<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EOP OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its governing instrument)
<TABLE>
<S> <C> <C>
DELAWARE 6798 36-4156801
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
TWO NORTH RIVERSIDE PLAZA, SUITE 2200
CHICAGO, ILLINOIS 60606
(Address of principal executive offices)
------------------------
STANLEY M. STEVENS
EXECUTIVE VICE PRESIDENT-CHIEF LEGAL COUNSEL
EQUITY OFFICE PROPERTIES TRUST
TWO NORTH RIVERSIDE PLAZA, SUITE 2200
CHICAGO, ILLINOIS 60606
(Name and address of agent for service)
------------------------
COPIES TO:
J. WARREN GORRELL, JR.
JAMES E. SHOWEN
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-1109
(202) 637-5600
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------------------
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED NOTE PRICE FEE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
6.375% Notes due 2003................................ $ 300,000,000 100% $ 300,000,000
6.625% Notes due 2005................................ 400,000,000 100% 400,000,000
6.750% Notes due 2008................................ 300,000,000 100% 300,000,000
7.250% Notes due 2018................................ 250,000,000 100% 250,000,000
6.376% MandatOry Par Put Remarketed Securities(SM)
due 2012........................................... 250,000,000 100% 250,000,000
7.24% Senior Notes due 2004.......................... 30,000,000 100% 50,000,000
7.36% Senior Notes due 2005.......................... 50,000,000 100% 30,000,000
7.44% Senior Notes due 2006.......................... 50,000,000 100% 50,000,000
7.41% Senior Notes due 2007.......................... 50,000,000 100% 50,000,000
Total.............................................. $1,680,000,000 $1,680,000,000 $495,600
==============================================================================================================================
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION, DATED MARCH 5, 1998
PROSPECTUS
$1,680,000,000
EOP OPERATING LIMITED PARTNERSHIP
OFFER TO EXCHANGE
6.375% NOTES DUE 2003 FOR ANY AND ALL OUTSTANDING 6.375% NOTES DUE 2003
6.625% NOTES DUE 2005 FOR ANY AND ALL OUTSTANDING 6.625% NOTES DUE 2005
6.750% NOTES DUE 2008 FOR ANY AND ALL OUTSTANDING 6.750% NOTES DUE 2008
7.250% NOTES DUE 2018 FOR ANY AND ALL OUTSTANDING 7.250% NOTES DUE 2018
6.376% MANDATORY PAR PUT REMARKETED SECURITIES(SM) DUE 2012 FOR ANY AND
ALL OUTSTANDING 6.376% MANDATORY PAR PUT REMARKETED SECURITIES(SM) DUE 2012
7.24% SENIOR NOTES DUE 2004 FOR ANY AND ALL OUTSTANDING 7.24% SENIOR NOTES DUE
2004
7.36% SENIOR NOTES DUE 2005 FOR ANY AND ALL OUTSTANDING 7.36% SENIOR NOTES DUE
2005
7.44% SENIOR NOTES DUE 2006 FOR ANY AND ALL OUTSTANDING 7.44% SENIOR NOTES DUE
2006
7.41% SENIOR NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 7.41% SENIOR NOTES DUE
2007
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998 UNLESS EXTENDED.
------------------------
EOP Operating Limited Partnership, a Delaware limited partnership (the
"Company"), is making this Exchange Offer (the "Exchange Offer") to provide
holders of its outstanding 6.375% Notes due 2003 (the "2003 Notes"), 6.625%
Notes due 2005 (the "2005 Notes"), 6.750% Notes due 2008 (the "2008 Notes"),
7.250% Notes due 2018 (the "2018 Notes" and, together with the 2003 Notes, the
2005 Notes and the 2008 Notes, the "$1.25 Billion Notes"), 6.376% MandatOry Par
Put Remarketed Securities(SM) due 2012 (the "MOPPRS(SM)"), 7.24% Senior Notes
due 2004 (the "2004 Senior Notes"), 7.36% Senior Notes due 2005 (the "2005
Senior Notes"), 7.44% Senior Notes due 2006 (the "2006 Senior Notes"), and 7.41%
Senior Notes due 2007 (the "2007 Senior Notes" and, together with the 2004
Senior Notes, the 2005 Senior Notes and the 2006 Senior Notes, the "$180 Million
Notes") the opportunity to exchange such notes for the 6.375% Notes due 2003,
6.625% Notes due 2005, 6.750% Notes due 2008, 7.250% Notes due 2018, 6.376%
MandatOry Par Put Remarketed Securities(SM) due 2012, 7.24% Senior Notes due
2004, 7.36% Senior Notes due 2005, 7.44% Senior Notes due 2006, and 7.41% Senior
Notes due 2007, respectively, offered hereby (collectively, the "Exchange
Notes"). The $1.25 Billion Notes, the MOPPRS and the $180 Million Notes are
sometimes collectively referred to as the "Private Notes." The Exchange Notes
will be subject to fewer restrictions on transfer than the Private Notes, which
are not freely transferable. The Private Notes and the Exchange Notes are
sometimes collectively referred to as the "Notes."
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES, INCLUDING:
- Restrictions on transfer of the Private Notes will continue for holders
who do not exchange such Private Notes in the Exchange Offer, and the
$1.25 Billion Exchange Notes and the Exchange MOPPRS will only be
transferable in blocks of at least $100,000 aggregate principal amount;
- Payments due under the Notes will be effectively subordinated to mortgages
and other secured indebtedness of the Company, as well as to indebtedness
and other liabilities of the Company's subsidiaries; and
- The Company could fail to effectively manage rapid growth and expansion
into new markets and is subject to risks typically associated with real
estate investment and management.
The 6.375% Exchange Notes due 2003 will mature on February 15, 2003; the
6.625% Exchange Notes due 2005 will mature on February 15, 2005; the 6.750%
Exchange Notes due 2008 will mature on February 15, 2008; the 7.250% Exchange
Notes due 2018 will mature on February 15, 2018; the Exchange MOPPRS will mature
on February 15, 2012; the 7.24% Exchange Notes due 2004 will mature on September
1, 2004; the 7.36% Exchange Notes due 2005 will mature on September 1, 2005; the
7.44% Exchange Notes due 2006 will mature on September 1, 2006; and the 7.41%
Exchange
[Cover page continued on next page]
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1998.
- -------------------------
"MandatOry Par Put Remarketed Securities" and "MOPPRS" are service marks owned
by Merrill Lynch & Co., Inc.
<PAGE> 3
[Cover page continued from prior page]
Notes due 2007 will mature on September 1, 2007. The Exchange Notes other than
the Exchange MOPPRS will be redeemable at any time at the option of the Company,
in whole or in part, at a redemption price equal to the sum of (i) the principal
amount of the Exchange Notes being redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole Amount (as defined in "Description of
the Exchange Notes -- Optional Redemption"), if any. The Exchange MOPPRS are
subject to mandatory tender on February 15, 2002 (the "Remarketing Date") to
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Remarketing Dealer (the
"Remarketing Dealer"), at 100% of their principal amount, except in limited
circumstances. If the Remarketing Dealer for any reason does not purchase all
tendered Exchange MOPPRS on the Remarketing Date or elects not to remarket the
Exchange MOPPRS, or in certain other, limited circumstances, the Company will be
required to repurchase the Exchange MOPPRS at 100% of the principal amount
thereof plus accrued interest. The Exchange Notes will not be subject to any
mandatory sinking fund. See "Description of the Exchange Notes."
Interest on the $1.25 Billion Exchange Notes and the Exchange MOPPRS will
be payable semi-annually in arrears on February 15 and August 15 of each year,
commencing August 15, 1998. Interest on the $180 Million Exchange Notes will be
payable semi-annually in arrears on March 1 and September 1 of each year,
commencing September 1, 1998.
The Exchange Notes will be senior unsecured obligations and will rank equal
with each other and with the Company's other unsecured and unsubordinated
indebtedness. The Exchange Notes will be effectively subordinated to mortgages
and other secured indebtedness of the Company as well as to indebtedness and
other liabilities of the Company's subsidiaries.
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on ,
1998 (the "Expiration Date"), unless the Exchange Offer is extended by the
Company in its sole discretion. The Company believes that the Exchange Notes
issued pursuant to the Exchange Offer in the exchange for the Private Notes may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchased the Private Notes directly from
the Company or (ii) a person that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act")), without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that the holder is
acquiring Exchange Notes in the ordinary course of its business and is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met. This
Prospectus, as it may be amended or supplemented from time to time, also may be
used by a broker-dealer in connection with any resale of the Exchange Notes
received for Private Notes where such Private Notes were acquired by a
broker-dealer as a result of market-making or other trading activities. The
Company has agreed that for a period of 180 days after the Expiration Date, it
will make this Prospectus available to any broker-dealer for use in connection
with any such resales. See "Plan of Distribution."
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender such Private Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered holder to tender on the
beneficial owner's behalf. Any such beneficial owner that wishes to tender on
its own behalf must, prior to completing and executing the letter of transmittal
delivered herewith and delivering its Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in its own name, if
permitted pursuant to the term of such Private Notes, or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time, and it may not be possible to complete the
transfer prior to the Expiration Date.
ii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary............................... 2
The Company......................... 2
Business and Growth Strategies...... 3
Recent Developments................. 4
The Properties...................... 6
Distribution of Office Properties,
Managed Properties, Parking
Facilities and Employees by
Region (as of December 31,
1997)............................ 7
Summary Risk Factors................ 7
The Exchange Offer.................. 8
The Exchange Notes.................. 11
No Cash Proceeds to the Company..... 13
Selected Combined Financial
Information......................... 14
Risk Factors.......................... 16
Restrictions on Transfer Continue
After Failure to Comply with
Exchange Procedures.............. 16
No Current Public Market for
Exchange Notes................... 16
Failure to Effectively Manage Rapid
Growth; Expansion into New
Markets.......................... 16
Real Estate Risks................... 17
Debt Financing...................... 18
Effective Subordination of Notes.... 19
Concentration of Properties in
Certain Markets.................. 20
Managed Property Business and Non-
REIT Services.................... 20
Conflicts of Interest in Connection
with Formation and Business of
the Trust and the Company........ 21
Possibility That the Expected
Benefits of Beacon Merger Will
Not Be Realized.................. 22
Possible Environmental
Liabilities...................... 22
Dependence on Key Personnel......... 23
Contingent or Undisclosed
Liabilities...................... 23
The Company........................... 25
General............................. 25
Distribution of Office Properties,
Managed Properties, Parking
Facilities and Employees by
Region (as of December 31,
1997)............................ 26
Operations.......................... 26
Operational Structure............... 26
Recent Developments................... 27
The Beacon Merger................... 27
Wright Runstad Acquisition.......... 27
Other Recent Acquisitions........... 28
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Capital Transactions................ 28
Business and Growth Strategies........ 29
Internal Growth..................... 29
External Growth..................... 30
Parking Facilities.................. 30
No Cash Proceeds to the Company....... 30
Ratios of Earnings to Fixed Charges... 31
Capitalization........................ 31
Selected Combined Financial
Information......................... 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Overview............................ 34
General............................. 34
Results of Operations............... 35
Parking Operations.................. 38
Parking Facilities.................. 44
Dispositions of Property............ 44
Liquidity and Capital Resources..... 45
Cash Flows.......................... 48
Capital Improvements................ 49
Inflation........................... 50
Funds from Operations............... 51
The Properties........................ 52
General............................. 52
Office Properties by Region......... 53
Office Property Markets and
Submarkets -- Office Property
Statistics....................... 54
Parking Facilities.................. 67
Tenants............................. 67
Lease Expirations by Region as of
December 31, 1997................ 68
Lease Expirations -- Total
Portfolio........................ 69
Lease Distributions................. 70
Occupancy........................... 70
Legal Proceedings................... 70
Office Property Market
Information...................... 71
Management............................ 77
Trustees and Executive and Senior
Officers of the Trust............ 77
Committees of the Board of
Trustees......................... 81
Compensation of the Board of
Trustees; Payment in Common
Shares........................... 82
Executive Compensation.............. 82
Option and Restricted Share Plan.... 83
401(k) Plan......................... 84
Employee Share Purchase Plan........ 84
Incentive Compensation.............. 84
Beacon Stock Option Plans........... 85
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Limitation of Liability and
Indemnification.................. 85
Certain Relationships and Related
Transactions........................ 87
Formation Transactions.............. 87
Leases and Parking Operations....... 88
Equity Group Distributions and
Fees............................. 88
Wright Runstad Acquisition.......... 88
Miscellaneous....................... 89
Policies with Respect to Certain
Activities.......................... 90
Investment Policies................. 90
Financing Policies.................. 90
Lending Policies.................... 91
Conflict of Interest Policies....... 91
Policies with Respect to Other
Activities....................... 92
Principal Shareholders of the Trust... 93
The Exchange Offer.................... 95
Purpose of the Exchange Offer....... 95
Terms of the Exchange Offer......... 96
Expiration Date; Extensions;
Amendments....................... 97
Interest on the Exchange Notes and
Accrued Interest on the Private
Notes............................ 97
Resale of the Exchange Notes........ 98
Procedures for Tendering............ 98
Return of Private Notes............. 100
Book-Entry Transfer................. 101
Guaranteed Delivery Procedures...... 101
Withdrawal of Tenders............... 101
Termination of Certain Rights....... 102
Exchange Agent...................... 102
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fees and Expenses................... 102
Consequence of Failure to
Exchange......................... 103
Accounting Treatment................ 103
Description of the Exchange Notes..... 104
General............................. 104
Principal and Interest.............. 105
Optional Redemption................. 105
Tender of Exchange MOPPRS;
Remarketing...................... 107
Repurchase of Exchange MOPPRS....... 110
Redemption of Exchange MOPPRS....... 110
Certain Covenants................... 111
Merger, Consolidation or Sale....... 114
Events of Default, Notice and
Waiver........................... 115
Modification of the Indenture....... 116
Satisfaction and Discharge.......... 117
No Conversion Rights................ 117
Global Securities................... 117
Certain United States Federal Income
Tax Considerations.................. 119
The Exchange........................ 120
Taxation of U.S. Holders............ 120
Taxation of Non-U.S. Holders........ 122
Backup Withholding and Information
Reporting........................ 122
Plan of Distribution.................. 123
Experts............................... 124
Legal Matters......................... 124
Available Information................. 124
Glossary.............................. 125
Index to Financial Statements.........
</TABLE>
iv
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, included elsewhere in this
Prospectus. The offer by the Company to exchange the $1.25 Billion Exchange
Notes, the Exchange MOPPRS and the $180 Million Exchange Notes, which have been
registered under the Securities Act, for an equal principal amount of its
outstanding $1.25 Billion Notes, MOPPRS and $180 Million Notes, respectively, is
referred to as the "Exchange Offer." The $1.25 Billion Notes, the MOPPRS and the
$180 Million Notes are sometimes collectively referred to as the "Private
Notes." The $1.25 Billion Exchange Notes, the Exchange MOPPRS and the $180
Million Exchange Notes are sometimes collectively referred to as the "Exchange
Notes." The Private Notes and the Exchange Notes are sometimes collectively
referred to as the "Notes." As used herein, "Company" means EOP Operating
Limited Partnership, a Delaware limited partnership, and one or more of its
subsidiaries, and the predecessors thereof. The Company is the "operating
partnership" of Equity Office Properties Trust (the "Trust"), a Maryland real
estate investment trust and managing general partner of the Company. 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 December 31, 1997. All references to the historical activities of the Trust
or the Company prior to July 11, 1997 refer to the activities of the Equity
Office Predecessors.
Information contained in or delivered in connection with this 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 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.
THE COMPANY
The Company and the Trust were formed to continue and expand the national
office property business organized by Mr. Samuel Zell, Chairman of the Board of
Trustees of the Trust. The Company's 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 December 31, 1997, the
Company owned or had an interest in 258 office properties containing
approximately 65.3 million rentable square feet of office space (the "Office
Properties") and owned 17 stand-alone parking facilities containing
approximately 16,749 parking spaces (the "Parking Facilities" and, together with
the Office Properties, the "Properties"). The Office Properties are located in
79 submarkets in 39 markets in 24 states and the District of Columbia. The
Office Properties, by rentable square feet, are located 48% in central business
districts ("CBDs") and 52% in suburban markets. See "The Properties."
The Company currently has approximately 1,456 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 the Company or its affiliates and an average of 23 years experience in the
real estate industry.
During the past several years, the Company has been among the most active
buyers of institutional quality office properties throughout the United States,
investing approximately $10 billion during the period from 1987 through 1997 and
averaging $2.7 billion annually in acquisitions (calculated on a cost basis) for
the three years ended December 31, 1997. Since the Trust's initial public
offering in July 1997 (the "IPO"), the Company has completed a number of new
acquisitions, including the Beacon Merger and the Wright Runstad Acquisition.
See "Recent Developments."
2
<PAGE> 7
The Company has demonstrated the ability to lease up the space it has
acquired. During the period from 1987 through 1997, the Company leased (net of
expiring leases) in excess of 5.9 million rentable square feet of office space.
As of December 31, 1997, the Office Properties were, on a weighted average
basis, 94% occupied by a total of 5,676 tenants, with no single tenant
accounting for more than 1.6% of annualized rent (except for the U.S. General
Services Administration, which accounted for 3.6% of annualized rent). An
additional 735,700 square feet (approximately 1.1% of the rentable square
footage of the Office Properties) was leased, with occupancy to commence during
1998.
The Trust, a self-administered and self-managed real estate investment
trust, is the managing general partner of, and controls a majority of the
limited partnership interests in, the Company. In July 1997, the Trust sold
28,750,000 of its common shares of beneficial interest, $.01 par value per share
("Common Shares"), in its IPO. As of December 31, 1997, the Trust owned,
directly or indirectly, 89.5% of the outstanding partnership interests in the
Company. The Trust owns all of its assets and conducts all of its business
through the Company and its subsidiaries.
