjournments thereof, in the best judgment of the proxy holders named therein.
EACH BEACON SHAREHOLDER IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO BEACON IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE OR BY FACSIMILE. FAILURE TO RETURN YOUR PROPERLY EXECUTED
PROXY OR TO VOTE AT THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER AND THE AGREEMENT.
BEACON SHAREHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR
PROXIES.
VOTING AND REVOCATION OF PROXIES. All Beacon Common Shares represented by
duly executed proxies will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated
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in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH BEACON COMMON SHARES
WILL BE VOTED FOR APPROVAL OF THE MERGER AND THE AGREEMENT. A Beacon Shareholder
who has executed and delivered a proxy may revoke it at any time before it is
voted by giving written notice of revocation or submitting a signed proxy
bearing a later date to the Secretary of Beacon (provided such notice or proxy
is actually received by Beacon prior to the vote of the Beacon Shareholders), or
by voting in person at the Beacon Special Meeting; however, mere attendance at
the Beacon Special Meeting will not in and of itself have the effect of revoking
the proxy. Beacon Shareholders may vote via facsimile by calling (800) 223-2064
for instructions.
SOLICITATION OF PROXIES. Beacon will bear the costs of soliciting proxies
from the Beacon Shareholders. In addition to use of the mails, proxies may be
solicited personally or by telephone or facsimile by directors, officers and
regular employees of Beacon, who will not be specially compensated for such
solicitation activities. Arrangements also will be made with brokerage firms and
other custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of Beacon Common Shares held of record by
such persons, and such persons will be reimbursed for their reasonable expenses
incurred in that effort by Beacon. Georgeson & Co. Inc. has been engaged by
Beacon to act as proxy solicitors in connection with the Mergers and will
receive a fee of $10,000, plus expenses.
VOTE REQUIRED. To be approved, the Merger and the Agreement must receive
the affirmative vote of holders of at least two-thirds of the Beacon Common
Shares entitled to vote on the matter. Abstentions and "broker non-votes" will
have the effect of votes against the approval of the Merger and the Agreement.
Votes cast by proxy or in person at the Beacon Special Meeting will be tabulated
by the teller(s) appointed for the meeting and will determine whether or not a
quorum is present. The presence in person or by properly executed proxy of the
holders of a majority of the issued and outstanding Beacon Common Shares
entitled to vote at the Beacon Special Meeting is necessary to constitute a
quorum at the Beacon Special Meeting. Abstentions and "broker non-votes" will be
treated as shares that are present at the Beacon Special Meeting for purposes of
determining whether a quorum exists.
Beacon has fixed the close of business on November 14, 1997 as the record
date (the "Beacon Record Date") for determining holders entitled to notice of
and to vote at the Beacon Special Meeting. Only holders of Beacon Common Shares
at the close of business on the Beacon Record Date will be entitled to notice of
and to vote at the Beacon Special Meeting. As of the Beacon Record Date, there
were 56,269,234 Beacon Common Shares entitled to vote at the Beacon Special
Meeting, with each share being entitled to one vote. As of the Beacon Record
Date, the members of the Beacon Board and the executive officers of Beacon and
their affiliates are deemed to beneficially own a total of 700,000 Beacon Common
Shares (excluding Beacon Common Shares issuable as of the Beacon Record Date
upon the exercise of vested options), representing approximately 1.3% of the
outstanding Beacon Common Shares, all of which are expected to be voted in favor
of the Merger and the Agreement. Moreover, in connection with the Agreement,
these directors, officers and affiliates (members of the Leventhal and Sidman
families, and certain trusts and partnerships established for their benefit)
entered into the Beacon Voting Agreement pursuant to which such individuals and
entities, which collectively hold 700,000 Beacon Common Shares or approximately
1.3% of the outstanding Beacon Common Shares, have agreed, among other things,
to vote their Beacon Common Shares to approve the Merger, the Agreement and any
other matter which requires their vote in connection with the transactions
contemplated by the Agreement.
RECOMMENDATION. For the reasons described herein, the Beacon Board
unanimously approved the Merger and the Agreement. THE BEACON BOARD BELIEVES THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, BEACON AND THE BEACON
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE BEACON SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER, THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
In making its recommendation, the Beacon Board considered, among other things,
the opinion of Morgan Stanley that the consideration to be received by the
Beacon Shareholders is fair from a financial point of view to the Beacon
Shareholders. See "THE MERGER -- Background of and Reasons for the Merger" and
"-- Opinions of Financial Advisors."
OTHER MATTERS. At the present time, it is not anticipated that any other
matters will be brought before the Beacon Special Meeting for consideration and
vote by the Beacon Shareholders, including, without limitation, any motion to
adjourn such meeting. Pursuant to the Agreement, if on the date of the
Shareholder Meetings,
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either Beacon or EOP has not received duly executed proxies for a sufficient
number of votes to approve the Merger and the Agreement (but less than one-third
of the outstanding Beacon Common Shares or less than a majority of the
outstanding EOP Common Shares, as the case may be, have voted against the Merger
and the Agreement), then both Beacon and EOP shall recommend the adjournment of
their respective meetings. In the event of any vote to adjourn the Beacon
Special Meeting in order to allow Beacon or EOP to solicit votes in favor of the
Merger and the Agreement, proxies voting AGAINST the Merger and the Agreement
will be voted AGAINST the motion to adjourn the Beacon Special Meeting.
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THE MERGER
The detailed terms of the Merger are contained in the Agreement attached as
Annex I to this Joint Proxy Statement/Prospectus. The following discussion
describes the more important aspects of the Merger and terms of the Agreement.
This description is qualified in its entirety by reference to the Agreement,
which is incorporated by reference herein and which EOP Shareholders and Beacon
Shareholders are urged to read carefully.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER. The prospectus dated July 7, 1997, relating to
EOP's IPO described EOP's growth strategies. With respect to EOP's external
growth strategy, the prospectus stated that EOP "is pursuing, and expects to
continue to actively pursue, acquisitions of additional office properties . . .,
although no such acquisitions are currently probable. Management believes that
significant opportunities for external growth will continue to be available
through strategic acquisitions of institutional quality office properties
. . . . Properties may be acquired separately or as part of a portfolio, and may
be acquired for cash and/or in exchange for equity or debt securities of [EOP],
and such acquisitions may be customary real estate transactions and/or mergers
or other business combinations."
The prospectus also stated EOP's view that "[t]he real estate industry is
in the early stages of a major consolidation which [EOP] believes will continue
as institutional owners gain increasing confidence in indirect rather than
direct ownership of real estate . . . . [EOP] believes that given its size, its
UPREIT structure (which enables it to acquire properties in transactions that
may permit sellers to defer tax consequences) and its historic relationship with
many of the major institutional owners of real estate in the United States, it
will be well positioned to benefit from the consolidation that is occurring in
the real estate industry."
On August 2, 1997, Samuel Zell, Chairman of the EOP Board, and Alan
Leventhal, President, Chief Executive Officer and a member of the Beacon Board,
independently attended a social event. At that event, Mr. Zell suggested to Mr.
Leventhal that a strategic merger of EOP and Beacon should be explored. Messrs.
Zell and Leventhal then briefly discussed in general terms the possibility of a
business combination transaction between Beacon and EOP and the strategic
benefits that could be achieved by such a transaction. Following this
conversation, both executives agreed to consider further the possible advantages
of such a strategic merger and to contact each other again if they were
interested in pursuing such a transaction. Following August 15, 1997, after
returning from a trip abroad, Mr. Zell contacted Mr. Leventhal to indicate his
continued interest and suggested that the parties proceed with more substantive
discussions regarding a potential transaction.
As a result of these conversations, each of EOP and Beacon began to analyze
a potential strategic merger of EOP and Beacon, focusing particularly on the
geographic and operational fit of the two companies, the quality of the assets
of the other company, the magnitude of and certainty of achieving cost savings
from a combination, the capital structures and relative costs of capital of the
companies, and the strength of the other company's management team.
On August 26, 1997, Tim Callahan, President of EOP, met with Alan Leventhal
and Lionel Fortin, Executive Vice President and Chief Operating Officer of
Beacon, in order to explore the feasibility of a strategic merger in greater
depth. At this meeting, the participants discussed in general terms their
respective businesses and business organizations, their existing markets and the
strategic goals of both companies. The parties also considered, in general
terms, the manner in which the combined companies might operate and what
benefits to the EOP Shareholders and the Beacon Shareholders would result
therefrom. At the end of this meeting, the parties concluded that the potential
benefits from a strategic merger warranted the continuation of discussions
regarding the matter.
Following the August 26 meeting, the parties commenced negotiating the
terms and provisions of reciprocal confidentiality agreements, which provided
that each party would not disclose and would keep confidential all non-public
due diligence materials provided to it by the other party. The parties executed
these confidentiality agreements on September 5, 1997. Also on that date, Alan
Leventhal, Lionel Fortin and Robert
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Perriello (Senior Vice President and Chief Financial Officer of Beacon) met with
Tim Callahan, Richard Kincaid (Executive Vice President and Chief Financial
Officer of EOP) and Jeffrey Johnson (Senior Vice President -- Investments of
EOP) to continue discussions regarding a possible strategic merger. At this
meeting, the participants exchanged a variety of information relating to both
companies' current businesses, future potential acquisitions and short-term and
long-term business objectives.
Over the weekend of September 6, 1997 and September 7, 1997, Lionel Fortin
and Tim Callahan engaged in several phone conversations in which they discussed
the material terms of a possible business combination, including (i) the
relative exchange ratio and whether it would be fixed or vary depending on the
trading price of EOP Common Shares, (ii) whether Beacon should have a right to
terminate the transaction in the event of a significant decrease in the trading
price of EOP Common Shares and, if so, the price level that would trigger such
right, (iii) whether to provide for break-up fees payable by either Beacon or
EOP if the transaction were to be terminated for certain specified reasons and,
if so, the amounts of such fees and triggering events, (iv) the representation
of Beacon on the EOP Board, (v) the nature of mechanisms to permit certain
Beacon Unitholders to defer the recognition of gain if certain properties were
sold or certain outstanding loans repaid, and (vi) the treatment of outstanding
employee stock options. The parties, however, did not reach agreement on the
material terms of a possible business combination at this time.
On September 8, 1997, Samuel Zell contacted Alan Leventhal and both parties
reiterated their interest in pursuing a possible strategic merger. At Mr. Zell's
suggestion, Alan Leventhal, Lionel Fortin, Samuel Zell and Tim Callahan met on
September 10, 1997 in Boston and continued substantive discussions regarding the
terms of a possible strategic merger. At this meeting, the parties agreed upon
the general structure of the Mergers and certain material terms. During the week
of September 8, 1997, Mr. Leventhal had numerous discussions with the members of
the Beacon Board to review the possible strategic merger.
On September 11, 1997, Beacon hired Morgan Stanley to act as Beacon's
financial advisor in connection with the proposed merger of Beacon and EOP.
Morgan Stanley's responsibilities included advice and assistance with respect to
defining objectives, performing valuation analysis, and structuring, planning
and negotiating the transaction. In addition, Morgan Stanley agreed to render a
fairness opinion letter with respect to the fairness, from a financial point of
view, of the consideration to be received by the Beacon Shareholders in the
transaction.
On September 11, 1997, the parties and their attorneys and accountants
commenced preparation and negotiation of definitive documentation for the
proposed business combination transaction. Representatives of EOP and its
attorneys and financial advisors traveled to Boston to commence their respective
due diligence reviews of Beacon and its operations. At this point, a number of
material terms were not resolved, including the trading price of EOP Common
Shares that would trigger Beacon's termination rights, the precise nature of
termination rights and break-up fees and the treatment of outstanding employee
stock options. However, the parties believed that negotiations had proceeded to
a point where the remaining differences should be addressed in the context of
negotiations over definitive documentation.
On September 13, 1997, EOP hired J.P. Morgan to act as EOP's financial
advisor with respect to the delivery of a written opinion to the EOP Board as to
the fairness, from a financial point of view, to EOP of the consideration
proposed to be paid by it in connection with the proposed merger of EOP and
Beacon. On September 13, 1997, EOP also hired Merrill Lynch to act as financial
advisor to EOP in connection with a possible acquisition transaction involving
Beacon. Merrill Lynch's responsibilities included analyzing, negotiating and
advising EOP with respect to such an acquisition transaction.
On September 13 and 14, 1997, the compensation committee of the Beacon
Board met to review the various compensation and severance issues relating to
the possible strategic merger. Additionally, on September 14, 1997, a proposed
form of merger agreement was forwarded by EOP's management and legal counsel and
Beacon's management and legal counsel to the EOP Board and the Beacon Board,
respectively, for their consideration.
On the evening of September 14, 1997, a special meeting of the EOP Board
was held at which members of management and representatives of J.P. Morgan and
Merrill Lynch and EOP's legal advisors were present
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in person or by conference telephone call. The special meeting was held in order
for the EOP Board to consider and formally act upon the proposed strategic
merger. At this meeting, Messrs. Zell, Callahan and Kincaid described to the EOP
Board the background and events leading up to the meeting with respect to the
proposed merger. Messrs. Zell, Callahan and Kincaid then set forth the reasons
they believed a strategic merger with Beacon would be beneficial to EOP and its
shareholders, including (i) Beacon's high quality properties, the nature of
Beacon's operations and Beacon's commitment to tenant satisfaction (each of
which are comparable to those of EOP), (ii) management's belief that the
proposed merger would result in significant operating efficiencies, greater
access to capital and reduced cost of capital, (iii) management's belief that
the combination of Beacon's properties with those of EOP would solidify EOP's
leadership position in the office property industry and significantly enhance
EOP's operations in attractive office markets such as metropolitan Boston,
Chicago, Washington, D.C., Atlanta, Los Angeles and San Francisco, and (iv)
management's belief that a merger would most likely increase Funds from
Operations per EOP Common Share and per EOP Partnership Unit available for
distribution in future periods. Legal counsel then reviewed the fiduciary duties
of trustees in connection with consideration of a merger proposal and described
to the EOP Board the due diligence investigation of Beacon which had been
conducted. J.P. Morgan then made a presentation which included, among other
things, (i) a summary of key transaction terms and a description of the Merger,
(ii) an analysis of the stock trading history of each of EOP and Beacon, (iii)
valuation analyses of EOP and Beacon, (iv) a comparison of each of EOP and
Beacon with selected publicly traded companies, (v) a comparison of the proposed
terms of the Merger with the financial terms of other relevant mergers and
acquisitions, and (vi) a pro forma merger analysis. J.P. Morgan delivered to the
EOP Board its oral opinion that, as of that date, based upon the facts and
circumstances as they existed at that time, and subject to certain assumptions,
limitations and other matters identified to the EOP Board, the Merger
Consideration to be paid by EOP in connection with the proposed Merger is fair,
from a financial point of view, to EOP, including EOP Partnership.
EOP's legal counsel then made a presentation to the EOP Board in which it
explained the material terms of the form of Agreement and the transactions
contemplated thereby, including closing conditions, termination rights and
provisions regarding break-up fees and termination expenses, and briefed the EOP
Board on certain legal issues raised by the proposed merger. In addition, legal
counsel reviewed a proposed timetable for completing the transaction.
Following such presentation, and after extensive discussion of the
advantages and risks of the proposed Merger transaction described under "--
EOP's Reasons for the Merger; Recommendation of the EOP Board" and "-- Opinions
of Financial Advisors -- EOP," the EOP Board concluded that the advantages of
the Merger outweighed the potential risks, and unanimously approved the Merger,
the form of Agreement and all transactions contemplated thereby.
On the evening of September 14, 1997, the Beacon Board met to consider the
proposed transaction with EOP. At this meeting, Beacon's senior management,
together with Beacon's legal and financial advisors and legal counsel to
Beacon's independent directors, reviewed with the Beacon Board the current
operations and properties of EOP, the background of the proposed business
combination, certain financial and valuation analyses of the transaction, and
certain severance and other payments to be made in connection with the Merger.
Beacon's senior management also discussed with the Beacon Board the strategic
rationale for the transaction and the potential benefits and potential negative
consequences of the proposed transaction for Beacon and Beacon Partnership and
their respective security holders. For a discussion of these factors, see "--
Beacon's Reasons for the Merger; Recommendation of the Beacon Board" and "--
Interests of Certain Persons in the Mergers" below. Beacon's legal counsel also
discussed with the Beacon Board, among other things, the terms of the legal
documentation relating to the proposed transaction, the timetable for signing
such definitive documentation and its fiduciary duties to its shareholders as
well as the unitholders of Beacon Partnership. Morgan Stanley then made a
presentation which included, among other things (i) a summary of key transaction
terms and a description of the Merger, (ii) a comparison of each of EOP and
Beacon with selected publicly traded companies, (iii) an analysis of the stock
trading history of EOP and Beacon, (iv) valuation analyses of EOP and Beacon,
(v) a comparison of the proposed terms of the Merger with the financial terms of
other relevant mergers and acquisitions, and (vi) a pro forma merger analysis.
Morgan
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Stanley also rendered its oral fairness opinion to the Beacon Board that, as of
such date, based upon the facts and circumstances as they existed at the time,
and subject to certain assumptions, factors and limitations, the proposed
Exchange Ratio was fair, from a financial point of view, to the Beacon
Shareholders. Following these presentations, the directors asked numerous
questions of management and its legal and financial advisors and discussed at
length the issues raised by these presentations, including the Morgan Stanley
presentation and fairness opinion. At the conclusion of these discussions, the
Beacon Board unanimously approved the merger proposals and the transactions
related thereto on substantially the terms discussed at the meeting, and
authorized management to complete negotiations of, and execute, the Agreement.
Throughout the night of September 14, 1997, representatives of Beacon and
EOP and their respective legal counsel negotiated the remaining unresolved terms
of the Agreement. On the morning of September 15, 1997, Beacon, Beacon
Partnership, EOP and EOP Partnership executed the definitive Agreement and
related documents.
EOP'S REASONS FOR THE MERGER; RECOMMENDATION OF THE EOP BOARD. The EOP
Board believes that the terms of the Merger, the Agreement and the other
transactions contemplated thereby are fair to, and are in the best interests of,
EOP and the EOP Shareholders. Accordingly, the EOP Board unanimously approved
the Merger, the Agreement and the transactions contemplated thereby and
recommends approval of the Merger, the Agreement and such transactions by the
EOP Shareholders. In reaching its decision, the EOP Board considered several
factors, consulted with EOP's management, legal counsel and accountants and was
advised by J.P. Morgan and Merrill Lynch, its financial advisors in this
transaction. The principal reasons, to which relative weights were not assigned,
for the EOP Board's approval of the Agreement and its recommendation to the EOP
Shareholders are as follows:
(i) Benefits from Being the Largest Office REIT in the Nation. The EOP
Board believes that the Merger would solidify EOPs leadership position in
the office property industry. The EOP Board viewed this as favorable
because the combined entity would own and operate approximately 250 office
buildings containing approximately 65 million square feet; would have Funds
from Operations on a pro forma basis for the six months ended June 30, 1997
of approximately $285.6 million and would have a combined pro forma market
capitalization, as of June 30, 1997, of approximately $12.9 billion.
(ii) Cost Savings and Operating Efficiencies. The EOP Board believes
that the Merger would generate additional efficiencies through economies of
scale and anticipated reductions in expenses, which the EOP Board viewed as
favorable. EOP's management estimated that the combined entity would
realize significant savings (approximately $15-20 million per annum) in
overhead and expenses.
(iii) Greater Access to Public Capital Markets. The EOP Board believes
that the Merger would provide greater access to the public equity and debt
markets. The Debt to Market Capitalization Ratio for EOP as of June 30,
1997 (on a pro forma basis without giving effect to the Merger) was
approximately 28.9%, while the ratio on a pro forma basis giving effect to
the Merger as of the same date would be approximately 27.4% (in each case
based on the closing price for the EOP Common Shares on September 12,
1997). The EOP Board viewed this favorably because of management's belief,
based in part on discussions with advisors, investment banking firms and
lenders, that it would provide EOP Shareholders with enhanced liquidity and
make the EOP Common Shares a more attractive investment for institutional
investors following the consummation of the Merger.
(iv) Facilitation of Future Growth. The EOP Board believes that
following the Merger, EOP would be a larger and financially stronger
company, which would facilitate additional growth, including by acquisition
of other public or private entities. The EOP Board viewed this as favorable
because it would provide another efficient and attractive means of growth.
(v) Greater Presence in Attractive Office Markets. The EOP Board
believes that the combination of the Beacon Properties (approximately 20.7
million square feet) with those of EOP will enhance EOP's operations in
attractive office markets such as metropolitan Boston, Chicago, Washington,
D.C., Atlanta, Los Angeles and San Francisco.
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(vi) Expected Positive Effect on Financial Condition. The Unaudited
Pro Forma Combined Financial Statements for the six months ended June 30,
1997 on a pro forma basis illustrate the effects of the Merger. On a pro
forma basis, Funds from Operations for EOP assuming consummation of the
Mergers are $285.6 million for the six months ended June 30, 1997, instead
of $186.2 million for EOP on a pro forma basis without giving effect to the
Merger. The EOP Board viewed this as favorable because it would most likely
increase Funds from Operations per EOP Common Share and per EOP Partnership
Unit available for distribution in future periods. Funds from Operations
available for distribution is not the same as Cash Available for
Distribution because it does not reflect cash required for capital
expenditures and principal repayments on debt.
(vii) Use of EOP Common Shares as Consideration. The Merger could be
effectuated through the issuance of new equity valued at $3.3 billion
(based upon a market price of $33.44 per EOP Common Share on September 12,
1997), rather than through the use of cash or the net proceeds of an
underwritten public offering of equity or debt securities, which the EOP
Board viewed as favorable.
(viii) Fairness Opinion of J.P. Morgan. J.P. Morgan delivered an oral
opinion on September 14, 1997 to the effect that, as of such date and based
upon and subject to certain matters stated therein, the Merger
Consideration to be paid by EOP in connection with the Merger was fair,
from a financial point of view, to EOP. The EOP Board viewed such opinion
as favorable not only because of the conclusion reached by J.P. Morgan, but
also because such conclusion was consistent with the opinion of EOP's
management.
(ix) Favorable Accounting and Tax Treatment. Under generally accepted
accounting principles, the Merger will be accounted for as a purchase, and
for federal income tax purposes the Merger will be a tax-free transaction,
which the EOP Board viewed as favorable because, with certain possible
exceptions, no gain or loss will be recognized by EOP, Beacon or a Beacon
Shareholder who receives EOP Common Shares in exchange for Beacon Common
Shares (except with respect to any cash received in lieu of a fractional
interest in an EOP Common Share).
The EOP Board and management also discussed certain potential negative
factors and risks that could arise or would arise from the Merger. These
included, among others, (i) the risk that the anticipated benefits of the Merger
to EOP and the EOP Shareholders may not be realized as a result of possible
changes in the real estate market in general, the inability to achieve the
anticipated reductions in expenses or other potential difficulties in
integrating the two companies and their respective operations, (ii) the fact
that the amount of the Merger Consideration (based upon the closing price of the
EOP Common Shares on September 12, 1997), to be paid by EOP to equity holders of
Beacon and Beacon Partnership represents a 28.4% premium over the closing price
of the Beacon Common Shares on September 12, 1997 (the last trading day prior to
the public announcement of the Merger), (iii) the significant costs involved in
connection with consummating the Merger, (iv) the risks that the Merger might be
delayed or not consummated and the substantial management time and effort
required to effectuate the Merger and integrate the businesses of EOP and
Beacon, and (v) Beacon's right to terminate the Agreement and withdraw from the
Merger if the average closing price of EOP Common Shares for the twenty
consecutive trading days preceding the seventh trading day prior to the Beacon
Special Meeting decreases below $27.39 per share. The EOP Board did not believe
that the negative factors were sufficient, either individually or collectively,
to outweigh the advantages of the Merger.
THE EOP BOARD BELIEVES THAT THE MERGER, INCLUDING THE EXCHANGE RATIO, IS
FAIR TO, AND IN THE BEST INTERESTS OF, THE EOP SHAREHOLDERS AND HAS UNANIMOUSLY
APPROVED THE MERGER AND THE AGREEMENT AND RECOMMENDS THAT THE EOP SHAREHOLDERS
VOTE FOR APPROVAL OF THE AGREEMENT AND THE ISSUANCE OF EOP COMMON SHARES
PURSUANT THERETO.
In the event the Merger is not consummated for any reason, EOP will
continue to execute its strategic objective of being a major owner of office
properties nationwide. To the extent such opportunities are available, it would
consider other acquisitions of office properties, separately or as part of a
portfolio, including through mergers or other business combinations.
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BEACON'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BEACON BOARD. The
Beacon Board unanimously approved the Mergers, the Agreement and the
transactions contemplated thereby at a meeting held on September 14, 1997. The
Beacon Board believes that the terms of the Merger, the Agreement and the other
transactions contemplated thereby are fair to, and in the best interests of,
Beacon and the Beacon Shareholders. Accordingly, the Beacon Board recommends
approval of the Merger, the Agreement and the transactions contemplated thereby
by the Beacon Shareholders.
In reaching the determination that the Mergers and the related transactions
are fair to, and in the best interests of, Beacon and the Beacon Shareholders,
the Beacon Board consulted with Beacon management, as well as its financial
advisors, legal counsel and accountants and considered the short-term and
long-term interests of Beacon. In particular, the Beacon Board considered the
following material factors, all of which it deemed favorable:
(i) Value of Consideration to Be Received by Beacon Shareholders in
the Merger as Compared to Historical and Recent Market Prices of Beacon
Common Shares. Based on the Exchange Ratio and the closing price of EOP
Common Shares on September 12, 1997 (the last trading day prior to the
public announcement of the Merger), Beacon Shareholders would receive EOP
Common Shares in the Merger having a value of $47.02, representing a 28.4%
premium over the closing price of $36.63 for Beacon Common Shares on
September 12, 1997 and a 27.1% premium over $37.00, the highest closing
price for Beacon Common Shares over the 52-week period preceding the public
announcement of the Merger.
(ii) Benefits from Being the Largest Office REIT in the Nation. The
Merger provides an opportunity for Beacon Shareholders to become equity
holders in the largest publicly owned owner and operator of office
properties in the nation, with one of the strongest management teams in the
industry. As of September 14, 1997, the Merger would result in the
surviving company owning approximately 250 properties containing
approximately 65 million square feet as compared to Beacon's existing and
anticipated portfolio of 126 properties containing approximately 20.7
million square feet. In addition, the combined asset portfolio will be more
geographically diversified than Beacon's current portfolio, with properties
located in 20 states and the District of Columbia compared to Beacon's
existing properties which are located in only five states. By virtue of its
larger size, the Beacon Board believes that the surviving company also
should have improved access to capital markets, which should make
additional debt or other financing available upon more attractive terms.
(iii) Increased Market Capitalization and Liquidity. Based on the
closing price of EOP Common Shares on September 12, 1997, the surviving
company would have a total market capitalization of approximately $11.2
billion. The larger total market capitalization will likely result in
higher trading volumes for the EOP Common Shares, and enhanced liquidity
for the EOP Shareholders. The liquidity of the EOP Common Shares will be
further enhanced over time as the restrictions imposed by the securities
laws on public sale of the EOP Common Shares held by certain EOP
Shareholders expire.
(iv) Cost Savings and Operating Efficiencies. The Beacon Board
believes that the opportunities for economies of scale and operating
efficiencies from the Merger will result in significant cost savings to the
surviving company, particularly as a result of reductions in overhead
expenses. While the Beacon Board did not attempt to quantify these savings
with precision, EOP has informed Beacon that it believes that approximately
$15 to $20 million of corporate level general administrative expenses may
be eliminated as a result of the Merger. See "SUMMARY UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA."
(v) Structure and Tax-Free Nature of the Merger. The Beacon Board
viewed as favorable to its determination the fact that the Merger, as a
"stock-for-stock" rather than a "cash-for-stock" transaction, will provide
the Beacon Shareholders with an opportunity to share in any future
appreciation of the surviving company, as well as the fact that the Merger
will allow the Beacon Shareholders to convert their Beacon Common Shares
into EOP Common Shares on a tax-free basis and the Partnership Merger
generally will allow Beacon Unitholders to convert their Beacon Partnership
Units into EOP Partnership Units on a tax-free basis.
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(vi) Termination Rights in the Event of a Superior Acquisition
Proposal and Break-Up Fee. The Beacon Board considered the provisions of
the Agreement permitting it to receive unsolicited inquiries and proposals
concerning other potential business combinations and to enter into
discussions or negotiations concerning such combinations with third parties
to the extent required by the fiduciary duties of the Beacon Board, and to
terminate the Agreement upon payment to EOP of the Break-Up Fee of up to
$75 million if the Beacon Board, in the exercise of its fiduciary duties,
withdraws or modifies in any manner adverse to EOP its approval or
recommendation of the Merger or the Agreement in connection with, or
approved or recommended, any Superior Acquisition Proposal.
(vii) Termination Rights of Beacon in the Event of a Decrease in the
Price of EOP Common Shares. Under the terms of the Agreement, Beacon also
has the right to terminate the Agreement and withdraw from the Merger if
the average of the closing prices of EOP Common Shares for the 20
consecutive trading days preceding the seventh trading day prior to the
Beacon Special Meeting decreases below $27.39 per share.
(viii) Morgan Stanley Fairness Opinion. The Beacon Board considered as
favorable to its determination the opinion, analyses and presentations of
Morgan Stanley described under "-- Opinions of Financial Advisors" below,
including the opinion of Morgan Stanley to the effect that, as of the date
of such opinion, and based upon and subject to certain matters stated
therein, the consideration to be received by the Beacon Shareholders
pursuant to the Agreement is fair from a financial point of view to such
holders.
The Beacon Board also considered the following potentially negative factors
in its deliberations concerning the Merger:
(i) Limited Public Trading History. EOP completed its IPO in July
1997, and, consequently, EOP Common Shares have a limited trading history
in the public market. The Beacon Board, however, did note that the value of
an EOP Common Share had increased 24.4% from its closing price on the first
day after the IPO to its closing price on September 12, 1997 (the last
trading day prior to the public announcement of the Merger).
(ii) Limited Public Float. Despite EOP's large total market
capitalization, as of September 12, 1997, EOP Shareholders holding 123.4
million EOP Common Shares have restrictions imposed by the securities laws
on their ability to sell their holdings (while only approximately 28.7
million EOP Common Shares were sold publicly in EOP's IPO), thus limiting
EOP's public float at this time. The expiration of these restrictions over
time may affect the trading market for EOP Common Shares.
(iii) Distribution Reduction. The Beacon Shareholders will receive a
distribution per Beacon Common Share after the Merger of $.42 per Beacon
Common Share, as compared to Beacon's current quarterly distribution of
$.50 per Beacon Common Share.
(iv) Fixed Exchange Ratio. The Exchange Ratio is fixed and not subject
to adjustment and, thus, a decrease in the trading price of EOP Common
Shares prior to the Effective Time will reduce the consideration paid to
Beacon's security holders in the Mergers. Despite Beacon's right to
withdraw from the Merger if the average of the closing prices of EOP Common
Shares decreases below $27.39 in the period prior to the Beacon Special
Meeting, a significant decrease in the consideration to be paid could still
occur without triggering Beacon's termination right. Based on the closing
price of EOP Common Shares on September 12, 1997, Beacon Shareholders would
receive EOP Common Shares in the Merger having a value of $ 47.02 per
share.
(v) Anticipated Benefits May Not Be Realized. The Beacon Board
considered the risk that the anticipated benefits of the Mergers to
Beacon's Securityholders may not be realized as a result of possible
changes in the real estate market in general, the inability to achieve the
anticipated reductions in expenses or other potential difficulties in
integrating the two companies and their respective operations.
(vi) Significant Costs Involved. The Beacon Board considered the
significant costs involved in connection with consummating the Mergers, the
substantial management time and effort required to
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effectuate the Mergers and integrate the businesses of Beacon and EOP and
the related disruption to Beacon's operations.
The Beacon Board also considered the potential benefits to certain
directors and officers discussed in "RISK FACTORS -- Conflicts of Interest
Arising from Benefits to Certain Directors and Officers of Beacon," including
the provisions of the Senior Executive Severance Agreements with each of Alan
Leventhal and Lionel Fortin, the Executive Severance Plan, acceleration of the
vesting of certain options to acquire Beacon Common Shares, certain agreements
restricting the sale or refinancing of certain Beacon Properties and the Stock
Purchase Agreements.
In the opinion of the Beacon Board, the above factors represent the
material potential adverse consequences which could occur as a result of the
Merger. In considering the Merger, the Beacon Board considered the impact of
these factors on existing Beacon Shareholders.
In view of the wide variety of factors considered by the Beacon Board, the
Beacon Board did not quantify or otherwise attempt to assign relative weights to
the specific factors that it considered in making its determination. However, in
the view of the Beacon Board, the potentially negative factors considered by it
were not sufficient, either individually or collectively, to outweigh the
positive factors considered by the Beacon Board in its deliberations relating to
the Merger.
In the event the Merger is not consummated for any reason, Beacon will
continue to pursue its business objectives of (i) maximizing Funds from
Operations and cash available for distribution to holders of Beacon Common
Shares, (ii) increasing distributions per Beacon Common Share, (iii) increasing
rental revenues and (iv) continuing its growth through the active acquisition
and development of commercial properties. In addition, Beacon may seek other
business combination opportunities and additional debt and/or equity financing.
The Beacon Board believes that there are no feasible alternatives to the Merger
available to Beacon at the present time that are likely to result in greater
shareholder value.
OPINIONS OF FINANCIAL ADVISORS
EOP. EOP retained J.P. Morgan on September 13, 1997 to render financial
advisory services in connection with a possible business combination with
Beacon. In connection with the engagement, EOP asked J.P. Morgan to render an
opinion as to whether the consideration to be paid in connection with the Merger
was fair, from a financial point of view, to EOP. J.P. Morgan was not requested
to, and did not make, any recommendation to the EOP Board as to the Exchange
Ratio to be provided for in the Merger, which Exchange Ratio was determined
through arm's length negotiations between EOP and Beacon.
At the meeting of the EOP Board on September 14, 1997, J.P. Morgan rendered
its oral opinion to the EOP Board that, as of such date, the consideration to be
paid by EOP in connection with the proposed Merger was fair, from a financial
point of view, to EOP. J.P. Morgan confirmed its September 14, 1997 oral opinion
by delivering its written opinion to the EOP Board, dated September 15, 1997,
that, as of such date, the consideration to be paid by EOP in connection with
the proposed Merger was fair, from a financial point of view, to EOP. No
limitations were imposed by the EOP Board upon J.P. Morgan with respect to the
investigations made or procedures followed by it in rendering its opinions.
THE FULL TEXT OF THE WRITTEN OPINION OF J.P. MORGAN, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS
ATTACHED AS ANNEX II TO THIS JOINT PROXY STATEMENT/ PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. EOP SHAREHOLDERS ARE URGED TO READ THE OPINION
IN ITS ENTIRETY. J.P. MORGAN'S WRITTEN OPINION IS ADDRESSED TO THE EOP BOARD, IS
DIRECTED ONLY TO THE CONSIDERATION TO BE PAID IN CONNECTION WITH THE MERGER AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY EOP SHAREHOLDER AS TO HOW SUCH EOP
SHAREHOLDER SHOULD VOTE AT THE EOP SPECIAL MEETING. THE SUMMARY OF THE OPINION
OF J.P. MORGAN SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
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In arriving at its opinion, J.P. Morgan reviewed, among other things, (i)
the Agreement, (ii) certain publicly available information concerning the
business of Beacon and of certain other companies engaged in businesses
comparable to those of Beacon, and the reported market prices for certain other
companies' securities deemed comparable, (iii) publicly available terms of
certain transactions involving companies comparable to Beacon and the
consideration received for such companies, (iv) current and historical market
prices of EOP Common Shares and Beacon Common Shares, (v) the audited financial
statements on Form 10-K of Beacon for the fiscal year ended December 31, 1996,
and the unaudited financial statements on Form 10-Q of EOP and Beacon for the
six months ended June 30, 1997, (vi) the unaudited financial statements for the
EOP Predecessors, together with the unaudited pro forma statement of operations
for EOP as shown in the Company's Form 10-Q for the period ended June 30, 1997,
(vii) certain agreements with respect to outstanding indebtedness or obligations
of EOP and Beacon, (viii) certain internal financial analyses and estimates of
budgeted 1998 Funds from Operations and net operating income prepared by EOP and
Beacon and their respective managements and (ix) the terms of other business
combinations deemed relevant by J.P. Morgan. J.P. Morgan also held discussions
with certain members of the managements of EOP and Beacon with respect to
certain aspects of the Merger, and the past and current business operations of
EOP and Beacon, the financial condition and future prospects and operations of
EOP and Beacon, and certain other matters believed necessary or appropriate to
J.P. Morgan's inquiry. In addition, J.P. Morgan reviewed such other financial
studies and analyses and considered such other information as it deemed
appropriate for the purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or that
was furnished to it by EOP and Beacon or otherwise reviewed by J.P. Morgan, and
J.P. Morgan has not assumed any responsibility or liability therefor. J.P.
Morgan has not conducted any valuation or appraisal of any assets or
liabilities, nor have any valuations or appraisals been provided to J.P. Morgan.
In relying on financial analyses and forecasts provided to J.P. Morgan, J.P.
Morgan has assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management as
to the expected future results of operations and financial condition of EOP and
Beacon. J.P. Morgan has also assumed that the Merger will have the tax
consequences described in discussions with, and materials furnished to J.P.
Morgan by, representatives of EOP, and that the other transactions contemplated
by the Agreement will be consummated as described in the Agreement.
No representation or warranty was made by any party with respect to these
projections. Financial projections are subject to contingencies beyond
management's control, and realization of the projections depends on numerous
factors, including among other things, the cost of integrating the companies,
the completion of pending developments, the actual cost in relation to such
projects and decisions by management to modify business plans to address
changing needs and a changing operating environment. All material events and
circumstances cannot be predicted and unanticipated events and circumstances are
likely to occur. Accordingly, there may be differences between the projected
results of operations and the actual results of operations of the respective
companies, and such differences could be material. In the event that the
financial projections prove to be materially different, the conclusions reached
in the opinion of J.P. Morgan could be materially affected.
J.P. Morgan's opinions are based on economic, market and other conditions
as in effect on, and the information made available to J.P. Morgan as of, the
date of such opinions. Subsequent developments may affect the written opinion
dated September 15, 1997, and J.P. Morgan does not have any obligation to
update, revise, or reaffirm such opinion. J.P. Morgan expressed no opinion as to
the price at which the EOP Common Shares or Beacon Common Shares will trade at
any future time.
In accordance with customary investment banking practice, J.P. Morgan
informed EOP that J.P. Morgan employed generally accepted valuation methods in
reaching its opinion. The following is a summary of the material analyses
utilized by J.P. Morgan in connection with providing its opinion.
Pro Forma Merger Analysis. J.P. Morgan analyzed the effect of the Merger
on, among other things, estimates of Funds from Operations per EOP Common Share
for the year ended December 31, 1998. In doing
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so, J.P. Morgan combined the estimated 1998 operating results for Beacon and EOP
and assumed certain savings in accounting adjustments and savings in general and
administrative expense per estimates. J.P. Morgan observed a total projected
post-Merger incremental accretion of 8.4% to estimated Funds from Operations for
1998. The analysis assumed the September 11, 1997 closing price of $32.75 per
EOP Common Share in calculating the purchase price for Beacon Common Shares.
J.P. Morgan also analyzed the effect of the Merger on EOP's pro forma
equity market capitalization and total capitalization, and 1998 pro forma
leverage ratios and distribution payout ratio. In this regard, J.P. Morgan noted
that the pro forma equity market capitalization for EOP would be approximately
$8.5 billion, assuming a share price of $32.75 (EOP's closing share price on
September 11, 1997) and 259.6 million EOP Common Shares outstanding after
completion of the Merger, and a total post-transaction pro forma capitalization
of approximately $11.2 billion. J.P. Morgan further noted that (i) EOP's ratio
of debt to total capitalization would decrease slightly, upon completion of the
Merger, from 23.9% prior to the Merger to 22.3% after the assumption of Beacon's
outstanding debt plus the incremental debt incurred from the payment of certain
transaction costs and (ii) the ratio of debt plus preferred stock to total
capitalization would increase slightly from 23.9% to 24.0%. Assuming a
post-transaction annual distribution for EOP of $1.20 per share, its pro forma
distribution payout ratio would be 56.0%, as compared to 60.0% prior to the
Merger.
Public Trading Multiples Analysis. Using publicly available information,
J.P. Morgan compared selected financial and stock market data of Beacon with
similar data for selected publicly traded companies (each, a "Comparable
Company" and, collectively, the "Comparable Companies") engaged in businesses
which J.P. Morgan judged to be analogous to that of Beacon's. The companies
selected by J.P. Morgan were: (i) Arden Realty Group, Inc.; (ii) Boston
Properties, Inc.; (iii) Cali Realty Corporation; (iv) CarrAmerica Realty
Corporation; (v) Cornerstone Properties, Inc.; (vi) Cousins Properties
Incorporated; (vii) Crescent Real Estate Equities Company; (viii) Kilroy Realty
Corp.; (ix) Reckson Associates Realty Corp.; (x) TrizecHahn Corporation; (xi)
Beacon (when comparing comparable companies to EOP); and (xii) EOP (when
comparing comparable companies to Beacon).
For each Comparable Company, publicly available financial performance data
through the six months ended June 30, 1997 was measured. J.P. Morgan calculated
the multiples of current stock price, as of September 11, 1997, to analysts'
estimates for 1998 consensus FFO as reported by First Call for each of the
Comparable Companies to determine the 1998 FFO trading multiples. First Call is
an on-line data service available to subscribers which compiles earnings
estimates by research analysts. J.P. Morgan's calculations resulted in a range
of 1998 FFO multiples from 10.6x to 15.8x. These multiples were then applied to
Beacon's 1998 FFO per share estimate prepared by EOP and Beacon, yielding a
range of implied trading values of approximately $34.24 to $51.03 per Beacon
Common Share compared to an implied transaction price per Beacon Common Share of
$46.06 as of September 11, 1997.
Selected Transaction Analysis. Using publicly available information, J.P.
Morgan examined selected transactions with respect to purchase price per share
to calculate FFO transaction multiples. Specifically, J.P. Morgan reviewed the
following thirteen transactions (collectively, the "Transaction Comparables")
that it deemed relevant: (i) Equity Residential Properties Trust with Evans
Withycombe Residential, Inc.; (ii) Post Properties, Inc. with Columbus Realty
Trust; (iii) Equity Residential Properties Trust with Wellsford Residential
Property Trust; (iv) Camden Property Trust with Paragon Group, Inc.; (v) United
Dominion Realty Trust Inc. with South West Property Trust, Inc.; (vi) Highwoods
Properties, Inc. with Crocker Realty Trust, Inc.; (vii) Simon Property Group
with DeBartolo Realty Corp.; (viii) Eastgroup Properties, Inc. with Copley
Properties, Inc.; (ix) BRE Properties, Inc. with Real Estate Investment Trust of
California; (x) Horizon Outlet Centers, Inc. with McArthur Glen Realty Corp.;
(xi) MidAmerica Apartment Communities Inc. with America First REIT, Inc.; (xii)
Property Trust of America with Security Capital; (xiii) Wellsford Residential
Property Trust with Holly Residential Properties, Inc.; and (xiv) Omega with
Health Equity. J.P. Morgan observed a range of transaction multiples from 8.2x
to 13.4x based on consensus First Call FFO estimates for the acquired companies.
This range was then applied to EOP's and Beacon's estimate of Beacon's 1998 FFO
per share, resulting in a range of equity values for Beacon Common Shares of
between $26.62 and $43.19 per share. J.P. Morgan noted that this range was below
the implied price for Beacon Common Shares.
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Average Transaction Premium Analysis. J.P. Morgan reviewed mergers and
acquisitions of U.S. public companies in negotiated transactions with values
over $50 million to derive a range of premiums paid over the public trading
prices per share five days prior to the announcement of such transactions for
the periods from 1988 to 1992 and from 1993 to 1996. J.P. Morgan noted that the
reasons for, and circumstances surrounding, each of the transactions analyzed
were diverse and that premiums fluctuate among different industry sectors and
based on perceived growth, synergies, strategic value and the type of
consideration utilized in the transaction.
The analyses indicated that the medians of premiums paid over the public
trading prices were 46.7% in the period from 1988-1992 and 29.2% in the period
from 1993 to 1996. J.P. Morgan applied these median premiums to Beacon's closing
price of $35.88 on September 11, 1997, to derive implied prices per Beacon
Common Share of $52.63 and $46.35, respectively.
Historical Exchange Ratio Analysis. J.P. Morgan reviewed the historical
exchange ratio of the daily closing price per Beacon Common Share to the daily
closing price per EOP Common Share for the 46-day period from July 8, 1997 to
September 11, 1997 (EOP has been a publicly traded company since July 8, 1997).
J.P. Morgan noted a low to high range of between 1.09 and 1.32, and an average
exchange ratio of 1.22 during the 46-day period. In addition, such analysis
implied a one-year historical share price range for Beacon of $35.70 to $43.23,
as calculated by multiplying the September 11, 1997 EOP Common Share closing
price of $32.75 by the 46-day low and high values for the exchange ratios,
respectively.
Discounted Cash Flow Analysis. J.P. Morgan performed discounted cash flow
analysis (i.e., an analysis of the present value of the projected levered cash
flows for the periods using a range of discount rates) of Beacon based upon
projections of Beacon's cash flow for the years 1998 through 2000, inclusive. A
range of terminal value capitalization rates from 7.75% to 8.25% was applied to
year 2001 cash flows to determine a terminal value. This value, and the
intervening annual cash flows from year 1998 through 2000, were discounted at a
range of discount rates from 10.00% to 11.00%. The present value of developments
was added to the discounted cash flow value. This sum was then divided by the
total Beacon Common Shares outstanding to arrive at an implied value of $42.54
to $46.96 per Beacon Common Share.
Contribution Analysis. J.P. Morgan reviewed certain estimated future
operating and financial information (including, among other things, total rental
revenues, NOI, EBITDA and Funds from Operations) for EOP and Beacon for 1998.
Based upon 1998 contribution, including synergies and accounting adjustments,
Beacon would contribute 30.9% of total rental revenues, 33.7% of NOI, 32.6% of
EBITDA and 35.7% of Funds from Operations, while maintaining a 34.3% equity
ownership in the combined entity.
The summary set forth above does not purport to be a complete description
of the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that the summary set forth
above and its analyses must be considered as a whole and that selecting portions
thereof, without considering all of its analyses, could create an incomplete
view of the processes underlying its analyses and opinion. J.P. Morgan based its
analyses on assumptions that it deemed reasonable, including assumptions
concerning general business and economic conditions and industry-specific
factors. The other principal assumptions upon which J.P. Morgan based its
analyses are set forth above under the description of each such analysis. J.P.
Morgan's analyses are not necessarily indicative of actual values or actual
future results that might be achieved, which values may be higher or lower than
those indicated. Moreover, J.P. Morgan's analyses are not and do not purport to
be appraisals or otherwise reflective of the prices at which businesses actually
could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to deliver an opinion to
the EOP Board with respect to the Merger on the basis of such experience and its
familiarity with EOP.
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J.P. Morgan received a fee of $1,250,000 from EOP for the delivery of its
opinion and related advisory work. EOP reimbursed J.P. Morgan for its reasonable
expenses incurred in connection with its services, including the fees and
disbursements of counsel, and agreed to indemnify J.P. Morgan against certain
liabilities, including liabilities arising under the federal securities laws.
J.P. Morgan and its affiliates (including Morgan Guaranty Trust Company of
New York) maintain banking and other business relationships with EOP and its
affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $5.9 million in fees over the past two years, and with Beacon and
its affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $58,000 in fees over the past two years. In the ordinary course of
their businesses, affiliates of J.P. Morgan may actively trade the debt and
equity securities of EOP or Beacon for their own accounts or for the accounts of
customers and, accordingly, they may at any time hold long or short positions in
such securities.
BEACON. Morgan Stanley was retained by Beacon as its financial advisor in
connection with the Merger. Morgan Stanley is an internationally recognized
investment banking firm and was selected by Beacon based on Morgan Stanley's
qualifications, experience, expertise and reputation. As part of its investment
banking business, Morgan Stanley is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuation for estate,
corporate and other purposes.
In connection with Morgan Stanley's engagement, the Beacon Board requested
that Morgan Stanley evaluate the fairness, from a financial point of view to the
Beacon Shareholders, of the consideration to be received by the Beacon
Shareholders pursuant to the Agreement. On September 14, 1997, Morgan Stanley
rendered to the Beacon Board an oral opinion to the effect that, as of such date
and subject to certain assumptions, limitations and other matters stated
therein, the consideration to be received by the Beacon Shareholders pursuant to
the Agreement was fair from a financial point of view to the Beacon
Shareholders. Morgan Stanley subsequently confirmed its oral opinion of
September 14, 1997, by delivery of a written opinion dated September 15, 1997
(the "Morgan Stanley Opinion"). Although Morgan Stanley evaluated the fairness,
from a financial point of view to the Beacon Shareholders, of the consideration
to be paid by EOP to acquire Beacon pursuant to the Agreement, the specific
consideration payable in the Merger and the terms of the Agreement were
determined by the Beacon Board and Beacon management through arm's length
negotiation.
THE FULL TEXT OF THE MORGAN STANLEY OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX III. BEACON
SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE MORGAN STANLEY OPINION CAREFULLY
AND IN ITS ENTIRETY. THE MORGAN STANLEY OPINION IS DIRECTED TO THE BEACON BOARD
AND ADDRESSES ONLY THE FAIRNESS FROM A FINANCIAL POINT OF VIEW TO THE BEACON
SHAREHOLDERS OF THE CONSIDERATION TO BE RECEIVED BY THE BEACON SHAREHOLDERS
PURSUANT TO THE AGREEMENT, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE
MERGER. THE MORGAN STANLEY OPINION DOES NOT CONSTITUTE AN OPINION OR A
RECOMMENDATION AS TO HOW ANY BEACON SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
TRANSACTION. THE SUMMARY OF THE MORGAN STANLEY OPINION SET FORTH HEREIN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Morgan Stanley has: (i) reviewed certain
publicly available financial statements and other information of Beacon and EOP,
respectively; (ii) reviewed certain internal financial statements and other
financial and operating data concerning Beacon and EOP prepared by the
managements of Beacon and EOP, respectively; (iii) analyzed certain financial
projections for Beacon and EOP prepared by the managements of Beacon and EOP,
respectively; (iv) reviewed the reported prices and trading activity for the
Beacon Common Shares and EOP Common Shares; (v) compared the financial
performance of Beacon and EOP and the prices and trading activity of the Beacon
Common Shares and EOP Common Shares with that of certain other comparable
publicly traded companies and their securities; (vi) discussed with the senior
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management of Beacon and EOP their preliminary estimates of the synergies and
cost savings expected to be derived from the Merger; (vii) reviewed the
financial terms, to the extent publicly available, of certain comparable
transactions; (viii) reviewed the pro forma impact of the Merger on EOP's Funds
from Operations per share, consolidated capitalization and financial ratios;
(ix) participated in discussions and negotiations among representatives of
Beacon and EOP and their financial and legal advisors; (x) reviewed the
Agreement and certain related documents; and (xi) performed such other analyses
as they have deemed appropriate.
In preparing the Morgan Stanley Opinion, Morgan Stanley has assumed and
relied upon, without independent verification, the accuracy and completeness of
the information reviewed by Morgan Stanley for the purposes of its opinion. With
respect to the financial projections, including the preliminary estimates of
synergies and cost savings expected to be derived from the Merger, Morgan
Stanley assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial performance
of Beacon and EOP. Morgan Stanley did not make any independent valuation or
appraisal of the assets or liabilities of Beacon or EOP, nor was Morgan Stanley
furnished with any such appraisals. Morgan Stanley noted that EOP completed its
IPO on July 7, 1997 and, accordingly, has a limited trading and operating
history as a public company. The Morgan Stanley Opinion was necessarily based on
economic, market and other conditions as in effect on, and the information made
available to, Morgan Stanley as of such date.
Morgan Stanley expressed no opinion as to what the value of the EOP Common
Shares will be when issued to the Beacon Shareholders or the prices at which the
EOP Common Shares will trade after the Merger. In addition, the Morgan Stanley
opinion does not evaluate the relative merits of the Merger as compared to any
other alternative business strategy.
The following is a brief summary of material analyses performed by Morgan
Stanley, which Morgan Stanley presented and reviewed with the Beacon Board on
September 14, 1997, in connection with the oral opinion as of such date and in
connection with the Morgan Stanley Opinion.
In the following analyses, Morgan Stanley assumed the implied purchase
price per share for Beacon Common Shares was $47.02 (the "Implied Purchase
Price"). Morgan Stanley arrived at this amount by multiplying the 1.4063
Exchange Ratio by $33.4375, the closing price of EOP Common Shares on the NYSE
on September 12, 1997.
Selected Comparable Public Companies Analysis. As part of its analysis,
Morgan Stanley compared selected historical and projected financial and
operating data of both Beacon and EOP with the corresponding data and stock
market performance data of certain publicly traded companies that Morgan Stanley
considered comparable in certain respects to Beacon and EOP. The comparable
companies consisted of nine office REITs. Morgan Stanley selected these
companies on the basis of corporate structure, asset type, size and portfolio
characteristics. The comparable companies included: (i) Boston Properties, Inc.;
(ii) Cali Realty Corporation; (iii) CarrAmerica Realty Corporation; (iv)
Cornerstone Properties, Inc.; (v) Duke Realty Investments, Inc.; (vi) Highwoods
Properties, Inc.; (vii) Prentiss Properties Trust; (viii) Reckson Associates
Realty Corp.; (ix) Spieker Properties, Inc.; (x) Beacon (when comparing
comparable companies to EOP); and (xi) EOP (when comparing comparable companies
to Beacon) (collectively, the "Peer Group").
Morgan Stanley calculated trading statistics for each member of the Peer
Group including: (i) the multiple of the common stock trading price as of
September 12, 1997 (the "Share Price") to forecasted 1997 Funds from Operations
("FFO") and to forecasted 1998 FFO (each an "FFO Multiple"); (ii) the multiple
of the Share Price to "adjusted" forecasted 1997 FFO and to "adjusted"
forecasted 1998 FFO (each an "AFFO Multiple"), where "adjusted" means a
normalized reserve for capitalized leasing and maintenance costs, and straight
line rent adjustment and gains from land sales have been subtracted from
forecasted 1997 and forecasted 1998 FFO; (iii) the multiple of 1998 forecasted
FFO to Share Price to the forecasted funds from operations five year growth rate
("FFO to Growth Multiple"); and (iv) the premium obtained by computing the
percentage excess of the Share Price over the net asset value per share
("Premium to NAV"). Morgan Stanley then calculated the high, median and low
statistics for the Peer Group. All FFO estimates and growth rates for the Peer
Group were based on consensus security analyst estimates as reported by First
Call as of
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September 13, 1997, except for the forecasted funds from operations five year
growth rate for EOP, which was from Merrill Lynch Research. All AFFO estimates
and net asset value per share estimates were from Realty Stock Review as of
August 29, 1997. The estimates published by First Call and Realty Stock Review,
a publication of the Dow Jones Financial Publishing Corp. which presents monthly
market analyses of REITs and operating companies, were not prepared in
connection with the Merger or at Morgan Stanley's request.
For the Peer Group, Morgan Stanley noted that (i) FFO multiples ranged from
11.9x to 19.7x forecasted 1997 funds from operations, and 10.7x to 17.4x
forecasted 1998 funds from operations; (ii) AFFO multiples ranged from 14.5x to
26.1x forecasted 1997 adjusted funds from operations, and 13.3x to 24.1x
forecasted 1998 adjusted funds from operations; (iii) 1998 FFO to Growth
Multiples ranged from 1.1x to 2.1x the forecasted funds from operations five
year growth rate; and (iv) Premiums to NAV ranged from 23% to 70% over the
estimated net asset value per share. Morgan Stanley also noted that (i) the
median FFO multiples when Beacon was excluded from the Peer Group and when EOP
was excluded from the Peer Group were 14.4x and 14.0x forecasted 1997 FFO,
respectively, and 12.6x and 12.5x forecasted 1998 FFO, respectively; (ii) the
median AFFO multiples with Beacon and with EOP excluded from the Peer Group were
15.9x and 15.9x forecasted 1997 adjusted funds from operations, respectively,
and 14.4x and 14.4x forecasted 1998 adjusted funds from operations,
respectively; (iii) the median 1998 FFO to Growth Multiple with EOP excluded
from the Peer Group was 1.4x the forecasted funds from operations five year
growth rate; and (iv) the median Premiums to net asset value with Beacon and
with EOP excluded from the Peer Group were 33% and 31% over the estimated net
asset value per share, respectively.
Morgan Stanley derived a range of valuations for EOP from the Peer Group
data set forth above. Applying the range of FFO multiples derived from the Peer
Group (excluding EOP and the remaining high and low multiples from the Peer
Group) of 10.7x to 13.6x forecasted 1998 funds from operations to the First Call
consensus forecasted 1998 funds from operations for EOP resulted in a low to
high range of Share Prices for EOP of $20.57 to $26.06. Applying the range of
FFO to Growth Multiples derived from the Peer Group (excluding EOP and the
remaining high and low multiples from the Peer Group) of 1.2x to 1.6x the
forecasted funds from operations five year growth rate for EOP resulted in a low
to high range of 1998 FFO multiples of 14.7x to 18.8x forecasted 1998 funds from
operations for EOP. These forecasted 1998 FFO multiples result in a low to high
range of Share Prices for EOP of $28.20 to $36.08. Applying the range of
premiums at which the Share Price is trading over net asset value per share for
the Peer Group (excluding EOP and the remaining high and low premiums from the
Peer Group) of 24% to 52% above the net asset value per share (as estimated by
Realty Stock Review) for EOP resulted in a low to high range of Share Prices for
EOP of $24.44 to $29.95.
Morgan Stanley derived a range of valuations for Beacon from the Peer Group
data as well. Applying the range of FFO multiples derived from the Peer Group
(excluding Beacon and the remaining high and low multiples from the Peer Group)
of 10.7x to 13.7x forecasted 1998 funds from operations to the First Call
consensus forecasted 1998 funds from operations for Beacon resulted in a low to
high range of Share Prices for Beacon of $33.16 to $42.41. Applying the range of
premiums at which the Share Price is trading over net asset value per share for
the Peer Group (excluding Beacon and the remaining high and low premiums from
the Peer Group) of 24% to 55% above the net asset value per share (as estimated
by Realty Stock Review) for Beacon resulted in a low to high range of Share
Prices for Beacon of $34.70 to $43.32. Morgan Stanley observed that the Implied
Purchase Price for Beacon is above the low and high range (excluding Beacon and
the remaining high and low multiples from the Peer Group) of the implied equity
valuation of Beacon and thus, such analysis supports Morgan Stanley's conclusion
that the Merger Consideration to be received by the Beacon Shareholders pursuant
to the Merger is fair to the Beacon Shareholders from a financial point of view.
As part of its analysis, Morgan Stanley also compared selected projected
financial and operating data of EOP with the corresponding data and stock market
performance data of another group of publicly traded companies that Morgan
Stanley considered comparable in certain respects to EOP. The comparable
companies consisted of seven REITs. Morgan Stanley selected these companies on
the basis of corporate structure, and the size relative to other publicly traded
companies in their respective asset sector categories. Morgan Stanley selected
the largest REITs in six REIT industry sectors. The companies selected included:
(i) Equity Residential Properties Trust in the multifamily REIT sector; (ii)
Starwood Lodging Trust in the
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hotel REIT sector; (iii) Simon DeBartolo Group, Inc. in the regional mall REIT
sector; (iv) Vornado Realty Trust in the non-mall retail REIT sector; (v) Public
Storage, Inc. in the self-storage REIT sector; (vi) Meditrust in the health care
REIT sector; and (vii) The Mills Corporation in the factory outlet center REIT
sector (collectively, "Peer Group II").
For Peer Group II, Morgan Stanley noted that the premium obtained by
computing the percentage excess of each company's FFO multiple over the median
1998 FFO multiples for each company's respective industry sector ("Premium to
Sector Median") ranged from 5.4% to 70.5%. Morgan Stanley derived a range of
valuations for EOP from the Peer Group II data set forth above. Applying the
range of Premiums to Sector Median derived from Peer Group II (excluding the
high and low multiples from Peer Group II) of 8.1% to 48.9% over the median 1998
FFO multiple for the office REIT sector for EOP resulted in a low to high range
of Share Prices for EOP of $25.71 to $35.41.
No company utilized in the comparable company analyses for purposes of
comparison to EOP and Beacon is identical to EOP or Beacon. In selecting and
evaluating the Peer Group and Peer Group II, Morgan Stanley made certain
judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters. Mathematical
analysis (such as determining the average or median) of certain financial ratios
of the Peer Group and Peer Group II is not in itself a meaningful method of
using comparable company data.
Comparable Transaction Analysis. Using publicly available information,
Morgan Stanley compared the principal terms of the Merger with those of selected
other comparable transactions ("Comparable Transactions"). These transactions
(some of which are pending), all involving combinations of two REITs, were the
mergers of: (i) Equity Residential Properties Trust with Evans Withycombe
Residential, Inc.; (ii) Post Properties, Inc. with Columbus Realty Trust; (iii)
Equity Residential Properties Trust with Wellsford Residential Property Trust;
(iv) Camden Property Trust with Paragon Group, Inc.; (v) United Dominion Realty
Trust, Inc. with South West Property Trust, Inc.; (vi) Chateau Communities, Inc.
with ROC Communities, Inc.; (vii) Highwoods Properties, Inc. with Crocker Realty
Trust, Inc.; (viii) Simon Property Group with DeBartolo Realty Corp.; (ix)
Eastgroup Properties, Inc. with Copley Properties, Inc.; (x) Bradley Real
Estate, Inc. with Tucker Properties Corp.; (xi) BRE Properties, Inc. with Real
Estate Investment Trust of California; (xii) Horizon Outlet Centers, Inc. with
McArthur Glen Realty Corp.; and (xiii) Wellsford Residential Property Trust with
Holly Residential Properties, Inc. Morgan Stanley noted that the premiums which
the acquiring companies paid over the targets' unaffected share price ("Premiums
to Unaffected Share Price" defined by computing the percentage excess of the
price per share paid over the average stock price for the ten trading days
ending five trading days prior to the announcement of the transaction) and the
premiums which the acquiring companies paid over the targets' 52 week high share
price ("Premiums to 52 Week High Share Price" defined by computing the
percentage excess of the price per share paid over the high share price over the
course of the 52 weeks prior to the announcement of the transaction) ranged from
- -2.3% to 59.0% and -40.0% to 16.0%, respectively.
Morgan Stanley derived a range of valuations for Beacon from the Comparable
Transactions data. Applying the range of Premiums to Unaffected Share Price
derived from the Comparable Transactions (excluding the high and low premiums
from the Comparable Transactions) of 4.8% to 23.0% to the current Beacon share
price resulted in a low to high range of Share Prices for Beacon of $38.38 to
$45.05. Applying the range of Premiums to 52 Week High Share Price derived from
the Comparable Transactions (excluding the high and low premiums from the
Comparable Transactions) of -21.4% to 12.1% to the current Beacon share price
resulted in a low to high range of Share Prices for Beacon of $28.79 to $41.06.
Morgan Stanley observed that the Implied Purchase Price for Beacon is above the
low and high range (excluding the high and low premiums from the Comparable
Transactions) of the implied equity valuation of Beacon and thus, such analysis
supports Morgan Stanley's conclusion that the Merger Consideration to be
received by the Beacon Shareholders pursuant to the Merger is fair to the Beacon
Shareholders from a financial point of view.
No transaction considered for purposes of the Comparable Transaction
analysis is identical to the Merger. In evaluating the Comparable Transactions,
Morgan Stanley made certain judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
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other matters. Mathematical analysis (such as determining the average or median)
is not in itself a meaningful method of using Comparable Transactions data.
Stock Trading History. Morgan Stanley reviewed the historical trading
prices for the EOP Common Shares from EOP's IPO through September 12, 1997, and
noted that the low and high closing prices for EOP Common Shares for this period
were $25.25 and $33.50, respectively. Morgan Stanley also reviewed the
historical trading prices for Beacon Common Shares for the last twelve months
ended September 12, 1997, and noted that the low and high closing prices for the
Beacon Common Shares for this period were $27.38 and $37.00, respectively.
Morgan Stanley also reviewed the premium obtained by computing the
percentage excess of the product of the closing prices of EOP Common Shares and
1.4063 over the closing prices of Beacon Common Shares for each day of trading
from EOP's IPO on July 8, 1997 through September 12, 1997, and computed the
average value of these premiums for the entire period and for the last one week,
one month and six weeks of this period. These premiums averaged 28.0%, 20.0%,
19.1% and 15.6% for the last one week, one month, six weeks and entire period
ended September 12, 1997, and was 28.4% on September 12, 1997.
Historical Implied Exchange Ratios. Morgan Stanley also computed the
historical ratios of the closing share prices of Beacon to EOP for each day of
trading from EOP's IPO on July 8, 1997 through September 12, 1997, and noted
that the averages of such ratios were 1.099, 1.174, 1.183 and 1.221 for the last
one week, one month, six weeks and entire period ending September 12, 1997, and
was 1.095 on September 12, 1997, as compared to the Exchange Ratio of 1.4063.
Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash
flow analyses of EOP based upon projections and assumptions provided by EOP's
management of EOP's FFO per EOP Common Share and by maintaining a constant
distribution payout ratio ("Distribution Payout Ratio," defined as the ratio of
distributions per share of common stock over FFO per share of common stock)
equal to EOP's current Distribution Payout Ratio for the years ending December
31, 1998 to December 31, 2002, using discount rates reflecting an expected
equity total return of 12.0% to 15.0% and terminal multiples of 2003 FFO of
15.0x to 17.5x (Morgan Stanley, for the purposes of this valuation, derived 2003
FFO by growing 2002 FFO at a rate equal to the compound annual growth rate of
FFO from 1998-2002). The range of present values per EOP Common Share was $30.13
to $39.08.
Morgan Stanley performed discounted cash flow analyses of Beacon based upon
projections and assumptions provided by Beacon's management of Beacon's FFO per
Beacon Common Share assuming no external growth (i.e., no acquisitions) and by
maintaining a constant Distribution Payout Ratio equal to Beacon's current
Distribution Payout Ratio for the years ending December 31, 1998 to December 31,
2002, using discount rates reflecting an expected equity total return of 10.0%
to 12.0% and terminal multiples of 2003 FFO of 11.0x to 13.0x (Morgan Stanley,
for the purposes of this valuation, derived 2003 FFO by growing 2002 FFO at a
rate equal to the compound annual growth rate of FFO from 1998-2002). The
expected equity total return and terminal multiples were affected by the
assumption of no external growth for these analyses. The range of present values
per Beacon Common Share was $32.43 to $40.09. Morgan Stanley observed that the
Implied Purchase Price for Beacon is above the range of the implied equity
valuation of Beacon and thus, such analysis supports Morgan Stanley's conclusion
that the Merger Consideration to be received by the Beacon Shareholders pursuant
to the Merger is fair to the Beacon Shareholders from a financial point of view.
Pro Forma Merger Analysis. As part of its analysis, Morgan Stanley analyzed
certain pro forma effects of the Merger for the fiscal years ended 1997 and
1998. These analyses were based on the First Call consensus estimates of FFO per
share for EOP and Beacon, certain synergies, and certain other adjustments
Morgan Stanley deemed appropriate.
Morgan Stanley also compared EOP's projected stand-alone FFO per share to
EOP's pro forma combined FFO per share resulting from the Merger. Morgan Stanley
observed that, after giving effect to expected synergies of $20.0 million for
fiscal year 1997 and 1998, an accounting adjustment of $5.8 million for fiscal
year 1997 and $5.3 million for fiscal year 1998 and transaction expenses then
estimated at $142.2 million to be financed with debt at a weighted average
interest rate of 7.45%, the transaction would be accretive to
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FFO per share in the amount of $0.15 per share in 1997, an 8.6% increase over
projected stand-alone FFO per share, and $0.15 per share in 1998, a 7.6%
increase over projected stand-alone FFO per share.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting any
portions of Morgan Stanley's analyses, without considering all analyses, would
create an incomplete view of the process underlying the Morgan Stanley Opinion.
In addition, Morgan Stanley may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting from
any particular analysis described above should not be taken to be Morgan
Stanley's view of the actual value of EOP or Beacon.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
EOP and Beacon. Where appropriate, Morgan Stanley discounted comparable industry
and/or company data to reflect the combined company's current and projected
operating performance in relation to that of the relevant industry or comparable
company group. The analyses performed by Morgan Stanley are not necessarily
indicative of actual values, which may be significantly more or less favorable
than suggested by such analyses. Such analyses were prepared solely as a part of
Morgan Stanley's analysis of whether the consideration to be received by the
holders of Beacon Common Shares pursuant to the Agreement is fair from a
financial point of view to such holders, and were conducted in connection with
the delivery of the Morgan Stanley Opinion. The analyses do not purport to be
appraisals or to reflect the prices at which Beacon might actually be sold.
Morgan Stanley was not authorized to solicit, nor did Morgan Stanley solicit,
third-party indications of interest for the acquisition of all or any part of
Beacon.
As described above (see "-- Background of and Reasons for the Merger --
Beacon's Reasons for the Merger; Recommendation of the Beacon Board"), the
Morgan Stanley Opinion and the information provided by Morgan Stanley to the
Beacon Board was one of a number of factors taken into consideration by the
Beacon Board in making its determination to recommend approval of the Merger and
the Agreement. Consequently, the Morgan Stanley analyses described above should
not be viewed as determinative of the opinion of the Beacon Board with respect
to the value of Beacon and EOP or whether a different valuation could have been
negotiated with EOP. The consideration received from EOP was determined through
negotiations between the Beacon Board and management of Beacon and EOP and was
approved by the Beacon Board. Morgan Stanley provided advice to the Beacon Board
during the course of such negotiations; however, the decision to enter into the
Agreement was solely that of the Beacon Board.
Pursuant to a letter agreement dated September 15, 1997, Beacon has agreed
to pay Morgan Stanley, upon the delivery of the Morgan Stanley Opinion to the
Beacon Board, a transaction fee of $2.5 million. In addition, Beacon has agreed
to reimburse and to indemnify Morgan Stanley for liabilities and expenses
arising out of the engagement and the transactions in connection therewith,
including liabilities under federal securities laws.
In the ordinary course of its business, Morgan Stanley and its affiliates
may actively trade the debt and equity securities of Beacon and EOP for their
own account and for the accounts of customers and, accordingly, may at any time
hold a long- or short-term position in such securities. Morgan Stanley has
provided financial advisory and investment banking services to EOP and Beacon in
the past, for which services Morgan Stanley has received customary fees.
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction of all conditions to consummation
of the Mergers (see "-- Conditions to Consummation of the Mergers"), EOP and
Beacon will file articles of merger with the Department. The Effective Time will
be such time as shall be specified in the articles of merger, not to exceed 30
days after the articles of merger are accepted for record by the Department.
Prior to the filing of the articles of merger with the Department, EOP and
Beacon each has the right to terminate the Agreement should the Merger not be
consummated before April 15, 1998 (subject to extension by EOP in certain
circumstances),
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provided that it has not breached in any material respect its obligations under
the Agreement in any manner that shall have proximately contributed to the
occurrence of the failure of the Merger to be consummated before such date. See
"-- Termination, Extension, Amendment, and Waiver."
Until the Effective Time, Beacon Shareholders will retain their rights as
shareholders of Beacon to vote on matters submitted to them.
THE PARTNERSHIP MERGER
Immediately following consummation of the Merger, Beacon Partnership shall
be merged with and into EOP Partnership (or, at EOP Partnership's option, a
limited liability company or limited partnership owned entirely, directly and/or
indirectly, by EOP Partnership, as EOP and EOP Partnership shall determine). As
soon as practicable after satisfaction of all conditions to consummation of the
Mergers (see "-- Conditions to Consummation of the Mergers") and the Merger has
been consummated, EOP Partnership will file a certificate of merger with the
Secretary of State of the State of Delaware.
EXCHANGE RATIOS AND EXCHANGE OF EOP COMMON SHARES, EOP PREFERRED SHARES AND EOP
PARTNERSHIP UNITS
At the Effective Time, (i) each outstanding Beacon Common Share will be
converted into the right to receive 1.4063 EOP Common Shares, with cash in lieu
of issuance of any fractional interests as described below, (ii) each
outstanding Beacon Preferred Share will be converted into the right to receive
one EOP Preferred Share, (iii) each outstanding Beacon Partnership Unit will be
converted into the right to receive 1.4063 EOP Partnership Units, with cash in
lieu of issuance of any fractional interests as described below and (iv) each
outstanding Beacon Preferred Unit will be converted into the right to receive
one EOP Preferred Unit. In lieu of issuance of any fractional EOP Common Shares
or EOP Partnership Units, each holder of Beacon Common Shares upon surrender of
a certificate for exchange and each holder of Beacon Partnership Units shall be
paid an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (i) the average closing price of one EOP Common Share
on the NYSE on the five trading days immediately preceding the closing date by
(ii) the fractional amount of the EOP Common Shares or EOP Partnership Units
which such holder would otherwise be entitled to receive under the Agreement.
At the Effective Time, all outstanding options under Beacon's Amended and
Restated 1994 Stock Option and Incentive Plan and Beacon's 1996 Stock Option
Plan (collectively, the "Beacon Stock Options") will vest and be immediately
exercisable, be assumed by EOP and be deemed to constitute an option to acquire
the same number of EOP Common Shares as the holder of such Beacon Stock Option
would have been entitled to receive pursuant to the Merger had such holder
exercised such Beacon Stock Option in full immediately prior to the Effective
Time. Such EOP Common Shares may be purchased at a price per share equal to the
aggregate exercise price for the Beacon Common Shares subject to such Beacon
Stock Option divided by the number of full EOP Common Shares deemed to be
purchasable pursuant to such Beacon Stock Option. All such Beacon Stock Options
held by directors of Beacon and officers of Beacon above the office of Vice
President will expire on the next business day following the closing date under
the Agreement. All such Beacon Stock Options held by any other person will
expire (i) six months after the closing date, if such person's employment
terminates prior to or during such six-month period or (ii) on the date on which
such Beacon Stock Options expire in accordance with their terms, if such
person's employment does not terminate prior to or during such six-month period.
EOP has agreed to use its reasonable best efforts to arrange a transaction
whereby each person who exercises his Beacon Stock Option on or within one
business day after the date of the Merger will receive (other than from EOP or
any of its Subsidiaries) a cash amount per Beacon Stock Option equal to the
excess, if any, of the fair market value of the EOP Common Shares underlying
such Beacon Stock Option over the deemed exercise price thereof, and whereby EOP
will receive a cash amount equal to the aggregate exercise price of such Beacon
Stock Option. In the case of any such transaction, EOP would not be responsible
for the brokerage commissions incurred on behalf of any director or officer who
is above the level of Vice President.
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As soon as reasonably practicable after the Effective Time, Boston
EquiServe, L.P., an affiliate of BankBoston, N.A. (the "Exchange Agent"), will
send to each holder of record of Beacon Common Shares or Beacon Preferred Shares
at such time, transmittal materials for use in exchanging all of their
certificates representing Beacon Common Shares or Beacon Preferred Shares, as
applicable, for a certificate or certificates representing EOP Common Shares or
EOP Preferred Shares. The transmittal materials will contain information and
instructions with respect to the surrender of certificates for Beacon Common
Shares and Beacon Preferred Shares in exchange for certificates of EOP Common
Shares and EOP Preferred Shares, respectively.
BEACON SHAREHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender following the Effective Time of all the certificates
representing Beacon Common Shares or Beacon Preferred Shares registered in the
name of a holder of Beacon Common Shares or Beacon Preferred Shares, as
applicable, (or indemnity satisfactory to EOP or the Exchange Agent if any of
such certificates are lost, stolen or destroyed), the Exchange Agent will mail
to such holder a certificate or certificates representing the number of EOP
Common Shares or EOP Preferred Shares, as applicable, to which such holder is
entitled, together with all undelivered distributions or other distributions to
which such holder is entitled and, where applicable, a check for the amount
representing any fractional share interest (in each case, without interest). In
the event of a transfer of ownership of Beacon Common Shares or Beacon Preferred
Shares which is not registered in the transfer records of Beacon, payment may be
made to a person other than the person in whose name the certificates for such
shares so surrendered is registered if such certificates shall be properly
endorsed or otherwise be in proper form for transfer and the person requesting
such payment either shall pay any transfer or other taxes required by reason of
such payment being made to a person other than the registered holder of such
certificates or establish to the satisfaction of EOP that such tax or taxes have
been paid or are not applicable.
DISTRIBUTIONS
Except for Beacon's regularly quarterly distributions not in excess of $.50
per Beacon Common Share, Beacon has agreed not to declare, set aside or pay any
distributions on the Beacon Common Shares prior to the Effective Time.
Notwithstanding the foregoing, to the extent necessary to satisfy the
requirements of Section 857(a)(1) of the Code for the taxable year of Beacon
ending at the Effective Time (and to avoid the payment of tax with respect to
undistributed income), Beacon agreed to declare a distribution (the "Final
Beacon Distribution") to holders of Beacon Common Shares, the record date for
which will be the close of business on the last business day prior to the
Effective Time, in an amount equal to the minimum distribution sufficient to
permit Beacon to satisfy such requirements. If Beacon determines it necessary to
declare the Final Beacon Distribution, it will notify EOP at least ten days
prior to the date for the Beacon Special Meeting, and EOP will declare a
distribution per share to holders of EOP Common Shares, the record date for
which will be the close of business on the last business day prior to the
Effective Time, in an amount per EOP Common Share equal to the quotient obtained
by dividing (x) the Final Beacon Distribution per Beacon Common Share paid by
Beacon by (y) 1.4063. Additionally, notwithstanding the foregoing, (a) Beacon
has agreed to declare and pay to holders of Beacon Common Shares of record as of
December 10, 1997, for the fiscal period commencing October 1, 1997 and ending
immediately prior to the earlier of the Effective Time or the close of business
on December 31, 1997 (the "Fourth Quarter Distribution Time"), a distribution of
$.50 per Beacon Common Share, such distribution to be paid by Beacon immediately
prior to the Fourth Quarter Distribution Time and (b) EOP has declared a
dividend payable to holders of EOP Common Shares of record as of December 10,
1997, for the fiscal period commencing October 1, 1997 and ending immediately
prior to the Fourth Quarter Distribution Time, a distribution of $.30 per EOP
Common Share, such distribution to be paid by EOP immediately prior to the
Fourth Quarter Distribution Time. Any distribution paid pursuant to the
foregoing sentence will be in addition to any Final Beacon Distribution and
corresponding EOP distribution.
Distributions declared by EOP after the Effective Time will include
distributions on all EOP Common Shares issued in the Merger, but no distribution
with respect to EOP Common Shares with a record date after the Effective Time
will be paid to the holder of any unsurrendered certificates of Beacon Common
Shares with
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respect to the EOP Common Shares represented thereby, and no cash payment in
lieu of fractional shares will be paid to any such holder, until the surrender
of such certificates as described above.
EFFECT OF MERGERS ON THE DECLARATION OF TRUST AND THE EOP BYLAWS AND AGREEMENT
OF LIMITED PARTNERSHIP
The Declaration of Trust and the EOP Bylaws, as in effect immediately prior
to the Effective Time, shall continue in full force and effect after the Merger
until further amended in accordance with applicable Maryland law. The Agreement
of Limited Partnership, as amended, of EOP Partnership, as in effect immediately
prior to the Effective Time (the "EOP Partnership Agreement"), shall continue in
full force and effect after the Partnership Merger until further amended in
accordance with applicable Delaware law.
HEADQUARTERS
After the Merger, the headquarters of EOP will continue to be located at
Two North Riverside Plaza, Suite 2200, Chicago, Illinois, the current
headquarters of EOP.
TRUSTEES AND MANAGEMENT
Following the Effective Time, the trustees of EOP who were trustees
immediately prior thereto will continue to serve for the balance of their
unexpired terms. In addition, Alan M. Leventhal, President, Chief Executive
Officer and a Director of Beacon, and Edwin N. Sidman, Chairman of the Beacon
Board, will become trustees of EOP with terms expiring at the first annual
meeting of the EOP Shareholders with respect to which notice is mailed
subsequent to the Effective Time. EOP has agreed that Messrs. Leventhal and
Sidman will thereafter be re-nominated as trustees for terms expiring at the
annual meetings of EOP Shareholders in 2002 and 2001, respectively. Those
persons currently serving as EOP's executive officers and senior management will
continue to be EOP's executive officers and senior management after the Merger.
EOP will continue to be the managing general partner of EOP Partnership
following consummation of the Merger. In addition, in the event that Mr. Zell
ceases to be Chairman of the EOP Board prior to the Effective Time, the EOP
Board will designate Mr. Leventhal as Chairman of the EOP Board for a term
consisting of at least 12 consecutive months (subject to Mr. Leventhal remaining
a trustee during such 12-month period).
CONDITIONS TO CONSUMMATION OF THE MERGERS
The respective obligations of EOP and Beacon to effect the Merger, and of
EOP Partnership and Beacon Partnership to effect the Partnership Merger, are
subject to the satisfaction of the following conditions: (i) the Agreement and
the transactions contemplated thereby shall have been approved by the EOP
Shareholders, the Beacon Shareholders and the Beacon Preferred Shareholders;
(ii) the Agreement and the transactions contemplated thereby shall have been
approved by the Beacon Unitholders; (iii) the waiting period (and any extension
thereof), if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
applicable to the Merger, the Partnership Merger and the transactions
contemplated by the Stock Purchase Agreements (as defined below) shall have
expired or been terminated; (iv) the NYSE shall have approved for listing the
EOP Common Shares and the EOP Preferred Shares to be issued in the Merger and
the EOP Common Shares reserved for issuance upon redemption of EOP Partnership
Units issued in the Partnership Merger, subject to official notice of issuance;
(v) the Registration Statement shall have become effective and shall not be the
subject of any stop order or proceedings by the Commission seeking a stop order;
(vi) no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Mergers or any of
the other transactions contemplated by the Agreement shall be in effect; and
(vii) EOP shall have received all state securities or "blue sky" permits and
other authorizations necessary to issue the EOP Common Shares, EOP Preferred
Shares and EOP Partnership Units issuable in the Mergers.
Consummation of the Mergers also is subject to the satisfaction or waiver
by EOP and EOP Partnership or Beacon and Beacon Partnership, as applicable, of
the following conditions: (i) the representations and
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warranties of each party contained in the Agreement shall be true and correct in
all material respects as of the date of the Agreement and as of the closing
date, except to the extent that such representation or warranty is expressly
limited by its terms to another date; (ii) each party shall have performed in
all material respects all obligations required to be performed by it under the
Agreement at or prior to the Effective Time; (iii) from the date of the
Agreement, there shall not have occurred a material adverse change in the
business, financial condition or results of operations of EOP or Beacon and its
respective Subsidiaries taken as a whole; (iv) EOP and Beacon shall have
received opinions of counsel to the effect described in "FEDERAL INCOME TAX
CONSIDERATIONS;" (v) each party shall have obtained all consents and waivers
from third parties necessary in connection with the transactions contemplated by
the Agreement, other than such consents and waivers which, if not obtained,
would not result, individually or in the aggregate, in a material adverse effect
on the business, properties, assets, financial condition or results of operation
on Beacon and its Subsidiaries taken as a whole or on EOP and its Subsidiaries
taken as a whole; and (vi) EOP and EOP Partnership, on the one hand, and Beacon
and Beacon Partnership, on the other hand, shall have received a "comfort
letter" which complies with the requirements for such letters as set forth in
the Agreement. In addition, consummation of the Mergers is subject to the
condition that all of the voting shares of the Beacon Management Company, the
Beacon Design Company and the Beacon Construction Company (other than any such
shares owned by Beacon Partnership) shall have been transferred to EOP
Management Corp., or its designees or assigns, in accordance with the Stock
Purchase Agreements.
REPRESENTATIONS AND WARRANTIES
The Agreement includes representations and warranties by Beacon and Beacon
Partnership as to the following: (i) the due organization, standing and power of
Beacon and Beacon's Subsidiaries, and the nature of Beacon's and third parties'
investments in Beacon's Subsidiaries and any other entities, (ii) the
capitalization of Beacon and Beacon's Subsidiaries, (iii) the authorization of
the Agreement and, subject to the requisite approvals, the transactions
contemplated thereby by Beacon and Beacon Partnership, (iv) the enforceability
of the Agreement against Beacon and Beacon Partnership, (v) the noncontravention
(except as specified) by the Agreement of any agreement, law, order or charter
or by-law or other organizational document provision applicable to Beacon or any
Beacon Subsidiary, (vi) the absence of the need (except as specified) for
governmental or third-party consents to the Mergers, (vii) the accuracy of
Beacon's and Beacon Partnership's documents required to be filed with the
Commission, (viii) the absence of any undisclosed liabilities, (ix) except as
specified, the conduct of Beacon's and Beacon Subsidiaries' businesses in the
ordinary course, and the absence of any material adverse change in the business,
financial condition or results of operations of Beacon and its Subsidiaries
taken as a whole since the date of the most recent audited financial statements
included in the documents filed by Beacon and Beacon Partnership with the
Commission through the date of the Agreement, (x) pending or threatened
litigation, (xi) certain matters relating to the real estate owned by Beacon and
the Beacon Subsidiaries, including, without limitation, the absence (except as
specified) of liens, security interests or other encumbrances on title or other
restrictions and the outstanding leases or other occupancy rights relating to
such real estate, (xii) certain environmental matters, (xiii) certain related
party transactions, (xiv) the terms, existence, operations, liabilities and
compliance with applicable laws of employee plans of Beacon and its
Subsidiaries, certain other matters relating to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and certain employee policy and
labor matters, (xv) payment of taxes and certain other tax matters, (xvi) bonus
and severance payments payable to employees, officers and directors of Beacon
and its Subsidiaries as a result of the Merger or a termination of service
subsequent to the Effective Time, (xvii) brokers, finders and financial advisors
engaged by Beacon and its Subsidiaries, (xviii) compliance with applicable laws,
(xix) certain contracts and debt instruments of Beacon and its Subsidiaries,
(xx) the fairness opinion received by Beacon, (xxi) the inapplicability of state
anti-takeover statutes and (xxii) the lack of any requirement of Beacon or any
Beacon Subsidiary to be registered under the Investment Company Act of 1940, as
amended (the "1940 Act").
The Agreement includes representations and warranties by EOP and EOP
Partnership as to the following: (i) the due organization, standing and power of
EOP and EOP's Subsidiaries, and the nature of EOP's and third parties'
investments in EOP's Subsidiaries and any other entities, (ii) the
capitalization of EOP and EOP's Subsidiaries, (iii) the authorization of the
Agreement and, subject to the requisite approvals,
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the transactions contemplated thereby by EOP and EOP Partnership, (iv) the
enforceability of the Agreement against EOP and EOP Partnership, (v) the
noncontravention (except as specified) by the Agreement of any agreement, law,
order or charter or by-law or other organizational document provision applicable
to EOP or any EOP Subsidiary, (vi) the absence of the need (except as specified)
for governmental or third-party consents to the Mergers, (vii) the accuracy of
EOP's and EOP Partnership's documents required to be filed with the Commission,
(viii) the absence of any undisclosed liabilities, (ix) except as specified, the
conduct of EOP's and EOP Subsidiaries' businesses in the ordinary course, and
the absence of any material adverse change in the business, financial condition
or results of operations of EOP and its Subsidiaries taken as a whole since the
date of the most recent audited financial statements included in the EOP reports
filed with the Commission through the date of the Agreement, (x) pending or
threatened litigation, (xi) certain matters relating to the real estate owned by
EOP and the EOP Subsidiaries, including, without limitation, the absence (except
as specified) of liens, security interests or other encumbrances on title or
other restrictions and the outstanding leases or other occupancy rights relating
to such real estate, (xii) certain environmental matters, (xiii) payment of
taxes and certain other tax matters, (xiv) brokers, finders and financial
advisors engaged by EOP and its Subsidiaries, (xv) compliance with applicable
laws, (xvi) certain contracts and debt instruments of EOP and its Subsidiaries,
(xvii) the fairness opinion received by EOP, (xviii) the inapplicability of
state anti-takeover statutes, (xix) the lack of any requirement of EOP or any
EOP Subsidiary to be registered under the 1940 Act, and (xx) the lack of EOP's
status as an "interested stockholder" of Beacon or an "affiliate of an
interested stockholder" of Beacon within the meaning of Section 3-601 of the
MGCL.
The representations and warranties of each of the parties contain various
customary exceptions for materiality, knowledge and previously disclosed
information. The representations and warranties of each of the parties are
deemed to be conditions to the Merger to the extent provided for in the
Agreement, but will not survive the Merger.
CONDUCT OF BUSINESS PENDING THE MERGERS
Beacon and Beacon Partnership have agreed that, prior to the Effective
Time, except as consented to by EOP in writing or as expressly provided for in
the Agreement, Beacon and Beacon Partnership shall, and shall cause (or, in the
case of Beacon Subsidiaries that Beacon or Beacon Partnership do not control,
shall use reasonable best efforts to cause) each of the Beacon Subsidiaries to:
(i) conduct its business only in the usual, regular and ordinary
course and in substantially the same manner as heretofore conducted;
(ii) preserve intact its business organizations and goodwill and use
reasonable best efforts to keep available the services of its officers and
employees;
(iii) confer on a regular basis with one or more representatives of
EOP to report operational matters of materiality and, subject to the
provisions described in "-- No Solicitation" below, any proposals to engage
in material transactions;
(iv) promptly notify EOP of any material emergency or other material
change in the condition (financial or otherwise), business, properties,
assets, liabilities or the normal course of its businesses or in the
operation of its properties, or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated);
(v) promptly deliver to EOP true and correct copies of any report,
statement or schedule filed with the Commission subsequent to the date of
the Agreement;
(vi) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its
methods, principles or practices of accounting in effect on the date of the
most recent audited financial statements included in the documents filed by
Beacon and Beacon Partnership with the Commission through the date of the
Agreement, except as may be required by the Commission, applicable law or
GAAP;
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(vii) duly and timely file all reports, tax returns and other
documents required to be filed with federal, state, local and other
authorities, subject to extensions permitted by law, provided Beacon
notifies EOP that it is availing itself of such extensions and provided
such extensions do not adversely affect Beacon's status as a REIT under the
Code;
(viii) not make or rescind any express or deemed election relative to
taxes (unless required by law or necessary to preserve Beacon's status as a
REIT or the status of any Beacon Subsidiary as a partnership for federal
income tax purposes or as a qualified REIT subsidiary under the Code, as
the case may be);
(ix) make all capital expenditures, and expenditures relating to
leasing, in accordance with a budget of Beacon approved by EOP, which
approval shall not be unreasonably withheld, and not (A) acquire, enter
into any option to acquire, or exercise an option or other right or
election or enter into any other commitment or contractual obligation
(each, a "Commitment") for the acquisition of any real property or other
transaction (other than certain specified Commitments) involving in excess
of $100,000 which is not included in its budget approved by EOP, (B)
encumber assets or commence construction of, or enter into any Commitment
to develop or construct other real estate projects, except in the ordinary
course of its office property business or (C) incur or enter into any
Commitment to incur additional indebtedness (secured or unsecured) except
for working capital under its revolving line(s) of credit and certain
specified Commitments for indebtedness;
(x) not amend the Beacon Articles or the Beacon Bylaws, or the
articles or certificate of incorporation, bylaws, code of regulations,
partnership agreement, operating agreement or joint venture agreement or
comparable charter or organization document of any Beacon Subsidiary;
(xi) make no change in the number of shares of capital stock,
membership interests or units of limited partnership interest issued and
outstanding, other than pursuant to (A) the exercise of specified options
or (B) the redemption of Beacon Partnership Units under certain specified
existing contracts, or pursuant to the Beacon Partnership Agreement, for
cash or, at Beacon's option, Beacon Common Shares;
(xii) grant no options or other right or commitment relating to its
shares of capital stock, membership interests or units of limited
partnership interest or any security convertible into its shares of capital
stock, membership interests or units of limited partnership interest, or
any security the value of which is measured by shares of capital stock, or
any security subordinated to the claim of its general creditors and not
amend or waive any rights under any of the Beacon Stock Options described
in the Agreement;
(xiii) except as discussed in "-- Distributions" above, and except for
quarterly distributions with respect to the Beacon Common Shares for the
distribution for the third quarter of 1997 and for each quarterly
distribution thereafter in an amount up to the distribution per share paid
by it for the second quarter of 1997, and distributions per Beacon
Partnership Unit in the same amount as a permitted distribution per Beacon
Common Share (except to the extent a distribution by Beacon is necessary to
maintain REIT status) or except in connection with the use of Beacon Common
Shares to pay the exercise price or tax withholding in connection with
equity-based employee benefit plans by the participants therein, not (A)
authorize, declare, set aside or pay any distribution or make any other
distribution or payment with respect to any Beacon Common Shares or Beacon
Partnership Units or (B) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or
units of partnership interest or any option, warrant or right to acquire,
or security convertible into, shares of capital stock, membership
interests, or units of partnership interest of Beacon, except for (A)
redemptions of Beacon Common Shares required under the Beacon Articles in
order to preserve the status of Beacon as a REIT under the Code, and (B)
redemptions of Beacon Partnership Units under the Beacon Partnership
Agreement in which Beacon Common Shares are utilized;
(xiv) not sell, lease, mortgage, subject to lien or otherwise dispose
of any of the Beacon Properties, except in connection with a transaction
that is permitted under clause (ix) above or that is made in the
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ordinary course of business and is the subject of a binding contract in
existence on the date of the Agreement and disclosed pursuant thereto;
(xv) not sell, lease, mortgage, subject to lien or otherwise dispose
of any of its personal property or intangible property, except in
connection with a transaction that is permitted by clause (xiv) above or
that is made in the ordinary course of business and is not material,
individually or in the aggregate;
(xvi) not make any loans, advances or capital contributions to, or
investments in, any other individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity (each, a "Person") other than loans, advances
and capital contributions to Beacon Subsidiaries in existence on the date
of the Agreement;
(xvii) not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) furnished to EOP or incurred in the ordinary course of
business consistent with past practice;
(xviii) not guarantee the indebtedness of another Person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another Person or enter into any arrangement having the
economic effect of any of the foregoing;
(xix) not enter into any Commitment with any officer, director or
affiliate of Beacon or any of the Beacon Subsidiaries or any material
Commitment with any consultant;
(xx) not increase any compensation or enter into or amend any
employment agreement disclosed pursuant to the Agreement with any of its
officers, directors or employees earning more than $50,000 per annum, other
than as required by any contract or plan or in accordance with waivers by
employees of benefits under such agreements;
(xxi) not adopt any new employee benefit plan or amend any existing
plans or rights, except for changes to severance benefits to provide that
an employee whose position is transferred to a location outside the
standard metropolitan statistical area in which such employee is currently
employed shall not forfeit severance benefits by reason of failure to
accept such transfer, changes which are required by law and changes which
are not more favorable to participants than provisions presently in effect;
(xxii) not settle any shareholder derivative or class action claims
arising out of or in connection with any of the transactions contemplated
by the Agreement;
(xxiii) not change the ownership of any of its Subsidiaries, except
changes which arise as a result of the acquisition of Beacon Partnership
Units in exchange for Beacon Common Shares pursuant to exercise of the
Beacon Partnership Unit redemption right under the Beacon Partnership
Agreement;
(xxiv) not accept a promissory note in payment of the exercise price
payable under any option to purchase Beacon Common Shares; and
(xxv) not enter into, or modify, amend or breach any of certain
specified agreements.
EOP and EOP Partnership have agreed that, prior to the Effective Time,
except as consented to by Beacon in writing or as expressly provided for in the
Agreement, EOP and EOP Partnership shall, and shall cause (or, in the case of
EOP Subsidiaries that EOP or EOP Partnership do not control, shall use
reasonable best efforts to cause) each of the EOP Subsidiaries to:
(i) preserve intact its business organizations and goodwill and use
reasonable best efforts to keep available the services of its officers and
employees;
(ii) confer on a regular basis with one or more representatives of
Beacon to report operational matters of materiality which would have a
material adverse effect on the business, properties, assets, financial
condition or results of operations of EOP and its Subsidiaries taken as a
whole;
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(iii) promptly notify Beacon of any material emergency or other
material change in the condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its
businesses or in the operation of its properties, or of any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated);
(iv) promptly deliver to Beacon true and correct copies of any report,
statement or schedule filed with the Commission subsequent to the date of
the Agreement;
(v) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its
methods, principles or practices of accounting in effect on the date of the
most recent audited financial statements included in the documents filed by
EOP and EOP Partnership with the Commission through the date of the
Agreement, except as may be required by the Commission, applicable law or
GAAP;
(vi) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted by law, provided such extensions do not
adversely affect EOP's status as a REIT under the Code;
(vii) not make or rescind any express or deemed election relative to
taxes (unless required by law or necessary to preserve EOP's status as a
REIT or the status of any EOP Subsidiary as a partnership for federal
income tax purposes or as a qualified REIT subsidiary under the Code, as
the case may be);
(viii) not enter into any Commitment for the acquisition of any real
property (other than specified real estate projects) if the amount of such
Commitment would cause the aggregate amount of all such Commitments
subsequent to the date of the Agreement to exceed $1,300,000,000 unless
such Commitment has been approved by Beacon;
(ix) not amend the Declaration of Trust or the EOP Bylaws, or the
articles or certificate of incorporation, bylaws, code of regulations,
partnership agreement, operating agreement or joint venture agreement or
comparable charter or organization document of any EOP Subsidiary,
including the EOP Partnership Agreement (except to the extent necessary to
reflect the admission of additional limited partners and other amendments
in connection therewith that can be made by EOP without a vote of limited
partners and that will not, individually or in the aggregate, materially
adversely affect the rights or obligations of holders of EOP Partnership
Units);
(x) except as discussed in "-- Distributions" above, and except for
quarterly distributions with respect to the EOP Common Shares for the
distribution for the third quarter of 1997 and for each quarterly
distribution thereafter in an amount up to the distribution per share paid
by it for the second quarter of 1997 (provided that EOP's distribution per
share paid by it for the second quarter of 1997 shall be deemed to be $.30)
(except to the extent a distribution by EOP is necessary to maintain REIT
status) or except in connection with the use of EOP Common Shares to pay
the exercise price or tax withholding in connection with equity-based
employee benefit plans by the participants therein, not (A) authorize,
declare, set aside or pay any distribution or make any other distribution
or payment with respect to any EOP Common Shares or EOP Partnership Units
or (B) directly or indirectly redeem, purchase or otherwise acquire any
shares of capital stock, membership interests or units of partnership
interest or any option, warrant or right to acquire, or security
convertible into, shares of capital stock, membership interests, or units
of partnership interest of EOP, except for (x) redemptions of EOP Common
Shares required under the Declaration of Trust in order to preserve the
status of EOP as a REIT under the Code, and (y) redemptions of EOP
Partnership Units under the EOP Partnership Agreement in which EOP Common
Shares are utilized;
(xi) not sell, lease, mortgage, subject to lien or otherwise dispose
of any of the EOP Properties, except in connection with a transaction that
would not reasonably be expected to have a material adverse effect on the
business, properties, assets, financial condition or results of operation
of EOP and its Subsidiaries taken as a whole;
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(xii) not sell, lease, mortgage, subject to lien or otherwise dispose
of any of its personal property or intangible property, except in
connection with a transaction that is permitted by clause (xi) above or
that is not material, individually or in the aggregate;
(xiii) not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) if it would reasonably be expected to have a material adverse
effect on the business, properties, assets, financial condition or results
of operation of EOP and its Subsidiaries taken as a whole;
(xiv) not directly or indirectly through a Subsidiary, merge or
consolidate with, or acquire all or substantially all of the assets of, or
the beneficial ownership of a majority of the outstanding capital stock or
other equity interests in, any person or entity whose securities are
registered under the Exchange Act unless such transaction has been approved
by Beacon; and
(xv) except as contemplated by the Agreement, not issue any EOP or EOP
Partnership securities pursuant to a registration statement filed with the
Commission relating to the public offering of any EOP or EOP Partnership
securities from the date of the Agreement until the date of this Joint
Proxy Statement/Prospectus unless such issuance has been approved by
Beacon.
NO SOLICITATION
Beacon has agreed, for itself and in its capacity as general partner of
Beacon Partnership, that neither it nor any of the Beacon Subsidiaries will, nor
will any of them permit any of its officers, directors, employees, affiliates,
agents, investment bankers, financial advisors, attorneys, accountants, brokers,
finders or other representatives to, invite, initiate, solicit or encourage,
directly or indirectly, any inquiries, proposals, discussions or negotiations or
the making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to a merger,
acquisition, tender offer, exchange offer, transaction resulting in the issuance
of securities representing 10% or more of the outstanding equity securities of
Beacon, consolidation, share exchange, business combination, sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 10% or more of the
assets or equity securities (including, without limitation, partnership
interests and units) of Beacon or Beacon Partnership, other than the
transactions contemplated by the Agreement (any such proposal or offer, an
"Acquisition Proposal") or engage in any discussions or negotiations concerning,
or provide any confidential or non-public information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal,
provided that nothing in the Agreement prohibits the Beacon Board (including
with respect to Beacon's capacity as general partner of Beacon Partnership) from
(i) furnishing information to or entering into discussions or negotiations with,
any person or entity that makes an unsolicited Acquisition Proposal, if, and
only to the extent that (A) a majority of the members of the Beacon Board
determines in good faith, based upon the advice of outside counsel, that such
action is required for the Beacon Board to comply with its duties to
shareholders imposed by applicable law and (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, Beacon provides written notice to EOP to the effect that it is
furnishing information to, or entering into discussions with, such person or
entity and (ii) making any disclosure required by applicable law with regard to
an Acquisition Proposal. The foregoing provision is not to be construed to (i)
permit Beacon to terminate the Agreement (except as specifically described in
"-- Termination, Extension, Amendment and Waiver"), (ii) permit Beacon to enter
into an agreement for an Acquisition Proposal during the term of the Agreement
or (iii) affect any other obligation of Beacon under the Agreement; provided,
however, that a majority of the members of the Beacon Board may approve and
recommend a Superior Acquisition Proposal (as defined below) and, in connection
therewith, withdraw or modify its approval or recommendation of the Agreement
and the Merger if such majority determines in good faith, based upon the advice
of outside counsel, that such action is required for the Beacon Board to comply
with its duties to shareholders imposed by applicable law. "Superior Acquisition
Proposal" means a bona fide Acquisition Proposal made by a third party which a
majority of the members of the Beacon Board resolves in good faith to be in the
best interests of and more favorable to the Beacon Shareholders than the Merger
and which the Beacon Board determines is reasonably capable of being
consummated.
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CERTAIN OTHER COVENANTS
Under the Agreement, the parties have agreed as follows: (i) to use all
reasonable best efforts to cooperate with one another in (A) determining which
filings are required to be made prior to the Effective Time with, and which
consents, approvals, permits or authorizations are required to be obtained prior
to the Effective Time from, governmental or regulatory authorities of the United
States, the several states and foreign jurisdictions and any third parties in
connection with the execution and delivery of the Agreement, and the
consummation of the transactions contemplated thereby and (B) timely making all
such filings and timely seeking all such consents, approvals, permits and
authorizations; (ii) to use all reasonable best efforts (other than the payment
of money) to obtain in writing any consents required from third parties to
effectuate the Merger, such consents to be in form reasonably satisfactory to
each of the parties; (iii) to use all reasonable best efforts to take, or cause
to be taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by the Agreement; (iv) to refrain from, and use
commercially reasonable efforts to cause each of their respective Subsidiaries
and joint ventures to refrain from, taking any action that would result in (A)
any of the representations and warranties of such party set forth in the
Agreement that are qualified as to materiality becoming untrue, (B) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (C) except as contemplated with respect to a Superior
Acquisition Proposal, any of the conditions to the Merger not being satisfied;
(v) subject to the requirements of confidentiality agreements with third
parties, to afford, and to cause each of their respective Subsidiaries to
afford, to the other parties and to the officers, employees, accountants,
counsel, financial advisors and other representatives of such other parties,
reasonable access during normal business hours prior to the Effective Time to
all their respective properties, books, contracts, commitments, personnel and
records and, during such period, to furnish, and to cause each of their
respective Subsidiaries to furnish, promptly to the other parties (A) a copy of
each report, schedule, registration statement and other document filed by it
during such period pursuant to the requirements of federal or state securities
laws and (B) all other information concerning its business, properties and
personnel as such other party may reasonably request and to use, and to cause
each of their respective Subsidiaries to use, commercially reasonable efforts to
cause its officers, employees, accountants, counsel, financial advisors and
other representatives and affiliates to, hold any nonpublic information in
confidence; (vi) to use reasonable best efforts to cause the Merger to qualify
as a reorganization under the provisions of Section 368(a) of the Code and to
obtain the opinions of counsel described in "FEDERAL INCOME TAX CONSIDERATIONS;"
(vii) if, based upon the advice of counsel, EOP and Beacon determine that the
Partnership Merger could reasonably be expected to create a risk that the Merger
would not qualify as a reorganization under the provisions of Section 368(a) of
the Code, to use reasonable best efforts to negotiate and structure an
alternative means to effect the Partnership Merger, for EOP to acquire the
interest in Beacon Partnership owned by Beacon, and for the holders of Beacon
Partnership Units to receive EOP Partnership Units (or the economic and tax
equivalent thereof) in exchange for their Beacon Partnership Units; (viii) to
cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any real property
transfer or gains, sales, use, transfer, value added stock transfer and stamp
taxes, any transfer, recording, registration and other fees and any similar
taxes payable in connection with the transactions contemplated by the Agreement;
and (ix) to consult with each other party before issuing, and provide each other
party the opportunity to review and comment upon, any press release or other
written public statements which address in any manner the transactions
contemplated by the Agreement, and to refrain from issuing any such press
release or making any such written public statement prior to such consultation,
except as may be required by applicable law, court process or by obligations
pursuant to any listing agreement with any national securities exchange.
Beacon has also agreed that (i) it will request written consents for
approval by the Beacon Unitholders of the Mergers to the extent required by the
Beacon Partnership Agreement and any other matters reasonably requested by
either party to effectuate the transactions contemplated by the Agreement and it
will vote in favor of such matters and recommend to the Beacon Unitholders that
they approve such matters, (ii) it will cause the directors and officers of each
of the Beacon Subsidiaries to submit their resignations from such positions,
effective as of the Effective Time, and (iii) it will not, and will not permit
any of its Subsidiaries to, amend the management agreements pursuant to which
Beacon, directly or indirectly, manages buildings in
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which Beacon does not own a 100% interest and it will not, and will not permit
any Beacon Subsidiary to, renew such management agreements except on terms which
permit their cancellation by Beacon or the applicable Beacon Subsidiary on
thirty days' notice or less without any charge, penalty or other cost for such
cancellation. Beacon and Beacon Partnership have agreed to use all reasonable
best efforts to obtain from Coopers & Lybrand L.L.P., access to all work papers
relating to audits of Beacon and Beacon Partnership performed by Coopers &
Lybrand L.L.P., and the continued cooperation of Coopers & Lybrand L.L.P. with
regard to the preparation of consolidated financial statements for EOP after the
Effective Time.
EOP has also agreed that (i) it will seek the requisite approval of the EOP
Unitholders to the Partnership Merger to the extent required by the EOP
Partnership Agreement and any other matters reasonably requested by either party
to effectuate the transactions contemplated by the Agreement and it will vote in
favor of such matters and recommend to the EOP Unitholders that they approve
such matters, (ii) it will use all reasonable best efforts to cause the EOP
Common Shares and the EOP Preferred Shares to be issued in the Merger and the
EOP Common Shares reserved for issuance upon redemption of EOP Partnership Units
issued in the Partnership Merger, to be approved for listing on the NYSE,
subject to official notice of issuance, prior to the Effective Time and (iii)
from and after the Effective Time, it will pay or cause EOP Partnership to pay
or cause to be paid, without deduction or withholding from any amounts payable
to the holders of EOP Common Shares, EOP Preferred Shares or EOP Partnerships
Units, as applicable, all transfers and gains taxes (which term does not include
taxes imposed under the Code or comparable provisions of state law). EOP and EOP
Partnership have agreed that they shall assume the obligations of Beacon, Beacon
Partnership or the applicable Beacon Subsidiary, as the case may be, under each
agreement specified in the Agreement (i) that has as one of its purposes to
permit a person or entity to take the position that such person or entity could
defer federal taxable income that otherwise might have been recognized upon a
transfer of property to Beacon Partnership or any other Beacon Subsidiary that
is treated as a partnership for federal income tax purposes, and (ii) that (A)
prohibits or restricts in any manner the disposition of any assets of Beacon or
any Beacon Subsidiary, (B) requires that Beacon or any Beacon Subsidiary
maintain, or put in place, or replace, indebtedness, whether or not secured by
one or more of the Beacon Properties, or (C) requires that Beacon or any Beacon
Subsidiary offer to any person or entity at any time the opportunity to
guarantee or otherwise assume, directly or indirectly, the risk of loss for
federal income tax purposes for indebtedness or other liabilities of Beacon or
any Beacon Subsidiary.
TERMINATION, EXTENSION, AMENDMENT AND WAIVER
The Agreement may be terminated at any time prior to the filing of the
articles of merger with the Department, whether before or after the approval
thereof by the EOP Shareholders, Beacon Shareholders or the Beacon Unitholders,
under the circumstances specified therein, including: (i) by mutual written
consent duly authorized by the EOP Board and the Beacon Board; (ii) by EOP, upon
a breach of any representation, warranty, covenant, obligation or agreement of
Beacon or Beacon Partnership set forth in the Agreement, or if any
representation or warranty of Beacon or Beacon Partnership in the Agreement
shall become untrue, in either case such that the conditions to EOP's obligation
to close relating to such representations, warranties, covenants, obligations
and agreements would be incapable of being satisfied by April 15, 1998 (or as
otherwise extended); (iii) by Beacon, upon a breach of any representation,
warranty, covenant, obligation or agreement of EOP or EOP Partnership set forth
in the Agreement, or if any representation or warranty of EOP or EOP Partnership
shall become untrue, in either case such that the conditions to Beacon's
obligation to close relating to such representations, warranties, covenants,
obligations and agreements would be incapable of being satisfied by April 15,
1998 (or as otherwise extended); (iv) by either EOP or Beacon, if any judgment,
injunction, order, decree or action by any governmental entity of competent
authority preventing the consummation of the Merger shall have become final and
nonappealable; (v) by either EOP or Beacon, if the Merger shall not have been
consummated before April 15, 1998 (or as otherwise extended); provided, however,
that a party may not terminate the Agreement for the reasons referred to in this
clause (v) if it shall have breached in any material respect its obligations
under the Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in this clause (v); (vi) by either EOP or
Beacon (unless Beacon or Beacon Partnership is in breach of its obligations
under the Agreement with respect to the preparation and mailing of this Joint
Proxy Statement/Prospectus, the holding of the Beacon Special
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Meeting or the approval of the Mergers and other matters by the Beacon
Shareholders and the Beacon Unitholders), if, upon a vote at a duly held Beacon
Special Meeting or any adjournment thereof, the requisite approval of the Merger
by the Beacon Shareholders shall not have been obtained; (vii) by either Beacon
or EOP (unless EOP or EOP Partnership is in breach of its obligations under the
Agreement with respect to the preparation and mailing of this Joint Proxy
Statement/Prospectus or the holding of the EOP Special Meeting), if, upon a vote
at a duly held EOP Special Meeting or any adjournment thereof, the requisite
approval of the Merger by the EOP Shareholders shall not have been obtained;
(viii) by Beacon, if prior to the Beacon Special Meeting, the Beacon Board shall
have withdrawn or modified in any manner adverse to EOP its approval or
recommendation of the Merger or the Agreement in connection with, or approved or
recommended, a Superior Acquisition Proposal; provided, however, that such
termination will not be effective prior to the payment of the Break-Up Fee (as
defined below); (ix) by EOP, if (A) prior to the Beacon Special Meeting, the
Beacon Board shall have withdrawn or modified in any manner adverse to EOP its
approval or recommendation of the Merger or the Agreement in connection with, or
approved or recommended, any Superior Acquisition Proposal, (B) Beacon shall
have entered into any agreement for any Acquisition Proposal, or (C) the Beacon
Board or any committee thereof shall have resolved to do any of the foregoing;
and (x) by Beacon, if the average of the closing prices of the EOP Common Shares
on the NYSE for all trading days during the period of twenty (20) consecutive
trading days commencing on the twenty-seventh (27th) trading day prior to the
date of the Beacon Special Meeting is less than $27.39.
The foregoing provisions are subject to the agreement of the parties that,
in the event of any preliminary, temporary or other nonfinal judgment,
injunction, order, decree or action by any court (each an "Action") preventing,
delaying or otherwise materially adversely affecting the consummation of either
of the Mergers primarily resulting from any action or inaction of Beacon, EOP
has the right, in its sole and absolute discretion, by giving written notice to
Beacon, to preclude Beacon (for one or more periods aggregating not more than
six (6) months) from terminating the Agreement pursuant to the provisions
described in clause (v) or (viii) of the preceding paragraph (unless, in the
case of provisions described in clause (viii), the Beacon Board shall have acted
in the circumstances described in clause (viii) without basing its decision in
any way, directly or indirectly, on the Action), for the period of such
prevention, delay or material adverse effect plus fifteen (15) days, in which
event each of the dates referred to in the provisions described in clauses (ii)
and (v) of the preceding paragraph and the date by which EOP must hold the EOP
Special Meeting under the Agreement shall be extended for each such period.
In the event of termination of the Agreement, no party to the Agreement
will have any liability or further obligation under the Agreement, other than
with respect to the obligations of the parties described in "-- Fees and
Expenses," provisions of the Agreement dealing with confidentiality and certain
miscellaneous provisions, except that nothing in the Agreement will relieve any
party from liability for any material breach by such party of any of its
representations, warranties, covenants or agreements set forth in the Agreement.
The parties to the Agreement may not amend the Agreement except by an
instrument in writing signed on behalf of all the parties and duly approved by
the EOP Board and the Beacon Board. The Agreement may be so amended at any time
before or after any shareholder approvals thereof are obtained and prior to the
filing of the articles of merger with the Department but, after such shareholder
approvals and any required partner approvals are obtained, no such amendment,
modification or supplement shall be made which by law requires the further
approval of shareholders or unitholders without obtaining such further approval.
The parties to the Agreement have agreed to amend the Agreement to the extent
required to (i) continue the status of each party as a REIT or (ii) preserve the
Merger as a tax-free reorganization under Section 368 of the Code.
At any time prior to the Effective Time, the parties to the Agreement may
(i) extend the time for the performance of any of the obligations or other acts
of the other parties, (ii) waive any inaccuracies in the representations and
warranties of the other parties contained in the Agreement or in any document
delivered pursuant to the Agreement or (iii) waive compliance with any of the
agreements or conditions of the other party contained in the Agreement, provided
that, after any shareholder approvals and any required partner approvals are
obtained, no such waiver will be made which by law requires the further approval
of shareholders without obtaining such further approval. Any agreement on the
part of a party to any such extension or waiver
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must be in writing to be valid. The failure of any party to the Agreement to
assert any of its rights under the Agreement or otherwise shall not constitute a
waiver of those rights.
FEES AND EXPENSES
Except as described below, each party shall bear its own fees and expenses
in connection with the transactions contemplated by the Agreement.
Beacon and Beacon Partnership are obligated to pay EOP Partnership a fee (a
"Break-Up Fee") equal to the lesser of (A) $75 million less any EOP Break-Up
Expenses (as defined below) paid or payable by Beacon and Beacon Partnership and
(B) the maximum amount which EOP Partnership can receive without causing EOP to
be disqualified as a REIT under the Code, under the following circumstances:
(i) if the Agreement is terminated by Beacon as a result of the Beacon
Board having, prior to the Beacon Special Meeting, withdrawn or modified in
any manner adverse to EOP its approval or recommendation of the Merger or
the Agreement in connection with, or approved or recommended, a Superior
Acquisition Proposal; provided, however, that Beacon and Beacon Partnership
will have no obligation to pay the Break-Up Fee if, at the time of such
termination of the Agreement, Beacon was also entitled to terminate the
Agreement as a result of a breach of any representation, warranty,
covenant, obligation or agreement on the part of EOP or EOP Partnership;
(ii) if the Agreement is terminated by EOP as a result of (A) the
Beacon Board having, prior to the Beacon Special Meeting, withdrawn or
modified in any manner adverse to EOP its approval or recommendation of the
Merger or the Agreement in connection with, or having approved or
recommended, any Superior Acquisition Proposal, (B) Beacon having entered
into any agreement for any Acquisition Proposal, or (C) the Beacon Board or
any committee thereof having resolved to do any of the foregoing; provided,
however, that Beacon and Beacon Partnership will have no obligation to pay
the Break-Up Fee if, at the time of such termination of the Agreement,
Beacon was also entitled to terminate the Agreement as a result of a breach
of any representation, warranty, covenant, obligation or agreement on the
part of EOP or EOP Partnership;
(iii) if the Agreement is terminated as a result of (A) a breach of
any representation, warranty, covenant, obligation or agreement on the part
of Beacon or Beacon Partnership, (B) the existence of a final and
non-appealable judgment, injunction, order, decree or action by any
governmental entity of competent authority preventing the consummation of
the Merger (if primarily resulting from any action or inaction of Beacon or
any Beacon Subsidiary), (C) the Merger not being consummated before April
15, 1998 (or as otherwise extended), (D) the failure of the Merger to be
approved by the requisite vote at the Beacon Special Meeting or any
adjournment thereof or (E) the average of the closing prices of the EOP
Common Shares on the NYSE for all trading days during the period of 20
consecutive trading days commencing on the 27th trading day prior to the
date of the Beacon Special Meeting having been less than $27.39, and, prior
to the time of such termination, an Acquisition Proposal has been received
by Beacon or any Beacon Subsidiary, and either prior to the termination of
the Agreement or within 12 months thereafter, Beacon or any Beacon
Subsidiary enters into any written Acquisition Proposal which is
subsequently consummated (whether or not any such Acquisition Proposal is
the same Acquisition Proposal which had been received at the time of the
termination of the Agreement);
(iv) if, prior to the Beacon Special Meeting, the Beacon Board shall
have withdrawn or modified in any manner adverse to EOP its approval or
recommendation of the Merger or the Agreement and, within 12 months after
termination of the Agreement, Beacon or Beacon Partnership enters into any
written Acquisition Proposal which is subsequently consummated (whether or
not any Acquisition Proposal had been received prior to the time of the
termination of the Agreement); or
(v) if the Agreement shall be terminated as a result of the average of
the closing prices of the EOP Common Shares on the NYSE for all trading
days during the period of 20 consecutive trading days commencing on the
27th trading day prior to the date of the Beacon Special Meeting having
been less than $27.39 and, within six months thereafter, Beacon or any
Beacon Subsidiary enters into any written
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Acquisition Proposal which is subsequently consummated (whether or not any
Acquisition Proposal had been received at the time of the termination of
the Agreement).
Beacon and Beacon Partnership are obligated to pay EOP Partnership an
amount ("EOP Break-Up Expenses") equal to the lesser of (A) $10 million, (B) EOP
Partnership's out-of-pocket expenses incurred in connection with the Agreement
and the transactions contemplated thereby (including, without limitation, all
attorneys', accountants' and investment bankers' fees and expenses) and (C) the
maximum amount which EOP Partnership can receive without causing it to be
disqualified as a REIT under the Code, under the following circumstances,
unless, at the time of termination of the Agreement, Beacon was also entitled to
terminate the Agreement as a result of a breach of any representation, warranty,
covenant, obligation or agreement on the part of EOP or EOP Partnership:
(i) if the Agreement is terminated by EOP as a result of a breach of
any representation, warranty, covenant, obligation or agreement on the part
of Beacon or Beacon Partnership; or
(ii) if the Agreement is terminated by EOP or Beacon as a result of
the failure of the Merger to be approved by the requisite vote at the
Beacon Special Meeting or any adjournment thereof.
EOP and EOP Partnership shall be obligated to pay Beacon Partnership an
amount ("Beacon Break-Up Expenses") equal to the lesser of (A) $10 million, (B)
Beacon Partnership's out-of-pocket expenses incurred in connection with the
Agreement and the transactions contemplated thereby (including, without
limitation, all attorneys', accountants' and investment bankers' fees and
expenses) and (C) the maximum amount which Beacon Partnership can receive
without causing it to be disqualified as a REIT under the Code, under the
following circumstances, unless, at the time of termination of the Agreement,
EOP was also entitled to terminate the Agreement as a result of a breach of any
representation, warranty, covenant, obligation or agreement on the part of
Beacon or Beacon Partnership:
(i) if the Agreement is terminated by Beacon as a result of a breach
of any representation, warranty, covenant, obligation or agreement on the
part of EOP or EOP Partnership; or
(ii) if the Agreement is terminated by EOP or Beacon as a result of
the failure of the Merger to be approved by the requisite vote at the EOP
Special Meeting or any adjournment thereof.
ASSUMPTION OF BEACON'S OBLIGATIONS UNDER REGISTRATION RIGHTS AGREEMENTS
Pursuant to the Agreement, EOP has agreed to assume Beacon's obligations
under existing registration rights agreements (the "Registration Rights
Agreements") between Beacon and certain holders of Beacon Partnership Units (the
"Registration Rights Holders"). Pursuant to the Registration Rights Agreements,
Beacon has agreed that, upon the request of the Registration Rights Holders, it
will file registration statements, in most cases under Rule 415 under the
Securities Act, for the sale of Beacon Common Shares which may be issued to the
Registration Rights Holders at the option of Beacon upon the redemption of their
Beacon Partnership Units and, in most cases, to cause such registration
statements to remain effective for six months. The Registration Rights Holders,
under each Registration Rights Agreement, cannot request that registration
statements be filed more than once in any 12-month period. The obligations of
Beacon to file such registration statements expire between 2002 and 2015 or, if
earlier, the date on which the Beacon Common Shares which are subject thereto
may be sold pursuant to Rule 144 under the Securities Act. Under certain of the
Registration Rights Agreements, Beacon is not required to file more than two
such registration statements.