The Company was formed on November 1, 1996, as a limited partnership under
the Delaware Revised Uniform Limited Partnership Act.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objective is to achieve sustainable
long-term growth in cash flow and portfolio value. The Company 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. The Company intends to supplement
this strategy by owning parking facilities.
INTERNAL GROWTH. Management believes that the Company'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
Properties which have not yet achieved stabilization, and (iv) increasing
economies of scale. See "Business and Growth Strategies."
As of December 31, 1997, 3.9 million rentable square feet of Office
Property space was vacant. Of this amount, 735,700 square feet was leased at an
average rent of $26.62 per square foot, with occupancy to commence in whole or
in part during 1998. The Company's average operating expenses for the total
vacant space were $9.37 per square foot as of December 31, 1997. The following
five Properties accounted for 22% of the Company's total vacant space as of
December 31, 1997:
<TABLE>
<CAPTION>
AMOUNT OF VACANT
VACANT SQUARE FOOTAGE
SQUARE FOOTAGE LEASED(1)
-------------- ----------------
<S> <C> <C>
28 State Street, Boston, MA...................... 240,666 117,971
Two California Plaza, Los Angeles, CA............ 166,911 9,451
161 North Clark, Chicago, IL..................... 201,538 183,121
Civic Opera House, Chicago, IL................... 143,604 83,527
Westbrook Corporate Center, Westchester, IL...... 118,862 37,158
------- -------
871,581 431,228
======= =======
</TABLE>
- ---------------
(1) Represents the amount of unoccupied space as of December 31, 1997 that was
subject to an executed lease with a commencement date after December 31,
1997.
During the period from December 31, 1997 through December 31, 2002, 4,673
leases for 36.5 million rentable square feet of space are scheduled to expire.
As of December 31, 1997, the average rent for this space was $21.77 per square
foot and the weighted average operating expenses were $8.80 per square foot. The
Company believes that leases expiring through December 31, 2002, 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
3
<PAGE> 8
factors at the time. There can be no assurance that the Company will relet such
space at an increased, or even at the then current, rental rate.
As the operating partnership of the largest publicly traded full-service
office company (based on revenues and square footage) in the United States, the
Company 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 the Company with extensive operational data, including daily leasing,
occupancy and other property and financial data). Historically, as the Company's
portfolio has increased in size, the Company's general and administrative costs
as a percentage of total revenues have decreased.
The Company owns undeveloped land on 23 sites on which approximately 8.1
million square feet of office space could be developed. The Company may decide
to develop this land if significant pre-leasing can be arranged or if such
development is necessary to protect the Company's investment in existing
Properties, but does not currently anticipate significant development
activities.
EXTERNAL GROWTH. The Company 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 the
Trust or the Company, 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 the Company believes will continue as institutional owners gain increasing
confidence in indirect rather than direct ownership of real estate. The Company
has acquired a significant number of the Office Properties from institutional
sellers. Emerging Trends in Real Estate 1998, published by Equitable Real Estate
Investment Management, Inc. and Real Estate Research Corporation, estimates that
institutions currently have direct investments of approximately $1.45 trillion
in commercial real estate in the United States. The Company believes that given
its size, its umbrella partnership REIT ("UPREIT") structure (which enables it
to acquire properties in transactions that may permit sellers to defer tax
consequences) and its long-standing relationship with many of the major
institutional owners of real estate in the United States, it is well positioned
to benefit from the consolidation that is occurring in the real estate industry.
PARKING FACILITIES. Management believes that parking facilities offer the
Company attractive investment opportunities which are 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.
The Company intends to 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 healthcare facilities.
RECENT DEVELOPMENTS
BEACON MERGER. On December 19, 1997, the Trust, the Company, Beacon
Properties Corporation, a Maryland corporation ("Beacon"), and Beacon
Properties, L.P., a Delaware limited partnership of which Beacon was the sole
general partner ("Beacon Partnership"), consummated the transactions
contemplated by the Agreement and Plan of Merger, dated September 15, 1997, as
amended (the "Merger Agreement"). Pursuant to the Merger Agreement, Beacon
merged with and into the Trust and Beacon Partnership merged with and into the
Company (the "Beacon Merger"). See "Recent Developments -- The Beacon Merger."
4
<PAGE> 9
In the Beacon Merger, (i) the Trust issued 80,596,117 Common Shares in
exchange for all of the outstanding shares of common stock, $0.01 par value per
share, of Beacon ("Beacon Common Shares"), (ii) the Trust issued 8,000,000 8.98%
Series A Cumulative Redeemable Preferred Shares, liquidation preference $25.00
per share, of the Trust ("Series A Preferred Shares") in exchange for all of the
outstanding shares of 8.98% Series A Cumulative Redeemable Preferred Stock,
liquidation preference $25.00 per share, of Beacon ("Beacon Preferred Shares"),
(iii) the Company issued 8,570,886 common units of limited partnership interest
in the Company ("Units") in exchange for the outstanding common partnership
units of Beacon Partnership exclusive of those held by Beacon, and (iv) the
Company issued to the Trust 80,596,117 Units underlying the Common Shares issued
in exchange for the Beacon Common Shares and 8,000,000 Series A Cumulative
Redeemable Preferred Units ("Series A Preferred Units") underlying the Series A
Preferred Shares issued in exchange for the Beacon Preferred Shares. In
addition, the Trust assumed the obligation to issue 4,749,095 Common Shares, of
which 3,829,739 had been issued as of December 31, 1997, upon the exercise of
certain outstanding Beacon employee stock options. See "Management -- Beacon
Stock Option Plans." The Company also assumed $533 million in unsecured debt of
Beacon under a credit facility (the "Beacon Facility"), of which $95 million had
been repaid as of December 31, 1997 and the balance of which was repaid in
February 1998.
As a result of the Beacon Merger, the Company acquired interests in 130
Office Properties (the "Beacon Properties") containing approximately 20.9
million rentable square feet of office space. The Beacon Properties are located
in 22 submarkets in six markets: Boston, Atlanta, Chicago, Los Angeles, San Jose
and Washington, D.C. The Beacon Properties, by rentable square feet, are located
65% in suburban markets and 35% in CBDs, primarily in Boston. As of December 31,
1997, the Beacon Properties were, on a weighted average basis, approximately 95%
leased by a total of approximately 1,694 tenants.
OTHER ACQUISITIONS. Since the Trust's IPO in July 1997, the Company has
completed 10 acquisition transactions in addition to the Beacon Merger. In the
Wright Runstad Acquisition, which closed on December 17, 1997, the Company
acquired 10 Office Properties located in Seattle, Washington, Portland, Oregon
and Anchorage, Alaska, containing an aggregate of approximately 3.34 million
square feet, for a purchase price of approximately $640 million. In nine other
acquisition transactions (the "Other Recent Acquisitions"), closing at various
times from August through November 1997, the Company acquired, for aggregate
consideration of approximately $1.47 billion, 27 Office Properties containing an
aggregate of approximately 8.8 million square feet and three Parking Facilities
containing approximately 2,141 parking spaces. See "Recent Developments --
Wright Runstad Acquisition" and "-- Other Recent Acquisitions."
CAPITAL TRANSACTIONS. Since the Trust's IPO in July 1997, the Company and
the Trust have completed several capital raising transactions. On September 3,
1997, the Company sold the $180 Million Notes in a private placement to an
institutional investor (the "Private Debt Offering") and used the proceeds
therefrom to repay amounts outstanding under the Company's $600 million
unsecured revolving line of credit (the "$600 Million Credit Facility") entered
into in July 1997.
The Company entered into a $1.5 billion unsecured term loan facility on
October 2, 1997 with Morgan Guaranty Trust Company of New York (the "$1.5
Billion Credit Facility" and, together with the $600 Million Credit Facility,
the "Credit Facilities"). The $1.5 Billion Credit Facility, which matures July
1, 1998, has been and may in the future be used to repay amounts outstanding
under the Company's $600 Million Credit Facility and to fund acquisitions.
In October 1997, the Trust sold an aggregate of $274 million of Restricted
Common Shares in two separate transactions to institutional investors and
contributed the proceeds to the Company in exchange for 9.7 million Units.
In February 1998, the Company sold (i) the $1.25 Billion Notes in a private
placement (the "Notes Offering") and (ii) $250 million of MOPPRS in a private
placement (the "MOPPRS Offering" and, together with the Notes Offering, the
"February 1998 Notes Offering") and used the proceeds therefrom to repay amounts
outstanding under the Credit Facilities and the Beacon Facility. The MOPPRS are
subject to mandatory tender on February 15, 2002 (the "Remarketing Date") to
Merrill Lynch, Pierce, Fenner & Smith Incorporated as Remarketing Dealer (the
"Remarketing Dealer"), at 100% of their principal amount, except
5
<PAGE> 10
in limited circumstances. If the Remarketing Dealer for any reason does not
purchase all tendered MOPPRS on the Remarketing Date or elects not to remarket
the MOPPRS, or in certain other limited circumstances, the Company will be
required to repurchase the MOPPRS at 100% of the principal amount thereof plus
accrued interest, if any.
In February 1998, the Trust also sold 6,000,000 5.25% Preferred Income
Equity Redeemable Shares(SM), designated by the Trust as its 5.25% Series B
Convertible, Cumulative Preferred Shares of Beneficial Interest, $.01 par value
per share, $50.00 liquidation preference per share (the "Series B Preferred
Shares"), in a private placement (the "Preferred Offering"). The Company used
the net proceeds from the Preferred Offering to repay amounts outstanding under
the Credit Facilities. "Preferred Income Equity Redeemable Shares(SM)" is a
service mark owned by Lehman Brothers Inc.
THE PROPERTIES
The Company's 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. Management believes that the 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.
The operation of the Properties is under the direction of six regional
managers, each of whom has oversight responsibility for all of the 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 the Trust's Executive Vice President -- Real
Estate Operations.
As of December 31, 1997, the Company owned or had an interest in 258 Office
Properties and 17 Parking Facilities. Through Equity Office Properties
Management Corp., a Delaware corporation ("EOP Management Company"), and Beacon
Property Management Corporation, a Delaware corporation ("Beacon Management
Company" and, together with EOP Management Company, the "Management Companies"),
the Company manages an additional 34 office properties (the "Managed
Properties"), containing 5.5 million square feet, including 31 office properties
owned by certain affiliates of the Equity Group Owners. The following table
6
<PAGE> 11
shows the distribution of the Company's Office Properties, Managed Properties,
Parking Facilities and employees by region:
DISTRIBUTION OF OFFICE PROPERTIES, MANAGED PROPERTIES,
PARKING FACILITIES AND EMPLOYEES BY REGION (AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
OFFICE PROPERTIES MANAGED PROPERTIES PARKING FACILITIES
--------------------- --------------------- -------------------
RENTABLE RENTABLE NUMBER NUMBER
REGION NUMBER SQUARE FEET NUMBER SQUARE FEET NUMBER OF SPACES OF EMPLOYEES
------ ------ ----------- ------ ----------- ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast
CBD.................... 21 8,572,562 1 312,000 7 3,852 487
Suburban............... 62 9,134,989 3 978,674 -- -- --
Central
CBD.................... 12 9,343,831 2 877,889 5 4,674 477(1)
Suburban............... 19 3,958,670 18 2,397,407 -- -- --
Pacific
CBD.................... 7 4,810,336 -- -- -- -- 127
Suburban............... 36 4,892,844 5 320,468 -- -- --
West
CBD.................... 9 3,302,508 -- -- 4 7,464 80
Suburban............... 23 5,491,587 1 157,311 -- -- --
Southeast
CBD.................... 6 2,887,795 1 130,189 -- -- 152
Suburban............... 45 5,776,376 2 207,664 -- -- --
Southwest
CBD.................... 5 2,588,819 -- -- 1 759 133
Suburban............... 13 4,531,473 1 100,558 -- -- --
--- ---------- -- --------- -- ------ -----
Total............... 258 65,291,790 34 5,482,160 17 16,749 1,456
=== ========== == ========= == ====== =====
</TABLE>
- ---------------
(1) 226 of these employees are located at the Company's headquarters in Chicago.
SUMMARY RISK FACTORS
The "Risk Factors" section of this Prospectus discusses in detail the more
important risks associated with an investment in the debt of the Company,
including risks associated with exchanging or not exchanging Private Notes in
the Exchange Offer, risks associated with the manner in which the Company
conducts its business and risks associated with the Company's investment in real
estate such as the Properties. These risks, which generally could adversely
affect the financial condition and results of operations of the Company (and
potentially the Company's ability to satisfy its obligations under the Notes) or
otherwise reduce the value of the Notes, include:
- Holders of Private Notes who do not exchange those Private Notes will
hold an investment subject to restrictions on transfer not applicable to
the Exchange Notes and may have difficulty selling the Exchange Notes
unless a public market for the Exchange Notes develops. The $1.25 Billion
Exchange Notes and the Exchange MOPPRS will only be transferable in
blocks of at least $100,000 aggregate principal amount.
- Payments due under the Exchange Notes will be effectively subordinated to
mortgages and other secured indebtedness of the Company, as well as to
indebtedness and other liabilities of the Company's Subsidiaries.
- The Company could fail to effectively manage rapid growth and expansion
into new markets.
7
<PAGE> 12
- The Company's operations are subject to real estate investment and
property management risks, such as the need to renew leases or relet
space upon lease expirations, the potential instability of cash flows and
changes in the value of office properties owned by the Company due to
economic and other conditions.
- The Company is subject to risks of borrowing, including the possibility
that the Company may not be able to refinance outstanding indebtedness
(approximately $4.3 billion as of December 31, 1997) upon maturity, that
indebtedness might be refinanced on less favorable terms and that
interest rates might increase on variable rate indebtedness.
- Management of the Company and certain members of the Trust's Board of
Trustees have conflicts of interest in business decisions regarding the
Company.
THE EXCHANGE OFFER
The following is a summary of the principal terms of the Exchange Offer. A
more detailed description is contained herein under the caption "The Exchange
Offer."
The Exchange Offer............ The Company is hereby offering to exchange the
$1.25 Billion Exchange Notes, the Exchange
MOPPRS and the $180 Million Exchange Notes for
an equal aggregate principal amount of $1.25
Billion Notes, MOPPRS and $180 Million Notes,
respectively, that are properly tendered and
accepted.
Holders of Private Notes who do not validly
tender such notes and accept the Exchange Offer
will continue to hold such Private Notes and
will continue to be subject to the rights and
limitations applicable thereto, including
existing restrictions upon transfer thereof.
The Company will have no further obligation to
provide for the registration under the
Securities Act of any offering of Private Notes
which continue to be held after the Exchange
Offer. See "The Exchange Offer -- Consequences
of Failure to Exchange."
Based on interpretations set forth in no-action
letters issued to third parties by the staff of
the Securities and Exchange Commission (the
"Commission"), the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be
offered for resale, resold and otherwise
transferred by a holder thereof without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that the holder is acquiring Exchange
Notes in the ordinary course of its business,
is not participating, does not intend to
participate and has no arrangement or
understanding with any person to participate in
the distribution of the Exchange Notes, and is
not an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act.
See "The Exchange Offer -- Resale of the
Exchange Notes."
If the Company fails to consummate the Exchange
Offer with respect to the $1.25 Billion Notes
and the MOPPRS prior to August 17, 1998 or, if
applicable, fails to fulfill its obligations
under a registration rights agreement to obtain
and maintain effectiveness of a shelf
registration statement to cover resales of the
$1.25 Billion Notes and the MOPPRS by the
holders thereof during specified time periods,
then liquidated damages will accrue on the
principal amounts of the $1.25 Billion Notes
and the MOPPRS at an annual
8
<PAGE> 13
rate of 0.50%. See "The Exchange Offer --
Purpose of the Exchange Offer."
Expiration Date............... The Exchange Offer will expire at 5:00 P.M.,
New York City time, on , 1998 (the
"Expiration Date"), unless the Exchange Offer
is extended by the Company in its sole
discretion, in which case the term "Expiration
Date" shall mean the latest date and time to
which the Exchange Offer is extended. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments."
Procedures for Tendering
Private Notes................. Each holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the letter of transmittal accompanying this
Prospectus (the "Letter of Transmittal"), or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Private Notes and any other required
documentation, to State Street Bank and Trust
Company, as exchange agent (the "Exchange
Agent"), at the address set forth under "The
Exchange Offer -- Exchange Agent." By executing
the Letter of Transmittal, the holder will
represent to and agree with the Company that,
among other things, (i) any Exchange Notes
acquired in exchange for Private Notes tendered
thereby are being acquired in the ordinary
course of business of the person receiving such
Exchange Notes, (ii) the person receiving such
Exchange Notes is not engaging in and does not
intend to engage in a distribution of such
Exchange Notes, (iii) the person receiving such
Exchange Notes does not have an arrangement or
understanding with any person to participate in
the distribution of such Exchange Notes and
(iv) neither the holder nor any other person
receiving the Exchange Notes from the holder is
an "affiliate," as defined in Rule 405 under
the Securities Act, of the Company. Certain
brokers, dealers, commercial banks, trust
companies and other nominees may effect tenders
by book-entry transfer, including an Agent's
Message (defined below) in lieu of a Letter of
Transmittal. See "The Exchange Offer --
Procedures for Tendering."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in
the Exchange Offer should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. Any such beneficial owner that
wishes to tender on its own behalf must, prior
to completing and executing the Letter of
Transmittal and delivering its Private Notes,
either make appropriate arrangements to
register ownership of the Private Notes in its
own name, if permitted pursuant to the terms of
such Private Notes, or obtain a properly
completed bond power from the registered
holder. The transfer of registered ownership
may take considerable time, and it may not be
possible to complete the transfer prior to the
Expiration Date. See "The Exchange Offer --
Procedures for Tendering."