The Registration Rights Agreements also grant to the Registration Rights
Holders the right, with certain exceptions, to register such number of their
Beacon Common Shares which are subject to such agreements as to which they
notify Beacon within 15 days following their receipt of notice of a proposed
offering from Beacon on any registration statement filed by Beacon for an
offering of Beacon Common Shares solely for cash. In the event that marketing
constraints prevent the registration of all Beacon Common Shares requested to be
registered, such shares shall be registered, to the extent marketable, on a pro
rata basis.
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As of November 17, 1997, Registration Rights Agreements were in effect with
respect to Beacon Common Shares issuable upon conversion of 6,938,900 Beacon
Partnership Units then outstanding. Such Beacon Partnership Units will be
converted into 9,758,175 EOP Partnership Units in connection with the
Partnership Merger and the 9,758,175 EOP Common Shares issuable upon conversion
thereof will be subject to the Registration Rights Agreements.
EOP has registered the issuance of the EOP Common Shares to be issued upon
the redemption of the EOP Partnership Units received by holders of Beacon
Partnership Units in the Merger. If EOP is unable to issue EOP Common Shares
pursuant to a registration statement at the time of a redemption of EOP
Partnership Units by a holder of Beacon Partnership Units, EOP has agreed to
cause EOP Partnership to redeem such EOP Partnership Units for cash.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Certain directors, executives and employees of Beacon and its affiliates
have certain interests in the Mergers that are different from, or in addition
to, the interests generally of the Beacon Shareholders, the Beacon Unitholders
and the EOP Shareholders. Such interests are described below. The Beacon Board
was aware of these interests at the time that it approved the Mergers and the
Agreement and considered them, among other matters, in approving the Agreement
and the transactions contemplated thereby.
BEACON STOCK OPTIONS. As of November 17, 1997, Beacon had granted to its
executive officers options to purchase a total of 2,418,333 Beacon Common Shares
as follows: 630,000 to Mr. Leventhal, 385,000 to Mr. Fortin, 300,000 to Mr.
Cremens, 200,000 to each of Messrs. Fletcher, Perriello and Wheeler, 190,000 to
Mr. Mitchell, 150,000 to Mr. Brooks, 100,000 to Ms. Judson and 63,333 to Mr.
Irwig. As of November 17, 1997, options to purchase a total of 343,336 Beacon
Common Shares were vested as follows: 116,667 for Mr. Leventhal, 61,667 for Mr.
Fortin, 58,334 for Mr. Perriello, 50,000 for Mr. Cremens, 48,334 for Mr.
Mitchell and 8,334 for Ms. Judson. According to the terms of such options, all
options which currently are not vested will become fully vested and immediately
exercisable in connection with the Merger. See "--Exchange Ratios and Exchange
of EOP Common Shares, EOP Preferred Shares and EOP Partnership Units." In the
event the executive officers exercise the options to purchase 2,418,333 Beacon
Common Shares, the aggregate value (net of the exercise price and assuming a
price of $43 3/8 per Beacon Common Share (the closing price of the Beacon Common
Shares on November 17, 1997)) for such options would be $38,816,242, including
$10,400,000 for the options of Mr. Leventhal, $6,257,500 for the options of Mr.
Fortin, $5,200,000 for the options of Mr. Cremens, $3,618,750 for the options of
Mr. Perriello, $2,625,000 for the options of Mr. Brooks, $3,355,000 for the
options of Mr. Mitchell, $2,375,000 for the options of each of Messrs. Fletcher
and Wheeler, $1,612,500 for the options of Ms. Judson and $997,492 for the
options of Mr. Irwig.
SENIOR EXECUTIVE SEVERANCE AGREEMENTS. Effective as of July 31, 1997,
Beacon entered into individual Senior Executive Severance Agreements with each
of Alan Leventhal, President, Chief Executive Officer and Director of Beacon and
Lionel Fortin, Executive Vice President, Chief Operating Officer and Director of
Beacon. Both of the Senior Executive Severance Agreements provide that, if
following a "change in control" (as defined in the Senior Executive Severance
Agreement), the respective officer experiences a Terminating Event (as defined
in the Senior Executive Severance Agreement) within 36 months of the change in
control, he will be entitled to receive three times (i) the amount of the
officer's current base salary, determined prior to any reduction for pre-tax
contributions to a cash deferred arrangement or a cafeteria plan, (ii) the
amount of \the highest potential cash bonus that could be earned by the officer
in the year of the change of control, and (iii) the amount of the value at the
time of the change of control of any restricted stock granted by Beacon to the
officer which vested in the calendar year immediately prior to the change in
control (collectively, the "Severance Payments"). Such amount is payable in one
lump sum no later than 31 days after the date of such Terminating Event.
Additionally, upon the effective date of the change in control, regardless of
whether a Terminating Event has occurred, the officer will receive an amount in
cash representing the officer's share of the performance pool under Beacon's
Extraordinary Performance Stock Incentive Plan for Senior Executives as a result
of the change in control (the "Performance Payment"). Further, in the event the
Severance Payments and the Performance Payments would be subject to an excise
tax imposed by Section 4999 of the Code (any such tax, together with any
interest or penalties, the "Excise Tax"), the officer will be entitled to an
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additional payment (the "Gross-Up Payment") such that the net amount retained by
the officer after payment of the Excise Tax and the income taxes due as a result
of receipt of the Gross-Up Payment will equal the Severance Payments and the
Performance Payment. As of November 17, 1997, the Severance Payments that would
be made pursuant to the Senior Executive Severance Agreements would be
approximately $2.4 million to Mr. Leventhal and approximately $1.8 million to
Mr. Fortin. Additionally, the Performance Payment that would be made pursuant to
the Senior Executive Severance Agreements would be approximately $12.8 million
to Mr. Leventhal and approximately $8.1 million to Mr. Fortin. Under the terms
of the Senior Executive Severance Agreements, the amount of any Gross-Up Payment
will be determined by Coopers & Lybrand L.L.P., or another nationally-recognized
accounting firm, within 15 business days of the termination date. The Gross-Up
Payments under the Senior Executive Severance Agreements are currently estimated
to be approximately $8.0 million for Mr. Leventhal and approximately $5.2
million for Mr. Fortin. The final amount of any Gross-Up Payments may be subject
to further adjustments. In addition to the payments described above, the
officers are also entitled to (i) continued health, dental, long-term
disability, life insurance and other fringe benefits for 36 months, (ii) COBRA
benefits following the period referred to in clause (i) of this sentence, and
(iii) all reasonable legal and mediation fees and expenses incurred in obtaining
or enforcing any right or benefit under the Senior Executive Severance
Agreements.
EXECUTIVE SEVERANCE PLAN. Effective as of July 31, 1997, Beacon adopted an
Executive Severance Plan that applies to the Senior Vice Presidents of Beacon
Properties Corporation. The Executive Severance Plan provides, if following a
change in control (as defined in the Executive Severance Plan), a covered
officer experiences a Terminating Event (as defined in the Executive Severance
Plan) within 24 months of the change in control, he or she will be entitled to
receive two times (i) the amount of the officer's current base salary,
determined prior to any reduction for pretax contributions to a cash deferred
arrangement or a cafeteria plan, (ii) the amount of the highest potential cash
bonus that could be earned by the covered officer in the year of the change of
control, and (iii) the amount of the value at the time of the change of control
of any restricted stock granted by Beacon to the covered officer which vested in
the calendar year immediately prior to the change in control (collectively, the
"Severance Payments"). Such amount is payable in one lump sum no later than 31
days after the date of such Terminating Event. Additionally, upon the effective
date of the change in control, regardless of whether a Terminating Event has
occurred, the officer will receive an amount in cash representing the officer's
share of the performance pool under Beacon's Extraordinary Performance Stock
Incentive Plan for Senior Executives as a result of the change in control (the
"Performance Payment"). Further, in the event the Severance Payments and the
Performance Payment would be subject to an Excise Tax, an officer with at least
five years of service will be entitled to a Gross-Up Payment such that the net
amount retained by the officer after payment of the Excise Tax and the income
taxes due as a result of receipt of the Gross-Up Payment will equal the
Severance Payments and the Performance Payment. As of November 17, 1997, the
Severance Payments that would be made pursuant to the Executive Severance Plan
would be approximately $750,000 to Mr. Mitchell, $700,000 to Mr. Perriello,
$557,600 to Ms. Judson, $800,000 to Mr. Cremens, $700,000 to Mr. Brooks,
$740,000 to each of Mr. Fletcher and Mr. Wheeler and $507,000 to Mr. Irwig.
Additionally, the Performance Payment that would be made pursuant to the
Executive Severance Plan would be approximately $3.9 million to each of Messrs.
Mitchell and Perriello, approximately $1.1 million to Mr. Cremens, approximately
$1.2 million to Ms. Judson and approximately $312,000 to Mr. Brooks. Under the
terms of the Executive Severance Plan, the amount of the Gross-Up Payments due
to qualifying officers (each of Mr. Mitchell, Mr. Perriello and Ms. Judson) will
be determined by Coopers & Lybrand L.L.P., or another nationally recognized
accounting firm within fifteen (15) business days of the termination date. The
Gross-Up Payments under the Executive Severance Plan are currently estimated to
be approximately $2.3 million for each of Messrs. Mitchell and Perriello and
$995,000 for Ms. Judson. The final amount of any Gross-Up Payments may be
subject to further adjustments. In addition to the payments described above, the
officers are also entitled to (i) continued health, dental, long-term
disability, life insurance and other fringe benefits for 24 months, (ii) COBRA
benefits following the period referred to in clause (i) of this sentence, and
(iii) all reasonable legal and mediation fees and expenses incurred in obtaining
or enforcing any right or benefit under the Executive Severance Plan.
SPECIAL TERMINATION PLAN. Effective as of July 31, 1997, Beacon adopted a
Special Termination Plan that applies to all employees with the title of either
Vice President or General Counsel of Beacon and all employees
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with the title of Senior Vice President or Vice President of a Subsidiary or
affiliate of Beacon. The Special Termination Plan provides, if following a
"change of control" (as defined in the Special Termination Plan), a covered
officer experiences a Terminating Event (as defined in the Special Termination
Plan) within 12 months of the change in control, he or she will be entitled to
receive (i) an amount equal to the officer's current base salary, determined
prior to any reduction for pre-tax contributions to a cash deferred arrangement
or a cafeteria plan, (ii) an amount equal to the highest potential cash bonus
that could earned by the covered officer in the year of the change of control,
and (iii) an amount equal to the value at the time of the change of control of
any restricted stock granted by Beacon to the covered officer which vested in
the calendar year immediately prior to the change in control. Such amount is
payable in one lump sum no later than 31 days after the date of such covered
officer's termination. As of November 17, 1997, the payments that would be made
pursuant to the Special Termination Plan to all covered officers would be
approximately $5.5 million. In addition to the payments described above, the
officers are also entitled to (i) continued health, dental, long-term
disability, life insurance and other fringe benefits for 12 months and (ii)
COBRA benefits following the period referred to in clause (i) of this sentence.
CERTAIN AGREEMENTS RESTRICTING THE SALE OR REFINANCING OF CERTAIN BEACON
PROPERTIES. The Agreement also provides that, prior to the closing of the
transactions thereunder, EOP and EOP Partnership will enter into agreements
pursuant to which EOP and EOP Partnership will agree, for a period of ten years
(subject to one ten-year extension option, at the election of the beneficiaries
upon payment of $250,000), to certain restrictions on the sale of the properties
located at One Post Office Square and Center Plaza in Boston, Massachusetts and
to certain requirements regarding the incurrence, maintenance or refinancing of
indebtedness with respect to such properties (or, alternatively, to pay to the
beneficiaries of such agreements the aggregate federal, state and local income
taxes (plus a full gross-up for any taxes that would be imposed on the
beneficiaries as the result of receipt of any such payments) payable by such
beneficiaries in the event EOP does not comply with such restrictions or
requirements). The purpose of such agreements is to permit certain persons and
entities, including Messrs. Sidman, Alan M. Leventhal, Norman Leventhal, Fortin,
Perriello and Mitchell, certain members of the families of Messrs. Sidman and
Leventhal and certain entities in which one or more of the foregoing persons
hold beneficial interests, who were the beneficial owners of entities that
transferred such properties to Beacon Partnership (or a Beacon Subsidiary) at
the time of the Beacon Initial Offering, to continue to defer federal taxable
income that otherwise might have been recognized upon such transfers or might be
recognized as a result of a subsequent transaction.
INDEMNIFICATION. Pursuant to the Agreement, EOP has agreed to provide, from
and after the Effective Time, exculpation and indemnification for each person
who is now or has been at any time prior to the date of the Agreement, or who
becomes prior to the Effective Time, an officer or director of Beacon or any
Beacon Subsidiary (the "Indemnified Parties") to the same extent as provided to
them by Beacon and the Beacon Subsidiaries immediately prior to the Effective
Time in their respective charters, bylaws, partnership, operating or similar
agreement, provided, however, that such exculpation and indemnification covers
actions on or prior to the Effective Time, including, without limitation, all
transactions contemplated by the Agreement.
In addition, the Agreement provides that EOP and EOP Partnership shall
indemnify and hold harmless, as and to the full extent permitted by applicable
law, each Indemnified Party against any losses, claims, liabilities, expenses
(including reasonable attorneys' fees and expenses), judgments, fines and
amounts paid in settlement in connection with any threatened or actual claim,
action, suit, proceeding or investigation, whether civil, criminal or
administrative, including without limitation, any action by or on behalf of any
or all security holders of Beacon or EOP, or any Beacon Subsidiary or EOP
Subsidiary, or by or in the right of Beacon or EOP, or any Beacon Subsidiary or
EOP Subsidiary, in which such Indemnified Party is, or is threatened to be, made
a party based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was an officer, employee or director of
Beacon or any of the Beacon Subsidiaries or any action or omission by such
person in his capacity as a director, or (ii) the Agreement or the transactions
contemplated thereby, whether in any case asserted or arising before or after
the Effective Time. After the Effective Time, EOP and EOP Partnership shall be
obligated to promptly pay and advance reasonable expenses and costs
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incurred by such Indemnified Person as they become due and payable in advance of
the final disposition of the claim, action, suit, proceeding or investigation to
the fullest extent and in the manner permitted by law.
EOP is also obligated to purchase, at or prior to the Effective Time,
directors' liability insurance policy coverage for Beacon's directors and
executive officers for a period of six years which will provide the directors
and officers with coverage on substantially similar terms as currently provided
by Beacon to such directors and officers.
REGISTRATION RIGHTS. Certain directors and officers of Beacon and other
Beacon affiliates hold, in the aggregate, 2,778,981 Beacon Partnership Units
which are redeemable for cash, or, at the option of Beacon, for Beacon Common
Shares on a one-for-one basis, which are subject to certain of the Registration
Rights Agreements. See " -- Assumption of Beacon's Obligations Under
Registration Rights Agreements."
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method in accordance
with Accounting Principles Board Opinion No. 16.
RESALES OF EOP COMMON SHARES AND EOP PREFERRED SHARES
The EOP Common Shares and the EOP Preferred Shares to be issued to holders
of the Beacon Common Shares and the Beacon Preferred Shares, respectively, upon
consummation of the Merger and the EOP Common Shares reserved for issuance upon
redemption of EOP Partnership Units to be issued to holders of Beacon
Partnership Units upon consummation of the Partnership Merger have been
registered under the Securities Act, and will be transferable freely and without
restriction by those holders of Beacon Common Shares, Beacon Preferred Shares
and Beacon Partnership Units who receive such shares following the consummation
of the Mergers or upon redemption of the EOP Partnership Units issued pursuant
thereto and who are not deemed to be Affiliates of EOP or Beacon. Rule 145,
among other things, imposes certain restrictions upon the resale of securities
received by Affiliates in connection with certain reclassifications, mergers,
consolidations or asset transfers. EOP Common Shares received by Affiliates of
Beacon in the Merger or upon redemption of EOP Partnership Units received by
such persons in the Partnership Merger will be tradeable within the volume and
manner of sale limitations of Rule 144 under the Securities Act.
Beacon has agreed that, prior to the Effective Time, it shall cause to be
prepared and delivered to EOP a list identifying all persons who, at the time of
the Shareholders Meetings, may be deemed to be Affiliates of Beacon. Beacon has
agreed to use its reasonable best efforts to cause each person who is identified
as an Affiliate to deliver to EOP, on or prior to the Effective Time, a written
agreement, in a form approved by the parties to the Agreement, that such
Affiliate will not sell, pledge, transfer or otherwise dispose of any EOP Common
Shares issued to such Affiliate pursuant to the Merger, except pursuant to an
effective registration statement under the Securities Act or in compliance with
Rule 145(d) thereunder or as otherwise permitted by the Securities Act. EOP
shall be entitled to place legends as specified in such written agreements on
the certificates representing any EOP Common Shares to be received pursuant to
the terms of the Agreement by such Affiliates who have executed such agreements
and to issue appropriate stop transfer instructions to the transfer agent for
the EOP Common Shares issued to such Affiliates, consistent with the terms of
such agreements. EOP has agreed that, at all times after the Effective Time, it
shall timely file the reports required to be filed by it under the Exchange Act
and the rules and regulations adopted by the Commission thereunder, and it will
take such further action as any Affiliate of Beacon or EOP may reasonably
request, all to the extent required from time to time to enable such Affiliate
to sell EOP Common Shares received by such Affiliate in the Merger without
registration under the Securities Act pursuant to (i) Rule 145(d)(1) under the
Securities Act, as such rule may be amended from to time, or (ii) any successor
rule or regulation hereafter adopted by the Commission.
OTHER RELATED TRANSACTIONS
STOCK PURCHASE AGREEMENTS. Concurrently with the execution of the
Agreement, the holders (other than Beacon Partnership) of the voting capital
stock of each of the Beacon Services Companies, each of which is a Subsidiary of
Beacon, have entered into Stock Purchase Agreements with EOP Management Corp.,
pursuant
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to which they have agreed to sell such stock to EOP Management Corp. or its
designee. Such sales will be consummated at the closing of the transactions
under the Agreement.
VOTING AGREEMENTS. In connection with the execution of the Agreement,
certain members of the Leventhal and Sidman families, and certain trusts and
partnerships established for their benefit, which collectively hold
approximately 1.3% of the outstanding Beacon Common Shares and approximately 37%
of the outstanding Beacon Partnership Units not held by Beacon, have agreed,
among other things, to vote their Beacon Common Shares and Beacon Partnership
Units to approve the Agreement, the respective Mergers and any other matter
which requires their vote in connection with the transactions contemplated by
the Agreement. In addition, certain entities affiliated with Mr. Zell which are
predecessors to EOP and several trusts established for the benefit of members of
the family of Mr. Zell (collectively, the "EOP Predecessor Securityholders"),
which collectively hold, as of the EOP Record Date, 2,327,267 EOP Common Shares
(approximately 1% of the outstanding EOP Common Shares) as of the EOP Record
Date, have agreed, among other things, to vote their EOP Common Shares to
approve the Agreement, the Merger and any other matter which requires their vote
in connection with the transactions contemplated by the Agreement. The EOP
Predecessor Securityholders have also agreed to cast all votes attributable to
EOP Common Shares held by the EOP Predecessor Securityholders in favor of the
election of the two nominees proposed by Beacon as trustees of EOP. If one of
these members is then elected for a one-year term, upon completion of such term
and renomination, the EOP Predecessor Securityholders agree to cast all votes
attributable to the EOP Common Shares held by EOP Partnership and the EOP
Predecessor Securityholders in favor of election of such nominee to a three-year
term.
AGREEMENT REGARDING ROWES WHARF LIMITED PARTNERSHIP. Rowes Wharf Limited
Partnership holds a 50% general partnership interest in Rowes Wharf Associates,
the partnership that owns the hotel space and leases the office and retail space
at the Rowes Wharf property. Two of the Beacon Services Companies hold,
collectively, a 90% limited partnership interest in Rowes Wharf Limited
Partnership, with the remaining 9% limited partnership interest held by
affiliates of Beacon, and the 1% general partnership interest held by RWLP
Corp., a corporation owned by affiliates of Beacon. To enable EOP Management
Corp. to control Rowes Wharf Limited Partnership in the future, Beacon and the
Beacon Partnership have agreed to use their reasonable best efforts to (i) cause
RWLP Corp. to sell its interest in Rowes Wharf Limited Partnership to EOP
Management Corp. (or its designee) within two years following the Effective
Time, (ii) cause the holders of RWLP Corp. stock to sell such stock to EOP
Management Corp. (or its designee) within two years of the Effective Time, or
(iii) take any other actions regarding RWLP Corp. as may be requested by EOP
Management Corp., including, without limitation, converting RWLP Corp.'s general
partnership interest to a limited partnership interest and consenting to the
admission of a substitute general partner designated by EOP Management Corp. Any
purchase of an interest in or held by RWLP Corp. will be for fair market value.
Neither EOP nor EOP Partnership will have any rights with respect to the Rowes
Wharf Limited Partnership, other than by reason of their ownership interest in
EOP Management Corp., Beacon Construction Company and Beacon Property Management
Company.
THE EOP BOARD AND THE BEACON BOARD EACH RECOMMENDS A VOTE FOR THE MERGER, THE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
APPRAISAL RIGHTS
Because the Beacon Common Shares were listed on the NYSE on the Beacon
Record Date, holders of the Beacon Common Shares will not have statutory rights
under the MGCL to demand and receive payment of the fair value thereof.
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BUSINESS OF EOP
GENERAL
EOP was formed to continue and expand the national office property business
organized by Mr. Samuel Zell, Chairman of the EOP Board. EOP believes that its
portfolio (based on revenues and square footage) is the largest office portfolio
in the United States controlled by any publicly traded, full-service office
company. As of September 30, 1997, EOP owned and operated 93 institutional
quality office properties containing 33.4 million rentable square feet, and
owned 16 stand-alone parking facilities containing 16,037 parking spaces. The
EOP Office Properties are located throughout the United States in 48 submarkets
in 35 markets in 20 states and the District of Columbia. Since September 30,
1997, EOP has acquired an additional 21 office properties containing
approximately 6.4 million rentable square feet of office space, thereby
increasing the size of its portfolio to 114 office properties containing
approximately 39.8 million rentable square feet. All of EOP's assets are owned
by, and its operations conducted through, EOP Partnership and its subsidiaries.
EOP is the managing general partner of EOP Partnership.
EOP currently has approximately 847 employees providing in-house expertise
in property management, leasing, finance, tax, acquisition, development,
disposition, marketing, accounting, information systems and real estate law. The
five most senior executives have an average tenure of 11 years with EOP or its
affiliates and an average of 23 years experience in the real estate industry.
During the past several years, EOP has been among the most active buyers of
institutional quality office properties throughout the United States, investing
in excess of $3.7 billion during the period from 1987 through September 1997 and
averaging $779 million annually in acquisitions (calculated on a cost basis) for
the three years ended September 30, 1997.
EOP has demonstrated the ability to lease up the space it has acquired. At
the time of acquisition, the EOP Office Properties were, on a weighted average
basis, 79% occupied. During the period from 1988 through September 1997, EOP
leased (net of expiring leases) in excess of an additional 5.8 million rentable
square feet of office space. As of September 30, 1997, the EOP Office Properties
were 93.2% occupied by 3,099 tenants.
As of September 30, 1997, the EOP Office Properties contained an average of
359,000 rentable square feet. Of the 3,099 tenants for the EOP Office
Properties, none accounted for more than 2.3% of the EOP portfolio's annualized
rent.
Management believes that larger properties allow for a higher quality of
tenant services, justify on-site management and facilitate economies of scale.
EOP, therefore, generally will not acquire office properties with less than
200,000 rentable square feet except in connection with a merger, portfolio
acquisition or geographic assemblage of properties. EOP's view is that, over the
long term, its return on investment in large, institutional quality properties
will be enhanced where tenants are provided with superior tenant services,
physical improvements and locations.
Management believes that a geographically diverse portfolio minimizes risk
and stabilizes earnings. As a result of its ownership presence in 35 markets,
which include 48 submarkets, EOP has local market expertise and knowledge in
markets situated throughout the United States. The EOP Office Properties and the
Managed Properties are located in suburban areas as well as CBDs. Some office
tenants are attracted to suburban locations that may offer proximity to
residential housing and the availability of inexpensive parking. Other tenants,
however, have requirements for transportation, labor, or close physical access
to governmental or institutional offices that attract them to CBDs. The EOP
Office Properties, by number of buildings, are located 33% in CBDs and 67% in
suburban markets and, by rentable square feet, 53% in CBDs and 47% in suburban
markets. Through EOP Management Corp., EOP manages an additional 33 office
properties, containing 3.7 million rentable square feet, owned by certain
affiliates of the Equity Group. The Managed Properties, by number of buildings,
are located 9% in CBDs and 91% in suburban markets and, by rentable square feet,
28% in CBDs and 72% in suburban markets.
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DISTRIBUTION OF EOP OFFICE PROPERTIES, MANAGED PROPERTIES
AND PARKING FACILITIES BY REGION (AS OF SEPTEMBER 30, 1997)
<TABLE>
<CAPTION>
EOP PARKING
EOP OFFICE PROPERTIES MANAGED PROPERTIES FACILITIES
--------------------- --------------------- -------------------
RENTABLE RENTABLE NUMBER NUMBER OF
REGION OFFICE NUMBER SQUARE FEET NUMBER SQUARE FEET NUMBER OF SPACES EMPLOYEES
------ ------ ------ ----------- ------ ----------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific Los Angeles 75
CBD................................. 6 4,243,902 -- -- -- --
Suburban............................ 12 2,506,841 5 320,468 -- --
Southeast Atlanta 108
CBD................................. 6 2,887,795 1 130,189 1 759
Suburban............................ 8 2,120,652 2 207,664 -- --
Northeast Washington, D.C. 151
CBD................................. 6 2,625,458 -- -- 6 3,140
Suburban............................ 11 2,537,749 3 598,576 -- --
Central Chicago 340(1)
CBD................................. 7 5,261,555 2 877,889 5 4,674
Suburban............................ 4 1,286,556 17 1,085,407 -- --
Southwest Houston 103
CBD................................. 5 2,588,819 -- -- -- --
Suburban............................ 9 3,159,286 2 277,953 -- --
West Denver 70
CBD................................. 1 230,022 -- -- 4 7,464
Suburban............................ 18 3,958,342 1 157,311 -- --
-- ---------- -- --------- -- ------ ---
Total............................ 93 33,406,977 33 3,655,457 16 16,037 847
== ========== == ========= == ====== ===
</TABLE>
- -------------------------
(1) 194 of these employees are located at EOP's headquarters.
OPERATIONS
The operation of the EOP Properties is under the direction of five regional
managers, each of whom has oversight responsibility for all of the EOP
Properties in his respective region. Each region has strategic and budget
planning responsibility combined with due diligence, property management,
engineering/construction, leasing/marketing, and information systems expertise.
Each regional manager reports to EOP's Executive Vice President -- Real Estate
Operations.
OPERATIONAL STRUCTURE
EOP Partnership is the entity through which EOP owns its properties. The
ownership and management structure of EOP is intended to (i) enable EOP to
acquire assets in transactions that may defer some or all of the sellers' tax
consequences and (ii) enable EOP to comply with certain technical and complex
requirements under the federal tax rules and regulations relating to the assets
and income permitted for a REIT.
EOP Management Corp. provides office property and asset management services
(the "Managed Property Business") to the 33 Managed Properties and to the EOP
Joint Venture Properties described below. EOP Management Corp. collects a
property management fee for the performance of such services. To maintain EOP's
qualification as a REIT, EOP Partnership owns 100% of the non-voting stock of
EOP Management Corp., representing a 95% economic interest, and EOH, an entity
owned by the Equity Group Owners, owns 100% of the voting stock of EOP
Management Corp., representing a 5% economic interest.
The 17 EOP Joint Venture Properties are held in ownership entities with
unaffiliated third parties. Ten of the EOP Joint Venture Properties are office
properties and seven are parking facilities. EOP Partnership or a subsidiary is
the managing general partner of each of the EOP Joint Venture Properties (except
for Civic Parking L.L.C., where a subsidiary of EOP Partnership is one of two
managing members).
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EOP's acquisition and oversight of its Parking Facilities is administered
through a wholly owned subsidiary, Equity Capital Holdings, L.P. All but one of
the EOP Parking Facilities are leased to and operated by third-party parking
garage service companies (the "Service Companies") under leases where the
Service Companies bear the operating expenses. The arrangements with the Service
Companies may be modified in the future if EOP receives a favorable ruling from
the IRS. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for
Qualification as a REIT -- Income Tests Applicable to REITs."
FORMATION TRANSACTIONS
BACKGROUND. EOP was formed pursuant to the consolidation (the
"Consolidation") in July 1997 of the ownership of the EOP Properties owned by
the four Zell/Merrill Lynch institutional real estate investment funds (each a
"ZML Fund" and collectively, the "ZML Funds"), and the Management Business (as
defined below) which was owned by the Equity Group. The ZML Funds were formed
during the period from 1988 to 1996 to acquire, improve, own, manage, operate
and dispose of primarily office properties.
Each ZML Fund consisted of (i) a limited partnership organized under the
laws of the State of Illinois (each a "ZML Opportunity Partnership"), (ii) a
general partner of such ZML Opportunity Partnership (each a "ZML Partner") which
was controlled by Mr. Zell and in which Merrill Lynch & Co. ("Merrill Lynch")
was a limited partner and (iii) a Delaware corporation or Maryland real estate
investment trust (each a "ZML REIT"), as the case may be, that served as the
majority limited partner in ZML Opportunity Partnerships I and II and the sole
limited partner in ZML Opportunity Partnerships III and IV. There were several
institutional investor limited partners in ZML Opportunity Partnerships I and II
(collectively, "Investor Limited Partners") in addition to ZML REITs I and II.
All of the Investor Limited Partners were given an opportunity to convert their
interest into an interest in the corresponding ZML REIT in connection with the
Consolidation (which interests were subsequently converted into EOP Common
Shares as described below), and all but one Investor Limited Partner (in ZML
Opportunity Partnership II) elected to do so.
CONSOLIDATION. In advance of or simultaneous with the IPO, EOP engaged in
the transactions described below, which were designed to consolidate the
ownership of the EOP Office Properties, the EOP Parking Facilities and the
Management Business, to facilitate the IPO and to enable EOP to qualify as a
REIT for federal income tax purposes commencing with the taxable year ending
December 31, 1997.
- The ZML Opportunity Partnerships (the predecessor owners of the EOP
Office Properties and Parking Facilities) contributed to EOP Partnership
all of their interests in the EOP Office Properties and Parking
Facilities, which included interests in the EOP Joint Venture Properties,
that comprised EOP's initial portfolio.
- The ZML REITs (each a majority or sole limited partner of a ZML
Opportunity Partnership) merged into EOP, with EOP succeeding to their
interest in, and becoming the managing general partner of, the ZML
Opportunity Partnerships.
- Certain entities (collectively, the "Equity Group") owned directly or
indirectly by certain trusts (together with certain partnerships
comprised of such trusts, the "Equity Group Owners") established for the
benefit of the families of Mr. Zell and of Mr. Robert Lurie, the deceased
former partner of Mr. Zell, contributed to EOP Partnership substantially
all of the interests in their office property and asset management
businesses and parking facility asset management business (collectively,
the "Management Business").
- Shareholders in the ZML REITs received EOP Common Shares in exchange for
their interests in the ZML REITs.
- Partners in the ZML Opportunity Partnerships (including EOP as the
successor to the ZML REITs) will receive EOP Partnership Units (to be
distributed over the two-year period ending July 11, 1999). Such EOP
Partnership Units are intended to correspond in value to, and be
exchangeable commencing two years following the closing of the IPO for,
EOP Common Shares or, at EOP's option, cash equal to the fair market
value of such EOP Common Shares.
73
<PAGE> 84
- Units in EOP Partnership were issued to the Equity Group in exchange for
the Management Business, which EOP Partnership Units will be exchangeable
for EOP Common Shares, or, at EOP's option, the cash equivalent thereof,
commencing one year following the closing of the IPO.
- The Management Business made a distribution to the Equity Group Owners of
cash on hand from pre-closing operations, which funds were not acquired
by EOP pursuant to the Consolidation. Affiliates of Mr. Zell received
approximately $11.4 million of such distribution.
- EOP Partnership transferred the Managed Property Business to EOP
Management Corp., in which EOP Partnership now owns nonvoting stock
representing 95% of the equity interest and EOH owns all of the voting
stock, representing 5% of the equity interest.
The principal executive offices of EOP and EOP Partnership are located at
Two North Riverside Plaza, 22nd Floor, Chicago, Illinois 60606, and their
telephone number is (312) 466-3300. EOP maintains regional offices in Los
Angeles, Denver, Houston, Chicago, Atlanta and Washington, D.C.
RECENT DEVELOPMENTS
ACQUISITIONS. Since September 30, 1997, EOP has completed a number of new
acquisitions.
On October 1, 1997, EOP acquired a total of approximately 2.5 million
square feet in Houston, Dallas and Philadelphia from The Prudential Insurance
Company of America ("Prudential"). The aggregate purchase price of $289 million
was paid $211.9 million in cash, $6.0 million in assumed liabilities and $71.1
million in EOP Partnership Units (valued at a price of $24.50 per unit). These
six properties are: (i) Destec Tower, a 25-story, 574,216 square foot tower in
the Westchase area of Houston; (ii) Brookhollow Central I, II and III, a 800,688
square foot office complex in suburban Houston; (iii) 8080 Central, a 17-story,
283,707 square foot office building in the North Central Expressway submarket of
Dallas; and (iv) 1700 Market, a 32-story, 825,547 square foot office building in
the Market Street West area of downtown Philadelphia. Average occupancy for the
entire portfolio is 87.4%. This acquisition increased EOP's total square footage
in Houston from 1.36 million to 2.74 million square feet, in Dallas from 1.84
million to 2.13 million square feet, and in Philadelphia from 681,289 to 1.50
million square feet. On October 6, 1997, in a separate transaction, two
investment funds, as assignees of Prudential, purchased approximately $74
million of restricted EOP Common Shares at $24.50 per share.
On October 6, 1997, EOP acquired a 27-story, 566,434 square foot office
building in downtown Los Angeles, California. The purchase price of $99.5
million was paid in cash. The property, 550 South Hope, includes a 549-space
parking garage.
On October 7, 1997, EOP purchased two 40-story office towers containing an
aggregate of 2,033,377 net rentable square feet in Chicago, Illinois for $462
million in cash. The properties, 10 and 30 South Wacker Drive, contain 500
parking spaces and are connected by the Chicago Mercantile Exchange (which EOP
did not acquire).
On October 7, 1997, EOP closed on the purchase of controlling interests in
nine office properties containing 1.0 million square feet located in suburban
Philadelphia from partnerships affiliated with the owners of Acorn Development
Corporation. Total consideration paid for the controlling interests was $127.5
million, of which approximately $14.7 million was assumed debt, $14.4 million
was paid in EOP Partnership Units valued at $28.775 per Unit, and the balance
was paid in cash. Agreement has been reached for the purchase by EOP of
controlling interests in two additional office properties, also located in
suburban Philadelphia and also owned by partnerships affiliated with the owners
of Acorn Development Corporation, for additional consideration in the
approximate amount of $17.2 million, of which approximately $4 million will be
payable in EOP Partnership Units valued at $28.775 per Unit, with the balance
comprised of a combination of cash and the assumption of debt. EOP shall have
the option of purchasing the remaining interests in all 11 properties,
exercisable for a designated period commencing three years after the respective
closing dates on the initial purchases, for additional consideration in the
amount of approximately $2.1 million, all payable in EOP Partnership Units
valued at $28.775 per Unit.
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<PAGE> 85
On October 17, 1997, EOP acquired a 10-story office building containing
314,634 net rentable square feet of office/rental space and a 264-space
underground parking garage in Washington, D.C. The property, located at 1120
20th Street, N.W. and known as One Lafayette Centre, was acquired for an
aggregate purchase price of $82.5 million, consisting of $24.4 million in EOP
Partnership Units (valued at a price of $32.975 per unit), assumed liabilities
of $5.3 million, and $52.8 million in cash.
On October 20, 1997, EOP sold $200 million of EOP Common Shares in an
unregistered private placement to an institutional investor at $30.00 per share.
FINANCING TRANSACTIONS. Since the IPO in July 1997, EOP has completed a
number of new financing transactions.
On September 3, 1997, EOP Partnership issued $180 million of the EOP
Unsecured Notes in a private placement with an institutional investor and used
the proceeds therefrom to repay amounts outstanding under the $600 million
Credit Facility.
EOP Partnership entered into the $1.5 billion Credit Facility on October 2,
1997 with Morgan Guaranty Trust Company of New York. The $1.5 billion Credit
Facility, which matures July 1, 1998, will be used to repay amounts outstanding
under the $600 million Credit Facility and fund future acquisitions.
BUSINESS AND GROWTH STRATEGIES
EOP's primary business objective is to achieve sustainable long-term growth
in cash flow per share and to maximize long-term shareholder value. EOP intends
to achieve this objective by owning and operating institutional quality office
buildings and providing a superior level of service to tenants in CBDs and
suburban markets across the United States. EOP intends to supplement this
strategy by the strategic acquisition of parking facilities.
INTERNAL GROWTH. Management believes EOP's future internal growth will come
from (i) lease up of vacant space, (ii) tenant roll-over at increased rents
where market conditions permit, (iii) repositioning of certain EOP Properties
which have not yet achieved stabilization, and (iv) increasing economies of
scale.
As of September 30, 1997, 2.3 million rentable square feet of EOP Office
Property space was vacant. Of this amount, 556,000 square feet was leased, with
occupancy yet to commence. EOP believes that the current average market rent for
this space is $24.17 per square foot. EOP's average operating expenses for this
space are $9.18 per square foot. The following five EOP Properties account for
40% of the total vacant space as of September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT OF
VACANT SQUARE
VACANT FOOTAGE
SQUARE FOOTAGE LEASED(1)
-------------- -------------
<S> <C> <C>
28 State Street, Boston, MA................................. 250,807 109,479
Two California Plaza, Los Angeles, CA....................... 161,803 9,451
161 North Clark, Chicago, IL................................ 271,601 251,036
Oakbrook Terrace Tower, Oak Brook Terrace, IL............... 103,725 0
Texaco Center, New Orleans, LA.............................. 110,714 0
------- -------
898,650 369,966
</TABLE>
- ------------------------
(1) Represents the amount of unoccupied space as of September 30, 1997 that was
subject to an executed lease with a commencement date after September 30,
1997.
During the period from September 30, 1997 through December 31, 2001, 2,239
leases for 15.0 million rentable square feet of space are scheduled to expire.
As of September 30, 1997, the average rent for this space was $20.33 per square
foot, the current market rent for such space averaged $23.30 per square foot,
and the weighted average operating expenses were $8.20 per square foot.
Accordingly, EOP expects that leases expiring through December 31, 2001 will be
renewed, or such space relet, at higher rents. The actual rental rates at which
available space will be relet will depend on prevailing market factors at the
time. There can be no assurance that EOP will relet such space at an increased,
or even at the then current, rental rate.
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<PAGE> 86
As the largest publicly traded full service office company (based on
revenue and square footage) in the United States, EOP expects to benefit from
certain economies of scale. Management intends to maximize the benefits
attributable to its large scale operations by aggressive cash management, bulk
purchasing, national and regional service agreements and utilization of
state-of-the-art information technology (which provides EOP with extensive
operational data, including daily leasing, occupancy and other property and
financial data). Historically, as the portfolio has increased in size, EOP's
general and administrative costs as a percentage of total revenue have
decreased.
EOP owns a total of approximately 50 acres of undeveloped land adjacent to
15 EOP Office Properties on which approximately 2.1 million square feet of
office space could be developed. EOP may decide to develop this land if
significant pre-leasing can be arranged, but does not currently anticipate other
development activities.
EXTERNAL GROWTH. EOP is pursuing, and expects to continue to actively
pursue, acquisitions of additional office properties and parking facilities.
Management believes that significant opportunities for external growth will
continue to be available through strategic acquisitions of institutional quality
office properties. Management believes that such properties may be acquired for
less than replacement cost in certain markets and that current rents generally
do not justify new construction in many of these markets. Properties may be
acquired separately or as part of a portfolio, and may be acquired for cash
and/or in exchange for equity or debt securities of EOP, and such acquisitions
may be customary real estate transactions and/or mergers or other business
combinations.
The real estate industry is in the early stages of a major consolidation
which EOP believes will continue as institutional owners gain increasing
confidence in indirect rather than direct ownership of real estate. EOP
generally has acquired the EOP Office Properties from institutional sellers.
Emerging Trends in Real Estate 1997, published by Equitable Real Estate
Investment Management, Inc. and Real Estate Research Corporation, estimates that
institutions currently have direct investments of approximately $1.3 trillion in
commercial real estate in the United States. EOP believes that given its size,
its UPREIT structure (which enables it to acquire properties in transactions
that may permit sellers to defer tax consequences) and its historic relationship
with many of the major institutional owners of real estate in the United States,
it will be well positioned to benefit from the consolidation that is occurring
in the real estate industry.
PARKING FACILITIES. Management believes that parking facilities offer EOP
attractive investment opportunities which will be complementary to investments
in office properties. Because the parking industry is highly fragmented, would
benefit from economies of scale and is in the early stages of consolidation and
privatization, management expects there to be future opportunities to acquire
parking facilities from smaller owners who lack capital for expansion,
technological upgrades or repairs. Management also expects municipalities and
other government entities to be a significant source of properties for
acquisition as budget constraints force such entities to consider nontraditional
sources of capital such as privatization of parking facilities. EOP will focus
its acquisition efforts solely on municipal or private parking facilities that
have limited competition, no (or minimal) rental rate restrictions and/or a
superior location proximate to or affiliated with airports, CBDs, entertainment
projects or health care facilities.
76
<PAGE> 87
PRICE RANGE OF EOP COMMON SHARES AND DISTRIBUTION HISTORY
The EOP Common Shares have been traded on the NYSE under the symbol "EOP"
since the IPO. EOP's transfer agent reported 459 record holders of EOP Common
Shares as of November 14, 1997 and the Depository Trust Company held
approximately 28,684,925 million EOP Common Shares on behalf of various
beneficial owners as of September 30, 1997. The following table sets forth the
quarterly high and low closing prices per share reported on the NYSE and the
distributions paid by EOP with respect to the periods noted. On October 9, 1997,
EOP paid a distribution of $.26 per EOP Common Share representing a pro rata
distribution based on a $.30 full quarterly distribution for the period
beginning July 11, 1997 and ended September 30, 1997.
<TABLE>
<CAPTION>
DISTRIBUTION
QUARTER ENDED HIGH LOW PER SHARE
------------- ---- --- ------------
<S> <C> <C> <C>
September 30, 1997.......................................... $33 15/16 $26 1/6 $.26
December 31, 1997 (through November 17, 1997)............... $34 1/4 $27 1/2 $.30(1)
</TABLE>
- -------------------------
(1) EOP has declared a distribution of $.30 per EOP Common Share payable to
shareholders of record on December 10, 1997 to be paid on December 19, 1997.
77
<PAGE> 88
EOP SELECTED CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The following sets forth selected consolidated and combined financial and
operating information on an historical basis for EOP and the EOP Predecessors.
The following information should be read in conjunction with the consolidated
and combined financial statements and notes thereto of EOP and the EOP
Predecessors included elsewhere in this Joint Proxy Statement/Prospectus. The
selected consolidated historical financial and operating information of EOP at
September 30, 1997 and for the period from July 11, 1997 to September 30, 1997,
has been derived from the historical financial and operating information of EOP.
The selected combined historical and operating information of the EOP
Predecessors for the period from January 1, 1997 to July 10, 1997 and the nine
months ended September 30, 1996, has been derived from the historical unaudited
combined financial statements of the EOP Predecessors. The selected combined
historical financial and operating information of the EOP Predecessors at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, has been derived from the historical combined financial
statements of the EOP Predecessors audited by Ernst & Young LLP, independent
auditors, whose report with respect thereto is included elsewhere in this Joint
Proxy Statement/Prospectus. The selected combined historical financial and
operating information of the EOP Predecessors at December 31, 1994, 1993 and
1992, and for each of the two years in the period ended December 31, 1993, has
been derived from the historical unaudited combined financial statements of the
EOP Predecessors.
<TABLE>
<CAPTION>
EOP
EOP FOR THE PREDECESSORS EOP PREDECESSORS
PERIOD FROM FOR THE PERIOD NINE MONTHS
JULY 11, 1997 FROM ENDED
TO JANUARY 1, SEPTEMBER 30,
SEPTEMBER 30, 1997 TO ----------------
1997 JULY 10, 1997 1996
------------- -------------- ----
<S> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental, parking and other............. $ 162,290 $ 327,017 $ 343,660
========== ========= ========
Total Revenue....................... $ 164,568 339,104 353,237
========== ========= ========
Expenses:
Interest.............................. 25,793 80,481 87,551
Depreciation and amortization......... 24,161 66,034 69,193
Property operating expenses(1)........ 62,885 127,285 141,823
General and administrative............ 5,855 17,201 16,278
Provision for value impairment........ 0 0 0
---------- --------- --------
Total Expenses...................... $ 118,694 $ 291,001 $ 314,845
========== ========= ========
Income before (income) loss allocated
to minority interests, income from
investments in unconsolidated joint
ventures, gain on sale of real estate,
and extraordinary items............... $ 45,874 $ 48,103 $ 38,392
Minority interests allocation.......... (2,866) (912) (2,166)
Income from investments in
unconsolidated joint ventures......... 1,426 1,982 1,554
Gain on sale of real estate and
extraordinary items................... (12,930) 12,236 5,262
---------- --------- --------
Net income.......................... $ 31,504 $ 61,409 $ 43,042
========== ========= ========
Net income per Common Share......... $ .21
==========
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in real estate after
accumulated depreciation.............. $5,000,159 -- --
Total assets........................ 5,355,922 -- --
Mortgage debt, notes payable and
revolving line of credit.............. 1,716,458 -- --
Total liabilities................... 1,892,170 -- --
Minority interests..................... 310,045 -- --
Shareholders' equity................... 3,153,707 -- --
OTHER DATA:
General and administrative expenses as
a percentage of total revenues........ 3.6% -- 4.6%
Number of Office Properties owned at
period end(2)(3)...................... 93 -- 78
Net rental square feet of Office
Properties owned at period end (in
millions)(2).......................... 33.4 -- 27.8
Occupancy of Office Properties owned at
period end(2)......................... 93% -- 89%
Number of Parking Facilities owned at
period end............................ 16 -- 3
Number of spaces at Parking Facilities
owned at period end................... 16,037 -- 7,321
Funds from Operations(4)............... $ 70,148 $ 113,022 $ 103,798
Cash flow from operating activities.... $ 59,665 $ 95,960 $ 89,685
Cash flow from investing activities.... $ (85,634) $(571,068) $ (589,340)
Cash flow from financing activities.... $ 158,593 $ 245,851 $ 530,280
Ratio of earnings to fixed charges..... 2.57 1.52 1.41
<CAPTION>
EOP PREDECESSORS (COMBINED HISTORICAL) YEARS ENDED
DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental, parking and other............. $ 493,396 $ 356,959 $ 230,428 $ 150,315 $ 96,787
========== ========== ========== ========== ========
Total Revenue....................... $ 508,124 $ 371,457 $ 240,878 $ 159,246 $107,154
========== ========== ========== ========== ========
Expenses:
Interest.............................. $ 119,595 $ 100,566 $ 59,316 $ 36,755 $ 25,775
Depreciation and amortization......... 96,237 74,156 46,905 29,752 19,266
Property operating expenses(1)........ 201,067 151,488 107,412 74,028 48,856
General and administrative............ 23,145 21,987 15,603 12,012 8,720
Provision for value impairment........ 0 20,248 0 0 0
---------- ---------- ---------- ---------- --------
Total Expenses...................... $ 440,044 $ 368,445 $ 229,236 $ 152,547 $102,617
========== ========== ========== ========== ========
Income before (income) loss allocated
to minority interests, income from
investments in unconsolidated joint
ventures, gain on sale of real estate,
and extraordinary items............... $ 68,080 $ 3,012 $ 11,642 $ 6,699 $ 4,537
Minority interests allocation.......... (2,086) (2,129) 1,437 1,772 1,793
Income from investments in
unconsolidated joint ventures......... 2,093 2,305 1,778 0 0
Gain on sale of real estate and
extraordinary items................... 5,338 31,271 1,705 -- --
---------- ---------- ---------- ---------- --------
Net income.......................... $ 73,425 $ 34,459 $ 16,562 $ 8,471 $ 6,330
========== ========== ========== ========== ========
Net income per Common Share.........
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in real estate after
accumulated depreciation.............. $3,291,815 $2,393,403 $1,815,160 $1,220,268 $820,805
Total assets........................ 3,912,565 2,650,890 2,090,933 1,318,644 912,631
Mortgage debt, notes payable and
revolving line of credit.............. 1,964,892 1,434,827 1,261,156 798,897 526,830
Total liabilities................... 2,174,483 1,529,334 1,350,552 845,315 552,666
Minority interests..................... 11,080 31,587 9,283 (15,298) (14,133)
Shareholders' equity................... 1,727,002 1,089,969 731,098 488,627 374,098
OTHER DATA:
General and administrative expenses as
a percentage of total revenues........ 4.6% 5.9% 6.5% 7.5% 8.1%
Number of Office Properties owned at
period end(2)(3)...................... 83 73 63 48 33
Net rental square feet of Office
Properties owned at period end (in
millions)(2).......................... 29.2 23.1 18.5 13.6 9.1
Occupancy of Office Properties owned at
period end(2)......................... 90% 86% 88% 80% 73%
Number of Parking Facilities owned at
period end............................ 10 3 0 0 0
Number of spaces at Parking Facilities
owned at period end................... 7,321 3,323 0 0 0
Funds from Operations(4)............... $ 160,460 96,104 $ 60,372 -- --
Cash flow from operating activities.... $ 165,975 $ 93,878 $ 73,821 -- --
Cash flow from investing activities.... $ (924,227) $ (380,615) $ (513,965) -- --
Cash flow from financing activities.... $1,057,551 $ 276,513 $ 514,923 -- --
Ratio of earnings to fixed charges..... 1.49 1.21 1.24 1.23 1.24
</TABLE>
(Footnotes on following page)
78
<PAGE> 89
- -------------------------
(1) Includes EOP Property operating expenses, real estate taxes, insurance, as
well as repair and maintenance expenses.
(2) The data at the periods ended September 30, 1997, December 31, 1996 and 1995
includes 28 State Street, a 570,040 square foot EOP Office Property which
recently has undergone major redevelopment and was vacant prior to May 1997.
The weighted average occupancy, excluding 28 State Street, as of September
30, 1997, December 31, 1996 and 1995 was approximately 94%, 92% and 88%,
respectively.
(3) The number of EOP Office Properties owned as of December 31, 1996, as
reflected in the combined historical financial statements, includes Barton
Oaks Plaza II, an EOP Office Property which was sold in January 1997 and
8383 Wilshire, an EOP Office Property which was sold in May 1997.
(4) The White Paper on 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. EOP believes that Funds from Operations is helpful to investors as
a measure of the performance of an 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 EOP to incur and
service debt, to make capital expenditures and to fund other cash needs. EOP
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 does EOP. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income (determined in accordance with
GAAP) as an indication of EOP's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
EOP's liquidity, nor is it indicative of funds available to fund EOP's cash
needs, including its ability to make distributions. For a reconciliation of
net income and Funds from Operations, see "EOP MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Funds from
Operations."
79
<PAGE> 90
EOP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the combined financial condition
and results of operations should be read in conjunction with the Consolidated
and Combined Financial Statements of EOP and the Combined Financial Statements
of the EOP Predecessors, respectively, and Notes thereto contained herein. All
references to the historical activities of EOP prior to July 11, 1997 contained
in this "EOP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" refer to the activities of the EOP Predecessors.
Statements contained in this "EOP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" which are not historical facts
may be forward-looking statements. Such statements are subject to certain risks
and uncertainties which could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof.
GENERAL
The following discussion is based primarily on the Consolidated and
Combined Financial Statements of EOP and the Combined Financial Statements of
the EOP Predecessors, respectively, as of September 30, 1997 and December 31,
1996 and 1995 and for the three and nine month periods ended September 30, 1997
and 1996 and for each of the years ended December 31, 1996, 1995 and 1994.
EOP receives income primarily from rental revenue from EOP Office
Properties (including reimbursements from tenants for certain operating costs),
parking revenue from EOP Office Properties and stand alone EOP Parking
Facilities, and, to a lesser extent, from fees from noncombined affiliates for
the management of the Managed Properties.
As of September 30, 1997, EOP owned or had an interest in 93 EOP Office
Properties totaling approximately 33.4 million square feet, and 16 stand alone
EOP Parking Facilities with approximately 16,037 spaces (the "Total Portfolio").
Of the Total Portfolio, 71 of these EOP Office Properties, totaling
approximately 22.6 million square feet, and three EOP Parking Facilities were
acquired prior to January 1, 1996; 11 EOP Office Properties, totaling
approximately 6.1 million square feet, and seven EOP Parking Facilities were
acquired in 1996; and 11 EOP Office Properties, totaling approximately 4.7
million square feet, and six EOP Parking Facilities, including an interest in
four EOP Parking Facilities, were acquired during the nine months ended
September 30, 1997. As a result of this rapid growth in the size of the Total
Portfolio, the financial data presented shows large increases in revenues and
expenses from year to year. For the foregoing reasons, EOP does not believe its
period to period financial data are comparable. Therefore, the analysis below
shows changes resulting from EOP Properties that were held during the entire
period for the periods being compared (the "Core Portfolio") and the changes in
Total Portfolio. The Core Portfolio for the comparison between the nine months
ended September 30, 1997 and 1996 consists of 71 EOP Office Properties and three
EOP Parking Facilities acquired prior to January 1, 1996. The Core Portfolio for
the comparison between the three months ended September 30, 1997 and 1996
consists of 72 EOP Office Properties and three EOP Parking Facilities acquired
prior to July 1, 1996. The Core Portfolio for these comparisons excludes Barton
Oaks Plaza II, a 118,529 square foot EOP Office Property which was sold in
January 1997, 8383 Wilshire, a 417,463 square foot EOP Office Property, which
was sold in May 1997, and 28 State Street, a 570,040 square foot EOP Office
Property, which was undergoing major redevelopment for the periods discussed.
The Core Portfolio for the comparison between the years ended December 31, 1996
and 1995 consists of the 63 EOP Office Properties acquired prior to January 1,
1995. The Core Portfolio for the comparison between the years ended December 31,
1995 and 1994 consists of the 48 EOP Office Properties acquired prior to January
1, 1994. The Core Portfolio for these comparisons includes Barton Oaks Plaza II
and 8383 Wilshire.
80
<PAGE> 91
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 72 EOP Office
Properties and three EOP Parking Facilities acquired prior to July 1, 1996. The
Core Portfolio excludes Barton Oaks Plaza II, which was sold in January 1997,
8383 Wilshire, which was sold in May 1997, and 28 State Street which has
recently undergone major redevelopment and was vacant prior to May 1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -------------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues...................... $181,095 $122,883 $58,212 47.4% $128,128 $114,870 $ 13,258 11.5%
Interest income........................ 1,390 2,348 (958) (40.8)% n/a n/a n/a n/a
Fees from noncombined affiliates....... 1,401 886 515 58.3% n/a n/a n/a n/a
-------- -------- ------- ------ -------- -------- -------- --------
Total revenues................. 183,886 126,117 57,769 45.8% 128,128 114,870 13,258 11.5%
-------- -------- ------- ------ -------- -------- -------- --------
Interest expense....................... 29,973 33,540 (3,567) (10.6)% 23,413 30,568 (7,155) (23.4)%
Depreciation and amortization.......... 29,786 25,661 4,125 16.1% 19,418 23,182 (3,764) (16.2)%
Property Operating Expenses............ 70,061 50,893 19,168 37.7% 51,926 47,991 3,935 8.2%
General and administrative............. 8,330 5,008 3,322 66.3% n/a n/a n/a n/a
-------- -------- ------- ------ -------- -------- -------- --------
Total expenses................. 138,150 115,102 23,048 20.0% 94,757 101,741 (6,984) (6.9)%
-------- -------- ------- ------ -------- -------- -------- --------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain
on sale of real estate and
extraordinary items.................. 45,736 11,015 34,721 315.2% 33,371 13,129 20,242 154.2%
Minority interests..................... (2,899) (468) (2,431) (519.4)% (312) (468) 156 33.3%
Income from unconsolidated joint
ventures............................. 1,383 477 906 189.9% 559 476 83 17.4%
Gain on sale of real estate and
extraordinary items.................. (12,930) -- (12,930) -- (12,876) -- (12,876) --
-------- -------- ------- ------ -------- -------- -------- --------
Net Income............................. $ 31,290 $ 11,024 $20,266 183.8% $ 20,742 $ 13,137 $ 7,605 57.9%
======== ======== ======= ====== ======== ======== ======== ========
Property Revenues less Property
Operating Expenses................... $111,034 $ 71,990 $39,044 54.2% $ 76,202 $ 66,879 $ 9,323 13.9%
======== ======== ======= ====== ======== ======== ======== ========
</TABLE>
Property Revenues. The increase in rental revenues, tenant reimbursements,
parking income and other income ("Property Revenues") in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 91.1% at
July 1, 1996 to 94.9% as of September 30, 1997. This increase represents
approximately 0.9 million square feet of additional occupancy in the Core
Portfolio between July 1, 1996 and September 30, 1997. Included in Property
Revenues for the Core Portfolio are lease termination fees of $.9 million and
$1.2 million for the three months ended September 30, 1997 and 1996,
respectively (which are included in the other revenue category on the combined
statement of operations). These fees are related to specific tenants who have
paid a fee to terminate their lease obligations before the end of the
contractual term of the lease. Although EOP has historically experienced similar
levels of such termination fees, there is no way of predicting the timing or
amounts of future lease termination fees. The straight-line rent adjustment
which is included in rental revenues for the Core Portfolio for the three months
ended September 30, 1997 and 1996, was approximately $6.0 million and $4.4
million, respectively. The straight-line rent adjustment which is included in
rental revenues for the Total Portfolio for the three months ended September 30,
1997 and 1996 was approximately $8.7 million and $5.2 million, respectively.
Interest Income. Interest income for the Total Portfolio decreased by $.9
million to $1.4 million for the three months ended September 30, 1997, compared
to $2.3 million for the three months ended September 30, 1996. This decrease in
interest income is primarily due to having a lesser amount of cash reserves
invested in short term investments since the closing of the Consolidation and
EOP's IPO. Prior to the Consolidation, each of the entities involved in the
Consolidation needed to maintain separate cash reserves which in the aggregate
were higher than the cash reserves EOP anticipates maintaining going forward.
Due to the availability of borrowings under the $600 million Credit Facility and
other changes in the capital structure of EOP, EOP
81
<PAGE> 92
anticipates that it will maintain cash reserves of $15 to $25 million (although
the cash balance may at times be more or less in anticipation of pending
acquisitions or other transactions). The lower cash balance will result in lower
interest income in future periods, however, this loss in income should be offset
by savings on the $600 million Credit Facility.
Fees from Noncombined Affiliates. Although fees from noncombined affiliates
increased, they are expected to decrease in future periods as the Managed
Properties are sold. Fee income of approximately $70,900 and $238,900 for the
three months ended September 30, 1997 and 1996, respectively, was related to
properties which have been sold.
Interest Expense. Interest expense decreased $3.5 million for the Total
Portfolio to $30.0 million for the three months ended September 30, 1997
compared to $33.5 million for the three months ended September 30, 1996. This
decrease was primarily the result of the repayment of approximately $598.4
million of mortgage debt in July 1997 (of which $497.6 million was secured by
properties in the Core Portfolio) and the repayment of $80 million on ZML Fund
IV's line of credit partially offset by the $180 million Private Debt Offering.
Interest expense related to the $598.4 million of secured debt repaid was
approximately $1.5 million and $10.9 million for the three months ended
September 30, 1997 and 1996, respectively. Interest expense related to ZML Fund
IV's line of credit, the $180 million Private Debt Offering and the $600 million
Credit Facility for three months ended September 30, 1997 (an equivalent amount
was not outstanding for the prior period) was approximately $.8 million, $1.1
million and $2.7 million, respectively. Due to these debt repayments, interest
expense is initially expected to decrease in future periods and then anticipated
to increase as EOP acquires additional properties and incurs additional
financing.
Depreciation and Amortization. The decrease in depreciation in the Core
Portfolio resulted from the recording of EOP's assets and liabilities at their
fair market value in connection with the Consolidation and EOP's IPO.
Accordingly, certain of EOP's assets are depreciated over longer lives than the
period over which those assets were previously depreciated by EOP Predecessors.
The resulting decrease to depreciation was partially offset by an increase to
depreciation resulting from a step-up recorded to investment in real estate,
also as a result of recording those assets at their fair market value at the
time of the Consolidation and EOP's IPO. The decrease in amortization in the
Core Portfolio resulted from the write-off of deferred financing and leasing
costs at the time of the Consolidation and EOP's IPO.
Property Operating Expense. The increase in real estate taxes and
insurance, repairs and maintenance, and property operating expenses ("Property
Operating Expenses") in the Core Portfolio relates primarily to increases in
real estate taxes due to higher property valuations partially offset by real
estate tax refunds recorded in the three months ended September 30, 1997.
General and Administrative Expenses. General and administrative expenses
increased by approximately $3.3 million to $8.3 million for the three months
ended September 30, 1997, compared to $5.0 million for the three months ended
September 30, 1996. General and administrative expenses as a percentage of total
revenues was approximately 4.5% and 4.0% for the three months ended September
30, 1997 and 1996, respectively. The primary reasons for the increase in general
and administrative expenses are the significant increase in the size of EOP's
portfolio and increased expenses associated with becoming a public company.
While general and administrative expenses will continue to increase as the size
of EOP's portfolio increases, it is anticipated that general and administrative
expenses as a percentage of total revenue will initially remain stable (or
increase slightly), as the full costs of running a public company are reflected
in operations, and then decrease over time as EOP realizes increased economies
of scale.
82
<PAGE> 93
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 71 EOP Office
Properties and three EOP Parking Facilities acquired prior to January 1, 1996.
The Core Portfolio excludes Barton Oaks Plaza II, which was sold in January
1997, 8383 Wilshire, which was sold in May 1997, and 28 State Street which has
recently undergone a major redevelopment and was vacant prior to May 1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues......... $489,307 $343,660 $145,647 42.4% $340,295 $317,520 $ 22,775 7.2%
Interest income........... 10,524 6,451 4,073 63.1% n/a n/a n/a n/a
Fees from noncombined
affiliates.............. 3,841 3,126 715 22.9% n/a n/a n/a n/a
-------- -------- -------- ------ -------- -------- -------- -----
Total revenues.......... 503,672 353,237 150,435 42.6% 340,295 317,520 22,775 7.2%
-------- -------- -------- ------ -------- -------- -------- -----
Interest expense.......... 106,274 87,551 18,723 21.4% 79,195 81,988 (2,793) (3.4)%
Depreciation and
amortization............ 90,195 69,193 21,002 30.4% 64,287 62,807 1,480 2.4%
Property Operating
Expenses................ 190,170 141,823 48,347 34.1% 132,629 130,536 2,093 1.6%
General and
administrative.......... 23,056 16,278 6,778 41.6% n/a n/a n/a n/a
-------- -------- -------- ------ -------- -------- -------- -----
Total expenses.......... 409,695 314,845 94,850 30.1% 276,111 275,331 780 0.3%
-------- -------- -------- ------ -------- -------- -------- -----
Income before allocation
to minority interests,
income from investment
in unconsolidated joint
ventures, gain on sale
of real estate and
extraordinary items..... 93,977 38,392 55,585 144.8% 64,184 42,189 21,995 52.1%
Minority interests........ (3,778) (2,166) (1,612) (74.4)% (1,191) (2,166) 975 45.0%
Income from unconsolidated
joint ventures.......... 3,408 1,554 1,854 119.3% 1,796 1,686 110 6.5%
Gain on sale of real
estate and extraordinary
items................... (694) 5,262 (5,956) (113.2)% (12,876) -- (12,876) --
-------- -------- -------- ------ -------- -------- -------- -----
Net income................ $ 92,913 $ 43,042 $ 49,871 115.9% $ 51,913 $ 41,709 $ 10,204 24.5%
======== ======== ======== ====== ======== ======== ======== =====
Property Revenues less
Property Operating
Expenses................ $299,137 $201,837 $ 97,300 48.2% $207,666 $186,984 $ 20,682 11.1%
======== ======== ======== ====== ======== ======== ======== =====
</TABLE>
Property Revenues. The increase in Property Revenues in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 88.5% at
January 1, 1996 to 94.8% as of September 30, 1997. This increase represents
approximately 1.4 million square feet of additional occupancy in the Core
Portfolio between January 1, 1996 and September 30, 1997. Included in Property
Revenues for the Core Portfolio are lease termination fees of $3.4 million and
$4.5 million for the nine months ended September 30, 1997 and 1996, respectively
(which are included in the other revenue category on the combined statement of
operations). These fees are related to specific tenants who have paid a fee to
terminate their lease obligations before the end of the contractual term of the
lease. Although EOP has historically experienced similar levels of such
termination fees, there is no way of predicting the timing or amounts of future
lease termination fees. The straight-line rent adjustment which is included in
rental revenues for the Core Portfolio for the nine months ended September 30,
1997 and 1996, was approximately $9.9 million and $9.9 million, respectively.
The straight-line rent adjustment which is included in rental revenues for the
Total Portfolio for the nine months ended September 30, 1997 and 1996, was
approximately $16.4 million and $13.1 million, respectively.
83
<PAGE> 94
Interest Income. Interest income for the Total Portfolio increased by $4.1
million to $10.5 million for the nine months ended September 30, 1997, compared
to $6.5 million for the nine months ended September 30, 1996. This increase in
interest income is due primarily to having a larger amount of cash invested in
short term investments pending the purchase of new acquisitions. Prior to the
Consolidation, each of the entities involved in the Consolidation needed to
maintain separate cash reserves which in the aggregate were higher than cash
reserves EOP anticipates maintaining going forward. Due to the availability of
borrowings under the $600 million Credit Facility and other changes in the
capital structure of EOP, EOP anticipates that it will maintain cash reserves of
$15 to $25 million (although the cash balance may at times be more or less in
anticipation of pending acquisitions or other transactions). The lower cash
balance will result in lower interest income in future periods, however, this
loss in income should be offset by savings on the $600 million Credit Facility.
Fees from Noncombined Affiliates. Although fees from noncombined affiliates
increased, they are expected to decrease in future periods as the Managed
Properties are sold. Fee income of approximately $380,800 and $834,300 for the
nine months ended September 30, 1997 and 1996, respectively, was related to
properties which have been sold.
Interest Expense. Interest expense increased $18.7 million for the Total
Portfolio to $106.3 million for the nine months ended September 30, 1997
compared to $87.6 million for the nine months ended September 30, 1996. This
increase was primarily the result of the $180 million Private Debt Offering,
proceeds of $164 million from ZML Fund IV's line of credit and the $600 million
Credit Facility (exclusive of the $80 million repaid after the closing of the
offering) and increased debt obtained to finance acquisitions. At or shortly
after the closing of EOP's IPO, EOP repaid approximately $598.4 million of
mortgage debt (of which $497.6 million was secured by properties in the Core
Portfolio) and repaid $80 million on ZML Fund IV's line of credit, partially
offsetting the increase in interest expense. Interest expense related to the
$598.4 million of secured debt repaid was approximately $25.2 million and $31.1
million for the nine months ended September 30, 1997 and 1996, respectively.
Interest expense related to ZML Fund IV's line of credit, the $180 million
Private Debt Offering and the $600 million Credit Facility for the nine months
ended September 30, 1997 (an equivalent amount was not outstanding for the prior
period) was approximately $5.2 million, $1.1 million and $2.7 million,
respectively. Due to these debt repayments, interest expense is initially
expected to decrease in future periods and then anticipated to increase as the
Company acquires additional properties and incurs additional financing.
Depreciation and Amortization. Depreciation and amortization for the Core
Portfolio increased as a result of capital and tenant improvements made in 1996
and 1997 and as a result of a step-up that was recorded to investment in real
estate. This step-up was recorded as a result of adjusting the basis of EOP's
assets and liabilities to their fair market values in connection with the
Consolidation and EOP's IPO. This increase was partially offset by a decrease
resulting from certain of EOP's assets being depreciated over longer lives than
the periods over which corresponding assets were previously depreciated by EOP
Predecessors.
Property Operating Expenses. The increase in Property Operating Expenses
relates primarily to an increase in maintenance expenses, offset in part by a
decrease in real estate taxes, which was caused by real estate tax refunds
related to prior periods recorded in the nine months ended September 30, 1997.
General and Administrative. General and administrative expenses increased
by approximately $6.8 million to $23.7 million for the nine months ended
September 30, 1997, compared to $16.3 million for the nine months ended
September 30, 1996. General and administrative expenses as a percentage of total
revenues was approximately 4.6% and 4.6% for the nine months ended September 30,
1997 and 1996, respectively. While general and administrative expenses will
continue to increase as the size of EOP's portfolio increases, it is anticipated
that general and administrative expenses as a percentage of total revenues will
initially remain stable (or increase slightly), as the full costs of running a
public company are reflected in operations, and then decrease over time as EOP
realizes increased economies of scale.
84
<PAGE> 95
PARKING OPERATIONS
Included in the Total Portfolio numbers above are results of operations
from the stand alone EOP Parking Facilities, the summarized information for
which is presented below.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
TOTAL EOP PARKING PORTFOLIO CORE EOP PARKING PORTFOLIO
------------------------------------- -------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues........ $6,311 $2,465 $3,846 156.0% $2,515 $2,465 $ 50 2.0%
Interest income.......... 35 42 (7) (16.7%) -- -- -- --
------ ------ ------ ----- ------ ------ ----- -----
Total revenues...... 6,346 2,507 3,839 153.1% 2,515 2,465 50 2.0%
------ ------ ------ ----- ------ ------ ----- -----
Interest expense......... 475 411 64 15.8% 700 411 289 70.3%
Depreciation and
amortization........... 1,068 333 735 220.7% 482 333 149 44.7%
Property Operating
Expenses............... 1,071 692 379 54.8% 426 692 (266) (38.4%)
------ ------ ------ ----- ------ ------ ----- -----
Total expenses...... 2,614 1,436 1,178 82.0% 1,608 1,436 172 12.0%
------ ------ ------ ----- ------ ------ ----- -----
Income before allocation
to minority interests,
income from investment
in unconsolidated joint
ventures............... 3,732 1,071 2,661 248.5% 907 1,029 (122) (11.9%)
Minority interests....... (79) (43) (36) 83.7% (79) (43) (36) (83.7%)
Income from
unconsolidated joint
ventures............... 825 -- 825 -- -- -- -- --
------ ------ ------ ----- ------ ------ ----- -----
Net Income............... $4,478 $1,028 $3,450 335.6% $ 828 $ 986 $(158) (16.0%)
====== ====== ====== ===== ====== ====== ===== =====
Property Revenues less
Property Operating
Expenses............... $5,240 $1,773 $3,467 195.5% $2,089 $1,773 $ 316 17.8%
====== ====== ====== ===== ====== ====== ===== =====
</TABLE>
85
<PAGE> 96
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
TOTAL EOP PARKING PORTFOLIO CORE EOP PARKING PORTFOLIO
-------------------------------------- -------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues............ $16,282 $7,402 $8,880 120.0% $7,515 $7,402 $ 113 1.5%
Interest income.............. 149 95 54 56.9% -- -- -- --
------- ------ ------ ------ ------ ------ ----- ------
Total revenues........... 16,431 7,497 8,934 119.2% 7,515 7,402 113 1.5%
------- ------ ------ ------ ------ ------ ----- ------
Interest expense............. 2,566 1,237 1,329 107.4% 1,995 1,237 758 61.3%
Depreciation and
amortization............... 2,703 1,000 1,703 170.3% 1,181 1,000 181 18.1%
Property Operating
Expenses................... 3,458 2,319 1,139 49.1% 1,869 2,319 (450) (19.4%)
------- ------ ------ ------ ------ ------ ----- ------
Total expenses........... 8,727 4,556 4,171 91.6% 5,045 4,556 489 10.7%
------- ------ ------ ------ ------ ------ ----- ------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint
ventures................... 7,704 2,941 4,763 162.0% 2,470 2,846 (376) (13.2%)
Minority interests........... (200) (249) 49 19.7% (200) (249) 49 19.7%
Income from unconsolidated
joint ventures............. 1,611 -- 1,611 -- -- -- -- --
------- ------ ------ ------ ------ ------ ----- ------
Net income................... $ 9,115 $2,692 $6,423 238.6% $2,270 $2,597 $(327) (12.6%)
======= ====== ====== ====== ====== ====== ===== ======
Property Revenues less
Property Operating
Expenses................... $12,824 $5,083 $7,741 152.3% $5,646 $5,083 $ 563 11.1%
======= ====== ====== ====== ====== ====== ===== ======
</TABLE>
86
<PAGE> 97
YEARS ENDED DECEMBER 31, 1996 AND 1995
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 63 EOP Office
Properties acquired prior to January 1, 1995. The Core Portfolio for this
comparison includes Barton Oaks Plaza II and 8383 Wilshire, which were sold in
1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
--------------- --------------
INCREASE/ % INCREASE/ %
1996 1995 (DECREASE) CHANGE 1996 1995 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues................. $493,396 $356,959 $136,437 38.2% $349,810 $327,017 $ 22,793 7.0%
Interest Income................... 9,608 8,599 1,009 11.7% -- -- -- --
Fees from noncombined
affiliates...................... 5,120 5,899 (779) (13.2%) -- -- -- --
-------- -------- -------- ------- -------- -------- -------- ------
Total revenues............ 508,124 371,457 136,667 36.8% 349,810 327,017 22,793 7.0%
-------- -------- -------- ------- -------- -------- -------- ------
Interest expense.................. 119,595 100,566 19,029 18.9% 85,225 85,371 (146) (0.2)%
Depreciation and amortization..... 96,237 74,156 22,081 29.8% 71,969 68,226 3,743 5.5%
Property Operating Expenses....... 201,067 151,488 49,579 32.7% 143,511 137,103 6,408 4.7%
General and administrative........ 23,145 21,987 1,158 5.3% -- -- -- --
Provision for value impairment.... -- 20,248 (20,248) (100.0%) -- 20,248 (20,248) (100.0%)
-------- -------- -------- ------- -------- -------- -------- ------
Total expenses............ 440,044 368,445 71,599 19.4% 300,705 310,948 (10,243) (3.3)%
-------- -------- -------- ------- -------- -------- -------- ------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures, gain on sale of
real estate and extraordinary
items........................... 68,080 3,012 65,068 2,160.3% 49,105 16,069 33,036 205.6%
Minority interests, net of
extraordinary gain of $20,035 in
1995 for the total and core
portfolios...................... (2,086) (2,129) 43 2.0% (1,733) (2,023) 290 14.3%
Income from unconsolidated joint
ventures........................ 2,093 2,305 (212) (9.2%) 2,093 2,305 (212) (9.2%)
Gain on sale of real estate and
extraordinary items............. 5,338 31,271 (25,933) (82.9%) -- 31,271 (31,271) (100.0%)
-------- -------- -------- ------- -------- -------- -------- ------
Net Income........................ $ 73,425 $ 34,459 $ 38,966 113.1% $ 49,465 $ 47,622 $ 1,843 3.9%
======== ======== ======== ======= ======== ======== ======== ======
Property Revenues less Property
Operating Expenses.............. $292,329 $205,471 $ 86,858 42.3% $206,299 $189,914 $ 16,385 8.6%
======== ======== ======== ======= ======== ======== ======== ======
</TABLE>
Property Revenues. The increase in Property Revenues in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 87.5% at
January 1, 1995 to 94.3% as of December 31, 1996. This increase represents
approximately 1.3 million square feet of additional occupancy in the Core
Portfolio between January 1, 1995 and December 31, 1996. Included in Property
Revenues for the Core Portfolio are lease termination fees of $5.6 million and
$5.0 million for the years ended December 31, 1996 and 1995, respectively (these
amounts are included in the other revenue category on the combined statement of
operations). These fees are related to specific tenants who have paid a fee to
terminate their lease obligations before the end of the contractual term of the
lease. Although EOP has historically experienced similar levels of such
termination fees, there is no way of predicting the timing or amounts of future
lease termination fees. The straight-line rent adjustment which is included in
rental revenues for the Core Portfolio for the years ended December 31, 1996 and
1995, was approximately $6.8 million and $10.5 million, respectively. The
straight-line rent adjustment which is included in rental revenues for the Total
Portfolio for the years ended December 31, 1996 and 1995, was approximately
$18.4 million and $12.7 million, respectively. Other income for 1996 also
includes $8.8 million relating to EOP's share of a litigation settlement.
Interest Income. Interest income for the Total Portfolio increased by $1.0
million to $9.6 million for the year ended December 31, 1996 compared to $8.6
million for the year ended December 31, 1995. This increase in interest income
is due primarily to having a larger amount of cash invested in short term
investments pending the purchase of new acquisitions. Prior to the
Consolidation, each of the entities involved in the Consolidation needed to
maintain separate cash reserves which in the aggregate were higher than cash
reserves EOP anticipates maintaining going forward. Due to the availability of
borrowings under the $600 million Credit Facility and other changes in the
capital structure of EOP, EOP anticipates that it will
87
<PAGE> 98
maintain cash reserves of $25 to $50 million (although the cash balance may at
times be more or less in anticipation of pending acquisitions or other
transactions). The lower cash balance will result in lower interest income in
future periods, however, this loss in income should be offset by savings on the
$600 million Credit Facility.
Fees from Noncombined Affiliates. Fee income from the Managed Properties
decreased as a result of disposition activities in 1995 and 1996 which reduced
the number of properties being managed.
Interest Expense. Interest expense increased $19.0 million for the Total
Portfolio to $119.6 million for the year ended December 31, 1996 compared to
$100.6 million for the year ended December 31, 1995. This increase was primarily
the result of increased debt obtained to finance acquisitions. At or shortly
after the closing of the IPO, EOP repaid approximately $598.4 million of
mortgage debt (of which $399.3 million was secured by EOP Properties in the Core
Portfolio). Interest expense related to the $598.4 million of secured debt
repaid was approximately $42.7 million and $35.9 million for the years ended
December 31, 1996 and 1995, respectively. Due to these debt repayments, interest
expense is initially expected to decrease in future periods and then anticipated
to increase as EOP acquires additional properties and incurs additional
financing.
Depreciation and Amortization. The increase in depreciation and
amortization in the Core Portfolio was related to depreciation of capital and
tenant improvements made at EOP Properties in the Core Portfolio Properties in
1995 and 1996 and the amortization of leasing commissions and loan fees paid
during that time period.
Property Operating Expenses. The increase in Property Operating Expenses
relates to an increase in maintenance expenses and to real estate tax refunds
received in 1995, with $1.9 million relating to a single property, reducing the
tax expense in 1995.
General and Administrative. General and administrative expenses increased
by approximately $1.1 million to $23.1 million for the year ended December 31,
1996 compared to $22.0 million for the year ended December 31, 1995. General and
administrative expenses as a percentage of total revenues was approximately 4.6%
and 5.9% for the years ended December 31, 1996 and 1995, respectively. While
general and administrative expenses will continue to increase as the size of
EOP's portfolio increases, it is anticipated that general and administrative
expenses as a percentage of total revenues will initially remain stable, (or
increase slightly), as the full costs of running a public company are reflected
in operations, and then decrease over time as EOP realizes increased economies
of scale.
Provision for Value Impairment. During 1995, the Financial Accounting
Standards Board issued Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of" which established accounting standards for
the evaluation of the potential impairment of such assets. This statement was
adopted by EOP Predecessors as of January 1, 1995. Rental properties are
individually evaluated for impairment when conditions exist which may indicate
that it is probable that the sum of expected future cash flows (on an
undiscounted basis) from a rental property are less than its historical net cost
basis. Upon determination that a permanent impairment has occurred, rental
properties are reduced to their fair value. As a result of cash deficits, San
Felipe Plaza was evaluated for impairment and accordingly, during the year ended
December 31, 1995, EOP Predecessors recorded a provision for value impairment of
approximately $20.2 million, of which $17.5 million related to the adjustment of
investment in real estate and approximately $2.7 million related to unamortized
lease acquisition costs.
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<PAGE> 99
YEARS ENDED DECEMBER 31, 1995 AND 1994
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 48 EOP Office
Properties acquired prior to January 1, 1994. The Core Portfolio for this
comparison includes Barton Oaks Plaza II and 8383 Wilshire, which were sold in
1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
--------------------------------------------- ---------------------------------------------
INCREASE/ % INCREASE/ %
1995 1994 (DECREASE) CHANGE 1995 1994 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues................. $356,959 $230,428 $126,531 54.9% $235,193 $208,969 $ 26,224 12.5%
Interest income................... 8,599 4,432 4,167 94.0% -- -- -- --
Fees from noncombined
affiliates...................... 5,899 6,018 (119) (2.0)% -- -- -- --
-------- -------- -------- ------- -------- -------- -------- --------
Total revenues................ 371,457 240,878 130,579 54.2% 235,193 208,969 26,224 12.5%
-------- -------- -------- ------- -------- -------- -------- --------
Interest expense.................. 100,566 59,316 41,250 69.5% 66,856 54,674 12,182 22.3%
Depreciation and amortization..... 74,156 46,905 27,251 58.1% 53,202 42,402 10,800 25.5%
Property Operating Expenses....... 151,488 107,412 44,076 41.0% 97,071 97,772 (701) (0.7)%
General and administrative........ 21,987 15,603 6,384 40.9% -- -- -- --
Provision for value impairment.... 20,248 -- 20,248 -- 20,248 -- 20,248 --
-------- -------- -------- ------- -------- -------- -------- --------
Total expenses................ 368,445 229,236 139,209 60.7% 237,377 194,848 42,529 21.8%
-------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before allocation to
minority, interests income from
investment in unconsolidated
joint ventures, gain on sale of
real estate and extraordinary
items........................... 3,012 11,642 (8,630) (74.1)% (2,184) 14,121 (16,305) (115.5)%
Minority interests, net of
extraordinary gain of $20,035 in
1995 for the total and core
portfolios...................... (2,129) 1,437 (3,566) (248.2)% (19) (2,550) 2,531 99.3%
Income from unconsolidated joint
ventures........................ 2,305 1,778 527 29.6% -- -- -- --
Gain on sale of real estate and
extraordinary items............. 31,271 1,705 29,566 1,734.1% 31,271 1,738 29,533 1,699.3%
-------- -------- -------- ------- -------- -------- -------- --------
Net Income........................ $ 34,459 $ 16,562 $ 17,897 108.1% $ 29,068 $ 13,309 $ 15,759 118.4%
======== ======== ======== ======= ======== ======== ======== ========
Property Revenues less Property
Operating Expenses.............. $205,471 $123,016 $ 82,455 67.0% $138,122 $111,197 $ 26,925 24.2%
======== ======== ======== ======= ======== ======== ======== ========
</TABLE>
Property Revenues. The increase in Property Revenues in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 79.6% at
January 1, 1994 to 92.6% as of December 31, 1995. This increase represents
approximately 1.8 million square feet of additional occupancy in the Core
Portfolio between January 1, 1994 and December 31, 1995. Included in Property
Revenues for the Core Portfolio are lease termination fees of $4.3 million and
$2.0 million for the years ended December 31, 1995 and 1994, respectively (these
amounts are included in the other revenue category on the combined statement of
operations). These fees are related to specific tenants who have paid a fee to
terminate their lease obligations before the end of the contractual term of the
lease. Although EOP has historically experienced similar levels of such
termination fees, there is no way of predicting the timing or amounts of future
lease termination fees. The straight-line rent adjustment which is included in
rental revenues for the Core Portfolio for the years ended December 31, 1995 and
1994, was approximately $6.7 million and $6.0 million, respectively. The
straight-line rent adjustment which is included in rental revenues for the Total
Portfolio for the years ended December 31, 1995 and 1994, was approximately
$12.7 million and $6.9 million, respectively.
Interest Income. Interest income for the Total Portfolio increased by $4.2
million to $8.6 million for the year ended December 31, 1995, compared to $4.4
million for the year ended December 31, 1994. This increase in interest income
is due primarily to having a larger amount of cash invested in short term
investments pending the purchase of new acquisitions. Prior to the
Consolidation, each of the entities involved in the Consolidation needed to
maintain separate cash reserves which in the aggregate were higher than cash
reserves EOP anticipates maintaining going forward. Due to the availability of
borrowings under the $600 million Credit Facility and other changes in the
capital structure of EOP, EOP anticipates that it will maintain cash reserves of
$25 to $50 million (although the cash balance may at times be more or less in
anticipation of
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<PAGE> 100
pending acquisitions or other transactions). The lower cash balance will result
in lower interest income in future periods, however, this loss in income should
be offset by savings on the $600 million Credit Facility.
Fees from Noncombined Affiliates. Management fee income from the Managed
Properties decreased by approximately $0.1 million.
Interest Expense. Interest expense increased $41.3 million for the Total
Portfolio to $100.6 million for the year ended December 31, 1995 compared to
$59.3 million for the year ended December 31, 1994. This increase was primarily
the result of increased debt obtained to finance acquisitions. At or shortly
after the closing of the IPO, EOP repaid approximately $598.4 million of
mortgage debt (of which $295.1 million was secured by EOP Properties in the Core
Portfolio). Interest expense related to the $598.4 million of secured debt
repaid was approximately $35.9 million and $15.9 million for the years ended
December 31, 1995 and 1994, respectively. Due to these debt repayments, interest
expense is initially expected to decrease in future periods and then anticipated
to increase as EOP acquires additional properties and incurs additional
financing.
Depreciation and Amortization. The increase in depreciation and
amortization in the Core Portfolio was related to depreciation of capital and
tenant improvements made at EOP Properties in the Core Portfolio Properties in
1994 and 1995 and the amortization of leasing commissions and loan fees paid
during that time period.
Property Operating Expenses. Property Operating Expenses increased by $44.1
million to $151.5 million for the year ended December 31, 1995 as compared to
$107.4 million for the year ended December 31, 1994. Virtually all of this
increase was attributable to EOP Properties acquired in 1994 and 1995. The Core
Portfolio had an increase of approximately $1.9 million in repairs and
maintenance expense that was offset by a $1.9 million decrease in real estate
tax and insurance expense while other property expenses decreased by $.7
million. The decrease in real estate tax expense was mainly the result of a real
estate tax refund received due to successful appeal of the tax bills at a single
EOP Property. EOP had calculated and billed the real estate tax reimbursement
due from tenants at this EOP Property, assuming that this refund would be
received, so substantially all of the refund was retained by EOP rather than
being refunded to tenants.
General and Administrative. General and administrative expenses increased
by approximately $6.4 million to $22.0 million for the year ended December 31,
1995, compared to $15.6 million for the year ended December 31, 1994. General
and administrative expenses as a percentage of total revenues was approximately
5.9% and 6.5% for the years ended December 31, 1995 and 1994, respectively.
While general and administrative expenses will continue to increase as the size
of EOP's portfolio increases, it is anticipated that general and administrative
expenses as a percentage of total revenues will initially remain stable, (or
increase slightly), as the full costs of running a public company are reflected
in operations, and then decrease over time as EOP realizes increased economies
of scale.
Provision for Value Impairment. During 1995, the Financial Accounting
Standards Board issued Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of" which established accounting standards for
the evaluation of the potential impairment of such assets. This statement was
adopted by EOP Predecessors as of January 1, 1995. Rental properties are
individually evaluated for impairment when conditions exist which may indicate
that it is probable that the sum of expected future cash flows (on an
undiscounted basis) from a rental property are less than its historical net cost
basis. Upon determination that a permanent impairment has occurred, rental
properties are reduced to their fair value. As a result of cash deficits, San
Felipe Plaza was evaluated for impairment and accordingly, during the year ended
December 31, 1995, EOP Predecessors recorded a provision for value impairment of
approximately $20.2 million, of which $17.5 million related to the adjustment of
investment in real estate and approximately $2.7 million related to unamortized
lease acquisition costs.
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<PAGE> 101
PARKING FACILITIES
Included in the Total Portfolio numbers above are results of operations
from EOP Parking Facilities, the summarized information for which is presented
below.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO
----------------------------
YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
($ IN THOUSANDS)
<S> <C> <C> <C>
Property Revenues........................................... $10,203 $5,391 --
Interest Income............................................. 141 17 --
------- ------ -------
Total Revenues......................................... 10,344 5,408
------- ------ -------
Interest expense............................................ 1,814 937 --
Depreciation and amortization............................... 1,432 722 --
Property Operating Expenses................................. 3,152 1,797 --
------- ------ -------
Total expenses......................................... 6,398 3,456 --
------- ------ -------
Income before allocation to minority interests and income
from investment in unconsolidated joint ventures.......... 3,946 1,952 --
Minority interests.......................................... (252) -- --
Income from unconsolidated joint ventures................... -- -- --
------- ------ -------
Net Income.................................................. $ 3,694 $1,952 --
======= ====== =======
Property Revenues less Property Operating Expenses.......... $ 7,051 $3,594 --
======= ====== =======
</TABLE>
DISPOSITIONS OF PROPERTY
EOP sold two EOP Office Properties in 1997: Barton Oaks Plaza II (118,529
net rentable square feet) was sold in January 1997 and 8383 Wilshire (417,463
net rentable square feet) was sold in May 1997. In January 1996, EOP sold the
condominium portion, comprised of a 210-room hotel at Three Lakeway, a mixed-use
property. Below is a summary of the operations of these EOP Office Properties
for the three and nine month periods ended September 30, 1997 and 1996 and the
years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- ---------------- --------------------------
1997 1996 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Property Revenues............................... $ 42 $2,540 $ 3,227 $7,460 $9,959 $ 9,445 $ 9,041
---- ------ ------- ------ ------ ------- -------
Interest expense................................ -- 149 36 808 956 4,910 4,724
Depreciation and amortization................... -- 563 451 1,678 2,286 2,262 2,044
Property Operating Expenses..................... 91 1,007 1,501 3,447 4,869 3,068 5,249
---- ------ ------- ------ ------ ------- -------
Total expenses.............................. 91 1,719 1,988 5,933 8,111 10,240 12,017
Income (loss) before allocation to minority
interests, and gain on sale of real estate and
extraordinary items........................... (49) 821 1,239 1,527 1,848 (795) (2,976)
Minority interests.............................. -- -- -- -- -- -- --
Gain on sale of real estate and extraordinary
items......................................... -- -- 12,962 5,262 5,338 -- (224)
---- ------ ------- ------ ------ ------- -------
Net (Loss) Income............................... $(49) $ 821 $14,201 $6,789 $7,186 $ (795) $(3,200)
==== ====== ======= ====== ====== ======= =======
Property Revenues less Property Operating
Expenses...................................... $(49) $1,533 $ 1,726 $4,013 $5,090 $ 6,377 $ 3,792
==== ====== ======= ====== ====== ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Net cash provided from operations represents the primary
source of liquidity to fund distributions, debt service, recurring capital costs
and non-revenue enhancing tenant improvements. Historically,
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<PAGE> 102
EOP made annual distributions equal to approximately 100% of taxable income.
Cash generated in excess of taxable income (resulting primarily from noncash
items such as depreciation and amortization) was retained for working capital
and to fund capital improvements and non-revenue enhancing tenant improvements.
EOP intends to make regular quarterly distributions to holders of EOP Common
Shares and EOP Partnership Units. EOP has established its initial distribution
at an annual rate of $1.20 per EOP Common Share based upon its estimate of
annualized cash flow.
EOP intends to fund recurring capital costs and non-revenue enhancing
tenant improvements from cash from operations and draws under its $600 million
Credit Facility. EOP has no contractual obligations for material capital costs,
other than in connection with customary tenant improvements in the ordinary
course of business. EOP also expects that the $600 million Credit Facility will
provide for temporary working capital, unanticipated cash needs, and funding of
acquisitions.
The anticipated size of EOP's distributions will not allow EOP, using only
cash from operations, to retire all of its debt as it comes due and, therefore,
EOP will be required to repay maturing debt with funds from debt and/or equity
financing.
MORTGAGE FINANCING. The table below summarizes the mortgage debt, unsecured
notes and credit facility indebtedness outstanding at September 30, 1997 and
December 31, 1996 and 1995, excluding the discount on mortgage debt (net of
accumulated amortization of approximately $1.3 million) of approximately $19
million recorded in connection with EOP's IPO and Consolidation.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Debt Summary:
Balance($ in thousands)
Fixed Rate......................................... $1,308,125 $1,304,075 $ 900,913
Variable Rate...................................... 427,368 660,817 533,914
---------- ---------- ----------
Total...................................... $1,735,493 $1,964,892 $1,434,827
========== ========== ==========
Percentage of Total Debt:
Fixed Rate......................................... 75.4% 66.4% 62.8%
Variable Rate...................................... 24.6% 33.6% 37.2%
---------- ---------- ----------
Total...................................... 100.0% 100.0% 100.0%
========== ========== ==========
Weighted Average Interest
Rate at End of Period:
Fixed Rate......................................... 7.56% 7.89% 8.01%
Variable Rate...................................... 6.86% 7.33% 7.58%
---------- ---------- ----------
Weighted Average........................... 7.39% 7.70% 7.85%
========== ========== ==========
</TABLE>
The variable rate debt shown above bore interest at a 30-day LIBOR-based
floating interest rate. The 30-day LIBOR at September 30, 1997 was 5.66%
resulting in a weighted average spread over LIBOR at September 30, 1997 of 1.2%.
During the quarter ended September 30, 1997, EOP used the net proceeds of
its IPO of approximately $564.5 million and approximately $33.9 million of
available cash reserves to repay $253.1 million of fixed rate debt and $345.3
million of the variable rate debt. An additional $12.9 million was incurred for
prepayment penalties. EOP used the $180 million of proceeds received from the
Private Debt Offering to repay a portion of the $600 million Credit Facility.
The balance on the $600 million Credit Facility at September 30, 1997 was
approximately $211.1 million. The total debt outstanding as of September 30,
1997, excluding the discount on
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<PAGE> 103
mortgage debt (net of accumulated amortization of approximately $1.3 million) of
approximately $19 million recorded in connection with EOP's IPO and the
Consolidation, will mature as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
1997........................................................ $ 3,319
1998........................................................ 45,218
1999........................................................ 168,085
2000........................................................ 357,605
2001........................................................ 192,074
2002........................................................ 60,333
Thereafter.................................................. 908,859
----------
Total.................................................. $1,735,493
==========
</TABLE>
The instruments encumbering the EOP Properties contain customary
restrictions and requirements such as transferability restrictions, payment of
taxes on the EOP Property, maintenance of the EOP Property in good condition,
maintenance of insurance on the EOP Property, prohibition on liens, and
obtaining lender consent to leases with material tenants.
LINES OF CREDIT. ZML Fund IV entered into an acquisition/term loan facility
in September 1996 which was amended in April 1997. On July 15, 1997, EOP
obtained the $600 million Credit Facility which is used for acquisitions and
general corporate purposes. Amounts were drawn on the $600 million Credit
Facility to repay the outstanding balance on ZML Fund IV's line of credit which
was terminated when the $600 million Credit Facility was obtained. The $600
million Credit Facility matures on July 15, 2000. EOP paid a commitment fee on
the $600 million Credit Facility at closing of approximately $645,000. In
addition, until EOP receives a long term debt rating of BBB- or Baa3 or higher
by two rating agencies, an unused commitment fee is payable quarterly in arrears
based upon the unused amount of the $600 million Credit Facility as follows:
.15% per annum if the unused amount is between 0 to 33%; .20% per annum if the
unused amount is more than 33% but less than 66%; .25% per annum if the unused
amount is more than 66%. The $600 million Credit Facility carries an interest
rate equal to LIBOR plus 110 basis points. Once EOP receives the rating as
described above, a competitive bid option will become available for up to $250
million of the facility amount. Under the competitive bid option, the interest
rate spread will be reduced on a sliding scale based upon EOP's senior unsecured
debt rating and the unused commitment fee will be replaced by a facility fee of
.20% per annum. EOP is negotiating an amendment to the $600 million Credit
Facility to reduce the interest rate to LIBOR plus 100 basis points. There can
be no assurance that the amendment will be consummated. As of November 14, 1997
the outstanding balance on the $600 million Credit Facility has been repaid with
proceeds received from the $180 million Private Debt Offering and the $1.5
billion Credit Facility.
TERM LOAN FACILITY. In October 1997 EOP obtained the $1.5 billion Credit
Facility. The $1.5 billion Credit Facility is available for the acquisition of
properties and general corporate purposes. The $1.5 billion Credit Facility
carries an interest rate equal to LIBOR plus 100 basis points and may be
increased or decreased upon the receipt of an investment grade unsecured debt
rating. The $1.5 billion Credit Facility matures on July 1, 1998, and may be
extended to October 1, 1998. EOP paid an underwriting fee on the $1.5 billion
Credit Facility at closing of approximately $4,875,000. In addition, an unused
commitment fee is payable quarterly in arrears based upon the unused amount of
the $1.5 billion Credit Facility as follows: .15% per annum if the unused amount
is between 0 to 33%; .20% per annum if the unused amount is more than 33% but
less than 66%; .25% per annum if the unused amount is greater than 66%. In
October 1997, EOP used approximately $236 million of proceeds from the $1.5
billion Credit Facility to repay the majority of the variable rate property
mortgage indebtedness outstanding as of September 30, 1997. EOP repaid $150
million on the $1.5 billion Credit Facility with proceeds from the $200 million
private placement of EOP Common Shares in October 1997. Under the terms of the
facility agreement any amounts repaid cannot be drawn. In addition, amounts were
drawn from the $1.5 billion Credit Facility for property acquisitions and
general corporate purposes. As of November 14, 1997 the outstanding balance on
the $1.5 billion Credit Facility was approximately $1.044 billion. The amount
available to draw under the $1.5 billion Credit Facility is approximately $306
million as of November 14, 1997.
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<PAGE> 104
UNSECURED NOTES. In September 1997, EOP completed the Private Debt Offering
with an unaffiliated party. The terms of the Private Debt Offering consist of
four tranches with maturities from seven to ten years which were priced at an
interest rate spread over the corresponding Treasury rate. EOP used the proceeds
of the Private Debt Offering to repay a portion of the $600 million Credit
Facility. In addition, EOP terminated $150 million of the $700 million of hedge
agreements at a cost of approximately $3.9 million for the Private Debt
Offering. This amount will be amortized to interest expense over the respective
terms of each tranche. A summary of the terms of the Private Debt Offering are
as follows:
<TABLE>
<CAPTION>
STATED EFFECTIVE
TRANCHE AMOUNT RATE RATE(A)
- --------------------------------- ------ ------ ---------
<S> <C> <C> <C>
7 Year Senior Notes due 2004..... $ 30,000,000 7.24% 7.24%
8 Year Senior Notes due 2005..... 50,000,000 7.36% 7.67%
9 Year Senior Notes due 2006..... 50,000,000 7.44% 7.73%
10 Year Senior Notes due 2007.... 50,000,000 7.42% 7.69%
------------
$180,000,000
============
</TABLE>
- -------------------------
(A) Includes the cost of the terminated interest rate protection
agreements.
It is currently anticipated that EOP will issue preferred shares and/or
senior unsecured notes in early 1998 (the "Expected Offering") subject to market
conditions. Proceeds from the Expected Offering would be used to repay a portion
of the $1.5 billion Credit Facility. There can be no assurance, however, that
the Expected Offering will be consummated.
INTEREST RATE PROTECTION AGREEMENTS. In order to limit the market risk
associated with variable rate debt, EOP entered into several interest rate
protection agreements. These agreements effectively convert floating rate debt
to a fixed rate basis, as well as hedge anticipated financing transactions. Net
amounts paid or received under these agreements are recognized as an adjustment
to interest expense when such amounts are incurred or earned. Settlement amounts
paid or received under these agreements are deferred and amortized over the term
of the related financing transaction on the straight-line method which
approximates the effective yield method. A summary of the various interest rate
hedge agreements is as follows: (1) On June 4, 1997, EOP entered into interest
rate protection agreements for $700 million of indebtedness. As a result of this
arrangement, EOP has essentially "locked into" U.S. Treasury rates in effect as
of June 4, 1997, for $700 million in indebtedness. In August 1997, EOP
terminated $150 million of the $700 million of hedge agreements at a cost of
$3.9 million. The terminated agreements pertained to the Private Debt Offering.
The portion of the Private Debt Offering protected by these agreements consisted
of three tranches with maturities of eight, nine and ten years, respectively.
The cost of the terminated hedge agreements will be amortized to interest
expense over the respective terms of each tranche. (2) On October 6, 1997, EOP
entered into an additional $450 million of interest rate protection agreements
based on the U.S. Treasury rates in effect as of that date. EOP intends to
terminate these agreements and the remaining $550 million hedge agreements
described above at such time as it incurs fixed rate indebtedness. Upon the
occurrence of such termination, EOP will either owe money or be entitled to
receive money depending on whether U.S. Treasury rates have increased (resulting
in a payment to EOP) or decreased (resulting in a payment obligation of EOP)
subsequent to the date of the hedge. The counterparties to these arrangements
are major U.S. financial institutions. (3) EOP Predecessors entered into an
interest rate swap agreement in October 1995 which effectively fixed the
interest rate on a $93.6 million loan at 6.94% through the maturity of the loan
on June 30, 2000. EOP Predecessors sold several interest rate protection
agreements (aggregating $173 million of LIBOR based agreements) in June 1997 at
a cost of approximately $1.1 million.
The $600 million Credit Facility, the Private Debt Offering, the $1.5
billion Credit Facility contain, and any notes issued in the Expected Offering
are expected to contain, certain customary restrictions and requirements such as
total debt to assets ratios, secured debt to total assets ratios, debt service
coverage ratios, minimum ratios of unencumbered assets to unsecured debt, and
other limitations.
94
<PAGE> 105
ISSUANCE OF COMMON SHARES AND UNITS.
During the period from July 11, 1997 through November 14, 1997, 5,833,682
Units and 3,018,367 EOP Common Shares were issued to the sellers of certain EOP
Properties acquired during this period. An additional 121,424 EOP Common Shares
were issued as restricted share awards to officers and to trustees as
compensation. Also, EOP completed the private placement of EOP Common Shares
with an unaffiliated party, issuing 6,666,667 EOP Common Shares at $30 per
share. A portion of these funds was used to repay a portion of the $1.5 billion
Credit Facility.
CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For discussion purposes, the cash flows for the nine months ended September
30, 1997 combine the cash flows of the EOP Predecessors for the period January
1, 1997 to July 10, 1997 and the cash flows of EOP for the period July 11, 1997
to September 30, 1997. The cash flows for the nine months ended September 30,
1996 represent solely the cash flows of EOP Predecessors. Consequently, the
comparison of the periods provides only limited information regarding the cash
flows of EOP.
Cash and cash equivalents decreased by approximately $277.8 million, to
approximately $132.6 million at September 30, 1997, compared to $410.4 million
at December 31, 1996. This decrease was the result of $155.6 million of cash
generated by operations, $404.4 million generated from financing activities
reduced by $656.7 million invested in new acquisitions, capital and tenant
improvements, and payment of leasing commissions. Net cash provided by operating
activities increased by $65.9 million from $89.7 million to $155.6 million
primarily due to the additional cash flow generated by the increase in the
number of EOP Properties owned. Net cash used for investing activities increased
by $67.4 million from $589.3 million to $656.7 million mainly due to an increase
in the amount of real estate assets purchased during the nine months ended
September 30, 1997 compared to the nine months ended September 30, 1996. Net
cash provided by financing activities decreased by $125.9 million from $530.3
million to $404.4 million due to an increase in principal payments on mortgage
notes (including the repayments of debt with proceeds received from EOP's IPO)
and the $600 million Credit Facility, and a decrease in proceeds from mortgage
notes offset in part by a decrease in capital distributions and an increase in
proceeds from the $600 million Credit Facility and unsecured notes.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Cash and cash equivalents increased by approximately $299.3 million, to
approximately $410.4 million at December 31, 1996, compared to $111.1 million at
December 31, 1995. This increase was the result of $166 million of cash
generated by operations, $1,057.5 million generated from financing activities,
reduced by $924.2 million invested in new acquisitions, capital and tenant
improvements, and payment of leasing commissions. Net cash provided by operating
activities increased by $72.1 million from $93.9 million to $166.0 million
primarily due to the additional cash flow generated by the increase in the
number of EOP Properties owned. Net cash used for investing activities increased
by $543.6 million from $380.6 million to $924.2 million mainly due to an
increase in the amount of real estate assets purchased during 1996 compared to
1995. Net cash provided by financing activities increased by $781.1 million from
$276.5 million to $1,057.6 million due to an increase in capital contributions
and to an increase in proceeds received on mortgage notes, and a net decrease in
principal payments on mortgage notes and revolving lines of credit offset in
part by distributions to minority interest partners.
YEARS ENDED DECEMBER 31, 1995 AND 1994
The decrease in cash and cash equivalents of approximately $10.2 million
from December 31, 1994 to December 31, 1995 was the result of $380.6 million
invested in new acquisitions, capital and tenant improvements, and payment of
leasing commissions net of $93.9 million of cash generated by operations and
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<PAGE> 106
$276.5 million generated from financing activities. Net cash provided by
operating activities increased by $20.1 million from $73.8 million to $93.9
million primarily due to the additional cash flow generated by the increase in
the number of EOP Properties owned. Net cash used for investing activities
decreased by $133.4 million from $514.0 million to $380.6 million mainly due to
a decrease in escrow deposits and restricted cash in 1995 and investment in an
unconsolidated joint venture in 1994. Net cash provided by financing activities
decreased by $238.4 million from $514.9 million to $276.5 million primarily due
to principal payments on mortgage notes and revolving lines of credit, offset in
part by increased capital contributions.
CAPITAL IMPROVEMENTS
EOP has a history of acquiring and repositioning undercapitalized and
poorly managed properties, many of which have required significant capital
improvements due to deferred maintenance and/or required substantial renovation
to enable them to compete effectively. A number of the EOP Properties also have
had significant amounts of shell space requiring build out at the time of
acquisition. EOP takes these capital improvements and revenue enhancing tenant
improvements into consideration at the time of acquisition in determining the
amount of equity and debt financing required to purchase the EOP Property and
fund the improvements. Therefore, capital improvements up to the first five
years after acquisition of these EOP Properties are treated separately from
typical recurring capital expenditures, nonrevenue enhancing tenant improvements
and leasing commissions required once these EOP Properties have reached
stabilized occupancy, and deferred maintenance and renovations planned at the
time of acquisition have been completed. Capital improvements (including tenant
improvements and leasing commissions for shell space) for the nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995 and 1994 were
approximately $57.0 million, $100.3 million, $48.8 million and $49.7 million,
respectively or $1.71, $3.49, $2.16 and $2.76 per square foot, respectively.
These amounts include approximately $27.8 million, $47.3 million and $16.8
million for the nine months ended September 30, 1997 and the years ended
December 31, 1996 and 1995, respectively, for the redevelopment of the 28 State
Street Building.
EOP considers capital expenditures to be recurring expenditures relating to
the ongoing maintenance of the EOP Office Properties. The table below summarizes
capital expenditures for the nine months ended September 30, 1997 and the years
ended December 31, 1996, 1995 and 1994. The capital expenditures set forth below
are not necessarily indicative of future capital expenditures.
<TABLE>
<CAPTION>
1997
(THROUGH
SEPT. 30) 1996 1995 1994
--------- ---- ---- ----
<S> <C> <C> <C> <C>
Number of EOP Office Properties.......... 93 81 71 61
Rentable Square Feet (in millions)....... 33.4 28.7 22.6 18.0
Annual Capital Expenditures per
square foot............................ $ .07 $ .16 $ .14 $ .32
</TABLE>
TENANT IMPROVEMENTS AND LEASING COMMISSION COSTS
EOP distinguishes its tenant improvements and leasing commissions between
those that are revenue enhancing (which are required for space which is vacant
at the time of acquisition or that has been vacant for nine months or more) and
non-revenue enhancing (which are required to maintain the revenue being
generated from currently leased space). The table below summarizes the revenue
enhancing and non-revenue enhancing tenant improvements and leasing commissions
for the nine months ended September 30, 1997 and the years ended December 31,
1996, 1995 and 1994. The tenant improvement and leasing commission costs
96
<PAGE> 107
set forth below are presented on an aggregate basis and do not reflect
significant regional variations and, in any event, are not necessarily
indicative of future tenant improvement and leasing commission costs:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------
1997 1996 1995 1994
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Number of EOP Office Properties................ 93 81 71 61
Rentable square feet (in millions)............. 33.4 28.7 22.6 18.0
Revenue enhancing tenant improvements and
leasing commissions
Amounts (in thousands)....................... $ 6,930 $31,534 $20,981 $16,975
Per square foot improved..................... $ 15.90(1) $ 30.26(3) $ 22.89 $ 14.14
Per total square foot........................ $ .28(1)(2) $ 1.10(3) $ .93 $ .94
Non-revenue enhancing tenant improvements and
leasing commissions:
Renewal space
Amounts (in thousands)....................... $ 7,553 $15,486 $10,008 $11,095
Per square foot improved..................... $ 6.02(1) $ 6.79(3) $ 7.82 $ 5.41
Per total square foot........................ $ .31(1)(2) $ .54(3) $ .44 $ .62
Retenanted space
Amounts (in thousands)....................... $10,689 $31,987 $ 8,446 $ 8,996
Per square foot improved..................... $ 13.93(1) $ 20.64(3) $ 19.80 $ 15.08
Per total square foot........................ $ .43(1)(2) $ 1.11(3) $ .37 $ .50
------- ------- ------- -------
Total non-revenue enhancing (in thousands)..... $18,242 $47,473 $18,454 $20,091
Per square foot improved....................... $ 9.02(1) $ 12.39 $ 10.81 $ 7.58
Per total square foot.......................... $ .74(1)(2) $ 1.65 $ .81 $ 1.12
</TABLE>
- -------------------------
(1) The per square foot calculations as of September 30, 1997 are calculated
taking the total dollars anticipated to be expended on tenant improvements
in process as of September 30, 1997, divided by the total square footage
being improved or total building square footage. The actual amounts expended
as of September 30, 1997 for revenue enhancing and non-revenue enhancing
renewal and released space were $8.7 million, $7.5 million and $21.5
million, respectively.
(2) The amounts shown have been annualized to reflect a full year of comparable
operation. The actual costs per total square foot as of September 30, 1997
for revenue enhancing and non-revenue enhancing renewal and released space
were $.21, $.23 and $.32, respectively.
(3) The per square foot calculations as of December 31, 1996 are calculated
taking the total dollars anticipated to be expended on tenant improvements
in process at December 31, 1996, divided by the total square footage being
improved or total building square footage. The actual amounts expended as of
December 31, 1996 for revenue enhancing and non-revenue enhancing renewal
and retenanted space were approximately $30.6 million and $14 million and
$20.8 million, respectively.
INFLATION
Substantially all of the office leases require the tenant to pay, as
additional rent, a portion of any increases in real estate taxes and operating
expenses over a base amount. In addition, many of the office leases provide for
fixed increases in base rent or indexed calculations (based on the Consumer
Price Index or other measures). EOP believes that inflationary increases in
expenses will be offset, in part, by the expense reimbursements and contractual
rent increases described above.
97
<PAGE> 108
FUNDS FROM OPERATIONS
Management of EOP believes Funds from Operations, as defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), to be an
appropriate measure of performance for an equity REIT. While Funds from
Operations is a relevant and widely used measure of operating performance of
equity REITs, it does not represent cash flow from operations or net income as
defined by accepted accounting principles GAAP, and it should not be considered
as an alternative to these indicators in evaluating liquidity or operating
performance of EOP.
The following table reflects the calculation of EOP's and EOP Predecessor's
combined Funds from Operations for the nine months ended September 30, 1997 and
1996 and the years ended December 31, 1996, 1995 and 1994 on an historical cost
basis:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income before income from investment
in unconsolidated joint ventures,
gain on sale of real estate,
extraordinary items and minority
interest............................ $ 93,977 $ 38,392 $ 68,080 $ 3,012 $ 11,642
Add back (deduct):
(Income) allocated to minority
interests........................ (1,191) (2,166) (2,086) (2,129) 1,437
Income from investment in
unconsolidated joint ventures.... 3,408 1,554 2,093 2,305 1,778
Provision for value impairment...... -- -- 20,248 --
Depreciation and amortization (real
estate related).................. 85,709 66,018 92,373 72,668 45,515
Amortization of loan discount....... 1,267 -- -- -- --
--------- --------- ---------- --------- ---------
Funds from Operations before effect of
adjusting straight-line rental
revenue and expenses included in
Funds from Operations to a cash
basis(1)............................ 183,170 103,798 160,460 96,104 60,372
--------- --------- ---------- --------- ---------
Deferred rental revenue............. (16,395) (13,140) (18,427) (12,663) (6,883)
Deferred rental expense............. 1,647 -- 788 -- --
--------- --------- ---------- --------- ---------
Funds from Operations excluding
straight-line rental revenue and
expense adjustments................. $ 168,422 $ 90,658 $ 142,821 $ 83,441 $ 53,489
========= ========= ========== ========= =========
Cash Flow Provided by (Used for):
Operating Activities................ $ 155,625 $ 89,685 $ 165,975 $ 93,878 $ 73,821
Investing Activities................ (656,702) $(589,340) $ (924,227) $(380,615) $(513,965)
Financing Activities................ 404,444 $ 530,280 $1,057,551 $ 276,513 $ 514,923
</TABLE>
- -------------------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of 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. EOP believes that Funds from Operations is helpful to
investors as a measure of the performance of an 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 EOP
to incur and service debt, to make capital expenditures and to fund other
cash needs. EOP computes Funds from Operations in accordance with standards
established by NAREIT which may not be comparable to Funds from Operations
98
<PAGE> 109
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 EOP. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income (determined in accordance with
GAAP) as an indication of EOP's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
EOP's liquidity, nor or is it indicative of funds available to fund EOP's
cash needs, including its ability to make cash distributions.
99
<PAGE> 110
THE EOP PROPERTIES
GENERAL
EOP believes it controls the largest portfolio of office properties of any
publicly traded, full service office company in the United States. Management
believes that the EOP Properties are generally well located in markets that
exhibit strong growth characteristics, are well maintained and professionally
managed, and are generally capable of attracting and retaining high quality
tenants while maintaining high rent, occupancy and tenant retention rates.
All EOP Property data is as of September 30, 1997.
EOP OFFICE PROPERTIES BY REGION
<TABLE>
<CAPTION>
PERCENTAGE ANNUALIZED
OF TOTAL PERCENTAGE NET EFFECTIVE
OFFICE OF RENT PER
PORTFOLIO ANNUALIZED PORTFOLIO NUMBER OCCUPIED
NUMBER OF RENTABLE RENTABLE PERCENTAGE RENT ANNUALIZED OF SQUARE
REGION PROPERTIES SQUARE FEET SQUARE FEET OCCUPIED ($000s)(1) RENT LEASES FOOT(2)
------ ---------- ----------- ----------- ---------- ---------- ---------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific.............. 18 6,750,743 20.2% 93.4% $145,966 23.2% 534 $12.37
Southeast............ 14 5,008,447 15.0 96.3 92,790 14.7 401 11.03
Northeast............ 17 5,163,207 15.5 93.2 120,711 19.2 423 13.48
Central.............. 11 6,548,111 19.6 90.0 119,707 19.0 498 8.86
Southwest............ 14 5,748,105 17.2 92.5 86,227 13.7 612 7.89
West................. 19 4,188,364 12.5 95.5 64,264 10.2 631 8.49
-- ---------- ----- --- -------- ----- ----- ------
Total/Weighted
Average.......... 93 33,406,977 100.0% 93.2% $629,667 100.0% 3,099 $10.41
== ========== ===== === ======== ===== ===== ======
<CAPTION>
ANNUALIZED
RENT PER
OCCUPIED
SQUARE ANNUALIZED
FOOT AS OF RENT PER MARKET
1/1/93 OR OCCUPIED RENT PER
ACQUISITION SQUARE SQUARE
REGION DATE(3) FOOT(1) FOOT(4)
------ ----------- ---------- --------
<S> <C> <C> <C>
Pacific.............. $22.79 $23.16 $29.55
Southeast............ 17.91 19.23 21.65
Northeast............ 20.30 25.09 27.84
Central.............. 20.30 20.31 23.35
Southwest............ 15.62 16.22 17.84
West................. 14.48 16.07 20.43
------ ------ ------
Total/Weighted
Average.......... $18.91 $20.22 $23.73
====== ====== ======
</TABLE>
- -------------------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
September 30, 1997, multiplied by 12. This amount reflects total rent before
any rent abatements and includes expense reimbursements, which may be
estimates as of such date. Total rent abatements for leases in effect as of
September 30, 1997 for the 12 months ending September 30, 1998 are
approximately $6.9 million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of
September 30, 1997 as follows: Annualized Rent, calculated as described
above, was reduced to reflect the annualized costs of tenant improvements
and leasing commissions, if any, paid or payable by EOP with respect to
leases entered into subsequent to the later of 1991 or the date of
acquisition of the relevant EOP Property (calculated by dividing the total
tenant improvements and leasing commissions for a given lease by the term of
that lease in months and multiplying the result by 12). Finally, the result
of this calculation was reduced by the estimated operating expenses per
square foot, based on 1996 actual operating expense for Properties owned as
of January 1, 1996 and based on EOP's estimate of annual operating expense
for EOP Properties acquired subsequent to January 1, 1996.
(3) Represents the gross rental rate per occupied square foot as of the later of
January 1, 1993, or the date of acquisition for Properties acquired after
January 1, 1993, calculated by annualizing the rent under existing leases as
of that date. The weighted average for each region represents the weighted
average gross rental rate per occupied square foot for each EOP Property
multiplied by the rentable square feet for each EOP Property divided by the
total rentable square feet per region.
(4) Represents the average asking gross rental rate per rentable square foot for
selected buildings which EOP deems to be of comparable size, class, location
and age based upon information obtained from CB Commercial Real Estate
Group, Inc./Torto Wheaton Research, Baxter Southwest and Jamison Research,
Inc., as of June 30, 1997.
100
<PAGE> 111
EOP OFFICE PROPERTY MARKET SECTORS AND SUBMARKETS
EOP OFFICE PROPERTY STATISTICS
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE SQUARE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET FEET OCCUPIED ($000s)(1) RENT LEASES
- ------------------- ---------- -------- ---------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PACIFIC REGION
Los Angeles
Downtown................................ 1 1,329,809 4.0% 87.8% $ 25,178 4.0% 31
Pasadena................................ 2 439,367 1.3 84.6 10,328 1.6 31
Orange County
Central Orange.......................... 2 657,512 2.0 96.0 11,233 1.8 73
Irvine/Airport.......................... 2 586,544 1.8 94.3 11,799 1.9 74
San Diego
La Jolla................................ 6 823,418 2.5 94.5 18,286 2.9 104
San Francisco
Downtown................................ 5 2,914,093 8.7 96.1 69,142 11.0 221
-- ---------- ----- ----- -------- ----- -----
Pacific Region Total/Weighted Average... 18 6,750,743 20.2% 93.4% $145,966 23.2% 534
SOUTHEAST REGION
Ft. Lauderdale
Downtown................................ 1 225,500 0.7% 99.0% $ 5,930 0.9% 21
Orlando
Downtown................................ 1 640,385 1.9 93.3 14,506 2.3 45
Palm Beach County, FL
West Palm Beach......................... 1 215,104 0.6 86.1 3,563 0.6 35
Sarasota
Downtown................................ 1 247,891 0.7 95.0 4,238 0.7 35
Tampa
Westshore............................... 2 470,331 1.4 99.2 8,113 1.3 59
Atlanta
Midtown................................. 1 770,840 2.3% 95.8% $ 16,394 2.6% 25
North Central........................... 2 612,733 1.8 96.8 11,834 1.9 74
Northwest............................... 2 641,263 1.9 95.0 12,466 2.0 41
Charlotte
Downtown................................ 1 581,666 1.7 100.0 6,897 1.1 9
Raleigh/Durham
Durham.................................. 1 181,221 0.5 98.6 3,260 0.5 35
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
EFFECTIVE SQUARE ANNUALIZED
RENT PER FOOT AS OF RENT PER MARKET
OCCUPIED 1/1/93 OR OCCUPIED RENT PER
OFFICE PROPERTIES SQUARE ACQUISITION SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) DATE(3) FOOT(1) FOOT(4)
- ------------------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
PACIFIC REGION
Los Angeles
Downtown......................... $10.75 $22.08 $21.56 $25.86
Pasadena......................... 17.70 27.79 27.78 25.22
Orange County
Central Orange................... 8.90 20.35 17.80 19.90
Irvine/Airport................... 13.07 20.78 21.32 24.22
San Diego
La Jolla......................... 14.41 20.13 23.50 24.30
San Francisco
Downtown......................... 12.43 24.07 24.70 36.63
------ ------ ------ ------
Pacific Region Total/Weighted Ave $12.37 $22.79 $23.16 $29.55
SOUTHEAST REGION
Ft. Lauderdale
Downtown......................... $15.42 $17.45 $26.56 $24.57
Orlando
Downtown......................... 14.82 23.99 24.29 23.63
Palm Beach County, FL
West Palm Beach.................. 6.34 18.90 19.24 24.49
Sarasota
Downtown......................... 9.10 17.47 18.00 15.50
Tampa
Westshore........................ 8.78 18.79 17.38 20.58
Atlanta
Midtown.......................... $13.84 $21.98 $22.19 $21.77
North Central.................... 12.01 19.07 19.94 24.44
Northwest........................ 13.15 18.83 20.47 24.14
Charlotte
Downtown......................... 6.64 11.04 11.86 17.56
Raleigh/Durham
Durham........................... 9.86 13.37 18.25 19.62
</TABLE>
101
<PAGE> 112
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE SQUARE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET FEET OCCUPIED ($000s)(1) RENT LEASES
- ------------------- ---------- -------- ---------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Nashville
Downtown................................ 1 421,513 1.3% 98.4% $ 5,590 0.9% 22
-- ---------- ----- ----- -------- ----- -----
Southeast Region
Total/Weighted Average................ 14 5,008,447 15.0% 96.3% $ 92,790 14.7% 401
NORTHEAST REGION
Fairfield County, CT
Shelton................................. 1 159,848 0.5% 94.1% $ 2,199 0.3% 12
Stamford................................ 7 1,651,856 4.9 98.2 40,323 6.4 121
Washington, D.C.
Downtown................................ 2 408,286 1.2 98.5 11,604 1.8 46
Boston
Downtown................................ 1 570,040 1.7 56.0 10,687 1.7 11
New York
Midtown................................. 1 562,567 1.7 100.0 16,718 2.7 28
Philadelphia
Downtown................................ 1 681,289 2.0 94.8 13,044 2.1 71
Norfolk
Downtown................................ 1 403,276 1.2 95.4 6,354 1.0 53
Northern Virginia
Reston.................................. 3 726,045 2.2 99.7 19,783 3.1 81
-- ---------- ----- ----- -------- ----- -----
Northeast Region
Total/Weighted Average................ 17 5,163,207 15.5% 93.2% $120,711 19.2% 423
CENTRAL REGION
Chicago
Downtown................................ 3 2,554,062 7.6% 88.2% $ 47,913 7.6% 226
O'Hare.................................. 1 133,876 0.4 99.1 2,173 0.3 15
East-West Corridor...................... 1 772,928 2.3 86.6 17,335 2.8 53
Indianapolis
Downtown................................ 2 1,057,877 3.2 91.7 19,092 3.0 81
Cleveland
Downtown................................ 1 1,242,144 3.7 93.3 17,965 2.9 34
Columbus
Downtown................................ 1 407,472 1.2 87.1 8,561 1.4 28
Worthington............................. 2 379,752 1.1 93.4 6,667 1.1 61
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
EFFECTIVE SQUARE ANNUALIZED
RENT PER FOOT AS OF RENT PER MARKET
OCCUPIED 1/1/93 OR OCCUPIED RENT PER
OFFICE PROPERTIES SQUARE ACQUISITION SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) DATE(3) FOOT(1) FOOT(4)
- ------------------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Nashville
Downtown......................... $ 6.03 $ 8.58 $13.47 $18.93
------ ------ ------ ------
Southeast Region
Total/Weighted Average......... $11.03 $17.91 $19.23 $21.65
NORTHEAST REGION
Fairfield County, CT
Shelton.......................... $ 5.95 $14.11 $14.62 $24.66
Stamford......................... 13.12 24.37 24.85 27.56
Washington, D.C.
Downtown......................... 16.07 23.22 28.85 28.79
Boston
Downtown......................... 16.40 -- 33.48 36.46
New York
Midtown.......................... 15.06 28.01 29.72 36.59
Philadelphia
Downtown......................... 11.47 20.14 20.21 18.71
Norfolk
Downtown......................... 7.03 14.19 16.52 16.40
Northern Virginia
Reston........................... 17.14 24.29 27.32 30.00
------ ------ ------ ------
Northeast Region
Total/Weighted Average......... $13.48 $20.30 $25.09 $27.84
CENTRAL REGION
Chicago
Downtown......................... $ 5.93 $23.72 $21.26 $24.35
O'Hare........................... 6.05 21.52 16.38 19.27
East-West Corridor............... 17.15 26.21 25.90 27.21
Indianapolis
Downtown......................... 9.29 15.94 19.69 21.43
Cleveland
Downtown......................... 7.64 13.18 15.50 21.60
Columbus
Downtown......................... 15.22 22.96 24.11 24.12
Worthington...................... 9.30 17.48 18.79 20.49
</TABLE>
102
<PAGE> 113
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE SQUARE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET FEET OCCUPIED ($000s)(1) RENT LEASES
- ------------------- ---------- -------- ---------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Central Region
Total/Weighted Average................ 11 6,548,111 19.6% 90.0% $119,707 19.0% 498
SOUTHWEST REGION
New Orleans
Downtown................................ 2 1,164,871 3.5% 82.4% 15,930 2.5% 54
Metairie................................ 3 1,192,828 3.6 95.7 17,030 2.7 188
Austin
Downtown................................ 3 1,423,948 4.3 94.4 25,598 4.1 130
Houston
Galleria................................ 1 959,466 2.9 94.6 14,610 2.3 129
North/Airport........................... 2 402,709 1.2 97.5 5,440 0.9 27
San Antonio
Airport................................. 1 194,398 0.6% 97.8% $ 2,548 0.4% 21
Northwest............................... 2 409,885 1.2 92.5 5,071 0.8 63
-- ---------- ----- ----- -------- ----- -----
Southwest Region
Total/Weighted Average................ 14 5,748,105 17.2% 92.5% $ 86,227 13.7% 612
WEST REGION
Phoenix
Central Corridor........................ 2 605,295 1.8% 98.4% $ 7,408 1.2% 10
Denver
Southeast/Denver Tech Center............ 3 671,659 2.0 97.0 11,716 1.9 66
St. Louis
Clayton................................. 1 339,163 1.1 98.5 7,457 1.2 34
Albuquerque
Downtown................................ 1 230,022 0.7 94.7 3,330 0.5 32
Oklahoma City
Northwest............................... 3 261,324 0.8 95.7 2,293 0.4 110
Dallas
LBJ Corridor............................ 2 740,899 2.2 95.1 11,142 1.8 97
North Central........................... 1 379,556 1.1 92.7 4,771 0.8 75
Preston Center.......................... 4 721,351 2.2 92.4 13,453 2.1 144
Ft. Worth
West/Southwest.......................... 2 239,095 0.7 94.8 2,694 0.4 63
-- ---------- ----- ----- -------- ----- -----
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
EFFECTIVE SQUARE ANNUALIZED
RENT PER FOOT AS OF RENT PER MARKET
OCCUPIED 1/1/93 OR OCCUPIED RENT PER
OFFICE PROPERTIES SQUARE ACQUISITION SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) DATE(3) FOOT(1) FOOT(4)
- ------------------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Central Region
Total/Weighted Average......... $ 8.86 $20.30 $20.31 $23.35
SOUTHWEST REGION
New Orleans
Downtown......................... $10.27 $16.60 $16.60 $15.49
Metairie......................... 7.39 13.25 14.93 18.06
Austin
Downtown......................... 8.64 17.84 19.04 21.36
Houston
Galleria......................... 7.24 17.24 16.10 16.82
North/Airport.................... 5.38 12.86 13.86 16.28
San Antonio
Airport.......................... $ 5.36 $11.55 $13.40 $16.27
Northwest........................ 6.12 12.88 13.37 16.27
------ ------ ------ ------
Southwest Region
Total/Weighted Average......... $ 7.89 $15.62 $16.22 $17.84
WEST REGION
Phoenix
Central Corridor................. $ 9.34 $12.23 $12.44 $20.15
Denver
Southeast/Denver Tech Center..... 8.94 15.41 17.99 22.66
St. Louis
Clayton.......................... 12.95 19.81 22.33 23.57
Albuquerque
Downtown......................... 5.73 16.47 15.29 17.09
Oklahoma City
Northwest........................ 2.97 8.41 9.17 12.50
Dallas
LBJ Corridor..................... 7.01 14.72 15.81 21.51
North Central.................... 4.77 11.74 13.56 19.68
Preston Center................... 13.07 17.03 20.19 22.89
Ft. Worth
West/Southwest................... 4.06 10.59 11.89 12.66
------ ------ ------ ------
</TABLE>
103
<PAGE> 114
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE SQUARE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET FEET OCCUPIED ($000s)(1) RENT LEASES
- ------------------- ---------- -------- ---------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
West Region
Total/Weighted Average................ 19 4,188,364 12.5% 95.5% $ 64,264 10.2% 631
-- ---------- ----- ----- -------- ----- -----
Total................................. 93 33,406,977 100.0% 93.2% $629,667 100.0% 3,099
== ========== ===== ===== ======== ===== =====
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
EFFECTIVE SQUARE ANNUALIZED
RENT PER FOOT AS OF RENT PER MARKET
OCCUPIED 1/1/93 OR OCCUPIED RENT PER
OFFICE PROPERTIES SQUARE ACQUISITION SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) DATE(3) FOOT(1) FOOT(4)
- ------------------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
West Region
Total/Weighted Average......... $ 8.49 $14.48 $16.07 $20.43
------ ------ ------ ------
Total.......................... $10.41 $18.91 $20.22 $23.73
====== ====== ====== ======
</TABLE>
- -------------------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
September 30, 1997 multiplied by 12. This amount reflects total rent before
any rent abatements and includes expense reimbursements, which may be
estimates as of such date. Total rent abatements for leases in effect as of
September 30, 1997 for the 12 months ending September 30, 1998 are
approximately $6.9 million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of
September 30, 1997 as follows: Annualized Rent, calculated as described
above, was reduced to reflect the annualized costs of tenant improvements
and leasing commissions, if any, paid or payable by EOP with respect to
leases entered into subsequent to the later of 1991 or the date of
acquisition of the relevant EOP Property (calculated by dividing the total
tenant improvements and leasing commissions for a given lease by the term of
that lease in months and multiplying the result by 12). Finally, the result
of this calculation was reduced by the estimated operating expenses per
square foot, based on 1996 actual operating expenses for EOP Properties
owned as of January 1, 1996 and based on EOP's estimate of annual operating
expenses for Properties acquired subsequent to January 1, 1996.
(3) Represents the gross rental rate per occupied square foot as of the later of
January 1, 1993 or the date of acquisition, for EOP Properties acquired
after January 1, 1993, calculated by annualizing the rent under existing
leases as of that date. The weighted average for each region represents the
weighted average gross rental rate per occupied square foot for each EOP
Property multiplied by the rentable square feet for each EOP Property
divided by the total rentable square feet per region.
(4) Represents the average asking gross rental rate per rentable square foot for
selected buildings which EOP deems to be of comparable size, class, location
and age based upon information obtained from CB Commercial Real Estate
Group, Inc./Torto Wheaton Research, Baxter Southwest and Jamison Research,
Inc., as of June 30, 1997.
104
<PAGE> 115
The following table sets forth certain information relating to each EOP
Office Property as of September 30, 1997.
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE
PORTFOLIO
NUMBER RENTABLE RENTABLE ANNUALIZED
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1)
-------- ---------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PACIFIC REGION
Los Angeles
Downtown
Two California Plaza(6)................ 1 1992 1,329,809 4.0% 87.8% $ 25,178
Pasadena
Pasadena Towers........................ 2 1990-91 439,367 1.3 84.6 10,328
Orange County
Central Orange
500 Orange Tower(7).................... 1 1988 290,765 0.9 91.7 4,892
1100 Executive Tower................... 1 1987 366,747 1.1 99.4 6,341
Irvine/Airport
1920 Main Plaza........................ 1 1988 305,662 0.9 97.3 6,086
2010 Main Plaza........................ 1 1988 280,882 0.8 91.1 5,714
San Diego
La Jolla
The Plaza at La Jolla Village(5)....... 5 1987-90 635,419 1.9 98.7 15,048
Smith Barney Tower..................... 1 1987 187,999 0.6 80.5 3,238
San Francisco
Downtown
201 Mission Street..................... 1 1981 483,289 1.4 93.2 8,604
580 California......................... 1 1984 313,012 0.9 100.0 8,116
60 Spear Street Building............... 1 1967/87 133,782 0.4 100.0 3,233
One Maritime Building.................. 1 1967/90 523,929 1.6 90.5 13,251
One Market............................. 1 1976/95 1,460,081 4.4 97.8 35,939
- ---------- ----- ----- --------
Pacific Region Total/Weighted
Average............................ 18 6,750,743 20.2% 93.4% 145,966
SOUTHEAST REGION
Ft. Lauderdale
Downtown
First Union Center..................... 1 1991 225,500 0.7% 99.0% 5,930
Orlando
Downtown
SunTrust Center........................ 1 1988 640,385 1.9 93.3 14,506
Palm Beach County, FL
West Palm Beach
One Clearlake Centre................... 1 1987 215,104 0.6% 86.1% $ 3,563
Sarasota
Downtown
Sarasota City Center................... 1 1989 247,891 0.7 95.0 4,238
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
PERCENTAGE EFFECTIVE SQUARE ANNUALIZED
OF RENT PER FOOT AS OF RENT PER MARKET
PORTFOLIO NUMBER OCCUPIED 1/1/93 OR OCCUPIED RENT PER
ANNUALIZED OF SQUARE ACQUISITION SQUARE SQUARE
PROPERTY RENT LEASES FOOT(2) DATE(3) FOOT(1) FOOT(4)
-------- ---------- ------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
PACIFIC REGION
Los Angeles
Downtown
Two California Plaza(6)................ 4.0% 31 $10.75 $22.08 $21.56 $25.86
Pasadena
Pasadena Towers........................ 1.6 31 17.70 27.79 27.78 25.22
Orange County
Central Orange
500 Orange Tower(7).................... 0.8 47 8.81 22.61 18.35 19.90
1100 Executive Tower................... 1.0 26 8.96 18.56 17.39 19.90
Irvine/Airport
1920 Main Plaza........................ 1.0 41 12.42 20.35 20.46 24.22
2010 Main Plaza........................ 0.9 33 13.83 21.24 22.32 24.22
San Diego
La Jolla
The Plaza at La Jolla Village(5)....... 2.4 88 14.77 20.34 24.00 24.30
Smith Barney Tower..................... 0.5 16 12.92 19.40 21.40 24.30
San Francisco
Downtown
201 Mission Street..................... 1.4 22 8.49 18.80 19.10 35.31
580 California......................... 1.3 29 12.92 23.02 25.93 34.82
60 Spear Street Building............... 0.5 9 11.37 23.12 24.17 33.41
One Maritime Building.................. 2.1 40 17.33 29.81 27.95 35.31
One Market............................. 5.7 121 12.03 24.07 25.16 38.22
----- ----- ------ ------ ------ ------
Pacific Region Total/Weighted
Average............................ $23.2% 534 $12.37 $22.79 $23.16 $29.55
SOUTHEAST REGION
Ft. Lauderdale
Downtown
First Union Center..................... $ 0.9% 21 $15.42 $17.45 $26.56 $24.57
Orlando
Downtown
SunTrust Center........................ 2.3 45 14.82 23.99 24.29 23.63
Palm Beach County, FL
West Palm Beach
One Clearlake Centre................... 0.6% 35 $ 6.34 $18.90 $19.24 $24.49
Sarasota
Downtown
Sarasota City Center................... 0.7 35 9.10 17.47 18.00 15.50
</TABLE>
105
<PAGE> 116
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE
PORTFOLIO
NUMBER RENTABLE RENTABLE ANNUALIZED
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1)
-------- ---------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tampa
Westshore
Tampa Commons.......................... 1 1985 254,808 0.8% 100.0% $ 4,715
Westshore Center....................... 1 1984 215,523 0.6 98.3 3,398
Atlanta
Midtown
Promenade II........................... 1 1990 770,840 2.3 95.8 16,394
North Central
Central Park........................... 2 1986 612,733 1.8 96.8 11,834
Northwest
Paces West............................. 2 1988 641,263 1.9 95.0 12,466
Charlotte
Downtown
Wachovia Center........................ 1 1972/94 581,666 1.7 100.0 6,897
Raleigh/Durham
Durham
University Tower....................... 1 1987/92 181,221 0.5 98.6 3,260
Nashville
Downtown
Nations Bank Plaza..................... 1 1977/95 421,513 1.3 98.4 5,590
- ---------- ----- ----- --------
Southeast Region Total/Weighted
Average.............................. 14 5,008,447 15.0% 96.3% $ 92,790
NORTHEAST REGION
Fairfield County, CT
Shelton
Shelton Point.......................... 1 1985/93 159,848 0.5% 94.1% $ 2,199
Stamford
One Stamford Plaza..................... 1 1986/94 212,244 0.6 100.0 5,338
Two Stamford Plaza..................... 1 1986/94 253,020 0.8 100.0 6,923
Three Stamford Plaza................... 1 1980/94 241,575 0.7 97.3 5,002
Four Stamford Plaza.................... 1 1979/94 260,581 0.8 95.9 5,008
177 Broad Street....................... 1 1989 187,573 0.6 93.5 4,152
300 Atlantic Street.................... 1 1987/96 272,458 0.8 100.0 7,190
Canterbury Green(6).................... 1 1987 224,405 0.7 100.0 6,710
Washington, D.C.
Downtown
1111 19th Street....................... 1 1979/83 252,014 0.8 98.8 7,256
1620 L Street.......................... 1 1989 156,272 0.5 98.0 4,348
Boston
Downtown
28 State Street(8)..................... 1 1968/97 570,040 1.7 56.0 10,687
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
PERCENTAGE EFFECTIVE SQUARE ANNUALIZED
OF RENT PER FOOT AS OF RENT PER MARKET
PORTFOLIO NUMBER OCCUPIED 1/1/93 OR OCCUPIED RENT PER
ANNUALIZED OF SQUARE ACQUISITION SQUARE SQUARE
PROPERTY RENT LEASES FOOT(2) DATE(3) FOOT(1) FOOT(4)
-------- ---------- ------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Tampa
Westshore
Tampa Commons.......................... 0.7% 23 $10.24 $22.16 $18.50 $20.58
Westshore Center....................... 0.5 36 7.02 14.80 16.04 20.58
Atlanta
Midtown
Promenade II........................... 2.6 25 13.84 21.98 22.19 21.77
North Central
Central Park........................... 1.9 74 12.01 19.07 19.94 24.44
Northwest
Paces West............................. 2.0 41 13.15 18.83 20.47 24.14
Charlotte
Downtown
Wachovia Center........................ 1.1 9 6.64 11.04 11.86 17.56
Raleigh/Durham
Durham
University Tower....................... 0.5 35 9.86 13.37 18.25 19.62
Nashville
Downtown
Nations Bank Plaza..................... 0.9 22 6.03 8.58 13.47 18.93
----- ----- ------ ------ ------ ------
Southeast Region Total/Weighted
Average.............................. 14.7% 401 $11.03 $17.91 $19.23 $21.65
NORTHEAST REGION
Fairfield County, CT
Shelton
Shelton Point.......................... 0.3% 12 $ 5.95 $14.11 $14.62 24.66
Stamford
One Stamford Plaza..................... 0.8 12 12.84 26.47 25.15 27.56
Two Stamford Plaza..................... 1.1 21 14.82 32.27 27.36 27.56
Three Stamford Plaza................... 0.8 17 10.21 18.66 21.27 27.56
Four Stamford Plaza.................... 0.8 9 7.71 19.20 20.05 27.56
177 Broad Street....................... 0.7 15 13.44 21.65 23.68 27.56
300 Atlantic Street.................... 1.1 26 14.30 22.17 26.39 27.56
Canterbury Green(6).................... 1.1 21 18.88 30.59 29.90 27.56
Washington, D.C.
Downtown
1111 19th Street....................... 1.2 30 15.95 20.85 29.14 28.37
1620 L Street.......................... 0.7 16 16.26 27.04 28.38 29.48
Boston
Downtown
28 State Street(8)..................... 1.7 11 16.40 -- 33.48 36.46
</TABLE>
106
<PAGE> 117
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE
PORTFOLIO
NUMBER RENTABLE RENTABLE ANNUALIZED
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1)
-------- ---------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
New York
Midtown
850 Third Avenue....................... 1 1960/96 562,567 1.7% 100.0% $ 16,718
Philadelphia
Downtown
1601 Market Street..................... 1 1970 681,289 2.0 94.8 13,044
Norfolk
Downtown
Dominion Tower(5)...................... 1 1987 403,276 1.2 95.4 6,354
Northern Virginia
Reston
Reston Town Center..................... 3 1990 726,045 2.2 99.7 19,783
- ---------- ----- ----- --------
Northeast Region Total/Weighted
Average.............................. 17 5,163,207 15.5% 93.2% $120,711
CENTRAL REGION
Chicago
Downtown
161 N. Clark........................... 1 1992 1,010,520 3.0 73.1 16,138
30 N. LaSalle(6)....................... 1 1974/90 925,950 2.8 97.6 19,002
One North Franklin..................... 1 1991 617,592 1.8 98.9 12,773
East-West Corridor
Oakbrook Terrace Tower................. 1 1988 772,928 2.3 86.6 17,335
O'Hare
1700 Higgins........................... 1 1986 133,876 0.4 99.1 2,173
Indianapolis
Downtown
Bank One Center/Tower.................. 2 1990 1,057,877 3.2 91.7 19,092
Cleveland
Downtown
BP Tower............................... 1 1985 1,242,144 3.7 93.3 17,965
Columbus
Downtown
One Columbus Building.................. 1 1987 407,472 1.2 87.1 8,561
Worthington
Community Corporate Center............. 1 1987 250,169 0.7 92.0 4,618
One Crosswoods Center.................. 1 1984 129,583 0.4 96.2 2,050
- ---------- ----- ----- --------
Central Region Total/Weighted
Average............................ 11 6,548,111 19.6% 90.0% $119,707
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
PERCENTAGE EFFECTIVE SQUARE ANNUALIZED
OF RENT PER FOOT AS OF RENT PER MARKET
PORTFOLIO NUMBER OCCUPIED 1/1/93 OR OCCUPIED RENT PER
ANNUALIZED OF SQUARE ACQUISITION SQUARE SQUARE
PROPERTY RENT LEASES FOOT(2) DATE(3) FOOT(1) FOOT(4)
-------- ---------- ------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
New York
Midtown
850 Third Avenue....................... 2.7% 28 $15.06 $28.01 $29.72 $36.59
Philadelphia
Downtown
1601 Market Street..................... 2.1 71 11.47 20.14 20.21 18.71
Norfolk
Downtown
Dominion Tower(5)...................... 1.0 53 7.03 14.19 16.52 16.40
Northern Virginia
Reston
Reston Town Center..................... 3.1 81 17.14 24.29 27.32 30.00
----- ----- ------ ------ ------ ------
Northeast Region Total/Weighted
Average.............................. 19.2% 423 $13.48 $20.30 $25.09 $27.84
CENTRAL REGION
Chicago
Downtown
161 N. Clark........................... 2.6 55 4.40 21.65 21.84 23.56
30 N. LaSalle(6)....................... 3.0 117 7.28 20.95 21.02 25.47
One North Franklin..................... 2.0 54 5.80 31.26 20.91 23.98
East-West Corridor
Oakbrook Terrace Tower................. 2.8 53 17.15 26.21 25.90 27.21
O'Hare
1700 Higgins........................... 0.3 15 6.05 21.52 16.38 19.27
Indianapolis
Downtown
Bank One Center/Tower.................. 3.0 81 9.29 15.94 19.69 21.43
Cleveland
Downtown
BP Tower............................... 2.9 34 7.64 13.18 15.50 21.60
Columbus
Downtown
One Columbus Building.................. 1.4 28 15.22 22.96 24.11 24.12
Worthington
Community Corporate Center............. 0.7 40 9.89 19.65 20.06 20.97
One Crosswoods Center.................. 0.3 21 8.20 13.29 16.45 19.56
----- ----- ------ ------ ------ ------
Central Region Total/Weighted
Average............................ 19.0% 498 $ 8.86 $20.30 $20.31 $23.35
</TABLE>
107
<PAGE> 118
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE
PORTFOLIO
NUMBER RENTABLE RENTABLE ANNUALIZED
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1)
-------- ---------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SOUTHWEST REGION
New Orleans
Downtown
LL&E Tower............................. 1 1987 545,157 1.6% 82.7% $ 7,656
Texaco Center.......................... 1 1984 619,714 1.9 82.1 8,274
Metairie
One Lake Center........................ 1 1981/96 289,112 0.9% 93.7% $ 3,977
Two Lakeway Center..................... 1 1984/96 440,826 1.3 95.7 6,213
Three Lakeway Center................... 1 1987/96 462,890 1.4 96.8 6,840
Austin
Downtown
Franklin Plaza......................... 1 1987 517,849 1.6 88.9 9,190
One American Center(6)................. 1 1984 505,770 1.5 97.0 9,217
San Jacinto Center..................... 1 1987 400,329 1.2 98.4 7,191
Houston
Galleria
San Felipe Plaza(5).................... 1 1984 959,466 2.9 94.6 14,610
North/Airport
Intercontinental Center................ 1 1983/91 194,801 0.6 100.0 2,715
Northborough Tower(5).................. 1 1983/90 207,908 0.6 95.1 2,725
San Antonio
Airport
Union Square........................... 1 1986 194,398 0.6 97.8 2,548
Northwest
Colonnade I............................ 1 1983 168,637 0.5 92.0 2,273
Northwest Center....................... 1 1984/94 241,248 0.7 92.9 2,798
- ---------- ----- ----- --------
Southwest Region Total/Weighted
Average............................ 14 5,748,105 17.2% 92.5% $ 86,227
WEST REGION
Phoenix
Central Corridor
49 East Thomas Road(11)................ 1 1974/93 18,892 0.1% 49.1% $ 70
One Phoenix Plaza(10).................. 1 1989 586,403 1.8% 100.0 7,338
Denver
Southeast/Denver Tech Center
Denver Corporate Center II & III....... 2 1981/93-97 358,357 1.1 100.0 6,304
The Quadrant........................... 1 1985 313,302 0.9 93.5 5,413
St. Louis
Clayton
Interco Corporate Tower................ 1 1986 339,163 1.0 98.5 7,457
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
PERCENTAGE EFFECTIVE SQUARE ANNUALIZED
OF RENT PER FOOT AS OF RENT PER MARKET
PORTFOLIO NUMBER OCCUPIED 1/1/93 OR OCCUPIED RENT PER
ANNUALIZED OF SQUARE ACQUISITION SQUARE SQUARE
PROPERTY RENT LEASES FOOT(2) DATE(3) FOOT(1) FOOT(4)
-------- ---------- ------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
SOUTHWEST REGION
New Orleans
Downtown
LL&E Tower............................. 1.2% 31 $10.48 $16.98 $16.98 $16.31
Texaco Center.......................... 1.3 23 10.08 16.26 16.26 14.76
Metairie
One Lake Center........................ 0.6% 49 $ 7.40 $13.74 $14.68 $18.06
Two Lakeway Center..................... 1.0 86 8.05 13.11 14.72 18.06
Three Lakeway Center................... 1.1 53 6.76 13.07 15.27 18.06
Austin
Downtown
Franklin Plaza......................... 1.5 38 10.27 18.43 19.96 21.36
One American Center(6)................. 1.5 42 8.86 18.05 18.79 21.36
San Jacinto Center..................... 1.1 50 6.45 16.81 18.25 21.36
Houston
Galleria
San Felipe Plaza(5).................... 2.3 129 7.24 17.24 16.10 16.82
North/Airport
Intercontinental Center................ 0.4 13 5.44 13.35 13.94 19.06
Northborough Tower(5).................. 0.4 14 5.32 12.40 13.78 13.67
San Antonio
Airport
Union Square........................... 0.4 21 5.36 11.55 13.40 16.27
Northwest
Colonnade I............................ 0.4 27 7.87 13.76 14.65 16.27
Northwest Center....................... 0.4 36 4.91 12.27 12.48 16.27
----- ----- ------ ------ ------ ------
Southwest Region Total/Weighted
Average............................ 13.7% 612 $ 7.89 $15.62 $16.22 $17.84
WEST REGION
Phoenix
Central Corridor
49 East Thomas Road(11)................ 0.0% 9 .35 $ 7.52 $ 7.52 $15.00
One Phoenix Plaza(10).................. 1.2 1 9.48 12.38 12.51 20.32
Denver
Southeast/Denver Tech Center
Denver Corporate Center II & III....... 1.0 27 9.57 15.24 17.59 22.66
The Quadrant........................... 0.9 39 8.17 15.60 18.47 22.66
St. Louis
Clayton
Interco Corporate Tower................ 1.2 34 12.95 19.81 22.33 23.57
</TABLE>
108
<PAGE> 119
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE
PORTFOLIO
NUMBER RENTABLE RENTABLE ANNUALIZED
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1)
-------- ---------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Albuquerque
Downtown
500 Marquette Building................. 1 1985 230,022 0.7% 94.7% $ 3,330
Oklahoma City
Northwest
Atrium Towers.......................... 2 1980/95 155,865 0.5 96.7 1,314
5100 Brookline(5)...................... 1 1974 105,459 0.3 94.1 980
Dallas
LBJ Corridor
Four Forest(5)......................... 1 1985 394,324 1.2 97.6 5,876
North Central Plaza Three.............. 1 1986/94 346,575 1.0 92.2 5,266
North Central
9400 NCX............................... 1 1981/95 379,556 1.1 92.7 4,771
Preston Center
Preston Commons........................ 3 1986 418,604 1.3 92.7 8,216
Sterling Plaza......................... 1 1984/94 302,747 0.9 92.0 5,237
Ft. Worth
West/Southwest
Summitt Office Park.................... 2 1974/93 239,095 0.7 94.8 2,694
- ---------- ----- ----- --------
West Region Total/Weighted Average... 19 4,188,364 12.5% 95.5% $ 64,264
- ---------- ----- ----- --------
Total/Weighted Average............... 93 33,406,977 100.0% 93.2% $629,667
========== ===== ===== ========
<CAPTION>
ANNUALIZED
ANNUALIZED RENT PER
NET OCCUPIED
PERCENTAGE EFFECTIVE SQUARE ANNUALIZED
OF RENT PER FOOT AS OF RENT PER MARKET
PORTFOLIO NUMBER OCCUPIED 1/1/93 OR OCCUPIED RENT PER
ANNUALIZED OF SQUARE ACQUISITION SQUARE SQUARE
PROPERTY RENT LEASES FOOT(2) DATE(3) FOOT(1) FOOT(4)
-------- ---------- ------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Albuquerque
Downtown
500 Marquette Building................. 0.5% 32 $ 5.73 $16.47 $15.29 $17.09
Oklahoma City
Northwest
Atrium Towers.......................... 0.2 47 2.60 8.03 8.71 11.89
5100 Brookline(5)...................... 0.2 63 3.53 8.96 9.87 13.40
Dallas
LBJ Corridor
Four Forest(5)......................... 0.9 58 6.74 15.78 15.26 21.51
North Central Plaza Three.............. 0.8 39 7.33 13.51 16.47 21.51
North Central
9400 NCX............................... 0.8 75 4.77 11.74 13.56 19.68
Preston Center
Preston Commons........................ 1.3 71 15.28 19.42 21.18 22.89
Sterling Plaza......................... 0.8 73 9.98 13.72 18.81 22.89
Ft. Worth
West/Southwest
Summitt Office Park.................... 0.4 63 4.06 10.59 11.89 12.66
----- ----- ------ ------ ------ ------
West Region Total/Weighted Average... 10.2% 631 $ 8.49 $14.48 $16.07 $20.43
----- ----- ------ ------ ------ ------
Total/Weighted Average............... 100.0% 3,099 $10.41 $18.91 $20.22 $23.73
===== ===== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
September 30, 1997, multiplied by 12. This amount reflects total base rent
before any rent abatements, but includes expense reimbursements, which may
be estimates as of such date. Total rent abatements for leases in effect as
of September 30, 1997, for the 12 months ending September 30, 1998 are
approximately $6.9 million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of
September 30, 1997 as follows: Annualized Rent, calculated as described
above, was reduced to reflect the annualized costs of tenant improvements
and leasing commissions, if any, paid or payable by EOP with respect to
leases entered into subsequent to the later of 1991 or the date of
acquisition of the relevant EOP Property (calculated by dividing the total
tenant improvements and leasing commissions for a given lease by the term
of that lease in months and multiplying the result by 12). Finally, the
result of this calculation was reduced by the estimated operating expenses
per square foot, based on 1996 actual operating expenses for EOP Properties
owned as of January 1, 1996 and based on EOP's estimate of annual operating
expenses for EOP Properties acquired subsequent to January 1, 1996.
(3) Represents the gross rental rate per occupied square foot as of the later
of January 1, 1993, or the date of acquisition (for EOP Properties acquired
after January 1, 1993) calculated by annualizing the base rent and expense
reimbursements under existing leases as of that date. The weighted average
for each region represents the weighted average gross rental rate per
occupied square foot for each EOP Property multiplied by the rentable
square feet for each EOP Property divided by the total rentable square feet
per region.
(4) Represents the average asking gross rental rate per rentable square foot
for selected buildings which EOP deems to be of comparable size, class,
location and age based upon information obtained from CB Commercial Real
Estate Group, Inc./Torto Wheaton Research, Baxter Southwest and Jamison
Research, Inc., as of June 30, 1997.
(5) This EOP Office Property is held in a partnership with an unaffiliated
third party and in the case of San Felipe Plaza, an affiliated party.
(6) This EOP Office Property is held subject to a ground lease. See Note 8 to
the Combined Financial Statements of EOP Predecessors included herein.
(7) This EOP Office Property is held subject to an interest in the improvements
at the EOP Property held by an unaffiliated third party. In addition, EOP
has a mortgage interest in such improvements. See Note 5 to the Combined
Financial Statements of EOP Predecessors included herein.
(8) This EOP Office Property recently underwent major redevelopment and tenants
commenced occupancy in May 1997.
(9) This EOP Office Property was purchased in conjunction with the purchase of
One Phoenix Plaza.
(10) This EOP Office Property is 100% leased to a single tenant on a triple net
basis, whereby the tenant pays for certain operating expenses directly
rather than reimbursing EOP. The amounts shown above for annualized rent
include the amounts for reimbursement of expenses paid by EOP but do not
make any adjustments for expenses paid directly by the tenant.
109
<PAGE> 120
EOP PARKING FACILITIES
Information concerning the EOP Parking Facilities as of September 30, 1997
is set forth below.
<TABLE>
<CAPTION>
APPROXIMATE MANAGEMENT NUMBER OF
NUMBER OF COMPANY PARKING
PROPERTY NAME SPACES CITY OR LESSEE(1) FACILITIES
------------- ----------- ---- ------------ ----------
<S> <C> <C> <C> <C>
Boston Harbor Garage.................... 1,380 Boston Standard Parking 1
1602-34 Chancellor Garage............... 416 Philadelphia Central Parking 1
15th & Sansom St. Garage................ 313 Philadelphia Central Parking 1
Juniper/Locust St. Garage............... 541 Philadelphia Central Parking 1
1111 Sansom St. Garage.................. 250 Philadelphia Central Parking 1
1616 Sansom St. Garage.................. 240 Philadelphia Central Parking 1
Milwaukee Center(2)..................... 876 Milwaukee Standard Parking 1
Capitol Commons Garage(2)(3)............ 950 Indianapolis Central Parking 1
North Loop Transportation Center(3)..... 1,172 Chicago Standard Parking 1
Theater District Garage(3).............. 1,006 Chicago Standard Parking 1
Adams-Wabash Garage..................... 670 Chicago Standard Parking 1
Civic Parking(4)........................ 7,464 St. Louis Central Parking 4
601 Tchoupitoulas....................... 759 New Orleans Central Parking 1
------ --
Total.............................. 16,037 16
====== ==
</TABLE>
- -------------------------
(1) With the exception of Capitol Commons Garage and 601 Tchoupitoulas, all of
the named Parking Facilities are operated by the designated third-party
Service Company under a lease agreement whereby EOP and the Service Company
share the gross receipts from the parking operation or EOP receives a fixed
payment from the Service Company, and EOP bears none of the operational
expenses. In the case of the Capitol Commons Garage, the operating agreement
provides for EOP's receipt of a percentage of net receipts and, therefore,
results in an insignificant amount of non-qualifying gross income for REIT
qualification purposes relative to the total gross income of EOP. In the
case of 601 Tchoupitoulas, the Parking Facility is managed by Central
Parking for the benefit of EOP Partnership and, therefore, may also result
in an insignificant amount of non-qualifying income for REIT qualification
purposes relative to the total gross income of EOP.
(2) This EOP Parking Facility is held subject to a ground lease. See Note 8 to
the Combined Financial Statements of EOP Predecessors included herein.
(3) Each of these EOP Parking Facilities is held in a partnership with an
unaffiliated third party. EOP Partnership or a Subsidiary is the managing
general partner of each such partnership. See Note 6 to the Combined
Financial Statements of EOP Predecessors included herein.
(4) EOP has a 50% membership interest in a portfolio of four EOP Parking
Facilities serving the St. Louis, Missouri area.
TENANTS
The EOP Office Properties are leased to 3,099 tenants. No tenant accounts
for more than 2.3% of EOP's aggregate annualized rent or 1.7% of aggregate
occupied square feet.
110
<PAGE> 121
LEASE EXPIRATION BY REGION
The following table sets forth a schedule of lease expirations by region for
leases in place as of September 30, 1997, for each of the 12 full and partial
calendar years beginning October 1, 1997, for the EOP Office Properties, on an
aggregate basis, assuming that none of the tenants exercise renewal options and
excluding an aggregate of 2,262,142 square feet of unleased space.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
<C> <S> <C> <C> <C> <C> <C> <C>
Pacific Region Square Feet(1).......... 163,454 410,242 1,012,756 614,729 1,038,366 569,617
Totals % Square Feet(2)........ 2.4% 6.1% 15.0% 9.1% 15.4% 8.4%
Annualized Rent......... 2,830,276 10,364,304 23,159,692 14,158,676 22,225,253 14,090,402
Number of Leases........ 37 88 100 71 83 53
Rent Per Square Foot.... $ 17.32 $ 25.26 $ 22.87 $ 23.03 $ 21.40 $ 24.74
Expected Rent(4)........ $ 29.55
Replacement Cost
Rent(5)................. $ 43.63
Southeast Region Square Feet(1).......... 81,398 349,218 434,158 895,749 495,994 407,413
Totals % Square Feet(2)........ 1.6% 7.0% 8.7% 17.9% 9.9% 8.1%
Annualized Rent(3)...... 1,562,529 6,849,739 7,854,070 18,303,232 10,763,989 7,520,298
Number of Leases........ 28 70 72 78 59 53
Rent Per Square Foot.... $ 19.20 $ 19.61 $ 18.09 $ 20.43 $ 21.70 $ 18.46
Expected Rent(4)........ $ 21.65
Replacement Cost
Rent(5)................. $ 31.01
Northeast Region Square Feet(1).......... 65,439 367,188 433,391 567,219 677,829 642,353
Totals % Square Feet(2)........ 1.3% 7.1% 8.4% 11.0% 13.1% 12.4%
Annualized Rent(3)...... 843,416 9,092,769 11,564,100 15,167,510 17,027,616 15,591,794
Number of Leases........ 21 42 54 57 55 55
Rent Per Square Foot.... $ 12.89 $ 24.76 $ 26.68 $ 26.74 $ 25.12 $ 24.27
Expected Rent(4)........ $ 27.84
Replacement Cost
Rent(5)................. $ 40.95
Central Region Square Feet(1).......... 105,948 441,681 333,599 480,585 409,455 436,274
Totals % Square Feet(2)........ 1.6% 6.7% 5.1% 7.3% 6.3% 6.7%
Annualized Rent(3)...... 2,104,998 11,219,696 7,576,209 11,208,567 8,891,259 9,635,238
Number of Leases........ 45 60 58 56 68 59
Rent Per Square Foot.... $ 19.87 $ 25.40 $ 22.71 $ 23.32 $ 21.71 $ 22.09
Expected Rent(4)........ $ 23.35
Replacement Cost
Rent(5)................. $ 38.73
Southwest Region Square Feet(1).......... 237,536 623,142 528,758 1,092,625 749,431 691,843
Totals % Square Feet(2)........ 4.1% 10.8% 9.2% 19.0% 13.0% 12.0%
Annualized Rent(3)...... 3,224,090 9,685,662 8,228,466 19,562,992 11,917,932 11,683,950
Number of Leases........ 94 114 95 112 84 71
Rent Per Square Foot.... $ 13.57 $ 15.54 $ 15.56 $ 17.90 $ 15.90 $ 16.89
Expected Rent(4)........ $ 17.84
Replacement Cost
Rent(5)................. $ 28.83
West Region Square Feet(1).......... 230,053 489,536 674,306 608,262 454,143 527,474
Totals % Square Feet(2)........ 5.5% 11.7% 16.1% 14.5% 10.8% 12.6%
Annualized Rent(3)...... 3,156,217 8,867,196 11,016,914 10,009,607 7,890,171 9,068,903
Number of Leases........ 106 125 127 107 73 53
Rent Per Square Foot.... $ 13.72 $ 18.11 $ 16.34 $ 16.46 $ 17.37 $ 17.19
Expected Rent(4)........ $ 20.43
Replacement Cost
Rent(5)................. $ 27.50
Portfolio Square Feet(1).......... 883,828 2,681,007 3,416,968 4,259,169 3,825,218 3,274,974
Totals % Square Feet(2)........ 2.6% 8.0% 10.2% 12.8% 11.5% 9.8%
Annualized Rent(3)...... 13,721,525 56,079,366 69,399,452 88,410,585 78,716,220 67,590,584
Number of Leases........ 331 499 506 481 422 344
Rent Per Square Foot.... $ 15.53 $ 20.92 $ 20.31 $ 20.76 $ 20.58 $ 20.64
Expected Rent(4)........ $ 23.73
Replacement Cost
Rent(5)................. $ 35.80
<CAPTION>
2007
2003 2004 2005 2006 AND BEYOND TOTALS
---- ---- ---- ---- ---------- ------
<C> <C> <C> <C> <C> <C> <C>
Pacific Region 398,266 249,607 320,984 273,056 1,250,943 6,302,020
Totals 5.9% 3.7% 4.8% 4.0% 18.5% 93.4%
9,964,616 6,003,342 7,520,554 6,934,824 28,714,063 145,966,001
26 17 16 17 26 534
$ 25.02 $ 24.05 $ 23.43 $ 25.40 $ 22.95 $ 23.16
Southeast Region 205,078 272,311 401,563 222,946 1,058,332 4,824,160
Totals 4.1% 5.4% 8.0% 4.5% 21.1% 96.3%
4,771,972 3,614,649 5,386,079 5,672,748 20,490,954 92,790,259
8 9 5 9 10 401
$ 23.27 $ 13.27 $ 13.41 $ 25.44 $ 19.36 $ 19.23
Northeast Region 400,272 499,283 319,461 295,880 542,933 4,811,248
Totals 7.8% 9.7% 6.2% 5.7% 10.5% 93.2%
9,260,838 12,168,971 8,051,550 6,647,797 15,294,941 120,711,302
44 27 22 23 23 423
$ 23.14 $ 24.37 $ 25.20 $ 22.47 $ 28.17 $ 25.09
Central Region 232,504 405,082 785,200 320,981 1,942,754 5,894,063
Totals 3.6% 6.2% 12.0% 4.9% 29.7% 90.0%
4,399,425 8,576,833 15,446,334 5,383,852 35,264,788 119,707,199
29 48 29 12 34 498
$ 18.92 $ 21.17 $ 19.67 $ 16.77 $ 18.15 $ 20.31
Southwest Region 260,675 457,905 72,924 446,126 154,048 5,315,013
Totals 4.5% 8.0% 1.3% 7.8% 2.7% 92.5%
4,110,261 8,819,155 1,311,485 7,070,911 612,591 86,227,493
15 14 4 7 2 612
$ 15.77 $ 19.26 $ 17.98 $ 15.85 $ 3.98 $ 16.22
West Region 160,643 705,001 54,008 5,429 89,476 3,998,331
Totals 3.8% 16.8% 1.3% 0.1% 2.1% 95.5%
2,751,421 9,385,730 1,146,707 94,331 877,234 64,264,432
23 9 4 2 2 631
$ 17.13 $ 13.31 $ 21.23 $ 17.38 $ 9.80 $ 16.07
Portfolio 1,657,438 2,589,189 1,954,140 1,564,418 5,038,486 31,144,835
Totals 5.0% 7.8% 5.9% 4.7% 15.1% 93.2%
35,258,531 48,568,680 38,862,710 31,804,463 101,254,571 629,666,686
145 124 80 70 97 3,099
$ 21.27 $ 18.76 $ 19.89 $ 20.33 $ 20.10 $ 20.22
</TABLE>
- -------------------------
(1) Total net rentable square feet represented by expiring leases.
(2) Percentage of total net rentable feet represented by expiring leases.
(3) Annualized Rent is the monthly contractual rent under existing leases as of
September 30, 1997, multiplied by 12. This amount reflects total base rent
before any rent abatements and includes expense reimbursements which may be
estimates as of such date. Total rent abatements for leases in effect as of
September 30, 1997 for the 12 months ending September 30, 1998 are
approximately $6.9 million.
(4) Represents the average asking gross rent per rentable square feet for
buildings of comparable size, class, location and age, based upon
information obtained from CB Commercial Real Estate Group, Inc./Torto
Wheaton Research, Baxter Southwest or Jamison Research, Inc.
(5) Represents EOP's estimate of the gross rent that would be required to
justify construction of a building which would be competitive with the
respective Office Properties. An estimate of the replacement cost to build a
property similar to the subject Property was calculated utilizing the
Marshall and Swift (February 1997) Commercial Estimator 5.03c Software
Program. The replacement cost rent is calculated under the assumptions that
a net effective return of 12% would be required to justify new construction
and that occupancy would stabilize at 95% as follows:
Replacement Cost Rent = (estimated replacement cost per square foot X 12%)
+ the estimated operating expenses per square foot at the subject
property)/95%. The estimated replacement costs and the estimated
replacement cost rents are based on building a building similar to the
subject Property in terms of the quality of construction and amenities. The
actual cost to construct a building that would be competitive with the
subject Property and the required investor returns could be more or less
than these estimates.
111
<PAGE> 122
LEASE EXPIRATIONS -- TOTAL PORTFOLIO
The following table sets forth a summary schedule of the lease expirations
for the EOP Office Properties for leases in place as of September 30, 1997,
assuming that none of the tenants exercise renewal options or termination
rights, if any, at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
ANNUALIZED ANNUALIZED PERCENTAGE
SQUARE PERCENTAGE RENT OF RENT OF OF ANNUALIZED
NUMBER OF FOOTAGE OF OF TOTAL EXPIRING EXPIRING RENT OF
LEASES EXPIRING OCCUPIED LEASES LEASES PER EXPIRING
YEAR OF LEASE EXPIRATION EXPIRING LEASES SQUARE FEET ($000S) SQUARE FOOT LEASES(1)
------------------------ --------- ---------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1997(2).................... 331 883,828 2.9% 13,722 $15.53 2.2%
1998....................... 499 2,681,007 8.7 56,079 20.92 8.9
1999....................... 506 3,416,968 11.1 69,399 20.31 11.0
2000....................... 481 4,259,169 13.9 88,411 20.76 14.1
2001....................... 422 3,825,218 12.5 78,716 20.58 12.5
2002....................... 344 3,274,974 10.7 67,591 20.64 10.7
2003....................... 145 1,657,438 5.4 35,259 21.27 5.6
2004....................... 124 2,589,189 8.4 48,569 18.76 7.7
2005....................... 80 1,954,140 6.4 38,863 19.89 6.2
2006....................... 70 1,564,418 5.1 31,804 20.33 5.1
2007....................... 36 1,126,892 3.7 30,782 27.32 4.9
2008....................... 26 1,037,999 3.4 22,860 22.02 3.6
2009....................... 13 373,185 1.2 8,336 22.34 1.3
2010 and beyond............ 22 2,008,795 6.6 39,276 19.55 6.2
----- ---------- --- -------- ------ -----
Total/Weighted
Average............. 3,099 30,653,220(3) 100%(3) $629,667 $20.22 100.0%
===== ========== === ======== ====== =====
</TABLE>
- -------------------------
(1) Based on currently payable rent.
(2) Represents lease expirations from October 1, 1997 to December 31, 1997 and
month-to-month leases.
(3) Reconciliation of total net rentable square footage is as follows:
<TABLE>
<CAPTION>
PERCENTAGE
SQUARE FOOTAGE OF TOTAL
-------------- ----------
<S> <C> <C>
Square footage occupied by tenants.......................... 30,653,220 91.9%
Square footage used for management offices and building use,
and remeasurement adjustments............................. 491,615 1.3
Square footage vacant....................................... 2,262,142 6.8
---------- -----
Total net rentable square footage...................... 33,406,977 100.0%
========== =====
</TABLE>
112
<PAGE> 123
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the EOP Office Property leases, based on rentable square feet under lease, as of
September 30, 1997:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF AGGREGATE OF AGGREGATE
PERCENT TOTAL PORTFOLIO ANNUALIZED PORTFOLIO
SQUARE FEET NUMBER OF ALL OCCUPIED OCCUPIED ANNUALIZED RENT PER ANNUALIZED
UNDER LEASE OF LEASES LEASES SQUARE FEET SQUARE FEET RENT SQUARE FOOT RENT
----------- --------- ------- ----------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
2,500 or Less.............. 1,059 34.1% 1,399,539 4.6% $ 25,261,934 $18.05 4.0%
2,501-5,000................ 666 21.5 2,292,036 7.5 44,219,820 19.29 7.0
5,001-7,500................ 365 11.8 2,110,283 6.9 41,406,322 19.62 6.6
7,501-10,000............... 201 6.5 1,614,337 5.3 32,562,600 20.17 5.2
10,001-20,000.............. 386 12.5 5,139,843 16.8 105,871,257 20.60 16.8
20,001-40,000.............. 213 6.9 5,282,043 17.1 109,690,484 20.77 17.4
40,001-60,000.............. 87 2.8 3,185,911 10.4 70,788,062 22.22 11.2
60,001-100,000............. 53 1.7 3,046,127 9.9 72,022,315 23.64 11.4
100,001 or Greater......... 69 2.2 6,583,101 21.5 127,843,892 19.42 20.4
----- ----- ---------- ----- ------------ ------ -----
Total/Weighted Average... 3,099 100.0% 30,653,220 100.0% $629,666,686 $20.54 100.0%
===== ===== ========== ===== ============ ====== =====
</TABLE>
CAPITAL IMPROVEMENTS
EOP has a history of acquiring and repositioning undercapitalized and
poorly managed properties, many of which have required significant capital
improvements due to deferred maintenance and/or required substantial renovation
to enable them to compete effectively. A number of the EOP Properties also have
had significant amounts of shell space requiring build out at the time of
acquisition. EOP takes these capital improvements and revenue enhancing tenant
improvements into consideration at the time of acquisition in determining the
amount of equity and debt financing required to purchase the Property and fund
the improvements. Therefore, capital improvements up to the first five years
after acquisition of these Properties are treated separately from typical
recurring capital expenditures and non-revenue enhancing tenant improvements and
leasing commissions required once these Properties have reached stabilized
occupancy and deferred maintenance and renovations planned at the time of
acquisition have been completed. Capital improvements (including tenant
improvements and leasing commissions for shell space) for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997
were $49.7 million, $48.8 million, $100.3 million and $57.0 million,
respectively, or $2.76, $2.16, $3.49 and $1.71 per square foot, respectively.
These amounts include $16.8 million, $47.3 million and $27.8 million for the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1997, respectively, for the redevelopment of the 28 State Street Building.
EOP considers capital expenditures to be recurring expenditures relating to
the daily maintenance of the EOP Office Properties. The table below summarizes
capital expenditures for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1997. The capital expenditures set forth
below are not necessarily indicative of future capital expenditures.
<TABLE>
<CAPTION>
1997 (THROUGH
1994 1995 1996 SEPTEMBER 30)
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Number of EOP Office Properties........................ 61 71 81 93
Rentable Square Feet (in millions)..................... 18.0 22.6 28.7 33.4
Annual Capital Expenditures per Square Foot............ $ .32 $ .14 $ .16 $ 0.7
</TABLE>
113
<PAGE> 124
TENANT IMPROVEMENT AND LEASING COMMISSION COSTS
EOP distinguishes its tenant improvements and leasing commissions between
those that are revenue enhancing (which are required for space which is vacant
at the time of acquisition or that has been vacant for nine months or more) and
non-revenue enhancing (which are required to maintain the revenue being
generated from currently leased space). The table below summarizes the revenue
enhancing and non-revenue enhancing tenant improvements and leasing commissions
for the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997. The tenant improvement and leasing commission costs set
forth below are presented on an aggregate basis and do not reflect significant
regional variations and, in any event, are not necessarily indicative of future
tenant improvement and leasing commission costs:
<TABLE>
<CAPTION>
1997 TOTAL/
(THROUGH WEIGHTED
1994 1995 1996 SEPTEMBER 30) AVERAGE
---- ---- ---- ------------- --------
<S> <C> <C> <C> <C> <C>
Number of Office Properties............. 61 71 81 93
Rentable square feet (in millions)...... 18.0 22.6 28.7 33.4
Revenue enhancing tenant improvements
and leasing commissions
Annual................................ $16,975,000 $20,981,000 $31,534,000 $ 6,930,000 $ 76,420,000
Per square foot improved.............. $ 14.14 $ 22.89 $ 30.26(1) $ 15.90(2) $ 21.25
Per square foot total................. $ .94 $ .93 $ 1.10(1) $ .28(2)(3) $ .74
Renewal space
Annual.............................. $11,095,000 $10,008,000 $15,486,000 $ 7,553,000 $ 44,142,000
Per square foot improved............ $ 5.41 $ 7.82 $ 6.79(1) $ 6.02(2) $ 6.43
Per square foot total............... $ .62 $ .44 $ .54(1) $ .31(2)(3) $ .43
Retenanted space
Annual.............................. $ 8,966,000 $ 8,446,000 $31,987,000 $10,689,000 $ 60,088,000
Per square foot improved............ $ 15.08 $ 19.80 $ 20.64(1) $ 13.93(2) $ 18.00
Per square foot total............... $ .50 $ .37 $ 1.11(1) $ .43(2)(3) $ .58
Total non-revenue enhancing............. $20,061,000 $18,454,000 $47,473,000 $18,242,000 $104,230,000
Per square foot improved................ $ 7.58 $ 10.81 $ 12.39 $ 9.02 $ 10.21
Per square foot total................... $ 1.12 $ .81 $ 1.65 $ .74(2)(3) $ 1.01
</TABLE>
- -------------------------
(1) The per square foot calculations as of December 31, 1996 are calculated
taking the total dollars anticipated to be expended on tenant improvements
in process as of December 31, 1996, divided by the total square footage
being improved or total building square footage. The actual amounts expended
as of December 31, 1996 for revenue enhancing and non-revenue enhancing
renewal and retenanted space were $30,587,000, $14,602,000 and $20,763,000,
respectively.
(2) The per square foot calculations as of September 30, 1997 are calculated
taking the total dollars anticipated to be expended on tenant improvements
in process as of September 30, 1997, divided by the total square footage
being improved or total building square footage. The actual amounts expended
as of September 30, 1997 for revenue enhancing and non-revenue enhancing
renewal and retenanted space were $8,700,000, $7,500,000 and $21,500,000,
respectively.
(3) The amounts shown have been annualized to reflect a full year of comparable
operation. The actual costs per square foot total as of September 30, 1997
for revenue enhancing and non-revenue enhancing renewal and retenanted space
were $.21, $.23 and $.32, respectively.
114
<PAGE> 125
OCCUPANCY
The table below sets forth weighted average occupancy rates, based on
square feet occupied, of the EOP Office Properties owned by EOP at the indicated
dates:
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
RENTABLE SQUARE RENTABLE SQUARE
DATE FEET FEET OCCUPIED
---- --------------- ---------------
<S> <C> <C>
December 31, 1992............................. 9,095,684 73%
December 31, 1993............................. 13,550,553 80
December 31, 1994............................. 18,505,591 88
December 31, 1995............................. 23,097,222 86
December 31, 1996............................. 29,127,289 90
September 30, 1997............................ 33,406,977 93
</TABLE>
DEBT FINANCING
As of September 30, 1997, EOP had outstanding existing long-term
indebtedness in an aggregate principal amount of $1.7 billion, of which $427
million or 25% had a floating interest rate. EOP's fixed rate debt had a
weighted average interest rate of 7.56% and a weighted average maturity of 76
months. As of such date, EOP's floating rate debt bore interest at a weighted
average rate of 6.86%. EOP's overall weighted average interest rate as of
September 30, 1997 was 7.39%.
EOP has previously entered into interest rate hedging arrangements for
approximately $1 billion of its floating rate debt in order to protect itself
from rising interest rates. Excluding the $600 million Credit Facility that EOP
entered into upon consummation of the Consolidation and an additional $44
million in debt, EOP's total debt as of the date hereof is principally comprised
of (i) fixed rate loans or (ii) floating rate loans subject to interest rate
hedging arrangements that will limit EOP's exposure to rising interest rates.
See "RISK FACTORS -- Debt Financing."
REALTY TAXES
As of September 30, 1997, the EOP Properties were subject to realty tax
rates ranging from approximately 1% to approximately 7.9% of assessed value. For
the year ended December 31, 1996, EOP incurred approximately $52.2 million in
annual realty taxes. EOP does not expect proposed improvements to previously
improved space to materially affect the amount of realty taxes.
LEGAL PROCEEDINGS
Neither EOP nor any of the EOP Properties is presently subject to any
material litigation nor, to EOP's knowledge, is any litigation threatened
against EOP, or any of the EOP Properties, other than routine actions for
negligence and other claims and administrative proceedings arising in the
ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the liquidity, results of operations, or business or
financial condition of EOP.
115
<PAGE> 126
BUSINESS OF BEACON
GENERAL
Beacon was formed in May 1994 to continue and expand the office and
commercial real estate business of the Beacon Group, a real estate company
founded in 1946 by Norman Leventhal and Robert Leventhal. Currently, Beacon owns
and operates 126 income producing commercial properties encompassing
approximately 20.7 million rentable square feet. The Beacon Properties are
located throughout the United States in 10 submarkets in six markets in five
states and the District of Columbia. Through the Beacon Management Company,
Beacon manages an additional three commercial properties, containing
approximately 2.2 million rentable square feet, owned by third-parties
(including, in the case of one such property, an affiliate of Beacon).
As of September 30, 1997, the Beacon Properties were approximately 97%
leased by a total of approximately 1,280 tenants with no single tenant
accounting for more than 4.0% of the annualized rent. As of September 30, 1997,
the Beacon Properties contained an average of 158,106 rentable square feet. As
of September 30, 1997, the Beacon Properties, by number of buildings, are
located 14% in CBDs and 86% in suburban markets and, by rentable square feet,
28% in CBDs and 72% in suburban markets.
OPERATIONS
The operations of the Beacon Properties are under the direction of three
regional Chief Executives, each of whom has responsibility directing the growth
and operations of the Beacon Properties in his respective region. Each region
has strategic and budget planning responsibility, as well as due diligence,
property management, engineering/construction and leasing/marketing expertise.
Each regional manager reports to Beacon's Chief Operating Officer.
OPERATIONAL STRUCTURE
All of Beacon's business is conducted through the Beacon Partnership and
its Subsidiaries. The Beacon Partnership owns, directly or indirectly, each of
the wholly owned Beacon Properties. The Beacon Partnership owns only a partial
interest in the Center Plaza property, the One Post Office Square property, the
Rowes Wharf property, the Polk and Taylor Buildings property, and the 75-101
Federal Street property (the "Beacon Joint Venture Properties"). Consequently,
Beacon is not in a position to exercise sole decision-making authority regarding
the Beacon Joint Venture Properties.
Beacon conducts third party management operations through the Beacon
Management Company and conducts third party tenant space design services through
the Beacon Design Company. Through the Beacon Management Company, Beacon manages
three properties comprising approximately 2.2 million square feet of commercial
office space owned by third parties, as well as the Beacon Joint Venture
Properties. The Beacon Partnership owns 1% of the voting stock and 100% of the
non-voting stock (collectively representing 99% of the economic value) of each
of the Beacon Service Companies. The Beacon Service Companies also own Beacon's
interest in the Rowes Wharf property.
Beacon conducts management operations for wholly owned properties through
Beacon Property Management, L.P., a Delaware limited partnership, and conducts
tenant space design services for wholly owned properties through Beacon Design,
L.P., a Delaware limited partnership.
RECENT DEVELOPMENTS
ACQUISITIONS. Since September 30, 1997, Beacon has completed a number of
new acquisitions.
In October 1997, Beacon acquired a 44-story office tower located at 20
North Wacker Drive in Chicago, Illinois (the "Civic Opera Building") for
aggregate consideration of approximately $59.6 million, of which approximately
$21.1 million would be in cash, $6.7 million would be in the form of operating
partnership units, and the balance by taking subject to a $31.8 million existing
mortgage. The Civic Opera Building is comprised of approximately 824,000
rentable square feet. Originally built in 1929, the building has undergone
116
<PAGE> 127
approximately $10 million of renovation since 1994. As of the date of
acquisition, the building was approximately 93% occupied.
In October 1997, Beacon also acquired an office property located at 200
West Adams in Chicago, Illinois ("200 West Adams") for aggregate consideration
of approximately $72.2 million. Completed in 1985, the 200 West Adams property
is comprised of approximately 677,000 rentable square feet, including
approximately 12,500 square feet of retail space. As of the date of acquisition,
the building was approximately 92% occupied.
In October 1997, Beacon acquired Lakeside Office Park, an office complex
located in Atlanta, Georgia ("Lakeside") for aggregate consideration of
approximately $38 million in cash. Lakeside was developed from 1972 to 1978 and
has been refurbished over the past three years. Lakeside consists of five
buildings containing a total of 391,000 rentable square feet and, upon
acquisition, was approximately 92% occupied.
In November 1997, Beacon entered into an Agreement for Purchase and Sale of
Partnership Interest with Dai-ichi Life Property Holdings, Inc. and Dai-ichi
Life Capital Properties, Inc. (collectively, "Dai-ichi") to purchase Dai-ichi's
50% interest in a 23-story office building located at 101 North Wacker Drive in
Chicago, Illinois for approximately $29.5 million. Beacon previously entered
into an Agreement for Purchase and Sale of Partnership Interest with
Metropolitan Life Insurance Company ("MetLife"), Dai-ichi's joint venturer in
the Property, to purchase MetLife's 50% interest in the property for
approximately $29.5 million. Dai-ichi has waived its first refusal options to
purchase MetLife's 50% interest in the Property. The Agreement for Purchase and
Sale of Partnership Interest with Dai-ichi is subject to the right of MetLife to
exercise a first refusal option to purchase Dai-ichi's 50% interest in the
property.
DEVELOPMENTS. Since September 30, 1997, Beacon has announced the following
development project.
In October 1997, Beacon purchased a parcel of land from CALPROP, L.P. for
$10.6 million with the plan to develop a 22-story, 207,000 square feet office
tower at 150 California Street in San Francisco, California.
117
<PAGE> 128
THE BEACON PROPERTIES
The following table sets forth certain information relating to each Beacon
Property as of September 30, 1997.
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
YEAR BUILT/ OWNERSHIP AREA IN PERCENT BASE
PROPERTY RENOVATED INTEREST(1) PROPERTY LOCATION SQUARE FEET LEASED RENT(2)
-------- ----------- ----------- ----------------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
DOWNTOWN BOSTON OFFICE MARKET:
225 Franklin Street............... 1966(4) 100% Boston, MA 929,545 100% $36.94
75-101 Federal Street............. 1985-1988 51.6% Boston, MA 812,000 91% 30.19
One Post Office Square............ 1981 50% Boston, MA 764,129 99% 25.18
Center Plaza...................... 1966-1969 (5) Boston, MA 649,359 97% 22.64
150 Federal Street................ 1988 100% Boston, MA 530,279 100% 26.02
Rowes Wharf....................... 1987 45% Boston, MA 344,326 100% 31.35
Russia Wharf...................... 1978-1982 100% Boston, MA 314,596 98% 15.07
2 Oliver Street-147 Milk Street... 1982-1988 100% Boston, MA 271,000 99% 18.62
175 Federal Street................ 1977 100% Boston, MA 203,349 99% 25.69
South Station(6).................. 1988 100% Boston, MA 148,591 100% 30.94
---------- ---- ------
Subtotal/Weighted Average....... 4,967,174 98% $27.59
---------- ---- ------
GREATER BOSTON SUBURBAN OFFICE
MARKET:
Wellesley Office Park(7).......... 1963-1984 100% Wellesley, MA 622,862 99% $24.73
Crosby Corporate Center(8)........ 1996 100% Bedford, MA 336,000 98% 14.02
175 Wyman Street.................. (9) 100% Waltham, MA 335,000 (9) (9)
Westwood Business Centre.......... 1985 100% Westwood, MA 160,400 96% 19.81
New England Executive Park
Portfolio(10)................... 1970-1985 100% Burlington, MA 817,013 93% 19.56
---------- ---- ------
Subtotal/Weighted Average....... 2,271,275 96%(9) $20.31
---------- ---- ------
CAMBRIDGE OFFICE MARKET:
One Canal Park.................... 1987 100% Cambridge, MA 100,300 100% $22.05
Ten Canal Park.................... 1987 100% Cambridge, MA 110,000 100% 19.00
245 First Street(11).............. 1985-1986 100% Cambridge, MA 263,227 100% 22.55
---------- ---- ------
Subtotal/Weighted Average....... 473,527 100% $21.61
---------- ---- ------
CENTRAL PERIMETER ATLANTA OFFICE
MARKET(12):
North Terraces.................... 1984 100% Atlanta, GA 492,845 98% $20.37
South Terraces.................... 1986 100% Atlanta, GA 494,513 95% 21.25
8,10,12,14,16 Perimeter Center
East............................ 1970 100% Atlanta, GA 64,998 89% 14.95
20,22,24,26 Perimeter Center
East............................ 1973 100% Atlanta, GA 69,727 95% 15.46
28,30,32 Perimeter Center East.... 1974 100% Atlanta, GA 104,816 98% 14.13
41 Perimeter Center East.......... 1974 100% Atlanta, GA 92,021 98% 15.59
47 Perimeter Center East.......... 1974 100% Atlanta, GA 92,021 97% 15.56
50 Perimeter Center East.......... 1981 100% Atlanta, GA 6,300 100% 7.66
53 Perimeter Center East.......... 1972 100% Atlanta, GA 90,505 100% 17.12
56 Perimeter Center East.......... 1977 100% Atlanta, GA 93,625 100% 16.16
64 Perimeter Center East.......... 1971 100% Atlanta, GA 183,037 100% 5.34
64A Perimeter Center East......... 1985 100% Atlanta, GA 372,498 100% 20.66
70,72,74,76 Perimeter Center
East............................ 1972 100% Atlanta, GA 61,932 88% 15.97
125 Perimeter Center West......... 1972 100% Atlanta, GA 223,059 100% 4.10
219 Perimeter Center Parkway...... 1979 100% Atlanta, GA 127,697 100% 15.94
223 Perimeter Center Parkway...... 1978 100% Atlanta, GA 127,823 100% 16.50
<CAPTION>
AVERAGE
ANNUAL NET
PROPERTY EFFECTIVE RENT(3)
-------- -----------------
<S> <C>
DOWNTOWN BOSTON OFFICE MARKET:
225 Franklin Street............... $32.73
75-101 Federal Street............. 19.62
One Post Office Square............ 15.69
Center Plaza...................... 12.87
150 Federal Street................ 21.25
Rowes Wharf....................... 18.91
Russia Wharf...................... 8.44
2 Oliver Street-147 Milk Street... 11.94
175 Federal Street................ 15.83
South Station(6).................. 21.00
------
Subtotal/Weighted Average....... $19.48
------
GREATER BOSTON SUBURBAN OFFICE
MARKET:
Wellesley Office Park(7).......... $17.36
Crosby Corporate Center(8)........ 10.02
175 Wyman Street.................. (9)
Westwood Business Centre.......... 11.28
New England Executive Park
Portfolio(10)................... 12.57
------
Subtotal/Weighted Average....... $13.58
------
CAMBRIDGE OFFICE MARKET:
One Canal Park.................... $13.99
Ten Canal Park.................... 12.16
245 First Street(11).............. 17.46
------
Subtotal/Weighted Average....... $15.49
------
CENTRAL PERIMETER ATLANTA OFFICE
MARKET(12):
North Terraces.................... $14.50
South Terraces.................... 13.37
8,10,12,14,16 Perimeter Center
East............................ 10.20
20,22,24,26 Perimeter Center
East............................ 10.03
28,30,32 Perimeter Center East.... 8.66
41 Perimeter Center East.......... 9.98
47 Perimeter Center East.......... 10.14
50 Perimeter Center East.......... 7.66
53 Perimeter Center East.......... 12.29
56 Perimeter Center East.......... 8.56
64 Perimeter Center East.......... 2.38
64A Perimeter Center East......... 17.39
70,72,74,76 Perimeter Center
East............................ 10.75
125 Perimeter Center West......... 3.07
219 Perimeter Center Parkway...... 11.60
223 Perimeter Center Parkway...... 11.43
</TABLE>
118
<PAGE> 129
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
YEAR BUILT/ OWNERSHIP AREA IN PERCENT BASE
PROPERTY RENOVATED INTEREST(1) PROPERTY LOCATION SQUARE FEET LEASED RENT(2)
-------- ----------- ----------- ----------------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
245 Perimeter Center Parkway...... 1981 100% Atlanta, GA 229,217 100% 18.05
301 Perimeter Center North........ 1982 100% Atlanta, GA 151,416 100% 18.48
303 Perimeter Center North........ 1989 100% Atlanta, GA 162,256 100% 20.98
Park Place Shopping Center........ 1979 100% Atlanta, GA 61,830 100% 16.44
---------- ---- ------
Subtotal/Weighted Average....... 3,302,136 98% $17.00
---------- ---- ------
ARLINGTON COUNTY, VIRGINIA OFFICE
MARKET:
The Polk and Taylor Buildings..... 1970 10% Arlington, VA 890,000 100% $23.82
1300 North Seventeenth Street..... 1980 100% Rosslyn, VA 372,865 100% 24.20
1616 North Fort Myer Drive........ 1974 100% Rosslyn, VA 292,826 100% 23.23
---------- ---- ------
Subtotal/Weighted Average....... 1,555,691 100% $23.80
---------- ---- ------
FAIRFAX COUNTY, VIRGINIA OFFICE
MARKET:
John Marshall I................... 1981 100% McLean, VA 261,364 100% $18.26
E.J. Randolph..................... 1983 100% McLean, VA 164,677 99% 21.21
Northridge I...................... 1988 100% Reston/Herndon, VA 124,319 100% 25.96
Centerpointe I.................... 1988 100% Fairfax, VA 204,481 100% 15.23
Centerpointe II................... 1990 100% Fairfax, VA 204,481 98% 18.29
---------- ---- ------
Subtotal/Weighted Average....... 959,322 100% $19.12
---------- ---- ------
WASHINGTON, D.C. OFFICE MARKET:
1333 H Street..................... 1982(13) 100% Washington, D.C. 238,694 91% $27.42
---------- ---- ------
SUBURBAN CHICAGO OFFICE MARKET:
AT&T Plaza........................ 1984 100% Oak Brook, IL 225,318 100% $21.23
Tri-State International(14)....... 1986 100% Lincolnshire, IL 548,000 84% 22.64
Presidents Plaza(15).............. 1980-1982 100% Chicago, IL 791,000 95% 19.94
Westbrook Corporate Center(16).... 1985-1996 100% Westchester, IL 1,106,000 91% 24.47
---------- ---- ------
Subtotal/Weighted Average....... 2,670,318 92% $22.48
---------- ---- ------
WEST LOS ANGELES OFFICE MARKET:
10960 Wilshire Boulevard.......... 1971/1992 100% Westwood, CA 543,804 89% $21.56
10880 Wilshire Boulevard(17)...... 1970/1992 100% Westwood, CA 541,176 85% 20.08
---------- ---- ------
Subtotal/Weighted Average....... 1,074,980 87% $20.83
---------- ---- ------
SILICON VALLEY OFFICE/R&D MARKET:
Shoreline Technology Park(18)..... 1985-1991 100% Mountain View, CA 726,500 100% $17.88(19)
Lake Marriott Business Park(21)... 1981 100% Santa Clara, CA 400,000 100% 10.29(19)
Sunnyvale Business Park(22)....... 1990 100% Sunnyvale, CA 175,000 100% 18.44
---------- ---- ------
Subtotal/Weighted Average....... 1,301,500 100% $15.62
---------- ---- ------
TOTAL/WEIGHTED
AVERAGE(9)(23)................ 18,623,617 97% $22.04
========== ==== ======
<CAPTION>
AVERAGE
ANNUAL NET
PROPERTY EFFECTIVE RENT(3)
-------- -----------------
<S> <C>
245 Perimeter Center Parkway...... 11.36
301 Perimeter Center North........ 12.25
303 Perimeter Center North........ 14.70
Park Place Shopping Center........ 13.04
------
Subtotal/Weighted Average....... $11.72
------
ARLINGTON COUNTY, VIRGINIA OFFICE
MARKET:
The Polk and Taylor Buildings..... $19.28
1300 North Seventeenth Street..... 17.09
1616 North Fort Myer Drive........ 15.44
------
Subtotal/Weighted Average....... $18.03
------
FAIRFAX COUNTY, VIRGINIA OFFICE
MARKET:
John Marshall I................... $15.85
E.J. Randolph..................... 15.26
Northridge I...................... 19.34
Centerpointe I.................... 11.94
Centerpointe II................... 13.90
------
Subtotal/Weighted Average....... $14.95
------
WASHINGTON, D.C. OFFICE MARKET:
1333 H Street..................... $20.18
------
SUBURBAN CHICAGO OFFICE MARKET:
AT&T Plaza........................ $14.26
Tri-State International(14)....... 15.92
Presidents Plaza(15).............. 13.92
Westbrook Corporate Center(16).... 19.23
------
Subtotal/Weighted Average....... $16.56
------
WEST LOS ANGELES OFFICE MARKET:
10960 Wilshire Boulevard.......... $18.53
10880 Wilshire Boulevard(17)...... 16.32
------
Subtotal/Weighted Average....... $17.44
------
SILICON VALLEY OFFICE/R&D MARKET:
Shoreline Technology Park(18)..... $18.77(20)
Lake Marriott Business Park(21)... 10.78(20)
Sunnyvale Business Park(22)....... 18.76
------
Subtotal/Weighted Average....... $16.32
------
TOTAL/WEIGHTED
AVERAGE(9)(23)................ $16.26
======
</TABLE>
- -------------------------
(1) Beacon Partnership holds a general partner interest in the entity which
owns the fee title in One Post Office Square; a general partner and limited
partner interest in the entities which own the fee title in each of Center
Plaza and the Polk and Taylor Buildings; and an indirect limited partner
interest in Rowes Wharf Associates, the entity that owns the hotel space
and ground leases the office and retail spaces at Rowes Wharf. Beacon
Partnership holds approximately 50.8% of the common stock of BeaMetFed,
Inc. ("BeaMetFed"), a private REIT that holds the fee title to 75-101
Federal Street. Beacon Partnership owns a 100% fee interest in the
remaining Beacon Properties, with the exception of South Station and 10880
Wilshire Boulevard, in each of which Beacon Partnership holds a ground
leasehold interest.
(2) Base Rent is gross rent excluding payments by tenants on account of real
estate tax and operating expense escalation.
(3) Net Effective Rent is Base Rent adjusted on a straight-line basis for
contractual rent step-ups and free rent periods, plus tenant payments on
account of real estate tax and operating expense escalations, less total
operating expenses and real estate taxes.
(4) 225 Franklin Street has undergone an approximately $95 million renovation
during the past eight years, including installation of new electrical
systems, and a complete upgrade of mechanical systems, elevators, lobbies,
roofs and the exterior plaza of the building.
(5) Beacon Partnership holds a 1% general partner interest, a 75% limited
partner interest and an option to purchase the remaining 24% limited
partner interest in the partnership that owns Center Plaza.
(6) Beacon Partnership owns a ground leasehold interest in South Station which
expires in 2024 but may be extended, at Beacon Partnership's option, for
two additional 15-year terms. The ground lessor and Beacon Partnership have
been in discussions to attempt to resolve a dispute involving the method of
calculation of the lease payments and representatives of the lessor have
informally taken the position that the ground lessor is entitled to declare
a default. Unless these discussions result in a resolution of the dispute,
litigation could ensue, the outcome of which could be adverse to Beacon
Partnership (or, assuming consummation of the Mergers, EOP Partnership),
possibly resulting in a loss of this property. This Beacon Property was
originally built in the early 1900s and was fully rehabilitated in 1988.
This Beacon Property includes a significant retail component.
(7) The Wellesley Office Park consists of eight office buildings.
(8) The Crosby Corporate Center consists of six office buildings.
119
<PAGE> 130
(9) 175 Wyman Street consists of a vacant 335,000 square foot office/research
and development complex and 26.7 acres of land suitable for development.
Weighted Averages exclude 175 Wyman Street.
(10) The New England Executive Park portfolio consists of nine of the 13 office
buildings located in the New England Executive Park, the remaining four of
which are owner-occupied.
(11) 245 First Street consists of two attached structures connected by a
four-story atrium. Riverview I, a six-story office building, was
constructed in 1909 and renovated in 1986. Riverview II, an 18-story
structure with parking on the first nine floors, was constructed in 1985.
(12) The Perimeter Center portfolio consists of 32 buildings and six parcels of
land that Beacon Partnership has ground leased to tenants.
(13) Approximately 205,000 square feet of the 1333 H Street Property was built
in 1982. The remaining approximately 34,000 square feet was renovated in
1982.
(14) The Tri-State International complex consists of five office buildings.
(15) Presidents Plaza consists of five office buildings.
(16) Westbrook Corporate Center consists of five office buildings.
(17) Beacon Partnership owns a ground leasehold interest in 10880 Wilshire
Boulevard which expires in 2068. Beacon Partnership has an option to
purchase the ground under 10880 Wilshire Boulevard at fair market value in
2001.
(18) Shoreline Technology Park consists of 12 office buildings.
(19) Shoreline Technology Park, Sunnyvale Business Center and substantially all
of the Lake Marriott Business Park are leased pursuant to triple net
leases.
(20) Net rent, as adjusted on a straight-line basis to take into effect periodic
increases in net rent.
(21) Lake Marriott Business Park consists of seven office buildings.
(22) Sunnyvale Business Center consists of three office buildings.
(23) Weighted Averages exclude 175 Wyman Street.
120
<PAGE> 131
LEASE EXPIRATIONS
The following tables set forth lease expirations (in square feet) for the
Beacon Properties by market area.
<TABLE>
<CAPTION>
LEASE EXPIRATIONS -- ALL BEACON PROPERTIES
-------------------------------------------------
10/97
TO
MARKET AREA 12/97 1998 1999 2000
- ----------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Downtown Boston............. square feet(a) 156,342 344,866 420,298 483,139
% sq. ft(b) 3.1% 6.9% 8.5% 9.7%
annual rent(c) 3,347,669 10,670,777 11,165,773 14,065,359
psf(d) $21.41 $30.94 $26.57 $29.11
tenants(e) 30 63 64 73
Suburban Boston(f).......... square feet(a) 243,905 234,737 197,356 227,914
% sq. ft(b) 12.5% 12.1% 10.1% 11.7%
annual rent(c) 4,562,258 5,212,586 3,813,204 5,286,633
psf(d) $18.71 $22.21 $19.32 $23.20
tenants(e) 21 38 30 37
Cambridge................... square feet(a) 0 3,499 1,411 6,320
% sq. ft(b) 0.0% 0.7% 0.3% 1.3%
annual rent(b) 0 127,832 31,606 83,269
psf(d) $0.00 $36.53 $22.40 $13.18
tenants(e) 0 1 1 1
Central Perimeter Atlanta... square feet(a) 103,981 282,822 686,095 332,652
% sq. ft(b) 3.1% 8.6% 20.8% 10.1%
annual rent(c) 1,982,033 4,758,379 13,146,864 6,546,469
psf(d) $19.06 $16.82 $19.16 $19.68
tenants(e) 19 47 61 45
Arlington County, VA........ square feet(c) 890,000 31,338 5,672 137,494
% sq. ft(b) 57.2% 2.0% 0.4% 8.8%
annual rent(b) 21,774,468 778,924 133,333 3,731,043
psf(d) $24.47 $24.86 $23.51 $27.14
tenants(e) 7 6 2 10
Fairfax County, VA.......... square feet(a) 6,976 10,698 42,430 137,943
% sq. ft(b) 0.7% 1.1% 4.4% 14.4%
annual rent(c) 103,378 220,898 899,587 3,694,874
psf(d) $14.82 $20.65 $21.20 $26.79
tenants(e) 2 2 5 2
Washington, D.C. ........... square feet(a) 4,004 4,045 2,945 8,835
% sq. ft(b) 1.7% 1.7% 1.2% 3.7%
annual rent(c) 111,880 115,428 80,988 243,846
psf(d) $27.94 $28.54 $27.50 $27.60
tenants(e) 1 3 1 3
<CAPTION>
LEASE EXPIRATIONS -- ALL BEACON PROPERTIES
-------------------------------------------------
2005 &
MARKET AREA 2001 2002 2003 2004 BEYOND
- ----------- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Downtown Boston............. 808,534 647,859 198,072 208,082 1,581,410
16.3% 13.1% 4.0% 4.2% 31.9%
26,761,372 20,330,985 5,707,104 6,355,076 64,806,054
$33.10 $31.38 $28.81 $30.54 $40.98
54 46 13 15 31
Suburban Boston(f).......... 165,988 124,633 53,521 104,177 529,727
8.5% 6.4% 2.7% 5.4% 27.2%
3,956,214 3,340,026 1,343,979 2,304,107 11,772,504
$23.83 $26.80 $25.11 $22.12 $22.22
32 23 4 5 8
Cambridge................... 315,964 116,601 28,000 0 0
66.6% 24.6% 5.9% 0.0% 0.0%
8,165,274 2,632,857 709,712 0 0
$25.84 $22.58 $25.35 $0.00 $0.00
4 2 1 0 0
Central Perimeter Atlanta... 873,983 237,574 54,204 257,229 412,664
26.5% 7.2% 1.6% 7.8% 12.5%
15,797,956 5,563,250 1,377,596 1,887,544 10,179,631
$18.08 $23.42 $25.42 $7.34 $24.67
45 28 5 6 7
Arlington County, VA........ 163,407 84,759 90,458 22,770 131,853
10.5% 5.4% 5.8% 1.5% 8.5%
4,215,680 1,924,479 2,368,468 666,162 3,632,976
$25.80 $22.71 $26.18 $29.26 $27.55
6 4 5 2 4
Fairfax County, VA.......... 67,282 63,342 4,890 70,904 552,784
7.0% 6.6% 0.5% 7.4% 57.7%
1,699,923 1,308,720 98,582 1,755,410 13,039,779
$25.27 $20.66 $20.16 $24.76 $23.59
7 9 1 2 5
Washington, D.C. ........... 2,945 71,006 14,708 0 108,528
1.2% 29.7% 6.2% 0.0% 45.5%
79,692 2,153,356 461,684 0 3,660,393
$27.06 $30.33 $31.39 $0.00 $33.73
1 6 1 0 2
</TABLE>
121
<PAGE> 132
<TABLE>
<CAPTION>
LEASE EXPIRATIONS -- ALL BEACON PROPERTIES
-------------------------------------------------
10/97
TO
MARKET AREA 12/97 1998 1999 2000
- ----------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Suburban Chicago............ square feet(a) 63,100 209,224 210,001 420,586
% sq. ft(b) 2.4% 7.8% 7.9% 15.7%
annual rent(c) 1,236,156 4,949,770 5,429,292 11,732,367
psf(d) $19.59 $23.66 $25.85 $27.90
tenants(e) 18 32 32 40
West Los Angeles............ square feet(a) 27,222 10,197 33,172 201,010
% sq. ft(b) 2.5% 0.9% 3.1% 18.7%
annual rent(c) 680,880 292,711 917,803 5,526,949
psf(d) $25.01 $28.71 $27.67 $27.50
tenants(e) 2 3 9 21
Silicon Valley.............. square feet(a) 60,548 9,465 24,548 509,320
% sq. ft(b) 4.7% 0.7% 1.9% 39.1%
annual rent(c) 938,578 133,634 241,383 7,991,481
psf(d) $15.50 $14.12 $9.83 $15.69
tenants(e) 2 2 3 7
Total Properties(f)......... square feet(a) 1,556,078 1,140,891 1,623,928 2,465,213
% sq. ft(b) 8.4% 6.2% 8.8% 13.3%
annual rent(c) 34,737,300 27,260,937 35,859,833 58,902,291
psf(d) $22.32 $23.89 $22.08 $23.89
tenants(e) 102 197 208 239
<CAPTION>
LEASE EXPIRATIONS -- ALL BEACON PROPERTIES
-------------------------------------------------
2005 &
MARKET AREA 2001 2002 2003 2004 BEYOND
- ----------- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Suburban Chicago............ 273,043 358,438 219,098 175,936 527,401
10.2% 13.4% 8.2% 6.6% 19.7%
7,022,124 9,616,157 5,721,308 4,557,637 15,565,119
$25.72 $26.83 $26.11 $25.91 $29.51
37 26 13 8 19
West Los Angeles............ 151,557 205,555 34,801 93,707 181,793
14.1% 19.1% 3.2% 8.7% 16.9%
4,462,547 6,381,707 1,134,632 3,041,886 6,159,909
$29.44 $31.05 $32.60 $32.46 $33.88
22 10 3 3 5
Silicon Valley.............. 380,932 0 0 0 314,997
29.3% 0.0% 0.0% 0.0% 24.2%
7,082,150 0 0 0 5,967,949
$18.59 $0.00 $0.00 $0.00 $18.95
2 0 0 0 2
Total Properties(f)......... 3,203,635 1,909,767 697,752 932,805 4,341,157
17.3% 10.3% 3.8% 5.0% 23.5%
79,242,932 53,251,537 18,923,064 20,567,823 134,784,314
$24.74 $27.88 $27.12 $22.05 $31.05
210 154 46 41 83
</TABLE>
- -------------------------
(a) Total area in square feet covered by such leases
(b) Percentage of total square feet represented by such leases
(c) Annualized expiring base rental income represented by such leases in the
year of expiration plus 1996 tenant payments on account of real estate tax
and operating expense escalations, except leases with CPI increases in lieu
of expense recoveries (amounts in dollars)
(d) Calculated as annual rent divided by square feet
(e) The number of tenants whose leases will expire
(f) These figures exclude 175 Wyman Street
122
<PAGE> 133
MORTGAGE INDEBTEDNESS AND CREDIT FACILITY
Beacon Partnership's total outstanding consolidated mortgage debt and its
proportionate share of the total outstanding unconsolidated mortgage debt on the
Beacon Properties (excluding Rowes Wharf) was approximately $679.3 million at
September 30, 1997. Additionally, at September 30, 1997, Beacon Partnership's
outstanding balance under the Beacon Credit Facility was $249 million. The
following table sets forth certain information regarding the consolidated and
unconsolidated mortgage debt obligations of Beacon Partnership, including
mortgage obligations relating to specific Beacon Properties, and the Beacon
Credit Facility. All of the mortgage debt is nonrecourse to Beacon Partnership.
At September 30, 1997, Beacon Partnership's fixed rate debt had a weighted
average interest rate of 7.39% and a weighted average maturity of 6.5 years.
<TABLE>
<CAPTION>
PRINCIPAL BEACON
AMOUNT PARTNERSHIP'S
(AS OF PORTION OF INTEREST MATURITY
PROPERTY 9/30/97) PRINCIPAL RATE DATE(A)
-------- --------- ------------- -------- --------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
MORTGAGE INDEBTEDNESS:
BEACON CONSOLIDATED PROPERTIES
175 Federal Street.................................... 12.8 12.8 8.00% 7/1/98
150 Federal Street.................................... 56.6 56.6 6.67% 11/1/98
Centerpointe I & II................................... 30.0 30.0 7.32% 2/28/01
Wellesley Office Park................................. 55.0 55.0 7.23% 2/1/03
Center Plaza.......................................... 60.0 60.0 7.23% 3/1/03
John Marshall I....................................... 20.3 20.3 8.63% 6/1/04
Perimeter Center...................................... 218.0 218.0 7.08% 3/31/06
Northridge I.......................................... 13.6 13.6 8.19% 1/1/07
E.J. Randolph......................................... 15.0 15.0 8.19% 1/1/07
Westbrook Corporate Center............................ 105.7 105.7 8.00% 5/1/07
------ ------
Total Consolidated Properties....................... $587.0 $587.0
====== ======
UNCONSOLIDATED BEACON PROPERTIES WITH RESPECT TO WHICH
BEACON PARTNERSHIP IS A GENERAL PARTNER OR
SHAREHOLDER
One Post Office Square................................ $ 67.1 $ 33.6 7.00% 8/1/00
One Post Office Square................................ 24.7 12.3 8.25% 8/1/00
75-101 Federal Street................................. 90.0 46.4 7.61% 10/1/02
------ ------
Total Unconsolidated Properties..................... 181.8 92.3
------ ------
Total Mortgage Debt................................. $768.8 $679.3
====== ======
CREDIT FACILITY....................................... $249.0 $249.0 (b) 3/31/00
====== ======
</TABLE>
- -------------------------
(a) All mortgage debt is subject to principal amortization over periods of 20 to
27 years and is prepayable prior to maturity subject to certain conditions
and penalties.
(b) At Beacon Partnership's option, at either (i) the higher of (x) BankBoston,
N.A.'s base interest rate and (y) one-half of one percent (0.5%) above the
overnight federal funds effective rate or (ii) the Eurodollar rate plus 90
basis points (0.90%).
123
<PAGE> 134
MARKETS AND COMPETITION OF EOP AND BEACON (ON A COMBINED BASIS)
EOP and Beacon (on a combined basis) operate in most of the top office
markets in the United States. Emerging Trends in Real Estate 1997, Cognetics
Real Estate, Inc. in December 1996, and 1997 Landauer Real Estate Market
Forecast have each ranked the top office markets. Of the 20 markets listed
below, EOP and Beacon (on a combined basis) own Office Properties in 16 of such
markets as highlighted in bold, capitalized text.
<TABLE>
<CAPTION>
TOP 15 CITIES -- LANDAUER
LEADING MARKETS FOR PRIMARY OFFICE MOMENTUM INDEX FOR
MARKETS TO WATCH IN 1997 EMPLOYMENT GROWTH -- 1996 TO 2005 OFFICE MARKETS -- 1997
- ------------------------ ---------------------------------- -------------------------
<S> <C> <C>
1. SAN FRANCISCO, CA 1. LOS ANGELES, CA 1. PHOENIX, AZ
2. Seattle, WA 2. SAN FRANCISCO/OAKLAND, CA 2. ORLANDO, FL
3. BOSTON, MA 3. ATLANTA, GA 3. Minneapolis, MN
4. CHICAGO, IL 4. DALLAS/FORT WORTH, TX 4. ATLANTA, GA
5. DENVER, CO 5. WASHINGTON, DC 5. DENVER, CO
6. SAN DIEGO, CA 6. CHICAGO, IL 6. CHARLOTTE, NC
7. ATLANTA, GA 7. PHOENIX, AZ 7. NASHVILLE, TN
8. LOS ANGELES, CA 8. NEW YORK, NY 8. TAMPA, FL
9. DALLAS/FORT WORTH, TX 9. HOUSTON/GALVESTON, TX 9. Kansas City, KS
10. WASHINGTON, DC 10. TAMPA/ST. PETERSBURG, FL 10. Miami, FL
11. Minneapolis, MN 11. Minneapolis, MN 11. DALLAS, TX
12. NEW YORK, NY 12. BOSTON, MA 12. Seattle, WA
13. PHOENIX, AZ 13. DENVER/BOULDER, CO 13. CHICAGO, IL
14. Miami, FL 14. Seattle, WA 14. SAN FRANCISCO, CA
15. HOUSTON, TX 15. MIAMI/FT. LAUDERDALE, FL 15. BOSTON, MA
Source: Emerging Trends Source: Cognetics Real Estate, Source: 1997 Landauer
in Real Estate 1997 Inc. Real Estate Market
(Equitable Real Estate Forecast
Management and Real
Estate Research
Corporation)
</TABLE>
124
<PAGE> 135
The 25 largest markets of EOP and Beacon (on a combined basis), based on
rentable area, are set forth below.
<TABLE>
<CAPTION>
PERCENTAGE OF
MARKET RENTABLE AREA
- ------ -------------
<S> <C>
Boston, MA.................................................. 15.9%
Chicago, IL................................................. 11.7
Atlanta, GA................................................. 10.2
Washington, D.C............................................. 7.4
San Francisco, CA........................................... 5.6
Los Angeles, CA............................................. 5.4
New Orleans, LA............................................. 4.5
Dallas, TX.................................................. 3.5
Fairfield County (Stamford), CT............................. 3.5
Austin, TX.................................................. 2.7
Houston, TX................................................. 2.6
San Jose, CA................................................ 2.5
Orange County, CA........................................... 2.4
Cleveland, OH............................................... 2.4
Indianapolis, IN............................................ 2.0
San Diego, CA............................................... 1.6
Columbus, OH................................................ 1.5
Philadelphia, PA............................................ 1.3
Denver, CO.................................................. 1.3
Orlando, FL................................................. 1.2
Phoenix, AZ................................................. 1.2
San Antonio, TX............................................. 1.2
Charlotte, NC............................................... 1.1
New York, NY................................................ 1.1
Tampa, FL................................................... 0.9
----
Total.................................................. 94.7%
</TABLE>
EOP believes that the current economic environment and lack of new office
space are allowing the office building industry to gradually re-establish
favorable supply and demand fundamentals. Continued office employment growth,
when combined with the continuing disparity between current rental rates and the
rental rates required to support new development, is expected to result in
improved trends in occupancy, rental rates and profitability.
125
<PAGE> 136
MAJOR U.S. OFFICE MARKET SPACE COMPLETIONS, ABSORPTION AND
VACANCY RATES
[BAR GRAPH]
<TABLE>
<CAPTION>
Office Space Net Absorption
Completions in in Thousands of
Year Thousands of Sq. Ft. Sq. Ft. Vacancy Rate
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1988 110,892 102,940 18.2%
1989 108,709 89,215 18.3%
1990 88,899 70,181 18.6%
1991 50,349 42,657 18.8%
1992 32,842 34,669 18.6%
1993 5,685 49,357 16.9%
1994 4,140 49,356 15.2%
1995 6,481 42,414 13.9%
1996 12,975 60,405 12.2%
2nd Qtr 1997 8,791 35,348 11.3%
</TABLE>
- -------------------------
Source: CB Commercial Real Estate Group, Inc./Torto Wheaton Research.
126
<PAGE> 137
In the 25 largest office markets of EOP and Beacon (on a combined basis),
rental rates have begun to trend upwards as vacancies have decreased, and EOP
believes that trends prevailing in these markets, taken as a whole, are
characteristic of the trends prevailing in all of the markets in which the
Office Properties are situated, taken as a whole. Commercial office buildings in
many markets are experiencing increasing demand for office space accompanied by
a shift in bargaining power in favor of landlords and positive trends in rental
rates and vacancies.
EOP'S AND BEACON'S 25 LARGEST MARKETS -- VACANCY RATE AND TW
RENT INDEX(1)
[BAR GRAPH]
<TABLE>
<CAPTION>
Year Vacancy Rate TW Rent Index
- ----------------------------------------------------------
<S> <C> <C>
1988 17.7% $17.12
1989 17.6% $16.93
1990 18.7% $17.08
1991 19.0% $16.54
1992 18.5% $15.55
1993 16.9% $15.26
1994 15.5% $15.74
1995 14.0% $16.59
1996 12.3% $17.67
Projected 1997 11.0% $19.73
</TABLE>
- -------------------------
Source: CB Commercial Real Estate Group, Inc./Torto Wheaton Research.
(1) Torto Wheaton Research defines the Torto Wheaton (TW) Rent Index as a
"statistically computed dollar value for a five year, 10,000 [square] foot
lease for an existing average building in the statistical average of the
metro or submarket area." The TW Rent Index and vacancy rate in the chart
above represent the weighted average of the TW Rent Index for the 25 largest
markets of EOP and Beacon excluding New Orleans and San Antonio which are
not covered by Torto Wheaton Research.
127
<PAGE> 138
Since the early 1990s, the real estate office market has been characterized
by declining new construction completions and continued moderate demand from
tenants. These dynamics have brought about improved rental rates, occupancies
and values. Since the early 1990s, when vacancy for all office space in the 25
largest office markets of EOP and Beacon peaked at approximately 20%, it has
steadily declined. For these 25 markets, the overall vacancy rate as of June 30,
1997 for all office space is currently approximately 11.5%, and the vacancy rate
for Class A office buildings is 9.0%. EOP believes that over the long term the
demand and rental rates for well located, institutional quality office space
will continue to increase and will remain competitive with new construction.
EOP'S AND BEACON'S 25 LARGEST MARKETS -- NET ABSORPTION (1),
COMPLETIONS AND VACANCY RATES
[BAR GRAPH]
<TABLE>
<CAPTION>
Year Net Absorption Completions Vacancy Rate
- ------------------------------------------------------------------------
<S> <C> <C> <C>
1988 62,566 65,172 18.0%
1989 57,682 68,868 18.0%
1990 41,719 59,239 18.6%
1991 26,645 33,221 18.8%
1992 21,049 18,290 18.5%
1993 31,256 3,273 17.0%
1994 32,151 1,276 15.5%
1995 29,031 3,491 14.1%
1996 40,490 5,948 12.4%
2nd Qtr 1997 23,349 5,711 11.5%
</TABLE>
- -------------------------
Source: CB Commercial Real Estate Group, Inc./Torto Wheaton Research and, in the
case of New Orleans, Jamison Research, Inc., and in the case of San Antonio,
Baxter Southwest Corporate Realty Services.
(1) CB Commercial Real Estate Group, Inc./Torto Wheaton Research defines net
absorption as the net change in multi-tenant occupied stock, in square feet,
during that period.
128
<PAGE> 139
FOR THE 25 LARGEST MARKETS OF EOP AND BEACON (ON A COMBINED BASIS)
VACANCY RATES OF CLASS A OFFICE SPACE
COMPARED TO VACANCY RATES FOR ALL OFFICE SPACE AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
VACANCY RATE FOR
CLASS A OFFICE VACANCY RATE FOR
MARKET SPACE ALL OFFICE SPACE
- ------ ---------------- ----------------
<S> <C> <C>
Los Angeles, CA............................................. 15.3% 17.8%
New Orleans, LA............................................. 12.1 19.4
Indianapolis, IN............................................ 11.3 13.2
Philadelphia, PA............................................ 10.7 11.9
New York, NY................................................ 10.4 11.4
Dallas, TX.................................................. 10.1 15.3
Columbus, OH................................................ 10.0 8.7
Fairfield County (Stamford), CT............................. 9.2 13.1
Chicago, IL................................................. 8.4 13.2
Cleveland, OH............................................... 8.2 13.2
Houston, TX................................................. 8.0 16.3
Atlanta, GA................................................. 7.9 9.8
San Diego, CA............................................... 7.9 11.5
Washington, D.C............................................. 7.9 7.7
Austin, TX.................................................. 7.2 8.3
Denver, CO.................................................. 7.0 8.9
Tampa, FL................................................... 6.4 10.1
San Antonio, TX............................................. 6.3 11.2
Orange County, CA........................................... 6.2 10.6
Phoenix, AZ................................................. 5.6 9.2
Orlando, FL................................................. 5.3 6.2
Boston, MA.................................................. 5.1 6.6
San Francisco, CA........................................... 4.9 5.5
Charlotte, NC............................................... 4.5 7.0
San Jose, CA................................................ 2.4 2.3
----- -----
All 25 markets.................................... 9.0% 11.5%
===== =====
</TABLE>
- ---------------
Source: CB Commercial Real Estate Group, Inc./Torto Wheaton Research and in the
case of New Orleans, Jamison Research, Inc. and, in the case of San
Antonio, Baxter Southwest Corporate Realty Services.
EOP believes that office markets across the country are in a recovery.
Given prospects for limited new development and continued growth in office
demand, EOP believes that the office market recovery will continue for the
foreseeable future and will lead to increased rental rates and reduced
concessions in most office markets across the country. Based upon information
published by CB Commercial Real Estate Group, Inc./Torto Wheaton Research, it is
estimated that finance, insurance and real estate and office-based employment
account for approximately 70% of the total U.S. primary office employment.
Additionally, employment projections for the years 1996 through 2000 anticipate
continued growth in U.S. employment with office-based employment growing at
approximately 2.2% compared to total U.S. employment growth of approximately
1.4% per annum.
129
<PAGE> 140
MANAGEMENT
TRUSTEES AND EXECUTIVE AND SENIOR OFFICERS
The EOP Board currently consists of nine trustees, two-thirds of whom are
not employees or affiliates of EOP or the Equity Group. The EOP Board is divided
into three classes of trustees. The initial terms of the first, second and third
classes will expire in 1998, 1999 and 2000, respectively. Beginning in 1998,
trustees of each class will be chosen for three-year terms upon the expiration
of their current terms and each year one class of trustees will be elected by
the shareholders. EOP believes that classification of the EOP Board will help to
assure the continuity and stability of EOP's business strategies and policies as
determined by the EOP Board. Holders of EOP Common Shares will have no right to
cumulative voting in the election of trustees. Consequently, at each annual
meeting of shareholders, the holders of a majority of the EOP Common Shares will
be able to elect all of the successors of the class of trustees whose terms
expire at that meeting.
Information concerning the trustees, the proposed trustees and executive
and senior officers of EOP is set forth below.
<TABLE>
<CAPTION>
NAME AGE OFFICES HELD
- ---- --- ------------
<S> <C> <C>
Samuel Zell................................ 56 Chairman of the Board, Trustee (term will
expire in 1998)
Timothy H. Callahan........................ 47 President, Chief Executive Officer, Trustee
(term will expire in 1999)
Gary A. Beller............................. 51 Executive Vice President -- Parking
Facilities
Richard D. Kincaid......................... 36 Executive Vice President, Chief Financial
Officer
Michael A. Steele.......................... 51 Executive Vice President -- Real Estate
Operations
Stanley M. Stevens......................... 48 Executive Vice President, Chief Legal
Counsel and Secretary
David H. Crawford.......................... 41 Senior Vice President -- Administration
and General Counsel for Property Operations
Sybil J. Ellis............................. 44 Senior Vice President -- Acquisitions
Frank Frankini............................. 42 Senior Vice President -- Design &
Construction
Jeffrey L. Johnson......................... 38 Senior Vice President -- Investments
Peter D. Johnston.......................... 40 Senior Vice President -- National Accounts
Frances P. Lewis........................... 44 Senior Vice President -- Corporate
Communications
Diane M. Morefield......................... 39 Senior Vice President -- Finance/Capital
Markets
David H. Naus.............................. 42 Senior Vice President -- Acquisitions
Michael E. Sheinkop........................ 35 Senior Vice President -- Portfolio
Management
Sheli Z. Rosenberg......................... 55 Trustee (term will expire in 2000)
Thomas E. Dobrowski........................ 54 Trustee (term will expire in 1998)
James D. Harper, Jr........................ 63 Trustee (term will expire in 1999)
Peter Linneman............................. 46 Trustee (term will expire in 2000)
Jerry M. Reinsdorf......................... 61 Trustee (term will expire in 1998)
William M. Goodyear........................ 49 Trustee (term will expire in 1999)
David K. McKown............................ 59 Trustee (term will expire in 2000)
Alan M. Leventhal(1)....................... 45 Proposed Trustee (term proposed to expire
2002)
Edwin N. Sidman(1)......................... 54 Proposed Trustee (term proposed to expire
in 2001)
</TABLE>
- -------------------------
(1) After the Effective Time, the trustees of EOP who were trustees immediately
prior thereto will continue to serve for the balance of their unexpired
terms. In addition, Alan M. Leventhal, President, Chief Executive Officer
and a director of Beacon, and Edwin N. Sidman, Chairman of the Board of
Directors of
130
<PAGE> 141
Beacon, will become trustees of EOP with terms expiring at the first
annual meeting of the shareholders of EOP with respect to which notice is
mailed subsequent to the effective time of the Merger. EOP has agreed that
Messrs. Leventhal and Sidman will thereafter be re-nominated as trustees
for terms expiring at the annual meetings of shareholders in 2002 and
2001, respectively. In addition, in the event that Mr. Zell ceases to be
Chairman of the EOP Board prior to the Effective Time, the EOP Board will
designate Mr. Leventhal as Chairman of the EOP Board for a term consisting
of at least twelve consecutive months (subject to Mr. Leventhal remaining
a trustee during such twelve-month period).
Samuel Zell has been a Trustee and Chairman of the Board of EOP since
October, 1996. For more than five years, Mr. Zell has served as Chairman of the
Board of Directors of Equity Group Investments, Inc. ("EGI"), an owner, manager
and financier of real estate and corporations. For more than five years, Mr.
Zell has served as Chairman of the Board of Directors of Anixter International
Inc., a provider of integrated network and cabling solutions ("Anixter"),
American Classic Voyages Co., an owner and operator of cruise lines ("ACV"),
Manufactured Home Communities, Inc. ("MHC"), a real estate investment trust
specializing in the ownership and management of manufactured home communities,
and as Chairman of the Board of Directors and Chief Executive Officer of Capsure
Holdings Corp., a holding company whose principal subsidiaries are specialty
property and casualty insurers ("Capsure"). Since February 1993, Mr. Zell has
served as a director of Sealy Corporation, a maker of bedding and related
products ("Sealy"). Since March 1993, Mr. Zell has served as Chairman of the
Board of Trustees of Equity Residential Properties Trust ("EQR"), an owner and
operator of multifamily residential properties. Since January 1995, Mr. Zell has
served as a director of TeleTech Holdings, Inc., a provider of telephone and
computer based customer care solutions. Since March 1995, Mr. Zell has served as
a director of Quality Food Centers, Inc., an independent supermarket chain
("QFC"). Since April 1996, Mr. Zell has served as a director of Ramco Energy
plc, an independent oil company based in the United Kingdom. Since March 1997,
Mr. Zell has served as a director of Chart House Enterprises, Inc., an owner and
operator of restaurants. Since April 1997, Mr. Zell has served as the Chairman
of the Board of Directors of Jacor Communications, Inc., an owner of radio
stations ("Jacor").
Timothy H. Callahan has been a Trustee and Chief Executive Officer and
President of EOP since October 1996. Mr. Callahan served on the Board of
Managers and has been the Chief Executive Officer of EOH, and Equity Office
Properties, L.L.C., a property manager of office buildings ("EOP LLC"), from
August 1996 until October 1997. Mr. Callahan was Executive Vice President and
Chief Financial Officer of EGI from January 1995 until August 1996, was
Executive Vice President of EGI from November 1994, through January 1995 and was
Senior Vice President of EGI from July 1992, until November 1994. Mr. Callahan
was Vice President -- Finance of the Edward J. DeBartolo Corporation, a
developer, owner and operator of shopping centers, in Youngstown, Ohio from July
1988 until July 1992. Mr. Callahan was employed by Chemical Bank, a commercial
bank located in New York City, from July 1973 until March 1987.
Gary A. Beller has been Executive Vice President of EOP since March 1997.
Mr. Beller has been President of Equity Capital Holdings L.L.C., the general
partner of Equity Capital Holdings, L.P., an asset manager of parking
facilities, since August 1997. Mr. Beller has been President of Equity Hotel
Properties, Inc., a subsidiary of EGI which manages hotels, since November 1993.
Mr. Beller was Senior Vice President -- Redevelopment of Equity Assets
Management, Inc., a former subsidiary of EGI which provided real estate asset
management services ("EAM") from October 1987 until March 1997.
Richard D. Kincaid has been Executive Vice President and Chief Financial
Officer of EOP since March 1997 and was Senior Vice President and Chief
Financial Officer of EOP from October 1996 until March 1997. Mr. Kincaid was
Senior Vice President and Chief Financial Officer of EOH from July 1995 until
October 1997. Mr. Kincaid was Senior Vice President of EGI from February 1995
until July 1995. Mr. Kincaid was Senior Vice President of the Yarmouth Group, a
real estate investment company in New York, New York, from August 1994 until
February 1995. Mr. Kincaid was Senior Vice President -- Finance for EGI from
December 1993 until July 1994. Mr. Kincaid was Vice President -- Finance for EGI
from August 1990 until December 1993. Mr. Kincaid was Vice President for
Barclays Bank PLC, a commercial bank located in Chicago, Illinois from August
1987 until August 1990.
131
<PAGE> 142
Michael A. Steele has been Executive Vice President -- Real Estate
Operations for EOP since October 1996. Mr. Steele has been President and Chief
Operating Officer of EOP LLC from July 1995 until October 1997. Mr. Steele was
Executive Vice President of EOH from July 1995 until October 1997. Mr. Steele
was President and Chief Operating Officer of Equity Office Properties, Inc., a
subsidiary of EGI which provided real estate property management services ("EOP
Inc."), from November 1993 through October 1995. Mr. Steele was President and
Chief Executive Officer of First Office Management, a former division of Equity
Property Management, Inc. that provided real estate property management services
("FOM"), from June 1992 until October 1993. Mr. Steele was Senior Vice President
and regional director for Rubloff, Inc., a full service real estate company in
Chicago, Illinois, from April 1987 until June 1992.
Stanley M. Stevens has been Executive Vice President, Chief Legal Counsel
and Secretary of EOP since October 1996. Mr. Stevens was Executive Vice
President and General Counsel of EOH from September 1996 until October 1997. Mr.
Stevens was a vice president of Rosenberg & Liebentritt, P.C., a law firm in
Chicago, Illinois, from December 1993 until September 1996. Mr. Stevens was a
partner at Rudnick & Wolfe, a national law firm based in Chicago, Illinois, from
October 1987 until December 1993.
David H. Crawford has been Senior Vice President -- Administration, General
Counsel for Property Operations and Assistant Secretary of EOP since March 1997.
Mr. Crawford was Senior Vice President and Associate General Counsel of EOH from
September 1996 until October 1997. Mr. Crawford was Senior Vice President and
General Counsel of EOH from July 1995 until September 1996 and of EOP LLC from
September 1996 until October 1997. Mr. Crawford was Of Counsel to Rosenberg &
Liebentritt, P.C. from February 1991 until December 1996. Mr. Crawford was
Senior Vice President and General Counsel of EOP Inc. from November 1993 until
July 1995. Mr. Crawford was Vice President and General Counsel of FOM from
February 1991 until November 1993. Mr. Crawford was an associate at Kirkland &
Ellis, a national law firm based in Chicago, Illinois, from June 1988 until
February 1991.
Sybil J. Ellis has been Senior Vice President -- Acquisitions of EOP since
March 1997. Ms. Ellis was Senior Vice President -- Acquisitions of EOH from July
1995 until October 1997. Ms. Ellis was Senior Vice President -- Acquisitions of
EOP Inc. from July 1994 through July 1995 and was Vice President -- Acquisitions
of EOP, Inc. from November 1993 until July 1994. Ms. Ellis was Vice
President -- Acquisitions of EAM from March 1990 until October 1993.
Frank Frankini has been Senior Vice President -- Design and Construction of
EOP since March 1997. Mr. Frankini was Senior Vice President -- Design and
Construction of EOP LLC from July 1995 until October 1997. Mr. Frankini was
Senior Vice President -- Engineering and Operations of EOP Inc. from November
1993 until July 1995. Mr. Frankini was Senior Vice President -- Engineering and
Operations of FOM from October 1990 until October 1993. Mr. Frankini was
National Director of Engineering and Operations for Rubloff, Inc., a full
service real estate company in Chicago, Illinois from October 1984 until October
1990.
Jeffrey L. Johnson has been Senior Vice President -- Investments for EOP
since March 1997. Mr. Johnson was Senior Vice President -- Asset Management for
EOH from July 1996 until October 1997. Mr. Johnson was Senior Vice
President -- Acquisitions for EOH from July 1995 until July 1996. Mr. Johnson
was Senior Vice President -- Acquisitions of EOP Inc. from December 1994 until
July 1995 and was Vice President -- Acquisitions of EOP, Inc. from November 1993
until December 1994. Mr. Johnson was Vice President -- Acquisitions of EAM from
September 1990 until October 1993. Mr. Johnson was an Investor and Asset Manager
for Aldrich Eastman Waltch, Inc., a real estate advisor in Boston,
Massachusetts, from August 1987 until August 1990. Mr. Johnson was Senior
Project Manager in the real estate investment group for First Wachovia, Inc., a
commercial bank in Winston-Salem, North Carolina, from July 1983 until August
1987.
Peter D. Johnston has been Senior Vice President -- National Accounts of
EOP since March 1997. Mr. Johnston has been Senior Vice President -- National
Leasing Director of EOP LLC from July 1995 until October 1997. Mr. Johnston was
Senior Vice President -- Marketing and Leasing of EOP Inc. from November 1993
until July 1995. Mr. Johnston was Senior Vice President -- Marketing and Leasing
of FOM from April 1993 until November 1993. Mr. Johnston was a Vice President of
EAM from October 1991 until
132
<PAGE> 143
April 1993. Mr. Johnston was a partner with Trammell Crow Company, a full
service real estate company, in Cincinnati, Ohio from January 1991 until July
1991. Mr. Johnston was a partner with Trammell Crow Company in Columbus, Ohio
from January 1990 until December 1990.
Frances P. Lewis has been Senior Vice President -- Corporate Communications
for EOP since April 1997. Ms. Lewis was Vice President -- Corporate
Communications of EGI from November 1994 until April 1997. Ms. Lewis was Vice
President -- Publications of EGI from September 1988 until October 1994.
Diane M. Morefield has been Senior Vice President -- Finance/Capital
Markets since July 1997. Ms. Morefield was Senior Manager in the Corporate
Finance practice of Deloitte & Touche, a public accounting and consulting firm,
from November 1994 until July 1997. Ms. Morefield was Executive Vice President
of the Fordham Company, a real estate development company located in Chicago,
Illinois, from November 1993 until November 1994. Ms. Morefield was Team Leader
for the Real Estate Group division, in the Midwest, of Barclays Bank PLC, a
commercial bank located in Chicago, Illinois, from 1982 until November 1993.
David H. Naus has been Senior Vice President -- Acquisitions of EOP since
March 1997. Mr. Naus was Senior Vice President -- Acquisitions for EOH from
December 1995 until October 1997. Mr. Naus was Vice President -- Acquisitions of
EOH from July 1995 until December 1995. Mr. Naus was Vice President --
Acquisitions of EOP Inc. from November 1993 until July 1995. Mr. Naus was Vice
President -- Acquisitions of EAM from November 1992 until November 1993. Mr.
Naus was Vice President of EAM from October 1988 until November 1992.
Michael E. Sheinkop has been Senior Vice President -- Portfolio Management
for EOP since March 1997. Mr. Sheinkop was Senior Vice President -- Divisional
Manager of EOH from March 1997 until October 1997. Mr. Sheinkop was Senior Vice
President -- Asset Management of EOH from December 1995 until February 1997. Mr.
Sheinkop was Vice President -- Asset Management of EOH from July 1995 until
December 1995. Mr. Sheinkop was a Vice President -- Asset Management of EOP Inc.
from November 1993 until July 1995. Mr. Sheinkop was Vice President of EAM from
March 1990 until November 1993.
Sheli Z. Rosenberg has been a trustee of EOP since March 1997. Since
November 1994, Ms. Rosenberg has been Chief Executive Officer and President of
EGI. From 1980 until September 1997, Ms. Rosenberg was a principal of the law
firm of, and is currently of counsel to, Rosenberg & Liebentritt, P.C. For more
than five years, Ms. Rosenberg has served on the Board of Directors of each of
the following companies: EGI, AVC, Anixter, and Capsure. Since March 1993, Ms.
Rosenberg has been a trustee of EQR. Since 1994, Ms. Rosenberg has been a
director of Jacor and since April 1997, has served as the Vice Chairman of the
Board of Directors of Jacor. Ms. Rosenberg was a vice president of First Capital
Benefit Administrators, Inc., a wholly owned indirect subsidiary of Great
American Management and Investment, Inc. ("FCBA"), which filed a Chapter 7
Bankruptcy petition on January 3, 1995, resulting in FCBA's liquidation. On
November 15, 1995, an order closing the FCBA bankruptcy case was entered by the
Bankruptcy Court for the Central District of California. Since December 1995,
Ms. Rosenberg has been a director of Sealy. Since March 1996, Ms. Rosenberg has
been a director of QFC. Since August 1986, Ms. Rosenberg has been director of
MHC. Since April 1997, Ms. Rosenberg has been a director of Illinois Power Co.,
a supplier of electricity and natural gas in Illinois, the holding company of
which is Illinova Corp., of which Ms. Rosenberg is also a director. Since May
1997, Ms. Rosenberg has been a director of CVS Corporation, a drugstore chain.
Thomas E. Dobrowski has been a trustee of EOP since July 1997. Since
December, 1994, Mr. Dobrowski has been the managing director of real estate and
alternative investments of General Motors Investment Management Corporation
("GMIMCO"), an investment advisor to several pension funds of General Motors
Corporation ("GM") and its subsidiaries and to several other clients also
controlled by GM. Since March 1993, Mr. Dobrowski has been a director of MHC.
Since April 1994, Mr. Dobrowski has been a director of Red Roofs Inns, Inc., an
owner and operator of hotels. Since May 1997, Mr. Dobrowski has been a director
of Taubman Centers Inc., an equity REIT focused on regional shopping centers.
James D. Harper, Jr. has been a trustee of EOP since July 1997. Since 1982,
Mr. Harper has been president of JDH Realty Co., a real estate development and
investment company. Since 1988, he has been a
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co-managing partner in AH Development, S.E. and AH HA Investments, S.E., special
limited partnerships formed to develop over 400 acres of land in Puerto Rico.
Since May 1993, Mr. Harper has been a trustee of EQR. Since 1993, Mr. Harper has
been a trustee of Urban Land Institute. Since 1997, Mr. Harper has been a
director of Burnham Pacific Properties Inc., a REIT that owns, develops and
manages commercial real estate properties in California. Since June 1997, Mr.
Harper has been a director of American Health Properties, Inc., a REIT
specializing in health care facilities.
Peter Linneman has been a trustee of EOP since July 1997. Dr. Linneman has
been a Professor of Finance and Public Policy at the Wharton School of the
University of Pennsylvania since 1979, the Albert Sussman Professor of Real
Estate at the Wharton School since 1989 and a director of the Wharton Real
Estate Center since 1986. In addition, he is an Urban Land Institute Research
Fellow and a member of the National Association of Real Estate Investment
Trusts. Since 1986, Dr. Linneman has been a trustee of Universal Health Realty
Trust, a REIT that invests in health care and human service related facilities.
Since 1992, Dr. Linneman has been a trustee of Kranzco Realty Trust, a REIT that
owns, develops, operates, leases, manages, and invests in neighborhood and
community shopping centers and free-standing properties. Since 1993, Dr.
Linneman has been a trustee of Gables Residential Properties Trust, a
self-administered, self-managed residential property REIT. Since 1996, Dr.
Linneman has served as a director of Nevada Investment Holdings, a full service
real estate company which focuses on community shopping centers. From 1993 until
1996, Dr. Linneman was Chairman of the Board of Directors of Rockefeller Center
Properties, Inc., a REIT which previously held the first mortgage loan relating
to Rockefeller Center in New York City.
Jerry M. Reinsdorf has been a trustee of EOP since July 1997. For more than
five years, Mr. Reinsdorf has been the Chairman of the Chicago White Sox
baseball team, the Chairman of the Chicago Bulls basketball team, and a partner
of Bojer Financial Ltd., a real estate investment company located in Northbrook,
Illinois. Since 1996, Mr. Reinsdorf has served as a director of LaSalle National
Bank, N.A., a commercial bank in Chicago, Illinois, the holding company of which
is LaSalle National Corporation, of which Mr. Reinsdorf is also a director.
Since 1993, Mr. Reinsdorf has been a trustee of Northwestern University in
Evanston, Illinois.
William M. Goodyear has been a trustee of EOP since July 1997. Since July
1997, Mr. Goodyear has been Chairman of Bank of America, Illinois, the midwest
business development unit of BankAmerica Corporation, a commercial bank. Mr.
Goodyear was Chairman and Chief Executive Officer of Bank of America Illinois, a
subsidiary of BankAmerica Corporation, from September 1994 until June 1997, at
which time it merged with Bank of America NT & SA, a subsidiary of BankAmerica
Corporation. For more than two years prior to September 1994, Mr. Goodyear was a
Vice Chairman and a member of the Board of Directors of Continental Bank
Corporation, the parent company of Continental Bank, N.A., a commercial bank
which merged into Bank of America Illinois in September 1994. Since June 1992,
Mr. Goodyear has been a member of the Board of Trustees of the Museum of Science
and Industry in Chicago, Illinois. Mr. Goodyear has been a member of the Board
of Trustees of the University of Notre Dame since May 1996 and of
Rush-Presbyterian St. Lukes Medical Center in Chicago, Illinois since June 1996.
Mr. Goodyear has been a member of the Advisory Council for the University of
Chicago Graduate School of Business since September 1995.
David K. McKown has been a trustee of EOP since July 1997. Since 1993, Mr.
McKown has been Group Executive of the Diversified Finance and Real Estate
Operating Unit of BankBoston, N.A., a commercial bank. Mr. McKown was director
of Loan Review for BankBoston, N.A. from 1990 until 1993. Mr. McKown serves as a
director of Electrolux Corporation.
Alan M. Leventhal will be appointed as a trustee of EOP upon consummation
of the Mergers. Mr. Leventhal has served as President, Chief Executive Officer
and a director of Beacon since 1994. Mr. Leventhal joined Beacon in 1976 after
receiving a degree in economics from Northwestern University in 1974 and a
Master of Business Administration from the Amos Tuck School of Business
Administration at Dartmouth College in 1976. Mr. Leventhal is a trustee of the
Beth Israel Corporation, trustee of Boston University, trustee of the New
England Aquarium Corporation and a member of the Visiting Committee of
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the College of Arts and Sciences at Northwestern University. He is also a member
of the Board of Overseers of WGBH and the Museum of Science. Mr. Leventhal is
the brother-in-law of Edwin N. Sidman.
Edwin N. Sidman will be appointed as a trustee of EOP upon consummation of
the Mergers. Mr. Sidman has served as the Chairman of the Board and a director
of Beacon since 1994. He is currently the Managing Partner of The Beacon
Companies. Prior to joining Beacon in 1971, Mr. Sidman practiced law with the
predecessor to the firm of Rubin and Rudman in Boston. Mr. Sidman graduated from
the University of Michigan and holds a law degree from Harvard University. Mr.