9
<PAGE> 14
Guaranteed Delivery
Procedures.................... Holders of Private Notes who wish to tender
their Private Notes and whose Private Notes are
not immediately available or who cannot deliver
their Private Notes, the Letter of Transmittal
or any other documentation required by the
Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender their
Private Notes according to the guaranteed
delivery procedures described under "The
Exchange Offer -- Guaranteed Delivery
Procedures."
Acceptance of the Private
Notes and Delivery of Exchange
Notes......................... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Private
Notes that are properly tendered in the
Exchange Offer prior to the Expiration Date.
The Exchange Notes issued pursuant to the
Exchange Offer will be delivered on the
earliest practicable date following the
Expiration Date. See "The Exchange Offer --
Terms of the Exchange Offer."
Withdrawal Rights............. Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date by
delivering a notice of withdrawal to the
Exchange Agent prior to the Expiration Date.
Any such notice of withdrawal must (i) specify
the name of the person who deposited the
Private Notes to be withdrawn, (ii) identify
the Private Notes to be withdrawn (including
the certificate number or numbers) and (iii) be
signed by the holder in the same manner as the
original signature on the Letter of Transmittal
by which such Private Notes were tendered
(including any required signature guarantees).
See "The Exchange Offer -- Withdrawal of
Tenders."
Federal Income Tax
Considerations................ The exchange of the Private Notes for the
Exchange Notes will not be a taxable exchange
for federal income tax purposes, and holders of
Private Notes should not recognize any taxable
gain or loss or any interest income as a result
of such exchange. See "Certain Federal Income
Tax Considerations -- Exchange Offer."
Exchange Agent................ State Street Bank and Trust Company is serving
as the Exchange Agent in connection with the
Exchange Offer. State Street Bank and Trust
Company also serves as trustee (the "Trustee")
under the indenture relating to the Notes.
10
<PAGE> 15
THE EXCHANGE NOTES
The Exchange Offer applies to the $1.68 billion aggregate principal amount
of the Private Notes. The form and terms of the respective Exchange Notes are
identical in all material respects to the form and terms of the Private Notes,
except that the Exchange Notes will not bear legends restricting the transfer
thereof (other than, with respect to the $1.25 Billion Exchange Notes and the
Exchange MOPPRS, requiring transfers in blocks having a minimum aggregate
principal amount of $100,000) and the holders of the Exchange Notes will not be
entitled to any of the registration rights of holders of the Private Notes under
any registration rights agreement, which rights will terminate upon consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under, and be entitled
to the benefits of, an indenture, dated as of September 2, 1997, as amended or
supplemented, between the Company and the Trustee (the "Indenture").
All capitalized terms used herein and not defined herein have the meanings
provided in "Description of the Exchange Notes." For a more complete description
of the terms of the Exchange Notes specified in the following summary, see
"Description of the Exchange Notes."
Issuer........................ EOP Operating Limited Partnership
Exchange Notes................ $300,000,000 principal amount of 6.375% Notes
due 2003
$400,000,000 principal amount of 6.625% Notes
due 2005
$300,000,000 principal amount of 6.750% Notes
due 2008
$250,000,000 principal amount of 7.250% Notes
due 2018
$250,000,000 principal amount of 6.376% MOPPRS
due 2012
$30,000,000 principal amount of 7.24% Senior
Notes due 2004
$50,000,000 principal amount of 7.36% Senior
Notes due 2005
$50,000,000 principal amount of 7.44% Senior
Notes due 2006
$50,000,000 principal amount of 7.41% Senior
Notes due 2007
Maturity...................... Unless, in each case, redeemed prior to
maturity as described below, the 6.375%
Exchange Notes due 2003 will mature on February
15, 2003; the 6.625% Exchange Notes due 2005
will mature on February 15, 2005; the 6.750%
Exchange Notes due 2008 will mature on February
15, 2008; the 7.250% Exchange Notes due 2018
will mature on February 15, 2018; the 7.24%
Exchange Notes due 2004 will mature on
September 1, 2004; the 7.36% Exchange Notes due
2005 will mature on September 1, 2005; the
7.44% Exchange Notes due 2006 will mature on
September 1, 2006; and the 7.41% Exchange Notes
due 2007 will mature on September 1, 2007. The
stated maturity date of the Exchange MOPPRS is
February 15, 2012.
Optional Redemption........... The Exchange Notes other than the Exchange
MOPPRS will be redeemable at any time at the
option of the Company, in whole or in part, at
a redemption price equal to the sum of (i) the
principal amount of the Exchange Notes being
redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole Amount,
if any. See "Description of the Exchange Notes
-- Optional Redemption."
The Exchange MOPPRS are subject to redemption
from the Remarketing Dealer, in whole but not
in part, at the option of the Company on the
Remarketing Date at the Optional Redemption
Price. The Exchange MOPPRS are not otherwise
subject to redemption by the Company.
11
<PAGE> 16
Mandatory Tender of Exchange
MOPPRS; Remarketing and
Repurchase.................... Provided that the Remarketing Dealer gives
notice to the Company and the Trustee on a
Business Day not later than five Business Days
prior to the Remarketing Date of its intention
to purchase the Exchange MOPPRS for
remarketing, each Exchange MOPPRS will be
automatically tendered, or deemed tendered, to
the Remarketing Dealer for purchase on the
Remarketing Date, except in the circumstances
described under "Description of the Exchange
Notes -- Repurchase of Exchange MOPPRS" or "--
Redemption of Exchange MOPPRS."
The purchase price to be paid by the
Remarketing Dealer for the tendered Exchange
MOPPRS will equal 100% of the principal amount
thereof. When the Exchange MOPPRS are tendered
for remarketing, the Remarketing Dealer may
remarket the Exchange MOPPRS for its own
account at varying prices to be determined by
the Remarketing Dealer at the time of each
sale. If the Remarketing Dealer for any reason
does not purchase all tendered Exchange MOPPRS,
or in certain other limited circumstances
described herein, the Company will be required
to repurchase the Exchange MOPPRS from the
Beneficial Owners thereof on the Remarketing
Date, at 100% of the principal amount thereof
plus accrued interest, if any. See "Description
of the Exchange Notes -- Repurchase of Exchange
MOPPRS."
Interest Payment Dates........ Interest on the $1.25 Billion Exchange Notes
and the Exchange MOPPRS will be payable
semiannually in arrears on each February 15 and
August 15, commencing August 15, 1998. The
$1.25 Billion Exchange Notes and the Exchange
MOPPRS will bear interest from the later of
February 18, 1998 or the Interest Payment Date
immediately preceding the date of issuance of
the $1.25 Billion Exchange Notes and the
Exchange MOPPRS, as applicable. In the Letter
of Transmittal, holders of $1.25 Billion Notes
or MOPPRS whose $1.25 Billion Notes or MOPPRS,
as the case may be, are accepted for exchange
will waive the right to receive any payment in
respect of interest on the $1.25 Billion Notes
or MOPPRS accrued from the later of February
18, 1998 or the Interest Payment Date
immediately preceding the date of issuance of
the $1.25 Billion Exchange Notes or Exchange
MOPPRS to the date of issuance of the $1.25
Billion Exchange Notes or Exchange MOPPRS.
Interest on the $180 Million Exchange Notes
will be payable semi-annually in arrears on
March 1 or September 1 of each year, commencing
September 1, 1998. The $180 Million Exchange
Notes will bear interest from the Interest
Payment Date immediately preceding the date of
issuance of the $180 Million Exchange Notes
(currently expected to be the Interest Payment
Date on March 1, 1998). In the Letter of
Transmittal, holders of $180 Million Notes
whose $180 Million Notes are accepted for
exchange will waive the right to receive any
payment in respect of interest on the $180
Million Notes accrued from the later of
September 3, 1997 or the Interest Payment Date
immediately preceding the date
12
<PAGE> 17
of issuance of the $180 Million Exchange Notes
(currently expected to be the Interest Payment
Date on March 1, 1998) to the date of issuance
of the $180 Million Exchange Notes.
Ranking....................... The Exchange Notes will be senior unsecured
obligations of the Company and will rank
equally with each other and with all other
unsecured and unsubordinated indebtedness of
the Company. The Exchange Notes will be
effectively subordinated to the prior claims of
any secured indebtedness of the Company to the
extent of the value of the property securing
such indebtedness. The Exchange Notes also will
be effectively subordinated to all existing and
future third-party indebtedness and other
liabilities of the Company's Subsidiaries. As
of September 30, 1997, on a Pro Forma Basis,
the secured indebtedness of the Company and all
other liabilities of the Company's Subsidiaries
aggregated approximately $2.2 billion and the
unsecured and unsubordinated indebtedness of
the Company aggregated approximately $1.8
billion. See "Capitalization."
Limitations on Incurrence of
Debt.......................... The Indenture contains various covenants,
including covenants limiting the ability of the
Company and its Subsidiaries to incur
additional secured and unsecured debt unless
certain financial standards are satisfied. See
"Description of the Exchange Notes -- Certain
Covenants."
NO CASH PROCEEDS TO THE COMPANY
The Company will not receive any proceeds from the issuance of the Exchange
Notes offered hereby and has agreed to pay the expenses of the Exchange Offer.
Private Notes surrendered in exchange for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase in the outstanding indebtedness of the Company.
The Company used the net proceeds from the issuance of the Private Notes to
repay indebtedness outstanding under the Credit Facilities and, in the case of
the $1.25 Billion Notes and the MOPPRS, the Beacon Facility, as described in the
pro forma financial statements presented in "Summary Selected Financial Data"
and "Selected Financial Data."
13
<PAGE> 18
SELECTED COMBINED FINANCIAL INFORMATION
The following sets forth summary selected combined financial and operating
information on a pro forma basis for the Company and on an historical basis for
the Company and the Company's predecessors ("Equity Office Predecessors"). The
following information should be read in conjunction with the consolidated and
combined financial statements and notes thereto of the Company and Equity Office
Predecessors included elsewhere in this Prospectus. The summary selected
consolidated historical financial and operating information of the Company at
September 30, 1997, and for the period from July 11, 1997 to September 30, 1997,
has been derived from the historical unaudited consolidated financial statements
of the Company. The selected combined historical and operating information of
Equity Office 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 Equity Office Predecessors
included elsewhere in this Prospectus. The summary selected combined historical
financial and operating information of Equity Office 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
Equity Office Predecessors audited by Ernst & Young LLP, independent auditors,
whose report with respect thereto is included elsewhere in this Prospectus. The
summary selected combined historical financial and operating information of
Equity Office 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 Equity Office
Predecessors. Unaudited pro forma operating information for the nine months
ended September 30, 1997 and the year ended December 31, 1996 is presented as if
the borrowings under the Credit Facilities at the end of the relevant period,
acquisitions (including the Beacon Merger) that occurred during and subsequent
to the relevant period, the IPO, the Preferred Offering and the issuance of the
Private Notes had occurred on January 1, 1997 and 1996, respectively, and,
therefore, incorporates certain assumptions that are described in the notes to
the Pro Forma Condensed Combined Financial Statements included elsewhere in this
Prospectus. The unaudited pro forma balance sheet data is presented as if the
borrowings under the Credit Facilities that occurred subsequent to September 30,
1997, the Preferred Offering and the issuance of the Private Notes acquisitions
(including the Beacon Merger) that occurred subsequent to September 30, 1997 had
occurred on September 30, 1997. The pro forma information does not purport to
represent what the Company's financial position or results of operations would
actually have been if these transactions had, in fact, occurred on such date or
at the beginning of the period indicated, or to project the Company's financial
position or results of operations at any future date or for any future period.
<TABLE>
<CAPTION>
COMPANY COMPANY EQUITY OFFICE EQUITY OFFICE
PRO FORMA FOR THE PREDECESSORS PREDECESSORS COMPANY
FOR THE PERIOD FOR THE FOR THE PRO FORMA
NINE FROM PERIOD FROM NINE FOR THE
MONTHS JULY 11, JANUARY 1, MONTHS YEAR
ENDED 1997 TO 1997 TO ENDED ENDED
SEPT. 30, SEPT. 30, JULY 10, SEPT. 30, DEC. 31,
1997 1997 1997 1996 1996
----------- ----------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE:
Rental, parking and other........... $ 1,045,967 $ 162,290 $ 327,017 $ 343,660 $ 1,297,427
----------- ----------- --------- --------- -----------
Total revenue.................... $ 1,072,183 $ 164,568 $ 339,104 $ 353,237 $ 1,326,695
----------- ----------- --------- --------- -----------
EXPENSES:
Interest........................... $ 206,537 $ 25,793 $ 80,481 $ 87,551 $ 272,145
Depreciation and amortization...... 196,942 24,161 66,034 69,193 260,506
Property operating(1).............. 380,159 62,885 127,285 141,823 484,883
General and administrative......... 39,573 5,855 17,201 16,278 32,644
Provision for value
impairment....................... -- -- -- -- --
----------- ----------- --------- --------- -----------
Total expenses................... $ 823,211 $ 118,694 $ 291,001 $ 314,845 $ 1,050,178
----------- ----------- --------- --------- -----------
Income before (income) loss
allocated to minority interests,
income from investments in
unconsolidated joint ventures,
gain on sale of real estate, and
extraordinary items.............. $ 248,972 $ 45,874 $ 48,103 $ 38,392 $ 276,517
Minority interests allocation....... (1,233) (279) (912) (2,166) (2,142)
Income from investments in
unconsolidated joint ventures...... 9,509 1,426 1,982 1,554 9,850
Preferred dividends................. (25,283) -- -- -- (33,710)
Gain on sale of real estate and
extraordinary items................ (15,192) (12,930) 12,236 5,262 18,985
----------- ----------- --------- --------- -----------
Net income....................... $ 216,773 $ 34,091 $ 61,409 $ 43,042 $ 269,500
=========== =========== ========= ========= ===========
Net income per Unit................. $ .78 $ .21 $ .97
=========== =========== ===========
Weighted-average Units
outstanding........................ 279,411,456 164,146,710 279,411,456
=========== =========== ===========
<CAPTION>
EQUITY OFFICE PREDECESSORS (COMBINED HISTORICAL) FOR THE
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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(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....................... -- 20,248 -- -- --
---------- ---------- ---------- ---------- --------
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 -- --
Preferred dividends................. -- -- -- -- --
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 Unit.................
Weighted-average Units
outstanding........................
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
EQUITY
COMPANY COMPANY EQUITY OFFICE OFFICE
PRO FORMA FOR THE PREDECESSORS PREDECESSORS COMPANY
FOR THE PERIOD FOR THE FOR THE PRO FORMA
NINE FROM PERIOD FROM NINE FOR THE
MONTHS JULY 11, JANUARY 1, MONTHS YEAR
ENDED 1997 TO 1997 TO ENDED ENDED
SEPT. 30, SEPT. 30, JULY 10, SEPT. 30, DEC. 31,
1997 1997 1997 1996 1996
----------- ----------- ------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
(at end of period)
Investment in real estate after
accumulated depreciation....... $10,999,947 $ 5,000,159 -- -- --
Total assets................. 11,473,392 5,355,922 -- -- --
Mortgage debt, notes payable and
revolving lines of credit...... 3,742,862 1,716,458 -- -- --
Total liabilities............ 3,999,947 1,892,170 -- -- --
Minority interest............... 28,118 28,118 -- -- --
Owners'/Partners' equity........ 7,445,327 3,435,634 -- -- --
OTHER DATA:
General and administrative
expenses as a percentage of
total revenues................. 3.7% 3.6% 5.1% 4.6% 2.5%
Number of Office Properties
owned at period end(2)(3)(4)... 258 93 -- 78 --
Net rentable square feet of
Office Properties owned at
period end (in millions)(2).... 65.3 33.4 -- 27.8 --
Occupancy of Office Properties
owned at period end(2)......... 93% 93% -- 89% --
Number of Parking Facilities
owned at period end(5)......... 17 16 -- 3 --
Number of spaces at Parking
Facilities owned at period
end(5)......................... 16,749 16,037 -- 7,321 --
Funds from Operations(6)........ $ 423,769 $ 70,148 $ 113,022 $ 103,798 $ 507,427
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>
EQUITY OFFICE PREDECESSORS (COMBINED HISTORICAL) FOR THE
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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 lines 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 interest............... 11,080 31,587 9,283 (15,298) (14,133)
Owners'/Partners' 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)(4)... 83 73 63 48 33
Net rentable 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(5)......... 10 3 -- -- --
Number of spaces at Parking
Facilities owned at period
end(5)......................... 7,321 3,323 -- -- --
Funds from Operations(6)........ $ 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>
- ---------------
(1) Includes Property operating expenses, real estate taxes, insurance, as well
as repair and maintenance expenses.
(2) The data at the periods ended September 30, 1997 and December 31, 1996 and
1995, includes 28 State Street, a 570,040 square-foot Office Property which
is undergoing major redevelopment and was vacant prior to May 1997. The
weighted average occupancy, excluding 28 State Street, as of September 30,
1997 and December 31, 1996 and 1995, was approximately 94%, 92% and 88%,
respectively.
(3) The pro forma number of Office Properties as of September 30, 1997, includes
acquisitions, including the Beacon Merger, made subsequent to September 30,
1997. The pro forma number of Office Properties as of December 31, 1996
excludes Barton Oaks Plaza II and 8383 Wilshire, each of which was a 1997
disposition.
(4) The number of Office Properties owned as of December 31, 1996, as reflected
in the combined historical financial statements, includes Barton Oaks Plaza
II, an Office Property which was sold in January 1997, and 8383 Wilshire, an
Office Property which was sold in May 1997.