Sidman's professional affiliations include service as Senior Vice Chairman of
the National Realty Committee. Mr. Sidman's civic commitment includes being a
past Chairman of the Combined Jewish Philanthropies of Greater Boston, a member
of the Board of Trustees of Duke University, a member of the Board of Directors
and Executive Committee for the United Way of Massachusetts Bay, a member of the
Executive Committee of the Artery Business Committee and a member of the Board
of The Friends of Post Office Square. Mr. Sidman is the brother-in-law of Alan
M. Leventhal.
COMMITTEES OF THE EOP BOARD
AUDIT COMMITTEE. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of EOP's internal accounting
controls. The members of the Audit Committee, Messrs. Dobrowski, Goodyear and
Reinsdorf, will continue to serve on the Audit Committee after the Merger.
EXECUTIVE COMMITTEE. The Executive Committee has the authority within
certain parameters to acquire, dispose of and finance investments for EOP
(including the issuance by EOP Partnership of additional EOP Partnership Units
or other equity interests) and approve the execution of contracts and
agreements, including those related to the borrowing of money by EOP, and
generally exercise all other powers of the EOP Board except as prohibited by
law. The members of the Executive Committee, Messrs. Zell, Callahan and
Linneman, will continue to serve on the Executive Committee after the Merger.
COMPENSATION COMMITTEE. The Compensation Committee determines compensation
for EOP's executive officers. The Compensation Committee reviews and makes
recommendations concerning proposals by management with respect to compensation,
bonus, employment agreements and other benefits and policies respecting such
matters for the executive officers of EOP. The members of the Compensation
Committee, Ms. Rosenberg and Messrs. Harper and McKown will continue to serve on
the Compensation Committee after the Merger.
The EOP Board does not have a nominating committee and the entire EOP Board
will perform the function of such a committee.
COMPENSATION OF THE EOP BOARD; PAYMENT IN EOP COMMON SHARES
EOP pays its non-employee trustees an annual fee of $40,000. In addition,
non-employee trustees who serve on the Audit Committee, Executive Committee or
Compensation Committee receive an additional $1,000 per annum for each committee
on which they serve. Committee chairs receive an additional $500 per annum.
These fees have been and generally are expected to be paid in EOP Common Shares.
Trustees who are employees of EOP are not paid any trustees' or committee fees.
EOP reimburses its trustees for travel expenses incurred in connection with
their activities on behalf of EOP. After EOP's IPO, each trustee (other than
Messrs. Zell and Callahan and Ms. Rosenberg) received a grant of options to
purchase 10,000 EOP Common Shares at the IPO price. Under EOP's 1997 Share
Option and Share Award Plan (the "Employee Plan"), each trustee then in office
(including Messrs. Zell and Callahan and Ms. Rosenberg for the years after 1997)
will receive an annual grant of options to purchase 10,000 EOP Common Shares at
the then current market price on the date of the meeting of the EOP Board held
immediately after the annual meeting of the EOP Shareholders. These grants of
options to purchase 10,000 EOP Common Shares will vest as follows:
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options for 3,333 EOP Common Shares will vest six months after the grant date,
options for an additional 3,333 EOP Common Shares will vest on the anniversary
of the grant date, and options for the remaining 3,334 EOP Common Shares will
vest on the second anniversary of the grant date. Trustees who perform other
functions for EOP may receive additional options under the Employee Plan.
EXECUTIVE COMPENSATION
The following table sets forth the annual base salary levels and options
and restricted share awards granted in 1997 to EOP's Chief Executive Officer and
EOP's four other most highly paid executive officers (the "Named Executive
Officers"). Information for 1996 is not presented because EOP had no operations
during such period and the Named Executive Officers were employed by other
affiliated entities, as well as by the EOP Predecessors.
<TABLE>
<CAPTION>
RESTRICTED
1997 BASE OPTIONS SHARE
NAME TITLE SALARY(1) ALLOCATED(2) AWARDS(3)
- ---- ----- --------- ------------ ----------
<S> <C> <C> <C> <C>
Timothy H. Callahan..... President and Chief Executive Officer $600,000 200,000 85,000
Gary A. Beller.......... Executive Vice President -- Parking Facilities 300,000 100,000 0
Richard D. Kincaid...... Executive Vice President, Chief Financial 235,000 150,000 17,000
Officer
Michael A. Steele....... Executive Vice President -- Real Estate 265,000 150,000 17,000
Operations
Stanley M. Stevens...... Executive Vice President, Chief Legal Counsel 325,000 150,000 0
</TABLE>
- ---------------
(1) Does not include bonuses that may be paid to the above individuals. See
"-- Incentive Compensation" below.
(2) At the time of the IPO, options to purchase EOP Common Shares equal to
approximately 2.56% of EOP's outstanding EOP Common Shares (calculated on a
fully diluted basis) were granted to officers, employees and consultants of
EOP under the EOP Employee Plan at a price equal to the IPO price. Such
grants included grants to Mr. Zell and Ms. Rosenberg of options to purchase
200,000 and 50,000 EOP Common Shares, respectively, at the IPO price which
will vest in three equal annual installments (rounded to the nearest whole
EOP Common Share) over three years. See "-- Option and Restricted Share
Plan" below.
(3) On September 22, 1997, the Compensation Committee of EOP's Board granted
restricted EOP Common Shares to certain of EOP's executive officers pursuant
to its Employee Plan. Mr. Callahan was granted an award of 85,000 restricted
EOP Common Shares, and Mr. Steele and Mr. Kincaid were each granted an award
of 17,000 restricted EOP Common Shares. These share awards will vest over
the five-year period following the date of grant (50% after year three, 25%
after year four, and 25% after year five).
OPTION GRANTS IN FISCAL-YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL COMMON SHARE PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE PRICE OPTION TERM(1)
OPTIONS EMPLOYEES IN PER COMMON EXPIRATION --------------------------
NAME GRANTED(2) FISCAL YEAR SHARE(3) DATE 5%(4) 10%(5)
- ---- ---------- ------------ -------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Timothy H.
Callahan........... 200,000 4.9% $21.00 July 7, 2007 $2,641,000 $6,694,000
Gary A. Beller....... 100,000 2.4 21.00 July 7, 2007 1,321,000 3,347,000
Richard D. Kincaid... 150,000 3.7 21.00 July 7, 2007 1,981,000 5,020,000
Michael A. Steele.... 150,000 3.7 21.00 July 7, 2007 1,981,000 5,020,000
Stanley M. Stevens... 150,000 3.7 21.00 July 7, 2007 1,981,000 5,020,000
</TABLE>
- ---------------
(1) In accordance with the rules of the Commission, these amounts are the
hypothetical gains or "option spreads" that would exist for the respective
options based on assumed rates of annual compound share price appreciation
of 5% and 10% from the date the options were granted over the full option
term. No
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gain to the optionee is possible without an increase in the price of EOP
Common Shares, which would benefit all shareholders.
(2) All options are granted at the fair market value of the EOP Common Shares at
the date of grant. Options granted are for a term of not more than ten years
from the date of grant and vest in three equal annual installments (rounded
to the nearest whole EOP Common Share) over three years.
(3) Based on the IPO price.
(4) An annual compound share price appreciation of 5% from the IPO price of
$21.00 per EOP Common Share yields a price of $34.21 per EOP Common Share.
(5) An annual compound share price appreciation of 10% from the IPO price of
$21.00 per EOP Common Share yields a price of $54.47 per EOP Common Share.
OPTION AND RESTRICTED SHARE PLAN
In July 1997, EOP adopted the Employee Plan for the purpose of attracting
and retaining highly qualified executive officers, trustees, employees and
consultants. EOP has reserved EOP Common Shares for issuance pursuant to the
Employee Plan. In connection with the establishment of the Employee Plan, EOP
granted additional options to purchase EOP Common Shares to certain officers,
trustees, employees and consultants of EOP at the IPO price.
Grants under the Employee Plan have been and will continue to be exempt
under Rule 16b-3 under the Exchange Act. The Employee Plan is administered by
the Compensation Committee and provides for the granting of share options, share
appreciation rights or restricted shares with respect to up to 6.8% of EOP's
outstanding EOP Common Shares (calculated on a fully diluted basis) to executive
or other employees of EOP. Share options may be granted in the form of
"incentive stock options" (as defined in Section 422 of the Code), or
non-statutory share options, and are exercisable for up to 10 years following
the date of the grant. The exercise price of each option will be set by the
Compensation Committee; provided, however, that the price per share must be
equal to or greater than the fair market value of the EOP Common Shares on the
grant date.
The Employee Plan also provides for the issuance of share appreciation
rights which will generally entitle a holder to receive cash or shares, as
determined by the Compensation Committee at the time of exercise, equal to the
difference between the exercise price and the fair market value of the EOP
Common Shares. In addition, the Employee Plan permits EOP to issue restricted
EOP Common Shares to executive or other key employees upon such terms and
conditions as shall be determined by the Compensation Committee in its sole
discretion.
401(K) PLAN
EOP intends to establish the Equity Office Properties Trust Section 401(k)
Savings/Retirement Plan (the "401(k) Plan") to cover eligible employees of EOP
and any designated affiliate.
The 401(k) Plan will permit eligible employees of EOP to defer up to 16% of
their annual compensation, subject to certain limitations imposed by the Code.
The employees' elective deferrals are immediately vested and nonforfeitable upon
contribution to the 401(k) Plan.
SUPPLEMENTAL RETIREMENT SAVINGS PLAN
In November 1997, the Compensation Committee of EOP adopted the EOP
Supplemental Retirement Savings Plan (the "SRP") for employees of EOP with
annual compensation in excess of $100,000.
The SRP permits eligible employees to defer a portion of their annual
compensation in excess of that permitted under the 401(k) Plan for retirement
and certain educational expenses of their children.
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EMPLOYEE SHARE PURCHASE PLAN
In July 1997, EOP adopted its 1997 Non-Qualified Employee Share Purchase
Plan (the "Purchase Plan") for the purpose of attracting and retaining highly
qualified executive officers, trustees and employees. EOP has reserved EOP
Common Shares for issuance pursuant to the Purchase Plan.
The Purchase Plan is qualified under Rule 16b-3 under the Exchange Act. The
Purchase Plan will be administered by the Compensation Committee and allows
eligible employees and trustees to acquire an interest in EOP through the
purchase of EOP Common Shares from EOP at a discount from fair market value. A
total of 2,000,000 EOP Common Shares (subject to adjustment for share splits,
share distributions, recapitalizations or other corporate restructurings) have
been reserved for issuance under the Purchase Plan.
EOP Common Shares will be offered under the Purchase Plan in semi-annual
offering periods. Eligible employees and trustees who elect to participate in
the Purchase Plan will be able to use funds accumulated through cash
contributions or payroll deductions to purchase EOP Common Shares at a price
less than the fair market value of the EOP Common Shares on the date of
purchase.
INCENTIVE COMPENSATION
EOP intends to establish an incentive compensation plan for key officers of
EOP and its subsidiaries and affiliates. This plan will provide for payment of
cash bonuses to participating officers after evaluating the officer's
performance and the overall performance of EOP. The Chief Executive Officer will
make recommendations to the Compensation Committee of the EOP Board, which will
make the final determination for the award of bonuses. The Compensation
Committee will determine such bonuses, if any, for the Chief Executive Officer.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Title 8 of the Corporations and Associations Article of the Annotated Code
of Maryland, as amended (the "Maryland REIT Law") permits a Maryland real estate
investment trust to include in its declaration of trust a provision limiting the
liability of its trustees and officers to the trust and its shareholders for
money damages except for liability resulting from (a) actual receipt of an
improper benefit or profit in money, property or services or (b) active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Declaration of Trust contains such a provision which
eliminates such liability to the maximum extent permitted by the Maryland REIT
Law.
The Declaration of Trust authorizes EOP, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former trustee or officer or (b) any individual who, while a trustee of EOP and
at the request of EOP, serves or has served as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise from and against any claim
or liability to which such person may become subject or which such person may
incur by reason of his or her status as a present or former trustee or officer
of EOP. The EOP Bylaws obligate EOP, to the maximum extent permitted by Maryland
law, to indemnify (a) any trustee, officer or shareholder or any former trustee,
officer or shareholder (including any individual who, while a trustee, officer
or shareholder and at the express request of EOP, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, shareholder, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) who has been successful, on the merits or otherwise, in the defense
of a proceeding to which he was made a party by reason of service in such
capacity, against reasonable expenses incurred by him in connection with the
proceeding or (b) any trustee or officer or any former trustee or officer
against any claim or liability to which he may become subject by reason of such
status.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for
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directors and officers of Maryland corporations. The MGCL permits a corporation
to indemnify its present and former directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. The foregoing limitations on indemnification are expressly set forth
in the EOP Bylaws. However, under the MGCL, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that a personal benefit
was improperly received, unless, in either case, a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
The EOP Partnership Agreement also provides for indemnification of EOP and
its officers and trustees to the same extent that indemnification is provided to
officers and trustees of EOP in its Declaration of Trust, and limits the
liability of EOP and its officers and trustees to EOP Partnership and its
respective partners to the same extent that the liability of the officers and
trustees of EOP to EOP and its shareholders is limited under the Declaration of
Trust.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
EOP has entered into indemnification agreements with each of its trustees
and executive officers. The indemnification agreements require, among other
things, that EOP indemnify its trustees and executive officers to the fullest
extent permitted by law and advance to the trustees and executive officers all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. Under these agreements, EOP must also
indemnify and advance all expenses incurred by trustees and executive officers
seeking to enforce their rights under the indemnification agreements and may
cover trustees and executive officers under EOP's trustees and officers'
liability insurance. Although the form of indemnification agreement offers
substantially the same scope of coverage afforded by law, as a traditional form
of contract it may provide greater assurance to trustees and executive officers
that indemnification will be available. In addition, Mr. Dobrowski will be
indemnified by GMIMCO and will be covered by an insurance policy maintained by
GM, of which GMIMCO is a subsidiary, in connection with serving on the EOP
Board.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the transactions that are expected to occur in connection
with the Merger, which are described in the section "THE MERGER -- Interests of
Certain Persons in the Mergers" and the transactions that occurred in connection
with the organization of EOP, which are described in the section entitled
"BUSINESS OF EOP -- Formation Transactions" above, the following transactions
have occurred.
SALE OF EOP COMMON SHARES TO MR. ZELL
Prior to EOP's IPO, EOP sold 1,000 unregistered EOP Common Shares to Mr.
Zell for a purchase price of $25.00 per EOP Common Share. In addition, pursuant
to certain option agreements, ZFT Partnership, a partnership comprised of
certain trusts established for the benefit of the family of Mr. Zell, acquired
for cash from certain unaccredited investors in the ZML REITs the interests
owned by them in such ZML REITs. ZFT Partnership paid approximately $32,400 for
such interests which, upon consummation of the IPO, represented approximately
1,543 EOP Common Shares.
LEASES AND PARKING OPERATIONS
EOP leases office space owned by Two North Riverside Plaza Joint Venture, a
partnership comprised of trusts, established for the benefit of the families of
Mr. Zell and Mr. Lurie, at Two North Riverside Plaza, Chicago, Illinois 60606.
In addition, EGI, an entity owned by the Equity Group Owners, and its affiliates
have in the past provided EOP and its predecessors with certain administrative,
office facility services and other services with respect to certain aspects of
EOP's business, including, but not limited to, financial and accounting
services, tax services, investor relations, and other services. EOP paid
approximately $12,786,000 during the year ended December 31, 1996 and expects to
pay in the aggregate approximately $9,600,000 to EGI and its affiliates during
1997 for such office space and services, which amount is calculated to
approximate a market rental rate for the office space and the actual cost of
providing these services. The independent members of the EOP Board will annually
review and approve the rates charged by EGI for services rendered to EOP.
EQR and certain other affiliates of EOP lease space in certain of the
Office Properties. The terms of the leases are consistent with terms of
unaffiliated tenants' leases. Total rents and other amounts paid by affiliates
under their respective leases were approximately $4,081,200, $2,272,800,
$3,471,500 and $2,657,500 for the nine months ended September 30, 1997 and 1996,
and the years ended December 31, 1996 and 1995, respectively.
SZ Parking Limited Partnership, an affiliate of the Equity Group Owners,
has an indirect 10% limited partnership interest in Standard Parking Limited
Partnership ("SPLP") which manages the parking operations of certain EOP Office
Properties. Management believes amounts paid to SPLP are equivalent to market
rates for such services.
EOP entered into various lease agreements with SPLP or affiliates of SPLP
whereby SPLP or its affiliates leased the North Loop Transportation Center
Parking Facility, the Milwaukee Center Parking Garage, the Boston Harbor Garage
and the Adams and Wabash Garage from EOP. Certain of these lease agreements
provide SPLP or its affiliates with annual successive options to extend the term
of the lease through various dates. The rent paid for the nine months ended
September 30, 1997 and 1996, and in the years ended December 31, 1996 and 1995
under these lease agreements was approximately $7,888,700, $2,334,600,
$3,161,500 and $1,691,600, respectively. The annual rent to be paid to EOP for
1997 is approximately $11,049,000. In addition, EOP may receive additional rent
based upon actual gross revenues generated by these Parking Facilities. In
accordance with certain of these leases, EOP may be obligated to make an early
termination payment if agreement is not reached as to rent amounts to be paid.
EQUITY GROUP DISTRIBUTIONS AND FEES
The partners of the ZML Partners, affiliates of the Equity Group Owners,
have received distributions and fees from EOP through their ownership interests
in the ZML Partners of approximately $8,603,600 for
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the year ended December 31, 1996 and received distributions and fees of
approximately $22,646,100 for the nine months ended September 30, 1997.
MISCELLANEOUS
As described under "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of EOP as
a REIT -- General," in March 1997 the ZML Partners of ZML Opportunity
Partnerships I and II made certain payments to the IRS in connection with
closing agreements pursuant to which the IRS agreed that neither ZML REIT I nor
ZML REIT II would be disqualified as a REIT as a result of certain technical
violations of the REIT provisions of the Code. The amounts of such payments were
$15,000 and $5,270,000, respectively, for ZML REITs I and II.
EOP Management Corp. has entered into third-party management contracts, on
terms equivalent to third-party transactions, with respect to properties not
owned by EOP but that are owned or controlled by the Equity Group. See "RISK
FACTORS -- Conflicts of Interest in Connection with Formation and Business of
EOP." Income recognized for similar services rendered for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996 and 1995 was
approximately $3,841,000, $3,126,000, $5,120,000, and $5,899,000, respectively.
Rosenberg & Liebentritt, P.C., a law firm in which Ms. Rosenberg, a trustee
of EOP, was a principal until September 11, 1997, and is now of counsel to,
received legal fees from EOP of approximately $1,900,000, $2,461,000, $3,480,500
and $3,230,100 for the nine months ended September 30, 1997 and 1996 and the
years ended December 31, 1996 and 1995, respectively.
Certain services for EOP's tenants that may not be permissibly undertaken
by a REIT are conducted through a service corporation owned entirely by
affiliates of the Equity Group Owners. EOP pays such service corporation a fee
for such services. EOP has no control over, or ownership interest in, such
service corporation, which operates as an independent contractor. EOP may
terminate such services at any time upon 30-days notice.
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EOP POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the policies with respect to investments,
financing and certain other activities of EOP Partnership and EOP. These
policies are determined by the EOP Board and may be amended or revised from time
to time at the discretion of the EOP Board without notice to or a vote of the
EOP Shareholders, or the limited partners of EOP Partnership, except that
changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. All of the
investment activities of EOP are conducted through EOP Partnership. EOP's
investment objectives are to increase cash flow and the value of the Properties,
and to acquire established income-producing office and parking properties with
cash flow growth potential. Additionally, where prudent and possible, EOP will
seek to upgrade the existing EOP Properties and any newly acquired office
properties. EOP's business will be focused on office properties and will include
parking facilities. Where appropriate, and subject to REIT qualification rules,
EOP Partnership may sell certain of its Properties.
EOP expects to pursue its investment objectives through the direct and
indirect ownership of properties and the ownership of interests in other
entities. EOP will focus on properties in those markets where EOP currently has
operations and in new markets targeted by management. See "BUSINESS OF EOP --
Business and Growth Strategies." EOP anticipates that newly acquired properties
will be located in the United States. Future investments, however, including the
activities described below, will not be limited to any geographic area or to a
specified percentage of EOP's assets.
EOP also may participate with other entities in property ownership through
joint ventures or other types of co-ownership. Equity investments may be subject
to existing mortgage financing and other indebtedness or such financing or
indebtedness may be incurred in connection with acquiring investments. Any such
financing or indebtedness will have priority over EOP's equity interest in such
property. Upon consummation of the Merger, EOP will succeed to Beacon's
interests in the Beacon joint ventures properties. See "THE BEACON PROPERTIES."
INVESTMENTS IN REAL ESTATE MORTGAGES. While EOP's emphasis will be on
equity real estate investments, it may, in its discretion, invest in mortgages
on office properties and other similar interests. A portion of EOP's interest in
one EOP Office Property, and in two EOP Parking Facilities, consists of
ownership of the mortgage securing such EOP Properties. EOP does not intend to
invest to a significant extent in mortgages or deeds of trust, but may acquire
mortgages, primarily as a strategy for acquiring ownership of a property or the
economic equivalent thereof, subject to the investment restrictions applicable
to REITs. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for
Qualification as a REIT -- Income Tests Applicable to REITs" and "-- Asset Tests
Applicable to REITs." In addition, EOP may invest in mortgage-related securities
and/or may seek to issue securities representing interests in such
mortgage-related securities as a method of raising additional funds. Upon
consummation of the Merger, EOP will succeed to Beacon's interests in mortgages
on certain properties. See "THE BEACON PROPERTIES."
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Although EOP has no current intention of making
such an investment, EOP also may legally invest in securities of entities
engaged in real estate activities or securities of other issuers, including for
the purpose of exercising control over such entities, subject to the gross
income and asset tests necessary for REIT qualification. EOP may acquire all or
substantially all of the securities or assets of other REITs or similar entities
where such investments would be consistent with EOP's investment policies. In
any event, EOP does not intend that its investments in securities will require
it or EOP Partnership to register as an "investment company" under the 1940 Act.
Upon consummation of the Merger, EOP will succeed to Beacon's interest in
BeaMetFed, a REIT which owns 75-101 Federal Street.
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FINANCING POLICIES
In addition to the limitations on indebtedness which are imposed on EOP
under the Credit Facilities and the Indenture, EOP intends to maintain a Debt to
Market Capitalization Ratio of approximately 50% or less. This policy differs
from conventional mortgage debt-to-equity ratios which are asset-based ratios.
EOP's Debt to Market Capitalization Ratio is equal to the total consolidated and
unconsolidated debt of EOP as a percentage of the market value of outstanding
EOP Common Shares and EOP Partnership Units (not owned by EOP) plus total
consolidated and unconsolidated debt, but excluding (i) all nonrecourse
consolidated debt in excess of EOP's proportionate share of such debt and (ii)
all nonrecourse unconsolidated debt of partnerships in which EOP is a limited
partner. EOP, however, may from time to time re-evaluate this policy and
decrease or increase such ratio in light of then current economic conditions,
relative costs to EOP of debt and equity capital, market values of its
Properties, growth and acquisition opportunities and other factors. There is no
limit on the Debt to Market Capitalization Ratio imposed by either the
Declaration of Trust, the EOP Bylaws or the EOP Partnership Agreement. To the
extent that the EOP Board determines to obtain additional capital, EOP may issue
equity securities, or cause EOP Partnership to issue additional EOP Partnership
Units or debt securities, or retain earnings (subject to provisions in the Code
requiring distributions of taxable income to maintain REIT status), or a
combination of these methods. As long as EOP Partnership is in existence, the
net proceeds of all equity capital raised by EOP will be contributed to EOP
Partnership in exchange for additional interests in EOP Partnership, which will
dilute the ownership interest, if any, of the Equity Group and any other holders
of EOP Partnership Units.
It is EOP's policy that Equity Office Properties Trust will not incur
indebtedness other than short-term trade, employee compensation, distributions
payable or similar indebtedness that will be paid in the ordinary course of
business, and that indebtedness shall instead be incurred by EOP Partnership to
the extent necessary to fund the business activities conducted by EOP
Partnership and its subsidiaries. To the extent that the EOP Board determines to
obtain debt financing in addition to the existing mortgage indebtedness, EOP
intends to do so generally through mortgages on its Properties, the Credit
Facilities and the Proposed Note Offering; however, EOP may cause EOP
Partnership to issue additional debt securities in the future. Such indebtedness
may be recourse, non-recourse or cross-collateralized and may contain
cross-default provisions. The net proceeds of any debt securities issued
directly by EOP (rather than by EOP Partnership) will be lent to EOP Partnership
on substantially the same terms and conditions as are incurred by EOP. EOP does
not have a policy limiting the number or amount of mortgages that may be placed
on any particular property, but mortgage financing instruments usually limit
additional indebtedness on such properties. In the future, EOP may seek to
extend, expand, reduce or renew the Credit Facilities, or obtain new credit
facilities or lines of credit, subject to its general policy on debt
capitalization, for the purpose of making acquisitions or capital improvements
or providing working capital or meeting the taxable income distribution
requirements for REITs under the Code.
LENDING POLICIES
EOP may consider offering purchase money financing in connection with the
sale of EOP Properties where the provision of such financing will increase the
value received by EOP for the property sold.
CONFLICT OF INTEREST POLICIES
OFFICERS AND TRUSTEES OF EOP. Mr. Zell, the Chairman of the EOP Board,
through affiliated entities is engaged in certain office real estate activities,
both inside and outside the markets in which the Properties are located. Mr.
Zell, therefore, may be subject to certain conflicts of interest in fulfilling
his responsibilities to EOP and EOP Shareholders. See "RISK FACTORS -- Conflicts
of Interest in Connection with Formation and Business of EOP." Under Maryland
law, contracts or other transactions between EOP and a trustee (or an entity in
which a trustee has a material financial interest) may be void or voidable.
However, the MGCL provides that any such contract or transaction will not be
void or voidable if (a) it is authorized, approved or ratified, after disclosure
of, or with knowledge of, the common directorship or interest, by the
affirmative vote of a majority of disinterested directors (even if the
disinterested directors constitute less than a quorum) or by the affirmative
vote of a majority of the votes cast by disinterested shareholders entitled to
vote, or (b) it is fair
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and reasonable to the corporation. While the Maryland REIT Law does not have a
comparable provision for trustees, a court may apply the principles of the MGCL
to contracts or transactions between EOP and its trustees. EOP believes that
this procedure and Mr. Zell's non-competition agreement will help to eliminate
or minimize certain potential conflicts of interest. Pursuant to the EOP Bylaws,
without the approval of a majority of the disinterested trustees, EOP and its
Subsidiaries will not (i) acquire from or sell to any trustee, officer or
employee of EOP, or any entity in which a trustee, officer or employee of EOP
owns more than a 1% interest, or acquire from or sell to any affiliate of any of
the foregoing, any assets or other property of EOP or its Subsidiaries, (ii)
make any loan to or borrow from any of the foregoing persons, or (iii) engage in
any other material transaction with any of the foregoing persons. Each
transaction of the type described above will be in all respects on such terms as
are, at the time of the transaction and under the circumstances then prevailing,
fair and reasonable to EOP and its Subsidiaries. The foregoing does not apply to
EOP Management Corp. and will not apply to the Beacon Service Companies.
POLICIES APPLICABLE TO ALL TRUSTEES. Under Maryland law, each trustee is
obligated to offer to EOP any opportunity (with certain limited exceptions)
which comes to him or her and which EOP could reasonably be expected to have an
interest in developing or acquiring. In addition, under Maryland law, any
contract or other transaction between a corporation and any director or any
other corporation, firm or other entity in which the director is a director or
has a material financial interest may be void or voidable unless approved as
described above.
LEASED OFFICE SPACE. EOP leases office space at Two North Riverside Plaza,
Chicago, Illinois 60606, a building that is owned by a single purpose entity
affiliated with the Equity Group Owners. EOP expects to pay in the aggregate
approximately $1.13 million in base rent and escalations during 1997. EOP
believes it is paying fair market rent for this space. The disinterested members
of the EOP Board will annually review and approve the rates charged to EOP for
such office space.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
EOP may, but does not presently intend to, make investments other than as
previously described. All investments will be related to the office property and
parking facility business. EOP will make investments only through EOP
Partnership. EOP will have authority to offer EOP Common Shares or other equity
or debt securities of EOP Partnership in exchange for property and to repurchase
or otherwise reacquire EOP Common Shares or any other securities and may engage
in such activities in the future. Similarly, EOP Partnership may offer
additional EOP Partnership Units or other equity interests in EOP Partnership
that are exchangeable into EOP Common Shares or EOP Preferred Shares, in
exchange for property. EOP Partnership also may make loans to joint ventures in
which it may or may not participate in the future. Neither EOP nor EOP
Partnership will engage in trading, underwriting or the agency distribution or
sale of securities of other issuers. At all times, EOP intends to cause EOP
Partnership to make investments in such a manner as to be consistent with the
requirements of the Code to qualify as a REIT unless, because of circumstances
or changes in the Code (or the regulations promulgated thereunder), the EOP
Board determines that it is no longer in the best interests of EOP to continue
to qualify as a REIT. EOP's policies with respect to such activities may be
reviewed and modified from time to time by the EOP Board without notice to or
the vote of the EOP Shareholders.
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SHARES OF BENEFICIAL INTEREST
The summary of the terms of the shares of beneficial interest of EOP set
forth below does not purport to be complete and is subject to and qualified in
its entirety by reference to the Declaration of Trust and the EOP Bylaws, copies
of which are exhibits to the Registration Statement of which this Joint Proxy
Statement/ Prospectus is a part.
GENERAL
The Declaration of Trust provides that EOP may issue 750 million EOP Common
Shares and 100 million EOP Preferred Shares. Upon completion of the Merger,
268,588,156 EOP Common Shares will be issued and outstanding (or subject to
issuance upon exchange of EOP Partnership Units) and 8,000,000 EOP Preferred
Shares will be issued and outstanding.
Under the Maryland REIT Law, a shareholder is not personally liable for
obligations of EOP solely as a result of his status as a shareholder. The
Declaration of Trust provides that no shareholder shall be liable for any debt,
claim, demand, judgment or obligation of EOP by reason of being a shareholder
nor shall any shareholder be subject to any personal liability in tort, contract
or otherwise to any person in connection with the property or affairs of EOP by
reason of being a shareholder. The EOP Bylaws further provide that EOP will
indemnify any shareholder or former shareholder (a) who has been successful, on
the merits or otherwise, in the defense of a proceeding to which he was made a
party by reason of service in such capacity as shareholder, against reasonable
expenses incurred by him or her in connection with the proceeding; and (b)
against any claim or liability to which he or she may become subject by reason
of such status. In addition, EOP will, without requiring a preliminary
determination of the ultimate entitlement to indemnification, pay or reimburse,
in advance of final disposition of a proceeding, reasonable expenses incurred by
the shareholder or former shareholder made a party to the proceeding by reason
of such status. EOP may, with the approval of the EOP Board, provide such
indemnification or payment or reimbursement of expenses to any shareholder or
former shareholder who served a predecessor of EOP. However, with respect to
tort claims, contractual claims where shareholder liability is not so negated,
claims for taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by EOP. Inasmuch as EOP carries public liability insurance which it
considers adequate, any risk of personal liability to shareholders is limited to
situations in which EOP's assets plus its insurance coverage would be
insufficient to satisfy the claims against EOP and its shareholders.
EOP COMMON SHARES
Upon the approval of the EOP Shareholders, all EOP Common Shares offered
hereby will be duly authorized, fully paid and nonassessable. Subject to the
preferential rights of any other shares of beneficial interest, including
without limitation, the EOP Preferred Shares, and to the provisions of the
Declaration of Trust regarding restrictions on transfers of shares of beneficial
interest, holders of EOP Common Shares are entitled to receive distributions if,
as and when authorized and declared by the EOP Board out of assets legally
available therefor and to share ratably in the assets of EOP legally available
for distribution to EOP Shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of EOP. EOP currently intends to pay regular quarterly
distributions. In order to remain qualified as a REIT under the Code, EOP must
distribute 95% of its taxable income (other than net capital gain) annually. See
"FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification as a
REIT -- Annual Distribution Requirements Applicable to REITs."
Subject to the provisions of the Declaration of Trust regarding
restrictions on transfer of shares of beneficial interest, each outstanding EOP
Common Share entitles the holder to one vote on all matters submitted to a vote
of EOP Shareholders, including the election of trustees, and, except as provided
with respect to any other class or series of shares of beneficial interest,
including without limitation, the EOP Preferred Shares, the holders of EOP
Common Shares will possess the exclusive voting power. There is no cumulative
voting in the election of trustees, which means that the holders of a majority
of the outstanding
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EOP Common Shares can elect all of the trustees then standing for election and
the holders of the remaining shares of beneficial interest, if any, will not be
able to elect any trustees.
Holders of EOP Common Shares have no preferences, conversion, sinking fund,
redemption rights or preemptive rights to subscribe for any securities of EOP.
Subject to the provisions of the Declaration of Trust regarding restrictions on
ownership and transfer, EOP Common Shares have equal distribution, liquidation
and other rights.
Pursuant to the Maryland REIT Law, a Maryland real estate investment trust
generally cannot amend its declaration of trust or merge, unless approved by the
affirmative vote of shareholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the trust's declaration of trust. The Declaration of Trust contains such a
provision providing for a lesser percentage, a majority of outstanding shares
entitled to be cast on the matter, with respect to transactions pursuant to
which EOP's assets will be combined with those of one or more other entities
(whether by merger, sale or other transfer of assets, consolidation or share
exchange).
Under the Maryland REIT Law, a declaration of trust may permit the trustees
by a two-thirds vote to amend the declaration of trust from time to time to
qualify as a REIT under the Code or the Maryland REIT Law without the
affirmative vote or written consent of the shareholders. The Declaration of
Trust permits such action by the EOP Board. Also under the Maryland REIT Law, a
declaration of trust may permit the board of trustees to amend the declaration
of trust to increase the aggregate number of shares of beneficial interest or
the number of shares of any class without shareholder approval. Pursuant to this
statute, the Declaration of Trust authorizes the EOP Board to increase or
decrease the aggregate number of EOP Shares or the number of EOP Shares of any
class of beneficial interest of EOP but requires that such action be approved by
the affirmative vote of a majority of all the votes cast on the matter at a
meeting of shareholders at which a quorum is present, and in certain cases, that
such action be approved by holders of two-thirds of the EOP Preferred Shares
outstanding at the time.
The Declaration of Trust authorizes the EOP Board to reclassify any
unissued EOP Common Shares into other classes or series of beneficial interest
and to establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions or other distributions, qualifications or terms
or conditions of redemption for each such class or series, subject, in certain
cases to the approval of holders of two-thirds of EOP Preferred Shares
outstanding at the time.
PREFERRED SHARES
The Declaration of Trust authorizes the EOP Board to issue 100 million
Preferred Shares, to classify any unissued Preferred Shares and to reclassify
any previously classified but unissued Preferred Shares of any series from time
to time, in one or more series of any shares of beneficial interest, as
authorized by the EOP Board. Prior to issuance of shares of each series, the EOP
Board is required by the Maryland REIT Law and the Declaration of Trust to set,
subject to the provisions of the Declaration of Trust regarding the restriction
on transfer of shares of beneficial interest, the terms, preferences, conversion
or other rights, voting powers, restrictions, limitations as to distributions or
other distributions, qualifications and terms or conditions of redemption for
each such series. As of the date hereof, no preferred shares of beneficial
interest are outstanding. In connection with the Merger, EOP will issue
8,000,000 EOP Preferred Shares in exchange for the 8,000,000 Beacon Preferred
Shares currently outstanding.
EOP PREFERRED SHARES
All EOP Preferred Shares to be issued in the Merger will be duly
authorized, fully paid and non-assessable.
DISTRIBUTIONS. Holders of EOP Preferred Shares shall be entitled to
receive, when and as authorized by the EOP Board, out of funds legally available
for the payment of distributions, cumulative preferential cash distributions at
the rate of 8.98% of the $25.00 liquidation preference per annum (equivalent to
a fixed annual
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amount of $2.245 per share). Such distributions shall be cumulative from the
Effective Time and shall be payable quarterly in arrears on or before March 15,
June 15, September 15 and December 15 of each year or, if not a business day,
the next succeeding business day. Distributions will be computed on the basis of
a 360-day year consisting of twelve 30-day months. Distributions will be payable
to the holders of record of EOP Preferred Shares as they appear in the share
records of EOP at the close of business on the applicable record date, which
shall be the first day of the calendar month in which the applicable
distribution payment date falls or such other date designated by the EOP Board
for the payment of distributions that is not more than 30 nor less than 10 days
prior to such distribution payment date.
No distributions on the EOP Preferred Shares shall be authorized by the EOP
Board or paid or set apart for payment if such authorization, payment or setting
apart for payment would violate any agreement of EOP or is restricted or
prohibited by law. Distributions on the EOP Preferred Shares will, nonetheless,
accrue whether or not any of the foregoing restrictions exist, whether or not
there are funds legally available for the payment thereof and whether or not
they are authorized, and accrued but unpaid distributions will accumulate as of
the distribution payment date on which they first become payable.
Except for pro rata distributions with respect to the EOP Preferred Shares
and any EOP Parity Shares, no distributions on any EOP Parity Shares or EOP
Junior Shares will be authorized, paid or set aside for payment (other than a
distribution payable in EOP Junior Shares) for any period, no other distribution
on any EOP Parity Shares or EOP Junior Shares and no redemption, purchase or
other acquisition for consideration of EOP Parity Shares or EOP Junior Shares
shall be made, in each case unless full cumulative distributions on the EOP
Preferred Shares have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for full payment thereof is set aside.
VOTING. Holders of EOP Preferred Shares have no other voting rights except
as provided by law and as described below.
Whenever distributions on EOP Preferred Shares are in arrears for six or
more quarterly periods, holders of EOP Preferred Shares will be entitled to vote
separately as a class with the holders of all EOP Parity Shares for the election
of two additional trustees of EOP. Such election shall be held at a special
meeting called by the holders of record of at least 20% of the outstanding EOP
Preferred Shares or the outstanding EOP Parity Shares or, if the request for a
special meeting is received by EOP less than 90 days prior to the next annual or
special meeting of shareholders, at the next annual or such special meeting of
shareholders and at each subsequent annual meeting of shareholders until all
arrearages and the distribution for the then current distribution period shall
have been fully paid or a sum sufficient for the full payment thereof shall have
been set aside. Vacancies for trustees elected by holders of EOP Preferred
Shares and EOP Parity Shares shall be filled by the remaining trustee so elected
then in office, or there is no such remaining trustee, by vote of holders of a
majority of the outstanding EOP Preferred Shares and the outstanding EOP Parity
Shares voting as a single class. A trustee elected by the holders of EOP
Preferred Shares and EOP Parity Shares may be removed with or without cause and
only by vote of holders of a majority of the outstanding EOP Preferred Shares
and the outstanding EOP Parity Shares voting as a single class.
In addition to the foregoing voting rights, for so long as any EOP
Preferred Shares are outstanding, any authorization of, increase in the
authorized amount of or number of issued, or reclassification of, of EOP Senior
Shares or EOP Senior Convertible Securities or any amendment of the Declaration
of Trust, by merger, consolidation or otherwise, which materially and adversely
affects any right, preference, privilege or voting power of the EOP Preferred
Shares or the holders thereof must be approved by holders of at least two-thirds
of the EOP Preferred Shares outstanding at the time. For purposes of the
foregoing sentence, any amendment of the Declaration of Trust resulting in the
EOP Preferred Shares remaining outstanding with the terms thereof materially
unchanged, any increase in the authorized amount of Preferred Shares or any
creation or issuance of any EOP Parity Shares shall not be deemed to materially
and adversely affect any right, preference, privilege or voting power of the EOP
Preferred Shares or the holders thereof.
OWNERSHIP LIMIT. The restrictions on transferability and ownership
described in "-- Restrictions on Ownership and Transfer" apply to the EOP
Preferred Shares.
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PREEMPTIVE RIGHTS; CONVERSION; REDEMPTION. Holders of EOP Preferred Shares
do not have any preemptive rights. The EOP Preferred Shares are not convertible,
redeemable or entitled to the benefit of any sinking fund, except that they may
be purchased by EOP under certain provisions of the Declaration of Trust
designed to enable EOP to preserve its status as a REIT under the Code (see
"FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification as a
REIT"); and the EOP Preferred Shares may be redeemed by EOP as described below.
On and after June 15, 2002, EOP, at its option and upon not less than 30
nor more than 60 days' written notice, may redeem EOP Preferred Shares, in whole
or part, at any time or from time to time, for cash at a redemption price of
$25.00 per share, plus all accrued and unpaid distributions thereon to the date
fixed for redemption, without interest, subject to the following limitations and
to compliance by EOP with the procedural requirements applicable to the
redemption of EOP Preferred Shares. First, if less than all of the outstanding
EOP Preferred Shares are to be redeemed, the EOP Preferred Shares to be redeemed
shall be selected pro rata (as nearly as may be practicable without creating
fractional shares) or by any other equitable method determined by EOP. Second,
the redemption price of EOP Preferred Shares (other than the portion thereof
consisting of accrued and unpaid distributions) is payable solely out of the
sale proceeds of other equity securities of EOP and any rights (other than debt
securities convertible into or exchangeable for such equity securities) or
options to purchase any of the foregoing. Third, unless full cumulative
distributions on all EOP Preferred Shares have been or contemporaneously are
authorized and paid and a sum sufficient for the payment thereof set apart for
all past distribution periods and the then current distribution period, no EOP
Preferred Shares shall be redeemed unless all outstanding EOP Preferred Shares
are simultaneously redeemed, and EOP shall not purchase or otherwise acquire
directly or indirectly any EOP Preferred Shares (except by exchange for EOP
Junior Shares); provided, however, that the foregoing shall not prevent the
purchase by EOP of EOP Preferred Shares in order to ensure that EOP remains
qualified as a REIT for federal income tax purposes or the purchase or
acquisition of EOP Preferred Shares pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding EOP Preferred Shares.
Any EOP Preferred Shares that have been redeemed shall, after such
redemption, have the status of authorized but unissued preferred shares of
beneficial interest, without designation as to series until such shares are once
more designated as part of a particular series by the EOP Board.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of EOP, the holders of any outstanding
EOP Preferred Shares will be entitled to receive out of the assets of EOP
available for distribution to shareholders remaining after payment or provision
for payment of all debts and other liabilities of EOP other than EOP's
obligations with respect to any outstanding EOP Junior Shares, a liquidation
preference of $25.00 per share, plus an amount equal to any accrued and unpaid
distributions to the date of payment. If upon any voluntary or involuntary
liquidation, dissolution or winding up of EOP, the assets of EOP shall be
insufficient to make such full payments to holders of EOP Preferred Shares, then
such assets shall be distributed pro rata among holders of EOP Preferred Shares.
After payment of the full amount of the liquidating distribution to which they
are entitled, the holders of EOP Preferred Shares will not be entitled to any
further participation in any distribution of assets by EOP. Neither a
consolidation or merger of EOP with or into another corporation nor a merger of
another corporation with or into EOP nor a sale, lease or conveyance of all or
substantially all of EOP's property or business shall be considered a
liquidation, dissolution or winding up of EOP.
POWER TO ISSUE ADDITIONAL EOP COMMON SHARES AND PREFERRED SHARES
EOP believes that the power of the EOP Board to issue additional authorized
but unissued EOP Common Shares or Preferred Shares and to classify or reclassify
unissued EOP Common Shares or Preferred Shares and thereafter to cause EOP to
issue such classified or reclassified shares of beneficial interest will provide
EOP with increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the EOP Common Shares, will be available for
issuance without further action by EOP Shareholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which EOP's securities may be listed or traded. The EOP
Preferred Shares have certain provisions that could delay, defer or prevent a
transaction or
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a change in control of EOP that might involve a premium price for holders of EOP
Common Shares or otherwise be in their best interest. Moreover, although the EOP
Board has no such intention at the present time, it could establish another
series of Preferred Shares that could cause the same result. (See "-- EOP
Preferred Shares -- Voting" above).
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For EOP to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of beneficial interest may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made) or during a
proportionate part of a shorter taxable year. In addition, if EOP, or an owner
of 10% or more of EOP, actually or constructively owns 10% or more of a tenant
of EOP (or a tenant of any partnership in which EOP is a partner), the rent
received by EOP (either directly or through any such partnership) from such
tenant will not be qualifying income for purposes of the REIT gross income tests
of the Code. A REIT's shares also must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
EOP. In order to assist in preserving EOP's status as a REIT under the
Code, the Declaration of Trust provides that no holder of shares EOP Shares may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than the EOP Ownership Limit or the Excepted Holder Limit, whichever is
applicable. The EOP Board, in its sole and absolute discretion, may grant to any
holder of EOP Shares an Excepted Holder Limit subject to satisfaction of certain
conditions set forth in the Declaration of Trust. The EOP Board is required to
waive or modify the EOP Ownership Limit with respect to one or more persons who
would not be treated as "individuals" for purposes of the Code if such person
submits to the EOP Board information satisfactory to the EOP Board, in its
reasonable discretion, demonstrating that (i) such person is not an individual
for purposes of the Code, (ii) such ownership will not cause a person who is an
individual to be treated as owning EOP Shares in excess of the EOP Ownership
Limit, applying the applicable constructive ownership rules, and (iii) such
ownership will not otherwise jeopardize EOP's status as a REIT. As a condition
of such waiver, the EOP Board may, in its reasonable discretion, require
undertakings or representations from the applicant to ensure that the conditions
in clauses, (i), (ii) and (iii) of the preceding sentence are satisfied and will
continue to be satisfied as long as such person owns shares in excess of the EOP
Ownership Limit. The EOP Board has the authority to increase the EOP Ownership
Limit from time to time, but will not have the authority to do so to the extent
that, after giving effect to such increase, five beneficial owners of EOP Shares
could beneficially own in the aggregate more than 49.5% of the outstanding EOP
Shares. The EOP Board may reduce the Excepted Holder Limit of any holder of EOP
Shares only with such holder's written consent or pursuant to any agreements
made between EOP and such holder at the time such Excepted Holder Limit was
granted, provided that no Excepted Holder Limit may be reduced to a percentage
that is less than the EOP Ownership Limit.
Any transfer (including any issuance, sale, transfer, gift, assignment,
devise or other disposition) of EOP Shares that would: (i) result in a holder
holding a number of EOP Shares in excess of the EOP Ownership Limit or the
Excepted Holder Limit, whichever is applicable, (ii) result in EOP being
"closely held" within the meaning of Section 856(h) of the Code, (iii) result in
the disqualification of EOP as a REIT or (iv) result in the outstanding EOP
Shares being owned by fewer than 100 persons or entities will be void and of no
force or effect with respect to the Prohibited Owner, in the case of the
foregoing clauses (i), (ii) and (iii), as to that number of EOP Shares that
exceeds the EOP Ownership Limit or the Excepted Holder Limit, as applicable
(referred to as "excess shares"), and in the case of the foregoing clause (iv),
as to all of the EOP Shares purported to be transferred, and the Prohibited
Owner shall acquire no right or interest therein. Any such excess shares
described above will be transferred automatically to a Charitable Trust for the
benefit of a Charitable Beneficiary. Such transfer shall be deemed to be
effective as of the close of business on the business day prior to the purported
transfer. If any such transfer to the Charitable Trust is not effective for any
reason, the transfer of such excess shares will be void.
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Any person or entity who acquires or intends to acquire EOP Shares that
will or may violate the foregoing provisions shall immediately notify EOP of
such acquisition, or give EOP 15 days prior notice thereof, and shall provide
EOP such other information as EOP may request in order to determine the effect
of such acquisition of EOP's status as a REIT.
Subject to the purchase rights of EOP described below, within 20 days of
receiving notice from EOP of the transfer of shares to the Charitable Trust, the
Charitable Trustee will be required to sell such excess shares to a person or
entity, including without limitation EOP, who could own such shares without
violating the restrictions described above, and distribute to the Prohibited
Owner an amount equal to the lesser of (i) the price paid by the Prohibited
Owner for such excess shares, or if no payment was made in respect thereof, the
EOP Market Price on the date on which such shares became excess shares and (ii)
the sales proceeds received by the Charitable Trustee for such excess shares.
Any proceeds in excess of the amount distributable to the Prohibited Owner will
be distributed to the Charitable Beneficiary.
Excess shares transferred to the Charitable Trust shall be deemed to have
been offered for sale to EOP, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the Charitable Trust (or, in the case of a devise or gift, the EOP
Market Price at the time of such devise or gift) and (ii) the EOP Market Price
of such shares on the date EOP, or its designee, accepts such offer. EOP shall
have the right to accept such offer until the Charitable Trustee has sold such
excess shares as described above. Upon a sale of such excess share to EOP, the
interest of the Charitable Beneficiary in such excess shares shall terminate and
the Charitable Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner.
Prior to a sale of any excess shares by the Charitable Trust, the
Charitable Trustee shall have all voting rights and rights to distributions or
other distributions (including distributions upon liquidation, dissolution or
winding up of EOP or any distributions of assets of EOP) with respect to such
excess shares. Any distribution or other distribution paid to the Prohibited
Owner prior to the discovery by EOP that such excess shares had been transferred
to the Charitable Trust must paid to the Charitable Trustee upon demand. Subject
to applicable law, effective as of the date that any excess shares have been
transferred to the Charitable Trust, the Charitable Trustee shall have the
authority in its sole discretion (i) to rescind as void any vote cast by a
Prohibited Owner prior to the discovery by EOP that such excess shares have been
transferred to the Charitable Trust and (ii) to recast such vote in accordance
with the instructions of the Charitable Trustee. Notwithstanding the foregoing,
if EOP has already taken irreversible action with respect to matters covered by
such vote, the Charitable Trustee shall not have the authority to rescind and
recast such vote.
The foregoing restrictions on transferability and ownership will not apply
if the EOP Board determines that they are no longer required in order for EOP to
continue to qualify as a REIT.
All persons or entities who own, directly or by virtue of the attribution
provisions of the Code, more than 5% (or such other percentage between 0.5% and
5% as provided in the rules and regulations promulgated under the Code) of the
lesser of the number or value of the outstanding EOP Shares must give a written
notice to EOP by January 30 of each year stating the name and address of such
owner, the number of EOP Shares owned and a description of the manner in which
such EOP Shares are held; in addition, a holder of record of EOP Shares subject
to the foregoing requirement who holds such EOP Shares as nominee for another
person or entity which is required to include in gross income the distributions
received on such shares must also give notice of the name and address of such
person or entity and the number of EOP Shares of such person or entity with
respect to which such holder of record is nominee. In addition, each record,
beneficial and constructive holder of EOP Shares must, upon demand of EOP,
disclose to EOP in writing any information with respect to the direct, indirect
and constructive ownership thereof as the EOP Board deems necessary to comply
with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the EOP Common Shares is Boston
EquiServe, L.P., an affiliate of BankBoston, N.A.
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COMPARATIVE RIGHTS OF SHAREHOLDERS
Beacon is organized as a corporation and EOP is organized as a real estate
investment trust under the laws of the State of Maryland. As a Maryland
corporation, Beacon is subject to the MGCL, which is a general corporation
statute dealing with a wide variety of matters, including election, tenure,
duties, liabilities and indemnification of directors and officers; dividends and
other distributions; meetings and voting rights of stockholders; and
extraordinary actions, such as amendments to the charter, mergers, sales of all
or substantially all of the assets and dissolution. As a Maryland real estate
investment trust, EOP is governed by the Maryland REIT Law and certain other
provisions of the Annotated Code of Maryland. The Maryland REIT Law covers some
of the same matters covered by MGCL, including liabilities of the trust,
shareholders, trustees and officers; amendment of the declaration of trust; and
mergers of a real estate investment trust with other entities. There are many
matters that are addressed in the MGCL that are not dealt with in the Maryland
REIT Law, and it is a general practice of REITs to address some of these matters
through provisions in the declaration of trust.
Certain differences between (a) the MGCL and the Maryland REIT Law and (b)
Beacon's Articles and Bylaws and the Declaration of Trust and EOP Bylaws are
discussed below. However, the discussion of the comparative rights of
shareholders of Beacon and shareholders of EOP set forth below does not purport
to be complete and is subject to and qualified in its entirety by reference to
the MGCL and the Maryland REIT Law and also to the Beacon Articles and Bylaws
and the Declaration of Trust and EOP Bylaws. Copies of these documents have been
filed as exhibits to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part.
At the Effective Time, Beacon Shareholders automatically would become
shareholders of EOP and their rights as shareholders would be determined by the
Declaration of Trust and the EOP Bylaws.
CAPITALIZATION
EOP. EOP is authorized to issue (i) 750,000,000 EOP Common Shares, of
which 161,987,228 shares were issued and outstanding as of the EOP Record Date
and (ii) 100,000,000 Preferred Shares, of which no shares were issued and
outstanding as of the EOP Record Date. The EOP Board has adopted resolutions
classifying and designating 8,000,000 of the Preferred Shares as EOP Preferred
Shares and articles supplementary relating to such EOP Preferred Shares, which
shares will be issued in the Merger in exchange for Beacon Preferred Shares. The
EOP Board, with the approval of the holders of EOP Common Shares by the majority
of votes cast at a meeting of shareholders duly called and at which a quorum is
present, may amend the Declaration of Trust from time to time to increase or
decrease the aggregate number of shares or the number of shares of any class
that EOP has the authority to issue, provided, that, so long as any EOP
Preferred Shares are outstanding, any amendment of the Declaration of Trust
which authorizes or creates, or increases, the authorized amount of any class or
series of shares ranking prior to the EOP Preferred Shares with respect to
payment of distributions or the distribution of assets upon liquidation,
dissolution or winding up of EOP ("EOP Senior Shares") or any obligations or
securities convertible into or evidencing the right to purchase any EOP Senior
Shares ("EOP Senior Convertible Securities") must be approved by holders of at
least two-thirds of the EOP Preferred Shares outstanding at the time.
The EOP Board may, without further action by the EOP Shareholders, provide
for the issuance of EOP Common shares in one or more classes or series and
Preferred Shares in one or more series and, subject to the restrictions on
transfer and ownership set forth in the Declaration of Trust (see "-- REIT
Qualification Provisions -- EOP" below) and the express terms of any class or
series of shares outstanding at the time, fix the preferences, conversion or
other rights, voting powers, restrictions, limitations as to distributions or
other distributions, qualifications and terms and conditions of redemption
thereof, by adopting a resolution or resolutions creating and designating such
class or series. Subject to an express provision to the contrary in the terms of
any class or series of authorized shares, the EOP Board has the power to divide
or combine the outstanding shares of any class or series, without a vote of
shareholders. For so long as any EOP Preferred Shares are outstanding, no EOP
Senior Shares or EOP Senior Convertible Securities may be authorized, no
authorized shares may be reclassified into EOP Senior Shares or EOP Senior
Convertible Securities nor may
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the number of issued EOP Senior Shares or EOP Senior Convertible Securities be
increased without the approval of at least two-thirds of the EOP Preferred
Shares outstanding at the time.
BEACON. Beacon is authorized to issue (i) 100,000,000 Beacon Common
Shares, of which 56,269,234 shares were issued and outstanding as of the Beacon
Record Date, (ii) 25,000,000 preferred shares of beneficial interest, $.01 par
value, of which 9,200,000 shares have been classified and designated as Beacon
Preferred Shares, of which 8,000,000 Beacon Preferred Shares and no other
preferred shares were issued and outstanding as of the Beacon Record Date and
(iii) 50,000,000 shares of excess stock, $0.01 par value per share (the "Beacon
Excess Shares"), none of which were issued or outstanding as of the Beacon
Record Date. The aggregate number of shares that Beacon has the authority to
issue may be increased or decreased only with the approval of holders of not
less than two-thirds of the Beacon Common Shares entitled to be cast on the
matter, provided, that, so long as any Beacon Preferred Shares are outstanding,
any amendment of the Beacon Articles which authorizes, creates, or increases,
the authorized amount of any class or series of shares ranking prior to the
Beacon Preferred Shares with respect to payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up of Beacon
("Beacon Senior Shares") or any obligations or securities convertible into or
evidencing the right to purchase any Beacon Senior Shares ("Beacon Senior
Convertible Securities") must be approved by holders of at least two-thirds of
the Beacon Preferred Shares outstanding at the time.
The Beacon Board may, without further action by the Beacon Shareholders,
provide for the issuance of Beacon preferred shares of beneficial interest in
one or more series and to fix the preferences, conversion and other rights,
voting rights, restrictions and limitations as to dividends, qualifications and
terms and conditions of redemption as the Beacon Board may determine. Subject to
an express provision to the contrary in the terms of any class or series of
authorized shares, the Beacon Board has the power to divide or combine the
outstanding shares of any class or series, without a vote of shareholders. For
so long as any Beacon Preferred Shares are outstanding, no Beacon Senior Shares
or Beacon Senior Convertible Securities may be authorized, no authorized shares
may be reclassified into Beacon Senior Shares or Beacon Senior Convertible
Securities nor may the number of issued Beacon Senior Shares or Beacon Senior
Convertible Securities be increased without the approval of at least two-thirds
of the Beacon Preferred Shares outstanding at the time.
VOTING RIGHTS
EOP. Each holder of EOP Common Shares is entitled to one vote per share
and to the same and identical voting rights as other holders of EOP Common
Shares. Holders of EOP Common Shares do not have cumulative voting rights.
Holders of EOP Common Shares are entitled to vote only on the following matters:
(i) election and removal of trustees, (ii) amendment of the Declaration of
Trust, (iii) termination of EOP, (iv) merger or consolidation of EOP, or the
sale or disposition of substantially all of the property of EOP, (v) such other
matters with respect to which the EOP Board has adopted a resolution declaring
that a proposed action is advisable and directing that the matter be submitted
to the shareholders for approval or ratification, (vi) such other matters as may
be properly brought before a meeting by a shareholder pursuant to the EOP Bylaws
and (vii) such other matters as required by applicable law.
Whenever distributions on EOP Preferred Shares are in arrears for six or
more quarterly periods, holders of EOP Preferred Shares will be entitled to vote
separately as a class with the holders of all other series of preferred shares
of beneficial interest ranking on a parity with the EOP Preferred Shares as to
distributions or on liquidation (the "EOP Parity Shares") for the election of
two additional trustees of EOP at a special meeting called by the holders of
record of at least 20% of the outstanding EOP Preferred Shares or the holders of
shares of any other series of EOP Parity Shares so in arrears (unless such
request is received less than 90 days before the date fixed for the next annual
or special meeting of shareholders) or at the next annual meeting of
shareholders. Such voting rights will continue until all accumulated dividends
and the dividend for the then current period have been fully paid or authorized
and a sum sufficient for such payment is set aside for payment in full. In
addition, for so long as any EOP Preferred Shares are outstanding, any
authorization of, increase in the authorized amount of or number of issued, or
reclassification of, of EOP Senior Shares or EOP Senior Convertible Securities
or any amendment or repeal of the Declaration of Trust, by merger, consolidation
or otherwise, which materially and adversely affects any right, preference,
privilege or voting
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power of the EOP Preferred Shares or the holders thereof must be approved by
holders of at least two-thirds of the EOP Preferred Shares outstanding at the
time. For purposes of the foregoing sentence, any amendment of the Declaration
of Trust resulting in the EOP Preferred Shares remaining outstanding with the
terms thereof materially unchanged, any increase in the authorized amount of
preferred shares of beneficial interest or any creation or issuance of any EOP
Parity Shares or EOP Junior Shares shall not be deemed to materially and
adversely affect any right, preference, privilege or voting power of the EOP
Preferred Shares or the holders thereof. Holders of EOP Preferred Shares have no
other voting rights except as provided by law.
BEACON. Each holder of Beacon Common Shares is entitled to one vote per
share and to the same and identical voting rights as other holders of Beacon
Common Shares. Holders of Beacon Common Shares do not have cumulative voting
rights. Holders of Beacon Common Shares are entitled to vote on all matters
submitted to them for a vote and any other matters requiring their vote under
applicable law.
Whenever dividends on Beacon Preferred Shares are in arrears for six or
more quarterly periods, holders of Beacon Preferred Shares will be entitled to
vote separately as a class with the holders of all other series of preferred
shares of beneficial interest ranking on a parity with the Beacon Preferred
Shares as to dividends or on liquidation (the "Beacon Parity Shares") for the
election of two additional directors of Beacon at a special meeting called by
the holders of record of at least 20% of the outstanding Beacon Preferred Shares
or the holders of shares of any other series of Beacon Parity Shares so in
arrears (unless such request is received less than 90 days before the date fixed
for the next annual or special meeting of shareholders) or at the next annual
meeting of shareholders. Such voting rights will continue until all accumulated
dividends and the dividend for the then current period have been fully paid or
authorized and a sum sufficient for such payment is set aside for payment in
full. In addition, for so long as any Beacon Preferred Shares are outstanding,
any authorization of, increase in the authorized amount of or number of issued,
or reclassification of, of Beacon Senior Shares or Beacon Senior Convertible
Securities or any amendment or repeal of the Beacon Articles, by merger,
consolidation or otherwise, which materially and adversely affects any right,
preference, privilege or voting power of the Beacon Preferred Shares or the
holders thereof must be approved by holders of at least two-thirds of the Beacon
Preferred Shares outstanding at the time. For purposes of the foregoing
sentence, any amendment of the Beacon Articles resulting in the Beacon Preferred
Shares remaining outstanding with the terms thereof materially unchanged, any
increase in the authorized amount of preferred shares of beneficial interest or
any creation or issuance of any Beacon Parity Shares or Beacon Junior Shares
shall not be deemed to materially and adversely affect any right, preference,
privilege or voting power of the Beacon Preferred Shares or the holders thereof.
Holders of Beacon Preferred Shares have no other voting rights except as
provided by law.
Holders of Beacon Excess Shares have no voting rights on any matters except
as otherwise expressly required by law.
TRUSTEES/DIRECTORS
EOP. The number of trustees shall be not less than nine nor more than 15,
who, except as described in the following sentence and except with respect to
trustees elected by holders of EOP Preferred Shares and EOP Parity Shares, shall
be elected at the annual meeting of shareholders. Subject to the foregoing, the
EOP Board, by majority vote, may increase the number of trustees, and fill any
vacancies on the EOP Board other than vacancies for trustees elected by holders
of EOP Preferred Shares and EOP Parity Shares, whether arising from an increase
in the number of trustees or from the failure by shareholders to elect the full
authorized number of trustees. Except during the period when a vacancy exists,
at least two-thirds of the trustees shall be persons who are not executive
officers (as defined in Rule 145 under the Securities Act) of EOP or persons
affiliated (as defined in Rule 145 under the Securities Act) with Mr. Zell or
his affiliates.
Whenever distributions on the EOP Preferred Shares are in arrears for six
or more quarterly periods, holders of the EOP Preferred Shares will be entitled
to vote separately as a class with the holders of all EOP Parity Shares for the
election of two additional trustees of EOP. Such election shall be held at a
special meeting called by the holders of record of at least 20% of the
outstanding EOP Preferred Shares or the outstanding EOP Parity Shares or, if the
request for a special meeting is received by EOP less than 90 days
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prior to the next annual or special meeting of shareholders, at the next annual
or such special meeting of shareholders and at each subsequent annual meeting of
shareholders until all arrearages and the distribution for the then current
distribution period shall have been fully paid or a sum sufficient for the full
payment thereof shall have been set aside. Vacancies for trustees elected by
holders of EOP Preferred Shares and EOP Parity Shares shall be filled by the the
written consent of the remaining trustee elected by such holders then in office,
or if there is no such remaining trustee, by vote of holders of a majority of
the outstanding EOP Preferred Shares and the outstanding EOP Parity Shares
voting as a single class.
As permitted by the Declaration of Trust, with the exception of any members
elected by holders of EOP Preferred Shares and EOP Parity Shares, the EOP Board
is divided into three classes of trustees. The initial terms of the first,
second and third classes expire in 1998, 1999 and 2000, respectively. Beginning
in 1998, trustees of each class will be chosen for three-year terms upon the
expiration of their current terms and each year one class of trustees will be
elected by the EOP Shareholders.
A trustee other than a trustee elected by the holders of EOP Preferred
Shares and EOP Parity Shares may be removed only with cause by the affirmative
vote of shareholders holding not less than a majority of all shares then
outstanding and entitled to vote generally in the election of trustees. A
trustee elected by the holders of EOP Preferred Shares and EOP Parity Shares may
be removed with or without cause and only by vote of holders of a majority of
the outstanding EOP Preferred Shares and the outstanding EOP Parity Shares
voting together as a single class.
BEACON. The number of Beacon Directors shall not be fewer than the greater
of two or the minimum number permitted by the MGCL and not more than nine who,
except as described in the following sentence and except with respect to
directors elected by holders of Beacon Preferred Shares and Beacon Parity
Shares, shall be elected at the annual meeting of shareholders. Subject to the
foregoing, the Beacon Board, by majority vote, may (i) increase or decrease the
number of directors and (ii) except for any vacancies for directors elected by
the holders of Beacon Preferred Shares and vacancies created by the removal of a
director other than a director elected by the holders of Beacon Preferred Shares
and Beacon Parity Shares, fill any vacancies on the Beacon Board. Vacancies
created by the removal of a director other than a director elected by the
holders of Beacon Preferred Shares and Beacon Parity Shares shall be filled by
the affirmative vote of two-thirds of the shares then outstanding and entitled
to vote generally in the election of directors.
Whenever dividends on the Beacon Preferred Shares are in arrears for six or
more quarterly periods, holders of the Beacon Preferred Shares will be entitled
to vote separately as a class with the holders of all Beacon Parity Shares for
the election of two additional directors of Beacon. Such election shall be held
at a special meeting called by the holders of record of at least 20% of the
outstanding Beacon Preferred Shares or the outstanding Beacon Parity Shares or,
if the request for a special meeting is received by Beacon less than 90 days
prior to the next annual or special meeting of shareholders, at the next annual
or such special meeting of shareholders and at each subsequent annual meeting of
shareholders until all arrearages and the dividend for the then current dividend
period shall have been fully paid or a sum sufficient for the full payment
thereof shall have been set aside. Vacancies for directors elected by the
holders of Beacon Preferred Shares and Beacon Parity Shares shall be filled by
the written consent of the remaining director elected by such holders then in
office, or if there is no such remaining director, by vote of holders of a
majority of the outstanding Beacon Preferred Shares and the outstanding Beacon
Parity Shares voting together as a single class.
As permitted by the Beacon Articles, with the exception of any members
elected by holders of Beacon Preferred Shares and Beacon Parity Shares, the
Beacon Board is divided into three classes of directors. The terms of the
current directors' first, second and third classes expire in 1998 (three
directors), 1999 (two directors) and 2000 (two directors), respectively.
Directors of each class are chosen for three-year terms upon the expiration of
their current terms and each year one class of directors is elected by the
Beacon Shareholders.
A director other than a director elected by the holders of Beacon Preferred
Shares and Beacon Parity Shares may be removed only with cause by the
affirmative vote of shareholders holding not less than two-thirds of all shares
then outstanding and entitled to vote in the election of directors.
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ANTI-TAKEOVER PROVISIONS
Certain provisions of Maryland law, EOP's Declaration of Trust and the
Beacon Articles, including without limitation those discussed below and
provisions relating to the classification of the EOP and Beacon Boards,
restrictions on the ability of shareholders to remove trustees or directors and
restrictions on shareholder nominations of trustees or directors or other
proposals (see "-- Trustees/Directors" above and "-- Shareholder Meetings"
below), may discourage an attempt to acquire control of EOP or Beacon,
respectively, that a majority of either entity's shareholders determined was in
their best interests. These provisions also may render the removal of one or all
trustees or directors more difficult or deter or delay a change of control that
the EOP Board or Beacon Board, respectively, did not approve. Provisions of
EOP's Declaration of Trust and Beacon Articles intended to preserve qualified
REIT status under the Code may have similar or comparable effects. See "-- REIT
Qualification Provisions" below.
EOP. Subject to the approval rights of the holders of EOP Preferred Shares
(see "-- Voting Rights" above), the EOP Board may authorize the issuance of
preferred shares at such times, for such purposes and for such consideration as
it may deem advisable without further shareholder approval. The rights of
holders of EOP Common Shares are or will be subject to, and may be adversely
affected by, the rights of holders of EOP Preferred Shares and the rights of
holders of any other preferred shares that may be issued in the future. The EOP
Preferred Shares and any other preferred shares which EOP may issue in the
future may adversely affect the interests of holders of EOP Common Shares by
limiting the control that such holders may exert by exercise of their voting
rights, by subordinating their rights in liquidation to the rights of the
holders of such shares, and otherwise. In addition, the existence of the
outstanding EOP Preferred Shares or the future issuance of any other preferred
shares, in some circumstances, may deter or discourage takeover attempts and
other changes in control of EOP by making it more difficult for a person who has
gained a substantial equity interest in EOP to obtain control or to exercise
control effectively. Other than the issuance of EOP Preferred Shares for Beacon
Preferred Shares in the Merger, EOP has no current plans or agreements with
respect to the issuance of any EOP Preferred Shares.
BEACON. Subject to the approval rights of the holders of Beacon Preferred
Shares (see "-- Voting Rights" above), the Beacon Board may authorize the
issuance of preferred shares at such times, for such purposes and for such
consideration as it may deem advisable without further shareholder approval. The
rights of holders of Beacon Common Shares are or will be subject to, and may be
adversely affected by, the rights of holders of Beacon Preferred Shares and the
rights of holders of any other preferred shares that may be issued in the
future. The Beacon Preferred Shares and any other preferred shares which Beacon
may issue in the future may adversely affect the interests of holders of Beacon
Common Shares by limiting the control that such holders may exert by exercise of
their voting rights, by subordinating their rights in liquidation to the rights
of the holders of such shares, and otherwise. In addition, the existence of the
outstanding Beacon Preferred Shares or the future issuance of any other
preferred shares, in some circumstances, may deter or discourage takeover
attempts and other changes in control of Beacon by making it more difficult for
a person who has gained a substantial equity interest in Beacon to obtain
control or to exercise control effectively. Beacon has no current plans or
agreements with respect to the issuance of any preferred shares, including
additional Beacon Preferred Shares.
MARYLAND CONTROL SHARE ACQUISITION STATUTE. The MGCL, as applicable to
real estate investment trusts as well as corporations, provides that Control
Shares (as defined below) of a Maryland corporation acquired in a "Control Share
Acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares
owned by the acquiror, or by officers or by directors or trustees who are
employees of the corporation. "Control Shares" are voting shares which, if
aggregated with all other such shares previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror, directly or indirectly, to exercise or direct the exercise of voting
power in electing directors or trustees within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third of all voting power,
(ii) one-third or more but less than a majority of all voting power or (iii) a
majority or more of all voting power. Control Shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "Control Share Acquisition" means the direct or
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indirect acquisition by any person, of ownership of, or the power to direct the
exercise of voting power with respect to, issued and outstanding Control Shares.
A person who has made or proposes to make a Control Share Acquisition, upon
satisfaction of certain conditions (including an undertaking to pay certain of
the corporation's or trust's expenses), may compel the board of directors or
trustees of a Maryland corporation or trust to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation or trust may
itself present the question at any shareholders meeting. If voting rights are
not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement as required by the MGCL, then, subject to certain
conditions and limitations, the corporation or trust may redeem any or all of
the Control Shares (except those for which voting rights have previously been
approved) for fair value determined, without regard to the absence of voting
rights for the Control Shares, as of the date of the last Control Share
Acquisition by the acquiror or, if a meeting is held, as of the date of any
meeting of shareholders at which the voting rights of such shares are considered
and not approved. If voting rights for Control Shares are approved at a
shareholders meeting and the acquiror becomes entitled to vote a majority of the
shares entitled to vote, all other shareholders may exercise appraisal rights.
The fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
Control Share Acquisition. The Control Share Acquisition statute does not apply
(a) to shares acquired in a merger, consolidation or share exchange if the
Maryland corporation or trust is a party to the transaction or (b) to
acquisitions approved or exempted by the articles of incorporation, declaration
of trust or bylaws of the Maryland corporation or trust. The EOP Bylaws contain
a provision exempting from the control share acquisition statute any acquisition
by any person of shares of beneficial interest of EOP. There can be no assurance
that such provision will not be amended or eliminated retroactively and/or
prospectively, at any time in the future. The Beacon Articles and Bylaws contain
provisions exempting from the control share acquisition statute any share of
Beacon beneficially held by Alan M. Leventhal, Norman B. Leventhal, Mark S.
Leventhal, Edwin N. Sidman, Paula L. Sidman, Lionel P. Fortin, Douglas S.
Mitchell, Robert J. Perriello and James M. Becker. In addition, the Beacon
Bylaws exempt current or future affiliates, associates, or other persons acting
in concert or as a group with any of the foregoing persons.
MARYLAND BUSINESS COMBINATION STATUTE. Under the MGCL, certain "business
combinations" between a Maryland corporation or trust and an Interested
Shareholder are prohibited for five years after the most recent date on which
the Interested Shareholder becomes an Interested Shareholder. Thereafter, any
such business combination must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting stock of the
corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting stock of the corporation other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the Maryland corporation's or
trust's common shareholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of directors or trustees of the corporation or
trust prior to the time that the Interested Shareholder becomes an Interested
Shareholder. See "RISK FACTORS -- Limitations on Changes in Control and of
Ownership Limit -- Possible Limitations on Changes in Control Pursuant to
Maryland Law." The EOP Board has elected to opt out of the business combination
statute. The Beacon Articles contain a provision expressly electing not to be
governed by the Maryland business combination statute with respect to any
business combination (as defined in the statute) involving Alan M. Leventhal,
Norman B. Leventhal, Mark S. Leventhal, Edwin N. Sidman, Paula L. Sidman, Lionel
P. Fortin, Douglas S. Mitchell, Robert J. Perriello and James M. Becker, or
current or future affiliates, associates (as such terms are defined in the
statute) or other persons acting in concert as a group with any of the foregoing
persons.
REIT QUALIFICATION PROVISIONS
EOP. In order to assist in preserving EOP's status as a REIT under the
Code, the Declaration of Trust provides that no holder of EOP Shares may own, or
be deemed to own by virtue of the attribution provisions of the Code, more than
the EOP Ownership Limit or such higher percentage applicable to such holder
approved
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by the EOP Board (in value or number of shares, whichever is more restrictive)
(the "Excepted Holder Limit"). The EOP Board, in its sole and absolute
discretion, may grant to any holder of EOP Shares an Excepted Holder Limit
subject to satisfaction of certain conditions set forth in the Declaration of
Trust. The EOP Board is required to waive or modify the EOP Ownership Limit with
respect to one or more persons who would not be treated as "individuals" for
purposes of the Code if such person submits to the EOP Board information
satisfactory to the EOP Board, in its reasonable discretion, demonstrating that
(i) such person is not an individual for purposes of the Code, (ii) such
ownership will not cause a person who is an individual to be treated as owning
EOP Shares in excess of the EOP Ownership Limit, applying the applicable
constructive ownership rules, and (iii) such ownership will not otherwise
jeopardize EOP's status as a REIT. As a condition of such waiver, the EOP Board
may, in its reasonable discretion, require undertakings or representations from
the applicant to ensure that the conditions in clauses, (i), (ii) and (iii) of
the preceding sentence are satisfied and will continue to be satisfied as long
as such person owns shares in excess of the EOP Ownership Limit. The EOP Board
may reduce the Excepted Holder Limit of any holder of EOP Shares only with such
holder's written consent or pursuant to any agreements made between EOP and such
holder at the time such Excepted Holder Limit was granted, provided that no
Excepted Holder Limit may be reduced to a percentage that is less than the EOP
Ownership Limit. The EOP Board has the authority to increase the EOP Ownership
Limit from time to time, but does not have the authority to do so to the extent
that after giving effect to such increase, five beneficial owners of EOP Shares
could beneficially own in the aggregate more than 49.5% of the outstanding EOP
Shares.
Any transfer (including any issuance, sale, transfer, gift, assignment,
devise or other disposition) of EOP Shares that would: (i) result in a holder
holding a number of EOP Shares in excess of the EOP Ownership Limit or the
Excepted Holder Limit, whichever is applicable, (ii) result in EOP being
"closely held" within the meaning of Section 856(h) of the Code, (iii) result in
the disqualification of EOP as a REIT or (iv) result in the outstanding EOP
Shares being owned by fewer than 100 persons or entities will be void and of no
force or effect with respect to the purported transferee and any person or
entity who would have been the record holder of such EOP Shares as a result of
such transfer (collectively, the "Prohibited Owner"), in the case of the
foregoing clauses (i), (ii) and (iii), as to that number of EOP Shares that
exceeds the EOP Ownership Limit or the Excepted Holder Limit, as applicable
(referred to as "excess shares"), and in the case of the foregoing clause (iv),
as to all of the EOP Shares purported to be transferred, and the Prohibited
Owner shall acquire no right or interest therein. Any such excess shares
described above will be transferred automatically to a trust (the "Charitable
Trust"), the beneficiary of which will be a qualified charitable organization
selected by EOP (the "Charitable Beneficiary"). Such transfer shall be deemed to
be effective as of the close of business on the business day prior to the
purported transfer. If any such transfer to the Charitable Trust is not
effective for any reason, the transfer of such excess shares will be void.
Any person or entity who acquires or intends to acquire EOP Shares that
will or may violate the foregoing provisions must immediately notify EOP of such
acquisition, or give EOP 15 days prior notice thereof, and must provide EOP such
other information as EOP may request in order to determine the effect of such
acquisition of EOP's status as a REIT.
Subject to the purchase rights of EOP described below, within 20 days of
receiving notice from EOP of the transfer of shares to the Charitable Trust, the
trustee of the Charitable Trust (who shall be designated by EOP, subject to
certain requirements in the Declaration of Trust) (the "Charitable Trustee")
will be required to sell such excess shares to a person or entity, including
without limitation EOP, who could own such shares without violating the
restrictions described above, and distribute to the Prohibited Owner an amount
equal to the lesser of (i) the price paid by the Prohibited Owner for such
excess shares, or if no payment was made in respect thereof, the market price of
such excess shares, as determined pursuant to the Declaration of Trust (the "EOP
Market Price") on the date on which such shares became excess shares and (ii)
the sales proceeds received by the Charitable Trustee for such excess shares.
Any proceeds in excess of the amount distributable to the Prohibited Owner will
be distributed to the Charitable Beneficiary.
Excess shares transferred to the Charitable Trust shall be deemed to have
been offered for sale to EOP, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the Charitable Trust (or, in the case of a devise or gift, the EOP
Market Price at the time of
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such devise or gift) and (ii) the EOP Market Price of such shares on the date
EOP, or its designee, accepts such offer. EOP shall have the right to accept
such offer until the Charitable Trustee has sold such excess shares as described
above. Upon a sale of such excess shares to EOP, the interest of the Charitable
Beneficiary in such excess shares shall terminate and the Charitable Trustee
shall distribute the net proceeds of the sale to the Prohibited Owner.
Prior to a sale of any excess shares by the Charitable Trust, the
Charitable Trustee shall have all voting rights and rights to dividends or other
distributions (including distributions upon liquidation, dissolution or winding
up of EOP or any distributions of assets of EOP) with respect to such excess
shares. Any dividend or other distribution paid to the Prohibited Owner prior to
the discovery by EOP that such excess shares had been transferred to the
Charitable Trust must be paid by the Prohibited Owner to the Charitable Trustee
upon demand. Subject to applicable law, effective as of the date that any excess
shares have been transferred to the Charitable Trust, the Charitable Trustee
shall have the authority in its sole discretion (i) to rescind as void any vote
cast by a Prohibited Owner prior to the discovery by EOP that such excess shares
have been transferred to the Charitable Trust and (ii) to recast such vote in
accordance with the instructions of the Charitable Trustee. Notwithstanding the
foregoing, if EOP has already taken irreversible action with respect to matters
covered by such vote, the Charitable Trustee shall not have the authority to
rescind and recast such vote.
The foregoing restrictions on transferability and ownership will not apply
if the EOP Board determines that they are no longer required in order for EOP to
continue to qualify as a REIT.
All persons or entities who own, directly or by virtue of the attribution
provisions of the Code, more than 5% (or such other percentage between 0.5% and
5% as provided in the rules and regulations promulgated under the Code) of the
lesser of the number or value of the outstanding EOP Shares must give a written
notice to EOP by January 30 of each year stating the name and address of such
owner, the number of EOP Shares owned and a description of the manner in which
such EOP Shares are held; in addition, a holder of record of EOP Shares subject
to the foregoing requirement who holds such EOP Shares as nominee for another
person or entity which is required to include in gross income the dividends
received on such shares must also give notice of the name and address of such
person or entity and the number of EOP Shares of such person or entity with
respect to which such holder of record is nominee. In addition, each record,
beneficial and constructive holder of EOP Shares shall, upon demand of EOP, be
required to disclose to EOP in writing any information with respect to the
direct, indirect and constructive ownership thereof as the EOP Board deems
necessary to comply with the provisions of the Code applicable to REITs, to
comply with the requirements of any taxing authority or governmental agency or
to determine any such compliance.
BEACON. In order to assist in preserving Beacon's status as a REIT under
the Code, the Beacon Articles provide that no person or entity may directly or
indirectly acquire or hold a beneficial ownership interest (determined in
accordance with the attribution rules applicable to ownership of REIT shares
under the Code) in any class or series of stock of Beacon (the "Beacon Shares")
with an aggregate value in excess of 6% of the aggregate value of all
outstanding Beacon Shares (the 6% Ownership Limit). Any entity, the ownership of
whose Beacon Shares is attributed to the owners of such entity under Sections
544 and 856(h) of the Code, will be "looked through" for purposes of the 6%
Ownership Limit. No such entities may directly or indirectly acquire or hold
beneficial ownership of Beacon Shares of any class or series with an aggregate
value in excess of 9.9% of the aggregate value of all outstanding Beacon Shares
(the "Look Through Ownership Limit" and together with the 6% Ownership Limit,
the "Beacon Ownership Limit"). Notwithstanding the foregoing, the Beacon Board
may, in its sole discretion, waive the Beacon Ownership Limit with respect to
any person or entity or any transaction if it is satisfied, based on the advice
of tax counsel, that ownership in excess of this limit will not jeopardize
Beacon's status as a REIT and it otherwise decides that such action is in the
best interest of Beacon. The Beacon Board may also, in its sole discretion,
revoke certain waivers of the Beacon Ownership Limit previously granted.
Unless waived by the Beacon Board as described above, if any person or
entity holds a number of shares of Beacon Shares in excess of the Beacon
Ownership Limit, such number of shares in excess of the Beacon Ownership Limit
will automatically be deemed to have been converted into Beacon Excess Shares
and
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transferred by such person or entity (the "Transferor") to Beacon as trustee of
a separate trust for the exclusive benefit of the persons or entities to whom
such shares can ultimately be transferred without violating the Beacon Ownership
Limit (the "Eligible Transferee"). Beacon Excess Shares may not be voted and are
not entitled to distributions or dividends, other than distributions upon
liquidation, dissolution or winding up of Beacon (see "-- Liquidation
Rights -- Beacon" below). Upon transfer to one or more Eligible Transferees,
such Beacon Excess Shares are reconverted to shares of Beacon Shares of the same
class or series from which they were converted to Beacon Excess Shares, with all
rights appurtenant thereto.
Subject to the purchase rights of Beacon described below, the interest in
any trust holding Beacon Excess Shares may be transferred to one or more
Eligible Transferees designated by the Transferor if the Transferor does not
receive a price for the trust interest in excess of (i) the price the Transferor
paid for the Beacon Shares in the purported transfer of Beacon Shares that
resulted in the Beacon Excess Shares represented by the trust interest or (ii)
if the Transferor did not pay for such Beacon Shares (e.g., the shares were
received through a gift, devise or other similar transaction), the price equal
to the aggregate market price determined pursuant to the Beacon Articles (the
"Beacon Market Price") of the Beacon Shares that resulted in the Beacon Excess
Shares represented by the trust interest on the day of the purported transfer
thereof. Upon transfer of such trust interest to one or more Eligible
Transferees, the Beacon Excess Shares subject to such trust interest shall be
reconverted to shares of Beacon Stock of the same class or series from which
they were converted to Beacon Excess Shares, with all rights appurtenant
thereto, and be distributed to such Eligible Transferees.
All Beacon Excess Shares shall be deemed to have been offered for sale to
Beacon, or its designee, at a price per share equal to the lesser of (i) the
price per Beacon Share in the transaction that created such Beacon Excess Shares
(or, in the case of devise or gift, the Beacon Market Price per share of such
Beacon Shares at the time of such devise or gift) and (ii) the Beacon Market
Price per Beacon Share of the class of Beacon Shares from which such Beacon
Excess Shares were converted on the date Beacon, or its designee, accepts such
offer. Beacon shall have the right to accept such offer at any time until 90
days after the date on which the Transferor gives written notice to Beacon of
any event or any purported transfer that results in the conversion of Beacon
Shares into Beacon Excess Shares and the nature and amount of all ownership
interests, direct or indirect, of record or beneficial, of such Transferor, or,
if no such notice is given, the date the Beacon Board determines that a
purported transfer resulting in the conversion of Beacon Shares into Beacon
Excess Shares has been made. Unless the Beacon Board determines that it is in
the interest of Beacon to make earlier payment thereof to the Transferor, the
redemption payment shall be paid, without interest, only upon liquidation of
Beacon and shall not exceed an amount equal to the lesser of (i) the price
described in the first sentence of this paragraph and (ii) the sum of the per
share distributions designated as liquidating distributions and return of
capital distributions declared subsequent to the redemption date with respect to
unredeemed shares of Beacon Shares of the class from which the redeemed Beacon
Excess Shares were converted.
In addition to the foregoing restrictions, Beacon Shareholders and their
transferees are or may be required to disclose to Beacon information relating to
ownership of Beacon Shares whenever the Beacon Board deems it reasonably
necessary to protect Beacon's status as a REIT, and the Beacon Board may refuse
to permit a transfer of Beacon Shares if in its opinion such transfer would
jeopardize the qualification of Beacon as a REIT.
If the Beacon Board determines that it is no longer in the best interests
of Beacon and its shareholders to continue to have Beacon qualify as a REIT, the
Beacon Board may revoke or otherwise terminate Beacon's REIT election pursuant
to Section 856(g) of the Code and the foregoing restrictions shall no longer
apply.
PREEMPTIVE RIGHTS
Neither the holders of EOP Common Shares nor the holders of EOP Preferred
Shares, on the one hand, nor holders of Beacon Common Shares nor the holders of
Beacon Preferred Shares, on the other hand, have preemptive rights. Thus, if
additional EOP Common Shares, EOP Preferred Shares, Beacon Common Shares
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or Beacon Preferred Shares were issued, the proportions of capital stock
ownership of the holders thereof would be reduced, to the extent they did not
participate in such additional issuance of shares.
ASSESSMENT
All outstanding EOP Common Shares are, all EOP Common Shares and EOP
Preferred Shares to be issued pursuant in the Merger will be, and, when issued,
all EOP Common Shares reserved for issuance upon redemption of EOP Partnership
Units to be issued in the Partnership Merger, will be, fully paid and
nonassessable.
The Beacon Common Shares and the Beacon Preferred Shares presently
outstanding are fully paid and nonassessable.
CONVERSION; REDEMPTION; SINKING FUND
GENERAL. Neither the EOP Common Shares, the EOP Preferred Shares, the
Beacon Common Shares, the Beacon Preferred Shares nor the Beacon Excess Shares
are convertible, redeemable or entitled to the benefit of any sinking fund,
except that the EOP Common Shares and the EOP Preferred Shares may be purchased
by EOP under certain provisions of EOP's Declaration of Trust designed to enable
EOP to preserve its status as a REIT under the Code, (see "-- REIT Qualification
Provisions -- EOP" above) and the Beacon Common Shares and the Beacon Preferred
Shares shall be converted into Beacon Excess Shares and vice versa and the
Beacon Excess Shares may be redeemed by Beacon, in each case under certain
provisions of the Beacon Articles designed to enable Beacon to preserve its
status as a REIT under the Code (see "-- REIT Qualification
Provisions -- Beacon" above) and the EOP Preferred Shares and the Beacon
Preferred Shares may be redeemed by EOP and Beacon, respectively, as described
below.
EOP PREFERRED SHARES. On and after June 15, 2002, EOP, at its option and
upon not less than 30 nor more than 60 days' written notice, may redeem the
outstanding EOP Preferred Shares, in whole or part, at any time or from time to
time, for cash at a redemption price of $25.00 per share, plus all accrued and
unpaid distributions thereon to the date fixed for redemption, without interest,
subject to the following limitations and to compliance by EOP with the
procedural requirements applicable to the redemption of EOP Preferred Shares.
First, if less than all of the outstanding EOP Preferred Shares are to be
redeemed, the EOP Preferred Shares to be redeemed shall be selected pro rata (as
nearly as may be practicable without creating fractional shares) or by any other
equitable method determined by EOP. Second, the redemption price of EOP
Preferred Shares (other than the portion thereof consisting of accrued and
unpaid distributions) is payable solely out of the sale proceeds of other equity
securities of EOP and any rights (other than debt securities convertible into or
exchangeable for such equity securities) or options to purchase any of the
foregoing. Third, unless full cumulative distributions on all EOP Preferred
Shares have been or contemporaneously are authorized and paid or authorized and
a sum sufficient for the payment thereof set apart for all past distribution
periods and the then current distribution period, no EOP Preferred Shares shall
be redeemed unless all outstanding EOP Preferred Shares are simultaneously
redeemed, and EOP shall not purchase or otherwise acquire directly or indirectly
any EOP Preferred Shares (except by exchange for shares of EOP ranking junior to
the EOP Preferred Shares as to distributions and upon liquidation (the "EOP
Junior Shares"); provided, however, that the foregoing shall not prevent the
purchase by EOP of EOP Preferred Shares in order to ensure that EOP remains
qualified as a REIT for federal income tax purposes or the purchase or
acquisition of EOP Preferred Shares pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding EOP Preferred Shares.
Any EOP Preferred Shares that have been redeemed shall, after such
redemption, have the status of authorized but unissued preferred shares of
beneficial interest, without designation as to series until such shares are once
more designated as part of a particular series by the EOP Board.
BEACON PREFERRED SHARES. On and after June 15, 2002, Beacon, at its option
and upon not less than 30 nor more than 60 days' written notice, may redeem the
outstanding Beacon Preferred Shares, in whole or part, at any time or from time
to time, for cash at a redemption price of $25.00 per share, plus all accrued
and unpaid distributions thereon to the date fixed for redemption, without
interest, subject to the following
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limitations and to compliance by Beacon with the procedural requirements
applicable to the redemption of Beacon Preferred Shares. First, if less than all
of the outstanding Beacon Preferred Shares are to be redeemed, the Beacon
Preferred Shares to be redeemed shall be selected pro rata (as nearly as may be
practicable without creating fractional shares) or by any other equitable method
determined by Beacon. Second, the redemption price of Beacon Preferred Shares
(other than the portion thereof consisting of accrued and unpaid distributions)
is payable solely out of the sale proceeds of other equity securities of Beacon
and any rights (other than debt securities convertible into or exchangeable for
such equity securities) or options to purchase any of the foregoing. Third,
unless full cumulative distributions on all Beacon Preferred Shares have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof set apart for all past dividend periods and the then current
dividend period, no Beacon Preferred Shares shall be redeemed unless all
outstanding Beacon Preferred Shares are simultaneously redeemed, and Beacon
shall not purchase or otherwise acquire directly or indirectly any Beacon
Preferred Shares (except by exchange for shares of Beacon ranking junior to the
Beacon Preferred Shares as to dividends and upon liquidation (the "Beacon Junior
Shares")) provided, however, that the foregoing shall not prevent the purchase
by Beacon of Beacon Excess Shares in order to ensure that Beacon remains
qualified as a REIT for federal income tax purposes or the purchase or
acquisition of Beacon Preferred Shares pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding Beacon Preferred Shares.
Any Beacon Preferred Shares that have been redeemed shall, after such
redemption, have the status of authorized but unissued preferred shares without
designation as to series until such shares are once more designated as part of a
particular series by the Beacon Board.
LIQUIDATION RIGHTS
EOP. In the event of any voluntary or involuntary liquidation, dissolution
or winding-up of the affairs of EOP, holders of outstanding EOP Common Shares
are entitled to share, in proportion to their respective interests, in EOP's
assets and funds remaining after payment, or provision for payment, of all debts
and other liabilities of EOP, including without limitations all obligations of
EOP with respect to any outstanding EOP Preferred Shares. Conversely, in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
EOP, the holders of any outstanding EOP Preferred Shares will be entitled to
receive out of the assets of EOP available for distribution to shareholders
remaining after payment or provision for payment of all debts and other
liabilities of EOP other than EOP's obligations with respect to any outstanding
EOP Junior Shares, a liquidation preference of $25.00 per share, plus an amount
equal to any accrued and unpaid distributions to the date of payment.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of EOP, the assets of EOP shall be insufficient to make such full payments to
holders of EOP Preferred Shares, then such assets shall be distributed pro rata
among holders of EOP Preferred Shares. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of EOP
Preferred Shares will not be entitled to any further participation in any
distribution of assets by EOP. Neither a consolidation or merger of EOP with or
into another corporation nor a merger of another corporation with or into EOP
nor a sale, lease or conveyance of all or substantially all of EOP's property or
business shall be considered a liquidation, dissolution or winding up of EOP.
BEACON. In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of Beacon, holders of outstanding
Beacon Common Shares and Beacon Excess Shares are entitled to share, in
proportion to their respective interests, in Beacon's assets and funds remaining
after payment, or provision for payment, of all debts and other liabilities of
Beacon, including without limitations all obligations of Beacon with respect to
any outstanding Beacon Preferred Shares. Conversely, in the event of any
voluntary or involuntary liquidation, dissolution or winding up of Beacon, the
holders of any outstanding Beacon Preferred Shares will be entitled to receive
out of the assets of Beacon available for distribution to shareholders remaining
after payment or provision for payment of all debts and other liabilities of
Beacon other than Beacon's obligations with respect to any outstanding Beacon
Junior Shares, a liquidation preference of $25.00 per share, plus an amount
equal to any accrued and unpaid dividends to the date of payment.
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If upon any voluntary or involuntary liquidation, dissolution or winding up
of Beacon, the assets of Beacon shall be insufficient to make such full payments
to holders of Beacon Preferred Shares, then such assets shall be distributed pro
rata among holders of Beacon Preferred Shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the holders of
Beacon Preferred Shares will not be entitled to any further participation in any
distribution of assets by Beacon. Neither a consolidation or merger of Beacon
with or into another corporation nor a merger of another corporation with or
into Beacon nor a sale, lease or conveyance of all or substantially all of
Beacon's property or business shall be considered a liquidation, dissolution or
winding up of Beacon.
DISTRIBUTIONS
In order to remain qualified as a REIT under the Code, each of EOP and
Beacon must distribute to its shareholders at least 95% of its taxable income
(other than net capital gain) annually. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification as a REIT -- Annual
Distribution Requirements Applicable to REITs." Under the MGCL, a dividend or
other distribution may not be made if after giving effect to it (i) the
corporation would not be able to pay its debts as they become due in the usual
course of business or (ii) the corporation's total assets would be less than the
corporation's total liabilities plus (unless the corporation's charter permits
otherwise) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights upon dissolution are
superior to those receiving the distribution. Under the Maryland REIT Law and
the EOP Declaration of Trust, there are no similar limits on the payment of
dividends or other distributions; however, a Maryland court could refer to the
MGCL in its decision as to the validity of a dividend or distribution made by a
trust REIT, such as EOP.
EOP. Holders of EOP Common Shares are entitled to cash distributions when,
if and as declared by the EOP Board. There can be no assurance as to the payment
of distributions on EOP Common Shares in the future because such payment will
depend upon the earnings and financial condition of EOP, as well as other
related factors. The Declaration of Trust permits the issuance of preferred
shares of beneficial interest having the right to receive distributions before
distributions on the EOP Common Shares are declared or paid. The EOP Preferred
Shares have such preferential distribution rights, as described below.
Holders of EOP Preferred Shares shall be entitled to receive, when and as
authorized by the EOP Board, out of funds legally available for the payment of
distributions, cumulative preferential cash distributions at the rate of 8.98%
of the $25.00 liquidation preference per annum (equivalent to a fixed annual
amount of $2.245 per share). Such distributions shall be cumulative and shall be
payable quarterly in arrears on or before March 15, June 15, September 15 and
December 15 of each year or, if not a business day, the next succeeding business
day. Distributions will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Distributions will be payable to the holders of record of
EOP Preferred Shares as they appear in the share records of EOP at the close of
business on the applicable record date, which shall be the first day of the
calendar month in which the applicable distribution payment date falls or such
other date designated by the EOP Board for the payment of distributions that is
not more than 30 nor less than ten days prior to such distribution payment date.
No distributions shall be authorized by the EOP Board or paid or set apart
for payment at such if such authorization, payment or setting apart for payment
would violate any agreement of EOP or is restricted or prohibited by law.
Distributions on the EOP Preferred Shares will, nonetheless, accrue whether or
not any of the foregoing restrictions exist, whether or not there are funds
legally available for the payment thereof and whether or not they are
authorized, and accrued but unpaid distributions will accumulate as of the
distribution payment date on which they first become payable.
Except for pro rata distributions with respect to the EOP Preferred Shares
and any EOP Parity Shares, no distributions on any EOP Parity Shares or EOP
Junior Shares will be authorized, paid or set aside for payment (other than a
distribution payable in EOP Junior Shares) for any period, no other distribution
on any EOP Parity Shares or EOP Junior Shares and no redemption, purchase or
other acquisition for consideration of EOP Parity Shares or EOP Junior Shares
shall be made, in each case unless full cumulative distributions
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on the EOP Preferred Shares have been or contemporaneously are authorized and
paid or authorized and a sum sufficient for full payment thereof is set aside.
BEACON. The holders of Beacon Common Shares are entitled to share ratably
in distributions when and as declared by the Beacon Board out of funds legally
available therefor. The Beacon Articles permit the issuance of preferred shares
having the right to receive distributions before distributions on the Beacon
Common Shares are declared or paid. The Beacon Preferred Shares have such
preferential distribution rights, as described below. The MGCL provides that
Beacon may not pay dividends if after giving effect to the dividend, Beacon
would not be able to pay its indebtedness as the indebtedness becomes due in the
usual course of business or Beacon's total assets would be less than the sum of
its total liabilities plus the amount that would be needed, if Beacon were to be
dissolved at such time, to satisfy any preferential rights upon dissolution held
by its shareholders whose preferential rights are superior to those receiving
the dividend.
Holders of Beacon Preferred Shares are entitled to receive, when and as
authorized by the Beacon Board, out of funds legally available for the payment
of dividends, cumulative preferential cash dividends at the rate of 8.98% of the
$25.00 liquidation preference per annum (equivalent to a fixed annual amount of
$2.245 per share). Such dividends are cumulative from the date of issuance and
are payable quarterly in arrears on or before March 15, June 15, September 15
and December 15 of each year or, if not a business day, the next succeeding
business day. Dividends are computed on the basis of a 360-day year consisting
of twelve 30-day months. Dividends are payable to the holders of record of
Beacon Preferred Shares as they appear in the share records of Beacon at the
close of business on the applicable record date, which shall be the first day of
the calendar month in which the applicable dividend payment date falls or such
other date designated by the Beacon Board for the payment of dividends that is
not more than 30 nor less than ten days prior to such dividend payment date.
No dividends shall be authorized by the Beacon Board or paid or set apart
for payment at such if such authorization, payment or setting apart for payment
would violate any agreement of Beacon or is restricted or prohibited by law.
Dividends on the Beacon Preferred Shares will, nonetheless, accrue whether or
not any of the foregoing restrictions exist, whether or not there are funds
legally available for the payment thereof and whether or not they are
authorized, and accrued but unpaid dividends will accumulate as of the dividend
payment date on which they first become payable.
Except for pro rata dividends with respect to the Beacon Preferred Shares
and any Beacon Parity Shares, no dividends on any Beacon Parity Shares or Beacon
Junior Shares will be authorized, paid or set aside for payment (other than a
dividend payable in Beacon Junior Shares) for any period, no other distribution
on any Beacon Parity Shares or Beacon Junior Shares and no redemption, purchase
or other acquisition for consideration of Beacon Parity Shares or Beacon Junior
Shares shall be made, in each case unless full cumulative dividends on the
Beacon Preferred Shares have been or contemporaneously are authorized and paid
or authorized and a sum sufficient for full payment thereof is set aside.
SHAREHOLDER MEETINGS
EOP. Pursuant to the EOP Bylaws, the Chairman of the Board, or the
President or one-third of the trustees may call special meetings of the
shareholders. Special meetings of shareholders shall also be called by the
Secretary of EOP upon the written request of the holders of shares entitled to
cast not less than a majority of all the votes entitled to be cast at such
meeting. Such request shall state the purpose of such meeting and the matters
proposed to be acted on at such meeting. Within ten days of the receipt of such
a request, the Secretary shall inform such shareholders of the reasonably
estimated cost of preparing and mailing notice of the meeting (including all
proxy materials that may be required in connection therewith) and, upon payment
by such shareholders to EOP of such costs, the Secretary shall, within 30 days
of such payment, or such longer period as may be necessitated by compliance with
any applicable statutory or regulatory requirements, give notice to each
shareholder entitled to notice of the meeting.
Unless requested by shareholders entitled to cast a majority of all the
votes entitled to be cast at such meeting, a special meeting need not be called
to consider any matter which is substantially the same as a matter voted on at
any meeting of the shareholders held during the preceding 12 months.
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The EOP Bylaws provide that (i) with respect to an annual meeting of
shareholders, nominations of persons for election to the EOP Board and the
proposal of business to be considered by shareholders may be made only (A)
pursuant to EOP's notice of the meeting, (B) by, or at the direction of, the EOP
Board or (C) by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the EOP Bylaws and (ii)
with respect to special meetings of the shareholders, only the business
specified in EOP's notice of meeting may be brought before the meeting of
shareholders and nominations of persons for election to the EOP Board may be
made only (A) pursuant to EOP's notice of the meeting, (B) by the EOP Board or
(C) provided that the EOP Board has determined that trustees shall be elected at
such meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the EOP Bylaws.
Not less than ten nor more than 90 days before each meeting of
shareholders, the Secretary shall give to each shareholder entitled to vote at
such meeting and to each shareholder not entitled to vote but who is entitled to
notice of the meeting written or printed notice stating the time and place of
the meeting and, in the case of a special meeting or as otherwise may be
required by any statute, the purpose for which the meeting is called. At any
meeting of shareholders, the presence in person or by proxy of shareholders
entitled to cast a majority of all the votes entitled to be cast at such meeting
shall constitute a quorum; but this requirement shall not affect any requirement
under any statute or the Declaration of Trust for the vote necessary for the
adoption of any measure. If such quorum is not present at any meeting of the
shareholders, the shareholders entitled to vote at such meeting, present in
person or by proxy, shall have the power to adjourn the meeting from time to
time to a date not more than 120 days after the original record date without
notice other than announcement at the meeting. At such adjourned meeting at
which a quorum shall be present, any business may be transacted which might have
been transacted at the meeting as originally notified.
A plurality of all the votes cast at a meeting of shareholders duly called
and at which a quorum is present shall be sufficient to elect a trustee. Each
share may be voted for as many individuals as there are trustees to be elected
and for whose election the share is entitled to be voted. A majority of the
votes cast at a meeting of shareholders duly called and at which a quorum is
present shall be sufficient to approve any other matter which may properly come
before the meeting, unless more than a majority of the votes cast is required by
statute, the Declaration of Trust or the EOP Bylaws. Unless otherwise provided
in the Declaration of Trust, each outstanding share, regardless of class, shall
be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders. A shareholder may cast the votes entitled to be cast by the shares
owned of record by such shareholder either in person or by proxy executed in
writing by the shareholder or by such shareholder's duly authorized attorney in
fact.
Any action required or permitted to be taken at a meeting of shareholders
may be taken without a meeting if a consent in writing, setting forth such
action, is signed by shareholders entitled to cast a sufficient number of votes
to approve the matter, as required by statute, the Declaration of Trust, or the
EOP Bylaws, and such consent is filed with the minutes of proceedings of the
shareholders.
BEACON. Pursuant to the Beacon Bylaws, the Chairman of the Board, the
President or a majority of the Beacon Board may call special meetings of
shareholders. In addition, the Secretary of Beacon shall call a special meeting
of the shareholders on the written request of shareholders entitled to cast at
least 25% of all the votes entitled to be cast at the meeting. Notwithstanding
the preceding sentence, unless requested by shareholders entitled to cast a
majority of all the votes entitled to be cast at the meeting, a special meeting
need not be called to consider any matter which is substantially the same as a
matter voted on at any special meeting of the shareholders held during the
preceding 12 months.
The Beacon Bylaws provide that (i) with respect to an annual meeting of
shareholders, nominations of persons for election to the Beacon Board may be
made only (A) by the Beacon Board or (B) by a shareholder who is entitled to
vote at the meeting and has complied with the advance notice procedures set
forth in the Beacon Bylaws and (ii) with respect to special meetings of the
shareholders, only the business specified in Beacon's notice of meeting may be
brought before such meeting.
Not fewer than ten nor more than 90 days before each meeting of
shareholders, the Secretary shall give to each shareholder entitled to vote at
such meeting and to each shareholder not entitled to vote who is entitled
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to notice of the meeting written or printed notice stating the time and place of
the meeting and, in the case of a special meeting or as otherwise may be
required by any statute, the purpose for which the meeting is called. At any
meeting of shareholders, the presence in person or by proxy of shareholders
entitled to cast a majority of all the votes entitled to be cast at such meeting
shall constitute a quorum; but this requirement shall not affect any requirement
under any statute or the Beacon Articles for the vote necessary for the adoption
of any measure. If such quorum is not present at any meeting of the
shareholders, the shareholders entitled to vote at such meeting, present in
person or by proxy, shall have the power to adjourn the meeting from time to
time. At such adjourned meeting at which a quorum shall be present, any business
may be transacted which might have been transacted at the meeting as originally
notified.
A majority of the votes cast at a meeting of shareholders duly called and
at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute, the Beacon Articles or the Beacon Bylaws.
Unless otherwise provided by statute, the Beacon Articles or the Beacon Bylaws,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote at a meeting of shareholders. A shareholder may
cast the votes entitled to be cast by the shares owned of record by such
shareholder either in person or by proxy executed in writing by the shareholder
or by such shareholder's duly authorized attorney in fact.
Any action required or permitted to be taken at a meeting of shareholders
may be taken without a meeting if a consent in writing, setting forth such
action, is signed by all the shareholders entitled to vote on the subject matter
thereof and any other shareholders entitled to notice of a meeting of
shareholders (but not to vote thereat) have waived in writing any rights which
they may have to dissent from such action, and such consents and waivers are
filed with the minutes of the proceedings of the shareholders.
INDEMNIFICATION
EOP. The Declaration of Trust authorizes EOP, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former shareholder, trustee or officer or (b) any individual
who, while a trustee of EOP and at the request of EOP, serves or has served as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his or her status as a present or
former trustee, officer or shareholder of EOP. The EOP Bylaws obligate EOP, to
the maximum extent permitted by Maryland law, to indemnify (a) any trustee,
officer or shareholder or any former trustee, officer or shareholder (including
any individual who, while a trustee, officer or shareholder and at the express
request of EOP, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, shareholder, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise) who has been
successful, on the merits or otherwise, in the defense of a proceeding to which
he was made a party by reason of service in such capacity, against reasonable
expenses incurred by him in connection with the proceeding or (b) any trustee or
officer or any former trustee or officer against any claim or liability to which
he may become subject by reason of such status.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. The foregoing
limitations on indemnification are also expressly set forth in the EOP Bylaws.
However, under the MGCL, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the
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corporation or for a judgment of liability on the basis that a personal benefit
was improperly received, unless, in either case, a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
BEACON. Beacon has the power to indemnify, by express provision in the
Beacon Bylaws, by agreement, or by majority vote of either its shareholders or
disinterested directors, any one or more of the following classes of
individuals: (i) present or former directors of Beacon, (ii) present or former
officers of Beacon, (iii) present or former agents and/or employees of Beacon,
(iv) present or former administrators, trustees or other fiduciaries under any
pension, profit sharing, deferred compensation, or other employee benefit plan
maintained by Beacon, and (v) any person serving or who has served at the
request of Beacon in any of these capacities for any other corporation,
partnership, joint venture, trust or other enterprise to the fullest extent
permitted by Maryland statutory or decisional law, as amended or interpreted;
provided, however, that Beacon shall not be obligated to indemnify or advance
expenses to a member of the foregoing classes of individuals (an "Indemnitee")
with respect to proceedings or claims initiated or brought voluntarily by an
Indemnitee and not by way of defense, except with respect to proceedings brought
to establish or enforce a right to indemnification under the Beacon Articles or
any other statute or law or otherwise as provided my the MGCL, but such
indemnification or advancement of expenses may be provided by Beacon in specific
cases if the Beacon Board has approved the initiation or bringing of such suit.
However, Beacon shall not have the power to indemnify any person to the extent
such indemnification would be contrary to Section 2-418 of the MGCL or any
successor provision of Maryland law or any other applicable statute, rule or
regulation. Beacon is obligated to indemnify an Indemnitee's spouse (whether by
statute or at common law and without regard to the location of the governing
jurisdiction) and children to the same extent and subject to the same
limitations applicable to an Indemnitee for claims arising solely out of the
status of such person as a spouse or child of an Indemnitee, including claims
seeking damages from marital property (including community property) or property
held by the Indemnitee and such spouse or child or transferred to such spouse or
child, but such indemnity shall not otherwise extend to protect the spouse
against liabilities caused by the spouse's own acts.
Pursuant to the Beacon Bylaws, Beacon is obligated to indemnify present and
former directors and officers of Beacon and any person who was or is serving at
the request of Beacon as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, to the full extent
permitted by the MGCL, (i) against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by Beacon, which approval shall not be unreasonably withheld)
actually and reasonably incurred by such person, or such portion thereof as to
which it is determined such person is entitled, in connection with
investigating, preparing for, defending or settling any threatened, pending or
completed action or proceeding, whether civil, administrative or investigative
(other than an action by or in the right of Beacon) by reason of such person's
service as a director or officer of Beacon or, at the request of Beacon, as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise in which Beacon had, directly or indirectly, an interest at the
time of such service and (ii) against expenses (including attorneys' fees)
actually and reasonably incurred by such person, or such portion thereof as to
which it is determined that such person is entitled, in connection with the
defense or settlement of any threatened, pending or completed action or
proceeding by or in the right of Beacon or any subsidiary of Beacon to procure a
judgment in its favor by reason of such person's service as a director or
officer of Beacon or, at the request of Beacon, as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise in
which Beacon had, directly or indirectly, an interest at the time of such
service, provided that Beacon shall not provide any indemnification for any
director's expenses relating to any willful or grossly negligent failure of a
director to notify the Beacon Board, and under certain circumstances the Beacon
Shareholders, that such director has an interest in an investment opportunity
presented to Beacon. Beacon is also obligated to indemnify the spouse and
children of the foregoing persons (to the extent arising out of the status of
such person as a spouse or child of any of the foregoing persons) with respect
to the matters described in clause (i) of the foregoing sentence. Beacon is
obligated to advance all expenses incurred by the foregoing
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persons in connection with the foregoing matters if such persons agree to repay
any such advances if it shall be ultimately determined that such person is not
entitled to the foregoing indemnification.
TRUSTEE AND DIRECTOR LIABILITY
As permitted by the Maryland REIT Law and the MGCL, respectively, the
Declaration of Trust and the Beacon Articles eliminate the liability of
trustees, directors and officers of EOP and Beacon, respectively, to EOP and
Beacon, respectively, and their shareholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit in
money, property or service or (b) active and deliberate dishonesty established
by a final judgment as being material to the cause of action.
AMENDMENTS TO CONSTITUENT DOCUMENTS
EOP. The Declaration of Trust may be amended only by the affirmative vote
of the holders of (i) not less than a majority of all the votes entitled to be
cast on the matter, if such action is taken in connection with a transaction,
approval of which requires by law the affirmative vote of shareholders and
pursuant to which EOP's business and assets will be combined with those of one
or more entitles (whether by merger, sale or other transfer of assets,
consolidation or share exchange (a "Business Combination")) or (ii) not less
than two-thirds of all of the votes entitled to be cast on the matter, if such
action is not taken in connection with a Business Combination. However,
amendments relating to changes in the number of authorized EOP Shares require
the approval of holders of a majority of all votes cast at a meeting of
shareholders at which a quorum is present, and, in certain cases, the approval
of holders of two-thirds of the EOP Preferred Shares outstanding at the time.
Under the Maryland REIT Law, a declaration of trust may permit the trustees by a
two-thirds vote to amend the declaration of trust from time to time to qualify
as a REIT under the Code or the Maryland REIT Law without the affirmative vote
or written consent of the shareholders. The Declaration of Trust permits such
action by the EOP Board. Also under the Maryland REIT Law, a declaration of
trust may permit the board of trustees to amend the declaration of trust to
increase the aggregate number of shares of beneficial interest or the number of
shares of any class without shareholder approval. Pursuant to this statute, the
Declaration of Trust authorizes the EOP Board to increase or decrease the
aggregate number of EOP Shares or the number of EOP Shares of any class of
beneficial interest of EOP but requires that such action be approved by the
affirmative vote of a majority of all the votes cast on the matter at a meeting
of shareholders at which a quorum is present, and, in certain cases, be approved
by holders of two-thirds of the EOP Preferred Shares outstanding at the time.
The EOP Bylaws may be amended by the affirmative vote of a majority of the
trustees present at a meeting of trustees duly called and at which a quorum is
present or by written consent of all the trustees, provided, however, that
amendments to provisions of the EOP Bylaws governing shareholder meetings, the
number of trustees, including the number of independent trustees, and the
amendment of the EOP Bylaws may not be amended without the consent of
shareholders by a majority of the votes cast at a meeting of shareholders duly
called and at which a quorum is present.
BEACON. The Beacon Articles may be amended only by the affirmative votes
of the holders of not less than two-thirds of all the votes entitled to be cast
in the matter and, in certain cases, with the affirmative votes of holders of
not less than two-thirds of the Beacon Preferred Shares outstanding at the time.
The Beacon Bylaws may be amended by the affirmative vote of a majority of
the directors present at a meeting of directors duly called and at which a
quorum is present or by written consent of all the directors or by holders of a
majority of the Beacon Common Shares outstanding at the time, provided, however,
that amendments to provisions of the Beacon Bylaws governing the indemnification
obligations of Beacon may not be amended without the affirmative vote of holders
of a majority of the Beacon Common Shares present at a meeting of Shareholders
duly called and at which a quorum is present and the consent of any indemnified
persons whose rights would be adversely affected by any such amendment and the
provisions of the Beacon Bylaws governing amendment of the Beacon Bylaws may not
be amended without the affirmative vote of holders of a majority of the Beacon
Common Shares present at a meeting duly called and at which a quorum is present.
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MERGERS; CONSOLIDATIONS; SALES OF ASSETS
EOP. Any Business Combination must be approved by the affirmative vote of
holders of not less than a majority of the EOP Common Shares then outstanding
and entitled to be cast on the matter and, in certain cases, by the affirmative
vote of holders of not less than two-thirds of the EOP Preferred Shares then
outstanding.
BEACON. Any merger or consolidation of Beacon or any sale or all or
substantially all of Beacon's assets must be approved by the affirmative vote of
holders of not less than two-thirds of the Beacon Common Shares then outstanding
and entitled to be cast on the matter and, in certain cases, by the affirmative
vote of holders of not less than two-thirds of the Beacon Preferred Shares then
outstanding.
CHARACTER OF ASSETS AND BUSINESS
Under the Maryland REIT Law, a Maryland real estate investment trust must
hold, either directly or through other entities, at least 75% of the value of
its assets in real estate assets, mortgages or mortgage related securities,
government securities, cash and cash equivalent items (including high-grade
short-term securities and receivables) and may not use or apply land for
farming, agriculture, horticulture or similar purposes. There are no such limits
for corporations, such as Beacon, which is organized under the MGCL.
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CERTAIN PROVISIONS OF MARYLAND LAW AND EOP'S
DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and the EOP Bylaws does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Declaration of Trust and the EOP Bylaws, copies of which are exhibits to the
Registration Statement of which this Joint Proxy Statement/Prospectus is a part.
The Declaration of Trust and the EOP Bylaws contain certain provisions that
could make more difficult an acquisition or change in control of EOP by means of
a tender offer, a proxy contest or otherwise. These provisions are expected to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of EOP to negotiate
first with the EOP Board. EOP believes that the benefits of these provisions
outweigh the potential disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals might result in an improvement
of their terms. See also "SHARES OF BENEFICIAL INTEREST -- Restrictions on
Ownership and Transfer."
CLASSIFICATION AND REMOVAL OF BOARD OF TRUSTEES; OTHER PROVISIONS
The Declaration of Trust provides for the EOP Board to be divided into
three classes of trustees, with each class to consist as nearly as possible of
an equal number of trustees. The term of office of the first class of trustees
will expire at the 1998 annual meeting of shareholders; the term of the second
class of trustees will expire at the 1999 annual meeting of shareholders; and
the term of the third class will expire at the 2000 annual meeting of
shareholders. At each annual meeting of shareholders, the class of trustees to
be elected at such meeting will be elected for a three-year term, and the
trustees in the other two classes will continue in office. Because shareholders
will have no right to cumulative voting for the election of trustees, at each
annual meeting of shareholders the holders of a majority of the EOP Common
Shares will be able to elect all of the successors to the class of trustees
whose term expires at that meeting.
The Declaration of Trust also provides that, except for any trustees who
may be elected by holders of a class or series of shares of beneficial interest
other than the EOP Common Shares, trustees may be removed only for cause and
only by the affirmative vote of shareholders holding at least a majority of all
the votes entitled to be cast for the election of trustees. Vacancies on the EOP
Board may be filled by the affirmative vote of the remaining trustees. A vote of
shareholders holding at least two-thirds of all the votes entitled to be cast
thereon is required to amend, alter, change, repeal or adopt any provisions
inconsistent with the foregoing classified board and trustee removal provisions.
These provisions may make it more difficult and time-consuming to change
majority control of the EOP Board and, thus, may reduce the vulnerability of EOP
to an unsolicited proposal for the takeover of EOP or the removal of incumbent
management.
Because the EOP Board will have the power to establish the preferences and
rights of additional series of shares of beneficial interest without a
shareholder vote, the EOP Board may afford the holders of any series of senior
shares of beneficial interest preferences, powers and rights, voting or
otherwise, senior to the rights of holders of EOP Common Shares. The issuance of
any such senior shares of beneficial interest could have the effect of delaying,
deferring or preventing a change in control of EOP. The EOP Board, however,
currently does not contemplate the issuance of any shares of beneficial interest
other than EOP Common Shares and the EOP Preferred Shares to be issued to
holders of the Beacon Preferred Shares in connection with the Merger.
CHANGES IN CONTROL PURSUANT TO MARYLAND LAW
MARYLAND BUSINESS COMBINATION LAW. Under the MGCL, as applicable to real
estate investment trusts, certain "business combinations" (including certain
mergers, consolidations, share exchanges and asset transfers and issuances and
reclassifications of equity securities) between a Maryland real estate
investment trust and any Interested Shareholder or an affiliate of the
Interested Shareholder are prohibited for five years after the most recent date
on which the Interested Shareholder becomes an Interested Shareholder.
Thereafter, any such business combination must be recommended by the board of
trustees of such trust and approved by at least (a) 80% of the votes entitled to
be cast by holders of outstanding voting shares of
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beneficial interest of the trust and (b) two-thirds of the votes entitled to be
cast by holders of voting shares of the trust other than shares held by the
Interested Shareholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the trust's
common shareholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its common shares. As
permitted by the MGCL, the EOP Board has opted out of the business combination
provisions of the MGCL. Consequently, the five-year prohibition and the
super-majority vote requirements will not apply to a business combination
involving EOP; however, the EOP Board may repeal this opt-out and cause EOP to
become subject to these provisions in the future.
MARYLAND CONTROL SHARE ACQUISITION LAW. The MGCL, as applicable to real
estate investments trusts, provides that "control shares" of a Maryland real
estate investment trust acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiror, by
officers or by trustees who are employees of the trust. "Control shares" are
voting shares which, if aggregated with all other such shares previously
acquired by the acquiror or in respect of which the acquiror is able to exercise
or direct the exercise of voting power (except solely by virtue of a revocable
proxy), would entitle the acquiror to exercise voting power in electing trustees
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority, or (iii) a
majority or more of all voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees of the trust to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the trust may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value determined, without regard to the absence of voting
rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of shareholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust. As permitted by the MGCL, the EOP Bylaws contain a
provision opting out of the control share provisions of the MGCL, but the EOP
Board may amend the EOP Bylaws so that acquisitions of shares of EOP are subject
to these provisions in the future.
AMENDMENTS TO THE DECLARATION OF TRUST
The Declaration of Trust, including its provisions on classification of the
EOP Board, restrictions on transferability of EOP Common Shares and removal of
trustees, may be amended only by the affirmative vote of the holders of not less
than two-thirds of all of the votes entitled to be cast on the matter. However,
amendments made in connection with a Business Combination and amendments
relating to changes in the number of authorized EOP Shares require the approval
of holders of only a majority of all votes cast at a meeting of shareholders at
which a quorum is present, and, in certain cases, the approval of holders of
two-thirds of the EOP Preferred Shares outstanding at the time. Under the
Maryland REIT Law, a declaration of trust may permit the trustees by a
two-thirds vote to amend the declaration of trust from time to
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time to qualify as a REIT under the Code or the Maryland REIT Law without the
affirmative vote or written consent of the shareholders. The Declaration of
Trust permits such action by the EOP Board. Also under the Maryland REIT Law, a
declaration of trust may permit the board of trustees to amend the declaration
of trust to increase the aggregate number of shares of beneficial interest or
the number of shares of any class without shareholder approval. Pursuant to this
statute, the Declaration of Trust authorizes the EOP Board to increase or
decrease the aggregate number of EOP Shares or the number of EOP Shares of any
class of beneficial interest of EOP but requires that such action be approved by
the affirmative vote of a majority of all the votes cast on the matter at a
meeting of shareholders at which a quorum is present, and in certain cases, be
approved by holders of two-thirds of the EOP Preferred Shares outstanding at the
time.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The EOP Bylaws provide that (i) with respect to an annual meeting of
shareholders, nominations of persons for election to the EOP Board and the
proposal of business to be considered by shareholders may be made only (A)
pursuant to EOP's notice of the meeting, (B) by the EOP Board or (C) by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the EOP Bylaws and (ii) with respect to
special meetings of the shareholders, only the business specified in EOP's
notice of meeting may be brought before the meeting of shareholders and
nominations of persons for election to the EOP Board may be made only (A)
pursuant to EOP's notice of the meeting, (B) by the EOP Board or (C) provided
that the EOP Board has determined that trustees shall be elected at such
meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the EOP Bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND THE EOP BYLAWS
The business combination provisions and the control share acquisition
provisions of the MGCL, in each case if they ever became applicable to EOP, the
provisions of the Declaration of Trust on classification of the EOP Board and
removal of trustees and the advance notice provisions of the EOP Bylaws could
delay, defer or prevent a transaction or a change in control of EOP that might
involve a premium price for holders of EOP Common Shares or otherwise be in
their best interests. The Declaration of Trust, as in effect, provides that a
merger, consolidation or sale of all or substantially all of the assets of EOP
must be approved by the affirmative vote of not less than a majority of all
votes entitled to be cast on the matter.
MARYLAND REIT LAW ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that EOP hold, either directly or through other
entities, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage-related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agriculture, horticulture or similar purposes.
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EOP PARTNERSHIP AGREEMENT
The following summary of the EOP Partnership Agreement, including the
descriptions of certain provisions thereof set forth elsewhere in this Joint
Proxy Statement/Prospectus, is qualified in its entirety by reference to the EOP
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part.
CAPITALIZATION
The EOP Partnership Agreement establishes (i) Class A units of partnership
interest of EOP Partnership ("EOP Class A Partnership Units"), of which, as of
the date of this Joint Proxy Statement/Prospectus, there are 175,795,840 issued
and outstanding, and (ii) Class B units of partnership interest of EOP
Partnership ("EOP Class B Partnership Units"), of which, as of the date of this
Joint Proxy Statement/Prospectus, there are 3,399,977 outstanding. (Unless
expressly stated otherwise in this Joint Proxy Statement/Prospectus, the term
"EOP Partnership Units" includes both the EOP Class A Partnership Units and the
EOP Class B Partnership Units.) Prior to the Effective Time, EOP, as the
managing general partner of EOP Partnership, is required to take such actions as
shall be necessary to cause EOP Partnership to issue to EOP in the Partnership
Merger 8,000,000 8.98% Series A preferred units having the rights, preferences
and other privileges, variations and designations described in this Joint Proxy
Statement/Prospectus in exchange for the outstanding Beacon Preferred Units
currently owned by Beacon.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
EOP, as the managing general partner of EOP Partnership, is authorized to
cause EOP Partnership from time to time to issue to partners of EOP Partnership
(including EOP and its affiliates) or other Persons EOP Partnership Units or
other partnership interests of EOP Partnership in one or more classes, or in one
or more series of any of such classes, with such designations, preferences and
relative, participating, optional or other special rights, powers and duties
(which may be senior to those of the EOP Partnership Units), as will be
determined by EOP, as the managing general partner of EOP Partnership, in its
sole and absolute discretion, provided that, no such EOP Partnership Units or
other partnership interests will be issued to EOP unless either (i) such EOP
Partnership Units or other partnership interests are issued in connection with
the grant, award or issuance of shares or other equity interests in EOP having
designations, preferences and other rights such that the economic interests
attributable to such shares or other equity interests are substantially similar
to the designations, preferences and other rights of such EOP Partnership Units
or other partnership interests, respectively, issued to EOP and EOP contributes
to EOP Partnership the proceeds of such shares or other equity interests
received by it or (ii) the additional EOP Partnership Units or other partnership
interests are issued to all partners holding EOP Partnership Units or other
partnership interests in the same class, respectively, in proportion to their
respective percentage interests in such EOP Partnership Units or class, as the
case may be.
At the election of EOP, as the managing general partner of EOP Partnership,
in its sole and absolute discretion, either EOP Class A Partnership Units or EOP
Class B Partnership Units may be issued to newly admitted partners, provided
that, any EOP Partnership Unit that is not specifically designated by EOP as
being of a particular class shall be deemed to be an EOP Class A Partnership
Unit. EOP Preferred Units shall be issued to EOP in the Partnership Merger in
exchange for Beacon Preferred Units currently held by Beacon.
CAPITAL CONTRIBUTIONS
No partner of EOP Partnership is required to make additional capital
contributions to EOP Partnership, except that EOP, as the managing general
partner of EOP Partnership, is generally required to contribute net proceeds of
the sale of equity interests in EOP to EOP Partnership. No limited or general
partner receiving EOP Partnership Units in the Partnership Merger is required to
pay to the EOP Partnership any deficit or negative balance which may exist in
its capital account.
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DISTRIBUTIONS
The EOP Partnership Agreement requires the distribution, on a quarterly or
shorter basis (a "Distribution Period"), of "Available Cash" (as defined below),
(i) first, to EOP, as the managing general partner of EOP Partnership, of an
amount that in the aggregate equals the amount of the distributions declared and
payable with respect to the EOP Preferred Shares for such Distribution Period
and (ii) second, to the partners of EOP Partnership in proportion to their
percentage interests in EOP Partnership (other than such interests represented
by their EOP Preferred Units) which, for any partner, is generally determined,
except as described below, by the number of EOP Partnership Units it owns
relative to the total number of EOP Partnership Units outstanding. "Available
Cash" is generally defined as net cash flow from operations plus any reduction
in reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments.
In the event that both EOP Class A Partnership Units and EOP Class B
Partnership Units are outstanding on the record date for a Distribution Period,
the Available Cash for such Distribution Period shall be allocated between the
EOP Class A Partnership Units and the EOP Class B Partnership Units, as well as
among any groups of EOP Class B Partnership Units which were outstanding for
different amounts of time during the Distribution Period, based on the total
number of days during such Distribution Period that each such class and or group
of units were outstanding. The portion of the Available Cash thus allocated
shall, in turn, be allocated among the holders of the applicable units in
proportion to their percentage interests in EOP Partnership as described above.
In no event may a partner receive a distribution of Available Cash with respect
to an EOP Class A Partnership Unit if such partner is entitled to receive a
distribution out of such Available Cash with respect to an EOP Common Share for
which such EOP Class A Partnership Unit has been redeemed or exchange. In no
event may a partner receive a distribution of Available Cash with respect to any
EOP Class B Partnership Unit for any Distribution Period ending prior to the
date on which such EOP Class B Partnership Unit was issued. Notwithstanding
anything to the contrary above, EOP Partnership must distribute to EOP, as the
managing general partner of EOP Partnership, an amount equal to the aggregate
amount necessary to redeem any EOP Preferred Shares which have been called for
redemption by EOP. Such distribution shall be made in redemption of a number of
EOP Preferred Units equal to the number of EOP Preferred Shares to be redeemed
with the funds to be distributed.
PREEMPTIVE RIGHTS
Except to the extent expressly granted by EOP Partnership pursuant to an
agreement other than the EOP Partnership Agreement, no person or entity,
including without limitation any partner of EOP Partnership, has any preemptive,
preferential or other similar right with respect to (i) additional capital
contributions or loans to EOP Partnership or (ii) the issuance or sale of any
EOP Partnership Units or other partnership interests of EOP Partnership.
LIQUIDATION PREFERENCES
Upon liquidation of EOP Partnership, partners holding EOP Preferred Units
shall be entitled to receive out the proceeds thereof, prior to any
distributions to holders of the EOP Partnership Units, pro rata, in the ratio in
which they hold such EOP Preferred Units, an amount equal to the liquidation
preference with respect to the EOP Preferred Shares plus any accrued but unpaid
distributions with respect to such shares.
CONVERSION OR REDEMPTION OF PARTNERSHIP INTERESTS
Each EOP Class B Partnership Unit shall be converted automatically into an
EOP Class A Partnership Unit on the day immediately following the record date
for the Distribution Period during which such EOP Class B Partnership Unit was
issued.
Subject to certain limitations described below, each limited partner other
than EOP has the right to require the redemption of such limited partner's EOP
Partnership Units at any time or from time to time beginning on the first
anniversary (or, in the case of EOP Partnership Units issued to the ZML
Investors in the Formation Transactions, the second anniversary) of the issuance
of such EOP Partnership Units to it or, in
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the case of any or all EOP Class A Partnership Units held by it, on or after
such earlier date as EOP, as the managing general partner of EOP Partnership,
designates in its sole and absolute discretion (the "Unit Redemption Right").
With respect to any EOP Partnership Units to be issued in the Partnership Merger
in exchange for Beacon Partnership Units, the foregoing holding period shall be
deemed to commence on the date of issuance of the Beacon Partnership Units to
the limited partners holding such EOP Partnership Units. In addition, each
limited partner may exercise such limited partners' Unit Redemption Right,
regardless of the length of time such limited partners has held such limited
partner's EOP Partnership Units, during the period commencing on the date EOP,
as the managing general partner of EOP Partnership, has given the limited
partners notice of its intention to make an extraordinary distribution of cash
or property to its shareholders or effect a merger, a sale of all or
substantially all of its assets or any other similar extraordinary transaction
and ending on the record date to determine shareholders eligible to receive such
distribution or to vote upon the approval of such merger, sale or other
extraordinary transaction (or, if no such record date is applicable, at least 20
business days before the consummation of such merger, sale or other
extraordinary transaction). A limited partner may exercise such limited
partner's Unit Redemption Right by giving written notice thereof to EOP
Partnership and EOP. The EOP Partnership Units specified in such notice shall be
redeemed on the 10th business date following the date on which EOP received the
redemption notice or, in the case of a the exercise of a Unit Redemption Right
in connection with an extraordinary transaction, the date on which EOP
Partnership and EOP received the redemption notice.
Unless EOP, as the managing general partner of EOP Partnership, elects to
assume and perform EOP Partnership's obligation with respect to a Unit
Redemption Right, as described below, a limited partner which exercises such
limited partner's Unit Redemption Right will receive cash from EOP Partnership
in an amount equal to the market value of the EOP Partnership Units to be
redeemed. The market value of an EOP Partnership Unit for this purpose will be
equal to the average of the closing trading price of an EOP Common Share on the
NYSE for the ten trading days before the day on which the redemption notice was
given. In lieu of EOP Partnership's acquiring the EOP Partnership Units for
cash, EOP, as the managing general partner of EOP Partnership, has the right to
elect to acquire on the redemption date the EOP Partnership Units directly from
a limited partner exercising the Unit Redemption Right, in exchange for cash in
the amount specified above or by issuance of a number of EOP Common Shares equal
to the number of EOP Partnership Units offered for redemption adjusted as
specified in the EOP Partnership Agreement to take into account prior share
distributions or subdivision or combinations of EOP Common Shares. Upon exercise
of the Unit Redemption Right, the limited partner's right to receive
distributions of the EOP Partnership Units so redeemed or exchanged will cease.
At least 1,000 EOP Partnership Units (or all remaining EOP Partnership Units
owned by the limited partner if less than 1,000 units) must be redeemed each
time the Unit Redemption Right is exercised. No redemption or exchange can occur
if delivery of common shares therefor would be prohibited either under the
provision of the Declaration of Trust or under applicable federal or state
securities laws, regardless of whether EOP, as the managing general partner of
EOP Partnership, would in fact assume and satisfy the Unit Redemption Right. EOP
will at times reserve and keep available out of its authorized but unissued EOP
Common Shares, solely for the purpose of effecting the issuance of EOP Common
Shares pursuant to the Unit Redemption Right, a sufficient number of EOP Common
Shares as shall from time to time be sufficient for the redemption of all
outstanding EOP Partnership Units not owned by EOP.
In the event any EOP Preferred Shares have been called for redemption, a
number of EOP Preferred Units equal to the number of EOP Preferred Shares called
for redemption must be redeemed. Such redemption shall be effectuated at such
time and in such manner as to allow the redemption of EOP Preferred Shares to be
completed in a timely fashion in accordance with the requirements applicable
thereto.
MANAGEMENT
EOP Partnership was formed on November 11, 1996, as a limited partnership
under the Delaware Revised Uniform Limited Partnership Act (the "Partnership
Act"). EOP is the managing general partner of EOP Partnership and expects at all
times to own a majority interest in EOP Partnership. ZML Opportunity
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Partnership II (of which EOP is the managing general partner) is an additional
general partner in EOP Partnership.
Except as otherwise expressly provided in the EOP Partnership Agreement,
all management powers over the business and affairs of EOP Partnership are
exclusively vested in the general partners and no limited partner has any right
to participate in or exercise control or management power over the business and
affairs of EOP Partnership or have the power to sign documents for or otherwise
bind EOP Partnership. EOP, as the managing general partner of EOP Partnership,
has full power and authority to do all things it deems necessary or desirable to
conduct the business of EOP Partnership, subject to the consent of the limited
partners in certain limited circumstances. In particular, EOP, as the managing
general partner of EOP Partnership, is under no obligation to consider the tax
consequences to limited partners when making decisions for the benefit of EOP
Partnership. The limited partners have no power to remove the general partners.
REIMBURSEMENT OF EOP; TRANSACTIONS WITH EOP AND ITS AFFILIATES
EOP is not entitled to receive any compensation for its services as the
managing general partner of EOP Partnership. EOP, however, as a partner in the
EOP Partnership, has the same right to allocations and distributions as other
partners of EOP Partnership. In addition, EOP Partnership is obligated to
reimburse EOP for all expenses it incurs relating to its activities as managing
general partner, its continued existence and qualification as a REIT and all
other liabilities incurred by EOP in connection with the pursuit of its business
and affairs (including expenses incurred by EOP in connection with the issuance
of EOP Common Shares or other securities of EOP). Except as expressly permitted
by EOP Partnership Agreement, affiliates of EOP will not engage in any
transactions with EOP Partnership except on terms that are fair and reasonable
and no less favorable to EOP Partnership than would be obtained from an
unaffiliated third party.
SALES OF SUBSTANTIALLY ALL OF THE ASSETS OF EOP PARTNERSHIP
A sale of all or substantially all of the assets of EOP Partnership in a
single transaction or a series of related transactions, including by way of a
merger, consolidation or other combination of EOP Partnership with another
entity, requires (i) the affirmative vote of the holders of a majority of the
outstanding EOP Partnership Units (including EOP Partnership Units held directly
or indirectly by EOP), if such transaction is in connection with a similar
transaction of EOP which has also been approved by the affirmative vote of the
holders of a majority of the outstanding EOP Partnership Units (including EOP
Partnership Units held directly or indirectly by EOP) and in connection with
which all limited partners have the right to receive consideration which, on a
per unit basis, is equivalent to the consideration to be received by the
shareholders of EOP or (ii) in the case of any other such transaction, the
affirmative vote of holders of a majority of the outstanding EOP Partnership
Units held by persons or entities other than EOP and certain of its affiliates.
INDEMNIFICATION
EOP Partnership is obligated to indemnify, to the fullest extent provided
by law, any person or entity made a party to a proceeding by reason of its
status as a general partner, a limited partner or a trustee, director or officer
of EOP Partnership or any general partner and such other persons or entities as
EOP, as the managing general partner of EOP Partnership, may designate from time
to time in its sole discretion (an "Indemnitee") from and against any and all
losses, claims, damages, liabilities, joint or several, expenses (including,
without limitation, attorneys fees and other legal fees and expenses),
judgments, fines, settlements and other amounts arising from or in connection
with any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, incurred by the Indemnitee and
relating to EOP Partnership or the general partners or the operation of, or the
ownership of property by, any of them as set forth in the EOP Partnership
Agreement in which any such Indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, unless it is established by a final
determination of a court of competent jurisdiction that: (i) the act or omission
of the Indemnitee was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the Indemnitee actually received an improper personal benefit
in money, property or services or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
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unlawful. Any indemnification shall be made only out of the assets of EOP
Partnership, and any insurance proceeds from the liability policy covering the
general partners and any Indemnitee, and neither a general partner nor any
limited partner shall have any obligation to contribute to the capital of EOP
Partnership or otherwise provide funds to enable EOP Partnership to fund its
indemnity obligations. EOP Partnership is obligated to advance amounts to an
Indemnitee for expenses upon receipt of (i) a written affirmation of the
Indemnitee that it believes it has met the standard of conduct necessary to
entitle it to indemnification and (ii) a written undertaking of the Indemnitee
that it will repay any such advances if it shall be ultimately determined that
it did not meet such standard of conduct. The foregoing indemnification rights
are in additions to any other rights afforded to an Indemnitee under any other
agreement, by vote of the partners, under applicable law or otherwise, and shall
continue as to an Indemnitee who has ceased to serve in such capacity unless
otherwise provided in a written agreement pursuant to which such Indemnitees are
indemnified. EOP Partnership is authorized to purchase and maintain insurance on
behalf of the Indemnitees with respect to the foregoing matters. EOP Partnership
shall be deemed to have requested an Indemnitee to serve as fiduciary of an
employee benefit plan whenever the performance by it of its duties to EOP
Partnership also imposes duties on, or otherwise involves services by, it to the
plan or participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute fines; and actions taken or omitted by the Indemnitee with
respect to an employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of EOP Partnership. An Indemnitee shall not be
denied indemnification in whole or in part because the Indemnitee had an
interest in the transaction with respect to which the indemnification applies if
the transaction was otherwise permitted by the terms of the EOP Partnership
Agreement.
TRANSFER OR PLEDGE OF PARTNERSHIP INTERESTS
EOP may not transfer any of its partnership interests (including any of its
limited partnership interests) except in connection with a merger, consolidation
or other combination with or into another Person, sale of all or substantially
all of its assets or any reclassification, recapitalization or change of its
outstanding shares and only if such transaction has been approved by the consent
of partners holding at least a majority of the then outstanding EOP Partnership
Units (including any EOP Partnership Units held by EOP and any other general
partner) and in connection with which all limited partners have the right to
receive consideration which, on a per unit basis, is equivalent to the
consideration to be received by the holders of corresponding EOP Common Shares,
nor shall EOP withdraw from EOP Partnership except in connection with such a
transaction. A general partner, other than EOP, may not transfer any of its
partnership interests or withdraw as a general partner except in connection with
a transaction described in the foregoing sentence and under other circumstances
specified in the EOP Partnership Agreement.
A limited partner (other than a general partner) may transfer, with or
without the consent of the general partners, all or any portion of such limited
partner's partnership interest, or any of such limited partner's economic rights
as a limited partner, if such transfer does not violate any federal or state
securities laws or regulations applicable to EOP Partnership or the EOP
Partnership Units, does not change the tax status of EOP Partnership or, in the
case of a proposed transfer to a lender of EOP Partnership or any person related
thereto whose loan constitutes a nonrecourse liability, if EOP, as the managing
general partner of EOP Partnership, does not consent to such transfer. No
transferee of a limited partnership interest shall be admitted as a limited
partner without the consent of EOP, as the managing general partner of EOP
Partnership, which may be given or withheld in its sole and absolute discretion.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the EOP Partnership Agreement may be proposed by any general
partners or by limited partners owning at least 25% of the total partnership
interests. Except as described below, the EOP Partnership Agreement may be
amended with the approval of the general partners and limited partners holding a
majority of the partnership interests held by the limited partners (including
limited partners who are general partners). EOP, as the managing general partner
of EOP Partnership, has the power, without the
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consent of the limited partners, to amend the EOP Partnership Agreement as may
be required (i) to add to the obligations of the general partners or surrender
any right or power granted to the general partners or any affiliate of a general
partner of the benefit of the limited partners, (ii) to reflect the admission,
substitution, termination or withdrawal of partners in accordance with the EOP
Partnership Agreement, (iii) to set forth the designations, rights, powers,
duties and preferences of the holders of any additional partnership interests
issued pursuant to its authority as the managing general partner, (iv) to
reflect a change that does not affect the limited partners in any material
respect, or to cure any ambiguity, correct or supplement any provision in the
EOP Partnership Agreement not inconsistent with law or with other provisions of
the EOP Partnership Agreement, or make other changes with respect to matters
arising under the EOP Partnership Agreement that will not be inconsistent with
law or with the provisions of the EOP Partnership Agreement and (v) to satisfy
any requirements, conditions or guidelines contained in any order, directive,
opinion, ruling or regulation of a federal, state or local law. Amendments of
provisions regarding, among other things, restrictions imposed on the issuance
of additional EOP Partnership Units or other partnership interests to EOP,
distribution requirements with respect to the EOP Class A Partnership Units in
the event that EOP is not publicly traded, the prohibition against removal of
the general partners by the limited partners, restrictions on the general
partners' power to conduct businesses other than owning partnership interests of
EOP Partnership or managing EOP Partnership, limitations on transactions with
affiliates, the liability of the general partners for monetary damages to EOP
Partnership, partnership consent requirements for the sale of substantially all
the assets of EOP Partnership, the transfer of partnership interests of general
partners, the admission and rights of substituted limited partners or the
dissolution of EOP Partnership, may not be amended without the approval of a
majority of the partnership interests held by limited partners other than EOP or
certain of its affiliates. Any amendment of the provision of the EOP Partnership
Agreement which allows the voluntary dissolution of EOP Partnership prior to
December 31, 2046 can be made only with the approval of 90% of the outstanding
partnership interests (including partnership interests held by the general
partners). Amendments to the EOP Partnership Agreement that would, among other
things, (i) convert a limited partner's interest into a general partner's
interest, (ii) modify the limited liability of a limited partner, (iii) alter
the interest of a partner in profits or losses, or the right to receive any
distributions (except as permitted under the EOP Partnership Agreement with
respect to the admission of new partners or the issuance of additional EOP
Partnership Units), or (iv) alter any redemption right, must be approved by each
limited partner that would be adversely affected by such amendment.
MEETINGS
Meetings of the partners may be called by EOP, as the managing general
partner of EOP Partnership, and must be called upon the receipt by EOP of a
written request by limited partners holding 25% or more of the partnership
interests. The call shall state the nature of the business to be transacted.
Notice of any such meeting shall be given to all partners not less than seven
days nor more than 30 days prior to the date of such meeting. Partners may vote
in person or by proxy at such meeting. Whenever the vote or consent of partners
is permitted or required under the EOP Partnership Agreement, such vote or
consent may be given at a meeting of partners. Except as otherwise expressly
provided in the EOP Partnership Agreement, the consent of holders of a majority
of the percentage interests held by limited partners (including limited
partnership interests held by general partners) shall control.
Any action required or permitted to be taken at a meeting of the partners
may be taken without a meeting if a written consent setting forth the action so
taken is signed by a majority of the percentage interests of the partners (or
such other percentage as is expressly required by the EOP Partnership Agreement.
FINANCIAL STATEMENTS AND REPORTS
As soon as practicable, but in no event later than the date on which EOP
mails its annual report to its shareholders, EOP, as the managing general
partner of EOP Partnership, will cause to be mailed to each limited partner an
annual report, as of the close of the most recently ended fiscal year of EOP
Partnership, containing financial statements of EOP Partnership, or of EOP if
such statements are prepared solely on a consolidated basis with EOP
Partnership, for such fiscal year, presented in accordance with GAAP and
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audited by a nationally recognized firm of independent public accountants
selected by EOP, as the managing general partner of EOP Partnership. In
addition, if and to the extent that EOP mails quarterly reports to its
shareholders, as soon as practicable, but in no event later than the date on
which such reports are mailed, EOP, as the managing general partner of EOP
Partnership, shall cause to be mailed to each limited partner a report
containing unaudited financial statements, as of the last day of such calendar
quarter, of EOP Partnership, or of EOP if such statements are prepared solely on
a consolidated basis with EOP Partnership, and such other information as may be
required by applicable law or regulation, or as EOP, as the managing general
partner of EOP Partnership, determines to be appropriate.
TERM
EOP Partnership will be dissolved and its affairs wound up upon the
earliest of (i) December 31, 2095; (ii) the withdrawal of EOP as general partner
and the absence of remaining general partners or a duly appointed successor
general partner; (iii) the sale of all or substantially all of the EOP
Partnership's assets and properties; (iv) the entry of a decree of judicial
dissolution of the EOP Partnership pursuant to the provisions of the Partnership
Act; (v) the entry of a final non-appealable judgment ruling that the last
remaining general partner is bankrupt or insolvent (except that, in either such
case, in certain circumstances the limited partners (other than EOP) may vote to
continue the EOP Partnership and substitute a new general partner in place of
EOP); (vi) prior to January 1, 2046, with the consent of holders (including EOP)
of 90% of the outstanding EOP Partnership Units; or (vii) on or after January 1,
2046, on election by EOP, in its sole and absolute discretion.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations relating to the Merger and the subsequent ownership and
disposition of EOP Common Shares that are reasonably anticipated to be material
to a holder of EOP Common Shares or Beacon Common Shares. The following
description is for general information only, is not exhaustive of all possible
tax considerations, and is not intended to be and should not be construed as tax
advice. For example, this summary does not give a detailed discussion of any
state, local or foreign tax consequences. In addition, this discussion is
intended to address only those federal income tax considerations that are
generally applicable for all shareholders in EOP and Beacon. It does not discuss
all aspects of federal income taxation that might be relevant to a specific
shareholder in light of its particular investment or tax circumstances. The
description does not purport to deal with aspects of taxation that may be
relevant to shareholders subject to special treatment under the federal income
tax laws, including, without limitation, insurance companies, financial
institutions or broker-dealers, tax-exempt organizations (except to the extent
discussed under the subheading "-- Taxation of Tax-Exempt Shareholders of EOP")
or foreign corporations and persons who are not citizens or residents of the
United States (except to the extent discussed under the subheading "-- Taxation
of Non-U.S. Shareholders of EOP").
The information in this section is based on the Code, current, temporary
and proposed Treasury Regulations thereunder, the legislative history of the
Code, current administrative interpretations and practices of the IRS (including
its practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law or
adversely affect existing interpretations of current law. Any such change could
apply retroactively to transactions preceding the date of the change. Except as
described below in "-- Requirements for Qualification as a REIT -- Income Tests
Applicable to REITs," EOP has not requested and does not plan to request any
rulings from the IRS concerning the tax treatment of the Merger, EOP or EOP
Partnership. Thus no assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged.
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As used in this section, the term "EOP" refers solely to Equity Office
Properties Trust, and the term "Beacon" refers solely to Beacon Properties
Corporation.
EACH HOLDER OF BEACON COMMON SHARES IS URGED TO CONSULT WITH ITS OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE MERGER AND THE
ACQUISITION, OWNERSHIP AND SALE OF EOP COMMON SHARES IN LIGHT OF ITS SPECIFIC
TAX AND INVESTMENT SITUATIONS AND THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN
TAX LAWS APPLICABLE TO IT.
TAX CONSEQUENCES OF THE MERGER TO BEACON SHAREHOLDERS, BEACON, AND EOP
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code and the federal income tax consequences summarized below are based
on the assumption that the Merger will qualify as a reorganization. Hogan &
Hartson L.L.P. ("Hogan & Hartson"), counsel to EOP, and Goodwin, Procter & Hoar
LLP ("Goodwin, Procter & Hoar"), counsel to Beacon, as a condition to the
Merger, will deliver opinions to EOP and Beacon, respectively, to the effect
that the Merger will qualify as a reorganization under the provisions of Section
368(a) of the Code, based on certain factual assumptions and representations
made by EOP and Beacon. The opinions of Hogan & Hartson and Goodwin, Procter &
Hoar will be based, in part, upon representations by the management of Beacon
and EOP to the effect that, to the knowledge of the management of Beacon and the
management of EOP, there is no plan or intention on the part of the shareholders
of Beacon to dispose of EOP Common Shares and EOP Preferred Shares received in
the Merger such that the aggregate value of the EOP Common Shares and EOP
Preferred Shares held by former Beacon Shareholders is reduced to less than 50%
of the value of the Beacon Common Shares and Beacon Preferred Shares as of the
Effective Time, and upon counsels' respective assumptions to the effect that
such representations are correct as if made without such "knowledge"
qualification.
If the Merger qualifies as a reorganization under Section 368(a) of the
Code, a Beacon Shareholder who receives solely EOP Common Shares in exchange for
his or her shares of Beacon Common Shares will not recognize any gain or loss on
the exchange (but all Beacon Shareholders and EOP Shareholders will recognize
income in the amount of any Pre-Merger Distributions (defined below) made to
them). See "-- Pre-Merger Distributions." If a Beacon Shareholder receives EOP
Common Shares and cash in lieu of a fractional EOP Common Share, such Beacon
Shareholder will recognize taxable gain or loss solely with respect to such cash
in an amount equal to the difference between such cash amount and the tax basis
allocated to such Beacon Shareholder's fractional share interest in EOP. Such
gain or loss will constitute capital gain or loss if the shareholder's Beacon
Common Shares were held as a capital asset. A Beacon Shareholder will have an
aggregate tax basis in his EOP Common Shares received in the Merger equal to his
aggregate tax basis in the shares of Beacon Common Shares (reduced by the amount
of any tax basis allocable to a fractional share interest for which cash is
received) exchanged therefor. A Beacon Shareholder's holding period for EOP
Common Shares received in the Merger will include his holding period for the
Beacon Common Shares exchanged therefor, if such shares are held as a capital
asset by the Beacon Shareholder at the Effective Time of the Merger. In the
event a Beacon Shareholder holds multiple blocks of Beacon Common Shares that
have different holdings periods and/or different tax bases, the EOP Common
Shares received for each such block of Beacon Common Shares will have a separate
tax basis and holding period that is determined by reference to the specific tax
basis and holding period of the specific Beacon Common Shares exchanged
therefor.
No gain or loss should be recognized by EOP or Beacon as a result of the
Merger so long as the merger qualifies as a reorganization under Section 368(a)
of the Code.
If, for any reason, the Merger did not qualify as a reorganization for
federal income tax purposes, the Merger would be treated as a taxable exchange,
and, accordingly,
(i) a Beacon Shareholder would recognize gain or loss, measured by the
difference between the fair market value of the EOP Common Shares
(including any cash received for a fractional share interest) received and
the Beacon Shareholder's adjusted tax basis in its Beacon Common Shares.
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(ii) the tax basis of the EOP Common Shares received in connection
with the Merger by a Beacon Shareholder would be the fair market value at
the Effective Time of such EOP Common Shares; and
(iii) the holding period of the EOP Common Shares received by a Beacon
Shareholder pursuant to the Merger would commence on the day following the
date of the Effective Time.
In addition, if the Merger did not qualify as a reorganization, Beacon would
recognize gain or loss equal to the difference between Beacon's basis in its
various properties and assets and the sum of the fair market value of the EOP
Common Shares and EOP Preferred Shares (including cash attributable to
fractional share interests) issued in the Merger and the outstanding debt of
Beacon, including Beacon's allocable share of the outstanding debt of Beacon
Partnership, as determined for tax purposes. As a result of the Merger, for
purposes of computing Beacon's dividends paid deduction, Beacon generally would
be deemed to pay a dividend to its shareholders in an amount equal to the lesser
of (i) gain, if any, recognized by Beacon in the Merger, or (ii) the fair market
value of the EOP Common Shares and EOP Preferred Shares (including cash
attributable to fractional share interests). In computing its taxable income for
the taxable year ending on the date of the Merger, Beacon generally would be
entitled to a dividends paid deduction equal to such deemed dividend. To the
extent that Beacon's gain, if any, were to exceed the fair market value of the
EOP Common Shares and EOP Preferred Shares (including cash attributable to
fractional share interests) issued in the Merger, such gain generally would be
taxable to Beacon, with the liability for the tax attributable thereto
transferring to EOP.
PRE-MERGER DISTRIBUTIONS
The Agreement provides that Beacon will distribute to its shareholders
immediately prior to the Merger the minimum amount necessary for Beacon to
satisfy the REIT distribution requirements under Section 857(a)(1) of the Code
for Beacon's short taxable year ending with the Merger. The Agreement also
provides that, should such distribution by Beacon occur, EOP shall distribute to
its shareholders an amount per share equal to (i) the amount per share of any
such dividend paid by Beacon, divided by (ii) the Exchange Ratio. Any such
distributions by Beacon and EOP are referred to herein as "Pre-Merger
Distributions." Except as provided below with respect to any Pre-Merger
Distributions that may be designated as capital gain dividends, (i) any
Pre-Merger Distributions paid to Beacon's taxable U.S. shareholders out of
Beacon's current or accumulated earnings and profits would be taken into account
by such U.S. shareholders as ordinary income and would not be eligible for the
dividends received deduction generally available for corporations, and (ii) any
Pre-Merger Distributions paid to EOP's taxable U.S. shareholders out of EOP's
current or accumulated earnings and profits would be taken into account by such
U.S. shareholders as ordinary income and would not be eligible for the dividends
received deduction generally available for corporations. Any Pre-Merger
Distributions in excess of current and accumulated earnings and profits of
either Beacon (in the case of any Beacon Pre-Merger Distributions) or EOP (in
the case of any EOP Pre-Merger Distributions) would not be taxable to the
shareholder to the extent that such distribution does not exceed the adjusted
basis of the shareholder's shares with respect to which the distribution is
made, but rather would reduce the adjusted basis of such shares. To the extent
that any such Pre-Merger Distribution in excess of earnings and profits exceeds
the adjusted basis of the shareholder's shares, such distribution would be
included in the shareholder's income as capital gain (for noncorporate
shareholders, such capital gain will be long-term capital gain if the shares
have been held for more than 18 months, mid-term capital gain if the shares have
been held for more than one year, but not more than 18 months, or short-term
capital gain if the shares have been held for one year or less; for corporate
shareholders, such capital gain will be long-term capital gain if held the
shares have been held for more than one year or short-term capital gain if the
shares have been held for one year or less), assuming the shareholder holds the
shares as a capital asset at the time of the Merger. Any Pre-Merger
Distributions designated as capital gain dividends will be taxed as capital gain
(to the extent they do not exceed the payor's actual net capital gain for the
taxable year) as described in greater detail below, provided that corporate
shareholders may be required to treat up to 20% of certain capital gain
distributions as ordinary income. For an explanation of the treatment of capital
gains distributions generally, see "-- Taxation of Taxable U.S. Shareholders of
EOP Generally -- Distributions by EOP."
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TAXATION OF EOP AS A REIT -- GENERAL
EOP plans to make an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997, when it files its federal income tax return for 1997. EOP believes that,
commencing with its formation on July 11, 1997, it has been organized and has
operated in such a manner so as to qualify for taxation as a REIT under the
Code. Beacon currently has in effect an election to be taxed as a REIT under
Sections 856 through 860 of the Code. Beacon believes that, since its inception
in 1994, it has been organized and has operated in such a manner so as to
qualify for taxation as a REIT under the Code. As a result of the Merger,
Beacon's separate existence will cease as of the Effective Time. Accordingly,
the following discussion summarizes only the taxation of EOP subsequent to the
Effective Time. Prior to the Effective Time, the taxation of Beacon as a REIT is
substantially similar to that described herein with respect to EOP.
EOP's continued qualification as a REIT after the Merger could depend in
part upon Beacon's qualification as a REIT immediately prior to the Merger. In
this regard, as a condition to the Merger, EOP will obtain an opinion from
Goodwin, Procter & Hoar to the effect that Beacon, commencing with its taxable
year ended December 31, 1994, through its short taxable year ending at the
Effective Time, was organized and has operated in conformity with the
requirements for qualification as a REIT. The opinion of Goodwin, Procter & Hoar
will be conditioned upon certain representations made by Beacon as to factual
matters relating to the organization and operation of Beacon, the Beacon
Partnership and their affiliates. In addition, this opinion will be based upon
the timely completion of all actions described in this Joint Proxy
Statement/Prospectus (including payment of the Beacon Pre-Merger Distribution)
and upon the assumption that EOP, on behalf of Beacon, will send the shareholder
demand letters required to be delivered with respect to Beacon's taxable year
ending at the time of the Merger and that EOP will maintain such records of
Beacon as required to comply with the REIT record keeping requirements. Beacon
intends to continue to operate in a manner so as to qualify as a REIT through
the Effective Time of the Merger, but no assurance can be given that Beacon will
qualify or remain qualified as a REIT for such period. Moreover, such
qualification and taxation as a REIT depends upon Beacon's ability to meet
(through actual annual operating results, distribution levels and diversity of
share ownership) through the Effective Time the various REIT qualification tests
imposed under the Code, the results of which will not be reviewed by Goodwin,
Procter & Hoar. Accordingly, no assurance can be given that the actual results
of Beacon's operations for any particular taxable year will satisfy such
requirements.
Hogan & Hartson, counsel to EOP in connection with the Merger, will deliver
an opinion to each of EOP and Beacon to the effect that EOP is organized in
conformity with the requirements for qualification and taxation as a REIT under
the Code, and that after giving effect to the consummation of the Merger, EOP's
proposed method of operation will enable it to continue to meet the requirements
for qualification and taxation as a REIT. This opinion will be conditioned upon
certain representations made by EOP and the ZML REITs as to factual matters
relating to the organization and operation of EOP, EOP Partnership and the ZML
Opportunity Partnerships (and the previous organization and operation of the ZML
REITs, which were combined to form EOP). In addition, this opinion will be based
upon the factual representations of EOP concerning its business and properties
as set forth in this Joint Proxy Statement/Prospectus and the timely completion
of all actions described in this Joint Proxy Statement/Prospectus (including EOP
making an election to be taxed as a REIT with its federal income tax return for
the year ending December 31, 1997). Finally, to the extent that the opinion of
Hogan & Hartson addresses the continued qualification of EOP as a REIT following
the Merger, it will be based in part upon the opinion of Goodwin, Procter & Hoar
described above as to the qualification of Beacon as a REIT and the
representations made by Beacon in connection therewith as described above. EOP
intends to continue to operate in a manner so as to qualify as a REIT following
the Effective Time, but no assurance can be given that EOP will qualify or
remain qualified as a REIT. Moreover, such qualification and taxation as a REIT
depends upon EOP's ability to meet on a ongoing basis (through actual annual
operating results, distribution levels and diversity of share ownership) the
various qualification tests imposed under the Code discussed below, the results
of which will not be reviewed by Hogan & Hartson. Accordingly, no assurance can
be given that the actual results of EOP's operations for any particular taxable
year will satisfy such requirements. See "-- Requirements for Qualification as a
REIT -- Failure of EOP to Qualify as a REIT."
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The sections of the Code and the corresponding Treasury Regulations
relating to qualification and operation as a REIT are highly technical and
complex. The following discussion sets forth certain material aspects of the
rules that govern the federal income tax treatment of a REIT and its
shareholders. The discussion is qualified in its entirety by the applicable Code
provisions, Treasury Regulations and administrative and judicial interpretations
thereof, all of which are subject to change prospectively or retroactively.
So long as EOP qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is distributed
currently to EOP Shareholders. This treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from investment in a regular corporation. However, EOP
will be subject to federal income tax in the following circumstances. First, EOP
will be taxed at regular corporate rates on any undistributed REIT taxable
income, including undistributed net capital gains. Second, under certain
circumstances, EOP may be subject to the "alternative minimum tax" on any items
of tax preference. Third, if EOP has (i) net income from the sale or other
disposition of certain "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if EOP has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if EOP
should fail to satisfy the 75% gross income test or the 95% gross income test
(discussed below), and nonetheless should maintain its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of either the amount by which
it fails the 75% gross income test or the amount by which it fails the 95% gross
income test. Sixth, if EOP should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, it would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
Seventh, if EOP acquires or has acquired (or if Beacon has acquired) any asset
from a C corporation (i.e., a corporation generally subject to full corporate-
level tax) in a transaction in which the basis of the asset in the acquiror's
hands is determined by reference to the basis of the asset (or any other asset)
in the hands of the C corporation and the acquiror recognizes gain on the
disposition of such asset during the 10 year period beginning on the date on
which such asset was acquired by it, then to the extent of such asset's
"Built-In Gain" (i.e., the excess of (a) the fair market value of such asset at
the time of the acquisition by EOP (or Beacon) over (b) the adjusted basis in
such asset, determined as of the time of such acquisition), such gain will be
subject to tax at the highest regular corporate rate applicable, pursuant to
anticipated Treasury Regulations that have not yet been promulgated.
The results described above with respect to the recognition of Built-In
Gain assume that EOP will make (or that Beacon made, if applicable) an election
pursuant to IRS Notice 88-19 with respect to any such acquisition. In this
regard, the Built-In Gain rules would apply with respect to any assets acquired
by EOP from a ZML REIT or Beacon if either such ZML REIT had failed, or Beacon
has failed, to qualify, for any reason, as a REIT throughout the duration of its
existence. If EOP were not to make an election pursuant to IRS Notice 88-19 (or
that election no longer were available because of a change in applicable law)
and a ZML REIT or Beacon failed to qualify as a REIT at the time of its merger
with EOP, the entity that failed to so qualify would recognize taxable gain on
such merger under the Built-In Gain rules, notwithstanding that such merger
otherwise qualified as a "tax-free reorganization." EOP believes that each of
the ZML REITs qualified as a REIT at the time of its merger into EOP, and EOP
will receive an opinion to such effect with respect to Beacon from Goodwin,
Procter & Hoar, counsel to Beacon, but EOP intends to make a protective election
under Notice 88-19 with respect to the merger of each of the ZML REITs and
Beacon in order to avoid the adverse consequences that otherwise could result.
REQUIREMENTS FOR QUALIFICATION AS A REIT
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for
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Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned directly or
indirectly by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year which has not been revoked or terminated) and satisfies
all relevant filing and other administrative requirements established by the IRS
that must be met in order to elect and maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (i) to
(iv) inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. For
purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. However, a trust that is a qualified
trust under Code Section 401(a) generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule.
EOP believes that it has issued sufficient EOP Common Shares with
sufficient diversity of ownership to allow it to satisfy the conditions
described in clauses (v) and (vi) above. In addition, the Declaration of Trust
contains restrictions regarding the transfer of EOP Common Shares and EOP
Preferred Shares that are intended to assist EOP in continuing to satisfy the
share ownership requirements described in clauses (v) and (vi) above. (The
Beacon Articles contain similar restrictions with respect to Beacon Common
Shares and Beacon Preferred Shares.) Such ownership and transfer restrictions
are described in "SHARES OF BENEFICIAL INTEREST -- Restrictions on Ownership and
Transfer." These restrictions, however, may not ensure that EOP will, in all
cases, be able to satisfy the share ownership requirements described above. If
EOP fails to satisfy such share ownership requirements, EOP's status as a REIT
will terminate. See "-- Requirements for Qualification as a REIT."
In connection with the 5/50 Rule, a REIT is required to send annual letters
to its shareholders requesting information regarding the actual ownership of its
shares. Pursuant to the Taxpayer Reform Act of 1997 (the "1997 Act"), for EOP's
taxable years beginning on or after January 1, 1998, if EOP complies with the
annual letters requirement and it does not know or, exercising reasonable
diligence, would not have known of its failure to meet the 5/50 Rule, then it
will be treated as having met the 5/50 Rule. Under current law applicable for
EOP's taxable year ending December 31, 1997, failure to send such annual letters
could result in termination of EOP's REIT election. The 1997 Act imposes a
monetary penalty for failure to send the annual letters in lieu of termination
of REIT status.
In order to qualify as a REIT, EOP cannot have at the end of any taxable
year any undistributed "earnings and profits" that are attributable to a "C
corporation" taxable year. EOP itself was a newly formed entity in 1997 and will
make a REIT election for its first taxable year ending December 31, 1997. Hence,
EOP itself will not have any undistributed "C corporation earnings and profits."
However, EOP succeeded to various tax attributes of the ZML REITs, including any
undistributed "earnings and profits." If each ZML REIT qualified as a REIT
throughout the duration of its existence, then any undistributed "earnings and
profits" to which EOP succeeded will not be "C corporation earnings and profits"
and EOP will satisfy this requirement. If, however, one or more of the ZML REITs
failed to qualify as a REIT throughout the duration of its existence, then it
might have had undistributed "C corporation earnings and profits" that, if not
distributed by EOP prior to the end of its first taxable year, could prevent EOP
from qualifying as a REIT. EOP believes that each ZML REIT qualified as a REIT
throughout the duration of its existence and that, in any event, no ZML REIT
should be considered to have had any undistributed "C corporation earnings and
profits" at the time of its merger into EOP. There can be no assurance, however,
that the IRS would not contend otherwise on a subsequent audit of one or more of
the ZML REITs. Recently finalized Treasury Regulations provide for certain
"deficiency distribution" procedures. Although the application of these
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Treasury Regulations is not entirely clear, it appears that EOP may be able to
use such "deficiency distribution" procedures to distribute any "C corporation
earnings and profits" deemed to have been acquired from a ZML REIT. In order to
use this procedure, EOP would have to make an additional distribution to EOP
Shareholders (in addition to distributions made for purposes of satisfying the
normal REIT distribution requirements), within 90 days of the IRS determination.
In addition, EOP would have to pay to the IRS an interest charge on 50% of the
acquired "C corporation earnings and profits" that were not distributed prior to
the end of EOP's taxable year ending December 31, 1997. There can be no
assurance, however, that the IRS would not take the position either that the
procedure is not available at all (in which case EOP would fail to qualify as a
REIT) or, alternatively, that even if the procedure is available, EOP cannot
qualify as a REIT for its taxable year ending December 31, 1997, but it could
qualify as a REIT for subsequent years.
Finally, if EOP were considered a "successor" to any ZML REIT and such ZML
REIT were determined not to have qualified as a REIT, EOP would not be eligible
to elect REIT status for up to four years after the year in which such ZML REIT
first failed to qualify as a REIT. EOP would be considered a "successor" for
these purposes, however, only if (i) persons who own more than 50% of the EOP
Common Shares at any time during EOP's taxable year ending December 31, 1997,
owned, directly or indirectly, 50% or more in value of the shares of such ZML
REIT during the first year in which it ceased to qualify as a REIT and (ii) a
significant portion of EOP's assets were assets owned by such ZML REIT. Hogan &
Hartson's opinion as to the qualification of EOP as a REIT under the Code is not
based upon, or limited by, an assumption or representation that the ZML REITs
have qualified as REITs for federal income tax purposes.
The same considerations apply with respect to EOP's continued qualification
as a REIT if Beacon has failed to qualify as a REIT throughout the duration of
its existence. Beacon believes, however, that it has qualified as a REIT for
each of its taxable years commencing with the year ending December 31, 1994,
(the year of Beacon's formation), and EOP will receive an opinion to such effect
from Goodwin Procter & Hoar, as a condition to the consummation of the Merger.
CLOSING AGREEMENTS WITH THE IRS WITH RESPECT TO ZML REITS I AND II. In
December 1996, the IRS was advised that ZML REIT I and ZML REIT II each had
failed to comply with a technical requirement of a provision of the Code which
must be satisfied for a company to qualify as a REIT for federal income tax
purposes. More specifically, in connection with structuring certain real estate
investments made by ZML Opportunity Partnership I and ZML Opportunity
Partnership II during the period 1991-1993, all of the voting stock of certain
corporations formed to serve as general partners of limited partnership
subsidiaries of such ZML Opportunity Partnerships was issued to such ZML
Opportunity Partnerships. Based upon a Treasury Regulation interpreting the
statutory provision limiting permitted REIT investments, a portion of such ZML
Opportunity Partnerships' ownership of corporate voting stock would be imputed
to ZML REIT I and ZML REIT II and, in so doing, would cause ZML REIT I and ZML
REIT II to violate the prohibition on a REIT owning more than 10% of the voting
stock of a corporation other than a qualified REIT subsidiary.
Pursuant to closing agreements, the IRS agreed that neither ZML REIT I nor
ZML REIT II would be disqualified as a REIT as a result of the technical
violations disclosed to the IRS. In connection with the agreements, the ZML
Partners of ZML Opportunity Partnership I and ZML Opportunity Partnership II
made certain payments to the IRS. As a result of the closing agreements, the
technical violations discussed above have caused no adverse impact on either the
REIT status of ZML REIT I and ZML REIT II for the tax years at issue, or EOP's
subsequent ability to qualify as a REIT.
QUALIFIED REIT SUBSIDIARIES. Section 856(i) of the Code provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities and items of income, deduction
and credit of a "qualified REIT subsidiary" shall be treated as assets,
liabilities and items of income, deduction and credit of the REIT. For EOP's
taxable year ending December 31, 1997, a "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at all
times during the period such corporation was in existence. Pursuant to the 1997
Act, for EOP's taxable years beginning on or after January 1, 1998, a "qualified
REIT subsidiary" is a corporation all of the capital stock of which is owned by
the REIT. Pursuant to this amendment, EOP will have the ability, if it so
chooses, to acquire an existing corporation that will qualify as a "qualified
REIT subsidiary," as opposed to having to form
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such a subsidiary. EOP currently has one "qualified REIT subsidiary." EOP may
form or acquire additional "qualified REIT subsidiaries" in the future. Beacon
does not have and will not have the at Effective Time of the Merger, any
"qualified REIT subsidiaries." In applying the income and asset tests described
below, a "qualified REIT subsidiary" will be ignored and all assets, liabilities
and items of income, deduction and credit of such "qualified REIT subsidiary"
will be treated as assets, liabilities and items of income, deduction and credit
of EOP. A "qualified REIT subsidiary" of EOP will not be subject to federal
corporate income taxation, although it may be subject to state and local
taxation in certain states.
OWNERSHIP OF PARTNERSHIP INTERESTS BY A REIT. In the case of a REIT which
is a partner in a partnership, Treasury Regulations provide that the REIT will
be deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership retain the same character in the hands of the REIT for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, EOP's proportionate share of the assets and items of income
of EOP Partnership (including EOP Partnership's share of such items of any
subsidiaries of EOP Partnership that are partnerships or LLCs, including those
partnership or LLC subsidiaries that EOP Partnership acquires as a result of the
merger of Beacon Partnership into EOP Partnership) will be treated as assets and
items of income of EOP for purposes of applying the requirements described
herein. EOP has direct control of EOP Partnership, each of the ZML Opportunity
Partnerships, and each partnership or LLC subsidiary of EOP Partnership and
intends to operate them in a manner that is consistent with the requirements for
qualification of EOP as a REIT.
INCOME TESTS APPLICABLE TO REITS. In order to qualify as a REIT, EOP must
satisfy two gross income tests (three gross income tests for the taxable year
ending December 31, 1997). First, at least 75% of EOP's gross income (excluding
gross income from prohibited transactions) for such taxable year must be derived
directly or indirectly from investments relating to real property or mortgages
on real property (including "rents from real property," gains on the disposition
of real estate, dividends paid by another REIT and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of EOP's gross income (excluding gross income from "prohibited transactions")
for such taxable year must be derived from such real property investments,
dividends, interest, certain payments under hedging instruments and gain from
the sale or disposition of stock, securities and certain hedging instruments (or
from any combination of the foregoing). Third, for the taxable year ending
December 31, 1997, short-term gain from the sale or other disposition of stock
or securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of EOP's gross income (including gross income from "prohibited
transactions"). The 1997 Act repealed the 30% gross income test for taxable
years beginning on or after January 1, 1998.
Rents received by EOP will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property."
For the taxable year ending December 31, 1997, rents received by the REIT
generally will fail to qualify as "rents from real property" for the purpose of
satisfying the gross income tests if the REIT operates or manages the property
or furnishes or renders services to the tenants of such property, other than
through an independent contractor from whom the REIT derives no revenue. Due to
certain changes in this requirement enacted as part of the 1997 Act for taxable
years beginning on or after January 1, 1998, a REIT may provide de minimis
services directly to the tenants of a property, provided, however, that if (i)
the REIT operates or
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manages a property or furnishes or renders services to the tenants at the
property other than through an independent contractor from whom the REIT derives
no revenue (not including services "usually or customarily rendered" in
connection with the rental of real property and not otherwise considered
"rendered to the occupant"), and (ii) the amount received for so doing (the
"Impermissible Tenant Service Income") exceeds one percent of the total amount
received by the REIT with respect to the property, then no amount received by
the REIT with respect to the property will qualify as "rents from real
property." If the Impermissible Tenant Service Income is one percent or less of
the total amount received by the REIT with respect to the property, then only
the Impermissible Tenant Service Income will not qualify as "rents from real
property." A REIT's Impermissible Tenant Service Income will not be less than
150% of the REIT's direct cost in generating such income. To the extent that
services (other than those customarily furnished or rendered in connection with
the rental of real property) are rendered to the tenants of the property by an
independent contractor, the cost of the services must be borne by the
independent contractor. In this regard EOP has engaged a service corporation
owned by affiliates of the Equity Group Owners, which has been structured to
qualify as an independent contractor, to perform contract services that might
not be permissible for a REIT to perform directly.
In any event, for all taxable years, the REIT may directly perform services
that are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant" of the property. EOP, through EOP Partnership, will provide certain
services to the EOP Properties. Based upon EOP's experience in the office rental
markets in which the EOP Properties are located, EOP believes that all services
provided to tenants by EOP are "usually or customarily rendered" in connection
with the rental of office space for occupancy, although there can be no
assurance that the IRS will not contend otherwise. Similarly, based on Beacon's
experience in the office rental markets in which the properties that EOP will
acquire from Beacon in the Merger are located, Beacon believes that all services
currently provided to tenants by Beacon (or any entity not an independent
contractor) are "usually or customarily rendered" in connection with the rental
of office space for occupancy and, hence, will not adversely affect EOP's
ability to qualify as a REIT if it continues to provide such services following
the Merger.
EOP does not and will not (i) charge rent for any property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage of receipts or sales, as described above, or unless
the EOP Board determines, in its discretion, that the rent received from a
particular tenant under such an arrangement is not material and will not
jeopardize EOP's status as a REIT), (ii) rent any property to a Related Party
Tenant (unless the EOP Board determines, in its discretion, that the rent
received from such Related Party Tenant is not material and will not jeopardize
EOP's status as a REIT), (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease), or (iv) perform services considered to be rendered to the
occupant of the property, other than through an independent contractor from whom
EOP derives no revenue (except to the extent that, commencing in 1998, the
Impermissible Tenant Service Income would not exceed the 1% threshold described
above or the EOP Board otherwise determines, in its discretion, that the
nonqualifying income resulting therefrom is not material and will not jeopardize
EOP's status as a REIT).
EOP has requested a ruling from the IRS to the effect that if EOP
Partnership enters into arrangements with independent contractors to operate
parking facilities under which EOP Partnership will bear the expenses incurred
in operating the parking facilities, such an arrangement will not affect EOP's
ability to satisfy the 95% and 75% gross income tests. All but one of the
stand-alone garages held by EOP Partnership are operated by third-party Service
Companies under lease agreements whereby EOP Partnership and the Service Company
share the gross receipts from the parking operation or EOP Partnership receives
fixed rental payments from the Service Company and bears none of the operational
expenses. The income received by EOP Partnership from the stand-alone garages
under such agreements should qualify as "rents from real properties" for the
purpose of the 95% and 75% gross income tests. EOP Partnership will retain the
current arrangements with the Service Companies if it is unsuccessful in
obtaining a favorable ruling from the IRS. One stand-alone garage agreement
provides for the receipt of a percentage of net receipts by EOP Partnership and,
therefore,
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results in an insignificant amount of non-qualifying gross income relative to
the total gross income of the EOP. The income received under this agreement
should not affect EOP's ability to satisfy the 95% and 75% gross income tests in
future taxable years. Parking garages which are located within a building, or
are adjacent to, or are part of the same complex as, a building generally are
operated by Service Companies pursuant to parking management agreements under
which the Service Companies receive a management fee which may be a fixed dollar
amount, or a percentage of gross or net revenues. EOP believes that the income
received pursuant to such agreements should qualify as "rents from real
property" for the purposes of the 95% and 75% gross income tests. In this
regard, Beacon has recently obtained a ruling from the IRS to this effect, and
EOP has been advised informally by the IRS that its request for a ruling to this
effect will be granted.
"Interest" generally will not qualify under the 75% or 95% gross income
tests if it depends in whole or in part on the income or profits of any person.
However, interest will not fail to so qualify solely by reason of being based on
a fixed percentage or percentages of receipts or sales. EOP does not expect to
derive significant amounts of interest that will not qualify under the 75% and
95% gross income tests. In this regard, Beacon currently holds, through Beacon
Management Company and Beacon Construction Company, options to acquire a loan
with respect to the Rowes Wharf property. Such loans provide for payments of
interest based upon cash flow. These loans, which could not be held directly by
Beacon or EOP without jeopardizing their qualification as a REIT, will continue
to be held in a taxable "C" corporation following the Merger.
As discussed above in "EOP" and "Beacon," EOP Management Corp. and Beacon
Management Company conduct third-party management services with respect to
properties not wholly owned by EOP Partnership or Beacon Partnership, as
applicable, and the Beacon Design Company provides interior space design
services with respect to properties that are not wholly-owned by Beacon. EOP
Partnership will own 100% of the non-voting stock of each of the Third-Party
Service Corporations but none of the voting stock of any of the Third Party
Service Corporations. Each of the Third-Party Service Corporations is taxable as
a regular "C" corporation. EOP's share of any dividends received from the
Third-Party Service Corporations should qualify for the purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. EOP does
not anticipate that it will receive sufficient dividends from the Third-Party
Service Corporations to cause it to exceed the limit on non-qualifying income
under the 75% gross income test.
If EOP fails to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, it may nevertheless qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if (i) EOP's failure to meet such tests
is due to reasonable cause and not due to willful neglect and (ii) EOP attaches
a schedule of the sources of its income to its federal income tax return and any
incorrect information on such schedule is not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances EOP
would be entitled to the benefit of these relief provisions. For example, if EOP
fails to satisfy the gross income tests because non-qualifying income that EOP
intentionally incurs exceeds the limits on such income, the IRS could conclude
that EOP's failure to satisfy the tests was not due to reasonable cause. If
these relief provisions are inapplicable to a particular set of circumstances
involving EOP, EOP will fail to qualify as a REIT. As discussed above in
"-- Taxation of EOP as a REIT -- General," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income. No similar
relief provision is available if EOP fails the 30% income test for its taxable
year ending December 31, 1997. If the 30% gross income test is not met for such
taxable year, EOP will fail to qualify as a REIT.
Any gain realized by EOP on the sale of any property held as inventory or
other property held primarily for sale to customers in the ordinary course of
business (including EOP's share of any such gain realized by EOP Partnership)
will be treated as income from a "prohibited transaction" that is subject to a
100% penalty tax. Such prohibited transaction income may also have an adverse
effect upon EOP's ability to satisfy the income tests for qualification as a
REIT. Under existing law, whether property is held as inventory or primarily for
sale to customers in the ordinary course of a trade or business is a question of
fact that depends on all the facts and circumstances with respect to the
particular transaction. EOP Partnership intends to hold the Properties
(including those properties acquired in the Merger) for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the Properties (and other properties) and to make such
occasional sales of the Properties as are consistent with EOP Partnership's
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investment objectives. There can be no assurance, however, that the IRS might
not contend that one or more of such sales is subject to the 100% penalty tax.
ASSET TESTS APPLICABLE TO REITS. EOP, at the close of each quarter of its
taxable year, must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of EOP's total assets must be
represented by real estate assets including (i) its allocable share of real
estate assets (including stock of a REIT) held by partnerships in which EOP owns
an interest (including its allocable share of the assets held directly or
indirectly through EOP Partnership) and (ii) stock or debt instruments held for
not more than one year purchased with the proceeds of a stock offering or
long-term (at least five years) debt offering of EOP, cash, cash items and
government securities. Second, not more than 25% of EOP's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by EOP may not exceed 5% of the value of EOP's total assets,
and EOP may not own more than 10% of any one issuer's outstanding voting
securities.
EOP Partnership will not own any of the voting stock of any of the
Third-Party Service Corporations but it will own 100% of the non-voting stock of
each of the Third-Party Service Corporations. EOP Partnership also may own
nonvoting stock, representing substantially all of the equity, in other
corporate entities that serve as partners or members in the various titleholding
entities. EOP has represented, however, that EOP Partnership does not and will
not own more than 10% of the voting securities of any entity that would be
treated as a corporation for federal income tax purposes (other than stock of
REITs, which are not taken into account for purposes of this limitation). In
addition, EOP and its senior management believe, and EOP will represent, that
EOP's pro rata share of the value of the securities of the Third-Party Service
Corporations does not exceed 5% of the total value of EOP's assets. There can be
no assurance, however, that the IRS might not contend either that the value of
the securities of the Third-Party Service Corporations held by EOP (through the
ZML Opportunity Partnerships and EOP Partnership) exceeds the 5% value
limitation or that nonvoting stock of the Third-Party Service Corporations or
another corporate entity owned by EOP Partnership should be considered "voting
stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, EOP
will not lose its status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter (including, for example, as a result of EOP
increasing its interest in EOP Partnership as a result of the Merger, the
exercise of a Unit Redemption Right or an additional capital contribution of
proceeds of an offering of EOP Common Shares by EOP), the failure can be cured
by disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. EOP intends to maintain adequate records of the value of its
assets to ensure compliance with the asset tests and to take such other actions
within 30 days after the close of any quarter as may be required to cure any
noncompliance. If EOP fails to cure noncompliance with the asset tests within
such time period, EOP would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS APPLICABLE TO REITS. EOP, in order to
qualify as a REIT, is required to distribute dividends (other than capital gain
dividends) to its shareholders in an amount at least equal to (i) the sum of (a)
95% of EOP's "REIT taxable income" (computed without regard to the dividends
paid deduction and EOP's net capital gain) and (b) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. In addition, if EOP disposes of any Built-In Gain Asset during
its Recognition Period, EOP will be required, pursuant to Treasury Regulations
which have not yet been promulgated, to distribute at least 95% of the Built-In
Gain (after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before EOP timely files its tax return for
such year and if paid on or before the first regular dividend payment date after
such declaration.
To the extent that EOP does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. Pursuant to the 1997 Act, for EOP's taxable years
commencing on or after January 1, 1998, EOP may elect to require the EOP
Shareholders to include EOP's undistributed net capital gains in their income by
designating, in a written notice to EOP Shareholders, those amounts as
undistributed
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capital gains in respect of its shareholders' shares. If EOP makes such an
election, the EOP Shareholders will (i) include in their income as capital gains
their proportionate share of such undistributed capital gains and (ii) be deemed
to have paid their proportionate share of the tax paid by EOP on such
undistributed capital gains and thereby receive a credit or refund for such
amount. An EOP Shareholder will increase the basis in its EOP Common Shares by
the difference between the amount of capital gain included in its income and the
amount of the tax that EOP is deemed to have paid on the EOP Shareholder's
behalf. The earnings and profits of EOP will be adjusted appropriately. For a
more detailed description of the tax consequences to an EOP Shareholder of such
a designation, see "-- Taxation of Taxable U.S. Shareholders of EOP Generally."
In addition, if EOP should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year, and (iii) any undistributed taxable
income from prior periods, EOP would be subject to a 4% excise tax on the excess
of such required distribution over the sum of amounts actually distributed
during the calendar year by the REIT and the amount, if any, on which the REIT
paid income tax for such year.
EOP intends to make timely distributions sufficient to satisfy its annual
distribution requirements. In this regard, the EOP Partnership Agreement
authorizes EOP, as managing general partner, to take such steps as may be
necessary to cause EOP Partnership to distribute to its partners an amount
sufficient to permit EOP to meet these distribution requirements. It is expected
that EOP's REIT taxable income will be less than its cash flow due to the
allowance of depreciation and other noncash charges in computing REIT taxable
income. Accordingly, EOP anticipates that it will generally have sufficient cash
or liquid assets to enable it to satisfy the distribution requirements described
above. It is possible, however, that EOP, from time to time, may not have
sufficient cash or other liquid assets to meet these distribution requirements
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of EOP. If such timing
differences occur, in order to meet the distribution requirements, EOP may find
it necessary to arrange for short-term, or possibly long-term, borrowings or to
pay dividends in the form of taxable stock dividends.
Under certain circumstances, EOP may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to EOP
Shareholders in a later year, which may be included in EOP's deduction for
dividends paid for the earlier year. Thus, EOP may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, EOP will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
RECORDKEEPING REQUIREMENTS. Pursuant to applicable Treasury Regulations,
EOP must comply with certain recordkeeping requirements in order to qualify for
taxation as a REIT.
FAILURE OF EOP TO QUALIFY AS A REIT. If EOP fails to qualify for taxation
as a REIT in any taxable year, and if the relief provisions do not apply, EOP
will be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to EOP Shareholders in
any year in which EOP fails to qualify will not be deductible by EOP nor will
they be required to be made. As a result, EOP's failure to qualify as a REIT
would significantly reduce the cash available for distribution by EOP to its EOP
Shareholders. In addition, if EOP fails to qualify as a REIT, all distributions
to EOP Shareholders will be taxable as ordinary income, to the extent of EOP's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, EOP also will be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances EOP would be entitled to such
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS OF EOP GENERALLY
As used herein, the term "U.S. Shareholder" means a holder of EOP Common
Shares who (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) is an estate or trust the income of which
is subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
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United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
DISTRIBUTIONS BY EOP. As long as EOP qualifies as a REIT, distributions
made by EOP out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction in the case of U.S. Shareholders
that are corporations. To the extent that EOP makes distributions (not
designated as capital gain dividends) in excess of its current and accumulated
earnings and profits, such distributions will be treated first as a tax-free
return of capital to each U.S. Shareholder, reducing the adjusted basis which
such U.S. Shareholder has in its EOP Common Shares for tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a U.S. Shareholder's adjusted basis in its EOP Common Shares taxable as
capital gains (provided that the EOP Common Shares have been held as a capital
asset). Dividends declared by EOP in October, November, or December of any year
and payable to an EOP Shareholder of record on a specified date in any such
month shall be treated as both paid by EOP and received by the EOP Shareholder
on December 31 of such year, provided that the dividend is actually paid by EOP
on or before January 31 of the following calendar year.
Distributions made by EOP with respect to taxable years beginning on or
after January 1, 1998, that are properly designated by EOP as capital gain
dividends will be taxable to taxable U.S. Shareholders, who are individuals,
estates or trusts, as gain from the sale or exchange of a capital asset held for
more than one year (to the extent that they do not exceed EOP's actual net
capital gain for the taxable year) without regard to the period for which a U.S.
Shareholder has held his EOP Common Shares.
On November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that EOP may classify portions of its designated capital gain dividend
as (i) a 20% rate gain distribution (which would be taxed as long-term capital
gain in the 20% group), (ii) an unrecaptured Section 1250 gain distribution
(which would be taxed as long-term capital gain in the 25% group), or (iii) a
28% rate gain distribution (which would be taxed as long-term capital gain in
the 28% group). (If no designation is made, the entire designated capital gain
divided will be treated as a 28% rate gain distribution. For a discussion of the
20%, 25% and 28% tax rates applicable to individuals, see "-- 1997 Act Changes
to Capital Gain Taxation" below.) IRS Notice 97-64 provides that a REIT must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computation required by the Code as if the REIT
were an individual whose ordinary income were subject to a marginal tax rate of
at least 28%. The Notice further provides that designations made by the REIT
only will be effective to the extent that they comply with Revenue Ruling 89-91,
which requires that distributions made to different classes of shares be
composed proportionately of dividends of a particular type.
Distributions that are properly designated by EOP as capital gain dividends
will be taxable to taxable corporate U.S. Shareholders as long-term capital gain
(to the extent that capital gains dividends do not exceed EOP's actual net
capital gain for the taxable year) without regard to the period for which such
corporate U.S. Shareholder has held his EOP Common Shares. Such corporate U.S.
Shareholders may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income.
U.S. Shareholders may not include in their individual income tax returns
any net operating losses or capital losses of EOP. Instead, such losses would be
carried over by EOP for potential offset against future income (subject to
certain limitations). Distributions made by EOP and gain arising from the sale
or exchange by a U.S. Shareholder of EOP Common Shares will not be treated as
passive activity income, and, as a result, U.S. Shareholders generally will not
be able to apply any "passive losses" against such income or gain. In addition,
taxable distributions from EOP generally will be treated as investment income
for purposes of the investment interest limitations. Capital gain dividends and
capital gains from the disposition of EOP Common Shares (including distributions
treated as such), however, will be treated as investment income only if the U.S.
Shareholder so elects, in which case such capital gains will be taxed at
ordinary income rates. EOP will notify EOP Shareholders after the close of EOP's
taxable year as to the portions distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
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Pursuant to the 1997 Act, for taxable years beginning on or after January
1, 1998, a EOP may designate (by written notice to EOP Shareholders) its
retained net capital gain (i.e., net capital gain that is not actually
distributed as capital gain dividends, as described above) as undistributed
capital gains in respect of EOP Shareholders' shares. Pursuant to such a
designation by EOP with respect to retained net capital gains, a U.S.
Shareholder would include its proportionate share of such gain in income as
capital gain, and would be treated as having paid its proportionate share of the
tax paid by the REIT with respect to the gain. The U.S. Shareholder's basis in
its shares would be increased by its share of such gain and decreased by its
share of such tax. With respect to such capital gain of a U.S. Shareholder that
is an individual or an estate or trust, the IRS, as described below in this
section, has authority to issue regulations that could apply the special tax
rate applicable generally to the portion of the long-term capital gains of an
individual or an estate or trust attributable to deductions for depreciation
taken with respect to depreciable real property.
SALES OF EOP COMMON SHARES. Upon any sale or other disposition of EOP
Common Shares, a U.S. Shareholder will recognize gain or loss for federal income
tax purposes in an amount equal to the difference between (i) the amount of cash
and the fair market value of any property received on such sale or other
disposition and (ii) the holder's adjusted basis in such EOP Common Shares for
tax purposes. In the case of a U.S. Shareholder who is an individual or an
estate or trust, such gain or loss will be mid-term capital gain or loss if such
shares have been held for more than one year but not more than 18 months, and
long-term capital gain or loss if such shares have been held for more than 18
months. In the case of a U.S. Shareholder that is a corporation, such gain or
loss will be long-term capital gain or loss if such shares have been held for
more than one year. In general, any loss recognized by an U.S. Shareholder upon
the sale or other disposition of EOP Common Shares that have been held for six
months or less (after applying certain holding period rules) will be treated as
either a long-term or a mid-term capital loss, to the extent of distributions
received by such U.S. Shareholder from EOP which were required to be treated as
long-term or mid-term capital gains.
1997 ACT CHANGES TO CAPITAL GAIN TAXATION. The 1997 Act alters the
taxation of capital gain income. Under the 1997 Act, individuals, trusts and
estates that hold certain investments for more than 18 months may be taxed at a
maximum long-term capital gain rate of 20% on the sale or exchange of those
investments. Individuals, trusts and estates that hold certain assets for more
than one year but not more than 18 months may be taxed at a maximum mid-term
capital gain rate of 28% on the sale or exchange of those investments. The 1997
Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain," and
other changes to prior law. The 1997 Act allows the IRS to prescribe regulations
on how the 1997 Act's new capital gain rates will apply to sales of capital
assets by "pass-through entities," which include REITs, such as EOP, and to
sales of interests in "pass-through entities." For a discussion of new rules
under the 1997 Act that apply to the taxation of distributions by EOP to its
shareholders that are designated by EOP as "capital gain dividends," see "--
Distributions by EOP" above. Shareholders are urged to consult with their own
tax advisors with respect to the new rules contained in the 1997 Act.
BACKUP WITHHOLDING FOR EOP DISTRIBUTIONS
EOP will report to its U.S. Shareholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. shareholder that does not provide EOP with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, EOP may be required to withhold a portion of
capital gain distributions to any EOP Shareholders who fail to certify their
non-foreign status to EOP. See "-- Taxation of Non-U.S. Shareholders of EOP."
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TAXATION OF TAX-EXEMPT SHAREHOLDERS OF EOP
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt shareholders described below) has not held its EOP
Common Shares as "debt financed property" within the meaning of the Code and
such EOP Common Shares are not otherwise used in a trade or business, the
dividend income from EOP will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of EOP Common Shares will not constitute UBTI
unless such tax-exempt shareholder has held such EOP Common Shares as "debt
financed property" within the meaning of the Code or has used the EOP Common
Shares in a trade or business.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in EOP will constitute UBTI unless the organization is able to
properly deduct amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its investment in EOP. Such prospective
shareholders should consult their own tax advisors concerning these "set aside"
and reserve requirements.
Notwithstanding the above, however, the Code provides that a portion of the
dividends paid by a "pension held REIT" shall be treated as UBTI as to any trust
which (i) is described in Section 401(a) of the Code, (ii) is tax-exempt under
Section 501(a) of the Code, and (iii) holds more than 10% (by value) of the
interests in the REIT. Tax-exempt pension funds that are described in Section
401(a) of the Code are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Code provides that stock
owned by qualified trusts shall be treated, for purposes of the "not closely
held" requirement, as owned by the beneficiaries of the trust (rather than by
the trust itself), and (ii) either (a) at least one such qualified trust holds
more than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (ii) the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5% for any year. The provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the
"look-through" exception with respect to qualified trusts. Based on both the
current ownership of EOP Common Shares and the anticipated ownership of EOP
Common Shares immediately following the Merger, and as a result of certain
limitations on transfer and ownership of EOP Common Shares contained in the
Declaration of Trust, EOP does not expect to be classified as a "pension held
REIT."
TAXATION OF NON-U.S. SHAREHOLDERS OF EOP
The rules governing United States federal income taxation of the ownership
and disposition of EOP Common Shares by persons that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Shareholders") are complex, and no attempt is made herein to provide more than a
brief summary of such rules. Accordingly, the discussion does not address all
aspects of United States federal income tax and does not address state, local or
foreign tax consequences that may be relevant to a Non-U.S. Shareholder in light
of its particular circumstances. In addition, this discussion is based on
current law, which is subject to change, and assumes that EOP qualifies for
taxation as a REIT. Prospective Non-U.S. Shareholders should consult with their
own tax advisers to determine the impact of federal, state, local and foreign
income tax laws with regard to an investment in EOP Common Shares, including any
reporting requirements.
DISTRIBUTIONS BY EOP. Distributions by EOP to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by EOP of United States
real property interests nor designated by EOP as capital gains dividends will be
treated as dividends of ordinary income to the extent that they are made out of
current
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or accumulated earnings and profits of EOP. Such distributions ordinarily will
be subject to withholding of United States federal income tax on a gross basis
(that is, without allowance of deductions) at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty, unless the dividends are
treated as effectively connected with the conduct by the Non-U.S. Shareholder of
a United States trade or business. Dividends that are effectively connected with
such a trade or business will be subject to tax on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as domestic
shareholders are taxed with respect to such dividends, and are generally not
subject to withholding. Any such dividends received by a Non-U.S. Shareholder
that is a corporation may also be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty. EOP expects to withhold United States income tax at the rate of 30% on
the gross amount of any such distributions made to a Non-U.S. Shareholder unless
(i) a lower treaty rate applies and any required form or certification
evidencing eligibility for that reduced rate is filed with EOP or (ii) the
Non-U.S. Shareholder files an IRS Form 4224 with EOP claiming that the
distribution is effectively connected income.
Distributions in excess of current or accumulated earnings and profits of
EOP will not be taxable to a Non-U.S. Shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's EOP Common Shares, but rather
will reduce the adjusted basis of such EOP Common Shares. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Shareholder's EOP
Common Shares, they will give rise to gain from the sale or exchange of its EOP
Common Shares, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that EOP will be required to withhold 10% of any distribution in excess
of EOP's current and accumulated earnings and profits. Consequently, although
EOP intends to withhold at a rate of 30% on the entire amount of any
distribution (or a lower applicable treaty rate), to the extent that EOP does
not do so, any portion of a distribution not subject to withholding at a rate of
30% (or a lower applicable treaty rate) will be subject to withholding at a rate
of 10%. However, the Non-U.S. Shareholder may seek a refund of such amounts from
the IRS if it subsequently determined that such distribution was, in fact, in
excess of current or accumulated earnings and profits of EOP, and the amount
withheld exceeded the Non-U.S. Shareholder's United States tax liability, if
any, with respect to the distribution.
Distributions to a Non-U.S. Shareholder that are designated by EOP at the
time of distribution as capital gains dividends (other than those arising from
the disposition of a United States real property interest) generally will not be
subject to United States federal income taxation, unless (i) the investment in
the EOP Common Shares is effectively connected with the Non-U.S. Shareholder's
United States trade or business, in which case the Non-U.S. Shareholder will be
subject to the same treatment as domestic shareholders with respect to such gain
(except that a shareholder that is a foreign corporation may also be subject to
the 30% branch profits tax, as discussed above), or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA"),
distributions to a Non-U.S. Shareholder that are attributable to gain from sales
or exchanges by EOP of United States real property interests (whether or not
designated as a capital gain dividend) will cause the Non-U.S. Shareholder to be
treated as recognizing such gain as income effectively connected with a United
States trade or business. Non-U.S. Shareholders would thus generally be taxed at
the same rates applicable to domestic shareholders (subject to a special
alternative minimum tax in the case of nonresident alien individuals). Also,
such gain may be subject to a 30% branch profits tax in the hands of a Non-U.S.
Shareholder that is a corporation, as discussed above. EOP is required to
withhold 35% of any such distribution. That amount is creditable against the
Non-U.S. Shareholder's United States federal income tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by EOP pursuant to the 1997 Act as undistributed capital
gains in respect of EOP Shareholders' shares (see "-- Requirements for
Qualification as a REIT -- Annual Distribution Requirements Applicable to REITs"
above) would be treated with respect to Non-U.S. Shareholders in the manner
outlined in the preceding two paragraphs for actual distributions by EOP of
capital gain dividends. Under that approach, the Non-U.S. Shareholders would
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be able to offset as a credit against their United States federal income tax
liability resulting therefrom their proportionate share of the tax paid by EOP
on such undistributed capital gains (and to receive from the IRS a refund to the
extent their proportionate share of such tax paid by EOP were to exceed their
actual United States federal income tax liability).
SALE OF COMMON SHARES. Gain recognized by a Non-U.S. Shareholder upon the
sale or exchange of EOP Common Shares generally will not be subject to United
States taxation unless such shares constitute a "United States real property
interest" within the meaning of FIRPTA. The EOP Common Shares will not
constitute a "United States real property interest" so long as EOP is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock is held directly or indirectly by Non-U.S. Shareholders.
Notwithstanding the foregoing, gain from the sale or exchange of EOP Common
Shares not otherwise subject to FIRPTA will be taxable to a Non-U.S. Shareholder
if the Non-U.S. Shareholder is a nonresident alien individual who is present in
the United States for 183 days or more during the taxable year and has a "tax
home" in the United States. In such case, the nonresident alien individual will
be subject to a 30% United States withholding tax on the amount of such
individual's gain.
EOP believes that after the Merger, it will continue to be a "domestically
controlled REIT," and therefore that the sale of Common Shares will not be
subject to taxation under FIRPTA. However, because the EOP Common Shares are
publicly traded, no assurance can be given that EOP will continue to be a
"domestically-controlled REIT." If EOP fails to qualify as a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Shareholder of EOP Common Shares still would not be subject to United
States taxation under FIRPTA as a sale of a "United States real property
interest," provided that (i) the EOP Common Shares are "regularly traded" (as
defined by applicable Treasury Regulations) on an established securities market
(e.g., the New York Stock Exchange) and (ii) the selling Non-U.S. Shareholder
held 5% or less of the value of the outstanding EOP Common Shares at all times
during a specified testing period. If gain on the sale or exchange of EOP Common
Shares were subject to taxation under FIRPTA, the Non-U.S. Shareholder would be
subject to regular United States income tax with respect to such gain in the
same manner as a U.S. Shareholder (subject to any applicable alternative minimum
tax, a special alternative minimum tax in the case of nonresident alien
individuals and the possible application of the 30% branch profits tax in the
case of foreign corporations), and the purchaser of the EOP Common Shares would
be required to withhold and remit to the IRS 10% of the purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by EOP of
United States real property interests. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of EOP Common Shares by or through a foreign office of a foreign broker.
Information reporting (but not backup withholding) will apply, however, to a
payment of the proceeds of a sale of EOP Common Shares by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States shareholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of EOP Common Shares is
subject to both backup withholding and information reporting unless the
shareholder certifies under penalty of perjury that the shareholder is a
Non-U.S. Shareholder, or otherwise establishes an exemption. A Non-U.S.
Shareholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS.
The United States Treasury has recently finalized regulations regarding the
withholding and information reporting rules discussed above. In general, these
regulations do not alter the substantive withholding and
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information reporting requirements but unify certification procedures and forms
and clarify and modify reliance standards. These regulations generally are
effective for payments made after December 31, 1998, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1998, will remain valid until the earlier of December 31, 1999 or the date of
expiration of the certificate under rules currently in effect (unless otherwise
invalidated due to changes in the circumstances of the person whose name is on
such certificate). A Non-U.S. Shareholder should consult its own advisor
regarding the effect of the new Treasury Regulations.
TAX ASPECTS OF EOP'S OWNERSHIP OF INTERESTS IN THE ZML OPPORTUNITY PARTNERSHIPS
AND EOP PARTNERSHIP
GENERAL. Substantially all of EOP's investments are held indirectly
through the ZML Opportunity Partnerships and EOP Partnership. In general,
partnerships are "pass-through" entities which are not subject to federal income
tax. Rather, partners are allocated their proportionate shares of the items of
income, gain, loss, deduction and credit of a partnership, and are potentially
subject to tax thereon, without regard to whether the partners receive a
distribution from the partnership. EOP will include in its income its
proportionate share of the foregoing partnership items for purposes of the
various REIT income tests and in the computation of its REIT taxable income.
Moreover, for purposes of the REIT asset tests, EOP will include its
proportionate share of assets held through the ZML Opportunity Partnerships and
EOP Partnership. See "-- Requirements for Qualification as a REIT -- Ownership
of Partnership Interests by a REIT."
ENTITY CLASSIFICATION. If any of the ZML Opportunity Partnerships or EOP
Partnership were treated as an association, the entity would be taxable as a
corporation and therefore would be subject to an entity level tax on its income.
In such a situation, the character of EOP's assets and items of gross income
would change and would preclude EOP from qualifying as a REIT (see
"-- Requirements for Qualification as a REIT -- Asset Tests Applicable to REITs"
and "-- Income Tests Applicable to REITs"). The same result could occur if any
subsidiary partnership or LLC failed to qualify for treatment as a partnership.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations in effect at that
time used to distinguish a partnership from a corporation for tax purposes.
These four characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability and (iv) free transferability of interests.
Under final Treasury Regulations which became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or as
a limited liability company will be taxed as a partnership for federal income
tax purposes, unless it specifically elects otherwise. The Treasury Regulations
provide that the IRS will not challenge the classification of an existing
partnership or limited liability company for tax periods prior to January 1,
1997, so long as (1) the entity had a reasonable basis for its claimed
classification, (2) the entity and all its members recognized the federal income
tax consequences of any changes in the entity's classification within the 60
months prior to January 1, 1997, and (3) neither the entity nor any member of
the entity had been notified in writing on or before May 8, 1996, that the
classification of the entity was under examination by the IRS.
Hogan & Hartson, special tax counsel to EOP, is of the opinion, based upon
certain factual assumptions and representations described in the opinion, that
each of the ZML Opportunity Partnerships and EOP Partnership will be treated as
a partnership for federal income tax purposes (and not as an association taxable
as a corporation).
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
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If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income and
loss provided for in the ZML Opportunity Partnership and EOP Partnership
agreements are intended to comply with the requirements of Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of such property
at such time (a "Book-Tax Difference"). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. Under Treasury Regulations
promulgated under Section 704 of the Code, similar rules apply when a
partnership elects to "revalue" its assets in certain situations, such as when a
contribution of property is made to a partnership by a new partner.
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
alternative methods which would permit any distortions caused by a Book-Tax
Difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. EOP Partnership and EOP have
determined to use the "traditional method" of accounting for Book-Tax
Differences with respect to the properties initially contributed to EOP
Partnership in connection with its formation and have agreed to use such method
with respect to the properties owned by Beacon Partnership that are to be
acquired in the Partnership Merger.
Based on the foregoing, in general, if any asset contributed to or revalued
by EOP Partnership is determined to have a fair market value which is greater
than its adjusted tax basis, certain partners of EOP Partnership will be
allocated lower amounts of depreciation deductions for tax purposes by EOP
Partnership and increased taxable income and gain on sale. Such allocations will
tend to eliminate the Book-Tax Difference over the life of EOP Partnership.
However, the special allocation rules of Section 704(c) of the Code do not
always entirely rectify the Book-Tax Difference on an annual basis or with
respect to a specific transaction such as a sale. Thus, EOP may be allocated
lower depreciation and other deductions, and possibly greater amounts of taxable
income in the event of a sale of contributed assets, and such amounts may be in
excess of the economic or book income allocated to it as a result of such sale.
Such an allocation might cause EOP to recognize taxable income in excess of cash
proceeds, which might adversely affect EOP's ability to comply with the REIT
distribution requirements. See "-- Requirements for Qualification as a REIT
- -- Annual Distribution Requirements Applicable to REITs."
OTHER TAX CONSEQUENCES FOR EOP, ITS SHAREHOLDERS AND THE THIRD-PARTY SERVICE
CORPORATIONS
EOP and its shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of EOP and its
shareholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
EOP.
A portion of the cash to be used by EOP to fund distributions is expected
to come from the Third-Party Service Corporations through payments of dividends
on the shares of the Third-Party Service Corporations held by EOP Partnership.
The Third-Party Service Corporations pay federal and state income tax at the
full applicable corporate rates. To the extent that the Third-Party Service
Corporations are required to pay federal, state or local taxes, the cash
otherwise available for distribution by EOP to EOP Shareholders will be reduced
accordingly.
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ERISA CONSIDERATIONS
STATUS OF EOP AND EOP PARTNERSHIP UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the entity's equity interests is an ERISA Plan, or, is an IRA
or a qualified pension, profit sharing or stock bonus plan, or other type of
plan that is not subject to ERISA but is defined as a "Plan" under Section
4975(e)(1) of the Code and is subject to the rules of Section 4975 of the Code
("Other Plans").
If the underlying assets of EOP are deemed to be assets of an investing
ERISA Plan ("Plan Assets"), (i) the prudence standards and other provisions of
Part 4 of Title I of ERISA and the prohibited transaction provisions of ERISA
and the Code would be applicable to any transactions involving EOP's assets and
(ii) persons who exercise any authority or control over EOP's assets, or who
provide investment advice for a fee or other compensation to EOP, would be (for
purposes of ERISA and the Code) fiduciaries of ERISA Plans, and of Other Plans
that acquire EOP Common Shares. The United States Department of Labor (the
"DOL"), which has certain administrative responsibility over ERISA Plans and
Other Plans, has issued a regulation defining plan assets for certain purposes
(the "DOL Regulation"). The DOL Regulation generally provides that when an ERISA
Plan acquires a security that is an equity interest in an entity and that
security is neither a "publicly offered security" nor a security issued by an
investment company registered under the 1940 Act, the assets of the ERISA Plan
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an "operating company" (as defined in the DOL Regulation) or that equity
participation in the entity by "benefit plan investors" is not significant.
The DOL Regulation defines a "publicly offered security" as a security that
is "widely held," "freely transferable" and either part of a class of securities
registered under the Exchange Act, or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days, or such later time as may be allowed by the
Commission (the "Registration Period"), after the end of the fiscal year of the
issuer during which the offering occurred).
The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulation further provides that where
a security is part of an offering in which the minimum investment is $10,000 or
less, certain restrictions ordinarily will not, alone or in combination, affect
a finding that such securities are "freely transferable." The restrictions on
transfer enumerated in the DOL Regulation as ordinarily not affecting a finding
that the securities are "freely transferable" include: (i) any restriction on or
prohibition against any transfer or assignment that would result in a
termination or reclassification of EOP for federal or state tax purposes, or
that would otherwise violate any state or federal law or court order, (ii) any
requirement that advance notice of a transfer or assignment be given to EOP,
(iii) any requirement that either the transferor or transferee, or both, execute
documentation setting forth representations as to compliance with any
restrictions on transfer that are among those enumerated in the DOL Regulation
as not affecting free transferability, (iv) any administrative procedure that
established an effective date, or an event (such as completion of an IPO) prior
to which a transfer or assignment will not be effective, (v) any prohibition
against transfer or assignment to an ineligible or unsuitable investor, and (vi)
any limitation or restriction on transfer or assignment that is not imposed by
the issuer or a person acting for or on behalf of the issuer. EOP believes that
the restrictions imposed under the Declaration of Trust on the transfer of EOP
Common Shares are of the type of restrictions on transfer generally permitted
under the DOL Regulation or are not otherwise material and should not result in
the failure of the EOP Common Shares to be "freely transferable" within the
meaning of the DOL
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Regulation. See "SHARES OF BENEFICIAL INTEREST -- Restrictions on Ownership and
Transfer." EOP also believes that certain restrictions on transfer that derive
from the securities laws and from certain provisions should not result in the
failure of the EOP Common Shares to be "freely transferable." Furthermore, EOP
is not aware of any other facts or circumstances limiting the transferability of
the EOP Common Shares that are not included among those enumerated as not
affecting their free transferability under the DOL Regulation, and EOP does not
expect to impose in the future (or to permit any person to impose on its behalf)
any other limitations or restrictions on transfer that would not be among the
enumerated permissible limitations or restrictions.
Assuming (i) that the EOP Common Shares are "widely held" within the
meaning of the DOL Regulation and (ii) that no facts and circumstances other
than those referred to in the preceding paragraph exist that restrict
transferability of the EOP Common Shares, EOP believes that, under the DOL
Regulation, the EOP Common Shares should be considered "publicly offered
securities" and, therefore, that the underlying assets of EOP should not be
deemed to be plan assets of any ERISA Plan or Other Plan that invests in the EOP
Common Shares.
The DOL Regulation will also apply in determining whether the underlying
assets of EOP Partnership will be deemed to be plan assets. The EOP Partnership
Units will not be publicly offered securities. Nevertheless, if the EOP Common
Shares constitute publicly offered securities, EOP believes that the indirect
investment in EOP Partnership by ERISA Plans or Other Plans through their
ownership of the EOP Common Shares will not cause the assets of EOP Partnership
to be treated as plan assets. Furthermore, the Declaration of Trust provides
that if and so long as the ownership of EOP Shares by "benefit plan investors"
is significant as those terms are defined in the DOL Regulation, the trustees
shall conduct the affairs of EOP as a "venture capital operating company"
("VCOC"), as that term is defined in the DOL Regulation. Based upon counsel's
advice, EOP believes it has operated as a VCOC since the Consolidation.
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EXPERTS
The combined financial statements of EOP Predecessors at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
the statements of revenue and certain expenses for 177 Broad Street, Preston
Commons, Oakbrook Terrace Tower, One Maritime Plaza, 201 Mission Street, 30 N.
LaSalle, Columbus America Properties, Prudential Properties, 550 South Hope
Street, Acorn Properties, 10 & 30 South Wacker Drive, One Lafayette Centre and
PPM Properties, all appearing in this Joint Proxy Statement/Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, and the information under the captions "EOP SUMMARY SELECTED
CONSOLIDATED AND COMBINED FINANCIAL DATA" and "EOP SELECTED CONSOLIDATED AND
COMBINED FINANCIAL INFORMATION" at December 31, 1996 and 1995, and for each of
the three years in the period ended December 31, 1996 appearing in this Joint
Proxy Statement/Prospectus and Registration Statement have been derived from
combined financial statements audited by Ernst & Young LLP, as set forth in
their report appearing herein. Such combined financial statements and selected
financial data are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated balance sheets of Beacon as of December 31, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995 and for the period May
26, 1994 to December 31, 1994, the combined statement of operations, owners'
equity (deficit) and cash flows for the period January 1, 1994 to May 25, 1994
of The Beacon Group, predecessor to Beacon, and the related financial statement
schedules of Beacon as of December 31, 1996, incorporated by reference herein
from the Beacon's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1996, have been so incorporated in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The statement of excess of revenues over specific operating expenses for
225 Franklin Street in Boston, Massachusetts for the year ended December 31,
1996, incorporated by reference herein from Beacon's report on Form 8-K dated
June 4, 1997, as amended on the Form 8-K/A of Beacon dated June 11, 1997, has
been so incorporated in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The statements of excess of revenues over specific operating expenses for
each of 10880 Wilshire Boulevard in Westwood, California, Centerpointe in
Fairfax, Virginia, and Westbrook Corporate Center in Westchester, Illinois for
the year ended December 31, 1996, incorporated by reference herein from Beacon's
current report on Form 8-K dated March 27, 1997, as amended on the Form 8-K/A of
Beacon dated April 7, 1997, have been so incorporated in reliance on the reports
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The statements of excess of revenues over specific operating expenses for
each of the Rosslyn Acquisitions in Rosslyn, Virginia, New England Executive
Park in Burlington, Massachusetts, and 10960 Wilshire Boulevard in Westwood,
California for the year ended December 31, 1995, incorporated by reference
herein from Beacon's current report on Form 8-K dated October 18, 1996, as
amended, have been so incorporated in reliance on the reports of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of said firm as
experts in accounting and auditing.
The statements of excess of revenues over specific operating expenses for
each of Fairfax County Portfolio in Tysons Corner and Herndon, Virginia, 1333 H
Street in Washington, D.C., AT&T Plaza in Oak Brook, Illinois, and Tri-State
International in Lincolnshire, Illinois for the year ended December 31, 1995,
incorporated by reference herein from Beacon's current report on Form 8-K dated
July 23, 1996, as amended on the Form 8-K/A of Beacon dated August 6, 1996, have
been so incorporated in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The statement of excess of revenues over specific operating expenses for
Perimeter Center in Atlanta, Georgia for the year ended December 31, 1995,
incorporated by reference herein from Beacon's current report
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on Form 8-K dated February 15, 1996, as amended, has been so incorporated in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The statement of excess of revenues over specific operating expenses for
each of Shoreline Technology Park in Mountain View, California, Lake Marriott
Business Park in Santa Clara, California and Presidents Plaza in Chicago,
Illinois for the year ended December 31, 1995, incorporated by reference herein
from Beacon's current report on Form 8-K dated December 20, 1996, as amended,
has been so incorporated in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the EOP Common Shares will be passed upon for EOP by Hogan
& Hartson L.L.P., Washington, D.C. Certain matters of Maryland law will be
passed upon for EOP by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
Certain tax matters will be passed upon for EOP by Hogan & Hartson L.L.P.,
Washington, D.C., special tax counsel for EOP.
Certain legal and tax matters will be passed upon for Beacon by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts, a limited liability partnership
including professional corporations, as corporate, securities and tax counsel to
the Company. Gilbert G. Menna, whose professional corporation is a partner of
Goodwin, Procter & Hoar LLP, is an assistant secretary of Beacon and owns in
excess of 1,000 Beacon Common Shares. Certain matters of Maryland law will be
passed upon for Beacon by Ballard Spahr Andrews & Ingersoll, Baltimore,
Maryland.
SHAREHOLDER PROPOSALS
Any proposals by EOP Shareholders to be presented at EOP's 1998 Annual
Meeting of Shareholders must be received by EOP no later than January 15, 1998
in order to be included in EOP's proxy materials relating to the meeting. Any
proposals by Beacon Shareholders to be presented at Beacon's 1998 Annual Meeting
of Shareholders, assuming that the Merger is not consummated by April 15, 1998
(as such date may be extended by the parties to the Agreement), must be received
by Beacon by December 12, 1997 pursuant to the Beacon Bylaws in order to be
included in Beacon's proxy materials relating to the meeting.
OTHER MATTERS
The EOP Board does not intend to bring any matter before the EOP Special
Meeting other than as specifically set forth in the Notice of Special Meeting of
Shareholders, nor does it know of any matter to be brought before the EOP
Special Meeting by others. If any other matters properly come before the Special
Meeting, however, it is the intention of the persons named in the EOP proxy to
vote such proxy in accordance with their best judgment.
The Beacon Board does not intend to bring any matter before the Beacon
Special Meeting other than as specifically set forth in the Notice of Special
Meeting of Shareholders, nor does it know of any matter to be brought before the
Beacon Special Meeting by others. If any other matters properly come before the
Beacon Special Meeting, however, it is the intention of the persons named in the
Beacon proxy to vote such proxy in accordance with their best judgment.
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GLOSSARY
For purposes of this Joint Proxy Statement/Prospectus, the following
capitalized terms shall have the meanings set forth below:
"ACBMs" means asbestos-containing building materials.
"Acquisition Proposal" means any inquiry, proposal, discussion or
negotiation or the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its shareholders) with respect to a
merger, acquisition, tender offer, exchange offer, transaction resulting in the
issuance of securities representing 10% or more of the outstanding equity
securities of Beacon, consolidation, share exchange, business combination, sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more
of the assets or equity securities (including, without limitation, partnership
interests and units) of Beacon or Beacon Partnership, other than the
transactions contemplated by the Agreement.
"Action" means any preliminary, temporary or other nonfinal judgment,
injunction, order, decree or action by any court.
"Affiliates" means all persons who, at the time of the Shareholder
Meetings, may be deemed to be "Affiliates" of EOP or Beacon, as that term is
used in paragraphs (c) and (d) of Rule 145 of the Securities Act.
"AFFO Multiple" means either the multiple of the Share Price to "adjusted"
forecasted 1997 Funds from Operations or to "adjusted" forecasted 1998 Funds
from Operations.
"Agreement" means the agreement pursuant to which Beacon has agreed to
merge with and into EOP and Beacon Partnership has agreed to merge with and into
EOP Partnership.
"Available Cash" means net cash flow from operations plus any reduction in
reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments.
"Beacon" means Beacon Properties Corporation, together with its
subsidiaries.
"Beacon Annual Report" means Beacon's Annual Report on Form 10-K for the
year ended December 31, 1996, filed with the Commission pursuant to the Exchange
Act, including all amendments thereto.
"Beacon Articles" means the Articles of Incorporation of Beacon.
"Beacon Board" means the Board of Directors of Beacon.
"Beacon Break-Up Expenses" means the expenses of EOP payable by Beacon and
Beacon Partnership upon the termination of the Agreement under certain
circumstances.
"Beacon Bylaws" means the Bylaws adopted by the Board of Directors of
Beacon.
"Beacon Common Shares" means the shares of common stock, $0.01 par value
per share, of Beacon.
"Beacon Construction Company" means Beacon Construction Company, Inc., a
Massachusetts corporation.
"Beacon Design Company" means Beacon Design Corporation, a Massachusetts
corporation.
"Beacon Excess Shares" means the excess shares, $0.01 par value per share,
of Beacon.
"Beacon Initial Offering" means Beacon's initial public offering.
"Beacon Junior Shares" means shares of Beacon ranking junior to the Beacon
Preferred Shares as to distributions and upon liquidation (including Beacon
Common Shares).
"Beacon Management Company" means Beacon Property Management Corporation, a
Delaware corporation.
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"Beacon Market Price" means the price equal to the aggregate market price
of any particular Beacon security determined pursuant to the Beacon Articles.
"Beacon Ownership Limit" means the Look Through Ownership Limit and the 6%
Ownership Limit.
"Beacon Parity Shares" means all series of preferred shares of beneficial
interest (other than Beacon Preferred Shares) ranking on a parity with the
Beacon Preferred Shares as to dividends or on liquidation.
"Beacon Partnership" means Beacon Properties, L.P.
"Beacon Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of Beacon Partnership.
"Beacon Partnership Unit" means a common partnership unit of Beacon
Partnership.
"Beacon Preferred Shareholders" means the holders of the Beacon Preferred
Shares.
"Beacon Preferred Shares" means the 8.98% Series A Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share, of Beacon.
"Beacon Preferred Units" means the 8.98% Series A Preferred Units of Beacon
Partnership.
"Beacon Properties" means one or more of the office properties and other
commercial properties in which Beacon Partnership has an interest.
"Beacon Record Date" means November 14, 1997.
"Beacon Securityholders" means Beacon Shareholders, Beacon Preferred
Shareholders, or Beacon Unitholders.
"Beacon Senior Convertible Securities" means any obligations or securities
convertible into or evidencing the right to purchase any Beacon Senior Shares.
"Beacon Senior Shares" means any class or series of shares ranking prior to
the Beacon Preferred Shares with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of Beacon.
"Beacon Service Companies" means the Beacon Construction Company, the
Beacon Design Company, and the Beacon Management Company.
"Beacon Shareholders" means the holders of Beacon Common Shares.
"Beacon Shares" means any class or series of stock of Beacon.
"Beacon Special Meeting" means the Special Meeting of Shareholders of
Beacon (including any adjournments or postponements thereof).
"Beacon Stock Options" means Beacon's Amended and Restated 1994 Stock
Option and Incentive Plan and Beacon's 1996 Stock Option Plan.
"Beacon Unitholders" means the holders of Beacon Partnership Units.
"Beacon Voting Agreement" means the voting agreement entered into by
certain members of the Beacon Board, their families, and trusts and partnerships
established for the benefit of the members of the families of these members of
the Beacon Board.
"Book-Tax Difference" has the meaning ascribed to it in the section
entitled "FEDERAL INCOME TAX CONSIDERATIONS -- Tax Aspects of EOP's Ownership of
Interests in the ZML Opportunity Partnerships and EOP Partnerships -- Tax
Allocations with Respect to the Properties."
"Break-Up Fee" means the fee of $75 million payable by Beacon and Beacon
Partnership to EOP Partnership in the event the Agreement is terminated under
certain circumstances.
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"Built-In Gain" means the excess of (a) the fair market value of a Built-In
Gain Asset over (b) the adjusted basis in such asset, determined as of the
beginning of the Recognition Period.
"Business Combination" means any transaction, approval of which requires by
law the affirmative vote of shareholders and pursuant to which EOP's business
and assets will be combined with those of one or more entities (whether by
merger, sale or other transfer of assets, consolidation or share exchange).
"Cash Available for Distribution" means Funds from Operations adjusted for
certain non-cash items, less reserves.
"CBD" means central business district.
"Charitable Beneficiary" means the qualified charitable organization
selected by EOP to be the beneficiary of a Charitable Trust.
"Charitable Trust" means the trust that will hold the excess shares
described under "COMPARATIVE RIGHTS OF SHAREHOLDERS -- REIT Qualification
Provisions -- EOP."
"Charitable Trustee" means the trustee of the Charitable Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commitment" means any commitment to acquire, enter into any option to
acquire, or exercise an option or other right or election or enter into any
other commitment or contractual obligation.
"Comparable Company" means a selected publicly traded company engaged in
business which J.P. Morgan judged to be analogous to that of Beacon's.
"Comparable Transaction" means the comparable transactions listed under
"THE MERGER -- Opinions of Financial Advisors -- Beacon -- Comparable
Transaction Analysis."
"Consolidation" means all of the transactions described under "BUSINESS OF
EOP -- Formation Transactions."
"Contribution Agreement" means the agreement pursuant to which the ZML
Funds and EOP agreed to consolidate.
"Control Share Acquisition" means the direct or indirect acquisition of
control shares, subject to certain exceptions.
"Control Shares" means voting shares which, if aggregated with all other
such shares previously acquired by the acquiror or in respect of which the
acquiror is entitled to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquiror, directly or
indirectly, to exercise or direct the exercise of voting power in electing
directors within one of the following ranges of voting power: (i) one-fifth or
more but less than one-third of all voting power, (ii) one-third or more but
less than a majority of all voting power or (iii) a majority or more of all
voting power.
"Core Portfolio" means the Properties that were held by the EOP
Predecessors during the entire period for both years being compared.
"Credit Facilities" means EOP's $1.5 billion unsecured term loan facility
and EOP's $600 million unsecured revolving line of credit.
"Debt to Market Capitalization Ratio" means the total consolidated and
unconsolidated debt of EOP or Beacon, as applicable, as a percentage of the
market value of such entity's outstanding common shares and partnership units
plus total consolidated and unconsolidated debt, but excluding (i) all
nonrecourse consolidated debt in excess of such entity's proportionate share of
such debt and (ii) all nonrecourse unconsolidated debt of partnerships in which
such entity is a limited partner.
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"Declaration of Trust" means EOP's declaration of trust, as amended from
time to time, and as filed with the State Department of Assessments and Taxation
of Maryland.
"Department" means the State Department of Assessments and Taxation of
Maryland
"Distribution Payout Ratio" means the ratio of distributions per share of
common stock over Funds from Operations per share of common stock.
"Distribution Period" means the period, quarterly or shorter, for which EOP
Partnership Agreement requires the distribution of Available Cash.
"DOL" means the United States Department of Labor.
"DOL Regulation" means the regulation issued by the DOL defining Plan
Assets for certain purposes.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"Effective Time" means the time when the Mergers shall become effective.
"EGI" means Equity Group Investments, Inc., an Illinois corporation.
"Eligible Transferee" means the persons or entities to whom a number of
shares of Beacon Shares in excess of the Beacon Ownership Limit can ultimately
be transferred without violating the Beacon Ownership Limit.
"Employee Plan" means EOP's 1997 Share Option and Share Award Plan.
"Environmental Laws" means federal, state and local laws and regulations
relating to protection of the environment.
"EOH" means Equity Office Holdings, L.L.C., a Delaware limited liability
company, and/or its successors and assigns.
"EOP" means either Equity Office Properties Trust, a Maryland real estate
investment trust, alone as an entity, or, as the context may require, the
combined enterprise consisting of Equity Office Properties Trust, EOP
Partnership and their subsidiaries. All references to the historical activities
of EOP refer to the activities of the EOP Predecessors.
"EOP Board" means the Board of Trustees of EOP.
"EOP Break-Up Expenses" means the expenses of Beacon payable by EOP and EOP
Partnership to Beacon Partnership upon the termination of the Agreement under
certain circumstances.
"EOP Bylaws" means the Bylaws adopted by the Board of Trustees of EOP.
"EOP Common Shares" means the common shares of beneficial interest, $0.01
par value per share, of EOP.
"EOP Joint Venture Properties" means 18 of the EOP Properties which are
held in partnerships or subject to participation agreements with unaffiliated
third parties.
"EOP Junior Shares" means shares of EOP (including EOP Common Shares)
ranking junior to the EOP Preferred Shares as to distributions and upon
liquidation.
"EOP LLC" means Equity Office Properties, L.L.C., a Delaware limited
liability company.
"EOP Management Corp." means Equity Office Properties Management Corp., a
Delaware corporation.
"EOP Market Price" means the market price of any particular EOP security,
as determined pursuant to the Declaration of Trust.
"EOP Office Properties" means the office properties in which EOP owns or
has an interest.
"EOP Ownership Limit" means 9.9% (in value or number of shares, whichever
is more restrictive) of the EOP Shares of any class or series.
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"EOP Parity Shares" means all series of preferred shares of beneficial
interest (other than EOP Preferred Shares) ranking on a parity with the EOP
Preferred Shares as to distributions or on liquidation.
"EOP Parking Facilities" means the stand-alone parking facilities owned by
EOP Partnership.
"EOP Partnership" means EOP Operating Limited Partnership, a Delaware
limited partnership, alone, or as the context may require, together with its
subsidiaries.
"EOP Partnership Agreement" means the limited partnership agreement of EOP
Partnership.
"EOP Partnership Unit" means a unit of partnership interest in EOP
Partnership.
"EOP Predecessor Securityholders" means certain entities affiliated with
Mr. Zell which are predecessors to EOP and several trusts established for the
benefit of members of the family of Mr. Zell.
"EOP Predecessors" or "Equity Office Predecessors" means, on a combined
basis, the EOP Office Properties and Parking Facilities of the ZML Funds and the
Management Business of the Equity Group that were combined into EOP pursuant to
the Consolidation.
"EOP Preferred Shares" means the 8.98% Series A Cumulative Redeemable
Preferred Shares, liquidation preference $25.00 per share, of EOP.
"EOP Preferred Units" means the 8.98% Series A Preferred Units of EOP
Partnership.
"EOP Properties" means collectively, one or more of the EOP Office
Properties and one or more of the EOP Parking Facilities more particularly
described in the section entitled "THE EOP PROPERTIES."
"EOP Record Date" means November 14, 1997.
"EOP Securityholders" means EOP Shareholders, EOP Preferred Shareholders or
EOP Unitholders.
"EOP Senior Convertible Securities" means any obligations or securities
convertible into or evidencing the right to purchase any EOP Senior Shares.
"EOP Senior Shares" means any class or series of shares ranking prior to
the EOP Preferred Shares with respect to payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up of EOP.
"EOP Shareholders" means the holders of EOP Common Shares.
"EOP Shares" means the issued and outstanding shares of beneficial interest
of EOP.
"EOP Special Meeting" means the Special Meeting of Shareholders of EOP
(including any adjournments or postponements thereof).
"EOP Unitholders" means the holders of record of EOP Partnership Units.
"EOP Unsecured Notes" means the $30 million of 7.24% Senior Notes due 2004,
the $50 million of 7.36% Senior Notes due 2005, the $50 million of 7.44% Senior
Notes due 2006 and the $50 million of 7.41% Senior Notes due 2007 of EOP issued
in September 1997.
"EOP Voting Agreement" means a voting agreement entered into by each of the
several trusts established for the benefit of members of the family of Samuel
Zell, and certain of the EOP Predecessors.
"Equity Group" means one or both of EGI and EOH, and/or its or their
successors and assigns.
"Equity Group Owners" means certain trusts established for the benefit of
the families of Mr. Zell and of Mr. Robert Lurie, the deceased former partner of
Mr. Zell, and the partnerships comprised of such trusts.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means an employee benefit plan subject to Title I of ERISA.
"Excepted Holder Limit" means the EOP Ownership Limit or such higher
percentage applicable to such holder approved by the EOP Board (in value or
number of shares, whichever is more restrictive).
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means Boston EquiServe, L.P., an affiliate of BankBoston,
N.A.
"Exchange Ratio" means the number of EOP Common Shares to be exchanged for
each Beacon Common Share pursuant to the Merger.
"Excise Tax" means any excise tax imposed by Section 4999 of the Code,
together with any interest or penalties.
"Expected Offering" means the anticipated issuance by EOP of preferred
shares and/or senior unsecured notes in early 1998.
"FFO" means Funds from Operations.
"FFO Multiple" means either the multiple of the Share Price to forecasted
1997 Funds from Operations or to forecasted 1998 Funds from Operations.
"FFO to Growth Multiple" means the multiple of 1998 forecasted Funds from
Operations to Share Price to the forecasted Funds from Operations five year
growth rate.
"Final Beacon Distribution" means the dividend declared by Beacon to the
extent necessary to satisfy the requirements of Section 857(a)(1) of the Code
for the taxable year of Beacon ending at the Effective Time (and avoid the
payment of tax with respect to undistributed income).
"FIRPTA" means the Foreign Investment in Real Property Tax Act.
"First Call" means an on-line data service available to subscribers which
compiles earnings estimates by research analysts.
"5/50 Rule" means the requirement in the Code's REIT definition that not
more than 50% in value of the outstanding shares of a REIT of which is owned
directly or indirectly by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of each taxable year.
"Formation Transactions" means the transactions engaged in prior to or
simultaneously with the completion of EOP's IPO which were designed to
consolidate the ownership of the EOP Properties, to facilitate the IPO and to
enable EOP to qualify as a REIT.
"401(k) Plan" means the Equity Office Properties Trust Section 401(k)
Savings/Retirement Plan.
"$475 Million Line" means the acquisition/term loan facility ZML Fund IV
entered into in September, 1996.
"Funds from Operations" means net income (loss) computed in accordance with
GAAP, excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Management believes that Funds
from Operations is helpful to investors as a measure of the performance of an
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 EOP to incur and service debt, to make capital expenditures and
to fund other cash needs. EOP computes Funds from Operations in accordance with
standards established by the White Paper on Funds from Operations approved by
the Board of Governors of NAREIT in March 1995 which may differ from the
methodology for calculating Funds from Operations utilized by other equity REITs
and, accordingly, may not be comparable to such other REITs. Funds from
Operations should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indicator of EOP's financial performance or to
cash flow from operating activities (determined in accordance with GAAP) as a
measure of EOP's liquidity, nor is it indicative of funds available to fund
EOP's cash needs, including its ability to make distributions.
"GAAP" means generally accepted accounting principles in the United States.
"Goodwin, Procter & Hoar" means Goodwin, Procter & Hoar LLP.
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"Gross-Up Payment" means the additional payment an officer will be entitled
to in the event the Severance Payments and the Performance Payments would be
subject to an Excise Tax such that the net amount retained by the officer after
payment of the Excise Tax and the income taxes due as a result of receipt of the
Gross-Up Payment will equal the Severance Payments and the Performance Payment.
"Hogan & Hartson" means Hogan & Hartson L.L.P.
"Impermissible Tenant Service Income" means the amount received by a REIT
for operating or managing a property or furnishing or rendering services to the
tenants of a property other than through an independent contractor from whom the
REIT derives no revenue (not including services "usually or customarily
rendered" in connection with the rental of real property and not otherwise
considered "rendered to the occupant").
"Implied Purchase Price" means $47.02 per Beacon Common Share.
"Indemnified Parties" means each person who is now or has been at any time
prior to the date of the Agreement or who becomes prior to the Effective Time an
officer or director of Beacon or any Beacon Subsidiary.
"Indemnitee" means any member of the classes of individuals described under
"COMPARATIVE RIGHTS OF SHAREHOLDERS -- Indemnification -- Beacon."
"Indenture" means the written agreement which governs the issuance of the
EOP Unsecured Notes and contains financial and operating covenants related
thereto.
"institutional quality" means the type of properties that pension funds,
insurance companies and other such investors have historically found to be
attractive investments over the long run. These properties tend to have superior
locations and a higher level of physical improvement than all real estate assets
taken as a whole.
"institutional sellers" means pension funds, insurance companies, other
REITs, commercial banks, saving associations and funds comprised of such
investors.
"Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland real estate investment trust's shares of
beneficial interest or any person who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the outstanding voting shares of beneficial interest of the
trust.
"Investor Limited Partner" means the ZML Investor who is a limited partner
of Opportunity Partnership II.
"IPO" means initial public offering.
"IRS" means the United States Internal Revenue Service.
"Joint Proxy Statement/Prospectus" means this prospectus, as the same may
be amended.
"J.P. Morgan" means J.P. Morgan Securities Inc.
"leased" means all space for which leases have been executed, whether or
not the lease term has commenced.
"LIBOR" means the London Interbank Offering Rate.
"LLC" means limited liability company.
"Look Through Ownership Limit" means 9.9% of the aggregate value of all
outstanding Beacon Shares.
"Managed Properties" means the properties of the Equity Group, together
with the EOP Joint Venture Properties, to be managed by EOP Management Corp.
"Managed Property Business" means that portion of the Management Business
that relates to property management of the Managed Properties and the EOP Joint
Venture Properties, which business is owned and conducted by EOP Management
Corp.
207
<PAGE> 218
"Management Business" means the office property management business, the
office property asset management business and the parking asset management
business contributed to EOP Partnership in the EOP Formation Transactions EGI
and EOH.
"Market Interest Rate" means the current market credit spread for each loan
when added to the annualized monthly Treasury rate.
"market rent" represents the average asking gross rental rate per rentable
square foot for buildings management believes to be of comparable size, class,
location and age based upon information obtained from CB Commercial Real Estate
Group, Inc./Torto Wheaton Research, as of March 31, 1997.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended from time to time.
"Merger" means the proposed merger of Beacon with and into EOP.
"Merger Consideration" means that number of EOP Common Shares and EOP
Preferred Shares to be issued pursuant to the Merger.
"Mergers" means both the Merger and the Partnership Merger.
"Merrill Lynch" means Merrill Lynch & Co. or its affiliates.
"MGCL" means the Maryland General Corporation Law, as amended from time to
time.
"Morgan Stanley" means Morgan Stanley & Co. Incorporated.
"Morgan Stanley Opinion" means the written opinion of Morgan Stanley dated
September 15, 1997.
"Named Executive Officers" means EOP's Chief Executive Officer and EOP's
four other most highly paid executive officers.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1997 Act" means the Taxpayer Reform Act of 1997.
"NOI" means net operating income.
"Non-ERISA Plan" means a qualified pension, profit sharing or stock bonus
plan not subject to ERISA.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"NYSE" means the New York Stock Exchange.
"occupied" means all space which is leased and for which the lease term has
commenced.
"Offering" means EOP's IPO.
"Office Properties" means both EOP Office Properties and Beacon's office
properties.
"$1.5 billion Credit Facility" means EOP's $1.5 billion unsecured term loan
facility.
"Other Plans" means an IRA and a Non-ERISA Plan.
"Partnership Act" means the Delaware Revised Uniform Limited Partnership
Act.
"Partnership Merger" means the merger of Beacon Partnership with and into
EOP Partnership (or into a limited liability company or limited partnership
wholly owned directly or indirectly by EOP Partnership).
"Peer Group" means Boston Properties, Inc.; Cali Realty Corporation;
CarrAmerica Realty Corporation; Cornerstone Properties, Inc.; Duke Realty
Investments, Inc.; Highwoods Properties, Inc.; Prentiss Properties Trust;
Reckson Associates Realty Corp.; Spieker Properties, Inc.; Beacon (when
comparing comparable companies to EOP); and EOP (when comparing comparable
companies to Beacon).
"Peer Group II" means Equity Residential Properties Trust in the
multifamily REIT sector; Starwood Lodging Trust in the hotel REIT sector; Simon
DeBartolo Group, Inc. in the regional mall REIT sector;
208
<PAGE> 219
Vornado Realty Trust in the nonmall retail REIT sector; Public Storage, Inc. in
the self-storage REIT sector; Meditrust in the health care REIT sector; and The
Mills Corporation in the factory outlet center REIT sector.
"Performance Payment" means the cash payment to an officer representing the
officer's share of the performance pool under Beacon's Extraordinary Performance
Stock Incentive Plan for Senior Executives.
"Person" means an individual, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization or other
entity.
"Plan Assets" means the assets of EOP deemed to be assets of an ERISA Plan.
"Preferred Shares" means the preferred shares of beneficial interest, $0.01
par value per share, of EOP.
"Pre-Merger Distributions" has the meaning ascribed to it in the section
entitled "FEDERAL INCOME TAX CONSIDERATIONS -- Pre-Merger Distributions."
"Premium to NAV" means the premium obtained by computing the percentage
excess of the Share Price over the net asset value per share.
"Premium to Sector Median" means the premium obtained by computing the
percentage excess of each company's Funds from Operations multiple over the
median 1998 Funds from Operations multiples for each company's respective
industry sector.
"Premiums to 52 Week High Share Price" means the percentage excess of the
price per share paid over the high share price over the course of the 52 weeks
prior to the announcement of the Comparable Transaction.
"Premiums to Unaffected Share Price" means the percentage excess of the
price per share paid over the average stock price of the ten trading days ending
five trading days prior to the announcement of the Comparable Transaction.
"Private Debt Offering" means the private debt offering of the EOP
Unsecured Notes.
"Probable Acquisitions" means all EOP acquisitions identified as probable
in EOP's pro forma financial statements.
"Prohibited Owner" means a purported transferee and any person or entity
who would have been the record holder of such EOP Shares as a result of the
transfers described under "COMPARATIVE RIGHTS OF SHAREHOLDERS -- REIT
Qualification Provisions -- EOP."
"Properties" means both EOP Properties and Beacon Properties.
"Property Operating Expenses" means real estate taxes and insurance,
repairs and maintenance and property operating expenses.
"Property Revenues" means rental revenues, tenant reimbursements, parking
income and other income.
"Prudential" means the Prudential Insurance Company of America.
"Purchase Plan" means the 1997 Non-Qualified Employee Share Purchase Plan.
"Recognition Period" means the ten-year period beginning on the date on
which a Built-In Gain Asset was acquired.
"Record Dates" means both the EOP Record Date and the Beacon Record Date.
"Registration Rights Agreements" means the existing registration rights
agreements between Beacon and the Registration Rights Holders.
"Registration Rights Holders" means certain Beacon Unitholders who have
registration rights under the Registration Rights Agreements.
"Registration Statement" means the registration statement of EOP on Form
S-4, together with all amendments and exhibits, of which this Joint Proxy
Statement/Prospectus is a part.
209
<PAGE> 220
"REIT" means a real estate investment trust as defined under Sections 856
through 860 of the Code and applicable Treasury regulations.
"Related Party Tenant" under the Code means a tenant of EOP's real property
in which EOP or an owner of 10.0% or more of EOP, directly or constructively
owns 10.0% or more of the ownership interests.
"Restricted EOP Common Shares" means the EOP Common Shares received by the
ZML Investors and ZML Partners in EOP's Formation Transactions or any EOP Common
Shares acquired in redemption of EOP Partnership Units.
"Securities Act" means the Securities Act of 1933, as amended.
"Service Companies" means third-party parking garage service companies
which lease and operate all but one of EOP's Parking Facilities.
"Severance Payments" means any payment made pursuant to the Senior
Executive Severance Agreements or the Executive Severance Plan.
"Share Price" means the common stock trading price of a member of the Peer
Group as of September 12, 1997.
"Shareholder Meetings" means both the Beacon Special Meeting and the EOP
Special Meeting.
"6% Ownership Limit" means 6% of the aggregate value of all outstanding
Beacon Shares.
"SPLP" means Standard Parking Limited Partnership, a limited partnership
which manages the parking operations of certain EOP Office Properties.
"Stock Purchase Agreements" means the stock purchase agreements between the
holders of 99% of the voting stock of each of the Beacon Service Companies and
EOP Management Corp.
"Subsidiary" or "Subsidiaries" of any party means, generally, any
corporation, partnership, limited liability company, joint venture, trust or
other legal entity of which such Person owns (either directly or through or
together with another Subsidiary of such Person) either (i) a general partner,
managing member or other similar interest, or (ii) (A) 10% or more of the voting
power of the voting capital stock or other equity interest, or (B) 10% or more
of the outstanding voting capital stock or other voting equity interests of such
corporation, partnership, limited liability company, joint venture or other
legal entity. In addition to the entities described above, the term Subsidiary
includes, with respect to EOP, EOP Management Corp., and with respect to Beacon,
Beacon Management Company, Beacon Design Company and Beacon Construction
Company.
"Sunnyvale Business Center" means a three-building office complex located
in Sunnyvale, California.
"Superior Acquisition Proposal" means a bona fide Acquisition Proposal made
by a third party which a majority of the members of the Beacon Board resolves in
good faith to be in the best interests of and more favorable to Beacon's
Shareholders than the Merger and which the Beacon Board determines is reasonably
capable of being consummated.