(5) The pro forma number of Parking Facilities and number of spaces at September
30, 1997 includes Parking Facilities acquired subsequent to September 30,
1997 and, on a pro forma basis as of December 31, 1996, includes Parking
Facilities acquired subsequent to December 31, 1996.
(6) 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. The Company 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 the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance
with standards established by NAREIT which may not be comparable to Funds
from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does
not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions. For a reconciliation of net income
and Funds from Operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Funds from Operations."
15
<PAGE> 20
RISK FACTORS
An investment in the Exchange Notes involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before deciding whether
to tender Private Notes in exchange for Exchange Notes pursuant to the Exchange
Offer.
RESTRICTIONS ON TRANSFER CONTINUE AFTER FAILURE TO COMPLY WITH EXCHANGE
PROCEDURES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes along with a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under any
duty to give notification of defects or irregularities with respect to tenders
of Private Notes for exchange.
Private Notes that are not tendered or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. Moreover, any holder of Private
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes will be required, in the absence of an
applicable exemption, to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
See "The Exchange Offer." In addition, the $1.25 Billion Exchange Notes and the
Exchange MOPPRS will only be transferable in blocks of at least $100,000
aggregate principal amount.
To the extent that Private Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Private
Notes could be adversely affected due to the limited principal amount of the
Private Notes that is expected to remain outstanding following the Exchange
Offer. A small outstanding amount of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security.
The Exchange Notes and any Private Notes that remain outstanding after
consummation of the Exchange Offer will vote together as a single series for
purposes of determining whether holders of the requisite percentage in principal
amount have taken certain actions or exercised certain rights under the
Indenture.
NO CURRENT PUBLIC MARKET FOR EXCHANGE NOTES
The Company does not intend to apply for listing of the Exchange Notes on
any securities exchange or to seek approval through any automated quotation
system. There can be no assurance regarding the future development of a market
for the Exchange Notes, the ability of holders of the Exchange Notes to sell
their Exchange Notes or the price at which such holders may be able to sell
their Exchange Notes. If such a market were to develop, the Exchange Notes could
trade at prices that may be higher or lower than the initial offering price of
the Private Notes depending on many factors, including prevailing interest
rates, the Company's operating results and financial condition, the market for
similar securities and other factors beyond the control of the Company,
including general economic conditions. Further, holders of Private Notes who do
not exchange those Private Notes will hold an investment subject to certain
restrictions on transfer not applicable to the Exchange Notes and, to the extent
that a large amount of Private Notes are not tendered or are tendered and not
accepted in the Exchange Offer, the trading market for the Exchange Notes could
be adversely affected. See "Plan of Distribution."
FAILURE TO EFFECTIVELY MANAGE RAPID GROWTH; EXPANSION INTO NEW MARKETS
The Company currently is experiencing a period of rapid growth. As of
December 31, 1997, the Company owned or had an interest in (i) 258 Office
Properties containing approximately 65.3 million rentable square feet of office
space, representing an approximate 102% increase in the office space in the
Company's portfolio since the Trust's IPO in July 1997 and (ii) 17 Parking
Facilities containing approximately 16,749 parking
16
<PAGE> 21
spaces, representing an approximate 13% increase in the parking spaces in the
Company's portfolio since the Trust's IPO. Additionally, the Beacon Merger
substantially expanded the Company's operations in Boston and extended its
operations to San Jose; the Wright Runstad Acquisition extended the Company's
operations to Seattle, Washington, Portland, Oregon and Anchorage, Alaska; and
the Other Recent Acquisitions extended the Company's operations to downtown New
Orleans, suburban Philadelphia, Minneapolis and Pittsburgh. The Company'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
could have a material adverse effect on the operating results and financial
condition of the Company and, consequently, on the Company's cash flow and
ability to service its debt, including the Notes.
REAL ESTATE RISKS
GENERAL. The yields from equity investments in real estate depend in large
part on the amount of income generated and expenses incurred. If the Company's
assets do not, in the future, generate income sufficient to meet operating
expenses and capital expenditures, the Company's ability to service its debt,
including the Notes, will be adversely affected. The economic performance and
value of, and the income from, the Properties may be adversely affected by many
factors, including changes in the national, regional and local economic climate,
local conditions such as an 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). 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 the Company 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 interest rate levels, the availability of financing, changes in
laws and governmental regulations (including those governing usage, zoning and
taxes) and the possibility of bankruptcies of tenants. To the extent that the
performance and/or value of its Properties are adversely affected by any of the
foregoing factors, the Company's financial condition and results of operations
would be adversely affected.
RENEWAL OF LEASES AND RELETTING OF SPACE. The Company 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 December 31, 1997, leases will expire
on or before December 31, 2002 on a total of approximately 56% of the rentable
square feet in the Properties. Because substantially all of the Company's income
is derived from rental income from the Properties, if the Company 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 results of operations and financial condition of the
Company would be adversely affected, and, consequently, the Company's cash flow
and ability to service its debt, including the Notes, could be adversely
affected.
RISK OF ACQUISITION ACTIVITIES; COMPETITION. The Company intends to
actively continue to acquire office and parking properties. 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 above under "-- General" are associated with any new
real estate investment. Finally, the Company expects that there will be
significant competition for attractive investment opportunities from other major
real estate investors with significant capital, including publicly traded real
estate investment trusts ("REITs"), private REITs, investment banking firms and
private institutional investment funds. Such competition has resulted in certain
markets, and may result in other markets, in increased prices for office
properties. The Company anticipates that future acquisitions will be
17
<PAGE> 22
financed through secured or unsecured financings, including the Credit
Facilities, and proceeds from equity or debt offerings by the Trust or the
Company. No assurance can be given that the Company will have the opportunity in
the future to make suitable property acquisitions on terms favorable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Because real estate investments are
relatively illiquid, the Company'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 or value of the investment. The foregoing and any other
factor or event that would impede the ability of the Company to respond to
changes in the performance of its investments could have an adverse effect on
the Company's financial condition and results of operations, with a consequent
adverse effect on the Company's ability to service its debt, including the
Notes.
UNINSURED LOSS. The Company carries comprehensive liability, fire, extended
coverage and rental loss insurance covering all of the Properties, with policy
specifications and insured limits which the Company 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, the Company could lose all or a portion of 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 the Company, would
remain obligated for any mortgage debt or other financial obligations related to
such property.
The Company carries earthquake insurance on all of the Properties,
including those located in California, subject to coverage limitations which the
Company believes 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 43 Properties
located in California, 12 have been built since January 1, 1988, and the Company
believes that all of the 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. The Company is subject to
risks normally associated with debt financing, including the risk that the
Company'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. The
Company has substantial outstanding indebtedness (approximately $3.7 billion on
a Pro Forma Basis as of September 30, 1997). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Debt Financing." If principal payments due at maturity
cannot be refinanced, extended or paid with proceeds of other capital
transactions, such as new equity capital, the Company expects that its cash flow
will not be sufficient in all years 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 or of investors to buy the Company's replacement notes) result in
higher interest rates upon refinancing, the interest expense relating to such
refinanced indebtedness would increase, adversely affecting the Company's cash
flow and potentially the Company's ability to service its debt, including the
Notes.
If a property is mortgaged to secure payment of indebtedness and the
Company 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 the Company. The Company's mortgages contain customary negative
covenants limiting, among other things, the Company's ability, without the prior
consent of the
18
<PAGE> 23
lender, to enter into new leases or materially modify existing leases, to
transfer interests in the mortgagor entity (including mortgage interests) and to
discontinue insurance coverage. In addition, the Credit Facilities and the
Beacon Facility contain certain customary restrictions, requirements and other
limitations on the Company's ability to incur indebtedness, including total debt
to assets ratios, secured debt to total assets ratios, debt service coverage
ratios and minimum ratios of unencumbered assets to unsecured debt. The
Indenture under which the Company's senior unsecured indebtedness, including the
Notes, is issued contains certain financial and operating covenants including,
among other things, certain coverage ratios, as well as limitations on the
Company's ability to incur secured and unsecured indebtedness, sell all or
substantially all of its assets and engage in mergers and consolidations and
certain acquisitions. See "Description of the Exchange Notes -- Certain
Covenants." Foreclosure on mortgaged Properties would, and limitations on the
Company's ability to refinance existing indebtedness for borrowed money may,
negatively impact the Company's financial condition and results of operations.
DEGREE OF LEVERAGE. The Company's Debt to Market Capitalization Ratio is
approximately 32.2% as of December 31, 1997. The Trust has adopted a policy of
incurring indebtedness for borrowed money only through the Company and its
Subsidiaries and only if upon such incurrence the Company's Debt to Market
Capitalization Ratio would be approximately 50% or less. The degree to which the
Company is leveraged could have important consequences to holders of the Notes,
including affecting the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, development or
other general partnership purposes and making the Company more vulnerable to a
downturn in its business or the economy generally.
RISK OF RISING INTEREST RATES AND VARIABLE RATE DEBT. The Trust, through
the Company, 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 one-month
LIBOR. The Company had entered into interest rate hedging agreements for
approximately $300 million of its floating rate debt to limit its exposure to
rising interest rates. Although the hedging agreements enable the Company to
convert floating rate liabilities to fixed rate liabilities, they expose the
Company to the risk that the counterparties to such hedge agreements may not
perform, which could increase the Company's exposure to rising interest rates.
The counterparties to such hedging agreements are all major financial
institutions. The Company may incur other variable rate indebtedness in the
future. Accordingly, the Company may in the future engage in other transactions
to further limit its exposure to rising interest rates as appropriate and cost
effective. Increases in interest rates on such indebtedness, or the loss of the
benefits of the anticipated hedging agreements, could increase the Company's
interest expense, which would adversely affect the Company's cash flow and its
ability to service its debt, including the Notes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Debt Financing."
EFFECTIVE SUBORDINATION OF NOTES
The Company derives substantially all of its operating income from its
Subsidiaries. The Holders of the Exchange Notes will have, and the holders of
the Private Notes have, no direct claim against the subsidiaries for payment
under the Notes. The Company must rely on dividends and other payments from its
subsidiaries or must raise funds in public or private equity (either directly or
through the Trust) or debt offerings or sell assets to generate the funds
necessary to meet its obligations, including the payment of principal and
interest on the Notes. If the dividends and other payments from subsidiaries
were insufficient to meet such obligations, there could be no assurance that the
Company would be able to obtain such funds on acceptable terms or at all.
Given a bankruptcy at the subsidiary level, the Exchange Notes and the
Private Notes would be effectively subordinated in right of payment to all
existing and future indebtedness and liabilities of the Company's subsidiaries.
As of September 30, 1997, on a Pro Forma Basis, the total liabilities of the
Company's subsidiaries (after the elimination of loans and advances to the
Company by its subsidiaries) was approximately $2.2 billion. In addition, the
Indenture permits the Company and its subsidiaries to incur additional
indebtedness, both secured and unsecured, provided certain conditions are met.
See "Description of the Exchange Notes -- Certain Covenants." Consequently, in
the event of a bankruptcy, liquidation,
19
<PAGE> 24
dissolution, reorganization or similar proceeding with respect to the Company's
subsidiaries, the holders of any indebtedness of the Company's subsidiaries will
be entitled to payment thereof from the assets of such subsidiaries prior to the
holders of any general unsecured obligation of the Company, including the Notes.
The Exchange Notes will be, and the Private Notes are, unsecured and
effectively subordinated to any secured indebtedness of the Company to the
extent of the value of the assets securing such indebtedness. As of September
30, 1997, on a Pro Forma Basis, the total secured indebtedness of the Company
and its subsidiaries was approximately $2.0 billion. The Indenture permits the
Company and its subsidiaries to incur additional secured indebtedness provided
certain conditions are met. See "Description of the Exchange Notes -- Certain
Covenants." Consequently, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to the Company,
the holders of any secured indebtedness will be entitled to proceed against the
collateral that secures such secured indebtedness and such collateral will not
be available for satisfaction of any amounts owed under the Company's unsecured
indebtedness, including the Notes.
CONCENTRATION OF PROPERTIES IN CERTAIN MARKETS
Approximately 16.3% and 16.7% (in number of buildings) and 12.2% and 14.9%
(in square footage) of the Company's Office Properties are located in Boston and
California, respectively. Of the 43 Office Properties located in California, 16
are located in Southern California. The Company'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, the Company's performance will be dependent, and its ability to
service its debt, including the Notes, may 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. No assurances can be given that economic conditions in this market
area will continue to improve.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
CONTRACT TERMINATION. Risks associated with the management of properties
which are not controlled by the Company and properties owned by parties other
than the Company (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 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. As of December 31,
1997, EOP Management Company had property management contracts with respect to
31 Managed Properties owned by affiliates of the Equity Group Owners, and Beacon
Management Company had management contracts with respect to three Managed
Properties owned by third parties. Affiliates of the Equity Group Owners
currently are in the process of selling certain of the Managed Properties. There
can be no assurance that the Management Companies' 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 MANAGEMENT AND SERVICES BUSINESS. To facilitate
maintenance of the Trust's qualification as a REIT for federal income tax
purposes, management of properties that are not wholly owned by the Company and
its subsidiaries is generally conducted through the Management Companies. The
Company owns all of the nonvoting 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 Company. (The Company does not own any interest in, or otherwise
control, EOH). The Company owns all of the nonvoting stock (representing a 99%
equity interest) and EOP Management Company owns all of the voting stock
(representing a 1% equity interest) in each of Beacon Management Company, Beacon
Design Corporation, a Massachusetts corporation ("Beacon Design Company"), and
Beacon Construction Company, Inc., a Massachusetts corporation ("Beacon
Construction Company"). See "Recent Developments -- The Beacon Merger." The
current board of directors of EOP
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<PAGE> 25
Management Company 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 Company. Also,
EOP Office Company, a Delaware corporation ("EOP Office Company"), which
acquired an interest in Wright Runstad Asset Limited Partnership ("WRALP") in
connection with the Wright Runstad Acquisition (see "Recent
Developments -- Wright Runstad Acquisition"), has an ownership and management
structure substantially the same as that of EOP Management Company. The Company
does not control the timing or amount of distributions paid by the Management
Companies, Beacon Design Company, Beacon Construction Company or EOP Office
Company (all of which are collectively referred to herein as the "Noncontrolled
Subsidiaries"), nor does the Company have the authority to control the
management and operation of the Noncontrolled Subsidiaries. As a result,
decisions relating to the declaration and payment of distributions and the
business policies and operations of the Noncontrolled Subsidiaries could be
adverse to the interests of the Company or could lead to adverse financial
results, which could adversely affect the Company's financial condition and
results of operations. Also, certain services for the Company'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. The Company
has no control over, or ownership interest in, such service corporation, which
operates as an independent contractor. Consequently, the Company is not able to
assure that the day-to-day operations of the service corporation are conducted
in a manner consistent with the Company's best interests. The Company 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 THE TRUST AND
THE COMPANY
ABSENCE OF ARM'S LENGTH NEGOTIATIONS IN THE FORMATION TRANSACTIONS. There
were no arm's length negotiations in connection with the transactions pursuant
to which the Trust and the Company were formed (the "Formation Transactions"),
in particular with respect to the representations and warranties made by the
contributors of Properties to the Company 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 the Company for such Properties and to $15 million with
respect to pre-IPO liabilities in connection with the Equity Group's
contribution of the office property management business of EOH and the office
property asset management business and the parking asset management business of
Equity Group Investments, Inc. ("EGI") and EOH relating to those Properties
contributed to the Company in the Formation Transactions (collectively, the
"Management Business"). Any losses to the Company resulting from breaches of the
agreement pursuant to which the ZML Funds and the Trust agreed to consolidate
(the "Contribution Agreement") in excess of the foregoing indemnification
limitations would have to be satisfied out of the Company's assets, with the
potential consequence of decreasing cash available to service its debt,
including the Notes. To date, the Company has no knowledge of any material
breaches of the Contribution Agreement.
MANAGEMENT COMPANY CONFLICTS. The Management Companies and Beacon Property
Management, L.P., a Delaware limited partnership ("BPMLP"), provide property
management services and, in most cases, asset management services to 37
Properties which are held in partnerships or subject to participation agreements
with unaffiliated third parties (the "Joint Venture Properties") and to the 34
Managed Properties, 31 of which are owned or controlled by the Equity Group
Owners or their affiliates. A substantial majority of these management contracts
were not negotiated on an arm's length basis. Although the Company believes that
the management fees charged by the Management Companies and BPMLP 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 Company, which, in turn, owns
all of the voting stock of Beacon Management Company.
CONTINUED INVOLVEMENT IN OTHER INVESTMENT ACTIVITIES. Although Mr. Zell
entered into a noncompetition agreement with the Trust 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
21
<PAGE> 26
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; therefore, he
may not be able to control whether any such company engages in activities that
are in competition with activities of the Company. Consequently, Mr. Zell's
continued involvement in other investment activities could result in competition
to the Company as well as management decisions which do not necessarily reflect
the interests of the holders of the outstanding securities of the Company and
the Trust.
In addition, none of the former Beacon officers or directors entered into
noncompetition agreements with the Trust or the Company in connection with the
Beacon Merger. Consequently, any former officer or director of Beacon could
engage in activities in competition with activities of the Company except, in
the event that a former Beacon director becomes a trustee of the Trust, to the
extent that his actions would violate his fiduciary duties to the Trust and its
shareholders. See "Management."
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 the Trust
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 the Company.
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 of and have substantial economic interest in
31 of the Managed Properties. The Company 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 the Company in the future if
the Company 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 the Company, consequently reducing amounts
available to service its debt, including the Notes. The Trust is prohibited by
the terms of the bylaws adopted by the Board of Trustees of the Trust (the
"Bylaws") from acquiring any properties from the Equity Group Owners or their
affiliates without the approval of a majority of its disinterested trustees. See
"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. The Company leases office space from an entity
controlled by an affiliate of the Equity Group Owners, at Two North Riverside
Plaza, Chicago, Illinois 60606. The Company believes that the rental rates and
other terms of such lease are on current market terms.
POSSIBILITY THAT THE EXPECTED BENEFITS OF BEACON MERGER WILL NOT BE REALIZED
The amount of the merger consideration (based upon the closing price of the
Common Shares on September 12, 1997, the last trading day prior to the public
announcement of the Beacon Merger) that was paid by the Company in the Beacon
Merger represented a 28.4% premium over the value of Beacon as implied by the
closing price of the Beacon Common Shares on September 12, 1997. In addition,
the Company incurred approximately $93.9 million in transaction costs in
connection with the Beacon Merger. Nevertheless, based on anticipated savings in
expenses and other factors, the Beacon Merger has an accretive (rather than a
dilutive) effect on the Company's Funds from Operations per unit 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 Beacon Merger will not have a dilutive effect on the Company's
Funds from Operations per unit.
POSSIBLE ENVIRONMENTAL LIABILITIES
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
22
<PAGE> 27
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.
Phase I environmental site assessments have been conducted at all of the
Properties by independent environmental consultants. These assessments included,
at a minimum, a visual inspection of the Properties and the surrounding areas,
an examination of current and historical uses of the 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 ("USTs")
are or were located or where other past site usages create a potential for site
impact, and for contamination in groundwater.
These environmental assessments have not revealed any environmental
liabilities at the Properties that the Company believes would have a material
adverse effect on the Company's business, assets, financial condition or results
of operations taken as a whole, nor is the Company aware of any such material
environmental liability. ACBMs have been detected through sampling in a
reasonable number of the Office Properties. Most of these buildings contain only
minor amounts of ACBMs in good condition and nearly all of it is nonfriable. 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 Properties, potential offsite sources of contamination, such as USTs,
are noted. For some of the Properties, previous uses, such as the former
presence of USTs, have been noted; in most of these cases, follow-up soil and/or
groundwater sampling has not identified evidence of significant contamination.
In the few cases where contamination has been found, existing plans to mitigate
and monitor the sites and financial commitments from certain prior owners and
tenants to cover costs related to mitigation should prevent the contamination
from presenting a significant risk.
The Company believes that the Properties are in compliance in all material
respects with applicable Environmental Laws. The Company believes that the
issues identified in its environmental reports will not have a material adverse
effect on the Company 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 Properties which could have an adverse effect on the Company's financial
condition and performance.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of the Trust's executive officers,
particularly Messrs. Zell and Callahan. The loss of their services could have an
adverse effect on the operations of the Company. Neither of these officers has
an employment agreement with the Trust.
CONTINGENT OR UNDISCLOSED LIABILITIES
In the Trust's Formation Transactions, pursuant to the Contribution
Agreement, the Company acquired all the assets of the ZML Opportunity
Partnerships and certain assets of the Equity Group subject to existing
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<PAGE> 28
liabilities. Such liabilities became the obligations of the Company because the
Company 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 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 during such time period. The
Company'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 the Company's recourse with respect
to any unknown liabilities in connection with the contribution of 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. Similarly,
the assets acquired by the Company in the Beacon Merger were acquired subject to
liabilities and without any recourse with respect to unknown liabilities.
Unknown liabilities with respect to Properties acquired in the Formation
Transactions or in the Beacon Merger might include liabilities for clean-up or
remediation of undisclosed environmental conditions, claims of tenants, vendors
or other persons dealing with the entities prior to the IPO or the Beacon
Merger, as the case may be (that had not been asserted prior to the respective
closings of such transactions), accrued but unpaid liabilities incurred in the
ordinary course of business, and claims for indemnification by general partners,
directors, officers and others indemnified by the Company's predecessors or
Beacon Partnership. See "-- Possible Environmental Liabilities" above as to the
possibility of undisclosed environmental conditions. Similarly, the Company
succeeded to any liabilities that the ZML REITs may have had for periods prior
to the IPO and that Beacon Partnership may have had prior to the Beacon Merger
and to any liabilities, including claims for property transfer taxes, arising
out of the contribution to the Company of Properties in the Formation
Transactions and the Beacon Merger. In the future, the Company may become
subject to additional risks of contingent or undisclosed liabilities in
connection with acquisitions that are accomplished by mergers, other business
combinations or similar transactions.
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<PAGE> 29
THE COMPANY
GENERAL
The Company and the Trust were formed to continue and expand the national
office property business organized by Mr. Samuel Zell, Chairman of the Board of
Trustees of the Trust. The Trust is the managing general partner of the Company
and all of the Trust's assets are owned by, and its operations are conducted
through, the Company and its subsidiaries. The Company's 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
December 31, 1997, the Company owned or had an interest in 258 institutional
quality Office Properties containing approximately 65.3 million rentable square
feet, and owned 17 stand-alone Parking Facilities containing approximately
16,749 parking spaces. 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. The Office Properties are located throughout the United States in 79
submarkets in 39 markets in 24 states and the District of Columbia. Through the
Management Companies, the Company manages 34 Managed Properties containing an
aggregate of 5.5 million square feet.
The Company currently has approximately 1,456 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 the Company or its affiliates and an average of 23 years experience in the
real estate industry.
During the past several years, the Company has been among the most active
buyers of institutional quality office properties throughout the United States,
investing approximately $10 billion during the period from 1987 through 1997 and
averaging $2.7 billion annually in acquisitions (calculated on a cost basis) for
the three years ended December 31, 1997.
The Company has demonstrated the ability to lease up the space it has
acquired. During the period from 1987 through 1997, the Company leased (net of
expiring leases) in excess of 5.9 million rentable square feet of office space.
As of December 31, 1997, the Office Properties were 94% occupied by 5,676
tenants.
As of December 31, 1997, the Office Properties contained an average of
253,069 rentable square feet. Of the 5,676 tenants for the Office Properties,
none accounted for more than 1.6% of annualized rent (except for the U.S.
General Services Administration, which accounted for 3.6% of annualized rent).
Management believes that larger properties allow for a higher quality of
tenant services, justify on-site management and facilitate economies of scale.
The Company, 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. The Company'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 39 markets,
which include 79 submarkets, the Company has local market expertise and
knowledge in markets situated throughout the United States. The 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 Office Properties, by number of buildings, are located 23% in CBDs and
77% in suburban markets and, by rentable square feet, 48% in CBDs and 52% in
suburban markets. The Managed Properties, by number of buildings, are located
12% in CBDs and 88% in suburban markets and, by rentable square feet, 24% in
CBDs and 76% in suburban markets.
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DISTRIBUTION OF OFFICE PROPERTIES, MANAGED PROPERTIES,
PARKING FACILITIES AND EMPLOYEES BY REGION (AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
OFFICE PROPERTIES MANAGED PROPERTIES PARKING FACILITIES
--------------------- --------------------- -------------------
RENTABLE RENTABLE NUMBER NUMBER
REGION NUMBER SQUARE FEET NUMBER SQUARE FEET NUMBER OF SPACES OF EMPLOYEES
------ ------ ----------- ------ ----------- ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast
CBD.................... 21 8,572,562 1 312,000 7 3,852 487
Suburban............... 62 9,134,989 3 978,674 -- -- --
Central
CBD.................... 12 9,343,831 2 877,889 5 4,674 477(1)
Suburban............... 19 3,958,670 18 2,397,407 -- -- --
Pacific
CBD.................... 7 4,810,336 -- -- -- -- 127
Suburban............... 36 4,892,844 5 320,468 -- -- --
West
CBD.................... 9 3,302,508 -- -- 4 7,464 80
Suburban............... 23 5,491,587 1 157,311 -- -- --
Southeast
CBD.................... 6 2,887,795 1 130,189 -- -- 152
Suburban............... 45 5,776,376 2 207,664 -- -- --
Southwest
CBD.................... 5 2,588,819 -- -- 1 759 133
Suburban............... 13 4,531,473 1 100,558 -- -- --
--- ---------- -- --------- -- ------ -----
Total............... 258 65,291,790 34 5,482,160 17 16,749 1,456
=== ========== == ========= == ====== =====
</TABLE>
- ---------------
(1) 226 of these employees are located at the Company's headquarters in Chicago.
OPERATIONS
The operation of the Properties is under the direction of six regional
managers, each of whom has oversight responsibility for all of the 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 the Trust's Executive Vice President -- Real
Estate Operations.
OPERATIONAL STRUCTURE
The Company is the entity through which the Trust owns the Properties. The
ownership and management structure of the Trust is intended to (i) enable the
Trust to acquire assets in transactions that may defer some or all of the
sellers' tax consequences and (ii) enable the Trust 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.
The Management Companies provide office property and asset management
services to 34 Managed Properties, 31 of which are owned by affiliates of the
Equity Group Owners. The Management Companies and BPMLP provide office property
and asset management services to 37 Joint Venture Properties. The Management
Companies and BPMLP collect property management fees for the performance of such
services. See "Risk Factors -- Managed Property Business and Non-REIT Services."
The 37 Joint Venture Properties are held in partnerships or are subject to
participation agreements with unaffiliated third parties. Thirty of the Joint
Venture Properties are Office Properties and seven are Parking Facilities. The
Company or a subsidiary is the managing general partner of each of the Joint
Venture
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<PAGE> 31
Properties (except for Civic Parking L.L.C., where a subsidiary of the Company
is one of two managing members).
The Company'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 Parking Facilities are leased to and operated by third-party
parking garage service companies under leases where such service companies bear
the operating expenses. The arrangements with such service companies may be
modified in the future if the Trust receives a favorable ruling from the IRS.
The principal executive offices of the Trust and the Company are located at
Two North Riverside Plaza, 22nd Floor, Chicago, Illinois 60606, and their
telephone number is (312) 466-3300. The Company maintains regional offices in
Los Angeles, Denver, Houston, Chicago, Atlanta and Washington, D.C.
RECENT DEVELOPMENTS
THE BEACON MERGER
On December 19, 1997, the Trust, the Company, Beacon and Beacon Partnership
consummated the Beacon Merger. In the Beacon Merger, (i) the Trust issued
80,596,117 Common Shares in exchange for all of the outstanding Beacon Common
Shares, (ii) the Trust issued 8,000,000 Series A Preferred Shares in exchange
for all of the outstanding Beacon Preferred Shares, (iii) the Company issued
8,570,886 Units in exchange for the outstanding common partnership units of
Beacon Partnership exclusive of those held by Beacon, and (iv) the Company
issued to the Trust 80,596,117 Units underlying the Common Shares issued in
exchange for the Beacon Common Shares and 8,000,000 Series A Preferred Units
underlying the Series A Preferred Shares issued in exchange for the Beacon
Preferred Shares. In addition, the Trust assumed the obligation to issue
4,749,095 Common Shares, of which 3,829,739 had been issued as of December 31,
1997 upon the exercise of certain outstanding Beacon employee stock options. See
"Management -- Beacon Stock Option Plans." The Company also assumed $533 million
in unsecured debt of Beacon under the Beacon Facility, of which $95 million had
been repaid as of December 31, 1997.
As a result of the Beacon Merger, the Company acquired interests in the 130
Beacon Properties containing approximately 20.9 million rentable square feet of
office space. The Beacon Properties are located in 22 submarkets in six markets:
Boston, Atlanta, Chicago, Los Angeles, San Jose and Washington, D.C. The Beacon
Properties, by rentable square feet, are located 65% in suburban markets and 35%
in CBDs, primarily Boston. As of December 31, 1997, the Beacon Properties were
on a weighted average basis approximately 95% leased by a total of approximately
1,694 tenants.
In connection with the Beacon Merger, the Company also acquired a 99%
equity interest in (but not voting control of) Beacon Management Company, which
manages third-party office and commercial space, Beacon Design Company, which
provides third-party tenant design services, and Beacon Construction Company,
which provides third-party construction services and is expected to cease
operations upon completion of its existing contracts.
WRIGHT RUNSTAD ACQUISITION
On December 17, 1997, the Company acquired 10 Office Properties, containing
an aggregate of approximately 3.34 million square feet, located in Seattle,
Washington, Portland, Oregon and Anchorage, Alaska, from Wright Runstad Holdings
L.P., Wright Runstad Asset Management, L.P. and Mellon Bank, N.A., as Trustee
for First Plaza Group Trust ("First Plaza") (the "Wright Runstad Acquisition").
The purchase price was approximately $640 million. The total consideration
included the assumption of approximately $240 million of existing debt, $208.9
million in cash and $176.1 million in Units valued at $29.11 per unit, $100
million of which were exchanged by the sellers for Restricted Common Shares of
the Trust. The sellers also received five-year warrants (valued at approximately
$15 million) to purchase an additional five million Restricted Common Shares at
an exercise price of $39.375 per share. In addition, EOP Office Company acquired
a 30% noncontrolling interest in WRALP for $16 million in cash and $4 million in
Units
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<PAGE> 32
valued at $29.11 per unit and agreed to provide up to $20 million in additional
financing or credit support for future development activities of WRALP.
Thomas E. Dobrowski, a trustee of the Trust, is the managing director of
real estate and alternative investments of General Motors Investment Management
Corporation, an investment advisor to several pension funds of General Motors
Corporation ("GM") and its subsidiaries and to several clients also controlled
by GM, including First Plaza, which received $192.4 million in cash, 3,435,688
Restricted Common Shares, and warrants to purchase 3,350,000 Restricted Common
Shares in exchange for First Plaza's interest in the properties acquired in the
Wright Runstad Acquisition. In connection with this transaction, First Plaza was
given the right to "put" the Restricted Common Shares back to the Company for a
period of six months at $29.11 per share.
In connection with the Wright Runstad Acquisition, H. Jon Runstad was
elected as a trustee of the Trust effective January 1, 1998. Mr. Runstad
received, directly and indirectly, 552,968 Units in exchange for his interest in
WRALP and the properties acquired in the Wright Runstad Acquisition.
OTHER RECENT ACQUISITIONS
Since the Trust's IPO in July 1997, the Company has completed nine Other
Recent Acquisitions in addition to the Beacon Merger and the Wright Runstad
Acquisition. In the Other Recent Acquisitions, the Company acquired 27 Office
Properties, containing an aggregate of approximately 8.8 million square feet,
located in New Orleans, Houston, Dallas, Philadelphia, Los Angeles, Chicago,
Washington, D.C., and Fairfax and Alexandria, Virginia. The Company also
acquired three Parking Facilities, containing approximately 2,141 parking
spaces, in Chicago, New Orleans and Pittsburgh. The aggregate consideration paid
by the Company in the Other Recent Acquisitions was approximately $1.47 billion,
comprised of $1.26 billion in cash, $163 million in Units and $48 million in
assumed liabilities.
CAPITAL TRANSACTIONS
Since the IPO in July 1997, the Company and the Trust have completed
several capital raising transactions. On September 3, 1997, the Company issued
the $180 Million Notes in a private placement to an institutional investor and
used the proceeds therefrom to repay amounts outstanding under the $600 Million
Credit Facility entered into in July 1997.
The Company 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, has been used to repay amounts outstanding
under the $600 Million Credit Facility and to fund acquisitions.
In October 1997, the Trust sold an aggregate of $274 million of Restricted
Common Shares in two separate transactions to institutional investors, and
contributed the proceeds to the Company in exchange for 9.7 million Units.
In February 1998, the Company sold (i) the $1.25 Billion Notes in the Notes
Offering and (ii) $250 million of MOPPRS in the MOPPRS Offering and used the
proceeds therefrom to repay amounts outstanding under the Credit Facilities and
the Beacon Facility. The MOPPRS are subject to mandatory tender on the
Remarketing Date to the Remarketing Dealer at 100% of their principal amount,
except in limited circumstances. If the Remarketing Dealer for any reason does
not purchase all tendered MOPPRS on the Remarketing Date or elects not to
remarket the MOPPRS, or in certain other limited circumstances, the Company will
be required to repurchase the MOPPRS at 100% of the principal amount thereof
plus accrued interest, if any.
In February 1998, the Trust sold 6,000,000 Series B Preferred Shares in the
Preferred Offering. The Company used the net proceeds from the Preferred
Offering to repay amounts outstanding under the Credit Facilities.
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<PAGE> 33
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objective is to achieve sustainable
long-term growth in cash flow and portfolio value. The Company 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. The Company intends to supplement
this strategy by owning parking facilities.
INTERNAL GROWTH
Management believes the Company'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 Properties which have not yet
achieved stabilization and (iv) increasing economies of scale.
As of December 31, 1997, 3.9 million rentable square feet of Office
Property space was vacant. Of this amount, 735,700 square feet was leased at an
average rent of $26.62 per square foot, with occupancy to commence in whole or
in part during 1998. The Company's average operating expenses for the total
vacant space were $9.37 per square foot as of December 31, 1997. The following
five Properties accounted for 22% of the Company's total vacant space as of
December 31, 1997:
<TABLE>
<CAPTION>
AMOUNT OF VACANT
VACANT SQUARE FOOTAGE
SQUARE FOOTAGE LEASED(1)
-------------- ----------------
<S> <C> <C>
28 State Street, Boston, MA................................. 240,666 117,971
Two California Plaza, Los Angeles, CA....................... 166,911 9,451
161 North Clark, Chicago, IL................................ 201,538 183,121
Civic Opera House, Chicago, IL.............................. 143,604 83,527
Westbrook Corporate Center, Westchester, IL................. 118,862 37,158
------- -------
871,581 431,228
======= =======
</TABLE>
- ---------------
(1) Represents the amount of unoccupied space as of December 31, 1997 that was
subject to an executed lease with a commencement date after December 31,
1997.
During the period from December 31, 1997 through December 31, 2002, 4,673
leases for 36.5 million rentable square feet of space are scheduled to expire.