"Third Party Service Companies" means EOP Management Corp., and with
respect to Beacon, Beacon Management Company, Beacon Design Company and Beacon
Construction Company.
"Total Portfolio" means the EOP Office Properties and stand alone EOP
Parking Facilities which EOP owned or had an interest in as of July 31, 1997.
"Transaction Comparables" means the thirteen transactions listed in the
section entitled "THE MERGER -- Opinions of Financial
Advisors -- EOP -- Selected Transaction Analysis."
"Transferor" means any person or entity holding a number of shares of
Beacon Shares in excess of the Beacon Ownership Limit (unless waived by the
Beacon Board).
"Treasury Regulations" means the regulations promulgated by the IRS under
the Code.
210
<PAGE> 221
"UBTI" means unrelated business taxable income as defined in Section 512(a)
of the Code.
"Unit Redemption Right" means the right of holders of EOP Partnership Units
to require the redemption of their EOP Partnership Units.
"UPREIT" means umbrella partnership REIT.
"U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) (i) is a citizen or resident of the United States,
(ii) is a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof, or
(iii) is an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
"UST" means an underground storage tank.
"ZML Fund I" means Opportunity Partnership I and its general and limited
partners, including ZML REIT I.
"ZML Fund II" means Opportunity Partnership II and its general and limited
partners, including ZML REIT II.
"ZML Fund III" means Opportunity Partnership III and its general and
limited partners, including ZML REIT III.
"ZML Fund IV" means Opportunity Partnership IV and its general and limited
partners, including ZML REIT IV.
"ZML Funds" means, collectively, the ZML Opportunity Partnerships, together
with their limited and general partners, including the ZML REITs.
"ZML Investors" means shareholders in the ZML REITs and limited partners
(other than the ZML REITs) in the ZML Opportunity Partnerships and/or their
successors and assigns.
"ZML Opportunity Partnership I" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership.
"ZML Opportunity Partnership II" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership II.
"ZML Opportunity Partnership III" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership III.
"ZML Opportunity Partnership IV" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership IV.
"ZML Opportunity Partnerships" means, collectively, ZML Opportunity
Partnership I, ZML Opportunity Partnership II, ZML Opportunity Partnership III
and ZML Opportunity Partnership IV.
"ZML Partner(s)" means ZML Partners Limited Partnership, ZML Partners
Limited Partnership II, ZML Partners Limited Partnership III and/or ZML Partners
Limited Partnership IV, as applicable, each of which is the current general
partner of, respectively, ZML Opportunity Partnership I, ZML Opportunity
Partnership II, ZML Opportunity Partnership III and ZML Opportunity Partnership
IV.
"ZML REIT I" means ZML Investors, Inc., a Delaware corporation.
"ZML REIT II" means ZML Investors II, Inc., a Delaware corporation.
"ZML REIT III" means Zell/Merrill Lynch Real Estate Opportunity Partners
III Trust, a Maryland real estate investment trust.
"ZML REIT IV" means Zell/Merrill Lynch Real Estate Opportunity Partners IV
Trust, a Maryland real estate investment trust.
"ZML REITs" means, collectively, ZML REIT I, ZML REIT II, ZML REIT III and
ZML REIT IV and/or their successors and assigns.
211
<PAGE> 222
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
EQUITY OFFICE PROPERTIES TRUST
Pro Forma Condensed Combined Financial Statements
(Unaudited) (Post-Merger):
Basis of Presentation to Unaudited Pro Forma Combined
Balance Sheet......................................... F-4
Pro Forma Condensed Combined Balance Sheet as of
September 30, 1997.................................... F-5
Notes to Pro Forma Condensed Combined Balance Sheet.... F-6
Basis of Presentation to Unaudited Pro Forma Combined
Statements of Operations.............................. F-8
Pro Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 1997.......... F-9
Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1996.................. F-10
Notes to Pro Forma Condensed Combined Statement of
Operations............................................ F-11
Pre-Merger Pro Forma Condensed Combined Financial
Statements (Unaudited):
Basis of Presentation to Unaudited Pre-Merger Pro Forma
Condensed Combined Balance Sheet...................... F-12
Pre-Merger Pro Forma Condensed Combined Balance Sheet
as of September 30, 1997.............................. F-13
Pre-Merger Pro Forma Condensed Combined Statement,
Statement of Operations for the nine months ended
September 30, 1997.................................... F-14
Pre-Merger Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1996....... F-15
Notes to Pre-merger Pro Forma Condensed Combined
Financial Statements.................................. F-16
Historical Consolidated and Combined Financial Statements
(Unaudited)
Consolidated and Combined Balance Sheets of Equity
Office Properties Trust and Equity Office Predecessors
as of September 30, 1997 and December 31, 1996........ F-23
Consolidated Statement of Operations of Equity Office
Properties Trust for the period from July 11, 1997 to
September 30, 1997 and the Combined Statements of
Operations of Equity Office Predecessors for the
period from July 1, 1997 to July 10, 1997 and the
three months ended September 30, 1996................. F-24
Consolidated Statement of Operations of Equity Office
Properties Trust for the period from July 11, 1997 to
September 30, 1997 and the Combined Statements of
Operations of Equity Office Predecessors for the
period from January 1, 1997 to July 10, 1997 and the
nine months ended September 30, 1996.................. F-25
Consolidated Statement of Cash Flows of Equity Office
Properties Trust for the period from July 11, 1997 to
September 30, 1997 and the Combined Statements of Cash
Flows of Equity Office Predecessors for the period
from January 1, 1997 to July 10, 1997 and the nine
months ended September 30, 1996....................... F-26
Notes to Consolidated and Combined Financial
Statements............................................ F-27
EQUITY OFFICE PREDECESSORS
Report of Independent Auditors............................ F-40
Combined Balance Sheets as of December 31, 1996 and
1995................................................... F-41
Combined Statements of Operations for the years ended
December 31, 1996, 1995 and 1994....................... F-42
Combined Statements of Owners' Equity for the years ended
December 31, 1996, 1995 and 1994....................... F-43
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-44
Notes to Combined Financial Statements.................... F-45
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 1996................................ F-58
177 BROAD STREET
Report of Independent Auditors............................ F-61
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996................................ F-62
Notes to Statement of Revenue and Certain Expenses........ F-63
</TABLE>
F-1
<PAGE> 223
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRESTON COMMONS
Report of Independent Auditors............................ F-64
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996................................ F-65
Notes to Statement of Revenue and Certain Expenses........ F-66
OAKBROOK TERRACE TOWER
Report of Independent Auditors............................ F-67
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-68
Notes to Statements of Revenue and Certain Expenses....... F-69
ONE MARITIME PLAZA
Report of Independent Auditors............................ F-70
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-71
Notes to Statements of Revenue and Certain Expenses....... F-72
201 MISSION STREET
Report of Independent Auditors............................ F-73
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-74
Notes to Statements of Revenue and Certain Expenses....... F-75
30 N. LASALLE
Report of Independent Auditors............................ F-76
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-77
Notes to Statements of Revenue and Certain Expenses....... F-78
COLUMBUS AMERICA PROPERTIES
Report of Independent Auditors............................ F-79
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996....................... F-80
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-81
PRUDENTIAL PROPERTIES
Report of Independent Auditors............................ F-83
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to August 31, 1997 and
the year ended December 31, 1996....................... F-84
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-85
550 SOUTH HOPE STREET
Report of Independent Auditors............................ F-86
Statements of Revenue and Certain Expenses for the period
from April 1, 1997 to July 31, 1997 and the year ended
March 31, 1997......................................... F-87
Notes to Statements of Revenue and Certain Expenses....... F-88
ACORN PROPERTIES
Report of Independent Auditors............................ F-89
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996....................... F-90
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-91
10 & 30 SOUTH WACKER DRIVE
Report of Independent Auditors............................ F-93
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996....................... F-94
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-95
</TABLE>
F-2
<PAGE> 224
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ONE LAFAYETTE CENTRE
Report of Independent Auditors............................ F-96
Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to July 31, 1997 and the year
ended December 31, 1996................................ F-97
Notes to Statements of Revenue and Certain Expenses....... F-98
PPM PROPERTIES
Report of Independent Auditors............................ F-99
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to August 31, 1997 and
the year ended December 31, 1996....................... F-100
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-101
</TABLE>
F-3
<PAGE> 225
EQUITY OFFICE PROPERTIES TRUST
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
The Unaudited Pro Forma Combined Balance Sheet gives effect to the proposed
Merger of EOP and Beacon as if the Merger and certain other EOP and Beacon
transactions, primarily property acquisitions, which have either occurred or are
probable of occurring subsequent to September 30, 1997, had occurred on
September 30, 1997. The Unaudited Pro Forma Combined Balance Sheet gives effect
to the Merger under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16. In the opinion of management, all
significant adjustments necessary to reflect the effects of the Merger have been
made.
The Unaudited Pro Forma Combined Balance Sheet is presented for comparative
purposes only and is not necessarily indicative of what the actual combined
position of EOP and Beacon would have been at September 30, 1997, nor does it
purport to represent the future combined financial position of EOP and Beacon.
This Unaudited Pro Forma Combined Balance Sheet should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
and notes thereto and the pre-Merger pro forma combined balance sheet at
September 30, 1997 of EOP included elsewhere herein and the historical financial
statements and the pre-Merger pro forma combined balance sheet at September 30,
1997 of Beacon incorporated by reference in this Joint Proxy
Statement/Prospectus.
F-4
<PAGE> 226
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
EQUITY OFFICE BEACON PROPERTIES
PROPERTIES TRUST CORPORATION EQUITY OFFICE
PRE-MERGER PRE-MERGER MERGER PROPERTIES TRUST
PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
---------------- ----------------- ----------- ----------------
(A) (B) (C)
<S> <C> <C> <C> <C>
Investment in real estate, net.............. $6,286,640 $2,459,465 $1,553,763 (D) $10,299,868
Cash and cash equivalents................... 4,393 9,802 988 (E) 15,183
Investment in unconsolidated joint
ventures.................................. 93,826 50,416 -- 144,242
Other assets................................ 159,313 148,254 (46,203)(F) 261,364
---------- ---------- ---------- -----------
TOTAL ASSETS...................... $6,544,172 $2,667,937 $1,508,548 $10,720,657
========== ========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage debt............................... $1,106,370 $ 618,698 $ (6,000)(G) $ 1,719,068
Notes payable/revolving line of credit/term
loan...................................... 1,399,218 407,017 -- 1,806,235
Other liabilities........................... 187,012 75,218 (24,052)(G) 238,178
---------- ---------- ---------- -----------
TOTAL LIABILITIES................. 2,692,600 1,100,933 (30,052) 3,763,481
Minority interests:
Operating Partnership..................... 384,399 149,453 147,740(H) 681,592
Partially owned properties................ 28,118 -- -- 28,118
Preferred Stock............................. -- 200,000 -- 200,000
Common Stock................................ 1,620 -- 840(I) 2,460
Paid in capital............................. 3,437,435 1,217,551 1,390,020(J) 6,045,006
---------- ---------- ---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY............ $6,544,172 $2,667,937 $1,508,548 $10,720,657
========== ========== ========== ===========
</TABLE>
F-5
<PAGE> 227
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(A) See EOP's Pre-Merger Pro Forma Balance Sheet as of September 30, 1997
included elsewhere herein.
(B) See the Beacon Form 8-K dated November 14, 1997 (see "Incorporation of
Certain Information by Reference", included elsewhere herein).
(C) Represents adjustments to record the Merger between EOP and Beacon. The
Merger will be accounted for using the purchase method of accounting,
based upon the assumed purchase price of $4,269,205,200 assuming a market
value of $31.00 per share of EOP's Common Shares, as follows:
<TABLE>
<S> <C>
Issuance of 83.97 million EOP Common Shares and 9.76 million
EOP Partnership Units based on the 1.4063 exchange rate,
in exchange for 59.71 million Beacon common shares
(including 3.44 million Beacon Common Shares related to
the exercise of Beacon options anticipated to occur
immediately prior to the Merger) and 6.94 million Beacon
Partnership Units......................................... $2,905,604,200
Issuance of $200 million of preferred shares to preferred
shareholders of Beacon.................................... 200,000,000
Assumption of mortgage debt and other liabilities of
Beacon.................................................... 1,100,933,000
Adjustment to mortgage debt and other liabilities of
Beacon's to market value (see Note G)..................... (30,052,000)
Merger costs (see calculation below)........................ 92,720,000
--------------
$4,269,205,200
==============
</TABLE>
The following is a calculation of the estimated fees and other expenses
related to the Merger:
<TABLE>
<S> <C>
Employee termination costs.................................. $71,000,000
Debt assumption fees........................................ 4,100,000
Transfer taxes.............................................. 3,500,000
Advisory fees............................................... 4,500,000
Legal and accounting fees................................... 5,500,000
Other, including printing and filing costs.................. 4,120,000
-----------
$92,720,000
===========
</TABLE>
(D) Represents the estimated increase in Beacon's investment in real estate,
net, based upon EOP's purchase price as adjusted to reflect the allocation
to other tangible assets of Beacon being acquired:
<TABLE>
<S> <C>
Purchase price (see Note C)................................. $4,269,205,200
--------------
Less: Pre-merger pro forma basis of Beacon's net assets
acquired:
Rental property, net...................................... 2,459,465,000
Cash and cash equivalents, including $93.7 million
received in connection with the anticipated exercise of
options related to 3.44 million common shares of
Beacon................................................. 103,509,900
Investment in unconsolidated joint ventures............... 50,416,000
Other assets, less write-off of deferred rents receivable
of $27.0 million and deferred financing and leasing
costs of $19.2 million (see Note F).................... 102,051,000
--------------
Subtotal.................................................... 2,715,441,900
--------------
Step-up to record fair value of Beacon's investment in real
estate, net............................................... $1,553,763,300
==============
</TABLE>
F-6
<PAGE> 228
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET -- (CONTINUED)
(E) To record the net increase in cash from the following transactions:
<TABLE>
<S> <C>
Cash received from the exercise of Beacon options (see Note
D)........................................................ $ 93,707,900
Transaction costs associated with the Merger (see Note C)... (92,720,000)
------------
Net increase in cash................................... $ 987,900
============
</TABLE>
(F) To eliminate Beacon's deferred rents receivable of $27.0 million which
arose from the historical straight-lining of rents, and Beacon's deferred
financing and leasing costs of $19.2 million which were not assigned any
value in the allocation of the purchase price.
(G) To adjust Beacon's mortgage debt and other liabilities to market value.
(H) To adjust minority interests in EOP to reflect the Merger calculated as
follows:
<TABLE>
<S> <C>
Total shareholders' equity and EOP Partnership minority
interests................................................. $6,929,058,000
Less: Preferred shares...................................... (200,000,000)
--------------
Total.................................................. 6,729,058,000
Percentage of Units which are not owned by EOP (see
below).................................................... 10.13%
--------------
Minority interests in the equity of EOP after the Merger.... 681,592,300
Less: Minority interests in the equity of EOP prior to the
Merger.................................................... (384,399,000)
Less: Pre-Merger pro forma minority interest in Beacon
Partnership............................................... (149,453,000)
--------------
Adjustment to minority interests in EOP to reflect the
Merger............................................... $ 147,740,300
==============
</TABLE>
The 10.13% minority interests ownership in EOP is calculated as follows:
<TABLE>
<CAPTION>
SHARES
SHARES AND UNITS
------ ---------
<S> <C> <C>
Beacon's historical common shares and units
outstanding.......................................... 59,708,916 66,647,816
=========== ===========
EOP's Common Shares/Units to be issued based on the
1.4063 Merger exchange ratio......................... 83,968,649 93,726,824
EOP's historical Common Shares/Units outstanding....... 161,484,488 179,393,390
----------- -----------
EOP's pro forma Common Shares/Units outstanding........ 245,453,137 273,120,214
=========== ===========
EOP ownership percentage of EOP Partnership............ 89.87%
===========
Minority interests ownership percentage of EOP
Partnership.......................................... 10.13%
===========
</TABLE>
(I) To record the par value of 83.97 million Common Shares issued to common
shareholders of Beacon in connection with the Merger.
(J) To reflect the net increase in paid in capital associated with the Merger,
as follows:
<TABLE>
<S> <C>
Issuance of 83.97 million EOP Common Shares and 9.76 million
EOP Partnership Units based on the 1.4063 exchange rate,
in exchange for 59.71 million Beacon Common Shares
(including 3.44 million Beacon Common Shares related to
the exercise of Beacon options anticipated to occur
immediately prior to the Merger) and 6.94 million Beacon
Partnership Units......................................... $2,905,604,200
Less: par value of EOP Common Shares issued to common
shareholders of Beacon (see Note I)....................... (839,700)
Adjustment to minority interests (see Note H)............... (147,740,300)
Less: Total pre-Merger pro forma shareholders' equity,
including minority interests, of Beacon................... (1,367,004,000)
--------------
Net increase to paid in capital........................ $1,390,020,200
==============
</TABLE>
F-7
<PAGE> 229
EQUITY OFFICE PROPERTIES TRUST
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
The Unaudited Pro Forma Combined Statements of Operations for the nine
months ended September 30, 1997 and the year ended December 31, 1996 are
presented as if the Merger and certain other EOP and Beacon transactions,
primarily property acquisitions, which have either occurred or are probable of
occurring subsequent to September 30, 1997, had occurred on January 1, 1997 and
January 1, 1996, respectively. The Unaudited Pro Forma Combined Statements of
Operations give effect to the Merger under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, and the combined
entity qualifying as a REIT, distributing at least 95% of its taxable income,
and therefore, incurring no federal income tax liability for the respective
periods. In the opinion of management, all significant adjustments necessary to
reflect the effects of these transactions have been made.
The Unaudited Pro Forma Combined Statements of Operations are presented for
comparative purposes only and are not necessarily indicative of what the actual
combined results of EOP and Beacon would have been for the nine months ended
September 30, 1997 and the year ended December 31, 1996, respectively, nor does
it purport to be indicative of the results of operations for future periods. The
Unaudited Pro Forma Combined Statements of Operations should be read in
conjunction with, and are qualified in their entirety by, the respective
historical financial statements and notes thereto of EOP included elsewhere
herein and of Beacon incorporated by reference in this Joint Proxy
Statement/Prospectus and the Pre-Merger Pro Forma Statements of Operations for
the nine months ended September 30, 1997 and the year ended December 31, 1997 of
EOP included elsewhere herein and of Beacon incorporated herein by reference.
F-8
<PAGE> 230
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BEACON PROPERTIES
EQUITY OFFICE PROPERTIES CORPORATION EQUITY OFFICE
TRUST PRE-MERGER PRE-MERGER MERGER PROPERTIES TRUST
PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
------------------------ ----------------- ----------- ----------------
(K) (L)
<S> <C> <C> <C> <C>
Revenues:
Rental........................... $511,834 $271,273 $ 1,412(M) $ 784,519
Tenant reimbursements............ 105,746 38,164 -- 143,910
Parking.......................... 43,430 -- -- 43,430
Other............................ 10,241 11,053 -- 21,294
Management fees.................. 3,841 2,445 -- 6,286
Interest......................... 12,777 7,153 -- 19,930
----------- -------- -------- ----------
Total revenues................... 687,869 330,088 1,412 1,019,369
----------- -------- -------- ----------
Expenses:
Property operating............... 258,028 104,285 -- 362,313
Interest......................... 139,201 53,831 -- 193,032
Depreciation and amortization.... 117,114 61,701 6,537(N) 185,352
General and administrative....... 24,856 29,756 (15,000)(O) 39,612
----------- -------- -------- ----------
539,199 249,573 (8,463) 780,309
----------- -------- -------- ----------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures, gain on sale of
real estate and extraordinary
items............................ 148,670 80,515 9,875 239,060
Discontinued operations:
Loss from operations --
Construction Company.......... -- (2,263) (2,263)
Minority interests:
Operating Partnership............ (13,963) (8,244) 99 (22,108)(P)
Partially owned properties....... (1,233) -- (1,233)
Income from investment in
unconsolidated joint ventures.... 4,431 4,638 9,069
Gain on sale of real estate........ -- -- --
Preferred dividends................ -- (13,470) (13,470)
----------- -------- -------- ----------
Income before extraordinary
items............................ 137,905 61,176 9,974 209,055
Extraordinary items................ (12,929) -- (12,929)
----------- -------- -------- ----------
Net income......................... $124,976 $ 61,176 $ 9,974 $ 196,126
=========== ======== ======== ==========
Net income per Common Share........ $ 0.77(Q) $ 0.80(Q)
=========== ==========
Weighted average Common Shares
outstanding...................... 161,484 245,453
=========== ==========
</TABLE>
F-9
<PAGE> 231
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY OFFICE BEACON PROPERTIES
PROPERTIES TRUST CORPORATION EQUITY OFFICE
PRE-MERGER PRE-MERGER MERGER PROPERTIES TRUST
PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
---------------- ----------------- ----------- ----------------
(K) (L)
<S> <C> <C> <C> <C>
Revenues:
Rental..................................... $631,276 $332,808 $ 3,750(M) $967,834
Tenant reimbursements...................... 120,436 46,386 -- 166,822
Parking.................................... 54,314 -- -- 54,314
Other...................................... 24,552 18,026 -- 42,578
Management fees............................ 5,120 3,005 -- 8,125
Interest................................... 12,767 8,376 -- 21,143
-------- -------- -------- --------
848,465 408,601 3,750 1,260,816
-------- -------- -------- --------
Expenses
Property operating......................... 330,057 132,229 -- 462,286
Interest................................... 177,733 71,789 -- 249,522
Depreciation and amortization.............. 154,069 80,844 10,085(N) 244,998
General and administrative................. 25,545 27,099 (20,000)(O) 32,644
-------- -------- -------- --------
687,404 311,961 (9,915) 989,450
-------- -------- -------- --------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on sale
of real estate and extraordinary items..... 161,061 96,640 13,665 271,366
Discontinued operations:
Loss from operations -- Construction
Company.................................. -- (2,609) (2,609)
Loss on sale -- Construction Company....... -- (249) (249)
Minority interests:
Operating Partnership...................... (16,983) (11,503) 184 (28,302)(P)
Partially owned properties................. (2,142) -- (2,142)
Income from investment in unconsolidated
joint ventures............................. 4,725 4,539 9,264
Gain on sale of real estate.................. 5,338 16,505 21,843
Preferred dividends.......................... -- (17,960) (17,960)
-------- -------- -------- --------
Income before extraordinary items............ 151,999 85,363 13,849 251,211
Extraordinary items.......................... -- -- -- --
-------- -------- -------- --------
Net income................................... $151,999 $ 85,363 $ 13,849 $251,211
======== ======== ======== ========
Net income per Common Share.................. $ 0.94(Q) $ 1.02(Q)
======== ========
Weighted average Common Shares outstanding... 161,484 245,453
======== ========
</TABLE>
F-10
<PAGE> 232
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED DECEMBER 31,
1996
(UNAUDITED)
(K) See EOP's Pre-Merger Pro Forma Statement of Operations for the nine
months ended September 30, 1997 and the year ended December 31, 1996
included elsewhere herein.
(L) See the Beacon Form 8-K dated November 14, 1997 (see "Incorporation
of Certain Information by Reference", herein).
(M) To reflect the adjustment for the straight-line effect of scheduled
rent increases, assuming the Merger closed on January 1, 1997 and
January 1, 1996, respectively, for the pro forma condensed combined
statement of operations for the nine months ended September 30, 1997
and the year ended December 31, 1996.
(N) To reflect the depreciation expense related to the adjustment to
record the net equity value of the investment in real estate on a
straight-line basis and amortization of the mark-to-market adjustment
of Beacon's mortgage debt for the nine months ended September 30, 1997
and the year ended December 31, 1996 associated with the Merger, as
follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------------- ------------------
<S> <C> <C>
Beacon Pre-Merger Pro Forma investment in
real estate, net........................ $2,459,465,000 $2,459,465,000
Adjustment to the basis of the investment
in real estate (see Note D)............. 1,553,763,300 1,553,763,300
-------------- --------------
Total investment in real estate,
post-Merger............................. 4,013,228,300 4,013,228,300
Less: Portion allocated to land, estimated
to be 10%............................... (401,322,800) (401,322,800)
-------------- --------------
Pro Forma depreciable basis of Beacon's
investment in real estate, net.......... $3,611,905,500 $3,611,905,500
============== ==============
Depreciation expense based on an estimated
useful life of 40 years................. $ 67,723,200 $ 90,297,600
Beacon pre-Merger pro forma depreciation
expense................................. 61,701,000 80,844,000
-------------- --------------
Adjustment to depreciation expense........ 6,022,200 9,453,600
Amortization of mark to market adjustment
of Beacon's mortgage debt............... 514,300 631,600
-------------- --------------
Total adjustment to depreciation and
amortization............................ $ 6,536,500 $ 10,085,200
============== ==============
</TABLE>
(O) To reflect the anticipated reduction of general and administrative
expenses as a result of the Merger.
(P) To reflect the estimated 10.13% minority interests ownership (see
Note H) in EOP Operating Partnership.
(Q) Pre-Merger pro forma net income per Common Shares is based upon 161.5
million Common Shares assumed to be outstanding upon acquisition of
the New Acquisitions and the issuance of Common Shares to the seller
of the Prudential Properties and the Private Equity Offering as
described in the pre-Merger pro forma financial statements for EOP
appearing elsewhere herein. Post-Merger net income per Common Share
is based upon 245.5 million Common Shares assumed to be outstanding
after the Merger.
F-11
<PAGE> 233
EQUITY OFFICE PROPERTIES TRUST
PRE-MERGER PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
The accompanying Unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1997 reflects the following transactions which all occurred or are
expected to occur subsequent to September 30, 1997: (a) the acquisition of 25
office properties and one parking facility; (b) the issuance of 9.7 million
Common Shares; (c) draws on the $1.5 billion Credit Facility to fund
acquisitions and repay mortgage indebtedness; and (d) the EOP acquisition of a
50% interest in the mortgage note securing the 1325 Avenue of the Americas
property.
The accompanying Unaudited Pro Forma Condensed Combined Statement of
Operations for the nine months ended September 30, 1997 reflects the following
transactions as if they had occurred on January 1, 1997: (a) the acquisition of
30 office properties and six parking facilities acquired between January 1, 1997
and October 17, 1997, the probable acquisition of six office properties and one
parking facility and the disposition of two office properties; (b) the $180
million private debt offering which occurred on September 3, 1997; (c) the
Consolidation and the Offering which closed on July 11, 1997 and the decrease in
interest expense resulting from the use of the net proceeds for the repayment of
mortgage debt; (d) the net increase in interest expense from draws on the $1.5
billion Credit Facility used to refinance existing mortgage debt; and (e)
interest income from the 50% interest in the mortgage note securing the 1325
Avenue of the Americas property.
The accompanying Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1996 reflects the following
transactions as if they had occurred on January 1, 1996: (a) the acquisition of
40 office properties and 13 parking facilities acquired between January 1, 1997
and October 17, 1997, the probable acquisition of six office properties and one
parking facility and the disposition of two office properties; (b) the $180
million private debt offering which occurred on September 3, 1997; (c) the
Consolidation and the Offering which closed on July 11, 1997 and the decrease in
interest expense resulting from the use of the net proceeds for the repayment of
mortgage debt; (d) the net increase in interest expense from draws on the $1.5
billion Credit Facility used to refinance existing mortgage debt; and (e)
interest income from the 50% interest in the mortgage note securing the 1325
Avenue of the Americas property.
The accompanying unaudited pro forma condensed combined financial
statements have been prepared by management of EOP and do not purport to be
indicative of the results which would actually have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The pro forma condensed combined financial statements
should be read in conjunction with the accompanying notes to the pro forma
condensed combined financial statements, the combined financial statements of
Equity Office Predecessors, EOP's financial statements for the nine month period
ended September 30, 1997 and the statements of revenue and certain expenses for
certain of the properties acquired by EOP and Equity Office Predecessors all
included elsewhere herein.
F-12
<PAGE> 234
EQUITY OFFICE PROPERTIES TRUST
PRE-MERGER PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY OFFICE
COMMON PROPERTIES TRUST
EQUITY OFFICE NEW STOCK OTHER PRE-MERGER
PROPERTIES TRUST ACQUISITIONS OFFERINGS ACTIVITY PRO FORMA
---------------- ------------ --------- -------- ----------------
(A) (B)
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in real estate, net........ $5,000,159 $ 1,286,481 $ -- $ -- $6,286,640
Cash and cash equivalents............. 132,649 (1,144,942) 273,950 742,736 (C) 4,393
Rents and other receivables........... 16,190 -- -- -- 16,190
Escrow deposits and restricted cash... 42,966 -- -- -- 42,966
Investment in mortgage notes.......... -- -- -- 25,150 (D) 25,150
Investment in unconsolidated joint
ventures............................ 93,826 -- -- -- 93,826
Other assets.......................... 70,132 -- -- 4,875 (E) 75,007
---------- ----------- -------- ---------- ----------
TOTAL ASSETS................. $5,355,922 $ 141,539 273,950 $ 772,761 $6,544,172
========== =========== ======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage debt......................... $1,325,333 $ 14,749 $ -- $ (233,712)(F) $1,106,370
Notes Payable......................... 180,000 -- -- -- 180,000
Revolving line of credit/term loan.... 211,125 -- -- 1,008,093 (G) 1,219,218
Distribution payable.................. 42,964 -- -- -- 42,964
Other liabilities..................... 132,748 11,300 -- -- 144,048
---------- ----------- -------- ---------- ----------
TOTAL LIABILITIES............ 1,892,170 26,049 -- 774,381 2,692,600
Minority interests:
Operating Partnership............... 281,927 -- -- 102,472(H) 384,399
Partially owned properties.......... 28,118 -- -- -- 28,118
Owners' equity........................ -- -- -- -- --
Common shares......................... 1,523 -- 97 -- 1,620
Paid in capital....................... 3,152,184 115,490 273,853 (104,092)(I) 3,437,435
========== =========== ======== ========== ==========
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $5,355,922 $ 141,539 273,950 $ 772,761 $6,544,172
========== =========== ======== ========== ==========
</TABLE>
F-13
<PAGE> 235
EQUITY OFFICE PROPERTIES TRUST
PRE-MERGER PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
OFFICE
PROPERTIES 1997 ACQUIRED FINANCING CONSOLIDATION
TRUST PROPERTIES DISPOSITIONS ACTIVITY ACTIVITY
---------- ------------- ------------ --------- -------------
(J) (K) (L)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental........................................... $381,108 $17,194 $ (2,558) $ -- $ 9,716(N)
Tenant reimbursements............................ 66,855 6,320 (62) -- --
Parking.......................................... 33,744 198 (573) -- --
Other............................................ 7,600 412 (26) -- --
Fees from noncombined affiliates................. 3,841 -- -- -- --
Interest......................................... 10,524 65 -- -- --
-------- ------- -------- ------- -------
Total revenues................................... 503,672 24,189 (3,219) -- 9,716
-------- ------- -------- ------- -------
Expenses:
Property operating............................... 190,170 11,034 (1,595) -- --
Interest......................................... 110,419 -- (36) 2,207(M) --
Depreciation..................................... 80,166 3,391 -- -- 1,205(O)
Amortization..................................... 5,884 -- (54) -- (1,699)(P)
General and administrative....................... 23,056 -- -- -- --
-------- ------- -------- ------- -------
409,695 14,425 (1,685) 2,207 (494)
-------- ------- -------- ------- -------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, gain on sale of real estate and
extraordinary items.............................. 93,977 9,764 (1,534) (2,207) 10,210
Minority interests:
Operating Partnership............................ (2,587) -- -- -- (7,581)(Q)
Partially owned properties....................... (1,191) -- -- -- (42)(Q)
Income from investment in unconsolidated joint
ventures......................................... 3,408 1,023 -- -- --
Gain on sale of real estate....................... 12,510 -- (12,510) -- --
-------- ------- -------- ------- -------
Income before extraordinary items................. 106,117 10,787 (14,044) (2,207) 2,587
Extraordinary items............................... (13,204) -- 275 -- --
-------- ------- -------- ------- -------
Net income........................................ $ 92,913 $10,787 $(13,769) $(2,207) $ 2,587
======== ======= ======== ======= =======
Net income per Common Share.......................
Weighted Average Common Shares Outstanding........
<CAPTION>
EQUITY OFFICE
OFFERING OTHER PROPERTIES TRUST
PRO FORMA NEW FINANCING PRE-MERGER
ADJUSTMENTS SUBTOTAL ACQUISITIONS ACTIVITY PRO FORMA
----------- -------- ------------ --------- ----------------
(K)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental........................................... $ -- $405,460 $106,374 $ -- $511,834
Tenant reimbursements............................ -- 73,113 32,633 -- 105,746
Parking.......................................... -- 33,369 10,061 -- 43,430
Other............................................ -- 7,986 2,255 -- 10,241
Fees from noncombined affiliates................. -- 3,841 -- -- 3,841
Interest......................................... -- 10,589 -- 2,188(T) 12,777
-------- -------- -------- -------- -------
Total revenues................................... -- 534,358 151,323 2,188 687,869
-------- -------- -------- -------- -------
Expenses:
Property operating............................... -- 199,609 58,419 -- 258,028
Interest......................................... (25,343)(R) 87,247 41,400 10,554(U) 139,201
Depreciation..................................... -- 84,762 24,080 -- 108,842
Amortization..................................... -- 4,131 -- 4,141(V) 8,272
General and administrative....................... 1,800(S) 24,856 -- -- 24,856
-------- -------- -------- -------- -------
(23,543) 400,605 123,899 14,695 539,199
-------- -------- -------- -------- -------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, gain on sale of real estate and
extraordinary items.............................. 23,543 133,753 27,424 (12,507) 148,670
Minority interests:
Operating Partnership............................ 968(Q) (9,200) (4,763)(Q) (13,963)
Partially owned properties....................... -- (1,233) -- -- (1,233)
Income from investment in unconsolidated joint
ventures......................................... -- 4,431 -- -- 4,431
Gain on sale of real estate....................... -- -- -- -- --
-------- -------- -------- -------- -------
Income before extraordinary items................. 24,511 127,751 22,661 (12,507) 137,905
Extraordinary items............................... -- (12,929) -- -- (12,929)
-------- -------- -------- -------- -------
Net income........................................ $ 24,511 $114,822 $ 22,661 $(12,507) $124,976
======== ======== ======== ======== =======
Net income per Common Share....................... $ 0.76(W) $ 0.77(W)
======== =======
Weighted Average Common Shares Outstanding........ 151,678 161,484
======== =======
</TABLE>
F-14
<PAGE> 236
EQUITY OFFICE PROPERTIES TRUST
PRE-MERGER PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY 1996 1997
OFFICE ACQUIRED ACQUIRED FINANCING CONSOLIDATION
PREDECESSORS PROPERTIES PROPERTIES DISPOSITIONS ACTIVITY ACTIVITY
------------ ---------- ---------- ------------ --------- -------------
(J) (K) (K) (L)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental................................ $386,481 $53,340 $46,240 $(8,303) $ -- $ 17,973(N)
Tenant reimbursements................. 62,036 9,967 6,889 (88) -- --
Parking............................... 27,253 13,518 1,074 (1,462) -- --
Other................................. 17,626 1,797 1,708 (99) -- --
Fees from noncombined affiliates...... 5,120 -- -- -- -- --
Interest.............................. 9,608 -- 249 (7) -- --
-------- ------- ------- ------- ------- --------
508,124 78,622 56,160 (9,959) -- 17,973
-------- ------- ------- ------- ------- --------
Expenses:
Property operating.................... 201,067 30,971 23,734 (5,046) -- --
Interest.............................. 119,595 24,178 -- (956) 9,983(M) --
Depreciation.......................... 82,905 13,090 11,951 (1,941) -- 7,011(O)
Amortization.......................... 13,332 -- -- (346) -- (8,591)(P)
General and administrative............ 23,145 -- -- -- -- --
-------- ------- ------- ------- ------- --------
440,044 68,239 35,685 (8,289) 9,983 (1,580)
-------- ------- ------- ------- ------- --------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on
sale of real estate and extraordinary
items................................. 68,080 10,383 20,475 (1,670) (9,983) 19,553
Minority interests:
Operating Partnership................. -- -- -- -- -- (10,441)(Q)
Partially owned properties.......... (2,086) -- -- -- -- (56)(Q)
Income from investment in unconsolidated
joint ventures........................ 2,093 -- 2,632 -- -- --
Gain on sale of real estate............. 5,338 -- -- -- -- --
-------- ------- ------- ------- ------- --------
Income before extraordinary items....... 73,425 10,383 23,107 (1,670) (9,983) 9,056
Extraordinary items..................... --
-------- ------- ------- ------- ------- --------
Net income.............................. $ 73,425 $10,383 $23,107 $(1,670) $(9,983) $ 9,056
======== ======= ======= ======= ======= ========
Net income per Common Share.............
Weighted average Common Shares
outstanding...........................
<CAPTION>
EQUITY OFFICE
OFFERING OTHER PROPERTIES PRE-
PRO FORMA NEW FINANCING MERGER TRUST
ADJUSTMENTS SUBTOTAL ACQUISITIONS ACTIVITY PRO FORMA
----------- -------- ------------ --------- ---------------
(K)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental................................ $ -- $495,731 $135,545 $ -- $631,276
Tenant reimbursements................. -- 78,804 41,632 -- 120,436
Parking............................... -- 40,383 13,931 -- 54,314
Other................................. -- 21,032 3,520 -- 24,552
Fees from noncombined affiliates...... -- 5,120 -- -- 5,120
Interest.............................. -- 9,850 -- 2,917(T) 12,767
-------- -------- -------- ------- --------
-- 650,920 194,628 2,917 848,465
-------- -------- -------- ------- --------
Expenses:
Property operating.................... -- 250,726 79,331 -- 330,057
Interest.............................. (43,041)(R) 109,759 66,351 1,623(U) 177,733
Depreciation.......................... -- 113,016 32,271 -- 145,287
Amortization.......................... -- 4,395 -- 4,387(V) 8,782
General and administrative............ 2,400(S) 25,545 -- -- 25,545
-------- -------- -------- ------- --------
(40,641) 503,441 177,953 6,010 687,404
-------- -------- -------- ------- --------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on
sale of real estate and extraordinary
items................................. 40,641 147,479 16,675 (3,093) 161,061
Minority interests:
Operating Partnership................. (1,114)(Q) (11,555) (5,428)(Q) -- (16,983)
Partially owned properties.......... -- (2,142) -- -- (2,142)
Income from investment in unconsolidated
joint ventures........................ -- 4,725 -- -- 4,725
Gain on sale of real estate............. -- 5,338 -- -- 5,338
-------- -------- -------- ------- --------
Income before extraordinary items....... 39,527 143,845 11,247 (3,093) 151,999
Extraordinary items..................... --
-------- -------- -------- ------- --------
Net income.............................. $ 39,527 $143,845 $ 11,247 $(3,093) $151,999
======== ======== ======== ======= ========
Net income per Common Share............. $ 0.95(W) $ 0.94(W)
======== ========
Weighted average Common Shares
outstanding........................... 151,678 161,484
======== ========
</TABLE>
F-15
<PAGE> 237
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRE-MERGER PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(A) To reflect the following acquisitions (the "New Acquisitions"):
<TABLE>
<CAPTION>
LIABILITIES VALUE OF OP
PROPERTY PURCHASE PRICE CASH PAID ASSUMED UNITS ISSUED
-------- -------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Prudential Properties....... $ 289,000,000 $ 211,950,000 $ 6,000,000 $ 71,050,000
Acorn Properties............ 144,700,000 109,950,715 14,749,285 20,000,000
550 South Hope Street....... 99,500,000 99,500,000 -- --
10 & 30 South Wacker
Drive..................... 462,000,000 462,000,000 -- --
One Lafayette Centre........ 82,500,000 52,760,315 5,300,000 24,439,685
PPM Properties.............. 92,831,000 92,831,000 -- --
Stanwix Parking Facility.... 17,850,000 17,850,000 -- --
LaSalle Office Plaza........ 98,100,000 98,100,000 -- --
-------------- -------------- ----------- ------------
$1,286,481,000 $1,144,942,030 $26,049,285 $115,489,685
============== ============== =========== ============
</TABLE>
(B) To reflect the following EOP Common Share issues:
<TABLE>
<S> <C>
Private issuance of 6,666,667 EOP Common Shares at $30.00
per EOP Common Share...................................... $ 200,000,000
Issuance of 3,018,367 EOP Common Shares at $24.50 per EOP
Common Share.............................................. 73,950,000
-------------
$ 273,950,000
=============
</TABLE>
(C) To reflect net cash proceeds from the following transactions:
<TABLE>
<S> <C>
Proceeds from the $1.5 billion Credit Facility to fund
acquisitions (see Note A)................................. $747,611,000
Payment of underwriting fees related to the $1.5 billion
Credit Facility (see Note E).............................. (4,875,000)
------------
Net cash proceeds...................................... $742,736,000
============
</TABLE>
(D) To reflect the investment in the mortgage note securing the 1325 Avenue of
the Americas property made in November, 1997. EOP owns a 50% interest in
the mortgage note which bears interest at LIBOR plus 6%.
(E) To reflect the underwriting fee paid by EOP pertaining to the $1.5 billion
Credit Facility. The underwriting fee will be amortized to interest
expense over the term of the $1.5 billion Credit Facility which is nine
months.
F-16
<PAGE> 238
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRE-MERGER PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(F) To reflect the mortgage debt repaid from draws on the $1.5 billion Credit
Facility and to write-off the mark-to-market adjustments for the following
properties recorded at the time of the Consolidation and the Offering
based on the outstanding principal balances as of September 30, 1997:
<TABLE>
<CAPTION>
BALANCE AT
PROPERTY INTEREST RATE MATURITY DATE 9/30/97
-------- ------------------ ------------- --------------
<S> <C> <C> <C>
1601 Market.................. LIBOR + 1.25% June 30, 2001 $ 24,151,911
1620 L Street................ 8.00% Feb. 4, 2000 21,085,736
9400 NCX..................... LIBOR + 1.65% May 10, 2001 14,217,800
Bank One Center.............. LIBOR + 1.1% Mar. 19, 1999 83,500,000
NationsBank.................. 8.00% Dec. 1, 2003 18,854,819
North Central Plaza.......... LIBOR + 1.75% Aug. 3, 1999 14,931,534
San Jacinto.................. LIBOR + 1.125% Dec. 13, 1998 18,212,287
Sterling Plaza............... LIBOR + 1.75% Dec. 8, 1998 15,627,529
The Quadrant................. EURODOLLAR + 2.00% May 31, 1999 18,000,000
Union Square................. EURODOLLAR + 2.00% May 31, 1999 6,750,000
--------------
Subtotal........... 235,331,616
Less: Write-off of mark-to-
market adjustments for debt
repaid on San Jacinto,
NationsBank and Bank One
Center..................... (1,620,000)
--------------
$ 233,711,616
==============
</TABLE>
(G) To record draws on the $1.5 billion Credit Facility which occurred or are
probable of occurring for the following:
<TABLE>
<S> <C> <C> <C>
Draws to fund acquisitions (see Note C)......................... $ 747,611,000
Draws to repay mortgage debt (see Note F)....................... 235,331,616
Draw to fund investment in mortgage note (see Note D)........... 25,150,000
--------------
$1,008,092,616
==============
</TABLE>
(H) To adjust minority interest in the EOP Partnership to reflect the New
Acquisitions (see Note A) and the issuance of EOP Common Shares (see Note
B):
<TABLE>
<S> <C>
Historical shareholders' equity............................. $3,153,707,000
Historical minority interests............................... 281,927,000
--------------
Subtotal............................................... 3,435,634,000
EOP Partnership Units issued for New Acquisitions (see Note
A)........................................................ 115,490,000
EOP Common Shares issued after September 30, 1997........... 273,950,000
--------------
Subtotal............................................... 3,825,074,000
Minority interests in the EOP Partnership after the
acquisition of the New Acquisitions and the EOP Common
Share issuances........................................... 10.05%
--------------
Minority interests in the EOP Partnership................... 384,399,438
Historical minority interests............................... 281,927,000
--------------
Adjustment to minority interests....................... $ 102,472,438
==============
</TABLE>
F-17
<PAGE> 239
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRE-MERGER PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(I) To reflect the net decrease in paid in capital due to the following
transactions:
<TABLE>
<S> <C>
Write-off mark-to-market adjustments on mortgage debt repaid
with the $1.5 billion Credit Facility (see Note F)........ $ (1,620,000)
Adjustment to minority interests in the EOP Partnership (see
Note H)................................................... (102,472,438)
-------------
$(104,092,438)
=============
</TABLE>
(J) Represents the combined historical statements of operations of EOP for the
period from July 11, 1997 to September 30, 1997 and Equity Office
Predecessors for the period from January 1, 1997 to July 10, 1997, for the
Pro Forma Condensed Combined Statement of Operations for the nine months
ended September 30, 1997 and the historical statement of operations of
Equity Office Predecessors for the Pro Forma Condensed Combined Statement
of Operations for the year ended December 31, 1996.
(K) To reflect the operations and the depreciation expense for (a) the pro
forma condensed combined statement of operations for the nine months ended
September 30, 1997; for the period from January 1, 1997 through the
earlier of the date of acquisition or September 30, 1997, as applicable,
for properties acquired, or expected to be acquired, in 1997, and (b) the
pro forma condensed combined statement of operations for the year ended
December 31, 1996; for the period from January 1, 1996 through the date of
acquisition for properties acquired in 1996, or December 31, 1996 for the
properties acquired, or expected to be acquired, in 1997. Interest expense
was also adjusted, where applicable, to reflect nine months and a full
year, for the nine months ended September 30, 1997 and the year ended
December 31, 1996, respectively.
<TABLE>
<CAPTION>
PROPERTY DATE ACQUIRED PERIOD REFERENCE
-------- ------------- ----------------
<S> <C> <C>
1601 Market Street............................ January 18, 1996 1
Promenade II.................................. June 14, 1996 1
Two California Plaza.......................... August 23, 1996 1
BP Tower...................................... September 4, 1996 1
SunTrust Center............................... September 18, 1996 1
Reston Town Center............................ October 22, 1996 1
One Phoenix Plaza............................. December 4, 1996 1
Colonnade I................................... December 4, 1996 1
Boston Harbor Garage.......................... December 10, 1996 1
Milwaukee Center Parking Garage............... December 18, 1996 1
15th & Sansom Streets Garage.................. December 27, 1996 1
1616 Chancellor Street Garage................. December 27, 1996 1
Juniper/Locusts Streets Garage................ December 27, 1996 1
1616 Sansom Street Garage..................... December 27, 1996 1
1111 Sansom Street Garage..................... December 27, 1996 1
177 Broad Street.............................. January 29, 1997 2
Biltmore Apartments........................... January 29, 1997 2
Preston Commons............................... March 21, 1997 2
Oakbrook Terrace Tower........................ April 16, 1997 2
50% Interest in Civic Parking, L.L.C.......... April 16, 1997 2
One Maritime Plaza............................ April 21, 1997 2
Smith Barney Tower............................ April 29, 1997 2
201 Mission Street............................ April 30, 1997 2
30 N. LaSalle................................. June 13, 1997 2
</TABLE>
F-18
<PAGE> 240
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRE-MERGER PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PROPERTY DATE ACQUIRED PERIOD REFERENCE
-------- ------------- ----------------
<S> <C> <C>
Adams-Wabash Parking Garage................... August 11, 1997 2
Columbus America Properties................... September 3, 1997 2
Prudential Properties......................... October 1, 1997 3
550 South Hope Street......................... October 6, 1997 3
10 & 30 South Wacker Drive.................... October 7, 1997 3
Acorn Properties.............................. October 7, 1997 3
One Lafayette Centre.......................... October 17, 1997 3
PPM Properties................................ Pending 3
Stanwix Parking Facility...................... Pending 3
LaSalle Office Plaza.......................... Pending 3
</TABLE>
Note 1: Included in the Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1996, in the column entitled "1996
Acquired Properties".
Note 2: Included in the Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1996 and for the nine months ended
September 30, 1997, in the column entitled "1997 Acquired Properties".
Note 3: Included in the Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1996 and for the nine months ended
September 30, 1997, in the column entitled "New Acquisitions" (see
Note A).
The depreciation adjustment of $3.4 million in the "1997 Acquired
Properties" column and $24.1 million in the "New Acquisitions" column in
the statement of operations for the nine months ended September 30, 1997,
and the depreciation adjustment of $13.1 million in the "1996 Acquired
Properties" column, $12.0 million in the "1997 Acquired Properties" column
and $32.3 million in the "New Acquisitions" column in the statement of
operations for the year ended December 31, 1996, are based on the cost to
acquire the above listed properties, assuming that 10% of the purchase
price is allocated to land and the depreciable lives are 40 years.
Depreciation is computed using the straight-line method.
(L) To eliminate the operations of Barton Oaks Plaza II and 8383 Wilshire for
the nine months ended September 30, 1997 and the year ended December 31,
1996, which were sold in January and May 1997, respectively.
(M) To reflect the additional interest expense on debt obtained in the nine
months ended September 30, 1997 on properties acquired before 1997 and to
reflect the private debt offering and paydown of the revolving credit
facility for the nine months ended September 30, 1997 and the year ended
December 31, 1996.
(N) To reflect the adjustment for the straight-line effect of scheduled rent
increase, assuming the Consolidation and the Offering closed on January 1,
1997 and 1996, respectively, for the pro forma condensed combined statement
of operations for the nine months ended September 30, 1997 and the year
ended December 31, 1996.
F-19
<PAGE> 241
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRE-MERGER PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) To reflect depreciation expense related to the adjustment to record the
net equity value of the investment in real estate for the nine months
ended September 30, 1997 and for the year ended December 31, 1996, on a
straight-line basis, as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------- ------------------
<S> <C> <C>
Historical investment in real
estate before accumulated
depreciation..................... $5,022,946,000 $5,022,946,000
Less: Portion allocated to land
estimated to be 10%.............. (502,294,600) (502,294,600)
-------------- --------------
Depreciable basis.................. $4,520,651,400 $4,520,651,400
============== ==============
Depreciation expense based on an
estimated useful life of 40
years............................ $ 84,762,214 $ 113,016,285
-------------- --------------
Less: Historical depreciation
expense recorded on the step-up
amount........................... 80,166,000 82,905,000
Pro forma depreciation expense on
1996
Acquired Properties................ -- 13,090,000
Pro forma depreciation expense on
1997
Acquired Properties................ 3,391,000 11,951,000
Depreciation expense on disposed
properties....................... -- (1,941,000)
-------------- --------------
Depreciation expense adjustment.... $ 1,205,214 $ 7,011,285
============== ==============
</TABLE>
(P) To eliminate the $5.9 million and $13.3 million of amortization
historically recognized as a result of the write-off of deferred loan
costs, lease acquisition costs and organization costs, net of the $4.1
million and $4.4 million amortization of the discount required to record
the mortgage debt at fair value recorded in connection with the
Consolidation and Offering, and the $0.1 million and $0.3 million of
amortization relating to disposed properties for the nine months ended
September 30, 1997 and the year ended December 31, 1996.
F-20
<PAGE> 242
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRE-MERGER PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(Q) To reflect the estimated 10.05% minority interests ownership in the EOP
Partnership and to reflect the 5% economic interest that EOP does not own
in Equity Office Properties Management Corp. (the "Management Corp.").
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, 1997 1996
------------------------- ------------------
<S> <C> <C>
Historical allocation of income to minority
interests................................... $ 2,587,000 --
Minority interests allocation of income before
Offering pro forma adjustments.............. $ 7,581,000 $ 10,441,000
Minority interests allocation of income
resulting from Offering pro forma
adjustments................................. (968,000) 1,114,000
Minority interests allocation of income
resulting from New Acquisitions and
issuances of EOP Common Shares.............. 4,763,000 5,428,000
------------------------- ------------------
Net income allocated to minority interests
ownership in the EOP Partnership............ $ 13,963,000 $ 16,983,000
========================= ==================
Historical ownership interest in partially
owned properties............................ $ 1,191,000 $ 2,086,000
------------------------- ------------------
Fees from noncombined affiliates.............. 3,840,000 5,120,000
Management Corp. expenses..................... 3,000,000 4,000,000
------------------------- ------------------
Estimated Management Corp. net income......... 840,000 1,120,000
------------------------- ------------------
Minority interest 5% economic interest in the
Management Corp............................. 42,000 56,000
------------------------- ------------------
Net income allocated to minority interests
ownership in partially owned properties..... $ 1,233,000 $ 2,142,000
========================= ==================
</TABLE>
(R) To reflect the reduction of interest expense associated with the $15.0
million of mortgage debt on Denver Corporate Center Towers II and III
repaid in May 1997 and the $598.4 million repaid with net proceeds of the
Offering and cash held by Equity Office Predecessors.
(S) To reflect additional general and administrative expenses expected to be
incurred as a result of reporting as a public company, as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE NINE MONTHS ENDED DECEMBER
SEPTEMBER 30, 1997 31, 1996
------------------------- ------------------
<S> <C> <C>
Directors and officers
insurance....................... $ 375,000 $ 500,000
Printing and mailing.............. 375,000 500,000
Trustees and directors fees....... 225,000 300,000
Investor relations................ 225,000 300,000
Other............................. 600,000 800,000
------------- ----------
Total................... $1,800,000 $2,400,000
============= ==========
</TABLE>
(T) To reflect interest income from the investment in the mortgage note (see
Note D).
(U) To reflect the net increase in interest expense associated with the $235.0
million of mortgage indebtedness repaid from draws on the $1.5 billion
Credit Facility (see Note F) and the repayment of the line of credit
balance of $211.1 million.
F-21
<PAGE> 243
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRE-MERGER PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(V) To eliminate the $.7 and $.5 million of amortization expense recorded on
the mark-to-market adjustment on debt repaid from draws on the Facility
and to reflect amortization of $4.9 and $4.9 million related to the
underwriting fees associated with the Facility for the nine months ended
September 30, 1997 and the year ended December 31, 1996.
(W) Net income per Common Share is based upon 151.7 million Common Shares
outstanding upon completion of the Consolidation and the Offering. Pro
forma net income per Common Share is based upon 161.5 million Common Shares
assumed to be outstanding upon acquisition of the New Acquisitions and the
issuances of Common Shares.
F-22
<PAGE> 244
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED BALANCE SHEET
AND EQUITY OFFICE PREDECESSORS COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
EQUITY OFFICE EQUITY OFFICE
PROPERTIES TRUST PREDECESSORS
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED) (UNAUDITED)
------------------ -----------------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment in real estate.................................. $5,022,946 $3,549,708
Accumulated depreciation................................... (22,787) (257,893)
---------- ----------
5,000,159 3,291,815
Cash and cash equivalents.................................. 132,649 410,420
Tenant and other receivables (net of allowance for doubtful
accounts of $774 and $55, respectively).................. 7,488 8,675
Deferred rent receivable................................... 8,702 49,986
Escrow deposits and restricted cash........................ 42,966 32,593
Investment in unconsolidated joint ventures................ 93,826 26,910
Deferred financing costs (net of accumulated amortization
of $107 and $3,351, respectively)........................ 1,232 8,372
Deferred leasing costs (net of accumulated amortization of
$0 and $18,455, respectively)............................ 19,648 62,593
Prepaid expenses and other assets.......................... 49,252 21,201
---------- ----------
TOTAL ASSETS..................................... $5,355,922 $3,912,565
========== ==========
LIABILITIES AND SHAREHOLDERS'/OWNERS' EQUITY
Mortgage debt.............................................. $1,325,333 $1,837,767
Unsecured notes............................................ 180,000 --
Line of credit............................................. 211,125 127,125
Accounts payable and accrued expenses...................... 98,369 81,995
Due to affiliates.......................................... 1,292 2,074
Distribution payable....................................... 42,964 96,500
Other liabilities.......................................... 33,087 29,022
---------- ----------
TOTAL LIABILITIES................................ 1,892,170 2,174,483
---------- ----------
Commitments and contingencies (Note 15).................... -- --
Minority interests:
Operating Partnership.................................... 281,927 --
Partially owned properties............................... 28,118 11,080
---------- ----------
TOTAL MINORITY INTERESTS......................... 310,045 11,080
---------- ----------
Owners' equity............................................. -- 1,727,002
Shareholders' equity:
Preferred Shares, $0.01 par value; 100,000,000 shares
authorized, none issued and outstanding............... -- --
Common Shares, $0.01 par value; 750,000,000 shares
authorized, 152,302,194 issued and 151,799,454
outstanding........................................... 1,523 --
Additional paid in capital............................... 3,160,116 --
Distributions in excess of accumulated earnings.......... (7,932) --
---------- ----------
TOTAL SHAREHOLDERS'/OWNERS' EQUITY......................... 3,153,707 1,727,002
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'/OWNERS' EQUITY......... $5,355,922 $3,912,565
========== ==========
</TABLE>
See accompanying notes.
F-23
<PAGE> 245
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENT OF OPERATIONS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
PROPERTIES
TRUST FOR THE EQUITY OFFICE EQUITY OFFICE
PERIOD FROM PREDECESSORS PREDECESSORS
JULY 11, 1997 FOR THE PERIOD FOR THE THREE
TO FROM JULY 1, MONTHS ENDED
SEPTEMBER 30, 1997 TO SEPTEMBER 30,
1997 JULY 10, 1997 1996
------------- --------------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental............................................. $ 124,962 $14,410 $ 98,186
Tenant reimbursements.............................. 23,614 2,985 16,103
Parking............................................ 12,653 1,141 6,746
Other.............................................. 1,061 269 1,848
Fees from noncombined affiliates................... 1,331 70 886
Interest........................................... 947 443 2,348
------------ ------- --------
Total revenues..................................... 164,568 19,318 126,117
------------ ------- --------
Expenses:
Interest:
Expense incurred................................ 25,793 4,180 33,540
Amortization of deferred financing costs........ 1,374 410 2,193
Depreciation....................................... 22,787 4,718 20,912
Amortization....................................... -- 497 2,556
Real estate taxes.................................. 18,317 2,326 12,246
Insurance.......................................... 1,255 245 1,344
Repairs and maintenance............................ 19,651 2,412 18,418
Property operating................................. 23,662 2,193 18,885
General and administrative......................... 5,855 2,475 5,008
------------ ------- --------
Total expenses..................................... 118,694 19,456 115,102
------------ ------- --------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, and extraordinary items.................. 45,874 (138) 11,015
Minority interests:
Operating Partnership.............................. (2,587) -- --
Partially owned properties......................... (279) (33) (468)
Income from unconsolidated joint ventures............ 1,426 (43) 477
------------ ------- --------
Income before extraordinary items.................... 44,434 (214) 11,024
Extraordinary items.................................. (12,930) -- --
------------ ------- --------
Net income (loss).................................... $ 31,504 $ (214) $ 11,024
============ ======= ========
Net income per Common Share:
Income before extraordinary items.................. $ 0.29 $ -- $ --
Extraordinary items................................ (0.08) -- --
------------ ------- --------
Net income per Common Share.......................... $ .21 $ -- $ --
============ ======= ========
Weighted average Common Shares outstanding........... 151,691,121 -- --
============ ======= ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 246
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENT OF OPERATIONS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
PROPERTIES EQUITY OFFICE
TRUST FOR THE PREDECESSORS EQUITY OFFICE
PERIOD FROM FOR THE PERIOD PREDECESSORS
JULY 11, 1997 FROM FOR THE NINE
TO JANUARY 1, MONTHS ENDED
SEPTEMBER 30, 1997 TO SEPTEMBER 30,
1997 JULY 10, 1997 1996
------------- --------------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental............................................. $ 124,962 $256,146 $275,156
Tenant reimbursements.............................. 23,614 43,241 43,239
Parking............................................ 12,653 21,091 18,975
Other.............................................. 1,061 6,539 6,290
Fees from noncombined affiliates................... 1,331 2,510 3,126
Interest........................................... 947 9,577 6,451
------------ -------- --------
Total revenues..................................... 164,568 339,104 353,237
------------ -------- --------
Expenses:
Interest:
Expense incurred................................ 25,793 80,481 87,551
Amortization of deferred financing costs........ 1,374 2,771 3,438
Depreciation....................................... 22,787 57,379 59,246
Amortization....................................... -- 5,884 6,509
Real estate taxes.................................. 18,317 34,000 37,208
Insurance.......................................... 1,255 3,060 3,463
Repairs and maintenance............................ 19,651 45,540 49,594
Property operating................................. 23,662 44,685 51,558
General and administrative......................... 5,855 17,201 16,278
------------ -------- --------
Total expenses..................................... 118,694 291,001 314,845
------------ -------- --------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, gain on sales of real estate and
extraordinary items................................ 45,874 48,103 38,392
Minority interests:
Operating Partnership.............................. (2,587) -- --
Partially owned properties......................... (279) (912) (2,166)
Income from unconsolidated joint ventures............ 1,426 1,982 1,554
Gain on sales of real estate......................... -- 12,510 5,262
------------ -------- --------
Income before extraordinary items.................... 44,434 61,683 43,042
Extraordinary items.................................. (12,930) (274) --
------------ -------- --------
Net income........................................... $ 31,504 $ 61,409 $ 43,042
============ ======== ========
Net income per Common Share:
Income before extraordinary items.................. $ 0.29 $ -- $ --
Extraordinary items................................ (0.08) -- --
------------ -------- --------
Net income per Common Share.......................... $ 0.21 $ -- $ --
============ ======== ========
Weighted average Common Shares outstanding........... 151,691,121 -- --
============ ======== ========
</TABLE>
See accompanying notes.
F-25
<PAGE> 247
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENT OF CASH FLOWS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
PROPERTIES
TRUST FOR THE EQUITY OFFICE
PERIOD FROM EQUITY OFFICE PREDECESSORS
JULY 11, 1997 PREDECESSORS FOR FOR THE NINE
TO THE PERIOD FROM MONTHS ENDED
SEPTEMBER 30, JANUARY 1, 1997 TO SEPTEMBER 30,
1997 JULY 10, 1997 1996
------------- ------------------ -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income.............................................. $ 31,504 $ 61,409 $ 43,042
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 24,161 66,034 69,193
(Income) from unconsolidated joint ventures........... (1,426) (1,982) (1,554)
(Gain) on sale of real estate......................... -- (12,510) (5,262)
Extraordinary loss from early extinguishments of
debt............................................... 12,930 274 --
Provision for doubtful accounts....................... 1,556 1,175 549
Allocation to minority interests...................... 2,866 912 2,166
Changes in assets and liabilities:
Decrease (increase) in rents receivable............ 5,297 2,664 (10,398)
(Increase) in deferred rent receivables............ (10,213) (8,061) --
(Increase) in other assets......................... (27,742) (8,839) (4,154)
Increase in accounts payable and accrued
expenses......................................... 12,504 2,916 190
(Decrease) increase in due to affiliates........... (1,678) (722) 2,240
Increase (decrease) in other liabilities........... 9,906 (7,310) (6,327)
-------- --------- --------
Net cash provided by operating activities.......... 59,665 95,960 89,685
-------- --------- --------
Investing activities:
Property acquisitions................................... (26,025) (531,968) (485,715)
Payments for capital and tenant improvements............ (42,587) (59,511) (78,690)
Proceeds from sale of real estate....................... -- 72,078 14,504
Distributions from (investments in) unconsolidated joint
ventures.............................................. 1,535 (44,260) 1,443
Payments of lease acquisition costs..................... (6,331) (9,260) (15,827)
(Increase) decrease in escrow deposits and restricted
cash.................................................. (12,226) 1,853 (25,055)
-------- --------- --------
Net cash (used for) investing activities......... (85,634) (571,068) (589,340)
-------- --------- --------
Financing activities:
Proceeds from common stock, net of offering costs....... 564,506 -- --
Capital contributions................................... -- 287,949 253,771
Capital distributions................................... -- (288,652) (26,408)
Distributions to minority interest partners............. (1,355) (3,401) (21,177)
Cash contributed from net assets........................ 181,163 -- --
Proceeds from mortgage notes............................ 1,697 154,090 483,116
Proceeds from unsecured notes........................... 180,000 -- --
Proceeds from line of credit............................ 425,125 218,000 140,225
Principal payments on mortgage notes.................... (691,714) (47,472) (205,406)
Principal payments on lines of credit................... (486,625) (72,500) (89,100)
Payments of loan costs.................................. (1,327) (1,889) (4,741)
Prepayment penalties on early extinguishments of debt... (12,877) (274) --
-------- --------- --------
Net cash provided by financing activities........ 158,593 245,851 530,280
-------- --------- --------
Net increase (decrease) in cash and cash equivalents...... 132,624 (229,257) 30,625
Cash and cash equivalents at the beginning of the
period.................................................. 25 410,420 111,121
-------- --------- --------
Cash and cash equivalents at the end of the period........ $132,649 $ 181,163 $141,746
======== ========= ========
Supplemental information:
Interest paid during the period, including capitalized
interest of $1,711, $3,669 and $532,
respectively....................................... $ 30,273 $ 82,969 $ 86,794
======== ========= ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 248
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
As used herein, "Company" means Equity Office Properties Trust, a Maryland
real estate investment trust, together with its subsidiaries including EOP
Operating Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), and the predecessors thereof ("Equity Office Predecessors"). The
Company was formed on October 9, 1996, to continue and expand the national
office property business organized by Mr. Samuel Zell, Chairman of the Board of
Trustees of the Company. The Company is a fully integrated, self-administered
and self-managed real estate company engaged in acquiring, owning, managing,
leasing and renovating office properties and parking facilities. The Company
expects to qualify as a real estate investment trust ("REIT") for federal income
tax purposes. As of September 30, 1997, the Company owned or had an interest in
93 office properties (the "Office Properties") containing 33.4 million rentable
square feet and 16 stand-alone parking facilities (the "Parking Facilities" and
together with the Office Properties, the "Properties") containing 16,037 parking
spaces. The Office Properties are located in 48 submarkets in 35 markets
throughout the United States.
The Company's assets, which include investments in joint ventures, are
owned by, and its operations are conducted through, the Operating Partnership.
The Company is the managing general partner of the Operating Partnership.
On July 11, 1997, the Company completed the consolidation of the entities
which comprised Equity Office Predecessors (the "Consolidation") and its initial
public offering (the "Offering"). The Company consummated the Offering having
sold 28,750,000 of its common shares of beneficial interest, $0.01 par value per
share ("Common Shares") (including 3,750,000 Common Shares relating to the
underwriters overallotment option) at $21 per Common Share generating proceeds
of $603,750,000. The Company contributed the net proceeds from the Offering
(after deducting the underwriting discount of $39,243,750) of $564,506,250 to
the Operating Partnership in exchange for 28,750,000 units of partnership
interest in the Operating Partnership ("Units"). The Company used the net
proceeds of the Offering and available cash reserves to repay debt of
approximately $678,394,000, of which $598,394,000 was mortgage debt and
$80,000,000 was a revolving line of credit.
Concurrent with the Offering, the Company also completed the following
formation transactions which resulted in the Consolidation of the Equity Office
Predecessors into the Company:
- Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership,
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership
II, Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership III and Zell/Merrill Lynch Real Estate Opportunity Partners
Limited Partners IV (collectively the "ZML Opportunity Partnerships"),
the predecessor owners of the Properties, contributed their interests in
the Properties to the Operating Partnership in exchange for 126,419,397
Units.
- ZML Investors Inc., ZML Investors II, Inc., Zell/Merrill Lynch Real
Estate Opportunity Partners III Trust and Zell/Merrill Lynch Real Estate
Opportunity Partners IV Trust (collectively the "ZML REITs") merged into
the Company, with the Company succeeding to their interests in, and
becoming the managing general partners of each of the ZML Opportunity
Partnerships. Shareholders of the ZML REITs received 122,900,572 Common
Shares of the Company in exchange for their interests in the ZML REITs.
- Equity Group Investments, Inc., an Illinois corporation ("EGI"), and
Equity Office Holdings, L.L.C., a Delaware limited liability company
("EOH" and together with EGI, the "Equity Group") contributed
substantially all of their interests in their office property and asset
management business and parking facilities management business
(collectively the "Management Business") to the Operating Partnership in
exchange for 8,358,822 Units.
F-27
<PAGE> 249
- The Operating Partnership transferred a portion of the office property
management business of EOH, the office property asset management business
and the parking asset management business of the Equity Group that
relates to the property management of the properties owned by the Equity
Group, together with the 18 Properties held in partnerships or subject to
participation agreements with unaffiliated parties (the "Joint Venture
Properties") (collectively, the "Managed Property Business") to Equity
Office Properties Management Corp., a Delaware corporation (the
"Management Corp."), in exchange for non-voting stock representing 95% of
the economic value in the Management Corp. and EOH contributed $150,000
to the Management Corp. in exchange for voting stock representing 5% of
the economic value of the Management Corp.
- ZML Partners Limited Partnership, ZML Partners Limited Partnership II,
ZML Partners Limited Partnership III and ZML Partners Limited Partnership
IV (the "ZML Partners"), each of which is the general partner of one of
the ZML Opportunity Partnerships, each transferred their 5% interest in
certain corporations which owned a 1% general partnership interest in
certain of the property title holding entities to a newly formed
qualified REIT subsidiary ("QRS") in exchange for 26,458 Common Shares.
- The Operating Partnership transferred its 95% interest in certain
corporations which owned a 1% general partner interest in certain of the
property title holding entities to a newly formed QRS in exchange for
502,740 Common Shares. Such Common Shares have been treated as treasury
stock in the accompanying financial statements.
The table below summarizes the ownership of the Company and the Operating
Partnership upon the completion of the transactions described above:
<TABLE>
<CAPTION>
NUMBER OF
OWNERSHIP OF EQUITY OFFICE PROPERTIES TRUST: COMMON SHARES PERCENTAGE
-------------------------------------------- ------------- ----------
(CURRENT OWNERSHIP)
<S> <C> <C>
Original capitalization (by Mr. Samuel Zell)................ 1,000 --
Shares sold in the Offering................................. 28,750,000 18.9%
Shares issued to shareholders of ZML REITs.................. 122,900,572 80.8%
Shares issued to the ZML Partners........................... 26,458 --
Shares issued to the Operating Partnership.................. 502,740 .3%
------------ ------
Total........................................ 152,180,770 100.0%
============ ======
(Assuming all Units are converted to Common Shares):
Shares sold in the Offering................................. 28,750,000 17.6%
Shares issued to shareholders of ZML REITs.................. 122,928,030 75.2%
Units convertible to Common Shares.......................... 11,877,647 7.2%
------------ ------
Total........................................ 163,555,677 100.0%
------------ ------
</TABLE>
<TABLE>
<CAPTION>
OWNERSHIP OF EOP OPERATING LIMITED PARTNERSHIP NUMBER OF UNITS PERCENTAGE
---------------------------------------------- --------------- ----------
<S> <C> <C>
Equity Office Properties Trust (held directly).............. 28,777,458 17.6%
Equity Office Properties Trust (held through its interests
in the ZML Opportunity Partnerships)...................... 122,900,572 75.1%
------------ ------
Equity Office Properties Trust subtotal..................... 151,678,030 92.7%
ZML Partners (held through its interests in ZML Opportunity
Partnerships)............................................. 3,229,001 2.0%
Other limited partner (held through its interest in ZML
Opportunity Partnership II)............................... 289,824 0.2%
Equity Group Investments, Inc............................... 3,737,438 2.3%
Equity Office Holdings, L.L.C............................... 4,621,384 2.8%
------------ ------
Total..................................................... 163,555,677 100.0%
============ ======
</TABLE>
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company reflect the Properties
at their carryover historical basis of accounting to the extent that interests
in the Properties were transferred from Equity Office
F-28
<PAGE> 250
Predecessors to the Company by the Equity Group. The remaining interests
acquired by the Company from other owners of Equity Office Predecessors have
been accounted for as a purchase and the excess of the purchase price over the
related historical basis of the net assets acquired was allocated primarily to
investment in real estate.
The combined financial statements of Equity Office Predecessors prior to
the Consolidation included interests in the Properties of the ZML Opportunity
Partnerships together with their limited and general partners (collectively, the
"ZML Funds" which includes ZML Fund I, ZML Fund II, ZML Fund III and ZML Fund
IV) and the Management Business. The combined financial statements of Equity
Office Predecessors are presented on a combined basis, at historical cost,
because the ZML Funds and the Management Business were under common control and
management of the owners of the Equity Group through general partnership
interests in the ZML Funds and through their ownership of the Management
Business. Minority interests have been recorded for those entities that were not
wholly owned by the ZML Funds. Where controlling interests were not held by the
ZML Funds, the entities were accounted for as investments in unconsolidated
joint ventures utilizing equity accounting. All intercompany transactions and
balances have been eliminated in combination.
The consolidated financial statements of the Company and the combined
financial statements of Equity Office Predecessors have been prepared pursuant
to the Securities and Exchange Commission ("SEC") rules and regulations. The
following notes highlight significant changes to the notes to the December 31,
1996 audited combined financial statements of Equity Office Predecessors
contained elsewhere herein, and present interim disclosures as required by the
SEC.
3. USE OF ESTIMATES
The preparation of the consolidated financial statements of the Company and
the combined financial statements of Equity Office Predecessors in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
4. UNAUDITED INTERIM STATEMENTS
The consolidated financial statements of the Company as of September 30,
1997 and for the period from July 11, 1997 to September 30, 1997, and the
combined financial statements of Equity Office Predecessors for the periods from
July 1, 1997 to July 10, 1997, January 1, 1997 to July 10, 1997 and for the
three and nine months ended September 30, 1996 and related footnote disclosures
are unaudited. In the opinion of management, such financial statements reflect
all adjustments necessary for a fair presentation of the results of the interim
periods. All such adjustments are of a normal, recurring nature.
5. RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 statements contained
elsewhere herein in order to provide comparability with the 1997 statements
reported herein. These reclassifications have not changed the 1996 results or
owners' equity.
6. INCOME TAXES
Commencing with the year ended December 31, 1997, the Company intends to
make an election to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company
generally will not be subject to federal income tax if it distributes at least
95% of its taxable income for each tax year to its shareholders. REITs are
subject to a number of organizational and operational requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate tax rates. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to state and local
income taxes and to federal income tax and excise tax on its undistributed
income.
F-29
<PAGE> 251
7. SHARE OPTION AND RESTRICTED SHARE PLANS
The Company adopted the 1997 Employee Share Option and Share Award Plan
(the "Employee Plan") for the purpose of attracting and retaining highly
qualified executive officers, trustees, employees and consultants. The Company
reserved 11,121,786 Common Shares for issuance pursuant to the Employee Plan, an
amount equal to approximately 6.8% of the total outstanding Common Shares,
calculated on a fully diluted basis immediately following the Offering and the
Consolidation. Pursuant to the Employee Plan, the Company granted options to
purchase Common Shares to certain officers, trustees, employees and consultants
of the Company.
Grants under the Employee Plan have been and will continue to be exempt
under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Employee Plan will be administered by the Compensation
Committee and provide for the granting of share options, share appreciation
rights or restricted shares. At the closing of the Offering, the Company granted
share options to purchase approximately 2.56% of the Company's outstanding
Common Shares (calculated on a fully diluted basis) to executives or other key
employees and consultants of the Company. Share options may be granted in the
form of "incentive stock options" (as defined in Section 422 of the Code), or
non-statutory share options, and are exercisable for up to 10 years following
the date of grant. The exercise price of each option will be set by the
Compensation Committee; provided, however, that the price per share must be
equal to or greater than the fair market value of the Common Shares on the grant
date.
The Employee Plan also provides for the issuance of share appreciation
rights which will generally entitle a holder to receive cash or shares, as
determined by the Compensation Committee at the time of exercise, equal to the
difference between the exercise price and the fair market value of the Common
Shares. In addition, the Employee Plan permits the Company to issue restricted
Common Shares to executive or other key employees upon such terms and conditions
as shall be determined by the Compensation Committee in its sole discretion.
8. INVESTMENT IN RENTAL PROPERTY
During the quarter ended September 30, 1997, the Company acquired the four
Properties listed below. Each Property was purchased from an unaffiliated party.
<TABLE>
<CAPTION>
TOTAL
DATE SQUARE PARKING
ACQUIRED PROPERTY LOCATION FEET SPACES PURCHASE PRICE
-------- -------- -------- --------- ------- --------------
<C> <S> <C> <C> <C> <C>
8/11/97 Adams-Wabash Parking Garage Chicago, IL -- 670 $ 25,000,000(1)
9/3/97 Columbus America Properties 140,000,000(2)
LL&E Tower New Orleans, LA 545,157 -- --
Texaco Center New Orleans, LA 619,714 -- --
601 Tchoupitoulas New Orleans, LA -- 759 --
--------- ----- ------------
1,164,871 1,429 $165,000,000
========= ===== ============
</TABLE>
- ---------------
(1) The total purchase price was paid from available cash.
(2) The purchase price was paid with $90.9 million in cash funded primarily from
the $600 million credit facility and $49.1 million in Units (1,692,546 Units
at $29 per Unit).
F-30
<PAGE> 252
9. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Equity Office Predecessors acquired a mortgage receivable secured by the
500 Orange Tower office property ("500 Orange") and purchased land underlying
and adjacent to 500 Orange in July 1994, and acquired a 50% limited partnership
interest in Civic Parking, L.L.C. in April 1997. These transactions were
accounted for utilizing the equity method of accounting. Under this method of
accounting, the net equity investment of the Company is reflected on the
consolidated and combined balance sheets, and the consolidated and combined
statements of operations include the Company's share of net income or loss from
500 Orange and Civic Parking, L.L.C. The Company's share of net income or loss
from 500 Orange and Civic Parking, L.L.C. is approximately 100% and 50%,
respectively. Selected balance sheets and statements of operations data for the
Company's interest in 500 Orange and Civic Parking, L.L.C. is as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
---------------------------- ----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1997 1996 1997 1996
------------- ------------ ------------- ------------
($ IN THOUSANDS)
(NOTE A)
<S> <C> <C> <C> <C>
ASSETS:
Investment in real estate, net.............. $42,082 $26,555 $51,383 --
Cash and cash equivalents................... 538 147 1,173 --
Rents and other receivables................. 46 150 65 --
Other assets................................ 190 720 33 --
------- ------- ------- -------
TOTAL ASSETS................... $42,856 $27,572 $52,654 --
======= ======= ======= =======
LIABILITIES AND OWNERS' EQUITY:
Accounts payable and accrued expenses....... $ 897 $ 364 $ 367 --
Due to affiliates........................... -- 19 34 --
Other liabilities........................... 369 279 17 --
------- ------- ------- -------
TOTAL LIABILITIES.............. 1,266 662 418 --
------- ------- ------- -------
Shareholders'/owners' equity................ 41,590 26,910 52,236 --
------- ------- ------- -------
TOTAL LIABILITIES AND OWNERS'
EQUITY....................... $42,856 $27,572 $52,654 --
======= ======= ======= =======
</TABLE>
F-31
<PAGE> 253
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
----------------------------- -----------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
($ IN THOUSANDS)
(NOTE A)
<S> <C> <C> <C> <C>
Revenues:
Rental..................................... $1,073 $1,123 $ 70 --
Tenant reimbursements...................... 63 14 6 --
Parking.................................... 1 -- 1,164 --
Other...................................... 152 12 14 --
------ ------ ------ -------
Total revenues................ 1,289 1,149 1,254 --
------ ------ ------ -------
Expenses:
Interest................................... -- -- -- --
Depreciation............................... 196 217 313 --
Amortization............................... 8 35 -- --
Real estate taxes and insurance............ 87 43 113 --
Repairs and maintenance.................... 102 160 2 --
Property operating......................... 339 217 -- --
------ ------ ------ -------
Total expenses................ 732 672 428 --
------ ------ ------ -------
Net income................................... $ 557 $ 477 $ 826 --
====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
----------------------------- -----------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
($ IN THOUSANDS)
(NOTE A)
<S> <C> <C> <C> <C>
Revenues:
Rental..................................... $3,579 $3,461 $ 195 --
Tenant reimbursements...................... (20) 73 6 --
Parking.................................... 1 -- 2,137 --
Other...................................... 178 22 14 --
------ ------ ------ -------
Total revenues................ 3,738 3,556 2,352 --
------ ------ ------ -------
Expenses:
Interest................................... -- -- -- --
Depreciation............................... 710 618 528 --
Amortization............................... 92 74 -- --
Real estate taxes and insurance............ 17 298 210 --
Repairs and maintenance.................... 436 484 3 --
Property operating......................... 686 528 -- --
------ ------ ------ -------
Total expenses................ 1,941 2,002 741 --
------ ------ ------ -------
Net income.................... $1,797 $1,554 $1,611 --
====== ====== ====== =======
</TABLE>
Note A: The balance sheet data as of December 31, 1996 and operational data for
the three and nine months ended September 30, 1996 is not applicable
since Civic Parking, L.L.C. was not owned by the Company or Equity
Office Predecessors at or during these periods.
10. MORTGAGE NOTES, UNSECURED NOTES AND LINES OF CREDIT
On July 15, 1997, the Company obtained a $600 million unsecured revolving
credit facility (the "$600 million Credit Facility") which is used for
acquisitions and general corporate purposes. Amounts were drawn
F-32
<PAGE> 254
on the $600 million Credit Facility to repay the outstanding balance on the
previous ZML Fund IV line of credit (the "$475 Million Line") which was
terminated when the $600 million Credit Facility was obtained. The $600 million
Credit Facility matures on July 15, 2000. The Company paid a commitment fee on
the $600 million Credit Facility at closing of approximately $645,000. In
addition, until the Company receives a long term debt rating of BBB- or Baa3 or
higher by two rating agencies, an unused commitment fee is payable quarterly in
arrears based upon the unused amount of the $600 million Credit Facility as
follows: .15% per annum if the unused amount is between 0 to 33%; .20% per annum
if the unused amount is more than 33% but less than 66%; .25% per annum if the
unused amount is more than 66%. The $600 million Credit Facility carries an
interest rate equal to LIBOR plus 110 basis points. Once the Company receives
the rating as described above, a competitive bid option will become available
for up to $250 million of the facility amount, the interest rate spread will be
reduced on a sliding scale based upon the Company's senior unsecured debt rating
and the unused commitment fee will be replaced by a facility fee of .20% per
annum. As of November 14, 1997, no amounts were outstanding under the $600
million Credit Facility.
On September 3, 1997, the Company completed a private debt offering of $180
million (the "$180 million Private Debt Offering") with an unaffiliated party.
The terms of the $180 million Private Debt Offering consist of four tranches
with maturities from seven to ten years which were priced at an interest rate
spread over the corresponding U.S. Treasury rate. The Company used the proceeds
of the $180 million Private Debt Offering to repay a portion of the $600 million
Credit Facility. In addition, the Company terminated $150 million of hedge
agreements at a cost of approximately $3.9 million in connection with the $180
million Private Debt Offering. This amount will be amortized to interest expense
over the respective terms of each tranche. A summary of the terms of the $180
Million Private Debt Offering is as follows:
<TABLE>
<CAPTION>
TRANCHE AMOUNT STATED RATE EFFECTIVE RATE(A)
------- ------------ ----------- -----------------
<C> <C> <C> <C>
7 Year Senior Notes due
2004....................... $ 30,000,000 7.24% 7.24%
8 Year Senior Notes due
2005....................... 50,000,000 7.36% 7.67%
9 Year Senior Notes due
2006....................... 50,000,000 7.44% 7.73%
10 Year Senior Notes due
2007....................... 50,000,000 7.42% 7.69%
------------
$180,000,000
============
</TABLE>
- ---------------
(A) Includes the cost of the amortized terminated interest rate protection
agreements.
As of September 30, 1997, the Company had outstanding mortgage indebtedness
of approximately $1.3 billion encumbering 48 of the Properties. The carrying
value of such Properties, net of accumulated depreciation of approximately $12
million, was approximately $2.6 billion.
In order to limit the market risk associated with variable rate debt, the
Company entered into several interest rate protection agreements. These
agreements effectively convert floating rate debt to a fixed rate basis, as well
as hedge anticipated financing transactions. Net amounts paid or received under
these agreements are recognized as an adjustment to interest expense when such
amounts are incurred or earned. Settlement amounts paid or received under these
agreements are deferred and amortized over the term of the related financing
transaction on the straight-line method which approximates the effective yield
method. A summary of the various interest rate hedge agreements is as follows:
(1) On June 4, 1997, the Company entered into interest rate protection
agreements for $700 million of indebtedness. As a result of this arrangement,
the Company has essentially "locked into" U.S. Treasury rates in effect as of
June 4, 1997, for $700 million in indebtedness. In August 1997, the Company
terminated $150 million of the $700 million of hedge agreements at a cost of
$3.9 million. The terminated agreements pertained to the $180 million Private
Debt Offering. The portion of the Private Debt Offering protected by these
agreements consisted of three tranches with maturities of eight, nine and ten
years, respectively. The cost of the terminated hedge agreements will be
amortized to interest expense over the respective terms of each tranche. (2) On
October 6, 1997, the Company entered into an additional $450 million of interest
rate protection agreements based on the U.S. Treasury rates in effect at that
date. The Company intends to terminate these agreements and the remaining $550
million hedge agreements described above at such time as it incurs fixed rate
indebtedness. Upon the occurrence of such termination, the Company will either
owe money or be entitled to receive money
F-33
<PAGE> 255
depending on whether U.S. Treasury rates have increased (resulting in a payment
to the Company) or decreased (resulting in a payment obligation of the Company)
subsequent to the date of the hedge. The counterparties to these arrangements
are major U.S. financial institutions. (3) Equity Office Predecessors entered
into an interest rate swap agreement in October 1995 which effectively fixed the
interest rate on a $93.6 million mortgage loan at 6.94% through the maturity of
the loan on June 30, 2000.
11. SHAREHOLDERS' EQUITY
On June 13, 1997, the Declaration of Trust of the Company was amended to
authorize the issuance of 750,000,000 Common Shares and 100,000,000 preferred
shares of beneficial interest ("Preferred Shares"). The Company had 152,302,194
Common Shares issued and 151,799,454 Common Shares outstanding at September 30,
1997. The number of Common Shares issued includes 502,740 Common Shares issued
to the Operating Partnership that are deemed not to be outstanding for
accounting purposes and accordingly, are eliminated in consolidation. The
Company had no issued and outstanding Preferred Shares at September 30, 1997.
On September 26, 1997, the Company declared a distribution of $.26 per
Common Share and Unit outstanding, representing a pro rata distribution since
the closing of the Offering on July 11, 1997, based upon a full quarterly
distribution of $0.30 per share and an annual distribution of $1.20 per share,
totaling approximately $42,964,500. The distribution was paid on October 9, 1997
to shareholders and Unit holders of record on September 29, 1997.
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing
activities for the nine months ended September 30, 1997 and 1996 are as follows:
(1) The following summarizes the assets and liabilities contributed by
Equity Office Predecessors in exchange for 122,928,030 Common Shares of
the Company and 11,877,647 Units of the Operating Partnership at the
Consolidation on July 11, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Investment in real estate................................... $ 4,815,234
Investment in unconsolidated joint ventures................. 93,935
Cash contributed to the Company............................. 181,163
-----------
$ 5,090,332
===========
Debt........................................................ $ 2,196,708
Other liabilities over assets, net.......................... 62,706
Owners' equity.............................................. 2,830,918
-----------
$ 5,090,332
===========
</TABLE>
<TABLE>
<CAPTION>
EQUITY OFFICE EQUITY OFFICE
PROPERTIES TRUST FOR PREDECESSORS EQUITY OFFICE
THE PERIOD FROM FOR THE PERIOD FROM PREDECESSORS FOR THE
JULY 11, 1997 TO JANUARY 1, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997 JULY 10, 1997 SEPTEMBER 30, 1996
-------------------- ------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans assumed through acquisition
of Properties:.......................... $90,000 $-- $55,000
======= === =======
Issuance of 1,692,546 Units in connection
with the acquisition of Properties:..... $49,100 $-- $ --
======= === =======
</TABLE>
F-34
<PAGE> 256
13. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARE
In February, 1997, the Financial Accounting Standards Board issued
statement No. 128, Earning Per Share ("FASB 128"). FASB 128 is effective for
fiscal years and interim periods ending after December 15, 1997. Early adoption
is not permitted except in pro forma presentations. The Company adopted the new
requirements of FASB 128 for the pro forma statements of operations (Note 14).
Under the new requirements for calculating primary earning per share, the
dilutive effect of stock options will be excluded. The weighted average Common
Shares outstanding for the period from July 11, 1997 to September 30, 1997
excludes 502,740 Common Shares issued to the Operating Partnership at the time
of the Consolidation. The Common Shares owned by the Operating Partnership are
eliminated in consolidation and, therefore, are not considered outstanding
during this period.
14. PRO FORMA STATEMENT OF OPERATIONS
The pro forma data presented below is included to illustrate the effect on
the Company's operations as a result of the transactions described below.
The pro forma consolidated statement of operations for the three and nine
months ended September 30, 1997 is presented as if the following transactions
occurred on January 1, 1997: (1) the acquisition of 30 Office Properties and six
Parking Facilities acquired between January 1, 1997 and October 17, 1997 and the
disposition of two Office Properties; (2) the Private Debt Offering which
occurred on September 3, 1997; (3) the Consolidation and the Offering and the
decrease in interest expense resulting from the use of the net proceeds for the
repayment of mortgage debt; and (4) the decrease in interest expense resulting
from draws from the $1.5 billion Credit Facility (see Note 17 (7)) used to
refinance existing debt.
The pro forma consolidated statement of operations for the nine months
ended September 30, 1996 is presented as if the following transactions occurred
on January 1, 1996: (1) the acquisition of 40 Office Properties and 13 Parking
Facilities acquired between January 1, 1996 and October 17, 1997 and the
disposition of two Office Properties; (2) the Private Debt Offering which
occurred on September 3, 1997; (3) the Consolidation and the Offering and the
decrease in interest expense resulting from the use of the net proceeds for the
repayment of mortgage debt; and (4) the decrease in interest expense resulting
from draws from the $1.5 billion credit facility (see Note 17 (7)) used to
refinance existing debt.
F-35
<PAGE> 257
The accompanying unaudited pro forma consolidated statement of operations
have been prepared by management of the Company and do not purport to be
indicative of the results which would actually have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The pro forma consolidated statement of operations
should be read in conjunction with the accompanying notes to the financial
statements contained herein.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE NINE MONTHS ENDED
------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------- ------------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental........................................... $ 168,869 $ 496,087 $ 461,627
Tenant reimbursements............................ 35,657 99,239 89,791
Parking.......................................... 15,303 40,167 37,032
Other............................................ 1,893 9,989 11,787
Fees from noncombined affiliate.................. 1,401 3,841 3,126
Interest......................................... 1,399 10,589 6,445
------------ ------------ ------------
Total revenues...................... 224,522 659,912 609,808
------------ ------------ ------------
Expenses:
Property operating............................... 85,606 247,789 242,575
Interest......................................... 42,997 126,311 125,544
Depreciation..................................... 34,219 102,658 102,658
Amortization..................................... 3,326 8,272 7,533
General and administrative....................... 8,930 24,856 18,078
------------ ------------ ------------
Total expenses...................... 175,078 509,886 496,388
------------ ------------ ------------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, gain on sale of real estate and
extraordinary items.............................. 49,444 150,026 113,420
Minority interests:
Operating Partnership............................ (3,733) (13,971) (11,950)
Partially owned properties....................... (326) (1,233) (2,208)
Income from investment in unconsolidated joint
ventures......................................... 1,297 4,431 3,528
Gain on sale of real estate........................ -- -- 5,262
------------ ------------ ------------
Income before extraordinary items.................. 46,682 139,253 108,052
Extraordinary items................................ (12,929) (12,929) --
------------ ------------ ------------
Net income....................................... $ 33,753 $ 126,324 $ 108,052
============ ============ ============
Net income per Common Share:
Income before extraordinary items................ $ .29 $ .86 $ .67
Extraordinary items.............................. (.08) (.08) --
------------ ------------ ------------
Net income per Common Share........................ $ .21 $ .78 $ .67
============ ============ ============
Number of Common Shares outstanding................ 161,484,488 161,484,488 161,484,488
============ ============ ============
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company has become a party to various legal actions resulting from the
operating activities transferred to the Operating Partnership in connection with
the Consolidation. These actions are incidental to the transferred business and
management does not believe that these actions will have a material adverse
effect on the Company.
ZML-Chicago Parking Limited Partnership ("ZCP") and ZML-North Loop/Theatre
District Parking Limited Partnership ("NLT"), were named as defendants in an
action (the "Action") brought by an investor
F-36
<PAGE> 258
(the "Plaintiff") in an unaffiliated entity owning an interest in NLT. The
Action was brought in the Circuit Court of Cook County, Illinois, Chancery
Division, on August 15, 1995. NLT is the owner of two Parking Facilities, North
Loop Transportation Center and Theatre District Self Park ("Theatre District
Garage"). The Plaintiff demands rescission of certain transactions related to
the acquisition by NLT of the Theatre District Garage. The case was settled on
October 1, 1997 and accordingly, was dismissed with prejudice pursuant to an
order of even date. ZCP and NLT are fully indemnified by certain of the other
co-defendants and will not be contributing any funds to the settlement.
Except as described above, management of the Company does not believe there
is any litigation threatened against the Company other than routine litigation
arising out of the ordinary course of business, some of which is expected to be
covered by liability insurance, and none of which is expected to have a material
adverse effect on the consolidated financial statements of the Company.
16. MERGER
On September 15, 1997, the Company entered into a definitive agreement and
plan of merger with Beacon Properties Corporation ("Beacon") whereby Beacon's
portfolio of 126 buildings containing 20.7 million square feet will be
integrated into that of the Company. The merger was unanimously approved by the
Company's Board of Trustees and Beacon's Board of Directors. The merger plan
calls for the Company to issue 1.4063 Common Shares of the Company for each
share of Beacon common stock which is anticipated to result in the issuance of
approximately 84.0 million new Common Shares, approximately $200 million in
preferred shares, 9.8 million Units and to assume outstanding liabilities of
approximately $1.0 billion. The merger, which will be accounted for under the
purchase method of accounting, is expected to be completed in December, 1997
with a total purchase price of approximately $4.3 billion and is subject to the
approval of the shareholders of both companies and other conditions. There can
be no assurance that this transaction will be consummated as described above.
17. SUBSEQUENT EVENTS
(1) In October, 1997, the Company purchased the following office properties
from an unaffiliated party:
- Destec Tower, a 25-story, 574,216 square-foot office tower in Houston,
Texas;
- Brookhollow Central I, II and III, a 800,688 square foot office
complex in suburban Houston, Texas;
- 8080 Central, a 17-story, 283,707 square foot office building near
Dallas, Texas; and
- 1700 Market, a 32-story, 825,547 square foot office building in
Philadelphia, Pennsylvania.
The purchase price of approximately $289 million was comprised of $211.9
million in cash, $6.0 million of liabilities assumed and $71.1 million in Units
issued at a price of $24.50 per Unit. In October 1997, affiliates of the seller
of the foregoing properties purchased approximately $73.95 million in restricted
Common Shares for $24.50 per share.
(2) On October 6, 1997, the Company purchased from an unaffiliated party
550 South Hope Street, a 566,434 square foot, 27-story office building located
in Los Angeles, California. The purchase price of approximately $99.5 million
was paid in cash.
(3) On October 7, 1997, the Company purchased from unaffiliated parties
interests in the following office buildings located in suburban Philadelphia,
Pennsylvania:
- Four Falls Corporate Center, consisting of 254,355 square feet;
- Oak Hill Plaza, consisting of 164,360 square feet;
- Walnut Hill Plaza, consisting of 149,716 square feet;
- Two Valley Square, consisting of 70,622 square feet;
- Four Valley Square, consisting of 49,757 square feet;
- Five Valley Square, consisting of 18,564 square feet;
F-37
<PAGE> 259
- One Devon Square, consisting of 77,267 square feet;
- Two Devon Square, consisting of 63,226 square feet;
- Three Devon Square, consisting of 6,000 square feet;
The purchase price of approximately $127.5 million was comprised of $14.39
million in Units at a price of $28.775 per Unit, cash of approximately $98.41
million and $14.7 million of debt assumed by the Company.
In addition, the Company's Board of Trustees approved the purchase of an
interest in the following two properties from a party affiliated with the seller
of the above properties:
- One Valley Square, consisting of 70,289 square feet; and
- Three Valley Square, consisting of 84,605 square feet.
The purchase price of the interests in these properties is approximately
$17.2 million of which approximately $4 million will be paid in Units to be
issued at a price of $28.775 per Unit and the remainder will be comprised of a
combination of cash and the assumption of debt. This transaction is contingent
upon certain terms and conditions as set forth in the purchase agreement. There
can be no assurance that this transaction will be consummated as described
above.
The Company shall have the option of purchasing the remaining interest in
all 11 properties, exercisable for a designated period commencing three (3)
years after the respective closing dates on the initial purchases, for
additional consideration in the amount of approximately $2.1 million, all
payable in Units valued at $28.775 per Unit. If this option is exercised, total
consideration paid and to be paid for sole ownership of all 11 properties will
be approximately $142.47 million.
(4) On October 7, 1997, the Company purchased from an unaffiliated party 10
and 30 South Wacker Drive, two 40-story office towers totaling 2,033,377 net
rentable square feet, in downtown Chicago, Illinois. The purchase price of
approximately $462 million was paid in cash.
(5) On October 17, 1997, the Company purchased from an unaffiliated party
One Lafayette Center, a 314,634 square-foot 10-story office building, located in
Washington, D.C. The purchase price of approximately $82.5 million was comprised
of $24.4 million in Units issued at a net price of $32.975 per Unit, the
assumption of approximately $5.3 million of liabilities and approximately $52.8
million of cash.
(6) In October, 1997, the Company's Board of Trustees approved the purchase
of the following properties from an unaffiliated party for approximately $92
million:
- 1600 Duke, a 68,770 square foot office building, located in
Alexandria, Virginia;
- Fair Oaks Plaza, a 177,917 square foot office building, located in
Fairfax, Virginia; and
- Lakeside Square, a 392,537 square foot office building, located in
Dallas, Texas.
This transaction is contingent upon certain terms and conditions as set
forth in the purchase agreement. There can be no assurance that this transaction
will be consummated as described above.
(7) In October, 1997, the Company obtained a $1.5 billion unsecured credit
facility (the "Facility"). The Facility is available for the acquisition of
properties and general corporate purposes. The Facility carries an interest rate
equal to LIBOR plus 100 basis points and may be increased or decreased upon the
receipt of an investment grade unsecured debt rating. The Facility matures on
July 1, 1998, and may be extended to October 1, 1998. The Company paid an
underwriting fee on the Facility at closing of approximately $4,875,000. In
addition, an unused commitment fee is payable quarterly in arrears based upon
the unused amount of the Facility as follows: .15% per annum if the unused
amount is between 0 to 33%; .20% per annum if the unused amount is more than 33%
but less than 66%; and .25% per annum if the unused amount is greater than 66%.
As of November 14, 1997, the outstanding balance on the Facility was
approximately $1,044,450,000.
(8) On October 20, 1997, the Company completed a private placement of
Common Shares with an unaffiliated party receiving approximately $200 million at
$30 per share.
F-38
<PAGE> 260
(9) In November, 1997, the Company's Board of Trustees approved the
purchase of LaSalle Plaza, a 588,908 square foot office building, located in
Minneapolis, Minnesota, for approximately $97.4 million. This transaction is
contingent upon certain terms and conditions as set forth in the purchase
agreement. There can be no assurance that this transaction will be consummated
as described above.
(10) In November, 1997, the Company's Board of Trustees approved the
purchase of the Stanwix Parking Facility, a parking facility consisting of
approximately 712 spaces, located in Pittsburgh, Pennsylvania for approximately
$17.3 million. This transaction is contingent upon the satisfactory completion
of the Company's due diligence and certain other terms and conditions. There can
be no assurance that this transaction will be consummated as described above.
(11) The table below summarized the issuance of Common Shares and Units at
the offering through November 14, 1997:
<TABLE>
<CAPTION>
TRANSACTION DATE COMMON SHARES UNITS
----------- ------- ------------- ----------
<S> <C> <C> <C>
Outstanding upon completion of the Offering(A)............ 7/11/97 152,180,770 11,877,647
Units issued to seller of Properties (Note 8)............. 9/3/97 -- 1,692,546
Restricted Share Awards to Officers....................... 9/22/97 119,000 --
Shares issued as Trustee compensation..................... 9/30/97 2,424 --
----------- ----------
Outstanding as of September 30, 1997...................... 9/30/97 152,302,194 13,570,193
Common Shares and Units issued to seller of Properties
(Note 17 (1))........................................... 10/7/97 3,018,367 2,900,000
Units issued to seller of Properties (Note 17 (3))........ 10/7/97 -- 499,977
Units issued to seller of Properties (Note 17 (5))........ 10/17/97 -- 741,159
Private placement (Note 17 (8))........................... 10/20/97 6,666,667 --
----------- ----------
Outstanding as of November 14, 1997....................... 161,987,228 17,711,329
=========== ==========
</TABLE>
- ---------------
(A) Includes 502,740 common shares held by the Operating Partnership which are
deemed not to be outstanding for accounting purposes and are eliminated in
consolidation.
F-39
<PAGE> 261
REPORT OF INDEPENDENT AUDITORS
To the Owners of
the Equity Office Predecessors
We have audited the accompanying combined balance sheets of the Equity
Office Predecessors, as defined in Note 1, as of December 31, 1996 and 1995, and
the related combined statements of operations, owners' equity, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedule III, Real Estate and Accumulated
Depreciation. These financial statements and schedule are the responsibility of
the management of the Equity Office Predecessors. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Equity Office
Predecessors at December 31, 1996 and 1995, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
March 25, 1997
F-40
<PAGE> 262
EQUITY OFFICE PREDECESSORS
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Investment in real estate................................... $3,549,708 $2,571,851
Accumulated depreciation.................................... (257,893) (178,448)
---------- ----------
3,291,815 2,393,403
Cash and cash equivalents................................... 410,420 111,121
Rents and other receivables (net of allowance for doubtful
accounts of $2,724 and $2,075, respectively).............. 58,661 38,974
Escrow deposits and restricted cash......................... 32,593 20,360
Investment in unconsolidated joint ventures................. 26,910 26,505
Other assets (net of accumulated amortization of $21,806 and
$14,721, respectively).................................... 92,166 60,527
---------- ----------
TOTAL ASSETS...................................... $3,912,565 $2,650,890
========== ==========
LIABILITIES AND OWNERS' EQUITY
Mortgage debt............................................... $1,837,767 $1,358,827
Revolving line of credit.................................... 127,125 76,000
Accounts payable and accrued expenses....................... 81,995 62,754
Due to affiliates........................................... 2,074 839
Distribution payable........................................ 96,500 12,508
Other liabilities........................................... 29,022 18,406
---------- ----------
TOTAL LIABILITIES................................. 2,174,483 1,529,334
---------- ----------
Commitments and contingencies (Note 11)
Minority interests.......................................... 11,080 31,587
Owners' equity.............................................. 1,727,002 1,089,969
---------- ----------
TOTAL LIABILITIES AND OWNERS' EQUITY.............. $3,912,565 $2,650,890
========== ==========
</TABLE>
See accompanying notes.
F-41
<PAGE> 263
EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental.................................................... $386,481 $289,320 $193,046
Tenant reimbursements..................................... 62,036 41,935 27,200
Parking................................................... 27,253 15,390 6,920
Other..................................................... 17,626 10,314 3,262
Fees from noncombined affiliates.......................... 5,120 5,899 6,018
Interest.................................................. 9,608 8,599 4,432
-------- -------- --------
Total Revenues..................................... 508,124 371,457 240,878
-------- -------- --------
Expenses:
Interest:
Expense incurred........................................ 119,595 100,566 59,316
Amortization of deferred financing costs................ 4,275 2,025 1,568
Depreciation.............................................. 82,905 64,716 40,812
Amortization.............................................. 9,057 7,415 4,525
Real estate taxes and insurance........................... 57,045 41,330 30,014
Repairs and maintenance................................... 71,156 53,618 35,260
Property operating........................................ 72,866 56,540 42,138
General and administrative................................ 23,145 21,987 15,603
Provision for value impairment............................ -- 20,248 --
-------- -------- --------
Total expenses..................................... 440,044 368,445 229,236
-------- -------- --------
Income before (income) loss allocated to minority interests,
income from investment in unconsolidated joint ventures,
gain on sale of real estate and extraordinary items....... 68,080 3,012 11,642
(Income) loss allocated to minority interests, net of
extraordinary gain of $20,035 in 1995..................... (2,086) (2,129) 1,437
Income from unconsolidated joint ventures................... 2,093 2,305 1,778
Gain on sale of real estate................................. 5,338 -- --
-------- -------- --------
Income before extraordinary items........................... 73,425 3,188 14,857
Extraordinary items......................................... -- 31,271 1,705
-------- -------- --------
Net income.................................................. $ 73,425 $ 34,459 $ 16,562
======== ======== ========
</TABLE>
See accompanying notes.
F-42
<PAGE> 264
EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, 1996,
1995 AND 1994
-------------------
(IN THOUSANDS)
<S> <C>
Owners' Equity, January 1, 1994............................. $ 488,627
Contributions............................................. 251,909
Offering expenses......................................... (942)
Distributions............................................. (25,058)
Net income for the year ended December 31, 1994........... 16,562
----------
Owners' Equity, December 31, 1994........................... 731,098
Contributions............................................. 337,048
Offering expenses......................................... (128)
Distributions............................................. (12,508)
Net income for the year ended December 31, 1995........... 34,459
----------
Owners' Equity, December 31, 1995........................... 1,089,969
Contributions............................................. 661,265
Offering expenses......................................... (1,157)
Distributions............................................. (96,500)
Net income for the year ended December 31, 1996........... 73,425
----------
Owners' Equity, December 31, 1996........................... $1,727,002
==========
</TABLE>
See accompanying notes.
F-43
<PAGE> 265
EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 73,425 $ 34,459 $ 16,562
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 96,237 74,156 46,905
(Income) from investment in unconsolidated joint
venture............................................... (2,093) (2,305) (1,778)
(Gain) on sale of real estate........................... (5,338) -- --
Provision for value impairment.......................... -- 20,248 --
Extraordinary (gain) from early extinguishments of
debt.................................................. -- -- (1,705)
Extraordinary (gain) on repurchase of debt.............. -- (31,271) --
Provision for doubtful accounts......................... 2,284 2,096 572
Income (loss) allocated to minority interests........... 2,086 2,129 (1,437)
Changes in assets and liabilities:
(Increase) in rents receivable....................... (21,971) (17,411) (8,552)
(Increase) decrease in other assets.................. (9,747) 1,374 (3,124)
Increase in accounts payable and accrued expenses.... 19,241 6,931 19,382
Increase (decrease) in due to affiliates............. 1,235 (89) 293
Increase in other liabilities........................ 10,616 3,561 6,703
--------- --------- ---------
Net cash provided by operating activities.......... 165,975 93,878 73,821
--------- --------- ---------
INVESTING ACTIVITIES:
Property acquisitions..................................... (768,906) (317,669) (351,489)
Payments for capital and tenant improvements.............. (129,485) (76,985) (72,952)
Proceeds from sale of real estate......................... 14,502 -- --
Distributions from (investment in) unconsolidated joint
venture................................................. 1,688 2,300 (24,722)
Payments of lease acquisition costs....................... (29,793) (16,106) (22,883)
(Increase) decrease in escrow deposits and restricted
cash.................................................... (12,233) 27,845 (41,919)
--------- --------- ---------
Net cash (used for) investing activities........... (924,227) (380,615) (513,965)
--------- --------- ---------
FINANCING ACTIVITIES:
Capital contributions..................................... 661,265 337,048 251,909
Capital distributions..................................... (12,508) (17,800) (8,458)
Payments for offering expenses............................ (1,157) (128) (942)
Contributions from (distributions to) minority interest
partners................................................ (22,593) 141 26,018
Proceeds from mortgage notes.............................. 640,953 271,482 240,365
Proceeds from revolving lines of credit................... 216,943 288,000 166,000
Repurchase of debt........................................ -- (40,078) --
Principal payments on mortgage notes...................... (254,104) (182,244) (152,615)
Principal payments on revolving line of credit............ (165,818) (378,000) --
Payments of loan costs.................................... (5,430) (1,908) (6,854)
Prepayment penalties on early extinguishments of debt..... -- -- (500)
--------- --------- ---------
Net cash provided by financing activities.......... 1,057,551 276,513 514,923
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ 299,299 (10,224) 74,779
Cash and cash equivalents at the beginning of the year...... 111,121 121,345 46,566
--------- --------- ---------
Cash and cash equivalents at the end of the year............ $ 410,420 $ 111,121 $ 121,345
========= ========= =========
Supplemental information:
Interest paid during the period, including capitalized
interest of $4,640, $1,682 and $0, respectively......... $ 121,813 $ 100,700 $ 55,832
========= ========= =========
Non-cash financing activities:
Financing assumed upon acquisition of real estate....... $ 92,091 $ 265,816 $ 211,263
========= ========= =========
</TABLE>
See accompanying notes.
F-44
<PAGE> 266
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION
Unless defined otherwise herein, capitalized terms used in these notes to
the combined financial statements have the same meanings as defined elsewhere in
this Registration Statement on Form S-4. These footnotes should be read in
conjunction with the Registration Statement on Form S-4. As used herein, "Equity
Office Predecessors" has the same meaning as EOP Predecessors.
Business
Prior to July 11, 1997, Equity Office Predecessors was engaged in
acquiring, owning, managing, leasing, and renovating office properties and
parking facilities throughout the United States. The Management Business
included activities related to both the management of properties owned by Equity
Office Predecessors (the "Properties") as well as properties which were owned by
entities affiliated with Equity Office Predecessors. Equity Office Properties
Trust (the "Company") is the successor to the business of Equity Office
Predecessors.
Organization
Equity Office Predecessors is not a legal entity, but rather a combination
of the Properties of the ZML Opportunity Partnerships together with their
limited and general partners (collectively, the "ZML Funds" which includes ZML
Fund I, ZML Fund II, ZML Fund III and ZML Fund IV), and the Management Business
of the Equity Group that were combined into the Company pursuant to the
Consolidation and the Offering. The combined financial statements include all
the direct and indirect costs of the business of Equity Office Predecessors. The
business of the apartment and retail properties owned by the ZML Funds (the
"Non-Office Properties") have not been included in these combined financial
statements.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements have been presented on a combined basis,
at historical cost, because the ZML Funds and the Management Business were under
the common control and management of the owners of the Equity Group through
general partnership interests in the ZML Funds and through their ownership of
the Management Business. Minority interests have been recorded for those
entities that were not wholly owned by the ZML Funds. Where controlling
interests were not held by the ZML Funds, the entities were accounted for as
investments in unconsolidated joint ventures utilizing equity accounting. All
significant intercompany transactions and balances have been eliminated in
combination.
Capital Contributions/Distributions
As of December 31, 1996, the capital partners of the four ZML Funds
previously committed to contribute approximately $2,113,947,500, of which
approximately $1,844,490,800 had been cumulatively contributed by capital
partners, approximately $82,661,700 of the commitment had been canceled and
approximately $186,795,000 remained uncalled.
As of December 31, 1996, the ZML Funds had cumulatively declared or
distributed approximately $139,045,900 to their capital partners.
As of December 31, 1996, the net book value of the Non-Office Properties,
consisting of 14 apartment buildings and two shopping center, which are not
included in these combined financial statements, was approximately $285,920,700.
All cash deficits incurred by the Non-Office Properties are reflected as
distributions and all excess cash flow generated by the Non-Office Properties,
including net proceeds from the sale of these properties, are reflected as
contributions to Equity Office Predecessors. The net contributions
F-45
<PAGE> 267
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(distributions) for the years ended December 31, 1996, 1995 and 1994 related to
the Non-Office Properties was approximately $98,780,000, $908,000 and
($7,258,000), respectively.
During 1996, two Non-Office Properties were sold which generated net
proceeds of approximately $96,664,000 which is included in the $98,780,000 net
contributions from Non-Office Properties for the year ended December 31, 1996.
Investment in Real Estate
Investment in real estate, including Equity Office Predecessors' office
properties (the "Office Properties") and Equity Office Predecessors' parking
facilities (the "Parking Facilities"), was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land........................................................ $ 314,370 $ 235,581
Building.................................................... 2,871,690 2,099,391
Building improvements....................................... 161,497 85,737
Tenant improvements......................................... 196,093 146,966
Furniture and fixtures...................................... 6,058 4,176
---------- ----------
3,549,708 2,571,851
Accumulated depreciation.................................... (257,893) (178,448)
---------- ----------
$3,291,815 $2,393,403
========== ==========
</TABLE>
Rental property and improvements, including costs capitalized during
construction and other costs incurred are included in investment in real estate
and are stated at cost. Expenditures for ordinary maintenance and repairs are
expensed to operations as they are incurred. Significant renovations and
improvements which improve or extend the useful life of the assets are
capitalized. Except for amounts attributed to land, rental property and
improvements are depreciated over their estimated useful lives using the
straight-line method. The estimated useful lives by asset category are:
<TABLE>
<CAPTION>
ASSET CATEGORY ESTIMATED USEFUL LIFE
-------------- ---------------------
<S> <C>
Building................................................ 40 years
Building improvements................................... 4-40 years
Tenant improvements..................................... Term of lease
Furniture and fixtures.................................. 3-12 years
</TABLE>
During 1995, the Financial Accounting Standards Board issued Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("Statement No. 121") which established accounting
standards for the evaluation of the potential impairment of such assets. This
statement was adopted by Equity Office Predecessors as of January 1, 1995.
Rental properties are individually evaluated for impairment when conditions
exist which may indicate that it is probable that the sum of expected future
cash flows (on an undiscounted basis) from a rental property are less than its
historical net cost basis. Upon determination that a permanent impairment has
occurred, rental properties are reduced to their fair value. During the year
ended December 31, 1995, Equity Office Predecessors recorded a provision for
value impairment of approximately $20,248,500, of which $17,512,000 related to
the adjustment of investment in real estate and approximately $2,736,500 related
to unamortized lease acquisition costs.
For properties to be disposed of, an impairment loss is recognized when the
fair value of the property, less the estimated cost to sell, is less than the
carrying amount of the property measured at the time Equity Office Predecessors
has a commitment to sell the property and/or is actively marketing the property
for sale. Property to be disposed of is reported at the lower of its carrying
amount or its estimated fair value, less its cost
F-46
<PAGE> 268
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
to sell. Subsequent to the date that a property is held for disposition,
depreciation expense is not provided for in the statement of operations.
Lease Acquisition Costs
Capitalized lease acquisition costs are recorded at cost and are included
in other assets. These costs are amortized over the respective terms of the
leases. Lease acquisition costs, net of accumulated amortization of $18,455,000
and $12,281,900, as of December 31, 1996 and 1995, respectively, were
approximately $62,592,700 and $40,913,700, respectively.
Loan Costs
Capitalized loan costs are recorded at cost and are included in other
assets. These costs are amortized over the term of the respective financings on
a straight-line basis, which approximates the effective yield method. Loan
costs, net of accumulated amortization of $3,351,000 and $2,438,700, as of
December 31, 1996 and 1995, respectively, were approximately $8,372,300 and
$7,217,100, respectively.
Rental Income
Certain leases of Office Properties provide for tenant occupancy during
periods for which no rent is due or where minimum rent payments increase during
the term of the lease. Equity Office Predecessors records rental income for the
full term of each lease on a straight-line basis. As of December 31, 1996 and
1995, the receivables from tenants, net of reserves, which Equity Office
Predecessors expects to collect over the remaining term of these leases rather
than currently were approximately $49,986,100 and $31,558,700, respectively
("Deferred Rent"). The amounts included in rental income for the years ended
December 31, 1996 and 1995, which are not currently collectible, were
approximately $18,427,400 and $12,662,600, respectively. Deferred Rent is not
recognized for income tax purposes.
Cash Equivalents
Cash equivalents are considered to be all highly liquid investments
purchased with a maturity of three months or less. In addition, cash equivalents
include deposits made to a commingled bank account which is held in an
affiliate's name. Such affiliate provides centralized cash management services
to Equity Office Predecessors.
Escrow Deposits
Escrow deposits primarily consist of amounts held by lenders to provide for
future real estate tax expenditures, tenant improvements and earnest money
deposits on acquisitions.
Restricted Cash
Restricted cash represents amounts committed for various utility deposits
and security deposits. Certain of these amounts may be reduced upon the
fulfillment of certain obligations.
Fair Value of Financial Instruments
Management believes that the carrying basis of Equity Office Predecessors'
long-term debt, consisting of mortgage loans, revolving bank loans and various
interest rate protection agreements, approximated their respective fair market
values as of December 31, 1996 and 1995. The current value of debt was computed
by discounting the projected debt service payments for each loan based on the
spread between the market rate and the effective rate, including the
amortization of loan origination costs, for each year. In addition, the carrying
values of cash and cash equivalents, restricted cash, escrow deposits, rents
receivable (excluding Deferred Rent), accounts payable and accrued expenses are
reasonable estimates of their fair value.
F-47
<PAGE> 269
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Protection Agreements
Equity Office Predecessors periodically enters into certain interest rate
protection agreements to effectively convert or cap floating rate debt to a
fixed rate basis, as well as to hedge anticipated finance transactions. Net
amounts paid or received under these agreements are recognized as an adjustment
to interest expense when such amounts are incurred or earned. Settlement amounts
paid or received in connection with terminated interest rate protection
agreements are deferred and amortized over the term of the related financing
transaction on the straight-line method, which approximates the effective yield
method.
Income Taxes
The Office Properties, Parking Facilities and the Management Business are
primarily owned in limited partnerships or limited liability companies, which
are substantially pass-through entities. Some of these pass-through entities
have corporate general partners or members, which are subject to Federal and
state income and franchise taxes. Equity Office Predecessors incurred Federal
and state income and franchise taxes of approximately $1,375,000 and $1,578,100
for the years ended December 31, 1996 and 1995, respectively, which are included
in general and administrative expenses.
The results of Equity Office Predecessors are included in the income tax
returns of the owners and, accordingly, the income tax obligations of the owners
have not been reflected in these financial statements.
Reclassification
Certain reclassifications have been made to the previously reported 1995
and 1994 statements in order to provide comparability with the 1996 statements
reported herein. These reclassifications have not changed the 1995 and 1994
results or Owners' Equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
NOTE 3 -- MORTGAGE DEBT AND REVOLVING LINE OF CREDIT:
Fixed Rate Debt
As of December 31, 1996 and 1995, Equity Office Predecessors had
outstanding fixed rate mortgage indebtedness of approximately $1,304,075,400 and
$900,912,800, respectively. Payments on fixed rate mortgage debt are generally
due in monthly installments of principal and interest or interest only. As of
December 31, 1996 and 1995, fixed interest rates ranged from 6.88% to 10% and
6.75% to 10.25%, respectively. The weighted average fixed interest rate was
approximately 7.89% and 8.01% as of December 31, 1996 and 1995, respectively.
Variable Rate Debt
As of December 31, 1996 and 1995, Equity Office Predecessors had
outstanding variable rate mortgage indebtedness of approximately $533,691,500
and $457,914,100, respectively. Payments on variable rate mortgage debt are
generally due in monthly installments of principal and interest or interest
only. As of December 31, 1996 and 1995, variable interest rates ranged from
6.56% (LIBOR + 1%) to 7.83% (LIBOR + 2.25%) and 6.75% (LIBOR + 1%) to 10.28%
(LIBOR + 4.375%), respectively. The weighted
F-48
<PAGE> 270
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
average variable interest rate was approximately 7.35% and 7.72% as of December
31, 1996 and 1995, respectively.
Lines of Credit
As of December 31, 1996 and 1995, Equity Office Predecessors had amounts
outstanding under lines of credit of approximately $127,125,000 and $76,000,000,
respectively. A $200 million line of credit ("$200 M Line") was obtained in
October 1994 and canceled in September 1996. Interest was payable monthly based
on the LIBOR + .625%. The $200 M line was secured by the capital commitments of
certain investors and was used to finance acquisitions.
A $275 million acquisition and term loan facility was obtained in September
1996 with a maturity in September 1999 for the purpose of providing financing
for acquisitions. Interest only was payable monthly with the interest based on
various LIBOR options plus various spreads ranging from 1.375% to 1.625% or the
prime rate.
Draw Facilities
As stated in the respective loan agreements, Equity Office Predecessors has
the ability to draw additional proceeds on certain of its mortgages for
operating deficits, capital and tenant improvements, and lease acquisition
costs. As of December 31, 1996 and 1995, amounts available to draw under these
mortgage notes were approximately $92,577,200 and $134,218,100, respectively.
Interest Rate Protection Agreements
In order to limit the market risk associated with variable rate debt,
Equity Office Predecessors entered into several interest rate protection
agreements. (1) A $73,000,000, 8% interest rate protection agreement based on
the three-month LIBOR at a total cost of 2.05% payable in quarterly installments
of approximately $66,600 was entered into in August 1993 and expires on August
14, 2000. A $100,000,000, 7% interest rate protection agreement based on a
three-month LIBOR at a total cost of 1.67% payable in quarterly installments of
approximately $97,600 was entered into in August, 1993 and expires on August 12,
1998. (2) An interest rate protection agreement in October, 1995 which fixes the
interest rate on a $93,600,000 loan at 6.94% through June 30, 2000. Amounts paid
under this interest rate protection agreement for the years ended December 31,
1996 and 1995 were approximately $463,400 and $16,200, respectively. The costs
associated with these interest rate protection agreements have been included in
interest expense. (3) Two interest rate protection agreements totaling
$179,500,000 as a hedge on two mortgages loans. The interest rate protection
agreements were terminated in 1996 at a net cost to Equity Office Predecessors
of approximately $110,000. This amount is being amortized as interest expense
over the term of the respective mortgage loans.
Scheduled payments of principal on mortgage debt and the revolving line of
credit for each of the next five years and thereafter, as of December 31, 1996,
are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 73,000,200
1998........................................................ 97,588,500
1999........................................................ 483,993,300
2000........................................................ 255,470,900
2001........................................................ 222,219,800
Thereafter.................................................. 832,619,200
--------------
$1,964,891,900
==============
</TABLE>
F-49
<PAGE> 271
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- EXTRAORDINARY ITEMS AND PROVISION FOR VALUE IMPAIRMENT:
As reflected in the Combined Statement of Operations for the year ended
December 31, 1995, Equity Office Predecessors reported an extraordinary gain of
approximately $31,270,800 on the repurchase of debt, which is net of the
$20,034,600 minority partners' share, and a provision for value impairment of
approximately $20,248,500 related to Equity Office Predecessors' investment in
San Felipe Plaza Ltd.