As of December 31, 1997, the average rent for this space was $21.77 per square
foot and the weighted average operating expenses were $8.80 per square foot. The
Company believes that leases expiring through December 31, 2002 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 the Company will relet such space at an increased, or
even at the then current, rental rate.
Because 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, the Company 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 the Company with extensive operational
data, including daily leasing, occupancy and other property and financial data).
Historically, as the portfolio has increased in size, the Company's general and
administrative costs as a percentage of total revenues have decreased.
The Company owns undeveloped land on 23 sites on which approximately 8.1
million square feet of office space could be developed. The Company may decide
to develop this land if significant pre-leasing can be arranged or if such
development is necessary to protect the Company's investment in existing
Properties, but does not currently anticipate significant development
activities.
29
<PAGE> 34
EXTERNAL GROWTH
The Company 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 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 the Trust or the Company, 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 the Company believes will continue as institutional owners gain increasing
confidence in indirect rather than direct ownership of real estate. The Company
has acquired a significant number of the Office Properties from institutional
sellers. Emerging Trends in Real Estate 1998, published by Equitable Real Estate
Investment Management, Inc. and Real Estate Research Corporation, estimates that
institutions currently have direct investments of approximately $1.45 trillion
in commercial real estate in the United States. The Company 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
long-standing relationship with many of the major institutional owners of real
estate in the United States, it is well positioned to benefit from the
consolidation that is occurring in the real estate industry.
PARKING FACILITIES
Management believes that parking facilities offer the Company attractive
investment opportunities which are 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. The Company
intends to 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.
NO CASH PROCEEDS TO THE COMPANY
The Company will not receive any proceeds from the issuance of the Exchange
Notes offered hereby and has agreed to pay the expenses of the Exchange Offer.
Private Notes surrendered in exchange for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase in the outstanding indebtedness of the Company.
The Company used the net proceeds from the issuance of the Private Notes to
repay indebtedness outstanding under the Credit Facilities and, in the case of
the $1.25 Billion Notes and the MOPPRS, the Beacon Facility, as described in the
pro forma financial statements presented in "Summary Selected Financial Data"
and "Selected Financial Data."
30
<PAGE> 35
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratios of earnings to fixed charges are as follows:
<TABLE>
<CAPTION>
EQUITY OFFICE EQUITY OFFICE
PREDECESSORS PREDECESSORS EQUITY OFFICE PREDECESSORS
COMPANY (COMBINED (COMBINED (COMBINED HISTORICAL)
(HISTORICAL) HISTORICAL) HISTORICAL) YEARS ENDED DECEMBER 31,
JULY 11, 1997 TO JANUARY 1, 1997 TO NINE MONTHS ENDED --------------------------------
SEPTEMBER 30, 1997 JULY 10, 1997 SEPTEMBER 30, 1996 1996 1995 1994 1993 1992
--------------------- ------------------ ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges......... 2.57 1.52 1.41 1.49 1.21 1.24 1.23 1.24
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income (loss) before
gains from sales of property and extraordinary items plus fixed charges. Fixed
charges consist of interest expense (including interest costs capitalized), the
amortization of debt issuance costs and rental expense deemed to represent
interest expense.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 on a historical basis and a Pro Forma Basis. The information
set forth in the table should be read in conjunction with the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
PRO FORMA
HISTORICAL BASIS
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage Debt(1).......................................... $1,325,333 $ 1,961,784
Credit Facilities(1)...................................... 211,125 96,626
Notes Payable............................................. 180,000 1,684,452
Partners' Capital........................................... 3,435,634 7,445,327
---------- -----------
Total Capitalization................................... $5,152,092 $11,188,189
========== ===========
</TABLE>
- ---------------
(1) See Note 8 of the notes to the September 30, 1997 Historical Consolidated
and Combined Financial Statements of the Company and the Equity Office
Predecessors for information relating to the indebtedness.
31
<PAGE> 36
SELECTED COMBINED FINANCIAL INFORMATION
The following sets forth summary selected combined financial and operating
information on a pro forma basis for the Company and on an historical basis for
the Company and the Company's predecessors ("Equity Office Predecessors"). The
following information should be read in conjunction with the consolidated and
combined financial statements and notes thereto of the Company and Equity Office
Predecessors included elsewhere in this Prospectus. The summary selected
consolidated historical financial and operating information of the Company at
September 30, 1997, and for the period from July 11, 1997 to September 30, 1997,
has been derived from the historical unaudited consolidated financial statements
of the Company. The selected combined historical and operating information of
Equity Office 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 Equity Office Predecessors
included elsewhere in this Prospectus. The summary selected combined historical
financial and operating information of Equity Office 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
Equity Office Predecessors audited by Ernst & Young LLP, independent auditors,
whose report with respect thereto is included elsewhere in this Prospectus. The
summary selected combined historical financial and operating information of
Equity Office 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 Equity Office
Predecessors. Unaudited pro forma operating information for the nine months
ended September 30, 1997 and the year ended December 31, 1996 is presented as if
the borrowings under the Credit Facilities at the end of the relevant period,
acquisitions (including the Beacon Merger) that occurred during and subsequent
to the relevant period, the IPO, the Preferred Offering and the issuance of the
Private Notes had occurred on January 1, 1997 and 1996, respectively, and,
therefore, incorporates certain assumptions that are described in the notes to
the Pro Forma Condensed Combined Financial Statements included elsewhere in this
Prospectus. The unaudited pro forma balance sheet data is presented as if the
borrowings under the Credit Facilities that occurred subsequent to September 30,
1997, the Preferred Offering and the issuance of the Private Notes, and
acquisitions (including the Beacon Merger) that occurred subsequent to September
30, 1997 had occurred on September 30, 1997. The pro forma information does not
purport to represent what the Company's financial position or results of
operations would actually have been if these transactions had, in fact, occurred
on such date or at the beginning of the period indicated, or to project the
Company's financial position or results of operations at any future date or for
any future period.
<TABLE>
<CAPTION>
COMPANY COMPANY EQUITY OFFICE EQUITY OFFICE
PRO FORMA FOR THE PREDECESSORS PREDECESSORS COMPANY
FOR THE PERIOD FOR THE FOR THE PRO FORMA
NINE FROM PERIOD FROM NINE FOR THE
MONTHS JULY 11, JANUARY 1, MONTHS YEAR
ENDED 1997 TO 1997 TO ENDED ENDED
SEPT. 30, SEPT. 30, JULY 10, SEPT. 30, DEC. 31,
1997 1997 1997 1996 1996
----------- ----------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE:
Rental, parking and other........... $ 1,045,967 $ 162,290 $ 327,017 $ 343,660 $ 1,297,427
----------- ----------- --------- --------- -----------
Total revenue.................... $ 1,072,183 $ 164,568 $ 339,104 $ 353,237 $ 1,326,695
----------- ----------- --------- --------- -----------
EXPENSES:
Interest........................... $ 206,537 $ 25,793 $ 80,481 $ 87,551 $ 272,145
Depreciation and amortization...... 196,942 24,161 66,034 69,193 260,506
Property operating(1).............. 380,159 62,885 127,285 141,823 484,883
General and administrative......... 39,573 5,855 17,201 16,278 32,644
Provision for value
impairment....................... -- -- -- -- --
----------- ----------- --------- --------- -----------
Total expenses................... $ 823,211 $ 118,694 $ 291,001 $ 314,845 $ 1,050,178
----------- ----------- --------- --------- -----------
Income before (income) loss
allocated to minority interests,
income from investments in
unconsolidated joint ventures,
gain on sale of real estate, and
extraordinary items.............. $ 248,972 $ 45,874 $ 48,103 $ 38,392 $ 276,517
Minority interests allocation....... (1,233) (279) (912) (2,166) (2,142)
Income from investments in
unconsolidated joint ventures...... 9,509 1,426 1,982 1,554 9,850
Preferred dividends................. (25,283) -- -- -- (33,710)
Gain on sale of real estate and
extraordinary items................ (15,192) (12,930) 12,236 5,262 18,985
----------- ----------- --------- --------- -----------
Net income....................... $ 216,773 $ 34,091 $ 61,409 $ 43,042 $ 269,500
=========== =========== ========= ========= ===========
Net income per Unit................. $ .78 $ .21 $ .97
=========== =========== ===========
Weighted-average Units
outstanding........................ 279,411,456 164,146,710 279,411,456
=========== =========== ===========
<CAPTION>
EQUITY OFFICE PREDECESSORS (COMBINED HISTORICAL) FOR THE
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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(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....................... -- 20,248 -- -- --
---------- ---------- ---------- ---------- --------
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 -- --
Preferred dividends................. -- -- -- -- --
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 Unit.................
Weighted-average Units
outstanding........................
</TABLE>
32
<PAGE> 37
<TABLE>
<CAPTION>
EQUITY
COMPANY COMPANY EQUITY OFFICE OFFICE
PRO FORMA FOR THE PREDECESSORS PREDECESSORS COMPANY
FOR THE PERIOD FOR THE FOR THE PRO FORMA
NINE FROM PERIOD FROM NINE FOR THE
MONTHS JULY 11, JANUARY 1, MONTHS YEAR
ENDED 1997 TO 1997 TO ENDED ENDED
SEPT. 30, SEPT. 30, JULY 10, SEPT. 30, DEC. 31,
1997 1997 1997 1996 1996
----------- ----------- ------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
(at end of period)
Investment in real estate after
accumulated depreciation....... $10,999,947 $ 5,000,159 -- -- --
Total assets................. 11,473,392 5,355,922 -- -- --
Mortgage debt, notes payable and
revolving lines of credit...... 3,742,862 1,716,458 -- -- --
Total liabilities............ 3,999,947 1,892,170 -- -- --
Minority interest............... 28,118 28,118 -- -- --
Owners'/Partners' equity........ 7,445,327 3,435,634 -- -- --
OTHER DATA:
General and administrative
expenses as a percentage of
total revenues................. 3.7% 3.6% 5.1% 4.6% 2.5%
Number of Office Properties
owned at period end(2)(3)(4)... 258 93 -- 78 --
Net rentable square feet of
Office Properties owned at
period end (in millions)(2).... 65.3 33.4 -- 27.8 --
Occupancy of Office Properties
owned at period end(2)......... 93% 93% -- 89% --
Number of Parking Facilities
owned at period end(5)......... 17 16 -- 3 --
Number of spaces at Parking
Facilities owned at period
end(5)......................... 16,749 16,037 -- 7,321 --
Funds from Operations(6)........ $ 423,769 $ 70,148 $ 113,022 $ 103,798 $ 507,427
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>
EQUITY OFFICE PREDECESSORS (COMBINED HISTORICAL) FOR THE
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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 lines 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 interest............... 11,080 31,587 9,283 (15,298) (14,133)
Owners'/Partners' 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)(4)... 83 73 63 48 33
Net rentable 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(5)......... 10 3 -- -- --
Number of spaces at Parking
Facilities owned at period
end(5)......................... 7,321 3,323 -- -- --
Funds from Operations(6)........ $ 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>
- ---------------
(1) Includes Property operating expenses, real estate taxes, insurance, as well
as repair and maintenance expenses.
(2) The data at the periods ended September 30, 1997 and December 31, 1996 and
1995, includes 28 State Street, a 570,040 square-foot Office Property which
is undergoing major redevelopment and was vacant prior to May 1997. The
weighted average occupancy, excluding 28 State Street, as of September 30,
1997 and December 31, 1996 and 1995, was approximately 94%, 92% and 88%,
respectively.
(3) The pro forma number of Office Properties as of September 30, 1997, includes
acquisitions, including the Beacon Merger, made subsequent to September 30,
1997. The pro forma number of Office Properties as of December 31, 1996
excludes Barton Oaks Plaza II and 8383 Wilshire, each of which was a 1997
disposition.
(4) The number of Office Properties owned as of December 31, 1996, as reflected
in the combined historical financial statements, includes Barton Oaks Plaza
II, an Office Property which was sold in January 1997, and 8383 Wilshire, an
Office Property which was sold in May 1997.
(5) The pro forma number of Parking Facilities and number of spaces at September
30, 1997 includes Parking Facilities acquired subsequent to September 30,
1997 and, on a pro forma basis as of December 31, 1996, includes Parking
Facilities acquired subsequent to December 31, 1996.
(6) 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. The Company 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 the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance
with standards established by NAREIT which may not be comparable to Funds
from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does
not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions. For a reconciliation of net income
and Funds from Operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Funds from Operations."
33
<PAGE> 38
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 the Company and the Combined Financial
Statements of the Equity Office Predecessors and Notes thereto contained herein.
All references to the historical activities of the Company prior to July 11,
1997 contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refer to the activities of the Equity
Office Predecessors. Statements contained in this "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. For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," property information relates to the
Company's Properties prior to acquisitions made subsequent to September 30,
1997.
GENERAL
The following discussion is based primarily on the Consolidated and
Combined Financial Statements of the Company and the Combined Financial
Statements of the Equity Office 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.
The Company receives income primarily from rental revenue from Office
Properties (including reimbursements from tenants for certain operating costs),
parking revenue from Office Properties and stand-alone Parking Facilities, and,
to a lesser extent, from fees from noncombined affiliates for the management of
the Managed Properties.
As of September 30, 1997, the Company owned or had an interest in 93 Office
Properties totaling approximately 33.4 million square feet, and 16 stand-alone
Parking Facilities with approximately 16,037 spaces (the "Total Portfolio"). Of
the Total Portfolio, 71 Office Properties, totaling approximately 22.6 million
square feet, and three Parking Facilities were acquired prior to January 1,
1996; 11 Office Properties, totaling approximately 6.1 million square feet, and
seven Parking Facilities were acquired in 1996; and 11 Office Properties,
totaling approximately 4.7 million square feet, and six Parking Facilities,
including an interest in four 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, the Company
does not believe its period-to-period financial data are comparable. Therefore,
the analysis below shows changes resulting from 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 Office Properties
and three 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 Office Properties and three Parking Facilities acquired
prior to July 1, 1996. The Core Portfolio for these comparisons excludes Barton
Oaks Plaza II, a 118,529-square-foot Office Property, which was sold in January
1997, 8383 Wilshire, a 417,463-square-foot Office Property, which was sold in
May 1997, and 28 State Street, a 570,040-square-foot 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 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 Office Properties acquired prior to January 1, 1994. The Core
Portfolio for these comparisons includes Barton Oaks Plaza II and 8383 Wilshire.
34
<PAGE> 39
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 Office Properties
and three 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
----------------------------------------- -----------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- 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........... (312) (468) 156 33.3% (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................... $ 33,877 $ 11,024 $ 22,853 207.3% $ 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 $0.9 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 the Company 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.
35
<PAGE> 40
Interest Income. Interest income for the Total Portfolio decreased by $0.9
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 (as
defined below) and the 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 the Company anticipates
maintaining going forward. Due to the availability of borrowings under the $600
Million Credit Facility and other changes in the capital structure of the
Company and the Trust, the Company anticipates that it will maintain cash
reserves of $25 million 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 lower interest expense 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, and was partially offset by the $180 million Private Debt
Offering. Interest expense related to the $598.4 million of mortgage 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 Notes 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 $0.8 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 the Company acquires additional properties and incurs additional
indebtedness.
Depreciation and Amortization. The decrease in depreciation in the Core
Portfolio resulted from the recording of the Company's assets and liabilities at
their fair market value in connection with the Consolidation and the IPO.
Accordingly, certain of the Company's assets are depreciated over longer lives
than the period over which those assets were previously depreciated by Equity
Office 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, and by recording those assets at their fair market value at the
time of the Consolidation and the 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 the IPO.
Property Operating Expenses. The increase in real estate taxes and
insurance, repairs and maintenance, and property operating expenses ("Property
Operating Expenses") relates primarily to increases in real estate taxes due to
higher property valuations partially offset by real estate tax refunds related
to prior periods recorded in the three months ended September 30, 1997.
General and Administrative Expenses. General and administrative expenses in
the Total Portfolio increased by approximately $3.3 million to $8.3 million for
the three months ended September 30, 1997 compared to $5.0 million for the three
months ended September 30, 1996. General and administrative expenses as a
percentage of total revenues was approximately 4.5% and 4.0% for the three
months ended September 30, 1997 and 1996, respectively. The primary reasons for
the increase in general and administrative expenses are the significant increase
in the size of the Company's portfolio and increased expenses associated with
becoming a public company. While general and administrative expenses will
continue to increase as the size of the Company's portfolio increases, it is
anticipated that general and administrative expenses as a percentage of total
revenue will initially remain stable (or increase slightly), as the full costs
of running a public company are reflected in operations, and then decrease over
time as the Company realizes increased economies of scale.
36
<PAGE> 41
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 71 Office Properties
and three Parking Facilities acquired prior to January 1, 1996. The Core
Portfolio excludes Barton Oaks Plaza II, which was sold in January 1997, 8383
Wilshire, which was sold in May 1997, and 28 State Street, which has recently
undergone a major redevelopment and was vacant prior to May 1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -----------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- INCREASE/ % ------------------- INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
-------- -------- ---------- ------ -------- -------- ---------- ------
($ 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........ (1,191) (2,166) 975 45.0% (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................ $ 95,500 $ 43,042 $ 52,458 121.9% $ 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 the Company 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.
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,
37
<PAGE> 42
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
properties. 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 the Company anticipates maintaining going
forward. Due to the availability of borrowings under the $600 Million Credit
Facility and other changes in the capital structure of the Company and the
Trust, the Company anticipates that it will maintain cash reserves of $25
million 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 lower interest expense 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, net
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
IPO), and increased debt obtained to finance acquisitions. At or shortly after
the closing of the IPO, the Company 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 mortgage 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 Notes
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 indebtedness.
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 the
Company's assets and liabilities to their fair market values in connection with
the Consolidation and the IPO. This increase was partially offset by a decrease
resulting from certain of the Company's assets being depreciated over longer
lives than the periods over which corresponding assets were previously
depreciated by Equity Office 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 in the
Total Portfolio increased by approximately $6.8 million to $23.1 million for the
nine months ended September 30, 1997 compared to $16.3 million for the nine
months ended September 30, 1996. General and administrative expenses as a
percentage of total revenues was approximately 4.6% and 4.6% for the nine months
ended September 30, 1997 and 1996, respectively. While general and
administrative expenses will continue to increase as the size of the Company's
portfolio increases, it is anticipated that general and administrative expenses
as a percentage of total revenues will initially remain stable (or increase
slightly), as the full costs of running a public company are reflected in
operations, and then decrease over time as the Company realizes increased
economies of scale.
PARKING OPERATIONS
Included in the Total Portfolio and Core Portfolio numbers above are
results of operations from the stand-alone Parking Facilities, the summarized
information for which is presented below.
38
<PAGE> 43
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO CORE PARKING PORTFOLIO
------------------------------------- -------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- INCREASE/ % --------------- INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
------ ------ ---------- ------ ------ ------ ---------- ------
($ 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>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO CORE PARKING PORTFOLIO
-------------------------------------- -------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- 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>
39
<PAGE> 44
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 63 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
----------------------------------------- -----------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------- 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 portfolio... (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 the Company 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 the Trust's share of a litigation settlement.
40
<PAGE> 45
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 properties. 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 the Company
anticipates maintaining going forward. Due to the availability of borrowings
under the $600 Million Credit Facility and other changes in the capital
structure of the Company and the Trust, the Company anticipates that it will
maintain cash reserves of $25 million 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 lower interest
expense 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. Interest expense
related to the $598.4 million of mortgage debt repaid in 1997 was approximately
$42.7 million and $35.9 million for the years ended December 31, 1996 and 1995,
respectively. Due to this debt repayment and other debt repayments in 1997,
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. The increase in depreciation and
amortization in the Core Portfolio was related to depreciation of capital and
tenant improvements made at properties in the Core Portfolio 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 in the
Total Portfolio 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 the Company'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 the
Company 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 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. As a result of cash deficits, San
Felipe Plaza was evaluated for impairment and accordingly, during the year ended
December 31, 1995, Equity Office 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 $2.7 million related
to unamortized lease acquisition costs.
41
<PAGE> 46
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 48 Office Properties
acquired prior to January 1, 1994. The Core Portfolio for this comparison
includes Barton Oaks Plaza II and 8383 Wilshire, which were sold in 1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------- INCREASE/ % ------------------- INCREASE/ %
1995 1994 (DECREASE) CHANGE 1995 1994 (DECREASE) CHANGE
-------- -------- ---------- ------- -------- -------- ---------- -------
($ 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
portfolio................ (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 the Company has historically experienced similar levels of such
termination fees, there
42
<PAGE> 47
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 properties. 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 the Company
anticipates maintaining going forward. Due to the availability of borrowings
under the $600 Million Credit Facility and other changes in the capital
structure of the Company, the Company anticipates that it will maintain cash
reserves of $25 million 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 lower interest expense 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. Interest expense
related to the $598.4 million of mortgage debt repaid in 1997 was approximately
$35.9 million and $15.9 million for the years ended December 31, 1995 and 1994,
respectively. Due to this debt repayment and other debt repayments in 1997,
interest expense is initially expected to decrease in future periods, and then
anticipated to increase as the Company acquires additional properties and incurs
additional indebtedness.
Depreciation and Amortization. The increase in depreciation and
amortization in the Core Portfolio was related to depreciation of capital and
tenant improvements made at properties in the Core Portfolio 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 compared to
$107.4 million for the year ended December 31, 1994. Virtually all of this
increase was attributable to 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 $0.7
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
Property. The Company had calculated and billed the real estate tax
reimbursement due from tenants at this Property, assuming that this refund would
be received, so substantially all of the refund was retained by the Company
rather than being refunded to tenants.
General and Administrative. General and administrative expenses in the
Total Portfolio 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 the Company'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 the
Company 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 Equity Office Predecessors as of January 1, 1995. Rental properties
are individually evaluated
43
<PAGE> 48
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, Equity
Office 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 $2.7 million related to unamortized lease
acquisition costs.
PARKING FACILITIES
Included in the Total Portfolio numbers above are results of operations
from Parking Facilities, the summarized information for which is presented
below.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO
-----------------------------
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------ ----
($ 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
The Company sold two Office Properties in 1997: Barton Oaks Plaza II
(118,529 square feet) was sold in January 1997 and 8383 Wilshire (417,463 square
feet) was sold in May 1997. In January 1996, the Company 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 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
---- ------ ------- ------ ------ ------- -------
<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>
44
<PAGE> 49
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
nonrevenue enhancing tenant improvements. Historically, the Company 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 nonrevenue enhancing tenant improvements. The Company
intends to make regular quarterly distributions to holders of the Units. The
Company has established its initial distribution at an annual rate of $1.20 per
unit based upon its estimate of annualized cash flow.
The Company intends to fund recurring capital costs and nonrevenue
enhancing tenant improvements from cash from operations and draws under the
Credit Facilities. The Company has no contractual obligations for material
capital costs, other than in connection with customary tenant improvements in
the ordinary course of business. The Company also expects that the Credit
Facilities will provide for temporary working capital, unanticipated cash needs,
and funding of acquisitions. See "Risk Factors -- Debt Financing -- Debt
Financing and Existing Debt Maturities."
The anticipated size of the Company's distributions will not allow the
Company, using only cash from operations, to retire all of its debt as it comes
due and, therefore, the Company will be required to repay maturing debt with
funds from debt and/or equity financing. See "Risk Factors -- Debt Financing"
and "-- Effective Subordination of Notes."
DEBT FINANCING
The table below summarizes the mortgage debt, unsecured notes and the $600
Million 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 $19
million recorded in connection with the IPO and the Consolidation.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Debt Summary:
Balance ($ 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 Per Annum 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 one-month floating
LIBOR-based rate. The applicable interest rate at September 30, 1997 was 5.66%
per annum, resulting in a weighted average spread over one-month LIBOR at
September 30, 1997 of 1.2% per annum.
During the quarter ended September 30, 1997, the Company used the net
proceeds of the IPO of approximately $564.5 million and approximately $33.9
million of available cash reserves to repay $253.1 million
45
<PAGE> 50
of fixed rate debt and $345.3 million of the variable rate debt. An additional
$12.9 million was incurred for prepayment penalties. The Company 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 mortgage debt
(net of accumulated amortization of approximately $1.3 million) of approximately
$19 million recorded in connection with the 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 Properties contain customary restrictions
and requirements such as transferability restrictions, payment of taxes on the
Property, maintenance of the Property in good condition, maintenance of
insurance on the Property, prohibition on liens, and obtaining lender consent to
leases with material tenants. As of December 31, 1997, the Properties were
encumbered by an aggregate of $2.1 billion of secured indebtedness of the
Company.
The Credit Facilities, the Beacon Facility and the Indenture contain
certain customary restrictions, requirements and other limitations on the
Company's ability to incur indebtedness, including total debt to assets ratios,
secured debt to total assets ratios, debt service coverage ratios and minimum
ratios of unencumbered assets to unsecured debt.
Credit Facilities. ZML Fund IV entered into an acquisition/term loan
facility in September 1996 which was amended in April 1997. On July 15, 1997,
the Company obtained the $600 Million Credit Facility which has been and will be
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 then terminated. 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 $975,000. 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 and 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
more than 66%. The $600 Million Credit Facility carries an interest rate equal
to one-month LIBOR plus 60 basis points. A competitive bid option is 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 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 December 31, 1997, the
outstanding balance on the $600 Million Credit Facility was $558.9 million. In
connection with the Beacon Merger, the Company assumed $533 million in unsecured
indebtedness under the Beacon Facility, of which, $95 million had been repaid as
of December 31, 1997.
In October 1997, the Company 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 one-month LIBOR plus 80 basis points. The $1.5 Billion Credit
Facility matures on July 1, 1998 and may be extended to October 1, 1998. The
Company 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 and 33%;
.20% per annum if the unused amount is more
46
<PAGE> 51
than 33% but less than 66%; and .25% per annum if the unused amount is greater
than 66%. In October 1997, the Company used approximately $236 million of
proceeds from the $1.5 Billion Credit Facility to repay the majority of the
variable rate mortgage indebtedness outstanding as of September 30, 1997. The
Company repaid $150 million on the $1.5 Billion Credit Facility with proceeds
from the $200 million private placement of Common Shares in October 1997. Under
the terms of the $1.5 Billion Credit Facility, any amounts repaid cannot be
redrawn. In addition, amounts were drawn from the $1.5 Billion Credit Facility
for property acquisitions and general corporate purposes. As of December 31,
1997, the outstanding balance on the $1.5 Billion Credit Facility was
approximately $1.044 billion.
Unsecured Notes. In September 1997, the Company 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. The Company
used the proceeds of the Private Debt Offering to repay a portion of the $600
Million Credit Facility. In addition, the Company 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 7.41% 7.69%
------------
$180,000,000
============
</TABLE>
- ---------------
(A) Includes the cost of the terminated hedge agreements.
Interest Rate Protection Agreements. 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 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 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 as of that date. The Company has terminated $700 million of
hedge agreements in connection with the February 1998 Notes Offering at a cost
of $32.6 million. Upon the occurrence of the termination of the remaining hedge
agreements, the Company will either owe money or be entitled to receive money
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 loan at 6.94% through the maturity of the loan
on June 30, 2000. Equity Office 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.
47
<PAGE> 52
ISSUANCE OF COMMON SHARES AND UNITS
During the period from July 11, 1997 through December 31, 1997, 8,711,157
Units and 6,454,055 Common Shares were issued to the sellers of certain
Properties acquired during this period, and 84,425,856 Common Shares and
8,570,886 Units were issued in connection with the Beacon Merger. An additional
303,055 Common Shares were issued as restricted share awards to officers and to
trustees as compensation. Also, during this period, the Trust completed a
private placement of Common Shares with an unaffiliated party, issuing 6,666,667
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 Equity Office Predecessors for the period
January 1, 1997 to July 10, 1997 and the cash flows of the Company 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 Equity Office
Predecessors. Consequently, the comparison of the periods provides only limited
information regarding the cash flows of the Company.
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
September 30, 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 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 the IPO) and
the $600 Million Credit Facility, and a decrease in proceeds received on
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 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, 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
$276.5 million generated from financing activities. Net cash provided by
operating activities increased by
48
<PAGE> 53
$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 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
The Company 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 Properties also have had
significant amounts of shell space requiring build out at the time of
acquisition. The Company 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, nonrevenue 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 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.
The Company considers capital expenditures to be recurring expenditures
relating to the ongoing maintenance of the 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
SEPTEMBER 30) 1996 1995 1994
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Number of Office Properties................................. 93 81 71 61
Rentable Square Feet (in millions).......................... 33.4 28.7 22.6 18.0
Capital Expenditures Per Square Foot........................ $.08 $.16 $.14 $.32
</TABLE>
TENANT IMPROVEMENTS AND LEASING COMMISSION COSTS
The Company 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 nonrevenue enhancing (which are required to maintain the revenue being
generated from currently leased space). The table below summarizes the revenue
enhancing and nonrevenue 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 set
forth below are presented on an aggregate basis and do not reflect significant
regional
49
<PAGE> 54
variations and, in any event, are not necessarily indicative of future tenant
improvement and leasing commission costs:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------------------
1997 1996 1995 1994
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Number of 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) $ 0.93 $ 0.94
Nonrevenue 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) $ 0.54(3) $ 0.44 $ 0.62
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................ $ 0.43(1)(2) $ 1.11(3) $ 0.37 $ 0.50
Total nonrevenue enhancing (in
thousands)........................... $ 18,242 $47,473 $18,454 $20,061
Per square foot improved............... $ 9.02(1) $ 12.39 $ 10.81 $ 7.58
Per total square foot.................. $ 0.74(1)(2) $ 1.65 $ 0.81 $ 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 nonrevenue enhancing
renewal and retenanted 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 nonrevenue enhancing renewal and retenanted 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 nonrevenue enhancing renewal and
retenanted space were $30.6 million and $14.6 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 (except, in the
case of certain California leases, which limit the ability of the landlord to
pass through to the tenants the effect of increased real estate taxes
attributable to a sale of real property interests) 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). The Company believes that inflationary increases in expenses will be
offset, in part, by the expense reimbursements and contractual rent increases
described above.
50
<PAGE> 55
FUNDS FROM OPERATIONS
Management of the Company 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 GAAP, and it should not be considered as an alternative to these
indicators in evaluating liquidity or operating performance of the Company.
The following table reflects the calculation of the Company's and Equity
Office Predecessors' combined Funds from Operations for the nine months ended
September 30, 1997 and 1996 and Equity Office Predecessors' Funds from
Operations for the years ended December 31, 1996, 1995 and 1994 on a historical
cost basis:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ------------------------
1997 1996 1996 1995 1994
--------- --------- ---------- --------- ---------
<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 interests.......................... $ 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-time rental revenue and
expense 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-time
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. The Company 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 the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT which may not
be comparable to Funds from Operations reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. Funds
from Operations does not represent cash generated from operating activities
in accordance with GAAP and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor or is it indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions and service its
debt.
51
<PAGE> 56
THE PROPERTIES
GENERAL
The Company's portfolio (based on revenue and square footage) is the
largest portfolio of office properties of any publicly traded, full-service
office company in the United States. Management believes that the 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 Property data is as of December 31, 1997.
52
<PAGE> 57
OFFICE PROPERTIES BY REGION
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO NUMBER
OF SQUARE SQUARE PERCENTAGE RENT ANNUALIZED OF
REGION PROPERTIES FEET FEET OCCUPIED ($000S)(1) RENT LEASES
------ ---------- ---------- ---------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast............................ 83 17,707,551 27.1% 95.8% $ 436,121 32.5% 1,395
Central.............................. 31 13,302,501 20.3 91.4 277,477 20.5 1,152
Pacific.............................. 43 9,703,180 14.9 92.1 210,402 15.7 673
West................................. 32 8,794,095 13.5 95.3 154,376 11.5 1,069
Southeast............................ 51 8,664,171 13.3 96.5 156,776 11.7 712
Southwest............................ 18 7,120,292 10.9 92.2 108,416 8.1 675
--- ---------- ----- ---- ---------- ----- -----
Total/Weighted Average.......... 258 65,291,790 100.0% 94.0% $1,343,568 100.0% 5,676
=== ========== ===== ========== ===== =====
<CAPTION>
ANNUALIZED
NET
EFFECTIVE
RENT ANNUALIZED
PER RENT PER
OCCUPIED OCCUPIED
SQUARE SQUARE
REGION FOOT(2) FOOT(1)
------ ---------- ----------
<S> <C> <C>
Northeast............................ $14.65 $25.72
Central.............................. 10.80 22.83
Pacific.............................. 13.50 23.54
West................................. 10.41 18.41
Southeast............................ 11.11 18.75
Southwest............................ 8.60 16.51
------ ------
Total/Weighted Average.......... $11.99 $21.90
</TABLE>
- ---------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
December 31, 1997 multiplied by 12. This amount reflects total rent before
any rent abatements and includes expense reimbursements, which may be
estimates. Total rent abatements for leases in effect as of December 31,
1997 for the 12 months ending December 31, 1998 are approximately $9.5
million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of
December 31, 1997 as follows: Annualized Rent, calculated as described
above, was reduced by the estimated operating expenses per square foot,
based on 1997 actual operating expenses for Properties owned as of January
1, 1997 and based on the Company's estimate of annual operating expenses for
Properties acquired subsequent to January 1, 1997.
53
<PAGE> 58
OFFICE PROPERTY MARKETS AND SUBMARKETS
OFFICE PROPERTY STATISTICS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL OFFICE PERCENTAGE
NUMBER RENTABLE PORTFOLIO ANNUALIZED OF PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE RENTABLE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET SQUARE FEET OCCUPIED ($000S)(1) RENT LEASES
------------------- ---------- ---------- ------------- ---------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION
Stamford, CT
Shelton.......................... 1 159,848 0.2% 96.2% $ 2,297 0.2% 12
Stamford......................... 7 1,651,856 2.5 98.1 40,859 3.0 118
Washington, D.C.
Central Business District........ 3 722,920 1.1 98.8 21,395 1.6 66
East End......................... 1 247,014 0.4 90.8 6,491 0.5 19
Alexandria/Old Town.............. 1 68,770 0.1 100.0 1,619 0.1 10
Crystal City..................... 2 896,003 1.4 100.0 24,728 1.8 6
Fairfax Center................... 3 585,640 0.9 97.7 9,747 0.7 48
Herndon/Dulles................... 1 124,319 0.2 100.0 3,312 0.2 1
Reston........................... 3 726,045 1.1 100.0 19,882 1.5 82
Rosslyn/Ballston................. 2 672,257 1.0 99.9 16,699 1.2 39
Tyson's Corner................... 2 420,674 0.6 99.6 8,724 0.6 17
Boston
Downtown-Financial District...... 13 4,896,223 7.5 92.8 142,685 10.6 383
Downtown-Government Center....... 1 637,002 1.0 93.7 15,089 1.1 82
East Cambridge................... 4 472,647 0.7 99.7 11,753 0.9 9
Northwest........................ 15 1,144,813 1.8 93.9 20, 673 1.5 96
South............................ 1 165,851 0.3 95.7 3,269 0.2 17
West............................. 8 638,229 1.0 98.4 16,022 1.2 86
New York City
Midtown.......................... 1 562,567 0.9 100.0 16,687 1.2 28
Philadelphia
Conshohocken..................... 1 254,355 0.4 99.8 6,229 0.5 43
Center City...................... 2 1,506,836 2.3 89.8 27,809 2.1 114
King of Prussia/Valley Forge..... 2 314,076 0.5 98.8 5,822 0.4 25
Main Line........................ 3 142,493 0.2 96.4 2,617 0.2 16
Plymouth Meeting/Blue Bell....... 5 293,837 0.5 99.5 5,346 0.4 24
Norfolk
Norfolk.......................... 1 403,276 0.6 96.2 6,367 0.5 54
--- ---------- ----- ---------- ----- -----
NORTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... 83 17,707,551 27.1% 95.8% $ 436,121 32.5% 1,395
<CAPTION>
ANNUALIZED
NET EFFECTIVE ANNUALIZED
RENT PER RENT PER
OCCUPIED OCCUPIED
OFFICE PROPERTIES SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) FOOT(1)
------------------- ------------- ----------
<S> <C> <C>
NORTHEAST REGION
Stamford, CT
Shelton.......................... $ 8.57 $14.93
Stamford......................... 14.60 25.23
Washington, D.C.