As reflected in the Combined Statement of Operations for the year ended
December 31, 1994, Equity Office Predecessors repaid the mortgage notes relating
to two properties at a 10% discount resulting in a gain on early extinguishment
of debt of approximately $1,704,900, which was net of approximately $499,900 in
prepayment penalties and the write-off of $547,600 of unamortized loan costs
incurred in connection with the refinancing of certain of Equity Office
Predecessors' properties.
NOTE 5 -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES:
Equity Office Predecessors acquired a mortgage receivable secured by the
500 Orange Tower office property ("500 Orange") and purchased land underlying
and adjacent to 500 Orange in July 1994. The transaction was accounted for
utilizing the equity method of accounting. Under this method of accounting, the
net equity investment of Equity Office Predecessors is reflected on the combined
balance sheets, and the combined statements of operations include Equity Office
Predecessors' share of net income or loss from 500 Orange. The Company's share
of net income or loss from 500 Orange is approximately 100%. Selected balance
sheets and statements of operations data for Equity Office Predecessors'
interest in 500 Orange are as follows:
<TABLE>
<CAPTION>
500 ORANGE TOWER
---------------------------------
DEC. 31, 1996 DEC. 31, 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Investment in real estate, net............................ $26,555 $26,281
Cash and cash equivalents................................. 147 158
Rents and other receivables............................... 150 74
Other assets.............................................. 720 438
------- -------
TOTAL ASSETS........................................... $27,572 $26,951
======= =======
LIABILITIES AND OWNERS' EQUITY:
Accounts payable and accrued expenses..................... $ 364 $ 248
Due to affiliates......................................... 19 39
Other liabilities......................................... 279 159
------- -------
TOTAL LIABILITIES...................................... 662 446
------- -------
Owners' equity............................................ 26,910 26,505
------- -------
TOTAL LIABILITIES AND OWNERS' EQUITY................... $27,572 $26,951
======= =======
</TABLE>
F-50
<PAGE> 272
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
500 ORANGE TOWER
------------------------------------------------
YEARS ENDED
------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental.............................................. $4,643 $4,935 $3,089
Tenant reimbursements............................... 85 127 56
Parking............................................. -- -- --
Other............................................... (60) --
------ ------ ------
Total revenues................................... 4,775 5,002 3,145
------ ------ ------
Expenses:
Interest............................................ -- -- --
Depreciation........................................ 730 679 295
Amortization........................................ 100 23 --
Real estate taxes and insurance..................... 372 540 250
Repairs and maintenance............................. 718 530 324
Property operating.................................. 762 925 498
------ ------ ------
Total expenses................................... 2,682 2,697 1,367
------ ------ ------
Net income............................................ $2,093 $2,305 $1,778
====== ====== ======
</TABLE>
NOTE 6 -- MINORITY INTEREST
The following properties are controlled and partially owned by Equity
Office Predecessors but have partners with minority interests. Equity Office
Predecessors has included 100% of the financial condition and results of
operations of these properties in the Combined Financial Statements of Equity
Office Predecessors. The equity interests by the unaffiliated partners are
reflected as minority interest.
<TABLE>
<CAPTION>
EQUITY OFFICE
PREDECESSOR
OWNERSHIP AS OF
PROPERTY DECEMBER 31, 1996
-------- -----------------
<S> <C>
CIGNA Center................................................ 95%(1)
Plaza at La Jolla Village................................... 66.67%(1)
First Union Center.......................................... 97%(2)
San Felipe Plaza............................................ 35%(3)
Capital Commons Garage...................................... 50%(4)
</TABLE>
- ---------------
(1) Equity Office Predecessors owns a controlling interest and is the managing
general partner.
(2) Equity Office Predecessors owns a controlling interest and receives
preferential allocations.
(3) An affiliate of Equity Office Predecessors was the managing general partner
of the limited partnership holding title to the property and controlled the
major operating and financing decisions of the property. Equity Office
Predecessors receives preferential allocations which result in Equity Office
Predecessors receiving 100% of the economic benefits.
(4) Equity Office Predecessors owns a controlling interest and receives
preferential allocations. The unaffiliated partner is entitled to receive
50% of the remaining cash flow after Equity Office Predecessors receives its
preferential allocations.
In addition to the properties listed above, Equity Office Predecessors owns
certain other properties, and has a controlling interest in such properties,
subject to minority or participating interests. Equity Office
F-51
<PAGE> 273
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Predecessors is entitled to 100% of the economic benefits of these properties
subject to diminution after Equity Office Predecessors receives specified
preferential returns. Accordingly, no minority interests are reflected for these
unaffiliated parties.
NOTE 7 -- FUTURE MINIMUM RENTS:
Future minimum rental receipts due on noncancelable operating leases at the
Office Properties and Parking Facilities as of December 31, 1996 were as
follows:
<TABLE>
<S> <C>
1997........................................................ $ 452,618,100
1998........................................................ 425,503,500
1999........................................................ 378,930,400
2000........................................................ 324,634,500
2001........................................................ 261,674,200
Thereafter.................................................. 1,069,271,200
--------------
$2,912,631,900
==============
</TABLE>
Equity Office Predecessors is subject to the usual business risks
associated with the collection of the above scheduled rents.
Equity Office Predecessors' investment in 500 Orange is accounted for
utilizing the equity method. Future minimum rental receipts for this Office
Property have not been included in the above schedule.
NOTE 8 -- FUTURE MINIMUM LEASE PAYMENTS:
As of December 31, 1996, Equity Office Predecessors' ownership of three of
its Office Properties and two of its Parking Facilities are subject to ground
leases. As disclosed in their respective ground lease agreements, certain of
these leases are subject to rental increases based upon the appraised value of
the property at specified dates or certain financial calculations of the
respective property. As disclosed in Note 9, Equity Office Predecessors leases
its office space from an affiliate. In addition, Equity Office Predecessors has
assumed lease obligations of certain of their tenants at their former locations.
Future minimum lease obligations under these noncancelable leases, net of
sublease rental income, as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
1997........................................................ $ 2,554,700
1998........................................................ 2,484,100
1999........................................................ 2,466,900
2000........................................................ 2,381,400
2001........................................................ 2,262,700
Thereafter.................................................. 369,366,900
------------
$381,516,700
============
</TABLE>
Rental expense, net of sublease rental income of approximately $955,000 and
$712,900 for the years ended December 31, 1996 and 1995 was approximately
$1,671,800 and $1,043,300, respectively.
F-52
<PAGE> 274
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- RELATED PARTY TRANSACTIONS:
Affiliates provide various services to Equity Office Predecessors. Fees and
reimbursements paid by Equity Office Predecessors to affiliates for the years
ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
PAID PAYABLE AS OF
--------------------------------------- ---------------------
YEARS ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------- ---------------------
1996 1995 1994 1996 1995
----------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Acquisition Fees (A)............... $ 3,067,800 $ 1,097,200 $ 5,818,900 $ 586,700 $ --
Accounting and tax related
services......................... 796,600 554,100 457,800 61,500 85,100
Legal fees and expenses(B)......... 3,480,500 3,230,100 2,084,900 1,294,700 652,600
Office rent (C).................... 777,100 668,000 543,300 -- --
Disposition fees................... 124,400 -- -- -- --
Development fees (D)............... 702,100 437,500 -- -- 43,800
Reimbursement of property insurance
premiums......................... 5,032,000 3,735,100 2,498,900 200 24,500
Organizational and Offering
Expenses(E)...................... 777,600 179,700 515,100 105,600 16,200
Administrative services(F)......... 821,600 608,700 1,635,200 20,600 16,800
Consulting......................... 274,000 409,700 204,100 4,700 --
----------- ----------- ----------- ---------- --------
$15,853,700 $10,920,100 $13,758,200 $2,074,000 $839,000
=========== =========== =========== ========== ========
</TABLE>
- ---------------
(A) Represents amounts paid to Merrill Lynch, a limited partner of the general
partner of the ZML Funds.
(B) Represents amounts primarily paid to Rosenberg & Liebentritt, P.C. for legal
fees and expenses in connection with acquisition, corporate, and leasing
activity.
(C) Equity Office Predecessors leases its corporate office space from an
affiliate of the Equity Group Owners. Significant terms of the lease are as
follows:
<TABLE>
<S> <C>
Term: January 1, 1995 -- December 31, 2001
Total space leased: 52,028 square feet
Base rent after December 31, 1996:
1997.............................................. $870,900
1998.............................................. $896,900
1999.............................................. $922,900
2000.............................................. $948,900
2001.............................................. $974,900
</TABLE>
Additional rent: Tenant's pro rata share of certain additional landlord
costs in excess of 1995 costs.
(D) The renovation project at the 28 State Street Office Building is being
managed by an affiliate of the Equity Group Owners. In consideration for
their services, the development managers are being paid fees which
management believes are equal to or less than market for such services.
(E) Affiliates of the Equity Group Owners were reimbursed for reasonable costs
incurred in connection with the organization and the offering of units in
the ZML Funds, including legal and accounting fees and expenses, printing
costs and filing fees.
(F) Administrative services include fees paid by Equity Office Predecessors to
EGI for centralized services such as payroll processing, employee benefits,
telecommunications, publications, and consulting services such as economic
and demographics research for possible acquisitions.
F-53
<PAGE> 275
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
An affiliate of the Equity Group Owners has an indirect interest in
Standard Parking Limited Partnership ("SPLP") which manages the parking
operations at certain Office Buildings that are owned by Equity Office
Predecessors. Management believes amounts paid to SPLP are equal to market for
such services.
Amounts received and due from affiliates
Affiliates of Equity Office Predecessors lease space in certain of the
Office Properties owned by Equity Office Predecessors. The provisions of the
leases are consistent with terms of unaffiliated tenants' leases. Total rents
and other amounts paid by affiliates under the terms of their respective leases
were approximately $3,471,500 and $2,657,500 for the years ended December 31,
1996 and 1995, respectively.
Equity Office Predecessors provides asset and property management services
to certain non-combined office and garage properties owned by affiliates of the
Equity Group Owners. Amounts due for these services as of December 31, 1996 and
1995 were approximately $816,900 and $1,363,300, respectively.
Equity Office Predecessors entered into various lease agreements with SPLP
whereby SPLP leased the North Loop Transportation Center Parking Facility, the
Milwaukee Center Parking Garage and the Boston Harbor Garage from Equity Office
Predecessors. Certain of these lease agreements provide SPLP with annual
successive options to extend the term of the lease through various dates. The
rent paid in the years ended December 31, 1996 and 1995 under these lease
agreements was approximately $3,161,500 and $1,691,600, respectively. In
addition, Equity Office Predecessors may receive additional rent based upon
actual gross revenues generated by these Parking Facilities. In accordance with
certain of these leases, Equity Office Predecessors may be obligated to make an
early termination payment if agreement is not reached as to rent amounts to be
paid.
NOTE 10 -- DISPOSITIONS:
Three Lakeway is a mixed - use property, including a 210 room hotel and an
18-story office complex. In January, 1996, Equity Office Predecessors sold the
condominium portion of the property which comprised the hotel. The gross sale
price attributable to the land and building was approximately $14,800,000 and
the gain realized was approximately $5.3 million. Pursuant to the terms of the
loan collateralizing the property, approximately $10,617,500 of the sales
proceeds were applied to the outstanding note balances.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES:
Concentration of Credit Risk
Equity Office Predecessors maintains its cash and cash equivalents at
financial institutions. The combined account balances at each institution
periodically exceeds FDIC insurance coverage, and, as a result, there is a
concentration of credit risk related to amounts on deposit in excess of FDIC
insurance coverage. Management of Equity Office Predecessors believes that the
risk is not significant. In addition, Equity Office Predecessors believes it has
limited exposure to the extent of non-performance by the swap counterparties
since each counterparty is a major U.S. financial institution, and management
does not anticipate their non-performance.
Environmental
Equity Office Predecessors, as an owner of real estate, is subject to
various environmental laws of Federal and local governments. Compliance by
Equity Office Predecessors with existing laws has not had a material adverse
effect on Equity Office Predecessors' financial condition and results of
operations, and management does not believe it will have such an impact in the
future. However, Equity Office Predecessors cannot predict the impact of new or
changed laws or regulations on its current properties or on properties that it
may acquire in the future.
F-54
<PAGE> 276
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
ZML-Chicago Parking Limited Partnership ("ZCP") and ZML-North Loop/Theatre
District Parking Limited Partnership ("NLT"), were named as defendants in an
action (the "Action") brought by an investor (the "Plaintiff") in an
unaffiliated entity owning an interest in NLT. The action was brought in the
Circuit Court of Cook County, Illinois, Chancery Division, on August 15, 1995.
NLT is the owner of two Parking Facilities, North Loop Transportation Center and
Theatre District Self Park ("Theatre District Garage"). The Plaintiff demanded
recision of certain transactions related to the acquisition by NLT of the
Theatre District Garage.
During 1996, Equity Office Predecessors and certain other parties filed
actions (the "Lawsuit") against Rockefeller Center Properties, Inc. ("RCPI")
seeking specific performance of certain agreements between the parties. In
November, 1996, the parties settled all matters related to the Lawsuit. The
settlement provided that RCPI pay approximately $10,274,000, of which Equity
Office Predecessors was entitled to and received approximately $8,806,500, net
of expenses, which has been recorded as other income.
Except as described above, management of Equity Office Predecessors does
not believe there is any litigation threatened against Equity Office
Predecessors other than routine litigation arising out of the ordinary course of
business, some of which is expected to be covered by liability insurance, none
of which is expected to have a material adverse effect on the combined financial
statements of Equity Office Predecessors.
NOTE 12 -- SUBSEQUENT EVENTS
The following significant transactions relating to Equity Office
Predecessors occurred during the period from January 1, 1997 to July 10, 1997:
Acquisition Activities
1) In January, 1997, Equity Office Predecessors, through its subsidiaries,
purchased from an unaffiliated third party 177 Broad Street and Biltmore
Apartments, a mixed-use property located in Stamford, Connecticut. The
all cash purchase of approximately $36,450,000 includes acquisition
related expenses.
2) In March, 1997, Equity Office Predecessors, through its subsidiaries,
purchased from an unaffiliated third party Preston Commons, an office
building located in Dallas, Texas. The all cash purchase price of
approximately $55,200,000 includes acquisition related expenses.
3) In April, 1997, Equity Office Predecessors, through its subsidiaries,
purchased from an unaffiliated third party Oakbrook Terrace Tower, an
office building located in Oakbrook Terrace, Illinois. The all cash
purchase price of approximately $130,100,000 includes acquisition
related expenses.
4) In April, 1997, Equity Office Predecessors, through its subsidiaries,
purchased from an unaffiliated third party One Maritime Plaza, an office
building located in San Francisco, California. The all cash purchase
price of approximately $99,400,000 includes acquisition related
expenses.
5) In April, 1997, Equity Office Predecessors, through its subsidiaries,
purchased from an unaffiliated third party Smith Barney Tower, an office
building located in San Diego, California. The all cash purchase price
of approximately $35,100,000 includes acquisition related expenses.
6) In April, 1997, Equity Office Predecessors, through its subsidiaries,
purchased from an unaffiliated third party 201 Mission Street, an office
building located in San Francisco, California. The all cash purchase
price of approximately $74,700,000 includes acquisition related
expenses.
F-55
<PAGE> 277
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7) In June, 1997, Equity Office Predecessors, through its subsidiaries,
purchased from an unaffiliated third party 30 N. LaSalle, an office
building located in Chicago, Illinois. The all cash purchase price of
approximately $100,700,000 includes acquisition related expenses.
Disposition Activities
1) In January, 1997, Equity Office Predecessors sold Barton Oaks Plaza II
for a gross sales price of approximately $13,535,000. Approximately
$6,585,400 of the sales proceeds were used to repay the outstanding note
balance of Barton Oaks Plaza II and an additional $1,646,300 was used to
repay a portion of the outstanding note balance of Tampa Commons. The
gain for financial reporting purposes was approximately $5.9 million.
Equity Office Predecessors incurred $207,600 of prepayment penalties and
recognized $67,400 of unamortized loan costs in connection with the
repayment. As a result, Equity Office Predecessors recorded an
extraordinary loss in the amount of $275,000 on early extinguishment of
debt.
2) In May, 1997, Equity Office Predecessors sold 8383 Wilshire, an Office
Property located in Beverly Hills, California for a sales price of
approximately $59,000,000. The gain for financial reporting purposes was
approximately $6.6 million.
Financing Activities
1) In January, 1997, Equity Office Predecessors obtained financing of
approximately $34,450,000 collateralized by the North Loop and Theater
District Parking Facilities. This loan has a 7.38% fixed interest rate
and a 10-year term. The existing loan on the Theater District Garage of
approximately $16,276,800 was repaid with a portion of the proceeds from
this financing.
2) In February, 1997, Equity Office Predecessors obtained an $87,000,000
mortgage loan collateralized by BP Tower. The term of the loan is seven
years. Interest is payable monthly with the stated interest rate fixed
at 7.34%
3) In April, 1997, Equity Office Predecessors amended and restated the $275
million acquisition and term loan facility to a $475 million unsecured
revolving credit facility with a maturity in October, 1997. Interest
only is payable monthly with the interest based on various LIBOR options
plus 1.625% or the prime rate.
4) In May, 1997, Equity Office Predecessors obtained financing of
approximately $4,500,000 collateralized by the Capitol Commons Garage.
The term of the loan is ten years. Interest is payable monthly with the
stated interest rate fixed at 7.83%.
5) In May, 1997, Equity Office Predecessors repaid the existing loan and
accrued interest of approximately $14,941,800 which was collateralized
by the Denver Corporate Center Towers II and III.
6) Equity Office Predecessors terminated several interest rate protection
agreements (aggregating $173 of LIBOR based agreements) in June 1997 at
a cost of approximately $1.1 million.
7) Various interest rate protection agreements for $700 million of
indebtedness were entered into in June, 1997. The agreements are
composed of various tranches with various interest rates and maturities.
The weighted average interest rate is approximately 6.71% and the
weighted average maturity of 5.21 years.
Non-Office Properties
1) During the period January 1, 1997 to July 10, 1997, 13 Non-Office
Properties were sold to an affiliate of the Equity Group Owners and two
Non-Office Properties were sold to an unaffiliated parties which
generated net proceeds of approximately $107,445,000.
F-56
<PAGE> 278
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2) Immediately prior to the Consolidation, ZML Fund I's interest in Swansea
Mall (the remaining Non-Office Property) was distributed to the capital
partners of ZML Fund I. As a capital partner, ZML Investors, Inc.
contributed its interest in Swansea Mall to a Qualified REIT Subsidiary
("QRS") in exchange for common stock in the QRS. ZML Investors, Inc.
distributed the common stock of the QRS to its shareholders.
F-57
<PAGE> 279
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31,
1996(7)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
INITIAL COST TO COMPANY SUBSEQUENT TO ACQUISITION
DECEMBER 31, ----------------------------- --------------------------
1996 BUILDINGS AND BUILDINGS AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------- -------------- ------------ -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
60 Spear Street Building San Francisco, CA $ 9,302,600(5) $ 4,149,900 $ 12,402,400 $ 0 $ 12,301,800
San Felipe Plaza(3) Houston, TX 54,265,700 10,032,200 116,545,700 0 (2,296,200)
Dominion Tower Norfolk, VA 23,440,300(5) 3,806,300 38,354,400 0 7,191,600
Summit Office Park Ft. Worth, TX 5,860,100(5) 865,000 7,785,100 0 4,077,600
CIGNA Center Oklahoma City, OK 732,500(5) 206,200 1,855,400 0 768,900
Tampa Commons Tampa, FL 16,603,500(5) 2,588,600 23,305,900 32,800 2,309,000
Intercontinental Center Houston, TX 6,226,300(5) 1,043,100 7,508,000 0 3,407,300
First Union Center Ft. Lauderdale, FL 16,603,500(5) 4,174,100 31,352,000 0 4,898,900
Four Forest Dallas, TX 17,067,400(5) 3,886,900 34,981,500 26,900 4,958,500
Northborough Tower Houston, TX 7,032,100(5) 676,500 6,060,700 363,500 4,406,500
500 Marquette Building Albuquerque, NM 11,329,500(5) 2,490,600 22,415,300 0 1,965,400
Atrium Towers Oklahoma City, OK 1,611,500(5) 433,200 3,898,700 0 1,889,300
One Clearlake Centre W. Palm Beach, FL 0 2,606,200 23,455,800 0 4,304,100
Barton Oaks Plaza II Austin, TX 6,592,600(5) 779,600 7,016,300 0 939,100
Community Corporate Center Columbus, OH 17,412,700 2,423,200 21,808,900 0 3,565,700
Sarasota City Center Sarasota, FL 11,720,100(5) 2,109,500 19,213,200 0 3,308,300
Denver Corporate Center
Towers II and III Denver, CO 15,037,100 2,304,400 20,739,200 0 3,829,100
University Tower Durham, NC 11,207,400(5) 916,700 8,250,400 0 1,868,900
8383 Wilshire Beverly Hills, CA 0 9,362,700 42,206,700 0 6,462,600
San Jacinto Center Austin, TX 18,212,300 2,753,700 24,783,800 0 5,494,600
1111 19th Street, N.W. Washington D.C. 18,752,200(5) 3,259,400 29,343,200 0 11,329,100
Shelton Pointe Shelton, CT 0 522,400 4,702,000 0 3,456,600
Bank One Center Indianapolis, IN 84,250,000 11,652,700 104,874,400 0 9,622,900
North Central Plaza Three Dallas, TX 15,035,400 1,775,100 15,976,200 0 3,158,700
The Quadrant Englewood, CO 18,000,000 2,579,500 23,215,000 0 2,406,400
Canterbury Green Stamford, CT 19,250,000 0 25,983,000 0 1,442,700
Three Stamford Plaza Stamford, CT 16,750,000 1,477,900 13,301,100 0 5,534,000
Union Square San Antonio, TX 6,750,000 1,023,000 9,206,700 0 1,656,100
One North Franklin Chicago, IL 65,150,400 4,414,800 39,723,000 0 27,297,800
1620 L Street Washington, DC 21,328,400 2,760,900 24,848,400 0 1,419,100
One and Two Stamford Plaza Stamford, CT 45,791,600 5,932,800 53,395,000 0 5,958,900
300 Atlantic Street Stamford, CT 28,309,800 3,433,500 30,901,300 0 8,146,600
Sterling Plaza Dallas, TX 15,738,700 2,086,600 19,180,800 0 2,239,300
Higgins Centre Des Plaines, IL 3,535,000(6) 577,800 5,200,400 0 2,455,000
Northwest Center San Antonio, TX 6,762,000(6) 1,108,000 9,971,800 0 3,299,500
Franklin Plaza Austin, TX 35,657,600(6) 5,805,800 52,252,400 0 2,110,300
One Crosswoods Center Columbus, OH 3,608,200(6) 523,500 5,432,500 0 1,165,900
One Columbus Columbus, OH 30,739,300(6) 5,024,900 45,223,900 0 2,499,900
Westshore Center Tampa, FL 7,377,400(6) 1,192,400 10,544,900 0 2,087,500
One Lakeway Metairie, LA 10,144,000(6) 1,641,400 14,772,400 0 5,381,900
Two Lakeway Metairie, LA 15,369,600(6) 2,510,600 22,601,700 0 6,917,100
Three Lakeway Metairie, LA 17,802,800(6) 3,773,600 34,088,800 (963,300) (4,363,800)
NationsBank Plaza Nashville, TN 19,008,800 2,543,800 22,894,000 0 4,049,900
Plaza at La Jolla Village San Diego, CA 59,506,700 9,406,300 66,150,000 0 8,002,300
Interco Corporate Tower Clayton, MO 22,661,200 3,603,700 32,433,100 0 1,390,500
9400 NCX Dallas, TX 14,301,700 1,416,800 12,750,300 0 6,050,400
Four Stamford Plaza Stamford, CT 16,000,000 1,367,200 12,303,100 0 7,050,200
1920 Main Street (Koll
Center Irvine North-West
Tower) Irvine, CA 30,684,900 4,196,700 37,770,200 0 2,221,200
One Paces West Atlanta, GA 19,500,000 3,289,500 29,605,800 0 1,043,200
Two Paces West Atlanta, GA 28,200,000 6,859,800 42,805,600 0 1,044,700
One Market Plaza San Francisco, CA 148,640,500 23,327,000 209,057,500 0 15,115,700
2010 Main Street (Koll
Center Irvine North-East
Tower) Irvine, CA 25,900,000 3,815,100 33,715,400 0 842,400
1100 Executive Tower Orange, CA 0 2,887,600 25,960,500 0 5,218,200
<CAPTION>
GROSS AMOUNT CARRIED AT
DECEMBER 31, 1996
-------------------------------
BUILDINGS AND ACCUMULATED DATE DATE DEPRECIABLE
DESCRIPTION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTED ACQUIRED LIVES(2)
----------- -------------- -------------- -------------- ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
60 Spear Street Building $ 4,149,900 $ 24,704,200 $ 28,854,100 $ 5,553,000 1967 09/29/87 40
San Felipe Plaza(3) 10,032,200 114,249,500 124,281,700 37,243,000 1984 09/29/87 40
Dominion Tower 3,806,300 45,546,000 49,352,300 8,142,400 1987 07/25/89 40
Summit Office Park 865,000 11,862,700 12,727,700 2,682,900 1974 03/01/89 40
CIGNA Center 206,200 2,624,300 2,830,500 636,700 1974 03/01/89 40
Tampa Commons 2,621,400 25,614,900 28,236,300 5,598,100 1985 04/25/89 40
Intercontinental Center 1,043,100 10,915,300 11,958,400 2,173,000 1983 06/28/89 40
First Union Center 4,174,100 36,250,900 40,425,000 5,402,000 1991 06/28/89 40
Four Forest 3,913,800 39,940,000 43,853,800 8,330,500 1985 06/29/89 40
Northborough Tower 1,040,000 10,467,200 11,507,200 1,946,500 1983 08/03/89 40
500 Marquette Building 2,490,600 24,380,700 26,871,300 4,909,000 1985 08/15/89 40
Atrium Towers 433,200 5,788,000 6,221,200 1,324,600 1980 12/15/89 40
One Clearlake Centre 2,606,200 27,759,900 30,366,100 5,515,600 1987 12/29/89 40
Barton Oaks Plaza II 779,600 7,955,400 8,735,000 1,456,200 1984-85 05/24/90 40
Community Corporate Center 2,423,200 25,374,600 27,797,800 4,956,700 1987 06/14/90 40
Sarasota City Center 2,109,500 22,521,500 24,631,000 4,091,400 1989 09/28/90 40
Denver Corporate Center
Towers II and III 2,304,400 24,568,300 26,872,700 5,137,400 1981-82 12/20/90 40
University Tower 916,700 10,119,300 11,036,000 1,940,800 1987 10/16/91 40
8383 Wilshire 9,362,700 48,669,300 58,032,000 6,731,700 1971 11/27/91 40
San Jacinto Center 2,753,700 30,278,400 33,032,100 4,855,400 1987 12/13/91 40
1111 19th Street, N.W. 3,259,400 40,672,300 43,931,700 5,954,900 1979 12/18/91 40
Shelton Pointe 522,400 8,158,600 8,681,000 1,759,200 1985 11/26/91 40
Bank One Center 11,652,700 114,497,300 126,150,000 14,561,100 1990 3/24/92 40
North Central Plaza Three 1,775,100 19,134,900 20,910,000 3,094,800 1986 4/21/92 40
The Quadrant 2,579,500 25,621,400 28,200,900 3,017,200 1985 12/1/92 40
Canterbury Green 0 27,425,700 27,425,700 2,801,100 1987 12/15/92 40
Three Stamford Plaza 1,477,900 18,835,100 20,313,000 2,421,000 1980 12/15/92 40
Union Square 1,023,000 10,862,800 11,885,800 1,579,100 1986 12/23/92 40
One North Franklin 4,414,800 67,020,800 71,435,600 8,432,800 1991 12/31/92 40
1620 L Street 2,760,900 26,267,500 29,028,400 3,087,900 1989 2/5/93 40
One and Two Stamford Plaza 5,932,800 59,353,900 65,286,700 6,165,300 1986 3/30/93 40
300 Atlantic Street 3,433,500 39,047,900 42,481,400 3,869,000 1987 3/30/93 40
Sterling Plaza 2,086,600 21,420,100 23,506,700 2,359,600 1984 6/25/93 40
Higgins Centre 577,800 7,655,400 8,233,200 847,400 1986 11/12/93 40
Northwest Center 1,108,000 13,271,300 14,379,300 1,454,100 1984 11/12/93 40
Franklin Plaza 5,805,800 54,362,700 60,168,500 4,332,400 1987 11/12/93 40
One Crosswoods Center 523,500 6,598,400 7,121,900 874,600 1984 11/12/93 40
One Columbus 5,024,900 47,723,800 52,748,700 4,094,700 1987 11/12/93 40
Westshore Center 1,192,400 12,632,400 13,824,800 1,295,700 1984 11/12/93 40
One Lakeway 1,641,400 20,154,300 21,795,700 1,720,400 1981 11/12/93 40
Two Lakeway 2,510,600 29,518,800 32,029,400 2,899,100 1984 11/12/93 40
Three Lakeway 2,810,300 29,725,000 32,535,300 2,761,500 1987 11/12/93 40
NationsBank Plaza 2,543,800 26,943,900 29,487,700 2,557,400 1977 12/1/93 40
Plaza at La Jolla Village 9,406,300 74,152,300 83,558,600 5,996,200 1987-1990 3/10/94 40
Interco Corporate Tower 3,603,700 33,823,600 37,427,300 2,446,900 1986 5/27/94 40
9400 NCX 1,416,800 18,800,700 20,217,500 1,345,800 1981 6/24/94 40
Four Stamford Plaza 1,367,200 19,353,300 20,720,500 1,188,100 1979 8/31/94 40
1920 Main Street (Koll
Center Irvine North-West
Tower) 4,196,700 39,991,400 44,188,100 2,586,900 1988 9/29/94 40
One Paces West 3,289,500 30,649,000 33,938,500 1,680,300 1987 10/31/94 40
Two Paces West 6,859,800 43,850,300 50,710,100 2,500,400 1990 11/3/94 40
One Market Plaza 23,327,000 224,173,200 247,500,200 12,071,500 1976 11/22/94 40
2010 Main Street (Koll
Center Irvine North-East
Tower) 3,815,100 34,557,800 38,372,900 1,797,100 1988 12/13/94 40
1100 Executive Tower 2,887,600 31,178,700 34,066,300 1,692,700 1987 12/15/94 40
</TABLE>
F-58
<PAGE> 280
<TABLE>
<CAPTION>
COSTS CAPITALIZED
INITIAL COST TO COMPANY SUBSEQUENT TO ACQUISITION
DECEMBER 31, ----------------------------- --------------------------
1996 BUILDINGS AND BUILDINGS AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------- -------------- ------------ -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
28 State Street(4) Boston, MA 25,808,700 2,539,200 22,925,100 0 63,029,200
850 Third Avenue New York, NY 54,200,000 7,044,200 63,398,000 0 10,857,300
161 North Clark (formerly
known as Chicago Title &
Trust Building) Chicago, IL 106,512,000 11,801,700 107,201,800 0 7,396,400
Wachovia Center Charlotte, NC 27,351,300 4,210,500 37,849,900 0 280,500
Central Park Office Park Atlanta, GA 57,000,000 7,573,200 68,158,900 0 2,766,500
One American Center Austin, TX 44,250,000 0 59,037,100 0 1,221,800
Pasadena Towers Pasadena, CA 47,839,100 8,018,700 72,104,200 0 473,400
580 California Street San Francisco, CA 32,067,000 5,256,400 47,268,600 0 2,479,700
1601 Market Street Philadelphia, PA 24,379,600 3,521,200 31,656,900 0 3,771,100
Promenade II Atlanta, GA 97,288,900 17,994,500 132,102,800 0 64,200
Two California Plaza Los Angeles, CA 54,766,300 0 99,080,800 0 4,275,100
BP Tower Cleveland, OH 0 14,663,700 131,982,100 0 131,000
Sun Trust Center Orlando, FL 0 11,043,900 99,394,600 0 50,000
Reston Town Center Reston, VA 92,400,000 15,504,400 139,539,500 0 35,800
Colonnade I San Antonio, TX 0 1,228,600 11,057,200 0 12,200
One Phoenix Plaza Phoenix, AZ 0 6,727,000 60,542,300 0 0
-------------- ------------ -------------- --------- --------------
Subtotal Office Properties $1,784,626,300 $300,525,900 $2,777,423,600 $(540,100) $ 329,745,400
-------------- ------------ -------------- --------- --------------
PARKING FACILITIES:
North Loop Transportation
Center Chicago, IL $ 0 $ 2,994,600 $ 26,959,600 $ 0 $ 173,100
Theatre District Self Park Chicago, IL 16,276,800 2,322,000 20,918,300 0 115,700
Capitol Commons Garage(5) Indianapolis, IN 0 0 5,184,700 0 539,100
Boston Harbor Garage Boston, MA 36,863,800 5,560,700 50,046,200 0 0
Milwaukee Center Parking
Garage Milwaukee, WI 0 0 4,534,800 0 0
15th & Sansom Streets Philadelphia, PA 0 650,900 5,857,600 0 0
1616 Chancellor Street Philadelphia, PA 0 638,000 5,741,700 0 0
Juniper/Locust Streets Philadelphia, PA 0 516,900 4,651,700 0 0
1616 Sansom Street Philadelphia, PA 0 382,800 3,445,800 0 0
1111 Sansom Street Philadelphia, PA 0 1,318,600 0 0 0
-------------- ------------ -------------- --------- --------------
Subtotal Parking
Facilities $ 53,140,600 $ 14,384,500 $ 127,340,400 $ 0 $ 827,900
-------------- ------------ -------------- --------- --------------
Investment in Real Estate $1,837,766,900 $314,910,400 $2,904,764,000 $(540,100) $ 330,573,300
============== ============ ============== ========= ==============
<CAPTION>
GROSS AMOUNT CARRIED AT
DECEMBER 31, 1996
-------------------------------
BUILDINGS AND ACCUMULATED DATE DATE DEPRECIABLE
DESCRIPTION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTED ACQUIRED LIVES(2)
----------- -------------- -------------- -------------- ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
28 State Street(4) 2,539,200 85,954,300 88,493,500 0 1968 1/23/95 40
850 Third Avenue 7,044,200 74,255,300 81,299,500 3,143,300 1960 3/20/95 40
161 North Clark (formerly
known as Chicago Title &
Trust Building) 11,801,700 114,598,200 126,399,900 4,171,200 1992 7/26/95 40
Wachovia Center 4,210,500 38,130,400 42,340,900 1,231,400 1972 9/1/95 40
Central Park Office Park 7,573,200 70,925,400 78,498,600 2,277,400 1986 10/17/95 40
One American Center 0 60,258,900 60,258,900 1,693,600 1984 11/1/95 40
Pasadena Towers 8,018,700 72,577,600 80,596,300 1,880,400 1990-1991 12/14/95 40
580 California Street 5,256,400 49,748,300 55,004,700 1,272,400 1984 12/21/95 40
1601 Market Street 3,521,200 35,428,000 38,949,200 947,100 1970 1/18/96 40
Promenade II 17,994,500 132,167,000 150,161,500 1,790,700 1990 6/14/96 40
Two California Plaza 0 103,355,900 103,355,900 984,300 1992 8/23/96 40
BP Tower 14,663,700 132,113,100 146,776,800 962,400 1985 9/4/96 40
Sun Trust Center 11,043,900 99,444,600 110,488,500 724,900 1988 9/18/96 40
Reston Town Center 15,504,400 139,575,300 155,079,700 726,700 1990 10/22/96 40
Colonnade I 1,228,600 11,069,400 12,298,000 11,500 1983 12/4/96 40
One Phoenix Plaza 6,727,000 60,542,300 67,269,300 63,000 1989 12/4/96 40
-------------- -------------- -------------- ------------
Subtotal Office Properties $ 299,985,800 $3,107,169,000 $3,407,154,800 $255,753,400
-------------- -------------- -------------- ------------
PARKING FACILITIES:
North Loop Transportation
Center $ 2,994,600 $ 27,132,700 $ 30,127,300 $ 1,038,800 1985 6/9/95 40
Theatre District Self Park 2,322,000 21,034,000 23,356,000 819,300 1987 6/9/95 40
Capitol Commons Garage(5) 0 5,723,800 5,723,800 209,300 1987 6/29/95 40
Boston Harbor Garage 5,560,700 50,046,200 55,606,900 52,100 1972 12/10/96 40
Milwaukee Center Parking
Garage 0 4,534,800 4,534,800 0 1988 12/18/96 40
15th & Sansom Streets 650,900 5,857,600 6,508,500 6,100 1950/1954 12/27/96 40
1616 Chancellor Street 638,000 5,741,700 6,379,700 6,000 1945/1955 12/27/96 40
Juniper/Locust Streets 516,900 4,651,700 5,168,600 4,800 1949/1952 12/27/96 40
1616 Sansom Street 382,800 3,445,800 3,828,600 3,500 1950 12/27/96 40
1111 Sansom Street 1,318,600 0 1,318,600 0 N/A 12/27/96 N/A
-------------- -------------- -------------- ------------
Subtotal Parking
Facilities $ 14,384,500 $ 128,168,300 $ 142,552,800 $ 2,139,900
-------------- -------------- -------------- ------------
Investment in Real Estate $ 314,370,300 $3,235,337,300 $3,549,707,600 $257,893,300
============== ============== ============== ============
</TABLE>
F-59
<PAGE> 281
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996(7)
(1) The aggregate cost for Federal Income Tax purposes as of December 31, 1996
was approximately $3.5 billion.
(2) The life to compute depreciation on building is 40 years. The life to
compute depreciation on building improvements is 4-40 years.
(3) During 1995, concurrent with the restructuring of its mortgage on the
property, Equity Office Predecessors reduced its carrying basis in San
Felipe Plaza by recording a write down for value impairment of $20,248,500.
This write down included adjustments against Investments in Real Estate of
$17,512,000 and against Other Assets of $2,736,500.
(4) The building is currently vacant and is undergoing a major renovation to
re-tenant the entire property. All operating costs, including real estate
taxes together with interest incurred during the renovation period will be
capitalized. As of December 31, 1996 and 1995 approximately $8,189,000 and
$4,357,100 of operating costs and interest have been capitalized,
respectively. In addition to the amounts paid to acquire the property,
Equity Office Predecessors expects to incur approximately $100,000,000, of
which approximately, $60,000,000 has been incurred. The renovation is
expected to be completed during 1997.
(5) These loans are subject to cross default and collateralization provisions.
(6) These loans are subject to cross default and collateralization provisions.
(7) Summary of activity of investment in real estate and accumulated
depreciation is as follows:
The changes in the total Equity Office Predecessors investment in real
estate for the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, beginning of year............ $2,571,851,300 $1,931,002,400 $1,297,304,500
Acquisitions........................ 860,995,000 583,485,200 562,752,900
Improvements........................ 129,485,300 76,985,400 72,951,600
Properties disposed of.............. (9,633,600) 0 0
Write down for value impairment..... 0 (17,512,000) 0
Write-off of fully depreciated
assets which are no longer in
service.......................... (2,990,400) (2,109,700) (2,006,600)
-------------- -------------- --------------
Balance, end of year.................. $3,549,707,600 $2,571,851,300 $1,931,002,400
============== ============== ==============
</TABLE>
The changes in accumulated depreciation for the years ended December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year.............. $(178,448,600) $(115,842,500) $ (77,036,900)
Depreciation.......................... (82,905,300) (64,715,800) (40,812,200)
Properties disposed of................ 470,200 0 0
Write-off of fully depreciated assets
which are no longer in service..... 2,990,400 2,109,700 2,006,600
------------- ------------- -------------
Balance, end of year.................... $(257,893,300) $(178,448,600) $(115,842,500)
============= ============= =============
</TABLE>
F-60
<PAGE> 282
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 177 Broad Street (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 28, 1997
F-61
<PAGE> 283
177 BROAD STREET
STATEMENT OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
(IN
THOUSANDS)
<S> <C>
REVENUE
Base rents................................................ $4,722
Storage and other rental income........................... 52
Tenant reimbursements..................................... 212
Parking income............................................ 322
Other income.............................................. 103
------
Total revenue..................................... 5,411
------
EXPENSES
Property operating and maintenance........................ 825
Utilities and telephone................................... 769
Repairs and maintenance................................... 313
Real estate taxes......................................... 864
Management fees........................................... 153
Insurance................................................. 46
Administrative............................................ 118
------
Total expenses.................................... 3,088
------
Revenue in excess of certain expenses....................... $2,323
======
</TABLE>
See accompanying notes.
F-62
<PAGE> 284
177 BROAD STREET
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statement of Revenue and Certain Expenses relate to the
operations of 177 Broad Street located in Stamford, Connecticut (the
"Property"). The Property was acquired on January 28, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
The Property consists of a fifteen story office complex with approximately
188,000 rentable square feet, an enclosed 540 space parking structure, and a
161-unit residential apartment building.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust. The statement is not representative of the
actual operations of the Property for the period presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
3. RENTALS
The Property has entered into tenant leases, in the office portion of the
Property, that provide for tenants to share in the operating expenses and real
estate taxes on a pro rata basis, as defined.
F-63
<PAGE> 285
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of Preston Commons (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
April 16, 1997
F-64
<PAGE> 286
PRESTON COMMONS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
REVENUE
Base rents................................................ $6,347
Tenant reimbursements..................................... 1,132
Garage and parking income................................. 216
Other income.............................................. 91
------
Total revenue..................................... 7,786
------
EXPENSES
Property operating & maintenance.......................... 2,327
Real estate taxes......................................... 742
Management fees........................................... 226
Insurance................................................. 30
------
Total expenses.................................... 3,325
------
Revenue in excess of certain expenses....................... $4,461
======
</TABLE>
See accompanying notes.
F-65
<PAGE> 287
PRESTON COMMONS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statement of Revenue and Certain Expenses relates to the
operations of the Preston Commons building, an office building with
approximately 419,000 rentable square feet, located in Dallas, Texas (the
"Property"). The Property was acquired on March 21, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust. The statement is not representative of the
actual operations of the Property for the period presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-66
<PAGE> 288
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of Oakbrook Terrace Tower (the Property) as described in Note 1 for the year
ended December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
May 30, 1997
F-67
<PAGE> 289
OAKBROOK TERRACE TOWER
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1996 1997
------------ ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
REVENUE
Base rents................................................ $11,409 $3,113
Tenant reimbursements..................................... 5,282 1,366
Garage and parking income................................. 148 37
Other income.............................................. 193 97
------- ------
Total revenue..................................... 17,032 4,613
------- ------
EXPENSES
Property operating & maintenance.......................... 4,276 1,037
Real estate taxes......................................... 1,259 353
Management fees........................................... 338 116
Insurance................................................. 111 17
------- ------
Total expenses.................................... 5,984 1,523
------- ------
Revenue in excess of certain expenses....................... $11,048 $3,090
======= ======
</TABLE>
See accompanying notes.
F-68
<PAGE> 290
OAKBROOK TERRACE TOWER
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the Oakbrook Terrace Tower building, an office building with
approximately 773,000 rentable square feet, located in Oakbrook Terrace,
Illinois (the "Property"). The Property was acquired on April 15, 1997, by
Equity Office Predecessors, as defined elsewhere in this registration statement,
from an unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-4
of Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
Property has entered into tenant leases that provide for tenants to share
in the operating expenses and real estate taxes on a pro rata basis, as defined.
4. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996, the Property was managed by an
affiliated party to the seller. The management agreement provided for a fee of
2.5% of gross receipts, as defined.
F-69
<PAGE> 291
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of One Maritime Plaza (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
June 6, 1997
F-70
<PAGE> 292
ONE MARITIME PLAZA
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
REVENUE
Base rents................................................ $13,410 $ 3,382
Tenant reimbursements..................................... 208 125
Interest income........................................... 249 65
Other income.............................................. 428 125
------- -------
Total revenue..................................... 14,295 3,697
------- -------
EXPENSES
Property operating & maintenance............................ 4,326 887
Real estate taxes......................................... 668 250
Management fees........................................... 585 146
Insurance................................................. 447 119
------- -------
Total expenses.................................... 6,026 1,402
------- -------
Revenue in excess of certain expenses....................... $ 8,269 $ 2,295
======= =======
</TABLE>
See accompanying notes.
F-71
<PAGE> 293
ONE MARITIME PLAZA
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the One Maritime Plaza building, an office building with
approximately 524,000 rentable square feet, located in San Francisco, California
(the "Property"). The Property was acquired on April 24, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-4
of Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-72
<PAGE> 294
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 201 Mission Street (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
April 30, 1997
F-73
<PAGE> 295
201 MISSION STREET
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1996 1997
----------------- ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
REVENUE
Base rents................................................ $7,423 $2,166
Tenant reimbursements..................................... 55 9
Garage and parking income................................. 366 60
Other income.............................................. 39 11
------- ------
Total revenue..................................... 7,883 2,246
------- ------
EXPENSES
Property operating & maintenance.......................... 3,369 969
Real estate taxes......................................... 959 264
Management fees........................................... 106 27
Insurance................................................. 569 196
------- ------
Total expenses.................................... 5,003 1,456
------- ------
Revenue in excess of certain expenses....................... $2,880 $ 790
======= ======
</TABLE>
See accompanying notes.
F-74
<PAGE> 296
201 MISSION STREET
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the 201 Mission Street building, an office building with
approximately 483,000 rentable square feet, located in San Francisco, California
(the "Property"). The Property was acquired on April 30, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-4
of Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-75
<PAGE> 297
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 30 N. LaSalle (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
June 13, 1997
F-76
<PAGE> 298
30 N. LASALLE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
REVENUE
Base rents................................................ $ 9,317 $1,870
Tenant reimbursements..................................... 9,164 2,194
Other income.............................................. 237 55
------- ------
Total revenue..................................... 18,718 4,119
------- ------
EXPENSES
Property operating & maintenance.......................... 4,336 1,047
Real estate taxes......................................... 5,155 1,327
Management fees........................................... 374 79
Insurance................................................. 160 39
Ground rent............................................... 165 42
------- ------
Total expenses.................................... 10,190 2,534
------- ------
Revenue in excess of certain expenses....................... $ 8,528 $1,585
======= ======
</TABLE>
See accompanying notes.
F-77
<PAGE> 299
30 N. LASALLE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the 30 N. LaSalle building, an office building with approximately
926,000 rentable square feet, located in Chicago, Illinois (the "Property"). The
Property was acquired on June 13, 1997, by Equity Office Predecessors, as
defined elsewhere in this registration statement, from an unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-4
of Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996, the Property was managed by an
affiliated party to the seller. The management agreement provided for a fee of
2% of gross receipts, as defined.
5. GROUND LEASE
The Property is subject to a ground lease on a portion of the land under
the building which expires November 30, 2067. The ground lease provides for
escalation payments in intervals of approximately 10 years, with the next
escalation scheduled for January 1, 2000. Through 1999, the minimum annual
rental payments required under the ground lease are $165,000.
F-78
<PAGE> 300
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Columbus America Properties (the Properties) as described in
Note 2 for the year ended December 31, 1996. The combined Statement of Revenue
and Certain Expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the combined Statement of Revenue and
Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' revenue and expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 3, 1997
F-79
<PAGE> 301
COLUMBUS AMERICA PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH
1996 JULY 31, 1997
------------ ---------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $15,620 $ 8,814
Tenant reimbursements..................................... 654 176
Parking income............................................ 2,356 1,460
Other income.............................................. 165 111
------- -------
Total revenue..................................... 18,795 10,561
------- -------
EXPENSES
Property operating and maintenance........................ 4,888 2,770
Real estate taxes......................................... 1,318 769
Management fee............................................ 786 403
Insurance................................................. 191 127
------- -------
Total expenses.................................... 7,183 4,069
------- -------
Revenue in excess of certain expenses....................... $11,612 $ 6,492
======= =======
</TABLE>
See accompanying notes.
F-80
<PAGE> 302
COLUMBUS AMERICA PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties, as
defined in Note 2, for the periods presented nor indicative of future operations
as certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the Columbus America Properties (the
"Properties"), which are all located in New Orleans, Louisiana. The Properties
have been presented on a combined basis because the Properties are under common
ownership and management. The Properties listed below were acquired on September
3, 1997 for $140 million by Equity Office Properties Trust from an unrelated
party.
<TABLE>
<CAPTION>
PROPERTY NAME TYPE OF FACILITY RENTABLE SQUARE FEET
------------- ---------------- --------------------
<S> <C> <C>
LL & E Tower...................................... office building 545,157
Texaco Center..................................... office building 619,714
601 Tchoupitoulas................................. parking facility 759(A)
</TABLE>
- ---------------
(A) Represents number of parking spaces.
The accompanying combined Statements of Revenue and Certain Expenses
include the operations of the 601 Tchoupitoulas parking facility.
3. RENTALS
LL&E Tower and Texaco Center have entered into tenant leases that provide
for tenants to share in the operating expenses and real estate taxes on a pro
rata basis, as defined.
F-81
<PAGE> 303
COLUMBUS AMERICA PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE
AND CERTAIN EXPENSES -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS
The office buildings were managed by an affiliated party to the seller. The
management agreements provided for a fee based on a percentage of gross
receipts, as defined by each of the office buildings' individual management
agreements, excluding any receipts from the parking garage.
During the year ended December 31, 1996, the parking facility was also
managed by an affiliated party to the seller. The management agreement provided
for a flat fee of $12,500 per month.
During the year ended December 31, 1996, LL&E Tower leased space to parties
affiliated with the seller. Rental income from those leases was approximately
$240,000 in 1996.
F-82
<PAGE> 304
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Prudential Properties (the Properties) as described in Note 2
for the year ended December 31, 1996. The combined Statement of Revenue and
Certain Expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the combined Statement of Revenue and
Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' combined revenue and
expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 3, 1997
F-83
<PAGE> 305
PRUDENTIAL PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1997
YEAR ENDED THROUGH
DECEMBER 31, AUGUST 31,
1996 1997
------------ ---------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $29,743 $21,626
Tenant reimbursements..................................... 2,367 1,645
Parking income............................................ 2,013 1,561
Other income.............................................. 529 778
------- -------
Total revenue..................................... 34,652 25,610
------- -------
EXPENSES
Property operating and maintenance........................ 13,239 8,687
Real estate taxes......................................... 4,414 3,112
Management fees........................................... 719 514
Insurance................................................. 446 361
------- -------
Total expenses............................................ 18,818 12,674
------- -------
Revenue in excess of certain expenses....................... $15,834 $12,936
======= =======
</TABLE>
See accompanying notes.
F-84
<PAGE> 306
PRUDENTIAL PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties, as
defined in Note 2, for the periods presented nor indicative of future operations
as certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the Prudential Properties (the "Properties").
Equity Office Properties Trust expects to acquire the Properties for
approximately $290 million from an unrelated party. The Properties have been
presented on a combined basis because all of the Properties are under common
control and management. The following Properties are included in the combined
financial statements:
<TABLE>
<CAPTION>
APPROXIMATE
RENTABLE
PROPERTY NAME LOCATION SQUARE FOOTAGE
------------- -------- --------------
<S> <C> <C>
Brookhollow Central I, II and III..................... Houston, TX 800,688
Destec Tower.......................................... Houston, TX 574,216
8080 Central.......................................... Dallas, TX 283,707
1700 Market........................................... Philadelphia, PA 825,547
---------
2,484,158
=========
</TABLE>
3. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
The Properties were managed by an affiliated party to the seller. The
management agreements provided for fees of 1.5% to 3.0% of gross receipts, as
defined.
Insurance premiums are paid to and coverage is provided by an affiliated
party to the seller.
F-85
<PAGE> 307
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 550 South Hope Street (the Property) as described in Note 2 for the year
ended March 31, 1997. The Statement of Revenue and Certain Expenses are the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 1, and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 2 for the year ended March 31, 1997,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 24, 1997
F-86
<PAGE> 308
550 SOUTH HOPE STREET
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 1, 1997
MARCH 31, THROUGH JULY 31,
1997 1997
---------- ----------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $7,602 $2,972
Tenant reimbursements..................................... 3,840 1,398
Parking income............................................ 1,273 423
Other income.............................................. 19 7
------ -------
Total revenue..................................... 12,734 4,800
====== =======
EXPENSES
Property operating and maintenance........................ 3,992 1,302
Real estate taxes......................................... 801 251
Management fee............................................ 140 58
Insurance................................................. 605 152
------ -------
Total expenses.................................... 5,538 1,763
------ -------
Revenue in excess of certain expenses....................... $7,196 $3,037
====== =======
</TABLE>
See accompanying notes.
F-87
<PAGE> 309
550 SOUTH HOPE STREET
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-4
of Equity Office Properties Trust. The accompanying statements are not
representative of the actual operations of the Property, as defined in Note 2,
for the periods presented nor indicative of future operations as certain
expenses, primarily depreciation, amortization and interest expense, which may
not be comparable to the expenses expected to be incurred by Equity Office
Properties Trust in future operations of the Property, have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of the revenue
and expenses during the reporting periods. Actual results could differ from
these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTY
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of 550 South Hope Street, an office building with approximately
566,434 rentable square feet, located in Los Angeles, California (the
"Property"). It is anticipated that Equity Office Properties Trust will acquire
the Property for $99.5 million from an unrelated party.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-88
<PAGE> 310
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Acorn Properties (the Properties) as described in Note 2 for the
year ended December 31, 1996. The combined Statement of Revenue and Certain
Expenses is the responsibility of the Properties' management. Our responsibility
is to express an opinion on the combined Statement of Revenue and Certain
Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' combined revenue and
expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 9, 1997
F-89
<PAGE> 311
ACORN PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH JULY 31,
1996 1997
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $16,999 $11,592
Tenant reimbursements..................................... 2,055 1,327
Other income.............................................. 202 181
------- -------
Total revenue..................................... 19,256 13,100
------- -------
EXPENSES
Property operating and maintenance........................ 4,526 2,665
Real estate taxes......................................... 1,378 853
Management fees........................................... 649 428
Insurance................................................. 160 92
------- -------
Total expenses.................................... 6,713 4,038
------- -------
Revenue in excess of certain expenses....................... $12,543 $ 9,062
======= =======
</TABLE>
See accompanying notes.
F-90
<PAGE> 312
ACORN PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties, as
defined in Note 2, for the periods presented nor indicative of future operations
as certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the Acorn Properties (the "Properties"). Equity
Office Properties Trust expects to acquire an 89% managing general partnership
interest in each of the partnerships that hold title to the Properties for
approximately $144.7 million, including the assumption of debt. The Acorn
Properties have been presented on a combined basis because all of the Properties
are under common control and management. The following Properties are included
in the combined financial statements:
<TABLE>
<CAPTION>
APPROXIMATE
RENTABLE
PROPERTY NAME LOCATION SQUARE FOOTAGE
------------- -------- --------------
<S> <C> <C>
One Valley Square................ Plymouth Meeting, PA 70,289
Two Valley Square................ Plymouth Meeting, PA 70,622
Three Valley Square.............. Plymouth Meeting, PA 84,605
Four Valley Square............... Plymouth Meeting, PA 49,757
Five Valley Square............... Plymouth Meeting, PA 18,564
Oak Hill Plaza................... King of Prussia, PA 164,360
Walnut Hill Plaza................ King of Prussia, PA 149,716
One Devon Square................. Wayne, PA 77,267
Two Devon Square................. Wayne, PA 63,226
Three Devon Square (a)........... Wayne, PA 6,000
Four Falls Corporate Center...... Conshohocken, PA 254,355
---------
1,008,761
=========
</TABLE>
- ---------------
(a) In addition, this property includes land leased to a third party.
F-91
<PAGE> 313
ACORN PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE
AND CERTAIN EXPENSES -- (CONTINUED)
3. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
The Properties were managed by an affiliated party to the sellers. The
management agreements provided for a fee of 4% of gross receipts, as defined.
Janitorial services were provided by an affiliated party to the sellers.
During the year ended December 31, 1996, the Properties incurred approximately
$714,000 in janitorial fees.
F-92
<PAGE> 314
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of 10 & 30 South Wacker Drive (the Properties) as described in Note 2
for the year ended December 31, 1996. The combined Statement of Revenue and
Certain Expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the combined Statement of Revenue and
Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' revenue and expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 5, 1997
F-93
<PAGE> 315
10 & 30 SOUTH WACKER DRIVE
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH JULY 31,
1996 1997
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $38,739 $23,388
Tenant reimbursements..................................... 23,518 14,604
Parking income............................................ 1,188 786
Other income.............................................. 2,232 643
------- -------
Total revenue..................................... 65,677 39,421
------- -------
EXPENSES
Property operating and maintenance........................ 9,891 5,370
Real estate taxes......................................... 16,600 9,683
Management fee............................................ 1,233 754
Insurance................................................. 403 160
------- -------
Total expenses.................................... 28,127 15,967
------- -------
Revenue in excess of certain expenses....................... $37,550 $23,454
======= =======
</TABLE>
See accompanying notes.
F-94
<PAGE> 316
10 & 30 SOUTH WACKER DRIVE
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust. The accompanying combined
statements are not representative of the actual operations of the Properties, as
defined in Note 2, for the periods presented nor indicative of future operations
as certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of 10 & 30 South Wacker Drive, two office buildings
with approximately 2,016,023 million rentable square feet, located in Chicago,
Illinois (the "Properties"). The Properties have been presented on a combined
basis because the Properties were under common ownership and management. It is
anticipated that the Properties will be acquired for $462 million by Equity
Office Properties Trust from an unrelated party.
F-95
<PAGE> 317
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of One Lafayette Centre (the Property) as described in Note 2 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 1, and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 2 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 5, 1997
F-96
<PAGE> 318
ONE LAFAYETTE CENTRE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH JULY 31,
1996 1997
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $8,509 $5,409
Tenant reimbursements..................................... 855 582
Parking income............................................ 446 260
Other income.............................................. 158 46
------- -------
Total revenue..................................... 9,968 6,297
------- -------
EXPENSES
Property operating and maintenance........................ 2,238 1,360
Real estate taxes......................................... 1,154 625
Management fee............................................ 300 186
Insurance................................................. 57 34
------- -------
Total expenses.................................... 3,749 2,205
------- -------
Revenue in excess of certain expenses....................... $6,219 $4,092
======= =======
</TABLE>
See accompanying notes.
F-97
<PAGE> 319
ONE LAFAYETTE CENTRE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-4
of Equity Office Properties Trust. The accompanying statements are not
representative of the actual operations of the Property for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation, amortization and interest expense, which may not be comparable to
the expenses expected to be incurred by Equity Office Properties Trust in future
operations of the Property, have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of the revenue
and expenses during the reporting periods. Actual results could differ from
these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTY
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of One Lafayette Centre, an office building with approximately
410,000 rentable square feet, located in Washington, D.C. (the "Property"). It
is expected that the Property will be acquired for $77.5 million by Equity
Office Properties Trust from an unrelated party.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-98
<PAGE> 320
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the PPM Properties (the Properties) as described in Note 2 for the
year ended December 31, 1996. The combined Statement of Revenue and Certain
Expenses is the responsibility of the Properties' management. Our responsibility
is to express an opinion on the combined Statement of Revenue and Certain
Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' combined revenue and
expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 22, 1997
F-99
<PAGE> 321
PPM PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1997
YEAR ENDED THROUGH
DECEMBER 31, AUGUST 31,
1996 1997
------------ ---------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $ 9,784 $7,038
Tenant reimbursements..................................... 344 262
Parking income............................................ 152 119
Other income.............................................. 144 56
------- ------
Total revenue..................................... 10,424 7,475
------- ------
EXPENSES
Property operating and maintenance........................ 3,062 2,122
Real estate taxes......................................... 1,170 824
Management fees........................................... 228 168
Insurance................................................. 92 76
------- ------
Total expenses.................................... 4,552 3,190
------- ------
Revenue in excess of certain expenses....................... $ 5,872 $4,285
======= ======
</TABLE>
See accompanying notes.
F-100
<PAGE> 322
PPM PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties for
the periods presented nor indicative of future operations as certain expenses,
primarily depreciation, amortization and interest expense, which may not be
comparable to the expenses expected to be incurred by Equity Office Properties
Trust in future operations of the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the PPM Properties which are to be acquired by
Equity Office Properties Trust for approximately $92 million from an unrelated
party. The PPM Properties have been presented on a combined basis because all of
the Properties are under common control and management. The following properties
are included in the combined financial statements:
<TABLE>
<CAPTION>
APPROXIMATE
RENTABLE
PROPERTY NAME SQUARE FOOTAGE
------------- --------------
<S> <C>
Lakeside Square............................................. 392,700
1600 Duke Street............................................ 68,800
Fair Oaks Plaza............................................. 177,900
-------
639,400
=======
</TABLE>
3. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
The Properties were managed by an affiliated party to the seller. The
management agreements provided for fees of 2.25% of gross receipts, as defined.
F-101
<PAGE> 323
ANNEX I
AGREEMENT AND PLAN OF MERGER
DATED AS OF SEPTEMBER 15, 1997, AS AMENDED
<PAGE> 324
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
AMONG
EQUITY OFFICE PROPERTIES TRUST,
EOP OPERATING LIMITED PARTNERSHIP,
BEACON PROPERTIES CORPORATION
AND
BEACON PROPERTIES, L.P.
DATED AS OF SEPTEMBER 15, 1997
<PAGE> 325
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 THE MERGERS.............................................. 2
1.1 The Merger.................................................. 2
1.2 The Partnership Merger...................................... 2
1.3 Closing..................................................... 2
1.4 Effective Time.............................................. 2
1.5 Effect of Merger on Declaration of Trust and By-Laws........ 3
1.6 Effect of Merger on Agreement of Limited Partnership........ 3
1.7 Trustees.................................................... 3
1.8 Effect on Shares............................................ 3
1.9 Effect on Partnership Interests............................. 3
1.10 Exchange Ratios............................................. 3
1.11 Registration Rights Agreement............................... 4
1.12 Partner Approval............................................ 4
1.13 No Appraisal Rights......................................... 4
1.14 Exchange of Certificates; Pre-Closing Dividends; Fractional 4
Shares......................................................
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF BEACON................. 6
2.1 Organization, Standing and Power of Beacon.................. 6
2.2 Beacon Subsidiaries......................................... 7
2.3 Capital Structure........................................... 7
2.4 Other Interests............................................. 8
2.5 Authority; Noncontravention; Consents....................... 9
2.6 SEC Documents; Financial Statements; Undisclosed 10
Liabilities.................................................
2.7 Absence of Certain Changes or Events........................ 10
2.8 Litigation.................................................. 11
2.9 Properties.................................................. 11
2.10 Environmental Matters....................................... 13
2.11 Related Party Transactions.................................. 13
2.12 Employee Benefits........................................... 13
2.13 Employee Policies........................................... 15
2.14 Taxes....................................................... 15
2.15 No Payments to Employees, Officers or Directors............. 15
2.16 Broker; Schedule of Fees and Expenses....................... 16
2.17 Compliance with Laws........................................ 16
2.18 Contracts; Debt Instruments................................. 16
2.19 Opinion of Financial Advisor................................ 17
2.20 State Takeover Statutes..................................... 17
2.21 Investment Company Act of 1940.............................. 17
2.22 Definition of Knowledge of Beacon........................... 17
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF EOP.................... 18
3.1 Organization, Standing and Power of EOP..................... 18
3.2 EOP Subsidiaries............................................ 18
3.3 Capital Structure........................................... 18
3.4 Other Interests............................................. 19
3.5 Authority; Noncontravention; Consents....................... 20
3.6 SEC Documents; Financial Statements; Undisclosed 21
Liabilities.................................................
3.7 Absence of Certain Changes or Events........................ 21
3.8 Litigation.................................................. 21
3.9 Properties.................................................. 22
3.10 Environmental Matters....................................... 23
</TABLE>
i
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<TABLE>
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PAGE
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<S> <C> <C>
3.11 Taxes....................................................... 23
3.12 Brokers; Schedule of Fees and Expenses...................... 24
3.13 Compliance with Laws........................................ 24
3.14 Contracts; Debt Instruments................................. 24
3.15 Opinion of Financial Advisor................................ 24
3.16 State Takeover Statutes..................................... 24
3.17 Investment Company Act of 1940.............................. 24
3.18 Definition of Knowledge of EOP.............................. 24
3.19 EOP Not an Interested Stockholder........................... 24
ARTICLE 4 COVENANTS................................................ 24
4.1 Conduct of Beacon's and Beacon Partnership's Business 24
Pending Merger..............................................
4.2 Conduct of EOP's and EOP Partnership's Business Pending 26
Merger......................................................
4.3 No Solicitation............................................. 28
4.4 Affiliates.................................................. 29
4.5 Other Actions............................................... 29
ARTICLE 5 ADDITIONAL COVENANTS..................................... 29
5.1 Preparation of the Registration Statement and the Proxy 29
Statement; Beacon Shareholders Meeting, Beacon Unitholders
Consent Solicitation and EOP Shareholders Meeting...........
5.2 Access to Information: Confidentiality...................... 32
5.3 Reasonable Best Efforts; Notification....................... 32
5.4 Tax Treatment............................................... 33
5.5 Public Announcements........................................ 33
5.6 Listing..................................................... 33
5.7 Transfer and Gains Taxes.................................... 33
5.8 Benefit Plans and Other Employee Arrangements............... 33
5.9 Indemnification............................................. 34
5.10 Declaration of Dividends and Distributions.................. 36
5.11 Transfer of Management Company Shares....................... 36
5.12 Notices..................................................... 36
5.13 Resignations................................................ 36
5.14 Third Party Management Agreements........................... 36
5.15 Existing Restrictions on Resale of Certain Beacon 36
Properties..................................................
5.16 Agreement to Hold Certain Properties and Maintain Certain 36
Indebtedness................................................
5.17 RWLP Corp................................................... 37
ARTICLE 6 CONDITIONS............................................... 37
6.1 Conditions to Each Party's Obligation to Effect the 37
Merger......................................................
6.2 Conditions to Obligations of EOP and EOP Partnership........ 37
6.3 Conditions to Obligations of Beacon and Beacon 38
Partnership.................................................
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER........................ 39
7.1 Termination................................................. 39
7.2 Certain Fees and Expenses................................... 40
7.3 Effect of Termination....................................... 42
7.4 Amendment................................................... 42
7.5 Extension; Waiver........................................... 42
ARTICLE 8 GENERAL PROVISIONS....................................... 42
8.1 Nonsurvival of Representations and Warranties............... 42
8.2 Notices..................................................... 42
8.3 Interpretation.............................................. 43
</TABLE>
ii
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<TABLE>
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PAGE
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<S> <C> <C>
8.4 Counterparts................................................ 43
8.5 Entire Agreement; No Third-Party Beneficiaries.............. 43
8.6 Governing Law............................................... 44
8.7 Assignment.................................................. 44
8.8 Enforcement................................................. 44
8.9 Severability................................................ 44
8.10 EOP Extension Option........................................ 44
8.11 Exculpation................................................. 44
</TABLE>
EXHIBITS
EXHIBIT "A" -- ARTICLES OF MERGER
EXHIBIT "B" -- CERTIFICATE OF MERGER
iii
<PAGE> 328
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
AICPA Statement............................................. 5.1(b)
Acquisition Proposal........................................ 4.3(a)
Action...................................................... 8.10
Affiliates.................................................. 4.4
Agreement................................................... Preamble
Articles of Merger.......................................... B
Average Closing Price....................................... 7.1(j)
Base Amount................................................. 7.2
Beacon...................................................... Preamble
Beacon Common Share......................................... 1.10(a)
Beacon Disclosure Letter.................................... Art. 2
Beacon Financial Statement Date............................. 2.7
Beacon Material Adverse Change.............................. 2.7
Beacon Material Adverse Effect.............................. 2.1
Beacon OP Unit.............................................. 1.10(c)
Beacon Other Interests...................................... 2.4
Beacon Partner Approvals.................................... 1.12
Beacon Partnership.......................................... Preamble
Beacon Partnership Agreement................................ 1.10(c)
Beacon Preferred Share...................................... 1.10(b)
Beacon Preferred Unit....................................... 1.10(d)
Beacon Properties........................................... 2.9(a)
Beacon Rent Roll............................................ 2.9(e)
Beacon SEC Documents........................................ 2.6
Beacon Shareholder Approvals................................ 2.5(a)
Beacon Shareholders Meeting................................. 5.1(e)
Beacon Space Lease.......................................... 2.9(e)
Beacon Stock Options........................................ 2.3(b)
Beacon Subsidiaries......................................... 2.2(a)
Beacon Voting Agreement..................................... J
BeaMet...................................................... 2.14(b)
Break-Up Fee................................................ 7.2
Break-Up Fee Tax Opinion.................................... 7.2
Break-Up Expenses........................................... 7.2
Certificate of Merger....................................... D
Certificates................................................ 1.14(c)
Closing..................................................... 1.3
Closing Date................................................ 1.3
Code........................................................ E
Commitment.................................................. 4.1(i)
Construction Company........................................ I
Construction Company Stock Purchase Agreement............... I
Controlled Group Member..................................... 2.12
Department.................................................. 1.4
Design Company.............................................. I
Design Company Stock Purchase Agreement..................... I
DRULPA...................................................... 1.2
Effective Time.............................................. 1.4
Employee Plan............................................... 2.12
Encumbrances................................................ 2.9(a)
</TABLE>
iv
<PAGE> 329
EOP......................................................... Preamble
EOP Bylaws.................................................. 1.5
EOP Common Share............................................ 1.10(a)
EOP Declaration of Trust.................................... 1.5
EOP Disclosure Letter....................................... Art. 3
EOP Financial Statement Date................................ 3.7
EOP Management Corp......................................... I
EOP Material Adverse Change................................. 3.7
EOP Material Adverse Effect................................. 3.1
EOP Options................................................. 3.3(b)
EOP OP Unit................................................. 1.10(c)
EOP Partner Approvals....................................... 1.12
EOP Partnership............................................. Preamble
EOP Partnership Agreement................................... 1.6
EOP Preferred Share......................................... 1.10(b)
EOP Preferred Unit.......................................... 1.10(d)
EOP Properties.............................................. 3.9(a)
EOP Rent Roll............................................... 3.9(g)
EOP SEC Documents........................................... 3.6
EOP Shareholder Approvals................................... 3.5(a)
EOP Shareholders Meeting.................................... 5.1(c)
EOP Space Lease............................................. 3.9(g)
EOP Subsidiaries............................................ 3.1
EOP Voting Agreement........................................ K
ERISA....................................................... 2.12
Exchange Act................................................ 2.6
Exchange Agent.............................................. 1.14(a)
Exchange Fund............................................... 1.14(b)
Exchange Ratio.............................................. 1.10(a)
Fair Market Value........................................... 1.14(g)
Final Company Dividend...................................... 1.14(d)
Form S-4.................................................... 5.1(a)
GAAP........................................................ 2.6
Governmental Entity......................................... 2.5(c)
Hazardous Materials......................................... 2.10
Indebtedness................................................ 2.18(b)
Indemnified Parties......................................... 5.9(a)
Indemnifying Parties........................................ 5.9(a)
Interested Stockholder...................................... 3.19
Knowledge of EOP............................................ 3.18
Knowledge of Beacon......................................... 2.22
Laws........................................................ 2.5(c)
Liens....................................................... 2.2(b)
Management Company.......................................... I
Management Company Stock Purchase Agreement................. I
Merger...................................................... A
Mergers..................................................... C
Merger Consideration........................................ 1.10(b)
MGCL........................................................ 1.1
NYSE........................................................ 1.14(g)
Outside Property Management Agreements...................... 2.18(f)
Partner Approvals........................................... 1.12
Partnership Merger.......................................... C
v
<PAGE> 330
Payor....................................................... 7.2
Pension Plan................................................ 2.12
Person...................................................... 2.2(a)
Preferred Exchange Ratio.................................... 1.10(b)
Preferred Unit Exchange Ratio............................... 1.10(d)
Pricing Period.............................................. 7.1(j)
Prohibited Transaction...................................... 2.12(c)
Property Restrictions....................................... 2.9(a)
Proxy Statement............................................. 5.1(a)
Qualifying Income........................................... 7.2
Recipient................................................... 7.2
Registration Rights Agreement............................... 1.11
REIT........................................................ 2.14(b)
REIT Requirements........................................... 7.2
SEC......................................................... 2.5(c)
Secretary................................................... 1.4
Shareholder Approvals....................................... 3.5(a)
Stock Purchase Agreements................................... I
Subsidiary.................................................. 2.2(a)
Superior Acquisition Proposal............................... 4.3(d)
Surviving Partnership....................................... 1.2
Surviving Trust............................................. 1.1
Takeover Statute............................................ 2.20
Taxes....................................................... 2.14(a)
Tax Protection Agreement.................................... 2.18(j)
Third Party Provisions...................................... 8.5
Title 8..................................................... 1.1
Transfer and Gains Taxes.................................... 5.7
Unit Exchange Ratio......................................... 1.10(c)
Welfare Plan................................................ 2.12
1940 Act.................................................... 2.21
vi
<PAGE> 331
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of September
15, 1997 by and among EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate
investment trust ("EOP"), EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited
partnership ("EOP Partnership"), BEACON PROPERTIES CORPORATION, a Maryland
corporation ("Beacon"), and BEACON PROPERTIES, L.P., a Delaware limited
partnership ("Beacon Partnership").
RECITALS:
A. The Board of Trustees of EOP and the Board of Directors of Beacon deem
it advisable and in the best interests of their respective shareholders, upon
the terms and subject to the conditions contained herein, that Beacon shall
merge with and into EOP (the "Merger").
B. Upon the terms and subject to the conditions set forth herein, EOP and
Beacon shall execute Articles of Merger (the "Articles of Merger") in
substantially the form attached hereto as Exhibit A and shall file such Articles
of Merger in accordance with Maryland law to effectuate the Merger.
C. EOP, as the managing general partner of EOP Partnership, and Beacon, as
the sole general partner of Beacon Partnership, deem it advisable and in the
best interests of their respective limited partners, subject to the conditions
and other provisions contained herein, that Beacon Partnership shall merge with
and into EOP Partnership (or a limited liability company owned entirely,
directly and/or indirectly, by EOP Partnership, or a limited partnership owned
entirely, directly and/or indirectly, by EOP Partnership, as determined by EOP
and EOP Partnership), with the holders of partnership interests in Beacon
Partnership receiving in any event units of limited partnership interest in EOP
Partnership, as set forth herein (the "Partnership Merger" and, together with
the Merger, the "Mergers").
D. Upon the terms and subject to the conditions set forth herein, EOP
Partnership and Beacon Partnership shall execute a Certificate of Merger (the
"Certificate of Merger") in substantially the form attached hereto as Exhibit B
and shall file such Certificate of Merger in accordance with Delaware law to
effectuate the Partnership Merger.
E. For federal income tax purposes, it is intended that the Merger shall
qualify as a tax-free reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code"), and that this Agreement shall constitute
a plan of reorganization under Section 368 of the Code.
F. For federal income taxes, it is intended that the Partnership Merger,
regardless of form, be treated as a contribution by Beacon Partnership of all of
its assets to EOP Partnership in exchange for partnership interests in EOP
Partnership, as provided for herein, under Section 721 of the Code, and a
distribution of such partnership interests by Beacon Partnership to its partners
under Section 731 of the Code.
G. EOP and Beacon have each received a fairness opinion relating to the
transactions contemplated hereby as more fully described herein.
H. EOP, EOP Partnership, Beacon and Beacon Partnership desire to make
certain representations, warranties and agreements in connection with the
Mergers.
I. Concurrently with the execution of this Agreement and as an inducement
to EOP and EOP Partnership to enter into this Agreement, each of the holders of
voting capital stock of each of Beacon Property Management Corporation, a
Delaware corporation (the "Management Company"), Beacon Design Corporation, a
Massachusetts corporation (the "Design Company"), and Beacon Construction
Company, Inc., a Massachusetts corporation (the "Construction Company"), other
than Beacon Partnership, has entered into a Stock Purchase Agreement relating to
the voting capital stock of the respective companies (the "Management Company
Stock Purchase Agreement," the "Design Company Stock Purchase Agreement" and the
"Construction Company Stock Purchase Agreement," respectively and, collectively,
the "Stock Purchase Agreements"), providing for the sale of all of the
outstanding voting capital stock (other than any such voting capital stock held
by Beacon Partnership) of the Management Company, the Design Company
<PAGE> 332
and the Construction Company, respectively, to Equity Office Properties
Management Corp. ("EOP Management Corp.") or its assigns.
J. As an inducement to EOP to enter into this Agreement, certain members of
the Leventhal and Sidman families and trusts and partnerships established for
the benefit of the members of the Leventhal and Sidman families have entered
into or will (within ten (10) business days following the date of this
Agreement) enter into a voting agreement (each, a "Beacon Voting Agreement")
pursuant to which such person or entity has agreed, among other things, to vote
his or its Beacon Common Shares (as defined in Section 1.10(a) of this
Agreement) and Beacon OP Units (as defined in Section 1.10(c) of this Agreement)
to approve this Agreement, the respective Mergers and any other matter which
requires his or its vote in connection with the transactions contemplated by
this Agreement.
K. As an inducement to Beacon to enter into this Agreement, each of several
trusts established for the benefit of members of the family of Samuel Zell,
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership,
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership II,
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership III,
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership IV, ZML
Partners Limited Partnership, ZML Partners Limited Partnership II, ZML Partners
Limited Partnership III and ZML Partners Limited Partnership IV has entered into
or will (within ten (10) business days of the date of this Agreement) enter into
a voting agreement (each, an "EOP Voting Agreement") pursuant to which such
person or entity has agreed, among other things, to vote his or its EOP Common
Shares (as defined in Section 1.10(a) of this Agreement) and EOP OP Units (as
defined in Section 1.10(c) of this Agreement) to approve this Agreement, the
respective Mergers and any other matter which requires his or its vote in
connection with the transactions contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGERS
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with Title 8 of the Corporations and
Associations Article of the Annotated Code of Maryland, as amended ("Title 8"),
and the Maryland General Corporation Law ("MGCL"), Beacon shall be merged with
and into EOP, with EOP as the surviving real estate investment trust (the
"Surviving Trust").
1.2 The Partnership Merger. Upon the terms and subject to the conditions of
this Agreement, and in accordance with Title 6, Chapter 17 of the Delaware Code
Annotated, as amended (the "DRULPA"), immediately following the consummation of
the Merger, Beacon Partnership shall be merged with and into EOP Partnership
(or, at EOP Partnership's option, a limited liability company owned entirely,
directly and/or indirectly, by EOP Partnership, or a limited partnership owned
entirely, directly and/or indirectly, by EOP Partnership, as determined by EOP
and EOP Partnership), with EOP Partnership (or such limited partnership or
limited liability company subsidiary) as the surviving limited partnership or
limited liability company (the "Surviving Partnership"), and with the holders of
partnership interests in Beacon Partnership receiving in any event units of
partnership interest in EOP Partnership, as set forth in Sections 1.9 and
1.10(c).
1.3 Closing. The closing of the Mergers (the "Closing") will take place at
10:00 a.m., local time on the date to be specified by the parties, which
(subject to satisfaction or waiver of the conditions set forth in Article 6)
shall be no later than the third business day after satisfaction or waiver of
the conditions set forth in Section 6.1(a) (the "Closing Date"), at the offices
of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts 02109,
unless another date or place is agreed to in writing by the parties.
1.4 Effective Time. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article 6, EOP and Beacon shall execute
and file the Articles of Merger, executed in accordance with
2
<PAGE> 333
Title 8 and the MGCL, with the State Department of Assessments and Taxation of
Maryland (the "Department"), and shall execute and file the Certificate of
Merger, executed in accordance with the DRULPA, with the Office of the Secretary
of State of the State of Delaware (the "Secretary") and shall make all other
filings and recordings required, with respect to the Merger, under Title 8 and
the MGCL or, with respect to the Partnership Merger, under the DRULPA. The
Mergers shall become effective (the "Effective Time") at such times as EOP and
Beacon shall agree should be specified in the Articles of Merger and the
Certificate of Merger (not to exceed thirty (30) days after the Articles of
Merger are accepted for record by the Department). Unless otherwise agreed, the
parties shall cause the Effective Time to occur on the Closing Date.
1.5 Effect of Merger on Declaration of Trust and Bylaws. The Articles of
Amendment and Restatement of Declaration of Trust, as amended, of EOP (the "EOP
Declaration of Trust") and the Bylaws of EOP (the "EOP Bylaws"), as in effect
immediately prior to the Effective Time, shall continue in full force and effect
after the Merger until further amended in accordance with applicable Maryland
law.
1.6 Effect of Merger on Agreement of Limited Partnership. The Agreement of
Limited Partnership, as amended, of EOP Partnership, as in effect immediately
prior to the Effective Time (the "EOP Partnership Agreement"), shall continue in
full force and effect after the Merger until further amended in accordance with
applicable Delaware law.
1.7 Trustees. The trustees of the Surviving Trust shall consist of the
trustees of EOP immediately prior to the Effective Time, who shall continue to
serve for the balance of their unexpired terms or their earlier death,
resignation or removal, together with each of Alan M. Leventhal and Edwin
Sidman, who shall, on the third business day after the Effective Time, become a
trustee with a term expiring at the first annual meeting of shareholders of EOP,
and, in connection with such first annual meeting, EOP's Board of Trustees shall
cause these two members to be nominated for election to the Board of Trustees
with terms expiring in 1999 and 2001, respectively; provided, however, that if
notice with respect to the first annual meeting of shareholders of EOP is mailed
prior to the Effective Time, Alan M. Leventhal and Edwin Sidman shall instead,
on the first business day after the first annual meeting of shareholders of EOP,
become trustees with terms expiring at the annual meetings of shareholders of
EOP in 1999 and 2001, respectively. In connection with the second annual meeting
of shareholders of EOP, EOP's Board of Trustees shall cause Alan M. Leventhal to
be nominated for re-election as a trustee to the Board of Trustees with a term
expiring at the annual meeting of shareholders of EOP in 2002. Following their
election as trustees, such persons shall serve for their designated terms,
subject to their earlier death, resignation or removal. In addition, in the
event that EOP's current Chairman of the Board ceases to be Chairman of the
Board of EOP prior to the Effective Time, EOP's Board of Trustees shall
designate Alan M. Leventhal as Chairman of the Board for a term consisting of at
least twelve consecutive months (subject to his remaining a trustee throughout
such period of twelve months).
1.8 Effect on Shares. The effect of the Merger on the shares of capital
stock of Beacon shall be as provided in the Articles of Merger. The Merger shall
not change the shares of beneficial interest of EOP outstanding immediately
prior to the Merger.
1.9 Effect on Partnership Interests. The effect of the Partnership Merger
on the partnership interests of Beacon Partnership shall be as provided in the
Certificate of Merger. The Partnership Merger shall not change the partnership
interests of EOP Partnership outstanding immediately prior to the Merger.
1.10 Exchange Ratios.
(a) The exchange ratio to be set forth in the Articles of Merger (the
"Exchange Ratio") shall be 1.4063 of a common share of beneficial interest,
$0.01 par value per share, of EOP ("EOP Common Share") for each share of common
stock, $0.01 par value per share, of Beacon ("Beacon Common Share") outstanding
immediately prior to the Effective Time.
(b) The exchange ratio to be set forth in the Articles of Merger (the
"Preferred Exchange Ratio") shall be one 8.98% Series A Cumulative Redeemable
preferred share of beneficial interest, liquidation preference $25.00 per share,
of EOP ("EOP Preferred Share" and, together with the EOP Common Shares, the
"Merger
3
<PAGE> 334
Consideration") for each share of 8.98% Series A Cumulative Redeemable Preferred
Stock, liquidation preference $25.00 per share, of Beacon ("Beacon Preferred
Share") outstanding immediately prior to the Effective Time. The holders of the
EOP Preferred Shares issued in the Merger shall be entitled to the same rights
and privileges as the holders of the Beacon Preferred Shares outstanding on the
date hereof.
(c) The exchange ratio to be set forth in the Certificate of Merger (the
"Unit Exchange Ratio") shall be 1.4063 of a Class A Unit (as defined in the EOP
Partnership Agreement) of EOP Partnership ("EOP OP Unit"), for each Partnership
Unit (as defined in the Amended and Restated Agreement of Limited Partnership of
Beacon Partnership (the "Beacon Partnership Agreement")) other than Series A
Preferred Units (as defined in the Beacon Partnership Agreement) ("Beacon OP
Unit") outstanding immediately prior to the Effective Time. The holders of the
EOP OP Units issued in the Partnership Merger shall be entitled to redeem such
EOP OP Units immediately following the consummation of the Partnership Merger
(and thereafter) pursuant to the terms of the EOP Partnership Agreement, and
shall be entitled to the same rights and privileges as the holders of EOP OP
Units outstanding on the date hereof.
(d) The exchange ratio to be set forth in the Certificate of Merger (the
"Preferred Unit Exchange Ratio") shall be one 8.98% Series A Preferred Unit of
EOP Partnership ("EOP Preferred Unit") for each unit of 8.98% Series A Preferred
Unit of Beacon Partnership ("Beacon Preferred Unit") outstanding immediately
prior to the Effective Time. EOP, as the holder of the EOP Preferred Units
issued in the Partnership Merger, shall be entitled to the same rights and
privileges as Beacon, as the holder of the Beacon Preferred Units outstanding on
the date hereof.
1.11 Registration Rights Agreement. At the Effective Time, EOP will assume
in writing and succeed to all rights and obligations of Beacon pursuant to the
Registration Rights Agreements listed on Schedule 2.5 to the Beacon Disclosure
Letter.
1.12 Partner Approval. Beacon shall seek the requisite approval of the
partners of Beacon Partnership to the Partnership Merger to the extent required
by the Beacon Partnership Agreement and any other matters reasonably requested
by either party to effectuate the transactions contemplated by this Agreement
(collectively, the "Beacon Partner Approvals"). EOP shall seek the requisite
approval of the partners of EOP Partnership to the Partnership Merger to the
extent required by the EOP Partnership Agreement and any other matters
reasonably requested by either party to effectuate the transactions contemplated
by this Agreement (collectively, the "EOP Partner Approvals," and together with
the Beacon Partner Approvals, the "Partner Approvals").
1.13 No Appraisal Rights. The holders of Beacon Common Shares, Beacon
Preferred Shares, Beacon OP Units, EOP Shares, and EOP OP Units are not entitled
under applicable law to appraisal rights as a result of the Mergers.
1.14 Exchange of Certificates; Pre-Closing Dividends; Fractional Shares.
(a) Exchange Agent. Prior to the Effective Time, EOP shall appoint the
exchange agent identified in Exhibit A, or another bank or trust company
reasonably acceptable to Beacon, to act as exchange agent (the "Exchange Agent")
for the exchange of the Merger Consideration upon surrender of certificates
representing issued and outstanding Beacon Common Shares or Beacon Preferred
Shares, as applicable.
(b) EOP to Provide Merger Consideration. EOP shall provide to the Exchange
Agent on or before the Effective Time, for the benefit of the holders of Beacon
Common Shares and Beacon Preferred Shares, EOP Common Shares and EOP Preferred
Shares (the "Exchange Fund") issuable in exchange for the issued and outstanding
Beacon Common Shares and Beacon Preferred Shares pursuant to Section 1.10.
Beacon shall provide to the Exchange Agent on or before the Effective Time, for
the benefit of the holders of Beacon Common Shares, cash payable in respect of
any dividends required pursuant to Section 1.14(d)(i) or (ii).
(c) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Beacon Common Shares and Beacon Preferred Shares (the
"Certificates") whose shares were converted into the right to receive the Merger
Consideration pursuant to
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Section 1.10 (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in a
form and have such other provisions as EOP may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for the Merger Consideration. Upon surrender of a Certificate for cancellation
to the Exchange Agent or to such other agent or agents as may be appointed by
EOP, together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor the Merger
Consideration into which the Beacon Common Shares or Beacon Preferred Shares, as
applicable, theretofore represented by such Certificate shall have been
converted pursuant to Section 1.10, as well as any dividends or other
distributions to which such holder is entitled pursuant to Section 1.14(d), and
the Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Beacon Common Shares or Beacon Preferred Shares which
is not registered in the transfer records of Beacon, payment may be made to a
person other than the person in whose name the Certificate so surrendered is
registered if such Certificate shall be properly endorsed or otherwise be in
proper form for transfer and the person requesting such payment either shall pay
any transfer or other taxes required by reason of such payment being made to a
person other than the registered holder of such Certificate or establish to the
satisfaction of EOP that such tax or taxes have been paid or are not applicable.
Until surrendered as contemplated by this Section 1.14, each Certificate shall
be deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration, without interest, into
which the Beacon Common Shares or Beacon Preferred Shares, as applicable,
theretofore represented by such Certificate shall have been converted pursuant
to Section 1.10, and any dividends or other distributions to which such holder
is entitled pursuant to Section 1.14(d). No interest will be paid or will accrue
on the Merger Consideration upon the surrender of any Certificate or on any cash
payable pursuant to Section 1.14(d) or Section 1.14(g).
(d) Record Dates for Final Dividends; Distributions with Respect to
Unexchanged Shares.
(i) To the extent necessary to satisfy the requirements of Section
857(a)(1) of the Code for the taxable year of Beacon ending at the
Effective Time (and avoid the payment of tax with respect to undistributed
income), Beacon shall declare a dividend (the "Final Company Dividend") to
holders of Beacon Common Shares, the record date for which shall be the
close of business on the last business day prior to the Effective Time, in
an amount equal to the minimum dividend sufficient to permit Beacon to
satisfy such requirements. If Beacon determines it necessary to declare the
Final Company Dividend, it shall notify EOP at least ten (10) days prior to
the date for the Beacon Shareholders Meeting (as defined in Section 5.1),
and EOP shall declare a dividend per share to holders of EOP Common Shares,
the record date for which shall be the close of business on the last
business day prior to the Effective Time, in an amount per EOP Common Share
equal to the quotient obtained by dividing (x) the Final Company Dividend
per Beacon Common Share paid by Beacon by (y) the Exchange Ratio. The
dividends payable hereunder to holders of Beacon Common Shares shall be
paid upon presentation of the certificates of Beacon Common Shares for
exchange in accordance with this Section 1.14.
(ii) No dividends or other distributions with respect to EOP Common
Shares with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of EOP
Common Shares represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section
1.14(g), in each case until the surrender of such Certificate in accordance
with this Section 1.14. Subject to the effect of applicable escheat laws,
following surrender of any such Certificate there shall be paid to the
holder of such Certificate, without interest, (i) at the time of such
surrender, the amount of any cash payable in lieu of any fractional EOP
Common Shares to which such holder is entitled pursuant to Section 1.14(g)
and (ii) if such Certificate is exchangeable for one or more whole EOP
Common Shares, (x) at the time of such surrender the amount of dividends or
other distributions with a record date after the Effective Time theretofore
paid with respect to such whole EOP Common Shares and (y) at the
appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to such surrender
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and with a payment date subsequent to such surrender payable with respect
to such whole EOP Common Shares.
(e) No Further Ownership Rights in Beacon Common Shares and Beacon
Preferred Shares. All Merger Consideration paid upon the surrender of
Certificates in accordance with the terms of this Section 1.14 (and any cash
paid pursuant to Section 1.14(g)) shall be deemed to have been paid in full
satisfaction of all rights pertaining to the Beacon Common Shares or Beacon
Preferred Shares, as applicable, theretofore represented by such Certificates;
provided, however, that Beacon shall transfer to the Exchange Agent cash
sufficient to pay any dividends or make any other distributions with a record
date prior to the Effective Time which may have been declared or made by Beacon
on such Beacon Common Shares or Beacon Preferred Shares, as applicable, in
accordance with the terms of this Agreement or prior to the date of this
Agreement and which remain unpaid at the Effective Time and have not been paid
prior to such surrender, and there shall be no further registration of transfers
on the stock transfer books of Beacon of the Beacon Common Shares and Beacon
Preferred Shares which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to EOP for any reason,
they shall be canceled and exchanged as provided in this Section 1.14.
(f) No Liability. None of Beacon, EOP or the Exchange Agent shall be liable
to any person in respect of any Merger Consideration or dividends delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Any portion of the Exchange Fund delivered to the Exchange Agent
pursuant to this Agreement that remains unclaimed for twelve (12) months after
the Effective Time shall be redelivered by the Exchange Agent to EOP, upon
demand, and any holders of Certificates who have not theretofore complied with
Section 1.14(c) shall thereafter look only to EOP for delivery of the Merger
Consideration and any unpaid dividends, subject to applicable escheat and other
similar laws.
(g) No Fractional Shares
(i) No certificates or scrip representing fractional EOP Common Shares
shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests will not entitle the owner thereof to vote, to
receive dividends or to any other rights of a shareholder of EOP.
(ii) No fractional EOP Common Shares shall be issued pursuant to this
Agreement. In lieu of the issuance of any fractional EOP Common Shares
pursuant to this Agreement, each holder of Beacon Common Shares upon
surrender of a Certificate for exchange shall be paid an amount in cash
(without interest), rounded to the nearest cent, determined by multiplying
(i) the average closing price of one EOP Common Share on the New York Stock
Exchange (the "NYSE") on the five trading days immediately preceding the
Closing Date (the "Fair Market Value") by (ii) the fractional amount of the
EOP Common Shares which such holder would otherwise be entitled to receive
under this Section 1.14.
(h) Except for the provisions relating to the Exchange Agent, certificates
and the exchange procedure (which shall not be applicable), all other provisions
of this Section 1.14 shall apply to Beacon Partnership, EOP Partnership and the
Beacon OP Units with respect to the Partnership Merger.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF BEACON
Except as set forth in the letter of even date herewith signed by the
President and Chief Executive Officer or the Executive Vice President and Chief
Operating Officer of Beacon and delivered to EOP prior to the execution hereof
(the "Beacon Disclosure Letter"), Beacon and Beacon Partnership represent and
warrant to EOP and EOP Partnership as follows:
2.1 Organization, Standing and Power of Beacon. Beacon is a corporation
duly organized, validly existing and in good standing under the laws of
Maryland. Beacon has all requisite corporate power and authority to own,
operate, lease and encumber its properties and carry on its business as now
being conducted. Beacon is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
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qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a material adverse effect on the business, properties, assets,
financial condition or results of operations of Beacon and the Beacon
Subsidiaries (as defined below), taken as a whole (an "Beacon Material Adverse
Effect"). Beacon has delivered to EOP complete and correct copies of Beacon's
Articles of Incorporation and Amended and Restated Bylaws, in each case, as
amended or supplemented to the date of this Agreement.
2.2 Beacon Subsidiaries.
(a) Schedule 2.2 to the Beacon Disclosure Letter sets forth (i) each
Subsidiary (as defined below) of Beacon (the "Beacon Subsidiaries"), (ii) the
ownership interest therein of Beacon, (iii) if not wholly owned by Beacon, the
identity and ownership interest of each of the other owners of such Beacon
Subsidiary, (iv) each office property and other commercial property owned by
such Subsidiary, and (v) if not wholly owned by such Subsidiary, the identity
and ownership interest of each of the other owners of such property. As used in
this Agreement, "Subsidiary" of any Person (as defined below) means any
corporation, partnership, limited liability company, joint venture, trust or
other legal entity of which such Person owns (either directly or through or
together with another Subsidiary of such Person) either (i) a general partner,
managing member or other similar interest, or (ii)(A) 10% or more of the voting
power of the voting capital stock or other equity interests, or (B) 10% or more
of the outstanding voting capital stock or other voting equity interests of such
corporation, partnership, limited liability company, joint venture or other
legal entity. As used herein, "Person" means an individual, corporation,
partnership, limited liability company, joint venture, association, trust,
unincorporated organization or other entity. Schedule 2.4 sets forth a true and
complete list of the equity securities owned by Beacon, directly or indirectly,
in any corporation, partnership, limited liability company, joint venture or
other legal entity, excluding Beacon Subsidiaries.
(b) Except as set forth in Schedule 2.2 to the Beacon Disclosure Letter,
(i) all of the outstanding shares of capital stock of each Beacon Subsidiary
that is a corporation have been duly authorized, validly issued and are (A)
fully paid and nonassessable and not subject to preemptive rights, (B) owned by
Beacon or by another Beacon Subsidiary and (C) owned free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever (collectively, "Liens") and (ii) all equity interests in
each Beacon Subsidiary that is a partnership, joint venture, limited liability
company or trust which are owned by Beacon, by another Beacon Subsidiary or by
Beacon and another Beacon Subsidiary are owned free and clear of all Liens. Each
Beacon Subsidiary that is a corporation is duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation and has
the requisite corporate power and authority to own, operate, lease and encumber
its properties and carry on its business as now being conducted, and each Beacon
Subsidiary that is a partnership, limited liability company or trust is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has the requisite power and authority to own,
operate, lease and encumber its properties and carry on its business as now
being conducted. Each Beacon Subsidiary is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed, individually or in the aggregate, would not have a
Beacon Material Adverse Effect. Complete and correct copies of the Articles of
Incorporation, Bylaws, organization documents and partnership, joint venture and
operating agreements of each Beacon Subsidiary, as amended to the date of this
Agreement, have been previously delivered or made available to EOP. No effective
amendment has been made to the Beacon Partnership Agreement since August 4,
1997.
2.3 Capital Structure.
(a) The authorized shares of capital stock of Beacon consist of 25,000,000
shares of preferred stock, $0.01 par value per share, 8,000,000 of which are
issued and outstanding on the date of this Agreement, 50,000,000 shares of
excess stock, $0.01 par value per share, none of which are issued or outstanding
on the date of this Agreement, and 100,000,000 Beacon Common Shares, 55,599,850
of which were issued and outstanding as of September 12, 1997.
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(b) Set forth in Schedule 2.3(b) to the Beacon Disclosure Letter is a true
and complete list of the following: (i) each qualified or nonqualified option to
purchase shares of Beacon's capital stock granted under Beacon's Amended and
Restated 1994 Stock Option and Incentive Plan and Beacon's 1996 Stock Option
Plan or any other formal or informal arrangement (collectively, the "Beacon
Stock Options"); and (ii) all other warrants or other rights to acquire shares
of Beacon's capital stock, all limited stock appreciation rights, phantom stock,
dividend equivalents, performance units and performance shares which are
outstanding on the date of this Agreement. Schedule 2.3(b) to the Beacon
Disclosure Letter sets forth for each Beacon Stock Option the name of the
grantee, the date of the grant, status of the option as qualified or
nonqualified under Section 422 of the Code, the number and type of shares of
Beacon's capital stock subject to such option, the number and type of shares
subject to options that are currently exercisable, the exercise price per share,
and the number and type of such shares subject to share appreciation rights. On
the date of this Agreement, except as set forth in this Section 2.3 or in
Schedule 2.3(b) to the Beacon Disclosure Letter, no shares of Beacon's capital
stock were outstanding or reserved for issuance.
(c) All outstanding shares of Beacon's capital stock are duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. There are no bonds, debentures, notes or other indebtedness of Beacon
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which shareholders of Beacon may
vote.
(d) Except (i) as set forth in this Section 2.3 or in Schedule 2.3(d) to
the Beacon Disclosure Letter and (ii) Beacon OP Units, which may be redeemed for
cash or, at the option of Beacon, Beacon Common Shares, as of the date of this
Agreement, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which Beacon or any Beacon Subsidiary is a party or by which such entity is
bound, obligating Beacon or any Beacon Subsidiary to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock,
voting securities or other ownership interests of Beacon or any Beacon
Subsidiary or obligating Beacon or any Beacon Subsidiary to issue, grant, extend
or enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking (other than to Beacon or a Beacon
Subsidiary).
(e) As of the date of this Agreement, 70,943,301 Beacon OP Units (including
8,000,000 8.98% Series A Preferred Units) are validly issued and outstanding,
fully paid and nonassessable and not subject to preemptive rights, of which
63,599,850 are owned by Beacon. Schedule 2.3(e) to the Beacon Disclosure
Schedule sets forth the name of each holder of Beacon OP Units and the number of
Beacon OP Units owned by each such holder as of the date of this Agreement. The
Beacon OP Units are subject to no restrictions except as set forth in the Beacon
Partnership Agreement or in certain Lock-up Agreements executed by certain
holders of Beacon OP Units upon the issuance of such Beacon OP Units. Except as
provided in the Beacon Partnership Agreement, Beacon Partnership has not issued
or granted and is not a party to any outstanding commitments of any kind
relating to, or any presently effective agreements or understandings with
respect to, the issuance or sale of interests in Beacon Partnership, whether
issued or unissued, or securities convertible or exchangeable into interests in
Beacon Partnership.
(f) All dividends on Beacon Common Shares and Beacon Preferred Shares, and
all distributions on Beacon OP Units (including Series A Preferred Units), which
have been declared prior to the date of this Agreement have been paid in full,
except that certain dividends payable on Beacon Preferred Shares (along with the
corresponding distributions payable on Series A Preferred Units) which were
declared on September 2, 1997 and are payable on September 15, 1997 have not yet
been paid.
(g) Set forth on Schedule 2.3(g) to the Beacon Disclosure Letter is a list
of each Registration Rights Agreement pursuant to which Beacon is obligated to
register any securities.
2.4 Other Interests. Except for interests in the Beacon Subsidiaries and
certain other entities as set forth in Schedule 2.4 to the Beacon Disclosure
Letter (the "Beacon Other Interests"), neither Beacon nor any Beacon
Subsidiaries owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or other entity (other than investments in short-term investment securities).
With respect to the Beacon Other Interests, Beacon or Beacon Partnership is a
partner or stockholder in good standing, and owns such interests free and clear
of all Liens. Neither Beacon nor any
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Beacon Subsidiary is in material breach of any provision of any agreement,
document or contract which is of a material nature governing its rights in or to
the Beacon Other Interests, all of which agreements, documents and contracts are
(a) set forth in the Beacon Disclosure Letter, (b) unmodified except as
described therein and (c) in full force and effect. To the Knowledge of Beacon,
the other parties to any such agreement, document or contract which is of a
material nature are not in material breach of any of their respective
obligations under such agreements, documents or contracts.
2.5 Authority; Noncontravention; Consents.
(a) Beacon has the requisite corporate power and authority to enter into
this Agreement and, subject to the requisite shareholder approval of the Merger
(the "Beacon Shareholder Approvals"), to consummate the transactions
contemplated by this Agreement to which Beacon is a party. The execution and
delivery of this Agreement by Beacon and the consummation by Beacon of the
transactions contemplated by this Agreement to which Beacon is a party have been
duly authorized by all necessary action on the part of Beacon, except for and
subject to the Beacon Shareholder Approvals and the Beacon Partner Approvals.
This Agreement has been duly executed and delivered by Beacon and constitutes a
valid and binding obligation of Beacon, enforceable against Beacon in accordance
with and subject to its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
(b) Beacon Partnership has the requisite partnership power and authority to
enter into this Agreement and, subject to the requisite Beacon Partner
Approvals, to consummate the transactions contemplated by this Agreement to
which Beacon Partnership is a party. The execution and delivery of this
Agreement by Beacon Partnership and the consummation by Beacon Partnership of
the transactions contemplated by this Agreement to which Beacon Partnership is a
party have been duly authorized by all necessary action on the part of Beacon
Partnership, except for and subject to the Beacon Shareholder Approvals and the
Beacon Partner Approvals. This Agreement has been duly executed and delivered by
Beacon Partnership and constitutes a valid and binding obligation of Beacon
Partnership, enforceable against Beacon Partnership in accordance with and
subject to its terms, subject to applicable bankruptcy, insolvency, moratorium
or other similar laws relating to creditors' rights and general principles of
equity.
(c) Except as set forth in Schedule 2.5(c)(1) to the Beacon Disclosure
Letter, the execution and delivery of this Agreement by Beacon do not, and the
consummation of the transactions contemplated by this Agreement to which Beacon
is a party and compliance by Beacon with the provisions of this Agreement will
not, conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any material obligation or to material loss of a
benefit under, or result in the creation of any Lien upon any of the properties
or assets of Beacon or any Beacon Subsidiary under, (i) the Articles of
Incorporation or the Amended and Restated Bylaws of Beacon or the comparable
charter or organizational documents or partnership, operating, or similar
agreement (as the case may be) of any Beacon Subsidiary, each as amended or
supplemented, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, reciprocal easement agreement, lease or other agreement, instrument,
permit, concession, franchise or license applicable to Beacon or any Beacon
Subsidiary or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any judgment, order, decree, statute, law, ordinance, rule or regulation
(collectively, "Laws") applicable to Beacon or any Beacon Subsidiary, or their
respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights, loss or Liens that
individually or in the aggregate would not (x) have a Beacon Material Adverse
Effect or (y) prevent the consummation of the transactions contemplated by this
Agreement. No consent, approval, order or authorization of, or registration,
declaration or filing with, any federal, state or local government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity"), is required
by or with respect to Beacon or any Beacon Subsidiary in connection with the
execution and delivery of this Agreement by Beacon or the consummation by Beacon
of the transactions contemplated by this Agreement, except for (i) the filing
with the Securities and Exchange Commission (the "SEC") of the Proxy Statement
(as defined in Section 5.1), (ii) the acceptance for record of the Articles of
Merger by the Department, (iii) the filing of the Certificate of Merger with the
Secretary and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations and filings (A) as
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are set forth in Schedule 2.5(c)(2) to the Beacon Disclosure Letter, (B) as may
be required under (x) laws requiring transfer, recordation or gains tax filings,
(y) federal, state or local environmental laws or (z) the "blue sky" laws of
various states, to the extent applicable or (C) which, if not obtained or made,
would not prevent or delay in any material respect the consummation of any of
the transactions contemplated by this Agreement or otherwise prevent Beacon from
performing its obligations under this Agreement in any material respect or have,
individually or in the aggregate, a Beacon Material Adverse Effect.
2.6 SEC Documents; Financial Statements; Undisclosed Liabilities. Beacon
and Beacon Partnership have filed all required reports, schedules, forms,
statements and other documents with the SEC since May 26, 1994 and April 9, 1997
respectively, through the date hereof (the "Beacon SEC Documents"). Schedule
2.6(a) to the Beacon Disclosure Letter contains a complete list of all Beacon
SEC Documents filed by Beacon or Beacon Partnership with the SEC since January
1, 1997 and on or prior to the date of this Agreement. All of the Beacon SEC
Documents (other than preliminary material), as of their respective filing
dates, complied in all material respects with all applicable requirements of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in each case, the rules and regulations promulgated
thereunder applicable to such Beacon SEC Documents. None of the Beacon SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except to the extent such statements
have been modified or superseded by later Beacon SEC Documents filed and
publicly available prior to the date of this Agreement. The consolidated
financial statements of Beacon included in the Beacon SEC Documents or of Beacon
Partnership included in the Beacon SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited statements, as permitted by the applicable rules and
regulations of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly presented,
in accordance with the applicable requirements of GAAP and the applicable rules
and regulations of the SEC, the consolidated financial position of Beacon and
its Subsidiaries or Beacon Partnership and its Subsidiaries, as the case may be,
in each case taken as a whole, as of the dates thereof and the consolidated
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in Schedule 2.6(b) to the Beacon Disclosure Letter, Beacon has no
Subsidiaries which are not consolidated for accounting purposes. Except for
liabilities and obligations set forth in the Beacon SEC Documents or in Schedule
2.6(c) to the Beacon Disclosure Letter, neither Beacon nor any of the Beacon
Subsidiaries has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) required by GAAP to be set forth on a
consolidated balance sheet of Beacon or in the notes thereto and which,
individually or in the aggregate, would have a Beacon Material Adverse Effect.
2.7 Absence of Certain Changes or Events. Except as disclosed in the Beacon
SEC Documents or in Schedule 2.7 to the Beacon Disclosure Letter, since the date
of the most recent audited financial statements included in Beacon SEC Documents
(the "Beacon Financial Statement Date"), Beacon and its Subsidiaries have
conducted their business only in the ordinary course (taking into account prior
practices, including the acquisition of properties and issuance of securities)
and there has not been (a) any material adverse change in the business,
financial condition or results of operations of Beacon and its Subsidiaries
taken as a whole (a "Beacon Material Adverse Change"), nor has there been any
occurrence or circumstance that with the passage of time would reasonably be
expected to result in a Beacon Material Adverse Change, (b) except for regular
quarterly distributions not in excess of $.56 per Beacon Preferred Share or
Beacon Preferred Unit or $.50 per Beacon Common Share or Beacon OP Unit (other
than Beacon Preferred Units), respectively (or, with respect to the period
commencing on the date hereof and ending on the Closing Date, distributions as
necessary to maintain REIT status), in each case with customary record and
payment dates, any authorization, declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to the Beacon Common Shares, Beacon Preferred Shares or Beacon OP Units, (c) any
split, combination or reclassification of the Beacon Common Shares or the Beacon
OP Units or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for, or
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giving the right to acquire by exchange or exercise, shares of stock of Beacon
or partnership interests in Beacon Partnership or any issuance of an ownership
interest in, any Beacon Subsidiary, (d) any damage, destruction or loss, whether
or not covered by insurance, that has or would have a Beacon Material Adverse
Effect, (e) any change in accounting methods, principles or practices by Beacon
or any Beacon Subsidiary materially affecting its assets, liabilities or
business, except insofar as may have been disclosed in Beacon SEC Documents or
required by a change in GAAP, or (f) any amendment of any employment,
consulting, severance, retention or any other agreement between Beacon and any
officer or director of Beacon.
2.8 Litigation. Except as disclosed in the Beacon SEC Documents or in
Schedule 2.8 to the Beacon Disclosure Letter, and other than personal injury and
other routine tort litigation arising from the ordinary course of operations of
Beacon and its Subsidiaries (a) which are covered by adequate insurance or (b)
for which all material costs and liabilities arising therefrom are reimbursable
pursuant to common area maintenance or similar agreements, there is no suit,
action or proceeding pending (in which service of process has been received by
an employee of Beacon or a Beacon Subsidiary) or, to the Knowledge of Beacon (as
hereinafter defined), threatened in writing against or affecting Beacon or any
Beacon Subsidiary that, individually or in the aggregate, could reasonably be
expected to (i) have a Beacon Material Adverse Effect or (ii) prevent the
consummation of any of the transactions contemplated by this Agreement, nor is
there any judgment, decree, injunction, rule or order of any court or
Governmental Entity or arbitrator outstanding against Beacon or any of its
Subsidiaries having, or which, insofar as reasonably can be foreseen, in the
future would have, any such effect. Notwithstanding the foregoing, (y) Schedule
2.8 to the Beacon Disclosure Letter sets forth each and every material uninsured
claim, equal employment opportunity claim and claim relating to sexual
harassment and/or discrimination pending or, to the Knowledge of Beacon,
threatened as of the date hereof, in each case with a brief summary of such
claim or threatened claim and (z) no claim has been made under any directors'
and officers' liability insurance policy maintained at any time by Beacon or any
of the Beacon Subsidiaries; provided, however, that if Beacon or Beacon
Partnership has prepared Schedule 2.8 to the Beacon Disclosure Letter in good
faith, EOP hereby covenants not to exercise any right that it may have to
terminate this Agreement pursuant to Section 7.1(b), based solely on any breach
of representation of Beacon and Beacon Partnership contained in this sentence;
provided further, however, that nothing contained in this Section 2.8 shall
affect EOP's right to terminate this Agreement pursuant to Section 7.1(b) with
respect to any matter described in clause (y) or (z) above that occurs or arises
after the date hereof.
2.9 Properties.
(a) Except as provided in Schedule 2.2 or Schedule 2.9(a) to the Beacon
Disclosure Letter, Beacon or the Beacon Subsidiary set forth on Schedule 2.2 to
the Beacon Disclosure Letter owns fee simple title to each of the real
properties identified in Schedule 2.2 to the Beacon Disclosure Letter (the
"Beacon Properties"), which are all of the real estate properties owned by them,
in each case (except as provided below) free and clear of liens, mortgages or
deeds of trust, claims against title, charges which are liens, security
interests or other encumbrances on title ("Encumbrances"). Except as set forth
in Schedule 2.2 to the Beacon Disclosure Letter, no other Person has any
ownership interest in any of the Beacon Properties, and any such ownership
interest so scheduled does not materially detract from the value of the Beacon
Subsidiary's interest in, or materially interfere with the present use of, any
of the Beacon Properties subject thereto or affected thereby. Except as set
forth in Schedule 2.9(a) to the Beacon Disclosure Letter, none of the Beacon
Properties is subject to any restriction on the sale or other disposition
thereof or on the financing or release of financing thereon. The Beacon
Properties are not subject to any rights of way, written agreements, laws,
ordinances and regulations affecting building use or occupancy, or reservations
of an interest in title (collectively, "Property Restrictions") or Encumbrances,
except for (i) Property Restrictions and Encumbrances set forth in the Beacon
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law or
any governmental body or authority with respect to real property, including
zoning regulations, which do not materially adversely affect the current use of
any Beacon Property, (iii) Property Restrictions and Encumbrances disclosed on
existing title reports or existing surveys or subsequently granted by Beacon or
the Beacon Subsidiary, which Property Restrictions and Encumbrances, in any
event, do not materially detract from the value of, or materially interfere with
the present use of, any of the Beacon Properties subject thereto or affected
thereby and (iv) liens for real estate taxes not yet due and payable,
mechanics', carriers', workmen's, repairmen's liens
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and other Encumbrances and Property Restrictions, if any, which, individually or
in the aggregate, do not materially detract from the value of or materially
interfere with the present use of any of the Beacon Property subject thereto or
affected thereby. Schedule 2.9(a) to the Beacon Disclosure Letter lists each of
the Beacon Properties which are under development as of the date of this
Agreement and describes the status of such development as of the date hereof.
(b) Except as provided in Schedule 2.2 or Schedule 2.9(b) to the Beacon
Disclosure Letter, valid policies of title insurance have been issued insuring
the applicable Beacon Subsidiary's fee simple title or leasehold estate, as the
case may be, to the Beacon Properties owned by it in amounts at least equal to
the purchase price therefor paid by such Beacon Subsidiary, subject only to the
matters disclosed above and in the Beacon Disclosure Letter. Such policies are,
at the date hereof, in full force and effect. No claim has been made against any
such policy.
(c) Except as provided in Schedule 2.9(c) to the Beacon Disclosure Letter,
Beacon has no Knowledge (i) that, any certificate, permit or license from any
governmental authority having jurisdiction over any of the Beacon Properties or
any agreement, easement or other right which is necessary to permit the lawful
use and operation of the buildings and improvements on any of the Beacon
Properties or which is necessary to permit the lawful use and operation of all
driveways, roads and other means of egress and ingress to and from any of the
Beacon Properties has not been obtained and is not in full force and effect, or
of any pending threat of modification or cancellation of any of same which would
have a material adverse effect on such Beacon Property, (ii) of any written
notice of any violation of any federal, state or municipal law, ordinance,
order, regulation or requirement materially and adversely affecting any of the
Beacon Properties issued by any governmental authority, (iii) of any structural
defects relating to any Beacon Property which would have a material adverse
effect on such Beacon Property, (iv) of any Beacon Property whose building
systems are not in working order so as to have a material adverse effect on such
Beacon Property, or (v) of any physical damage to any Beacon Property which
would have a material adverse effect on such Beacon Property for which there is
no insurance in effect covering the cost of the restoration.
(d) Neither Beacon nor any Beacon Subsidiary has received any written or
published notice to the effect that (i) any condemnation or rezoning proceedings
are pending or threatened with respect to any of the Beacon Properties or (ii)
any zoning, building or similar law, code, ordinance, order or regulation is or
will be violated by the continued maintenance, operation or use of any buildings
or other improvements on any of the Beacon Properties or by the continued
maintenance, operation or use of the parking areas. Except as set forth in
Schedule 2.9(d) to the Beacon Disclosure Letter, all work required to be
performed, payments required to be made and actions required to be taken other
than those which would not have a material adverse effect on any of Beacon or
the Beacon Subsidiaries prior to the date hereof pursuant to any agreement
entered into with a governmental body or authority in connection with a site
approval, zoning reclassification or other similar action relating to any Beacon
Properties (e.g., Local Improvement District, Road Improvement District,
Environmental Mitigation) have been performed, paid or taken, as the case may
be, and Beacon has no Knowledge of any planned or proposed work, payments or
actions that may be required after the date hereof pursuant to such agreements,
except as set forth in development or operating budgets for such Beacon
Properties delivered to EOP and EOP Partnership prior to the date hereof.
(e) The rent roll previously provided by Beacon to EOP (the "Beacon Rent
Roll") lists each Beacon Space Lease (as defined below) in effect as of April 1,
1997. "Beacon Space Lease" means each lease or other right of occupancy
affecting or relating to a property in which Beacon Partnership (or an entity in
which it directly or indirectly has an interest) is the landlord, either
pursuant to the terms of the lease agreement or as successor to any prior
landlord, but excluding any ground lease. Beacon has made available to EOP true,
correct and complete copies of all Beacon Space Leases, including all
amendments, modifications, supplements, renewals, extensions and guarantees
related thereto, as of the date hereof. Except for discrepancies that, either
individually or in the aggregate, would not reasonably be expected to have a
Beacon Material Adverse Effect, all information set forth in the Beacon Rent
Roll is true, correct and complete as of the date thereof. Except as set forth
in a delinquency report made available to EOP, neither Beacon or any Beacon
Subsidiary, on the one hand, nor, to the knowledge of Beacon or Beacon
Partnership, any other party, on the
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other hand, is in monetary default under any Beacon Space Lease, except for such
defaults that would not reasonably be expected to have a Beacon Material Adverse
Effect.
2.10 Environmental Matters. Except as disclosed in the Beacon SEC
Documents, (a) none of Beacon, any of the Beacon Subsidiaries or, to Beacon's
Knowledge, any other Person has caused or permitted the unlawful presence of any
hazardous substances, hazardous materials, toxic substances or waste materials
(collectively, "Hazardous Materials") on or under any of the Beacon Properties
and none of Beacon nor any of the Beacon Subsidiaries has any knowledge of the
presence of any Hazardous Materials on or under any of the Beacon Properties or
(b) none of Beacon, any of the Beacon Subsidiaries, or to Beacon's Knowledge,
any other Person, has caused or permitted any unlawful spills, releases,
discharges or disposal of Hazardous Materials to have occurred or be presently
occurring on or from the Beacon Properties as a result of any construction on or
operation and use of such properties and none of Beacon nor any of the Beacon
Subsidiaries has any knowledge of any spills, releases, discharges or disposal
of Hazardous Materials to have occurred or be presently occurring on, under or
from the Beacon Properties as a result of any construction on or operation and
use of such properties, in each of the foregoing cases, which presence or
occurrence would, individually or in the aggregate, have a Beacon Material
Adverse Effect; and in connection with the construction on or operation and use
of the Beacon Properties, Beacon and the Beacon Subsidiaries have not failed to
comply in any material respect with all applicable local, state and federal
environmental laws, regulations, ordinances and administrative and judicial
orders relating to the generation, recycling, reuse, sale, storage, handling,
transport and disposal of any Hazardous Materials, except to the extent such
failure to comply, individually or in the aggregate, would not have a Beacon
Material Adverse Effect. Beacon has previously delivered or made available to
EOP complete copies of all final versions of environmental investigations and
testing or analysis made by or on behalf of Beacon or any of the Beacon
Subsidiaries that are in the possession of any of them with respect to the
environmental condition of the Beacon Properties.
2.11 Related Party Transactions. Set forth in Schedule 2.11 to the Beacon
Disclosure Letter is a list of all material arrangements, agreements and
contracts entered into by Beacon or any of the Beacon Subsidiaries with (a) any
investment banker or financial advisor, (b) any person who is an officer,
director or Affiliate (as defined below) of Beacon or any of its Subsidiaries,
any relative of any of the foregoing or any entity of which any of the foregoing
is an Affiliate or (c) any person who acquired Beacon Common Shares or Beacon OP
Units in a private placement. Such documents, copies of all of which have
previously been delivered or made available to EOP, are listed in Schedule 2.11
to the Beacon Disclosure Letter. As used in this Agreement, the term "Affiliate"
shall have the same meaning as such term is defined in Rule 405 promulgated
under the Securities Act.
2.12 Employee Benefits. As used herein, the term "Employee Plan" includes
any pension, retirement, savings, disability, medical, dental, health, life,
death benefit, group insurance, profit sharing, deferred compensation, stock
option, bonus, incentive, vacation pay, tuition reimbursement, severance pay, or
other employee benefit plan, trust, agreement, contract, agreement, policy or
commitment (including, without limitation, any pension plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended,
and the rules and regulations promulgated thereunder ("ERISA") ("Pension Plan"),
and any welfare plan as defined in Section 3(1) of ERISA ("Welfare Plan")),
whether any of the foregoing is funded, insured or self-funded, written or oral,
(i) sponsored or maintained by Beacon or its Subsidiaries (each a "Controlled
Group Member") and covering any Controlled Group Member's active or former
employees (or their beneficiaries), (ii) to which any Controlled Group Member is
a party or by which any Controlled Group Member (or any of the rights,
properties or assets thereof) is bound or (iii) with respect to which any
current Controlled Group Member may otherwise have any material liability
(whether or not such Controlled Group Member still maintains such Employee
Plan). Each Employee Plan is listed on Schedule 2.12 to the Beacon Disclosure
Letter. With respect to the Employee Plans:
(a) Except as disclosed in Schedule 2.12(a) to the Beacon Disclosure
Letter, no Controlled Group Member has any continuing liability under any
Welfare Plan which provides for continuing benefits or coverage for any
participant or any beneficiary of a participant after such participant's
termination of employment, except as may be required by Section 4980B of
the Code or Section 601 (et seq.) of
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ERISA, or under any applicable state law, and at the expense of the
participant or the beneficiary of the participant.
(b) Each Employee Plan complies in all material respects with the
applicable requirements of ERISA and any other applicable law governing
such Employee Plan, and, to the best Knowledge of Beacon, each Employee
Plan has at all times been properly administered in all material respects
in accordance with all such requirements of law, and in accordance with its
terms and the terms of any applicable collective bargaining agreement to
the extent consistent with all such requirements of law. Each Pension Plan
which is intended to be qualified is qualified under Section 401(a) of the
Code, has received a favorable determination letter from the IRS stating
that such Plan meets the requirements of Section 401(a) of the Code and
that the trust associated with such Plan is tax-exempt under Section 501(a)
of the Code and, to the best Knowledge of Beacon, no event has occurred
which would jeopardize the qualified status of any such plan or the tax
exempt status of any such trust under Sections 401(a) and Section 501(a) of
the Code, respectively. No lawsuits, claims (other than routine claims for
benefits) or complaints to, or by, any person or governmental entity have
been filed, are pending, to the best Knowledge of Beacon, threatened with
respect to any Employee Plan and, to the best Knowledge of Beacon, there is
no fact or contemplated event which would be expected to give rise to any
such lawsuit, claim (other than routine claims for benefits) or complaint
with respect to any Pension Plan. Without limiting the foregoing, the
following are true with respect to each Employee Plan:
(i) all Controlled Group Members have complied in all material
respects with the reporting and disclosure requirements of ERISA, the
Code, or both, with respect to each Employee Plan and no Controlled
Group Member has incurred any material liability in connection with
such reporting or disclosure;
(ii) all contributions and payments with respect to Employee Plans
that are required to be made by a Controlled Group Member with
respect to periods ending on or before the Closing Date (including
periods from the first day of the current plan or policy year to the
Closing Date) have been, or will be, made or accrued before the
Closing Date in accordance with the appropriate plan document,
actuarial report, collective bargaining agreements or insurance
contracts or arrangements or as otherwise required by ERISA or the
Code; and
(iii) with respect to each such Employee Plan, to the extent
applicable, Beacon has delivered to or has made available to EOP true
and complete copies of (A) plan documents, or any and all other
documents that establish the existence of the plan, trust,
arrangement, contract, policy or commitment and all amendments
thereto, (B) the most recent determination letter, if any, received
from the IRS, (C) the three most recent Form 5500 Annual Reports (and
all schedules and reports relating thereto) and actuarial reports and
(D) all related trust agreements, insurance contract or other funding
agreements that implement each such Employee Plan.
(c) With respect to each Employee Plan, to the best Knowledge of
Beacon, there has not occurred, and no person or entity is contractually
bound to enter into, any "prohibited transaction" within the meaning of
Section 4975(c) of the Code or Section 406 of ERISA, which transaction is
not exempt under Section 4975(d) of the Code or Section 408 of ERISA and
which could subject Beacon or any Controlled Group Member to material
liability.
(d) Except as disclosed in Schedule 2.12(d) to the Beacon Disclosure
Letter, no Controlled Group Member has maintained or been obligated to
contribute to any Employee Plan subject to Code Section 412 or Title IV of
ERISA. No Employee Plan subject to Code Section 412 or Title IV of ERISA
has been terminated.
(e) With respect to each pension plan maintained by any Controlled
Group Member, such Plans provide the Plan Sponsor the authority to amend or
terminate the Plan at any time, subject to applicable requirements of ERISA
and the Code.
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2.13 Employee Policies. No employee handbook of Beacon or any of the Beacon
Subsidiaries is currently in effect. Schedule 2.13 to the Beacon Disclosure
Letter fairly and accurately summarizes all material employee policies, vacation
policies and payroll policies.
2.14 Taxes.
(a) Each of Beacon and the Beacon Subsidiaries (A) has filed all Tax
returns and reports required to be filed by it (after giving effect to any
filing extension properly granted by a Governmental Entity having authority to
do so) and all such returns and reports are accurate and complete in all
material respects, and (B) has paid (or Beacon has paid on its behalf) all Taxes
(as defined below) shown on such returns and reports as required to be paid by
it, except those where the failure to file such tax returns and reports or pay
such Taxes would not have a Beacon Material Adverse Effect. The most recent
audited financial statements contained in the Beacon SEC Documents reflect an
adequate reserve for all material Taxes payable by Beacon and the Beacon
Subsidiaries for all taxable periods and portions thereof through the date of
such financial statements. Since the Beacon Financial Statement Date, Beacon has
incurred no liability for taxes under Sections 857(b), 860(c) or 4981 of the
Code, including without limitation any tax arising from a prohibited transaction
described in Section 857(b)(6) of the Code, and neither Beacon nor any Beacon
Subsidiary has incurred any material liability for taxes other than in the
ordinary course of business. No event has occurred, and no condition or
circumstance exists, which presents a material risk that any material Tax
described in the preceding sentence will be imposed upon Beacon. To the
Knowledge of Beacon, no deficiencies for any Taxes have been proposed, asserted
or assessed against Beacon or any of the Beacon Subsidiaries, and no requests
for waivers of the time to assess any such Taxes are pending. As used in this
Agreement, "Taxes" shall include all federal, state, local and foreign income,
property, sales, franchise, employment, excise and other taxes, tariffs or
governmental charges of any nature whatsoever, together with penalties, interest
or additions to Tax with respect thereto.
(b) Beacon and BeaMetFed, Inc. ("BeaMet") (i) for all taxable years
commencing with 1994 (or, in the case of BeaMet, 1995) through December 31, 1996
has been subject to taxation as a real estate investment trust (a "REIT") within
the meaning of Section 856 of the Code and has satisfied all requirements to
qualify as a REIT for such years, (ii) has operated since December 31, 1996 to
the date of this representation, and intends to continue to operate, in such a
manner as to qualify as a REIT for the taxable year ending December 31, 1997 and
for the taxable year of Beacon ending on the Closing Date (or, in the case of
BeaMet, on December 31, 1998), and (iii) has not taken or omitted to take any
action which would reasonably be expected to result in a challenge to its status
as a REIT and, to Beacon's Knowledge, no such challenge is pending or
threatened. Each Beacon Subsidiary which is a partnership, joint venture or
limited liability company (i) has been since its formation and continues to be
treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation and (ii) has not since
the later of its formation or the acquisition by Beacon of a direct or indirect
interest therein, owned any assets (including, without limitation, securities)
that would cause Beacon to violate Section 856(c)(5) of the Code. No Beacon
Subsidiary (other than BeaMet, the Management Company, the Design Company and
the Construction Company) is a corporation (or an entity that would, under
applicable federal income tax principles, be classified as an association
taxable as a corporation). Beacon Partnership is not a publicly traded
partnership within the meaning of Section 7704 of the Code. Neither Beacon nor
any Beacon Subsidiary holds any asset (x) the disposition of which would be
subject to rules similar to Section 1374 of the Code as a result of a notice
under IRS Notice 88-19 or (y) which is subject to a consent filed pursuant to
Section 341(f) of the Code and the regulations thereunder.
2.15 No Payments to Employees, Officers or Directors. Schedule 2.15 to the
Beacon Disclosure Letter contains a true and complete list of all arrangements,
agreements or plans pursuant to which cash and non-cash payments which will
become payable (and the maximum aggregate amount which may be payable
thereunder) to each employee, officer or director of Beacon or any Beacon
Subsidiary as a result of the Merger or a termination of service subsequent to
the consummation of the Merger. Except as described in Schedule 2.15 to the
Beacon Disclosure Letter, or as otherwise provided for in this Agreement, there
is no employment or severance contract, or other agreement requiring payments,
cancellation of indebtedness or other obligation to be made on a change of
control or otherwise as a result of the consummation of any of the
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transactions contemplated by this Agreement or as a result of a termination of
service subsequent to the consummation of any of the transactions contemplated
by this Agreement, with respect to any employee, officer or director of Beacon
or any Beacon Subsidiary.
2.16 Broker; Schedule of Fees and Expenses. No broker, investment banker,
financial advisor or other person, other than Morgan Stanley & Co.,
Incorporated, the fees and expenses of which are described in the engagement
letter dated September 12, 1997, between Morgan Stanley & Co., Incorporated and
Beacon, a true, correct and complete copy of which has previously been given to
EOP, is entitled to any broker's, finder's, financial advisor's or other similar
fee or commission in connection with the transactions contemplated hereby based
upon arrangements made by or on behalf of Beacon or any Beacon Subsidiary.
2.17 Compliance with Laws. Neither Beacon nor any of the Beacon
Subsidiaries has violated or failed to comply with any statute, law, ordinance,
regulation, rule, judgment, decree or order of any Governmental Entity
applicable to its business, properties or operations, except to the extent that
such violation or failure would not have a Beacon Material Adverse Effect.
2.18 Contracts; Debt Instruments.
(a) Neither Beacon nor any Beacon Subsidiary has received a written notice
that Beacon or any Beacon Subsidiary is in violation of or in default under (nor
to the Knowledge of Beacon does there exist any condition which upon the passage
of time or the giving of notice or both would cause such a violation of or
default under) any material loan or credit agreement, note, bond, mortgage,
indenture, lease, permit, concession, franchise, license or any other material
contract, agreement, arrangement or understanding, to which it is a party or by
which it or any of its properties or assets is bound, nor to the Knowledge of
Beacon does such a violation or default exist, except to the extent that such
violation or default, individually or in the aggregate, would not have a Beacon
Material Adverse Effect.
(b) Except for any of the following expressly identified in Beacon SEC
Documents, Schedule 2.18(b) to the Beacon Disclosure Letter sets forth a list of
each material loan or credit agreement, note, bond, mortgage, indenture and any
other agreement or instrument pursuant to which any Indebtedness (as defined
below) of Beacon or any of the Beacon Subsidiaries, other than Indebtedness
payable to Beacon or a Beacon Subsidiary is outstanding or may be incurred. For
purposes of this Section 2.18, "Indebtedness" shall mean (i) indebtedness for
borrowed money, whether secured or unsecured, (ii) obligations under conditional
sale or other title retention agreements relating to property purchased by such
person, (iii) capitalized lease obligations, (iv) obligations under interest
rate cap, swap, collar or similar transaction or currency hedging transactions
(valued at the termination value thereof) and (v) guarantees of any such
indebtedness of any other person.
(c) To the extent not set forth in response to the requirements of Section
2.18(b), Schedule 2.18(c) to the Beacon Disclosure Letter sets forth each
interest rate cap, interest rate collar, interest rate swap, currency hedging
transaction, and any other agreement relating to a similar transaction to which
Beacon or any Beacon Subsidiary is a party or an obligor with respect thereto.
(d) Except as set forth in Schedule 2.18(d) of the Beacon Disclosure
Letter, neither Beacon nor any of the Beacon Subsidiaries is a party to any
agreement which would restrict any of them from prepaying any of their
Indebtedness without penalty or premium at any time or which requires any of
them to maintain any amount of Indebtedness with respect to any of the Beacon
Properties.
(e) Neither Beacon nor any Beacon Subsidiary is a party to any agreement
relating to the management of any Beacon Property by any Person other than the
Management Company, Beacon Management L.P. and Beacon Properties South Station
Management Company, L.P.
(f) Neither Beacon nor any of the Beacon Subsidiaries is a party to any
agreement pursuant to which Beacon or any Beacon Subsidiary manages or provides
services with respect to any real properties other than Beacon Properties,
except for the agreements described in Schedule 2.18(f) to the Beacon Disclosure
Letter (the "Outside Property Management Agreements").
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(g) Beacon has delivered to EOP prior to the date of this Agreement a true
and complete capital budget relating to budgeted construction. Schedule 2.18(g)
to the Beacon Disclosure Letter lists all material agreements entered into by
Beacon or any of the Beacon Subsidiaries relating to the development or
construction of, or additions or expansions to, any Beacon Real Properties (or
any properties with respect to which Beacon has executed as of the date of this
Agreement a purchase agreement or other similar agreement) which are currently
in effect and under which Beacon or any of the Beacon Subsidiaries currently
has, or expects to incur, an obligation in excess of $250,000. True, correct and
complete copies of such agreements have previously been delivered or made
available to EOP.
(h) Schedule 2.18(h) to the Beacon Disclosure Letter lists all agreements
entered into by Beacon or any Beacon Subsidiary providing for the sale of, or
option to sell, any Beacon Properties or the purchase of, or option to purchase,
by Beacon or any Beacon Subsidiary, on the one hand, or the other party thereto,
on the other hand, any real estate which are currently in effect.
(i) Except as set forth in Schedule 2.18(i) to the Beacon Disclosure
Letter, neither Beacon nor any Beacon Subsidiary has any material continuing
contractual liability (A) for indemnification or otherwise under any agreement
relating to the sale of real estate previously owned, whether directly or
indirectly, by Beacon or any Beacon Subsidiary or (B) to pay any additional
purchase price for any of the Beacon Properties.
(j) Except as set forth in Schedule 2.18(j) to the Beacon Disclosure
Letter, neither Beacon nor any Beacon Subsidiary has entered into or is subject,
directly or indirectly, to any "Tax Protection Agreements." As used herein, a
Tax Protection Agreement is an agreement, oral or written, (A) that has as one
of its purposes to permit a person or entity to take the position that such
person or entity could defer federal taxable income that otherwise might have
been recognized upon a transfer of property to the Beacon Partnership or any
other Beacon Subsidiary that is treated as a partnership for federal income tax
purposes, and (B) that (i) prohibits or restricts in any manner the disposition
of any assets of Beacon or any Beacon Subsidiary, (ii) requires that Beacon or
any Beacon Subsidiary maintain, or put in place, or replace, indebtedness,
whether or not secured by one or more of the Beacon Properties, or (iii)
requires that Beacon or any Beacon Subsidiary offer to any person or entity at
any time the opportunity to guarantee or otherwise assume, directly or
indirectly, the risk of loss for federal income tax purposes for indebtedness or
other liabilities of Beacon or any Beacon Subsidiary.
2.19 Opinion of Financial Advisor. Beacon has received the oral opinion of
Morgan Stanley & Co., Incorporated or an affiliate thereof, satisfactory to
Beacon, to the effect that the proposed consideration to be received by the
holders of Beacon Common Shares pursuant to the Merger is fair to such holders
from a financial point of view.
2.20 State Takeover Statutes. Beacon has taken all action necessary to
exempt the transactions contemplated by this Agreement between EOP and Beacon
and its Affiliates from the operation of any "fair price," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under the state or federal laws of the United States or similar
statute or regulation (a "Takeover Statute").
2.21 Investment Company Act of 1940. Neither Beacon nor any of the Beacon
Subsidiaries is, or at the Effective Time will be, required to be registered
under the Investment Company Act of 1940, as amended (the "1940 Act").
2.22 Definition of Knowledge of Beacon. As used in this Agreement, the
phrase "Knowledge of Beacon" (or words of similar import) means the knowledge of
those individuals identified in Schedule 2.22 to the Beacon Disclosure Letter.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF EOP
Except as set forth in the letter of even date herewith signed by the
President or an Executive Vice President of EOP and delivered to Beacon prior to
the execution hereof (the "EOP Disclosure Letter"), EOP and EOP Partnership
represent and warrant to Beacon and Beacon Partnership as follows:
3.1 Organization, Standing and Power of EOP. EOP is a real estate
investment trust duly organized, validly existing and in good standing under the
laws of Maryland and has all requisite power and authority to own, operate,
lease and encumber its properties and carry on its business as now being
conducted. EOP is duly qualified or licensed to do business as a foreign trust
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
material adverse effect on the business, properties, assets, financial condition
or results of operations of EOP and the Subsidiaries of EOP (collectively, "EOP
Subsidiaries"), taken as a whole (an "EOP Material Adverse Effect"). EOP has
delivered to Beacon complete and correct copies of the EOP Declaration of Trust
and the EOP Bylaws, as amended or supplemented to the date of this Agreement.
3.2 EOP Subsidiaries.
(a) Schedule 3.2(a) to the EOP Disclosure Letter sets forth (i) each EOP
Subsidiary, (ii) the ownership interest therein of EOP, (iii) if not wholly
owned by EOP, the identity and ownership interest of each of the other owners of
such EOP Subsidiary, (iv) each office property and other commercial property
owned by such Subsidiary, and (v) if not wholly owned by such Subsidiary, the
identity and ownership interest of each of the other owners of such property.
(b) Except as set forth in Schedule 3.2(b) to the EOP Disclosure Letter,
(i) all the outstanding shares of capital stock of each EOP Subsidiary that is a
corporation have been duly authorized, validly issued and are (A) fully paid and
nonassessable and not subject to preemptive rights, (B) owned by EOP or by
another EOP Subsidiary and (C) owned free and clear of all Liens and (ii) all
equity interests in each EOP Subsidiary that is a partnership, joint venture,
limited liability company or trust which are owned by EOP, by another EOP
Subsidiary or by EOP and another EOP Subsidiary are owned free and clear of all
Liens. Each EOP Subsidiary that is a corporation is duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to own,
operate, lease and encumber its properties and carry on its business as now
being conducted, and each EOP Subsidiary that is a partnership, limited
liability company or trust is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has the
requisite power and authority to own, operate, lease and encumber its properties
and carry on its business as now being conducted. Each EOP Subsidiary is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have an EOP Material Adverse Effect.
Complete and correct copies of the Articles of Incorporation, Bylaws,
organization documents and partnership, joint venture and operating agreements
of each EOP Subsidiary, as amended to the date of this Agreement, have been
previously delivered or made available to Beacon. No effective amendment has
been made to the EOP Partnership Agreement since September 3, 1997.
3.3 Capital Structure.
(a) The authorized shares of beneficial interest of EOP consist of
750,000,000 EOP Common Shares, 152,180,770 of which are issued and outstanding
as of September 15, 1997 (including 502,740 EOP Common Shares owned by EOP
Partnership), and 100,000,000 preferred shares of beneficial interest, none of
which are issued or outstanding as of the date of this agreement.
(b) Set forth in Schedule 3.3(b) to the EOP Disclosure Letter is a true and
complete list of the following: (i) each qualified or nonqualified option to
purchase EOP's shares of beneficial interest granted
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under the Employee Share Option and Restricted Share Plan or any other formal or
informal arrangement (collectively, the "EOP Options"); and (ii) all other
warrants or other rights to acquire EOP's shares of beneficial interest, all
limited share appreciation rights, phantom shares, dividend equivalents,
performance units and performance shares which are outstanding on the date of
this Agreement. Schedule 3.3(b) to the EOP Disclosure Letter sets forth the EOP
Options granted to EOP's Chief Executive Officer and four other most highly
compensated officers, the date of each grant, the status of each EOP Option as
qualified or nonqualified under Section 422 of the Code, the number of EOP
Common Shares subject to each EOP Option, the number and type of EOP's shares of
beneficial interest subject to EOP Options that are currently exercisable, the
exercise price per share, and the number and type of such shares subject to
share appreciation rights. On the date of this Agreement, except as set forth in
this Section 3.3 or in Schedule 3.3(b) to the EOP Disclosure Letter, no shares
of beneficial interest of EOP were outstanding or reserved for issuance (except
for EOP Common Shares reserved for issuance upon redemption of EOP OP Units).
(c) All outstanding shares of beneficial interest of EOP are duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes or other indebtedness
of EOP having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which shareholders of EOP
may vote.
(d) Except (i) as set forth in this Section 3.3 or in Schedule 3.3(d) to
the EOP Disclosure Letter and (ii) EOP OP Units, which may be redeemed for EOP
Common Shares, as of the date of this Agreement, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which EOP or any EOP Subsidiary is a
party or by which such entity is bound, obligating EOP or any EOP Subsidiary to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of beneficial interest, voting securities or other ownership interests of
EOP or any EOP Subsidiary or obligating EOP or any EOP Subsidiary to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking (other than to EOP or an EOP
Subsidiary).
(e) As of the date hereof, 165,248,223 EOP OP Units are validly issued and
outstanding, fully paid and nonassessable and not subject to preemptive rights,
of which 155,196,855 are owned by EOP and EOP Subsidiaries. Schedule 3.3(e) to
the EOP Disclosure Schedule sets forth the name of each holder of EOP OP Units
and the number of EOP OP Units owned by each such holder as of the date of this
Agreement. The EOP OP Units are subject to no restrictions except as set forth
in the EOP Partnership Agreement. EOP Partnership has not issued or granted and
is not a party to any outstanding commitments of any kind relating to, or any
presently effective agreements or understandings with respect to, interests in
EOP Partnership, whether issued or unissued, or securities convertible or
exchangeable into interests in EOP Partnership.
(f) All dividends on EOP Common Shares and all distributions on EOP OP
Units which have been declared prior to the date of this Agreement have been
paid in full, except that the dividends payable on EOP Common Shares (along with
the corresponding distributions payable on EOP OP Units) which were declared on
September 11, 1997 and are payable on October 9, 1997 have not yet been paid.
(g) The EOP Common Shares and the EOP Preferred Shares to be issued by EOP,
and the EOP OP Units to be issued by the EOP Partnership pursuant to this
Agreement have been duly authorized for issuance, and upon issuance will be duly
and validly issued, fully paid and nonassessable.
3.4 Other Interests. Except for interests in the EOP Subsidiaries and
certain other entities as set forth in Schedule 3.4(a) or Schedule 3.5 to the
EOP Disclosure Letter, neither EOP nor any of its Subsidiaries owns directly or
indirectly any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust or other entity (other
than investments in short-term investment securities). With respect to such
other interests, EOP or EOP Partnership is a partner or stockholder in good
standing, and owns such interests free and clear of all Liens. Neither EOP nor
any of the EOP Subsidiaries is in breach of any provision of any agreement,
document or contract governing its rights in or to the interests owned or held
by it, all of which agreements, documents and contracts are (a) set forth in
Schedule 3.4(b) to the EOP Disclosure Letter (or disclosed in the EOP SEC
Documents (as defined below)), (b) unmodified except as described therein and
(c) in full force and effect. To the Knowledge of EOP (as defined in Section
3.19), the other
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parties to any such agreement, document or contract which is of a material
nature are not in breach of any of their respective obligations under such
agreements, documents or contracts.
3.5 Authority; Noncontravention; Consents.
(a) EOP has the requisite power and authority to enter into this Agreement
and, subject to the requisite shareholder approval of the Merger (the "EOP
Shareholder Approvals" and, together with the Beacon Shareholder Approvals, the
"Shareholder Approvals"), to consummate the transactions contemplated by this
Agreement to which EOP is a party. The execution and delivery of this Agreement
by EOP and the consummation by EOP of the transactions contemplated by this
Agreement to which EOP is a party have been duly authorized by all necessary
action on the part of EOP, except for and subject to the EOP Shareholder
Approvals and the requisite approval, if any is required, of the partners of EOP
Partnership. This Agreement has been duly executed and delivered by EOP and
constitutes a valid and binding obligation of EOP, enforceable against EOP in
accordance with and subject to its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights and
general principles of equity.
(b) EOP Partnership has the requisite partnership power and, subject to the
requisite partner approval of the Partnership Merger (if any), authority to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement to which EOP Partnership is a party. The execution and delivery
of this Agreement by EOP Partnership and the consummation by EOP Partnership of
the transactions contemplated by this Agreement to which EOP Partnership is a
party have been duly authorized by all necessary action on the part of EOP
Partnership, except for and subject to the EOP Shareholder Approvals. This
Agreement has been duly executed and delivered by EOP Partnership and
constitutes a valid and binding obligation of EOP Partnership, enforceable
against EOP Partnership in accordance with and subject to its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
(c) Except as set forth in Schedule 3.5(c)(1) to the EOP Disclosure Letter,
the execution and delivery of this Agreement by EOP and EOP Partnership do not,
and the consummation of the transactions contemplated by this Agreement to which
EOP or EOP Partnership is a party and compliance by EOP or EOP Partnership with
the provisions of this Agreement will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any material obligation or to loss of a material benefit under, or result in the
creation of any Lien upon any of the properties or assets of EOP or any EOP
Subsidiary under, (i) the EOP Declaration of Trust or the EOP Bylaws or the
comparable charter or organizational documents or partnership, operating or
similar agreement (as the case may be) of any other EOP Subsidiary, each as
amended or supplemented to the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to EOP or any EOP Subsidiary or their respective properties or assets
or (iii) subject to the governmental filings and other matters referred to in
the following sentence, any Laws applicable to EOP or any EOP Subsidiary or
their respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights, loss or Liens that
individually or in the aggregate would not (x) have an EOP Material Adverse
Effect or (y) prevent the consummation of the transactions contemplated by this
Agreement. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to EOP or any EOP Subsidiary in connection with the execution and
delivery of this Agreement or the consummation by EOP of any of the transactions
contemplated by this Agreement, except for (i) the filing with the SEC of (x)
the Registration Statement (as defined in Section 5.1) and (y) such reports
under Section 13 (a) of the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated by this Agreement, (ii) the
acceptance for record of the Articles of Merger by the Department, (iii) the
filing of the Certificate of Merger with the Secretary, (iv) such filings as may
be required in connection with the payment of any transfer and gains taxes and
(v) such other consents, approvals, orders, authorizations, registrations,
declarations and filings (A) as are set forth in Schedule 3.5(c)(2) to the EOP
Disclosure Letter or (B) as may be required under (x) federal, state or local
environmental laws or (y) the "blue sky" laws of various states, to the extent
applicable, or (C) which, if not obtained or made, would not prevent or delay in
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any material respect the consummation of any of the transactions contemplated by
this Agreement or otherwise prevent EOP from performing its obligations under
this Agreement in any material respect or have, individually or in the
aggregate, an EOP Material Adverse Effect.
3.6 SEC Documents; Financial Statements; Undisclosed Liabilities. EOP and
EOP Operating Partnership have filed all required reports, schedules, forms,
statements and other documents with the SEC since July 8, 1997 through the date
hereof (the "EOP SEC Documents"). Schedule 3.6(a) to the EOP Disclosure Letter
contains a complete list of all EOP SEC Documents filed by EOP under the
Exchange Act since July 8, 1997 and on or prior to the date of this Agreement.
All of the EOP SEC Documents (other than preliminary material), as of their
respective filing dates, complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act and, in each case, the
rules and regulations promulgated thereunder applicable to such EOP SEC
Documents. None of the EOP SEC Documents at the time of filing contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except to the extent such statements have been modified or
superseded by later EOP SEC Documents filed and publicly available prior to the
date of this Agreement. The consolidated financial statements of EOP and the EOP
Subsidiaries included in the EOP SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP (except, in the case of unaudited statements, as permitted
by the applicable rules and regulations of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly presented, in accordance with the applicable requirements of
GAAP and the applicable rules and regulations of the SEC, the consolidated
financial position of EOP and the EOP Subsidiaries, taken as a whole, as of the
dates thereof and the consolidated results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). Except for liabilities and obligations set forth in
the EOP SEC Documents or in Schedule 3.6(b) to the EOP Disclosure Letter,
neither EOP nor any EOP Subsidiary has any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) required by GAAP to
be set forth on a consolidated balance sheet of EOP or in the notes thereto and
which, individually or in the aggregate, would have an EOP Material Adverse
Effect.
3.7 Absence of Certain Changes or Events. Except as disclosed in the EOP
SEC Documents or in Schedule 3.7 to the EOP Disclosure Letter, since the date of
the most recent audited financial statements included in the EOP SEC Documents
(the "EOP Financial Statement Date"), EOP and the EOP Subsidiaries have
conducted their business only in the ordinary course (taking into account prior
practices, including the acquisition of properties and issuance of securities)
and there has not been (a) any material adverse change in the business,
financial condition or results of operations of EOP and the EOP Subsidiaries
taken as a whole (a "EOP Material Adverse Change"), nor has there been any
occurrence or circumstance that with the passage of time would reasonably be
expected to result in an EOP Material Adverse Change, (b) except for regular
quarterly distributions (in the case of EOP) not in excess of $.30 per EOP
Common Share, subject to rounding adjustments as necessary and with customary
record and payment dates, any authorization, declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to any of EOP's shares of beneficial interest, (c) any
split, combination or reclassification of any of EOP's shares of beneficial
interest, (d) any damage, destruction or loss, whether or not covered by
insurance, that has or would have an EOP Material Adverse Effect or (e) any
change made prior to the date of this Agreement in accounting methods,
principles or practices by EOP or any EOP Subsidiary materially affecting its
assets, liabilities or business, except insofar as may have been disclosed in
the EOP SEC Documents or required by a change in GAAP.
3.8 Litigation. Except as disclosed in the EOP SEC Documents or in Schedule
3.8 to the EOP Disclosure Letter, and other than personal injury and other
routine tort litigation arising from the ordinary course of operations of EOP
and the EOP Subsidiaries (a) which are covered by adequate insurance or (b) for
which all material costs and liabilities arising therefrom are reimbursable
pursuant to common area maintenance or similar agreements, there is no suit,
action or proceeding pending (in which service of process has been received by
an employee of EOP or an EOP Subsidiary) or, to the Knowledge of EOP (as defined
in
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Section 3.19), threatened in writing against or affecting EOP or any EOP
Subsidiary that, individually or in the aggregate, could reasonably be expected
to (i) have an EOP Material Adverse Effect or (ii) prevent the consummation of
any of the transactions contemplated by this Agreement, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against EOP or any EOP Subsidiary having, or which,
insofar as reasonably can be foreseen, in the future would have, any such
effect.
3.9 Properties.
(a) Except as set forth in Schedule 3.9(a) to the EOP Disclosure Letter,
EOP or one of the EOP Subsidiaries owns fee simple title to each of the real
properties listed in the EOP SEC Filings as owned by it (the "EOP Properties"),
except where the failure to own such title would not have an EOP Material
Adverse Effect.
(b) The EOP Properties are not subject to any Encumbrances or Property
Restrictions which reasonably could be expected to cause an EOP Material Adverse
Effect.
(c) Valid policies of title insurance have been issued insuring EOP's or
the applicable EOP Subsidiary's fee simple title or leasehold estate, as the
case may be, to the EOP Properties in amounts which are, except in the case of
San Felipe Plaza, at least equal to the purchase price thereof paid by EOP or
the applicable EOP Subsidiaries therefor, except where the failure to obtain
such title insurance would not have an EOP Material Adverse Effect.
(d) EOP has no Knowledge (i) that it has failed to obtain a certificate,
permit or license from any governmental authority having jurisdiction over any
of the EOP Properties where such failure would have an EOP Material Adverse
Effect or of any pending threat of modification or cancellation of any of the
same which would have an EOP Material Adverse Effect, (ii) of any written notice
of any violation of any federal, state or municipal law, ordinance, order, rule,
regulation or requirement affecting any of the EOP Properties issued by any
governmental authorities which would have an EOP Material Adverse Effect or
(iii) of any structural defects relating to EOP Properties, EOP Properties whose
building systems are not in working order, physical damage to any EOP Property
for which there is no insurance in effect covering the cost of restoration, any
current renovation or uninsured restoration, except such structural defects,
building systems not in working order, physical damage, renovation and
restoration which, in the aggregate, would not have an EOP Material Adverse
Effect.
(e) Except as set forth in Schedule 3.9(e) to the EOP Disclosure Letter,
neither EOP nor any of the EOP Subsidiaries has received any written or
published notice to the effect that (i) any condemnation or rezoning proceedings
are pending or threatened with respect to any of the EOP Properties or (ii) any
zoning, building or similar law, code, ordinance, order or regulation is or will
be violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the EOP Properties or by the continued maintenance,
operation or use of the parking areas, other than such notices which, in the
aggregate, would not have an EOP Material Adverse Effect.
(f) All work to be performed, payments to be made and actions to be taken
by EOP or the EOP Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection with
a site approval, zoning reclassification or similar action relating to any EOP
Properties (e.g., Local Improvement District, Road Improvement District,
Environmental Mitigation), has been performed, paid or taken, as the case may
be, except where the failure to do so would, in the aggregate, not have an EOP
Material Adverse Effect, and EOP has no Knowledge of any planned or proposed
work, payments or actions that may be required after the date hereof pursuant to
such agreements.
(g) The rent roll previously provided by EOP to Beacon (the "EOP Rent
Roll") lists each EOP Space Lease (as defined below) in effect as of the
respective dates in August 1997 indicated in the EOP Rent Roll. "EOP Space
Lease" means each lease or other right of occupancy affecting or relating to a
property in which EOP Partnership (or an entity in which it directly or
indirectly has an interest) is the landlord, either pursuant to the terms of the
lease agreement or as successor to any prior landlord, but excluding any ground
lease. EOP has made available to Beacon true, correct and complete copies of all
EOP Space Leases, including all amendments, modifications, supplements,
renewals, extensions and guarantees related thereto, as of the date
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hereof. Except for discrepancies that, either individually or in the aggregate,
would not reasonably be expected to have an EOP Material Adverse Effect, all
information set forth in the EOP Rent Roll is true, correct, and complete as of
the date thereof. Except as set forth in a delinquency report made available to
EOP, neither EOP nor any EOP Subsidiary, on the one hand, nor, to the Knowledge
of EOP or EOP Partnership, any other party, on the other hand, is in monetary
default under any EOP Space Lease, except for such defaults that would not
reasonably be expected to have a Material Adverse Effect.
3.10 Environmental Matters. Except as disclosed in the EOP SEC Documents or
on Schedule 3.10 to the EOP Disclosure Letter, (a) none of EOP, any of the EOP
Subsidiaries or, to EOP's Knowledge, any other Person has caused or permitted
the unlawful presence of any Hazardous Materials on or under any of the EOP
Properties or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on, under or from
the EOP Properties as a result of any construction on or operation and use of
such properties, which presence or occurrence would, individually or in the
aggregate, have an EOP Material Adverse Effect; and in connection with the
construction on or operation and use of the EOP Properties, EOP and the EOP
Subsidiaries have not failed to comply in any material respect with all
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials, except to the extent such failure to comply, individually or in the
aggregate, would not have an EOP Material Adverse Effect.
3.11 Taxes.
(a) Each of EOP and the EOP Subsidiaries (i) has filed all Tax returns and
reports required to be filed by it (after giving effect to any filing extension
properly granted by a Governmental Entity having authority to do so), and all
such returns and reports are accurate and complete in all material respects, and
(ii) has paid (or EOP has paid on its behalf) all Taxes shown on such returns
and reports as required to be paid by it except where the failure to file such
tax returns or reports and failure to pay such Taxes would not have an EOP
Material Adverse Effect. The most recent audited financial statements contained
in the EOP SEC Documents reflect an adequate reserve for all material Taxes
payable by EOP and the EOP Subsidiaries for all taxable periods and portions
thereof through the date of such financial statements. Since the EOP Financial
Statement Date, EOP has incurred no liability for taxes under Sections 857(b),
860(c) or 4981 of the Code, including without limitation any tax arising from a
prohibited transaction described in Section 857(b)(6) of the Code, and neither
EOP nor any EOP Subsidiary has incurred any material liability for taxes other
than in the ordinary course of business. No event has occurred, and no condition
or circumstance exists, which presents a material risk that any material Tax
described in the preceding sentence will be imposed upon EOP. To the Knowledge
of EOP, no deficiencies for any Taxes have been proposed, asserted or assessed
against EOP or any of the EOP Subsidiaries, and no requests for waivers of the
time to assess any such Taxes are pending.
(b) EOP (i) has operated, and intends to continue to operate, in such a
manner as to qualify as a REIT within the meaning of Section 856 of the Code for
the taxable year ending December 31, 1997 and intends to continue to operate in
such a manner as to qualify as a REIT for the taxable year that includes the
Closing Date and (ii) has not taken or omitted to take any action which would
reasonably be expected to result in a challenge to its status as a REIT, and to
EOP's Knowledge, no such challenge is pending or threatened. Each EOP Subsidiary
which is a partnership, joint venture or limited liability company (i) has been
treated since its formation and continues to be treated for federal income tax
purposes as a partnership and not as a corporation or as an association taxable
as a corporation and (ii) has not since the later of its formation or the
acquisition by EOP of a direct or indirect interest therein, owned any assets
(including, without limitation, securities) that would cause EOP to violate
Section 856(c)(5) of the Code. Each EOP Subsidiary which is a corporation (other
than EOP Management Corp.) has been since its formation a qualified REIT
subsidiary under Section 856(i) of the Code. EOP Partnership is not a publicly
traded partnership within the meaning of Section 7704 of the Code. Except as set
forth in Schedule 3.11 to the EOP Disclosure Letter neither EOP nor any EOP
Subsidiary holds any asset (x) the disposition of which would be subject to
rules similar to Section 1374 of the Code as a result of a notice under IRS
Notice 88-19 or (y) which is subject to a consent filed pursuant to Section
341(f) of the Code and the regulations thereunder.
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3.12 Brokers; Schedule of Fees and Expenses. No broker, investment banker,
financial advisor or other person, other than J.P. Morgan Securities Inc. and
Merrill Lynch & Co., the fees and expenses of which will be paid by EOP and are
described in the respective engagement letters with J.P. Morgan Securities Inc.
and Merrill Lynch & Co., true, correct and complete copies of which have
previously been given to Beacon, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
EOP or any EOP Subsidiary.
3.13 Compliance with Laws. Neither EOP nor any of the EOP Subsidiaries has
violated or failed to comply with any statute, law, ordinance, regulation, rule,
judgment, decree or order of any Governmental Entity applicable to its business,
properties or operations, except to the extent that such violation or failure
would not have an EOP Material Adverse Effect.
3.14 Contracts; Debt Instruments. Neither EOP nor any EOP Subsidiary has
received a written notice that EOP or any EOP Subsidiary is in violation of or
in default under (nor to the Knowledge of EOP does there exist any condition
which upon the passage of time or the giving of notice or both would cause such
a violation of or default under) any material loan or credit agreement, note,
bond, mortgage, indenture, lease, permit, concession, franchise, license or any
other material contract, agreement, arrangement or understanding, to which it is
a party or by which it or any of its properties or assets is bound, nor to the
Knowledge of EOP does such a violation or default exist, except to the extent
such violation or default, individually or in the aggregate, would not have an
EOP Material Adverse Effect, except as set forth in the EOP SEC Documents or in
Schedule 3.14 to the EOP Disclosure Letter.
3.15 Opinion of Financial Advisor. EOP has received the oral opinion of
J.P. Morgan Securities Inc., satisfactory to EOP, to the effect that the
consideration to be paid by EOP and EOP Partnership in connection with the
Mergers is fair, from a financial point of view, to EOP and EOP Operating
Partnership.
3.16 State Takeover Statutes. EOP has taken all action necessary to exempt
transactions between EOP and Beacon and its Affiliates from the operation of
Takeover Statutes.
3.17 Investment Company Act of 1940. Neither EOP nor any of the EOP
Subsidiaries is, or at the Effective Time will be, required to be registered
under the 1940 Act.
3.18 Definition of Knowledge of EOP. As used in this Agreement, the phrase
"Knowledge of EOP" (or words of similar import) means the knowledge of those
individuals identified in Schedule 3.19 to the EOP Disclosure Letter.
3.19 EOP Not an Interested Stockholder. EOP is not an "interested
stockholder" of Beacon or an "affiliate of an interested stockholder" of Beacon
within the meaning of Section 3-601 of the MGCL.
ARTICLE 4
COVENANTS
4.1 Conduct of Beacon's and Beacon Partnership's Business Pending
Merger. During the period from the date of this Agreement to the Effective Time,
except as consented to in writing by EOP or as expressly provided for in this
Agreement (including as contemplated by the Principal Terms of the Tax
Protection Agreements set forth as Schedule 5.16 hereto), Beacon and Beacon
Partnership shall, and shall cause (or, in the case of Beacon Subsidiaries that
Beacon or Beacon Partnership do not control, shall use reasonable best efforts
to cause) each of the Beacon Subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary
course and in substantially the same manner as heretofore conducted;
(b) preserve intact its business organizations and goodwill and use
reasonable best efforts to keep available the services of its officers and
employees;
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(c) confer on a regular basis with one or more representatives of EOP
to report operational matters of materiality and, subject to Section 4.3,
any proposals to engage in material transactions;
(d) promptly notify EOP of any material emergency or other material
change in the condition (financial or otherwise), business, properties,
assets, liabilities or the normal course of its businesses or in the
operation of its properties, or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated);
(e) promptly deliver to EOP true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(f) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its
methods, principles or practices of accounting in effect at the Beacon
Financial Statement Date, except as may be required by the SEC, applicable
law or GAAP;
(g) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted by law, provided Beacon notifies EOP that
it is availing itself of such extensions and provided such extensions do
not adversely affect Beacon's status as a qualified REIT under the Code;
(h) not make or rescind any express or deemed election relative to
Taxes (unless required by law or necessary to preserve Beacon's status as a
REIT or the status of any Beacon Subsidiary as a partnership for federal
income tax purposes, as the case may be);
(i) make all capital expenditures, and expenditures relating to
leasing, in accordance with a budget of Beacon approved by EOP, which
approval shall not be unreasonably withheld, and will not (A) acquire,
enter into any option to acquire, or exercise an option or other right or
election or enter into any other commitment or contractual obligation
(each, a "Commitment") for the acquisition of any real property or other
transaction (other than Commitments referred to in Schedule 4.1(i) to the
Beacon Disclosure Letter) involving in excess of $100,000 which is not
included in its budget approved by EOP, encumber assets or commence
construction of, or enter into any Commitment to develop or construct other
real estate projects, except in the ordinary course of its office property
business or (B) incur or enter into any Commitment to incur additional
indebtedness (secured or unsecured) except for working capital under its
revolving line(s) of credit and Commitments for indebtedness described on
Schedule 4.1(i) to the Beacon Disclosure Letter;
(j) not amend its Articles of Incorporation, as amended, or its
Amended and Restated Bylaws, or the articles or certificate of
incorporation, bylaws, code of regulations, partnership agreement,
operating agreement or joint venture agreement or comparable charter or
organization document of any Beacon Subsidiary;
(k) make no change in the number of shares of capital stock,
membership interests or units of limited partnership interest issued and
outstanding, other than pursuant to (i) the exercise of options disclosed
in Schedule 2.3 to the Beacon Disclosure Letter or (ii) the redemption of
Beacon OP Units under existing contracts described on Schedule 2.18, or
pursuant to the Beacon Partnership Agreement, for cash or, at Beacon's
option, Beacon Common Shares;
(l) grant no options or other right or commitment relating to its
shares of capital stock, membership interests or units of limited
partnership interest or any security convertible into its shares of capital
stock, membership interests or units of limited partnership interest, or
any security the value of which is measured by shares of capital stock, or
any security subordinated to the claim of its general creditors and not
amend or waive any rights under any of the Beacon Stock Options;
(m) except as provided in Section 5.10 and in connection with the use
of Beacon Common Shares to pay the exercise price or tax withholding in
connection with equity-based employee benefit plans by the participants
therein, not (i) authorize, declare, set aside or pay any dividend or make
any other distribution or payment with respect to any Beacon Common Shares
or Beacon OP Units or (ii) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or
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units of partnership interest or any option, warrant or right to acquire,
or security convertible into, shares of capital stock, membership
interests, or units of partnership interest of Beacon, except for (A)
redemptions of Beacon Common Shares required under Section 9.5 of the
Articles of Incorporation of Beacon in order to preserve the status of
Beacon as a REIT under the Code, and (B) redemptions of Beacon OP Units,
whether or not outstanding on the date of this Agreement, under the Beacon
Partnership Agreement in which Beacon Common Shares are utilized;
(n) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of the Beacon Properties, except in connection with a transaction that
is permitted by Section 4.1(i) or that is made in the ordinary course of
business and is the subject of a binding contract in existence on the date
of this Agreement and disclosed in Schedule 2.18 to the Beacon Disclosure
Schedule;
(o) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of its personal property or intangible property, except in connection
with a transaction that is permitted by Section 4.1(n) or that is made in
the ordinary course of business and is not material, individually or in the
aggregate;
(p) not make any loans, advances or capital contributions to, or
investments in, any other Person, other than loans, advances and capital
contributions to Beacon Subsidiaries in existence on the date hereof;
(q) not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) furnished to EOP or incurred in the ordinary course of
business consistent with past practice;
(r) not guarantee the indebtedness of another Person, enter into any
"keep well" or other agreement to maintain any financial statement
condition of another Person or enter into any arrangement having the
economic effect of any of the foregoing;
(s) not enter into any Commitment with any officer, director or
Affiliate of Beacon or any of the Beacon Subsidiaries or any material
Commitment with any consultant;
(t) not increase any compensation or enter into or amend any
employment agreement described in Schedule 2.18 to the Beacon Disclosure
Letter with any of its officers, directors or employees earning more than
$50,000 per annum, other than as required by any contract or Plan or in
accordance with waivers by employees of benefits under such agreements;
(u) not adopt any new employee benefit plan or amend any existing
plans or rights, except for changes to severance benefits to provide that
an employee whose position is transferred to a location outside the
standard metropolitan statistical area in which such employee is currently
employed shall not forfeit severance benefits by reason of failure to
accept such transfer, changes which are required by law and changes which
are not more favorable to participants than provisions presently in effect;
(v) not settle any shareholder derivative or class action claims
arising out of or in connection with any of the transactions contemplated
by this Agreement;
(w) not change the ownership of any of its Subsidiaries, except
changes which arise as a result of the acquisition of Beacon OP Units in
exchange for Beacon Common Shares pursuant to exercise of the Beacon OP
Unit redemption right under Section 8.6 of the Beacon Partnership
Agreement;
(x) not accept a promissory note in payment of the exercise price
payable under any option to purchase Beacon Common Shares; and
(y) not enter into, or modify, amend or breach any Tax Protection
Agreement.
4.2 Conduct of EOP's and EOP Partnership's Business Pending Merger. During
the period from the date of this Agreement to the Effective Time, except as (i)
contemplated by this Agreement, or (ii) consented to in writing by Beacon, EOP
and EOP Partnership shall, and shall cause (or, in the case of EOP Subsidiaries
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that EOP or EOP Partnership do not control, use reasonable best efforts to
cause) each of the EOP Subsidiaries to:
(a) preserve intact its business organizations and goodwill and use
reasonable best efforts to keep available the services of its officers and
employees;
(b) confer on a regular basis with one or more representatives of
Beacon to report operational matters of materiality which would have an EOP
Material Adverse Effect;
(c) promptly notify Beacon of any material emergency or other material
change in the condition (financial or otherwise), business, properties,
assets, liabilities, prospects or the normal course of its businesses or in
the operation of its properties, or of any material governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated);
(d) promptly deliver to Beacon true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(e) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its
methods, principles or practices of accounting in effect at the EOP
Financial Statement Date, except as may be required by the SEC, applicable
law or GAAP;
(f) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted by law, provided such extensions do not
adversely affect EOP's status as a qualified REIT under the Code;
(g) not make or rescind any express or deemed election relative to
Taxes (unless required by law or necessary to preserve EOP's status as a
REIT or the status of any EOP Subsidiary as a partnership for federal
income tax purposes or as a qualified REIT subsidiary under Section 856(i)
of the Code, as the case may be);
(h) not enter into any Commitment for the acquisition of any real
property (other than all real estate projects described in Schedule 4.2(h)
to the EOP Disclosure Letter) if the amount of such Commitment would cause
the aggregate amount of all such Commitments subsequent to the date hereof
to exceed $1,300,000,000 unless such Commitment has been approved by
Beacon;
(i) not amend the EOP Declaration of Trust or the EOP Bylaws, or the
articles or certificate of incorporation, bylaws, code of regulations,
partnership agreement, operating agreement or joint venture agreement or
comparable charter or organization document of any EOP Subsidiary,
including the EOP Partnership Agreement (except to the extent necessary to
reflect the admission of additional limited partners and other amendments
in connection therewith that can be made by EOP without a vote of limited
partners and that will not, individually or in the aggregate, materially
adversely affect the rights or obligations of holders of EOP OP Units);
(j) except as provided in Section 5.10 hereof and in connection with
the use of EOP Common Shares to pay the exercise price or tax withholding
in connection with equity-based employee benefit plans by the participants
therein, not (i) authorize, declare, set aside or pay any dividend or make
any other distribution or payment with respect to any EOP Common Shares or
EOP OP Units or (ii) directly or indirectly redeem, purchase or otherwise
acquire any shares of capital stock, membership interests or units of
partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of capital stock, membership interests,
or units of partnership interest of EOP, except for (A) redemptions of EOP
Common Shares required under Section 7.3.6 of the EOP Declaration of Trust
in order to preserve the status of EOP as a REIT under the Code, and (B)
redemptions of EOP OP Units, whether or not outstanding on the date of this
Agreement, under the EOP Partnership Agreement in which EOP Common Shares
are utilized;
(k) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of the EOP Properties, except in connection with a transaction that
would not reasonably be expected to have an EOP Material Adverse Effect;
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(l) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of its personal property or intangible property, except in connection
with a transaction that is permitted by Section 4.2(k) or that is not
material, individually or in the aggregate;
(m) not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) if it would reasonably be expected to have an EOP Material
Adverse Effect;
(n) not directly or indirectly through a subsidiary, merge or
consolidate with, or acquire all or substantially all of the assets of, or
the beneficial ownership of a majority of the outstanding capital stock or
other equity interests in any person or entity whose securities are
registered under the Exchange Act unless such transaction has been approved
by Beacon; and
(o) except as contemplated by this Agreement, not issue any EOP or EOP
Partnership securities pursuant to a Registration Statement filed with the
SEC relating to the public offering of any EOP or EOP Partnership
securities from the date hereof until the date of the Proxy Statement (as
defined in Section 5.1) unless such issuance has been approved by Beacon.
4.3 No Solicitation. Prior to the Effective Time, Beacon agrees, for itself
and in its capacity as general partner of the Beacon Partnership, that:
(a) neither it nor any of the Beacon Subsidiaries shall invite,
initiate, solicit or encourage, directly or indirectly, any inquiries,
proposals, discussions or negotiations or the making or implementation of
any proposal or offer (including, without limitation, any proposal or offer
to its shareholders) with respect to a merger, acquisition, tender offer,
exchange offer, transaction resulting in the issuance of securities
representing 10% or more of the outstanding equity securities of Beacon,
consolidation, share exchange, business combination, sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the
assets or equity securities (including, without limitation, partnership
interests and units) of Beacon or Beacon Partnership, other than the
transactions contemplated by this Agreement (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal") or engage in
any discussions or negotiations concerning or provide any confidential or
non-public information or data to, or have any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal;
(b) neither it nor any of the Beacon Subsidiaries will permit any of
its officers, directors, employees, affiliates, agents, investment bankers,
financial advisors, attorneys, accountants, brokers, finders or other
representative retained by Beacon to engage in any of the activities
described in Section 4.3(a);
(c) it and the Beacon Subsidiaries will immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing and will
take the necessary steps to inform the individuals or entities referred to
in Section 4.3(b) of the obligations undertaken in this Section 4.3; and
(d) it will notify EOP immediately if Beacon or any of the Beacon
Subsidiaries receives any such inquiries or proposals, or any requests for
such information, or if any such negotiations or discussions are sought to
be initiated or continued with it;
provided, however, that nothing contained in this Section 4.3 shall prohibit the
Board of Directors of Beacon (including with respect to Beacon's capacity as
general partner of Beacon Partnership) from (i) furnishing information to or
entering into discussions or negotiations with, any person or entity that makes
an unsolicited Acquisition Proposal, if, and only to the extent that (A) a
majority of the Board of Directors of Beacon determines in good faith, based
upon the advice of its outside counsel, that such action is required for the
Board of Directors of Beacon to comply with its duties to shareholders imposed
by applicable law and (B) prior to furnishing such information to, or entering
into discussions or negotiations with, such person or entity, Beacon provides
written notice to EOP to the effect that it is furnishing information to, or
entering into discussions with, such person or entity; and (ii) making any
disclosure required by applicable law with regard to an Acquisition Proposal.
Nothing in this Section 4.3 shall (x) permit Beacon to terminate this Agreement
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(except as specifically provided in Article 7 hereof), (y) permit Beacon to
enter into an agreement for an Acquisition Proposal during the term of this
Agreement or (z) affect any other obligation of Beacon under this Agreement;
provided, however, that a majority of the Board of Directors of Beacon may
approve and recommend a Superior Acquisition Proposal and, in connection
therewith, withdraw or modify its approval or recommendation of this Agreement
and the Merger in accordance with Section 5.1(e). Any disclosure that the Board
of Directors of Beacon may be compelled to make with respect to the receipt of
an Acquisition Proposal in order to comply with its duties to shareholders
imposed by applicable law or Rule 14d-9 or 14e-2 of the Exchange Act will not
constitute a violation of this Section 4.3. As used herein, "Superior
Acquisition Proposal" means a bona fide Acquisition Proposal made by a third
party which a majority of the members of the Board of Directors of Beacon
resolves in good faith to be in the best interests of and more favorable to
Beacon's shareholders than the Merger and which the Board of Directors of Beacon
determines is reasonably capable of being consummated.
4.4 Affiliates. Prior to the Effective Time, Beacon shall cause to be
prepared and delivered to EOP a list (reasonably satisfactory to counsel for
EOP) identifying all persons who, at the time of the Beacon and EOP Shareholders
Meetings, may be deemed to be "affiliates" of Beacon as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act (the "Affiliates").
Beacon shall use its reasonable best efforts to cause each person who is
identified as an Affiliate in such list to deliver to EOP on or prior to the
Effective Time a written agreement, in the form previously approved by the
parties hereto, that such Affiliate will not sell, pledge, transfer or otherwise
dispose of any EOP Common Shares issued to such Affiliate pursuant to the
Merger, except pursuant to an effective registration statement under the
Securities Act or in compliance with paragraph (d) of Rule 145 or as otherwise
permitted by the Securities Act. EOP shall be entitled to place legends as
specified in such written agreements on the certificates representing any EOP
Common Shares to be received pursuant to the terms of this Agreement by such
Affiliates who have executed such agreements and to issue appropriate stop
transfer instructions to the transfer agent for the EOP Common Shares issued to
such Affiliates, consistent with the terms of such agreements. The Surviving
Trust shall timely file the reports required to be filed by it under the
Exchange Act and the rules and regulations adopted by the SEC thereunder, and it
will take such further action as any Affiliate of Beacon or EOP may reasonably
request, all to the extent required from time to time to enable such Affiliate
to sell shares of beneficial interest of the Surviving Trust received by such
Affiliate in the Merger without registration under the Securities Act pursuant
to (i) Rule 145(d)(1) under the Securities Act, as such rule may be amended from
to time, or (ii) any successor rule or regulation hereafter adopted by the SEC.
4.5 Other Actions. Each of Beacon and Beacon Partnership on the one hand
and EOP and EOP Partnership on the other hand shall not, and shall use
commercially reasonable efforts to cause their respective subsidiaries and joint
ventures not to take, any action that would result in (i) any of the
representations and warranties of such party (without giving effect to any
"knowledge" qualification) set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
(without giving effect to any "knowledge" qualification) that are not so
qualified becoming untrue in any material respect or (iii) except as
contemplated by Section 4.3, any of the conditions to the Merger set forth in
Article 6 not being satisfied.
ARTICLE 5
ADDITIONAL COVENANTS
5.1 Preparation of the Registration Statement and the Proxy Statement;
Beacon Shareholders Meeting, Beacon Unitholders Consent Solicitation and EOP
Shareholders Meeting.
(a) As promptly as practicable after execution of this Agreement, (i) each
of Beacon and EOP shall prepare and file with the SEC (with appropriate requests
for confidential treatment, unless the parties hereto otherwise agree) under the
Exchange Act, (x) one or more joint proxy statements/prospectuses and forms of
proxies (such joint proxy statement(s)/prospectus(es) together with any
amendments to supplements thereto, the "Proxy Statement") relating to the
stockholder meetings of each of Beacon and EOP, the vote of the stockholders of
Beacon and EOP with respect to the Merger, and the consent, if any, of partners
of Beacon
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Partnership and EOP Partnership in connection with any required Partner
Approvals and (y) an information statement/prospectus relating to the issuance
of EOP Preferred Shares pursuant to the Merger and (ii) following clearance by
the SEC of the Proxy Statement, EOP shall within two business days prepare and
file with the SEC under the Securities Act a registration statement on Form S-4
(such registration statement, together with any amendments or supplements
thereto, the "Form S-4"), in which the Proxy Statement and any information
statement/prospectus described in clause (y) above will be included, as one or
more prospectuses in connection with the registration under the Securities Act
of the EOP Common Shares, EOP Preferred Shares and EOP OP Units to be
distributed to the holders of Beacon Common Shares, Beacon Preferred Stock and
Beacon OP Units in the Merger. The respective parties will cause the Proxy
Statement and the Form S-4 to comply as to form in all material respects with
the applicable provisions of the Securities Act, the Exchange Act and the rules
and regulations thereunder. Each of Beacon, Beacon Partnership, EOP and EOP
Partnership shall furnish all information about itself and its business and
operations and all necessary financial information to the other as the other may
reasonably request in connection with the preparation of the Proxy Statement and
the Form S-4. EOP shall use its reasonable best efforts, and Beacon will
cooperate with it, to have the Form S-4 declared effective by the SEC as
promptly as practicable (including clearing the Proxy Statement with the SEC),
taking into account EOP's permitted activities hereunder and applicable legal
requirements. Each of Beacon and Beacon Partnership, on the one hand, and EOP
and EOP Partnership, on the other hand, agree promptly to correct any
information provided by it for use in the Proxy Statement and the Form S-4 if
and to the extent that such information shall have become false or misleading in
any material respect, and each of the parties hereto further agrees to take all
steps necessary to amend or supplement the Proxy Statement and the Form S-4 and
to cause the Proxy Statement and the Form S-4 as so amended or supplemented to
be filed with the SEC and to be disseminated to their respective stockholders
and partners, in each case as and to the extent required by applicable federal
and state securities laws. Each of Beacon, Beacon Partnership, EOP and EOP
Partnership agrees that the information provided by it for inclusion in the
Proxy Statement or the Form S-4 and each amendment or supplement thereto, at the
time of mailing thereof and at the time of the respective meetings of
stockholders of Beacon and EOP and at the time of the respective taking of
consents, if any, of partners of Beacon Partnership and EOP Partnership, will
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. EOP
will advise and deliver copies (if any) to Beacon, promptly after it receives
notice thereof, of any request by the SEC for amendment of the Proxy Statement
or the Form S-4 or comments thereon and responses thereto or requests by the SEC
for additional information (regardless whether such requests relate to EOP or
EOP Partnership, on the one hand, and Beacon or Beacon Partnership, on the other
hand), and EOP shall promptly notify Beacon of (i) the time when the Form S-4
has become effective, (ii) or any supplement or amendment thereto has been
filed, (iii) the issuance of any stop order, and (iv) the suspension of the
qualification and registration of the EOP Common Shares, EOP Preferred Shares
and EOP OP Units issuable in connection with the Mergers.
(b) Each of Beacon, Beacon Partnership, EOP and EOP Partnership shall use
its reasonable best efforts to timely mail the joint proxy statement/prospectus
contained in the Form S-4 to its stockholders. It shall be a condition to the
mailing of the joint proxy statement/prospectus that (i) EOP and EOP Partnership
shall have received a "comfort" letter from Coopers & Lybrand, LLP, independent
public accountants for Beacon and Beacon Partnership, of the kind contemplated
by the Statement of Auditing Standards with respect to Letters to Underwriters
promulgated by the American Institute of Certified Public Accountants (the
"AICPA Statement"), dated as of the date on which the Form S-4 shall become
effective and as of the Effective Time, addressed to EOP and EOP Partnership, in
form and substance reasonably satisfactory to EOP and EOP Partnership,
concerning the procedures undertaken by Coopers & Lybrand, LLP with respect to
the financial statements and information of Beacon, Beacon Partnership and their
subsidiaries contained in the Form S-4 and the other matters contemplated by the
AICPA Statement and otherwise customary in scope and substance or letters
delivered by independent public accountants in connection with transactions such
as those contemplated by this Agreement and (ii) Beacon shall have received a
"comfort" letter from Ernst & Young LLP, independent public accountants for EOP
and EOP Partnership, of the kind contemplated by the AICPA Statement, dated as
of the date on which the Form S-4 shall become effective and as of the Effective
Time,
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addressed to Beacon and Beacon Partnership, in form and substance reasonably
satisfactory to Beacon, concerning the procedures undertaken by Ernst & Young,
LLP with respect to the financial statements and information of EOP, EOP
Partnership and their subsidiaries contained in the Form S-4 and the other
matters contemplated by the AICPA Statement and otherwise customary in scope and
substance for letters delivered by independent public accountants in connection
with transactions such as those contemplated by this Agreement.
(c) EOP will duly call and as soon as practicable following the date of
this Agreement (but in no event sooner than 20 business days following the date
the Proxy Statement is mailed to the shareholders of EOP), give notice of,
convene and hold a meeting of its shareholders (the "EOP Shareholders Meeting")
for the purpose of obtaining the EOP Shareholder Approvals. EOP will, through
its Board of Trustees, recommend to its shareholders approval of this Agreement,
the Merger, and the transactions contemplated by this Agreement.
(d) On or before September 22, 1997, EOP and EOP Partnership shall deliver
to Beacon and Beacon Partnership (i) a list of all information to be provided by
Beacon or Beacon Partnership that is required to be included in the Proxy
Statement in accordance with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations thereunder and (ii) an
irrevocable letter of credit in the face amount of $10,000,000 issued by a bank
reasonably acceptable to the parties, naming Beacon Partnership as beneficiary,
expiring no sooner than June 1, 1998 and payable at site upon presentation of a
sight draft and an affidavit of Beacon Partnership stating that all conditions
to a draw under the letter of credit pursuant to this Section 5.1(d) have been
met and the beneficiaries are entitled to draw the full amount thereunder. In
addition, in the event that EOP and EOP Partnership shall fail to file the Proxy
Statement with the SEC within fifteen (15) days after EOP and EOP Partnership
have received all information requested pursuant to clause (i) above
substantially in final form, EOP and EOP Partnership shall deliver to Beacon and
Beacon Partnership another irrevocable letter of credit in the face amount of
$5,000,000 and otherwise satisfying the requirements of clause (ii) above. In
the event Beacon shall terminate this Agreement pursuant to Section 7.1(e), and
provided that Beacon shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have caused the
occurrence of either of the events referred to in clauses (x) and (y) to this
Section 5.1(d), then at any time following the expiration of three (3) business
days after EOP's receipt of written notice of such termination, Beacon shall be
entitled to draw on the letter(s) of credit posted pursuant to this Section
5.1(c) if either of the following events has occurred: (x) EOP and EOP
Partnership shall have failed to file the Proxy Statement with the SEC within
fifteen (15) days after EOP and EOP Partnership have received all information
requested pursuant to clause (i) above substantially in final form or (y) the
Form S-4 shall not have been declared effective by the SEC on or before February
27, 1998. The receipt of Beacon and Beacon Partnership of any amounts pursuant
to this Section 5.1(d) shall not affect the other remedies, if any, available to
such parties.
(e) Beacon will duly call and give notice of and, as soon as practicable
following the date of this Agreement (but in no event sooner than 20 business
days following the date the Proxy Statement is mailed to the shareholders of
Beacon), convene and hold a meeting of its shareholders (the "Beacon
Shareholders Meeting") for the purpose of obtaining Beacon Shareholder
Approvals. Beacon will, through its Board of Directors, recommend to its
shareholders approval of this Agreement, the Merger and the transactions
contemplated by this Agreement and include such recommendation in the Proxy
Statement; provided, however, that prior to the Beacon Shareholders Meeting,
such recommendation may be withdrawn, modified or amended if a majority of the
Board of Directors of Beacon determines in good faith, based upon the advice of
its outside counsel, that such action is required for the Board of Directors of
Beacon to comply with its duties to its shareholders imposed by applicable law.
(f) EOP and Beacon shall use their best efforts to convene their respective
shareholder meetings on the same day, which day, subject to the provisions of
Sections 5.1(c), 5.1(d) and 5.3, shall be a day not later than 45 days after the
date the Proxy Statement is mailed.
(g) If on the date for the EOP Shareholders Meeting and Beacon Shareholders
Meeting established pursuant to Section 5.1(f) of this Agreement, either EOP or
Beacon has not received duly executed proxies
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for a sufficient number of votes to approve the Merger (but less than a majority
of the outstanding Beacon Common Shares or EOP Common Shares, as the case may
be, have voted against the Merger), then both parties shall recommend the
adjournment of their respective shareholders meetings until one or more dates
not later than the date ten (10) days after the originally scheduled date of the
shareholders meetings.
(h) Beacon will request written consents for approval by the limited
partners of Beacon Partnership of each of the matters described in the
definition of Beacon Partner Approvals. Beacon hereby agrees to vote in favor of
such matters and to recommend to the limited partners of Beacon Partnership that
they approve such matters. EOP will request written consents, if any is
required, by the limited partners, of EOP Partnership of each of the matters
described in the definition of EOP Partner Approvals. EOP hereby agrees to vote,
if any is required, in favor of such matters and to recommend to the limited
partners of EOP Partnership that they approve such matters.
5.2 Access to Information; Confidentiality. Subject to the requirements of
confidentiality agreements with third parties, each of the parties shall, and
shall cause each of its Subsidiaries to, afford to the other parties and to the
officers, employees, accountants, counsel, financial advisors and other
representatives of such other parties, reasonable access during normal business
hours prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, each of
the parties shall, and shall cause each of its Subsidiaries to, furnish promptly
to the other parties (a) a copy of each report, schedule, registration statement
and other document filed by it during such period pursuant to the requirements
of federal or state securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
Each of the parties shall, and shall cause its Subsidiaries to, use commercially
reasonable efforts to cause its officers, employees, accountants, counsel,
financial advisors and other representatives and affiliates to, hold any
nonpublic information in confidence.
5.3 Reasonable Best Efforts; Notification.
(a) Subject to the terms and conditions herein provided, each of the
parties shall: (i) use all reasonable best efforts to cooperate with one another
in (A) determining which filings are required to be made prior to the Effective
Time with, and which consents, approvals, permits or authorizations are required
to be obtained prior to the Effective Time from, governmental or regulatory
authorities of the United States, the several states and foreign jurisdictions
and any third parties in connection with the execution and delivery of this
Agreement, and the consummation of the transactions contemplated hereby and (B)
timely making all such filings and timely seeking all such consents, approvals,
permits and authorizations; (ii) use all reasonable best efforts (other than the
payment of money) to obtain in writing any consents required from third parties
to effectuate the Merger, such consents to be in form reasonably satisfactory to
each of the parties; and (iii) use all reasonable best efforts to take, or cause
to be taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If at any time after the Effective
Time any further action is necessary or desirable to carry out the purpose of
this Agreement, each party shall take all such necessary action.
(b) Beacon and Beacon Partnership shall use all reasonable best efforts to
obtain from Coopers & Lybrand, LLP, access to all work papers relating to audits
of Beacon and Beacon Partnership performed by Coopers & Lybrand, LLP, and the
continued cooperation of Coopers & Lybrand, LLP, with regard to the preparation
of consolidated financial statements for the Surviving Trust.
(c) Beacon and Beacon Partnership shall give prompt notice to EOP and EOP
Partnership, and EOP and EOP Partnership shall give prompt notice to Beacon and
Beacon Partnership, (i) if any representation or warranty made by it contained
in this Agreement that is qualified as to materiality becomes untrue or
inaccurate in any respect or any such representation or warranty that is not so
qualified becomes untrue or inaccurate in any material respect or (ii) of the
failure by it to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
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5.4 Tax Treatment. Each of EOP and Beacon shall use its reasonable best
efforts before and after the Effective Time to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a) of the Code and to obtain
the opinions of counsel referred to in Sections 6.2(e) nd 6.3(e). If, based upon
the advice of counsel, EOP and Beacon determine that the Partnership Merger
could reasonably be expected to create a risk that the Merger would not qualify
as a reorganization under the provisions of Section 368(a) of the Code, EOP and
Beacon undertake to use reasonable best efforts to negotiate and structure an
alternative means to effect the Merger, for EOP to acquire the interest in
Beacon Partnership owned by Beacon, and for the holders of Beacon OP Units to
receive EOP OP Units (or the economic and tax equivalent thereof) in exchange
for their Beacon OP Units. EOP Partnership will use the "traditional method"
under Treasury Regulations Section 1.704-3(b) for purposes of making allocations
under Section 704(c) of the Code with respect to the properties of or interests
in the Beacon Partnership as of the Effective Time (with no curative allocations
of gross income with respect to depreciation to offset the effects of the
"ceiling rule" but with a curative allocation of gain upon disposition of such
properties to offset the effect of the "ceiling rule"). EOP Partnership and
Beacon Partnership shall negotiate in good faith to agree upon the "Section
704(c) values" of the properties of Beacon Partnership, effective as of the
Closing Date. For purposes of allocating "excess nonrecourse liabilities" of the
EOP Partnership pursuant to Treasury Regulations Section 1.752-3(a)(3) following
the Closing Date, EOP Partnership shall use a methodology to be agreed upon
between EOP Partnership and Beacon Partnership.
5.5 Public Announcements. Each party will consult with each other party
before issuing, and provide each other the opportunity to review and comment
upon, any press release or other written public statements which address in any
manner the transactions contemplated by this Agreement, and shall not issue any
such press release or make any such written public statement prior to such
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange. The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement will be in the form
agreed to by the parties prior to the execution of this Agreement.
5.6 Listing. EOP shall use all reasonable best efforts to cause the EOP
Common Shares and the EOP Preferred Shares to be issued in the Merger and the
EOP Common Shares reserved for issuance upon redemption of EOP OP Units issued
in the Partnership Merger, to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Effective Time.
5.7 Transfer and Gains Taxes. Each party shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with the transactions contemplated by this Agreement (together with
any related interests, penalties or additions to tax, "Transfer and Gains
Taxes"). From and after the Effective Time, EOP shall pay or cause EOP Operating
Partnership, as appropriate, to pay or cause to be paid, without deduction or
withholding from any amounts payable to the holders of EOP Common Shares and EOP
Preferred Shares, or EOP OP Units, as applicable, all Transfer and Gains Taxes
(which term shall not in any event be construed to include for these purposes
any tax imposed under the Code).
5.8 Benefit Plans and Other Employee Arrangements.
(a) Benefit Plans. After the Effective Time, all employees of Beacon who
are employed by the Surviving Trust shall, at the option of the Surviving Trust,
either continue to be eligible to participate in an "employee benefit plan", as
defined in Section 3(3) of ERISA, of Beacon which is, at the option of the
Surviving Trust, continued by the Surviving Trust, or alternatively shall be
eligible to participate in the same manner as other similarly situated employees
of the Surviving Trust who were formerly employees of EOP in any "employee
benefit plan," as defined in Section 3(3) of ERISA, sponsored or maintained by
the Surviving Trust after the Effective Time. With respect to each such employee
benefit plan, service with Beacon or any Beacon Subsidiary (as applicable) and
the predecessor of any of them shall be included for purposes of determining
eligibility to participate, vesting (if applicable) and entitlement to benefits.
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(b) Stock Option Plan. The stock option plan of Beacon shall be
discontinued.
(c) Beacon Stock Options. As of the Effective Time, each outstanding
Beacon Stock Option shall vest and be immediately exercisable, be assumed by
EOP, and be deemed to constitute an option to acquire the same number of EOP
Common Shares as the holder of such Beacon Stock Option would have been entitled
to receive pursuant to the Merger had such holder exercised such Beacon Stock
Option in full immediately prior to the Effective Time at a price per share
equal to the aggregate exercise price for the Beacon Common Shares subject to
such Beacon Stock Option divided by the number of full EOP Common Shares deemed
to be purchasable pursuant to such Beacon Stock Option; provided, however,that
the number of EOP Common Shares that may be purchased upon exercise of such
Beacon Stock Option shall not include any fractional share and, upon the first
such exercise of such Beacon Stock Option, a cash payment shall be made for any
fractional share calculated in accordance with and in the manner provided for
calculations as to be paid in lieu of fractional shares as part of the Merger
Consideration under Section 1.10. All such Beacon Stock Options held by
directors and officers of Beacon above the office of Vice President shall remain
exercisable for one day after the Closing Date and shall expire at 11:59 p.m.,
New York time, on the next business day following the Closing Date and all such
Beacon Stock Options held by persons other than directors and officers of Beacon
above the office of Vice President shall expire on the six month anniversary of
the Closing Date if such person's employment terminates prior to or during such
six-month period and shall expire in accordance with the present terms of the
Beacon Stock Option if such person's employment does not terminate prior to or
during such six-month period; provided, however, that EOP shall use its
reasonable best efforts to enable each person who holds Beacon Stock Options as
of the Effective Time and who exercises (with no requirement to deliver funds or
withholding amounts until settlement) such Beacon Stock Options subsequent to
the Effective Time but prior to 11:59 p.m., New York time, on the next business
day following the Closing Date to receive (other than from EOP or any EOP
Subsidiary), within four (4) business days after the Effective Time, an amount
per Beacon Stock Option equal to the excess, if any, of (A) the closing price of
one EOP Common Share on the New York Stock Exchange (the "NYSE") on the next
business day following the Closing Date, over (B) the sum of (i) the exercise
price of such Beacon Stock Option divided by the Exchange Ratio plus (ii) with
respect to directors and officers of Beacon above the office of Vice President,
an amount equal to any reasonable and customary brokerage commissions payable
with respect to the sale of EOP Common Shares in connection with such option
exercise; and, if EOP is unsuccessful in enabling each such person to receive
such amount, then such Beacon Stock Option shall not expire prior to its stated
expiration date and EOP shall use its reasonable best efforts to make other
arrangements to enable each such person to receive the full economic benefit of
such amount (provided that neither EOP nor any EOP Subsidiary shall have any
obligation to pay to any such person any amount of cash or cash equivalents with
respect to his or her Beacon Stock Options).
(d) Withholding. To the extent required by applicable law, Beacon shall
require each employee who exercises a Beacon Stock Option or who receives Beacon
Common Shares pursuant to any existing commitment to pay to Beacon in cash or
Beacon Common Shares an amount sufficient to satisfy in full Beacon's obligation
to withhold Taxes incurred by reason of such exercise or issuance.
5.9 Indemnification.
(a) From and after the Effective Time, EOP and EOP Partnership
(collectively, the "Indemnifying Parties") shall provide exculpation and
indemnification for each person who is now or has been at any time prior to the
date hereof or who becomes prior to the Effective Time, an officer or director
of Beacon or any Beacon Subsidiary (the "Indemnified Parties") which is the same
as the exculpation and indemnification provided to the Indemnified Parties by
Beacon and the Beacon Subsidiaries immediately prior to the Effective Time in
its charter, Bylaws or in its partnership, operating or similar agreement, as in
effect on the date hereof; provided, however, that such exculpation and
indemnification covers actions on or prior to the Effective Time, including,
without limitation, all transactions contemplated by this Agreement.
(b) In addition to the rights provided in Section 5.9(a) above, in the
event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including without
limitation, any action by or on behalf of any or all security holders of Beacon
or EOP, or any Beacon
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Subsidiary or EOP Subsidiary, or by or in the right of Beacon or EOP, or any
Beacon Subsidiary or EOP Subsidiary, or any claim, action, suit, proceeding or
investigation in which any person who is now, or has been, at any time prior to
the date hereof, or who becomes prior to the Effective Time, an officer,
employee or director of Beacon or any Beacon Subsidiary (the "Indemnification
Parties") is, or is threatened to be, made a party based in whole or in part on,
or arising in whole or in part out of, or pertaining to (i) the fact that he is
or was an officer, employee or director of Beacon or any of the Beacon
Subsidiaries or any action or omission by such person in his capacity as a
director, or (ii) this Agreement or the transactions contemplated by this
Agreement, whether in any case asserted or arising before or after the Effective
Time, EOP, Beacon and the Indemnified Parties, hereby agree to use their
reasonable best efforts to cooperate in the defense of such claim, action, suit,
proceeding or investigation. The Indemnified Parties shall have the right to
select counsel, subject to the consent of the Indemnifying Parties (which
consent shall not be unreasonably withheld or delayed). It is understood and
agreed that, after the Effective Time, the Indemnifying Parties shall indemnify
and hold harmless, as and to the full extent permitted by applicable law, each
Indemnified Party against any losses, claims, liabilities, expenses (including
reasonable attorneys' fees and expenses), judgments, fines and amounts paid in
settlement in accordance herewith in connection with any such threatened or
actual claim, action, suit, proceeding or investigation. In addition, after the
Effective Time, in the event of any such threatened or actual claim, action,
suit, proceeding or investigation, the Indemnifying Parties shall promptly pay
and advance reasonable expenses and costs incurred by each Indemnified Person as
they become due and payable in advance of the final disposition of the claim,
action, suit, proceeding or investigation to the fullest extent and in the
manner permitted by law. Notwithstanding the foregoing, the Indemnifying Parties
shall not be obligated to advance any expenses or costs prior to receipt of an
undertaking by or on behalf of the Indemnified Party to repay any expenses
advanced if it shall ultimately be determined that the Indemnified Party is not
entitled to be indemnified against such expense. Notwithstanding anything to the
contrary set forth in this Agreement, the Indemnifying Parties (i) shall not be
liable for any settlement affected without their prior written consent, and (ii)
shall not have any obligation hereunder to any Indemnified Party to the extent
that a court of competent jurisdiction shall determine in a final and
non-appealable order that such indemnification is prohibited by applicable law.
In the event of a final and non-appealable determination by a court that any
payment of expenses is prohibited by applicable law, the Indemnified Person
shall promptly refund to the Indemnifying Parties the amount of all such
expenses theretofore advanced pursuant hereto. Any Indemnified Party wishing to
claim indemnification under this Section 5.9, upon learning of any such claim,
action, suit, proceeding or investigation, shall promptly notify the
Indemnifying Parties of such claim and the relevant facts and circumstances with
respect thereto; provided, however, that the failure to provide such notice
shall not affect the obligations of EOP except to the extent such failure to
notify materially prejudices the Indemnifying Parties ability to defend such
claim, action, suit, proceeding or investigation; and provided, further,
however, that no Indemnified Party shall be obligated to provide any
notification pursuant to this Section 5.9(b) prior to the Effective Time.
(c) At or prior to the Effective Time, EOP shall purchase directors'
liability insurance policy coverage for Beacon's executive officers for a period
of six years which will provide the directors and officers with coverage on
substantially similar terms as currently provided by Beacon to such directors
and officers. Beacon shall have the right to reasonably review and approve any
such policy, which approval shall not be unreasonably withheld.
(d) This Section 5.9 is intended for the irrevocable benefit of, and to
grant third party rights to, the Indemnified Parties and their successors,
assigns and heirs and shall be binding on all successors and assigns of EOP.
Each of the Indemnified Parties shall be entitled to enforce the covenants
contained in this Section 5.9 and EOP acknowledges and agrees that each
Indemnified Party would suffer irreparable harm and that no adequate remedy at
law exists for a breach of such covenants and such Indemnified Party shall be
entitled to injunctive relief and specific performance in the event of any
breach of any provision in this Section.
(e) In the event that the Surviving Trust or any of its respective
successors or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case the successors
and assigns of such entity shall assume the obligations set forth in this
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Section 5.9, which obligations are expressly intended to be for the irrevocable
benefit of, and shall be enforceable by, each director and officer covered
hereby.
5.10 Declaration of Dividends and Distributions. From and after the date of
this Agreement, neither Beacon nor EOP shall make any dividend or distribution
to its shareholders without the prior written consent of the other party;
provided, however, the written consent of the other party shall not be required
for the authorization and payment of quarterly distributions with respect to the
Beacon Common Shares or EOP Common Shares for the dividend for the third quarter
of 1997 and for each quarterly dividend thereafter in an amount up to the
dividend per share paid by it for the second quarter of 1997 (provided that, for
purposes of this Section 5.10 only, EOP's dividend per share paid by it for the
second quarter of 1997 shall be deemed to be $.30); provided, however, the
record date for each distribution with respect to the Beacon Common Shares shall
be the same date as the record date for the quarterly distribution for the EOP
Common Shares as provided to Beacon by notice not less than twenty (20) business
days prior to the record date for any quarterly EOP distribution. From and after
the date of this Agreement, Beacon Partnership shall not make any distribution
to the holders of Beacon OP Units except a distribution per Beacon OP Unit in
the same amount as a dividend per Beacon Common Share permitted pursuant to this
Section, with the same record and payment dates as such dividend on the Beacon
Common Shares. The foregoing restrictions shall not apply, however, to the
extent a distribution by Beacon or EOP is necessary for Beacon or EOP, as
applicable, to maintain REIT status.
5.11 Transfer of Management Company Shares. At the Closing and pursuant to
the Stock Purchase Agreements, each of the holders of voting capital stock of
the Management Company, Design Company and Construction Company (other than
Beacon Partnership, to the extent it owns any such voting capital stock) shall
transfer to EOP Management Corp. or such person or persons as EOP Management
Corp. shall designate by written notice delivered to them prior to the Closing,
all of the shares of each such Company owned by them, constituting all the
outstanding shares of such companies which are not owned by Beacon Partnership,
for an aggregate consideration in an amount equal to the fair market value of
such shares, as determined in accordance with the provisions of the Stock
Purchase Agreements.
5.12 Notices. EOP shall provide such notice to its preferred shareholders
of the Merger as is required under Maryland law.
5.13 Resignations. On the Closing Date, Beacon shall cause the directors
and officers of each of the Beacon Subsidiaries to submit their resignations
from such positions, effective as of the Effective Time.
5.14 Third Party Management Agreements. Beacon will not, and will not
permit any of its Subsidiaries to, amend the management agreements pursuant to
which Beacon, directly or indirectly, manages buildings in which Beacon does not
own a 100% interest. Beacon will not, and will not permit any Beacon Subsidiary
to, renew such management agreements except on terms which permit its
cancellation by Beacon or the applicable Beacon Subsidiary on thirty days'
notice or less without any charge, penalty or other cost for such cancellation.
5.15 Existing Restrictions on Resale of Certain Beacon Properties. EOP and
EOP Partnership shall assume the obligations of Beacon, Beacon Partnership or
the applicable Beacon Subsidiary, as the case may be, under the Tax Protection
Agreements described in Schedule 2.18(j) to the Beacon Disclosure Letter.
5.16 Agreement to Hold Certain Properties and Maintain Certain
Indebtedness. EOP and EOP Partnership will enter into agreements with Beacon and
Beacon Partnership, for the benefit of and enforceable by the individuals and
entities set forth in Schedule 5.16 hereto, implementing the principal terms set
forth in Schedule 5.16 hereto, the purpose of which is to permit the individuals
and entities set forth in Schedule 5.16 hereto to defer the recognition of gain
for federal income tax purposes that otherwise would be recognized if certain
properties were to be sold and/or certain outstanding loans were to be repaid.
EOP, EOP Partnership, Beacon and Beacon Partnership agree to negotiate in good
faith the specific provisions of such agreements consistent with the principal
terms set forth in Schedule 5.16 hereto and enter into such agreements prior to
the Closing Date.
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5.17 RWLP Corp. If requested by EOP Management Corp., Beacon and Beacon
Partnership shall use their reasonable best efforts to (a) cause RWLP Corp. to
sell its interest in Rowes Wharf Limited Partnership to Design Corp.,
Construction Corp. or such other person as may be designated by EOP Management
Corp. for the fair market value thereof at or within two (2) years after the
Effective Time; (b) cause the stockholders of RWLP Corp. to sell all of their
stock of RWLP Corp. to Design Corp., Construction Corp. or such other person as
may be designated by EOP Management Corp. for the fair market value thereof at
or within two (2) years after the Effective Time; and (c) take such other
actions in connection with RWLP Corp. as EOP Management Corp. reasonably may
request, including, without limitation, converting the general partner interest
of RWLP Corp. in Rowes Wharf Limited Partnership into a limited partnership
interest and consenting to the substitution of Design Corp., Construction Corp.,
or such other person as may be designated by EOP Management Corp., as a general
partner of Rowes Wharf Limited Partnership.
ARTICLE 6
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
obligations of each party to effect the Mergers and to consummate the other
transactions contemplated by this Agreement to occur on the Closing Date shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Shareholder and Partner Approvals. This Agreement, the Mergers and
all other matters necessary to consummate the other transactions
contemplated to occur on the Closing Date and the transactions contemplated
by this Agreement shall have been approved and adopted by the Shareholder
Approvals and all required Partner Approvals shall have been obtained.
(b) HSR Act. The waiting period (and any extension thereof) applicable
to the Partnership Merger, the Merger and the transactions contemplated by
the Stock Purchase Agreements under the HSR Act, if applicable to the
Partnership Merger, the Merger and the transactions contemplated by the
Stock Purchase Agreements, shall have expired or been terminated.
(c) Listing of Shares. The NYSE shall have approved for listing the
EOP Common Shares and the EOP Preferred Shares to be issued in the Merger
and the EOP Common Shares reserved for issuance upon redemption of EOP OP
Units issued in the Partnership Merger, subject to official notice of
issuance.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Mergers or any of the other transactions
contemplated hereby shall be in effect.
(f) Blue Sky Laws. EOP shall have received all state securities or
"blue sky" permits and other authorizations necessary to issue the EOP
Common Shares, EOP Preferred Shares and EOP OP Units issuable in the
Mergers.
6.2 Conditions to Obligations of EOP and EOP Partnership. The obligations
of EOP and EOP Partnership to effect the Mergers and to consummate the other
transactions contemplated to occur on the Closing Date are further subject to
the following conditions, any one or more of which may be waived by EOP:
(a) Representations and Warranties. The representations and warranties
of Beacon and Beacon Partnership set forth in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and
as of the Closing Date, as though made on and as of the Closing Date,
except to the extent such representation or warranty is expressly limited
by its terms to another date, and EOP shall have received a certificate
(which certificate may be qualified by Knowledge to the same extent as the
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representations and warranties of Beacon and Beacon Partnership contained
herein are so qualified) signed on behalf of Beacon by the chief executive
officer or the chief financial officer of Beacon, in such capacity, to such
effect.
(b) Performance of Obligations of Beacon and Beacon
Partnership. Beacon and Beacon Partnership shall have performed in all
material respects all obligations required to be performed by them under
this Agreement at or prior to the Effective Time, and EOP shall have
received a certificate signed on behalf of Beacon by the chief executive
officer or the chief operating officer of Beacon, in such capacity, to such
effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no Beacon Material Adverse Change and EOP shall have
received a certificate of the chief executive officer or chief operating
officer of Beacon, in such capacity, certifying to such effect.
(d) Tax Opinions Relating to REIT Status and Partnership Status. EOP
shall have received (i) an opinion of Goodwin, Procter & Hoar LLP or other
counsel to Beacon reasonably satisfactory to EOP, dated as of the Closing
Date, to the effect that, commencing with its taxable year ended December
31, 1994, (x) Beacon was organized and has operated in conformity with the
requirements for qualification as a REIT under the Code, and (y) Beacon
Partnership has been during and since 1994, and continues to be, treated
for federal income tax purposes as a partnership and not as a corporation
or association taxable as a corporation (with customary exceptions,
assumptions and qualifications and based upon customary representations)
and (ii) an opinion of Hogan & Hartson L.L.P. or other counsel to EOP
reasonably satisfactory to Beacon, dated as of the Closing Date, to the
effect that, commencing with its taxable year ending December 31, 1997, EOP
was organized and has operated in conformity with the requirements for
qualification as a REIT under the Code and that, after giving effect to the
Merger, EOP's proposed method of operation will enable it to continue to
meet the requirements for qualification and taxation as a REIT under the
Code (with customary exceptions, assumptions and qualifications and based
upon customary representations and based upon and subject to the opinion of
counsel to Beacon described in clause (i) above).
(e) Tax Opinion Relating to Merger. EOP shall have received an opinion
dated the Closing Date from Hogan & Hartson L.L.P., Sullivan & Cromwell or
other counsel reasonably satisfactory to EOP, based upon customary
certificates and letters, which letters and certificates are to be in a
form to be agreed upon by the parties and dated the Closing Date, to the
effect that the Merger will qualify as a reorganization under the
provisions of Section 368(a) of the Code.
(f) Consents. All consents and waivers (including, without limitation,
waivers of rights of first refusal) from third parties necessary in
connection with the consummation of the transactions contemplated by this
Agreement shall have been obtained, other than such consents and waivers
from third parties, which, if not obtained, would not result, individually
or in the aggregate, in an EOP Material Adverse Effect or a Beacon Material
Adverse Effect.
(g) "Comfort" Letter. EOP and EOP Partnership shall have received a
"comfort" letter from Coopers & Lybrand, LLP, as described in Section
5.1(b).
(h) Shares of the Management, Design and Construction Companies. All
of the voting shares of the Management Company, the Design Company and the
Construction Company (other than any such shares owned by Beacon
Partnership) shall have been transferred to EOP Management Corp., or its
designees or assigns, in accordance with the Stock Purchase Agreements.
6.3 Conditions to Obligations of Beacon and Beacon Partnership. The
obligations of Beacon and Beacon Partnership to effect the Mergers and to
consummate the other transactions contemplated to occur on the Closing Date is
further subject to the following conditions, any one or more of which may be
waived by Beacon:
(a) Representations and Warranties. The representations and warranties
of EOP and EOP Partnership set forth in this Agreement shall be true and
correct in all material respects as of the date of this
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Agreement and as of the Closing Date, as though made on and as of the
Closing Date, except to the extent the representation or warranty is
expressly limited by its terms to another date, and Beacon shall have
received a certificate (which certificate may be qualified by Knowledge to
the same extent as such representations and warranties of EOP and EOP
Partnership contained herein are so qualified) signed on behalf of EOP by
the chief executive officer or the chief financial officer of such party,
in such capacity, to such effect.
(b) Performance of Obligations of EOP and EOP Partnership. EOP and EOP
Partnership shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the
Effective Time, and Beacon shall have received a certificate of EOP signed
on behalf of EOP by the chief executive officer or the chief financial
officer of EOP, in such capacity, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no EOP Material Adverse Change and Beacon shall have
received a certificate of the chief executive officer or chief financial
officer of EOP, in such capacity, certifying to such effect.
(d) Tax Opinions Relating to REIT Status and Partnership
Status. Beacon shall have received an opinion of Hogan & Hartson L.L.P. or
other counsel to EOP, reasonably satisfactory to Beacon, dated as of the
Closing Date, that, commencing with its taxable year ended December 31,
1997, (i) EOP was organized and has operated in conformity with the
requirements for qualification as a REIT under the Code and (ii) EOP
Operating Partnership has been during and since 1997, and continues to be,
treated for federal income tax purposes as a partnership and not as a
corporation or association taxable as a corporation (with customary
exceptions, assumptions and qualifications and based upon customary
representations).
(e) Tax Opinion Relating to Merger. Beacon shall have received an
opinion dated the Closing Date from Goodwin, Procter & Hoar LLP, Sullivan &
Cromwell or other counsel reasonably satisfactory to Beacon, based upon
customary certificates and letters, which letters and certificates are to
be in a form to be agreed upon by the parties and dated the Closing Date,
to the effect that the Merger will qualify as a reorganization under the
provisions of Section 368(a) of the Code.
(f) Consents. All consents and waivers (including, without limitation,
waivers or rights of first refusal) from third parties necessary in
connection with the consummation of the transactions contemplated hereby
shall have been obtained, other than such consents and waivers from third
parties, which, if not obtained, would not result, individually or in the
aggregate, in an EOP Material Adverse Effect or a Beacon Material Adverse
Effect.
(g) "Comfort" Letter. Beacon and Beacon Partnership shall have
received a "comfort" letter from Ernst & Young LLP, as described in Section
5.1(b).
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
filing of the Articles of Merger with the Department, whether before or after
either of the Shareholder Approvals or the Beacon Unitholder Approvals are
obtained:
(a) by mutual written consent duly authorized by the Board of Trustees
of EOP and the Board of Directors of Beacon;
(b) by EOP, upon a breach of any representation, warranty, covenant,
obligation or agreement on the part of Beacon or Beacon Partnership set
forth in this Agreement, or if any representation or warranty of Beacon or
Beacon Partnership shall become untrue, in either case such that the
conditions set forth in Section 6.2(a) or Section 6.2(b), as the case may
be, would be incapable of being satisfied by April 15, 1998 (or as
otherwise extended);
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(c) by Beacon, upon a breach of any representation, warranty, covenant
obligation or agreement on the part of EOP or EOP Partnership set forth in
this Agreement, or if any representation or warranty of EOP or EOP
Partnership shall become untrue, in either case such that the conditions
set forth in Section 6.3(a) or Section 6.3(b), as the case may be, would be
incapable of being satisfied by April 15, 1998 (or as otherwise extended);
(d) by either EOP or Beacon, if any judgment, injunction, order,
decree or action by any Governmental Entity of competent authority
preventing the consummation of the Merger shall have become final and
non-appealable;
(e) by either EOP or Beacon, if the Merger shall not have been
consummated before April 15, 1998; provided, however, that a party may not
terminate pursuant to this clause (e) if the terminating party shall have
breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the occurrence of the
failure referred to in this clause;
(f) by either EOP or Beacon (unless Beacon or Beacon Partnership is in
breach of its obligations under Section 5.1) if, upon a vote at a duly held
Beacon Shareholders Meeting or any adjournment thereof, the Beacon
Shareholder Approvals shall not have been obtained as contemplated by
Section 5.1 (excluding Section 5.1(d));
(g) by either Beacon or EOP (unless EOP or EOP Partnership is in
breach of its obligations under Section 5.1 (excluding Section 5.1(d)) if,
upon a vote at a duly held EOP Shareholders Meeting or any adjournment
thereof, the EOP Shareholder Approvals shall not have been obtained as
contemplated by Section 5.1 (excluding Section 5.1(d));
(h) by Beacon, if prior to the Beacon Shareholders Meeting, the Board
of Directors of Beacon shall have withdrawn or modified in any manner
adverse to EOP its approval or recommendation of the Merger or this
Agreement in connection with, or approved or recommended, a Superior
Acquisition Proposal; provided, however, that such termination shall not be
effective prior to the payment of the Break-Up Fee to the extent required
by Section 7.2;
(i) by EOP, if (A) prior to the Beacon Shareholders Meeting, the Board
of Directors of Beacon shall have withdrawn or modified in any manner
adverse to EOP its approval or recommendation of the Merger or this
Agreement in connection with, or approved or recommended, any Superior
Acquisition Proposal, (B) Beacon shall have entered into any agreement for
any Acquisition Proposal, or (C) the Board of Directors of Beacon or any
committee thereof shall have resolved to do any of the foregoing; and
(j) by Beacon at any time during the seven (7) trading day period
following the Pricing Period (as defined below) if the Average Closing
Price (as defined below) shall be less than Twenty-Seven Dollars and
Thirty-Nine Cents ($27.39). If Beacon elects to exercise its termination
right pursuant to this Section 7.1(j), it shall give written notice to EOP
(provided that such notice of election to terminate may be withdrawn at any
time within the aforementioned seven (7) trading day period). For purposes
of this Section 7.1(j), (i) the term "Average Closing Price" means the
average of the closing prices of EOP Common Stock, on the New York Stock
Exchange for all trading days during the Pricing Period, and (ii) "Pricing
Period" means the period of twenty (20) consecutive trading days commencing
on the twenty-seventh (27th) trading day prior to the date of the Beacon
Shareholders Meeting.
7.2 Certain Fees and Expenses. If this Agreement shall be terminated (i)
pursuant to Section 7.1(h) or 7.1(i), then Beacon and Beacon Partnership
thereupon shall pay to EOP Partnership (provided that Beacon was not entitled to
terminate this Agreement pursuant to Section 7.1(c) at the time of such
termination) a fee equal to the Break-Up Fee (as defined below), and (ii)
pursuant to Section 7.1(b) (subject to the proviso in the final sentence of
Section 2.8) or 7.1(f), then Beacon and Beacon Partnership shall pay to EOP
Partnership (provided that Beacon was not entitled to terminate this Agreement
pursuant to Section 7.1(c) at the time of such termination) an amount equal to
the Break-Up Expenses (as defined below). If this Agreement shall be terminated
pursuant to Section 7.1(c) or 7.1(g), then EOP and EOP Partnership shall pay
Beacon Partnership (provided that EOP was not entitled to terminate this
Agreement pursuant to Section 7.1(b) at the time of such termination) an amount
equal to the Break-Up Expenses. If this Agreement shall be
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terminated pursuant to Section 7.1(b), 7.1(d) (if primarily resulting from any
action or inaction of Beacon or any Beacon Subsidiary), 7.1(e), 7.1(f) or 7.1(j)
and prior to the time of such termination an Acquisition Proposal has been
received by Beacon or any Beacon Subsidiary, and either prior to the termination
of this Agreement or within twelve (12) months thereafter, Beacon or any Beacon
Subsidiary enters into any written Acquisition Proposal which is subsequently
consummated (whether or not any such Acquisition Proposal is the same
Acquisition Proposal which had been received at the time of the termination of
this Agreement), then Beacon and Beacon Partnership shall pay the Break-Up Fee
to EOP Partnership. If prior to the Beacon Shareholders Meeting the Board of
Directors of Beacon shall have withdrawn or modified in any manner adverse to
EOP its approval or recommendation of the Merger or this Agreement and, within
twelve (12) months after termination of this Agreement, Beacon or Beacon
Partnership enters into any written Acquisition Proposal which is subsequently
consummated (whether or not any Acquisition Proposal had been received prior to
the time of the termination of this Agreement), then Beacon and Beacon
Partnership shall pay the Break-Up Fee to EOP Partnership. If this Agreement
shall be terminated pursuant to Section 7.1(j) and within six (6) months
thereafter, Beacon or any Beacon Subsidiary enters into any written Acquisition
Proposal which is subsequently consummated (whether or not any Acquisition
Proposal had been received at the time of the termination of this Agreement),
then Beacon and Beacon Partnership shall pay the Break-Up Fee to EOP
Partnership. The payment of the Break-Up Fee shall be compensation for the loss
suffered by EOP and EOP Partnership as a result of the failure of the Mergers to
be consummated (including, without limitation, opportunity costs and
out-of-pocket costs and expenses) and to avoid the difficulty of determining
damages under the circumstances. The Break-Up Fee shall be paid by Beacon and
Beacon Partnership to EOP Partnership, or the Break-Up Expenses shall be paid by
Beacon and Beacon Partnership to EOP Partnership or EOP Partnership to Beacon
Partnership (as applicable), in immediately available funds within fifteen (15)
calendar days after the date the event giving rise to the obligation to make
such payment occurred (except as otherwise provided in Section 7.1(h)). As used
in this Agreement, "Break-Up Fee" shall be an amount equal to the lesser of (i)
$75,000,000 less Break-Up Expenses paid or payable under this Section 7.2 (the
"Base Amount") and (ii) the sum of (A) the maximum amount that can be paid to
EOP Partnership without causing EOP to fail to meet the requirements of Sections
856(c)(2) and (3) of the Code determined as if the payment of such amount did
not constitute income described in Sections 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by independent
accountants to EOP, and (B) in the event EOP receives a letter from outside
counsel (the "Break-Up Fee Tax Opinion") indicating that EOP has received a
ruling from the IRS holding that EOP Partnership's receipt of the Base Amount
would either constitute Qualifying Income or would be excluded from gross income
of EOP within the meaning of Sections 856(c)(2) and (3) of the Code (the "REIT
Requirements") or that the receipt by EOP Partnership of the remaining balance
of the Base Amount following the receipt of and pursuant to such ruling would
not be deemed constructively received prior thereto, the Base Amount less the
amount payable under clause (A) above. Beacon's and Beacon Partnership's
obligation to pay any unpaid portion of the Break-Up Fee shall terminate three
years from the date of this Agreement. In the event that EOP Partnership is not
able to receive the full Base Amount, Beacon and Beacon Partnership shall place
the unpaid amount in escrow and shall not release any portion thereof to EOP
Partnership unless and until Beacon receives either one of the following: (i) a
letter from EOP's independent accountants indicating the maximum amount that can
be paid at that time to EOP Partnership without causing EOP to fail to meet the
REIT Requirements or (ii) a Break-Up Fee Tax Opinion, in either of which events
Beacon and Beacon Partnership shall pay to EOP Partnership the lesser of the
unpaid Base Amount or the maximum amount stated in the letter referred to in (i)
above. The "Break-Up Expenses" payable to EOP Partnership or Beacon Partnership,
as the case may be (the "Recipient"), shall be an amount equal to the lesser of
(i) $10,000,000, (ii) the Recipient's out-of-pocket expenses incurred in
connection with this Agreement and the transactions contemplated hereby
(including, without limitation, all attorneys', accountants' and investment
bankers' fees and expenses) or (iii) the sum of (A) the maximum amount that can
be paid to the Recipient without causing EOP or Beacon, as the case may be, to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute Qualifying
Income, as determined by independent accountants to the EOP or Beacon, as the
case may be, and (B) in the event EOP or Beacon, as the case may be, receives a
Break-Up Fee Tax Opinion indicating that it has received a ruling from the IRS
holding that the Recipient's receipt of the Break-Up Expenses would either
constitute Qualifying Income or would be excluded from gross income of
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EOP or Beacon, as the case may be, within the meaning of the REIT Requirements
or that receipt by the Recipient of the remaining balance of the Break-Up
Expenses following the receipt of and pursuant to such ruling would not be
deemed constructively received prior thereto, the Break-Up Expenses less the
amount payable under clause (A) above. The obligation of EOP and EOP Partnership
or Beacon and Beacon Partnership, as applicable ("Payor"), to pay any unpaid
portion of the Break-Up Expenses shall terminate three years from the date of
this Agreement. In the event that the Recipient is not able to receive the full
Break-Up Expenses, the Payor shall place the unpaid amount in escrow and shall
not release any portion thereof to the Recipient unless and until the Payor
receives either one of the following: (i) a letter from the independent
accountants of EOP or Beacon, as the case may be, indicating the maximum amount
that can be paid at that time to the Recipient without causing it to fail to
meet the REIT Requirements or (ii) a Break-Up Expense Tax Opinion, in either of
which events the Payor shall pay to the Recipient the lesser of the unpaid
Break-Up Expenses or the maximum amount stated in the letter referred to in (i)
above.
7.3 Effect of Termination. In the event of termination of this Agreement by
either Beacon or EOP as provided in Section 7.1, this Agreement shall forthwith
become void and have no effect, without any liability or obligation on the part
of EOP, EOP Partnership, Beacon or Beacon Partnership, other than the last
sentence of Section 5.2, Section 7.2, this Section 7.3 and Article 8, and except
to the extent that such termination results from a material breach by any party
of any of its representations, warranties, covenants or agreements set forth in
this Agreement.
7.4 Amendment. This Agreement may be amended by the parties in writing by
action of the respective Board of Trustees or Board of Directors of EOP and
Beacon at any time before or after any Shareholder Approvals are obtained and
prior to the filing of the Articles of Merger with the Department; provided,
however, that, after the Shareholder Approvals and Partner Approvals are
obtained, no such amendment, modification or supplement shall be made which by
law requires the further approval of shareholders without obtaining such further
approval. The parties agree to amend this Agreement in the manner provided in
the immediately preceding sentence to the extent required to (a) continue the
status of each party as a REIT or (b) preserve the Merger as a tax-free
reorganization under Section 368 of the Code.
7.5 Extension; Waiver. At any time prior to the Effective Time, the parties
may (a) extend the time for the performance of any of the obligations or other
acts of the other party, (b) waive any inaccuracies in the representations and
warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.4, waive compliance with any of the agreements or conditions of the other
party contained in this Agreement. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
ARTICLE 8
GENERAL PROVISIONS
8.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement confirming the representations and warranties in this
Agreement shall survive the Effective Time. This Section 8.1 shall not limit any
covenant or agreement of the parties which by its terms contemplates performance
after the Effective Time.
8.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be delivered
personally, sent by overnight courier (providing proof of delivery) to
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the parties or sent by telecopy (providing confirmation of transmission) at the
following addresses or telecopy numbers (or at such other address or telecopy
number for a party as shall be specified by like notice):
(a) if to EOP, to:
Equity Office Properties Trust
Two North Riverside Plaza, 22nd Floor
Chicago, Illinois 60606
Attention: Timothy H. Callahan, President
Stanley M. Stevens, Chief Counsel
Fax No.: (312) 559-5021
with a copy to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attention: J. Warren Gorrell, Jr., Esq.
James E. Showen, Esq.
Fax No.: (202) 637-5910
(b) if to Beacon, to:
Beacon Properties Corporation
50 Rowes Wharf
Boston, Massachusetts 02110
Attention: President
Fax.: (617) 251-0151
with a copy to:
Goodwin Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attention: Gilbert G. Menna, P.C.
Kathryn I. Murtagh, Esq.
Fax No.: (617) 523-1231
All notices shall be deemed given only when actually received.
8.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
8.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement, the
Beacon Disclosure Letter, the EOP Disclosure Letter, the Confidentiality
Agreement, the Voting Agreements and the other agreements entered into in
connection with the Mergers (a) constitute the entire agreement and supersede
all prior agreements and understandings, both written and oral (including,
without limitation, in connection with the form of this Agreement executed on
September 15, 1997) between the parties with respect to the subject matter of
this Agreement and (b) except as provided in Section 1.7, 1.11, 5.8, 5.9, 5.15,
5.16, and 8.10 ("Third Party Provisions"), are not intended to confer upon any
person other than the parties hereto any rights or remedies. The Third Party
Provisions may be enforced by the beneficiaries thereof or on behalf of the
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beneficiaries thereof by the directors of Beacon who had been members of the
Board of Directors of Beacon prior to the Effective Time.
8.6 Governing Law. THE PARTNERSHIP MERGER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF
LAWS THEREOF. EXCEPT AS PROVIDED IN THE IMMEDIATELY PRECEDING SENTENCE, THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER
APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
8.7 Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned or delegated, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
8.8 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any federal court located in
Maryland or in any state court located in Maryland this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (a) consents to submit itself (without making such
submission exclusive) to the personal jurisdiction of any federal court located
in Maryland or any state court located in Maryland in the event any dispute
arises out of this Agreement or any of the transactions contemplated by this
Agreement and (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court.
8.9 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
8.10 EOP Extension Option. Notwithstanding anything to the contrary in
Sections 5.1(c), 7.1(b) or 7.1(e), in the event of any preliminary, temporary or
other nonfinal judgment, injunction, order, decree or action by any court (each
an "Action") preventing, delaying or otherwise materially adversely affecting
the consummation of either of the Mergers primarily resulting from any action or
inaction of Beacon, EOP shall have the right, in its sole and absolute
discretion, by giving written notice to Beacon, to preclude Beacon (for one or
more periods aggregating not more than six (6) months) from terminating this
Agreement pursuant to Section 7.1(e) or 7.1(h) (unless, in the case of Section
7.1(h), the Board of Directors of Beacon shall have acted in the circumstances
described in Section 7.1(h) without basing its decision in any way, directly or
indirectly, on the Action), for the period of such prevention, delay or material
adverse effect plus fifteen (15) days, in which event each of the dates referred
to in Sections 5.1(c), 7.1(b) or 7.1(e) shall be extended for each such period.
8.11 Exculpation. This Agreement shall not impose any personal liability on
any shareholder, trustee, officer, employee or agent of EOP, and all Persons
shall look solely to the property of EOP for the payment of any claim hereunder
or for the performance of this Agreement.
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IN WITNESS WHEREOF, EOP, EOP Partnership, Beacon and Beacon Partnership
have caused this Agreement to be signed by their respective officers (or general
partners) thereunto duly authorized all as of the date first written above.
EQUITY OFFICE PROPERTIES TRUST
By: /s/ TIMOTHY H. CALLAHAN
----------------------------------
Name: Timothy H. Callahan
Title: President and CEO
EOP OPERATING LIMITED PARTNERSHIP
By: Equity Office Properties Trust,
its managing general partner
By: /s/ TIMOTHY H. CALLAHAN
----------------------------------
Name: Timothy H. Callahan
Title: President and CEO
BEACON PROPERTIES CORPORATION
By: /s/ LIONEL P. FORTIN
----------------------------------
Name: Lionel P. Fortin
Title: Executive Vice President
BEACON PROPERTIES, L.P.
By: Beacon Properties Corporation,
its sole general partner
By: /s/ LIONEL P. FORTIN
----------------------------------
Name: Lionel P. Fortin
Title: Executive Vice President
45
<PAGE> 376
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment is entered into as of November 14, 1997 for the
purposes of amending the Agreement and Plan of Merger dated as of September 15,
1997 by and among Equity Office Properties Trust, EOP Operating Limited
Partnership, Beacon Properties Corporation and Beacon Properties, L.P. (the
"Merger Agreement"). All capitalized terms used herein without definition shall
have the meanings ascribed to them in the Merger Agreement.
WHEREAS, the parties hereto desire to amend the Merger Agreement to clarify
certain matters as provided herein.
NOW THEREFORE, in consideration of the mutual covenants set forth herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
Section 1. Preferred Stockholder Voting
Section 5.1(a) of the Merger Agreement shall be amended by deleting clauses
5.1(a)(i)(x) and 5.1(a)(i)(y) in their entirety and replacing them with the
following:
"(x) one or more joint proxy statement(s)/prospectus(es) and forms of
proxies (such joint proxy statement(s)/prospectus(es) together with any
amendments or supplements thereto, the "Common Proxy Statement") relating
to the stockholder meetings of each of Beacon and EOP, the vote of the
stockholders of Beacon and EOP with respect to the Merger, and the consent,
if any, of the partners of Beacon Partnership and EOP Partnership in
connection with any required Partner Approvals and (y) a proxy
statement/prospectus relating to the issuance of EOP Preferred Shares (the
"Preferred Proxy Statement" and, together with the Common Proxy Statement,
the "Proxy Statement") pursuant to the Merger and"
Section 5.1(a) of the Merger Agreement shall be amended further by deleting
the words "and any information statement/prospectus described in clause (y)
above" from the third clause of Section 5.1(a)(ii).
Section 5(d) of the Merger Agreement shall be amended to replace each
reference to the "Proxy Statement" with a reference to the "Common Proxy
Statement."
Section 2. Payment of Final Dividends; Fourth Quarter Dividend
Section 1.14 of the Merger Agreement shall be amended by deleting the last
sentence of Section 1.14(d)(i) and replacing it in its entirety with the
following:
"The dividends payable hereunder to holders of Beacon Common Shares shall
be paid on the Closing Date prior to the Effective Time."
Section 1.14 of the Merger Agreement shall be amended further to add
Section 1.14(d)(iii) as follows:
"(iii) Notwithstanding anything in this Section 1.14(d) to the
contrary, if the Closing Date shall occur on or before December 31, 1997,
(x) Beacon shall declare and pay to its stockholders of record as of
December 10, 1997, a dividend for the fiscal period commencing October 1,
1997 and ending immediately prior to the Effective Time of $.50 per Beacon
Common Share, such dividend to be paid on the Closing Date prior to the
Effective Time and (y) EOP shall declare and pay to its shareholders of
record on December 10, 1997, a dividend for the fiscal period commencing
October 1, 1997 and ending immediately prior to the Effective Time of $.30
per EOP Common Share, such dividend to be paid on the Closing Date prior to
the Effective Time. The foregoing dividends shall be in addition to, and
not in lieu of, any dividends required pursuant to Section 1.14(d)(i).
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<PAGE> 377
Section 5.10 of the Merger Agreement shall be amended to add the following
proviso at the beginning of the first sentence of such Section:
"Except as otherwise provided in Section 1.14(d)(iii) of the Agreement,"
Section 3. Registration Rights Agreements
Section 1.11 of the Merger Agreement shall be revised by adding the
following sentences at the end of such section:
"The Form S-4 (as defined below) shall register the issuance of the EOP
Common Shares to be issued upon the redemption of the EOP OP Units received
by a holder of Beacon OP Units in the Merger. Notwithstanding anything in
the EOP Partnership Agreement to the contrary, if EOP is unable to issue
EOP Common Shares pursuant to the Form S-4 (or another registration
statement) at the time of a redemption of EOP OP Units by a former holder
of Beacon OP Units, then EOP agrees to cause the EOP Partnership to redeem
such EOP OP Units for cash. Any such redemption shall be made in accordance
with the procedures for redemption set forth in the EOP Partnership
Agreement."
Section 5. Additional Covenants
Section 5.1(g) of the Merger Agreement shall be deleted in its entirety and
replaced with the following:
"If on the date of the EOP Shareholders Meeting and Beacon Shareholders
Meeting established pursuant to Section 5.1(f) of this Agreement, either
EOP or Beacon has not received duly executed proxies for a sufficient
number of votes to approve the Merger (but less than one-third of the
outstanding Beacon Common Shares, one-third of the outstanding Beacon
Preferred Shares or a majority of the EOP Common Shares, as the case may
be, have voted against the Merger), than both parties shall recommend the
adjournment of their respective shareholders meetings until one or more
dates not later than the date ten (10) days after the originally scheduled
date of the shareholders meetings.
Section 7. Construction of Merger Agreement
The Merger Agreement shall be read together and shall have the same force
and effect as if the provisions of the Merger Agreement and this First Amendment
were contained in one document. Except as expressly amended by this First
Amendment, the Merger Agreement shall remain in full force and effect in
accordance with its terms.
Section 8. Counterparts
This First Amendment may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
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<PAGE> 378
IN WITNESS WHEREOF, EOP, EOP Partnership, Beacon and Beacon Partnership
have caused this Agreement to be signed by their respective officers (or general
partners) thereunto duly authorized all as of the date first written above.
EQUITY OFFICE PROPERTIES TRUST
By: /s/ STANLEY M. STEVENS
------------------------------------
Name: Stanley M. Stevens
Title: Executive Vice President
EOP OPERATING LIMITED PARTNERSHIP
By: Equity Office Properties Trust,
its managing general partner
By: /s/ STANLEY M. STEVENS
----------------------------------
Name: Stanley M. Stevens
Title: Executive Vice President
BEACON PROPERTIES CORPORATION
By: /s/ LIONEL P. FORTIN
------------------------------------
Name: Lionel P. Fortin
Title: Executive Vice President
BEACON PROPERTIES, L.P.
By: Beacon Properties Corporation, its
sole general partner
By: /s/ LIONEL P. FORTIN
----------------------------------
Name: Lionel P. Fortin
Title: Executive Vice President
A-3
<PAGE> 379
ANNEX II
OPINION OF J.P. MORGAN SECURITIES INC.
<PAGE> 380
JPMORGAN
September 15, 1997
The Board of Trustees
Equity Office Properties Trust
Two North Riverside Plaza
Chicago, Illinois 60606
Attention: Mr. Timothy H. Callahan
Chief Executive Officer
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Equity Office Properties Trust (individually, and together with EOP
Operating Limited Partnership, the "Company") of the consideration proposed to
be paid by the Company in connection with the proposed merger (the "Merger") of
the Company with Beacon Properties Corporation (individually, and together with
Beacon Properties, L.P., the "Seller"). Pursuant to the Agreement and Plan of
Merger, dated as of September 15, 1997 (the "Agreement"), between the Company
and the Seller, each common share of the Seller, $0.01 par value per share, will
be converted into 1.4063 common shares of beneficial interest of the Company,
each share of 8.98% Series A Cumulative Redeemable Preferred Stock, liquidation
preference $25.00 per share, of the Seller, will be converted into one 8.98%
cumulative redeemable preferred share of beneficial interest, liquidation
preference $25.00 per share, and each unit of limited partnership interest in
Beacon Properties, L.P. will be converted into 1.4063 common units of EOP
Operating Limited Partnership.
In arriving at our opinion set forth below, we have reviewed, among other
things: (i) the Agreement; (ii) certain publicly available information
concerning the business of the Seller and of certain other companies engaged in
businesses comparable to those of the Seller, and the reported market prices for
certain other companies' securities deemed comparable; (iii) publicly available
terms of certain transactions involving companies comparable to the Seller and
the consideration received for such companies; (iv) current and historical
market prices of the common shares of beneficial interest of the Company and the
common shares of the Seller; (v) audited financial statements of the Seller on
Form 10-K for the fiscal year ended December 31, 1996, and unaudited financial
statements of the Seller on Form 10-Q for the six months ended June 30, 1997;
(vi) unaudited financial statements for Equity Office Predecessors (as such term
is defined in the Company's Form 10-Q for the period ended June 30, 1997),
together with the unaudited Pro Forma Statement of Operations for the Company as
shown in the Company's Form 10-Q for the period ended June 30, 1997, (vii)
certain agreements with respect to outstanding indebtedness or obligations of
the Company and the Seller; (viii) certain internal financial analyses and
estimates of budgeted 1998 funds from operations and net operating income
prepared by the Company and the Seller and their respective managements; and
(ix) the terms of other business combinations that we deemed relevant.
In addition, we have held discussions with certain members of the
management of the Company and the Seller with respect to certain aspects of the
Merger, and the past and current business operations of the Company and the
Seller, the financial condition and future prospects and operations of the
Company and the Seller, the effects of the Merger on the financial condition and
future prospects of the Company and the Seller, and certain other matters we
believed necessary or appropriate to our inquiry. We have reviewed such other
financial studies and analyses and considered such other information as we
deemed appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company and the Seller or otherwise
reviewed by us, and we have not assumed any responsibility or liability
therefor. We have not conducted any valuation or appraisal of any assets or
liabilities, nor have any such valuations or appraisals
<PAGE> 381
JPMORGAN
been provided to us. In relying on financial analyses and forecasts provided to
us, we have assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management as
to the expected future results of operations and financial condition of the
Company and the Seller to which such analyses or forecasts relate. We have also
assumed that the Merger will have the tax consequences described in discussions
with, and materials furnished to us by, representatives of the Company, and that
the other transactions contemplated by the Agreement will be consummated as
described in the Agreement. We have relied as to all legal matters relevant to
rendering our opinion upon the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect this
opinion and that we do not have any obligation to update, revise, or reaffirm
this opinion. We are expressing no opinion herein as to the price at which the
Company's or the Seller's shares will trade at any future time.
We did not participate in negotiations with respect to the terms of the
Merger and related transactions. Consequently, we have assumed that such terms
are the most beneficial terms from the Company's perspective that could under
the circumstances be negotiated among the parties to such transactions.
We will receive a fee from the Company for the delivery of this opinion,
and for advisory services provided in connection with this transaction. Our
affiliate, Morgan Guaranty Trust Company of New York ("MGT"), is an arranger on
the Company's revolving credit facility and expects to arrange additional
financing for the Company. We have also provided other financial advisory
services to the Company in the past and have received fees for such services. In
the ordinary course of their businesses, our affiliates may actively trade the
debt and equity securities of the Company or the Seller for their own account or
for the accounts of customers and, accordingly, they may at any time hold long
or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be paid by the Company in connection with
the proposed Merger is fair, from a financial point of view, to the Company,
including EOP Operating Limited Partnership.
This letter is provided to the Board of Trustees of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any stockholder of the Company
as to how such stockholder should vote with respect to the Merger. This opinion
may not be disclosed, referred to, or communicated (in whole or in part) to any
third party for any purpose whatsoever except with our prior written consent in
each instance. This opinion may be reproduced in full in any proxy or
information statement mailed to stockholders of the Company but may not
otherwise be disclosed publicly in any manner without our prior written approval
and must otherwise be treated as confidential.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ PETER E. BACCILE
------------------------------------
Name: Peter E. Baccile
Title: Managing Director
<PAGE> 382
ANNEX III
OPINION OF MORGAN STANLEY & CO. INCORPORATED
<PAGE> 383
MORGAN STANLEY
MORGAN STANLEY REALTY
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4700
September 15, 1997
Board of Directors
Beacon Properties Corporation
50 Rowes Wharf
Boston, MA 02110
Members of the Board:
We understand that Beacon Properties Corporation ("Beacon" or the
"Company") and Equity Office Properties Trust ("Equity Office" or "Buyer") have
entered into an Agreement and Plan of Merger, dated September 15, 1997 (the
"Merger Agreement"), which provides, among other things, for the merger (the
"Merger") of Beacon with and into Equity Office. Pursuant to the Merger, each
outstanding share of common stock, par value $0.01 per share (the "Beacon Common
Stock") of Beacon, other than shares held in treasury or held by Buyer or any
affiliate of Buyer or as to which dissenters' rights have been perfected, will
be converted into the right to receive 1.4063 shares of common stock of Buyer,
par value $0.01 per share (the "Buyer Common Stock"), subject to certain
adjustments as set forth in the Merger Agreement. We further understand that, in
connection with the Merger, certain units evidencing limited partnership
interests in Beacon Properties, L.P. will be converted into the right to
exchange each such unit into 1.4063 Class A limited partnership units of EOP
Operating Limited Partnership, subject to certain adjustments as set forth in
the Merger Agreement. The terms and conditions of the Merger are more fully set
forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders (other than
Buyer and its affiliates).
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and Buyer, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and Buyer prepared by
the managements of the Company and Buyer, respectively;
(iii) analyzed certain financial projections for the Company and Buyer
prepared by the managements of the Company and Buyer, respectively;
(iv) reviewed the reported prices and trading activity for the Beacon
Common Stock and the Buyer Common Stock;
(v) compared the financial performance of the Company and the Buyer
and the prices and trading activity of the Beacon Common Stock and Buyer
Common Stock with that of certain other comparable publicly-traded
companies and their securities;
(vi) discussed with the senior management of the Company and Buyer
their estimates of the synergies and cost savings expected to be derived
from the Merger;
(vii) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(viii) reviewed the pro forma impact of the Merger on the Buyer's
funds from operations per share, consolidated capitalization and financial
ratios;
<PAGE> 384
MORGAN STANLEY
Board of Directors
Beacon Properties Corporation
September 15, 1997
Page 2
(ix) participated in discussions and negotiations among
representatives of the Company and Buyer and their financial and legal
advisors;
(x) reviewed the Merger Agreement and certain related documents; and
(xi) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including the estimates
of synergies and cost savings expected to be derived from the Merger, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial performance
of the Company and Buyer. We have not made any independent valuation or
appraisal of the assets or liabilities of the Company or Buyer, nor have we been
furnished with any such appraisals. We note that Buyer completed its initial
public offering on July 7, 1997 and, accordingly, has a limited trading and
operating history as a public company. Our opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets, nor did we negotiate with any party other than the Buyer,
with respect to the possible acquisition of the Company.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley Realty Incorporated and its affiliates have provided
financial advisory and financing services for the Company and Buyer and have
received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Beacon and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
filing made by Beacon with the Securities and Exchange Commission with respect
to the Merger. We express no opinion and make no recommendation as to how
shareholders of Beacon should vote at the shareholders' meeting to be held in
connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the holders of shares of Beacon
Common Stock pursuant to the Merger Agreement is fair from a financial point of
view to such holders (other than Buyer and its affiliates).
Very truly yours,
MORGAN STANLEY REALTY INCORPORATED
By: /s/ W. BLAKE BAIRD
---------------------------------------
W. Blake Baird
Principal
<PAGE> 385
1314-CPS-97