Central Business District........ 18.35 29.97
East End......................... 15.18 28.92
Alexandria/Old Town.............. 15.14 23.54
Crystal City..................... 20.25 27.60
Fairfax Center................... 9.30 17.04
Herndon/Dulles................... 19.94 26.64
Reston........................... 17.57 27.38
Rosslyn/Ballston................. 15.94 24.88
Tyson's Corner................... 13.49 20.83
Boston
Downtown-Financial District...... 16.79 31.41
Downtown-Government Center....... 11.36 25.29
East Cambridge................... 13.66 24.94
Northwest........................ 10.25 19.23
South............................ 9.53 20.60
West............................. 16.19 25.51
New York City
Midtown.......................... 16.50 29.66
Philadelphia
Conshohocken..................... 16.41 24.55
Center City...................... 10.05 20.54
King of Prussia/Valley Forge..... 11.60 18.76
Main Line........................ 13.09 19.05
Plymouth Meeting/Blue Bell....... 11.78 18.28
Norfolk
Norfolk.......................... 8.55 16.42
NORTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... $14.65 $25.72
</TABLE>
54
<PAGE> 59
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL OFFICE PERCENTAGE
NUMBER RENTABLE PORTFOLIO ANNUALIZED OF PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE RENTABLE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET SQUARE FEET OCCUPIED ($000S)(1) RENT LEASES
------------------- ---------- ---------- ------------- ---------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
CENTRAL REGION
Chicago
Downtown -- Central Loop......... 4 3,231,284 4.9% 90.1% $ 65,004 4.8% 283
Downtown -- West Loop............ 4 3,405,054 5.2 91.5 82,678 6.2 366
O'Hare........................... 5 928,272 1.4 94.2 18,364 1.4 74
East-West Corridor............... 7 2,104,383 3.2 89.7 48,612 3.6 176
Lake County...................... 5 546,263 0.8 84.6 9,656 0.7 40
Indianapolis
Downtown......................... 2 1,057,877 1.6 93.3 18,650 1.4 83
Cleveland
Downtown......................... 1 1,242,144 1.9 94.0 18,767 1.4 37
Columbus
Downtown......................... 1 407,472 0.6 92.6 8,911 0.7 30
Suburban......................... 2 379,752 0.6 98.1 6,835 0.5 63
--- ---------- ----- ---------- ----- -----
CENTRAL REGION
TOTAL/WEIGHTED AVERAGE......... 31 13,302,501 20.3% 91.4% $ 277,477 20.5% 1,152
PACIFIC REGION
Los Angeles
Downtown......................... 2 1,896,243 2.9% 87.2% $ 38,048 2.8% 69
Pasadena......................... 2 439,367 0.7 90.9 10,849 0.8 32
Westwood......................... 2 1,084,437 1.7 84.1 28,458 2.1 78
Orange County
Central Orange................... 2 657,512 1.0 97.6 11,467 0.9 76
Irvine/Airport................... 2 586,544 0.9 95.7 11,851 0.9 72
San Diego
University Town Center........... 6 823,418 1.3 95.8 18,637 1.4 107
San Francisco
Downtown......................... 5 2,914,093 4.5 94.0 70,164 5.2 209
San Jose
Mountain View.................... 12 726,508 1.1 100.0 13,509 1.0 12
Santa Clara...................... 7 400,058 0.6 84.6 4,200 0.3 15
Sunnyvale........................ 3 175,000 0.3 100.0 3,219 0.2 3
--- ---------- ----- ---------- ----- -----
PACIFIC REGION
TOTAL/WEIGHTED AVERAGE......... 43 9,703,180 14.9% 92.1% $ 210,402 15.7% 673
WEST REGION
Anchorage
Midtown.......................... 2 190,599 0.3% 100.0% $ 3,505 0.3% 39
Phoenix
Central Corridor................. 2 605,295 0.9% 98.8 7,431 0.6 13
<CAPTION>
ANNUALIZED
NET EFFECTIVE ANNUALIZED
RENT PER RENT PER
OCCUPIED OCCUPIED
OFFICE PROPERTIES SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) FOOT(1)
------------------- ------------- ----------
<S> <C> <C>
CENTRAL REGION
Chicago
Downtown -- Central Loop......... $ 8.39 $22.33
Downtown -- West Loop............ 11.63 26.54
O'Hare........................... 9.04 21.01
East-West Corridor............... 15.49 25.76
Lake County...................... 11.21 20.90
Indianapolis
Downtown......................... 9.77 18.89
Cleveland
Downtown......................... 7.32 16.07
Columbus
Downtown......................... 15.12 23.60
Suburban......................... 11.02 18.34
CENTRAL REGION
TOTAL/WEIGHTED AVERAGE......... $10.80 $22.83
PACIFIC REGION
Los Angeles
Downtown......................... $11.72 $23.00
Pasadena......................... 15.93 27.18
Westwood......................... 16.51 31.19
Orange County
Central Orange................... 10.40 17.88
Irvine/Airport................... 11.99 21.11
San Diego
University Town Center........... 15.33 23.62
San Francisco
Downtown......................... 13.86 25.63
San Jose
Mountain View.................... 15.52 18.59
Santa Clara...................... 7.15 12.40
Sunnyvale........................ 16.24 18.40
PACIFIC REGION
TOTAL/WEIGHTED AVERAGE......... $13.50 $23.54
WEST REGION
Anchorage
Midtown.......................... $ 9.73 $18.39
Phoenix
Central Corridor................. 11.60 12.43
</TABLE>
55
<PAGE> 60
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL OFFICE PERCENTAGE
NUMBER RENTABLE PORTFOLIO ANNUALIZED OF PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE RENTABLE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET SQUARE FEET OCCUPIED ($000S)(1) RENT LEASES
------------------- ---------- ---------- ------------- ---------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Minneapolis
Downtown......................... 1 589,432 0.9 97.1 15,065 1.1 29
Denver
Southeast........................ 3 671,659 1.0 92.5 11,231 0.8 53
St. Louis
Mid County....................... 1 339,163 0.5 100.0 7,559 0.6 33
Albuquerque
Downtown......................... 1 230,022 0.4 93.6 3,324 0.2 32
Oklahoma City
Northwest........................ 3 261,324 0.4 87.0 2,059 0.2 104
Portland
Downtown......................... 1 368,018 0.6 95.7 6,028 0.4 48
Dallas
LBJ/Quorum Plaza................. 3 1,333,436 1.7 95.5 18,746 1.4 120
Central.......................... 1 283,707 0.4 87.1 4,159 0.3 41
North Central Expressway......... 1 379,556 0.6 91.0 4,895 0.4 70
Preston Center................... 4 721,351 1.1 91.5 13,062 1.0 142
Ft. Worth
W/SW Fort Worth.................. 2 239,095 0.4 94.3 2,705 0.2 63
Seattle
Bellevue......................... 2 755,570 1.2 95.9 15,041 1.1 99
Central Business District........ 5 2,025,868 3.1 97.9 39,565 2.9 183
--- ---------- ----- ---------- ----- -----
WEST REGION
TOTAL/WEIGHTED AVERAGE......... 32 8,794,095 13.5% 95.3% $ 154,376 11.5% 1,069
SOUTHEAST REGION
Ft. Lauderdale
Downtown......................... 1 225,500 0.3 99.0% $ 6,078 0.5 21
Orlando
Central Business District........ 1 640,385 1.0 94.4 15,120 1.1 46
Palm Beach County, FL
West Palm Beach.................. 1 215,104 0.3 90.2 3,811 0.3 36
Sarasota
Downtown......................... 1 247,891 0.4 90.5 4,145 0.3 35
Tampa
Westshore/Airport................ 2 470,331 0.7 98.1 8,311 0.6 57
Atlanta
Central Perimeter................ 39 4,268,457 6.5 96.8 74,280 5.5 385
Midtown.......................... 1 770,840 1.2 97.1 16,803 1.3 24
Northwest........................ 2 641,263 1.0 95.1 12,551 0.9 42
Charlotte
Uptown........................... 1 581,666 0.9 100.0 6,897 0.5 9
Raleigh/Durham
South Durham..................... 1 181,221 0.3 93.4 3,142 0.2 36
<CAPTION>
ANNUALIZED
NET EFFECTIVE ANNUALIZED
RENT PER RENT PER
OCCUPIED OCCUPIED
OFFICE PROPERTIES SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) FOOT(1)
------------------- ------------- ----------
<S> <C> <C>
Minneapolis
Downtown......................... 9.92 26.32
Denver
Southeast........................ 9.46 18.09
St. Louis
Mid County....................... 12.63 22.29
Albuquerque
Downtown......................... 7.20 15.44
Oklahoma City
Northwest........................ 3.94 9.06
Portland
Downtown......................... 9.79 17.12
Dallas
LBJ/Quorum Plaza................. 9.12 17.32
Central.......................... 7.95 16.82
North Central Expressway......... 6.21 14.17
Preston Center................... 11.89 19.79
Ft. Worth
W/SW Fort Worth.................. 5.72 11.99
Seattle
Bellevue......................... 12.54 20.76
Central Business District........ 12.61 19.95
WEST REGION
TOTAL/WEIGHTED AVERAGE......... $10.41 $18.41
SOUTHEAST REGION
Ft. Lauderdale
Downtown......................... $17.50 $27.22
Orlando
Central Business District........ 14.06 25.00
Palm Beach County, FL
West Palm Beach.................. 9.36 19.64
Sarasota
Downtown......................... 9.93 18.48
Tampa
Westshore/Airport................ 10.19 18.01
Atlanta
Central Perimeter................ 10.74 17.97
Midtown.......................... 14.66 22.46
Northwest........................ 13.12 20.57
Charlotte
Uptown........................... 6.50 11.86
Raleigh/Durham
South Durham..................... 10.66 18.56
</TABLE>
56
<PAGE> 61
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL OFFICE PERCENTAGE
NUMBER RENTABLE PORTFOLIO ANNUALIZED OF PORTFOLIO NUMBER
OFFICE PROPERTIES OF SQUARE RENTABLE PERCENTAGE RENT ANNUALIZED OF
(MARKET, SUBMARKET) PROPERTIES FEET SQUARE FEET OCCUPIED ($000S)(1) RENT LEASES
------------------- ---------- ---------- ------------- ---------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Nashville
Downtown......................... 1 421,513 0.6 97.9 5,637 0.4 21
--- ---------- ----- ---------- ----- -----
SOUTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... 51 8,664,171 13.3% 96.5% $ 156,776 11.7% 712
SOUTHWEST REGION
New Orleans
Central Business District........ 2 1,164,871 1.8% 85.8% $ 16,081 1.2% 59
Metairie/E. Jefferson............ 3 1,192,828 1.8 94.8 17,359 1.3 188
Austin
Central Business District........ 3 1,423,948 2.2 93.8 26,064 1.9 122
Houston
Galleria/West Loop............... 1 959,466 1.5 93.6 14,803 1.1 125
North/North Belt................. 2 402,709 0.6 97.2 5,444 0.4 26
North Loop/Northwest............. 3 797,971 1.2 88.8 10,702 0.8 53
West............................. 1 574,216 0.9 97.6 10,287 0.8 24
San Antonio
Airport.......................... 1 194,398 0.3 88.7 2,511 0.2 18
Northwest........................ 2 409,885 0.6 89.9 5,166 0.4 60
--- ---------- ----- ---------- ----- -----
SOUTHWEST REGION
TOTAL/WEIGHTED AVERAGE......... 18 7,120,292 10.9% 92.2% $ 108,416 8.1% 675
--- ---------- ----- ----- ---------- ----- -----
PORTFOLIO TOTAL/WEIGHTED AVERAGE... 258 65,291,790 100.0% 94.0% $1,343,568 100.0% 5,676
=== ========== ===== ========== ===== =====
<CAPTION>
ANNUALIZED
NET EFFECTIVE ANNUALIZED
RENT PER RENT PER
OCCUPIED OCCUPIED
OFFICE PROPERTIES SQUARE SQUARE
(MARKET, SUBMARKET) FOOT(2) FOOT(1)
------------------- ------------- ----------
<S> <C> <C>
Nashville
Downtown......................... 6.43 13.66
SOUTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... $11.11 $18.75
SOUTHWEST REGION
New Orleans
Central Business District........ $ 8.38 $16.08
Metairie/E. Jefferson............ 9.07 15.36
Austin
Central Business District........ 9.39 19.52
Houston
Galleria/West Loop............... 8.63 16.49
North/North Belt................. 6.85 13.91
North Loop/Northwest............. 7.41 15.10
West............................. 11.13 18.36
San Antonio
Airport.......................... 6.59 14.57
Northwest........................ 6.48 14.01
SOUTHWEST REGION
TOTAL/WEIGHTED AVERAGE......... $ 8.60 $16.51
------ ------
PORTFOLIO TOTAL/WEIGHTED AVERAGE... $11.99 $21.90
</TABLE>
- ---------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
December 31, 1997 multiplied by 12. This amount reflects total rent before
any rent abatements and includes expense reimbursements, which may be
estimates. Total rent abatements for leases in effect as of December 31,
1997 for the 12 months ending December 31, 1998 are approximately $9.5
million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of
December 31, 1997 as follows: Annualized Rent, calculated as described
above, was reduced by the estimated operating expenses per square foot,
based on 1997 actual operating expenses for Properties owned as of January
1, 1997 and based on the Company's estimate of annual operating expenses for
Properties acquired subsequent to January 1, 1997.
57
<PAGE> 62
The following table sets forth certain information relating to each Office
Property as of December 31, 1997.
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION
Stamford, CT
Shelton
Shelton Point.................. 1 1985/93 159,848 0.2% 96.2% $ 2,297 0.2%
Stamford
One Stamford Plaza............. 1 1986/94 212,244 0.3 100.0 5,450 0.4
Two Stamford Plaza............. 1 1986/94 253,020 0.4 97.4 6,787 0.5
Three Stamford Plaza........... 1 1980/94 241,575 0.4 97.3 5,063 0.4
Four Stamford Plaza............ 1 1979/94 260,581 0.4 95.9 5,031 0.4
177 Broad Street............... 1 1989 187,573 0.3 95.5 4,343 0.3
300 Atlantic Street............ 1 1987/96 272,458 0.4 100.0 7,287 0.5
Canterbury Green (4)........... 1 1987 224,405 0.3 100.0 6,899 0.5
Washington, D.C.
Central Business District
1111 19th Street............... 1 1979/93 252,014 0.4 98.8 7,248 0.5
1620 L Street.................. 1 1989 156,272 0.2 98.0 4,360 0.3
One Lafayette Centre........... 1 1980/93 314,634 0.5 99.1 9,788 0.7
East End
1333 H Street.................. 1 1982 247,014 0.4 90.8 6,491 0.5
Alexandria/Old Town
1600 Duke Street............... 1 1985 68,770 0.1 100.0 1,619 0.1
Crystal City
Polk and Taylor
Buildings(3)(11)............. 2 1970 896,003 1.4 100.0 24,728 1.8
Fairfax Center
Centerpointe I & II............ 2 1988/90 407,723 0.6 99.8 7,124 0.5
Fair Oaks Plaza................ 1 1986 177,917 0.3 92.7 2,623 0.2
Herndon/Dulles
Northridge I................... 1 1988 124,319 0.2 100.0 3,312 0.2
Reston
Reston Town Center............. 3 1990 726,045 1.1 100.0 19,882 1.5
Rosslyn/Ballston
1300 North 17th Street......... 1 1980 379,199 0.6 99.7 9,600 0.7
1616 N. Fort Myer Drive........ 1 1974 293,058 0.4 100.0 7,099 0.5
Tyson's Corner
E. J. Randolph................. 1 1983 165,116 0.3 98.9 3,570 0.3
John Marshall I................ 1 1981 255,558 0.4 100.0 5,153 0.4
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
NORTHEAST REGION
Stamford, CT
Shelton
Shelton Point.................. 12 $ 8.90 $14.93
Stamford
One Stamford Plaza............. 12 14.99 25.68
Two Stamford Plaza............. 20 16.44 27.53
Three Stamford Plaza........... 16 11.64 21.53
Four Stamford Plaza............ 9 11.01 20.14
177 Broad Street............... 16 14.00 24.24
300 Atlantic Street............ 26 15.49 26.75
Canterbury Green (4)........... 19 20.82 30.74
Washington, D.C.
Central Business District
1111 19th Street............... 30 17.99 29.11
1620 L Street.................. 16 18.26 28.46
One Lafayette Centre........... 20 19.21 31.39
East End
1333 H Street.................. 19 16.71 28.92
Alexandria/Old Town
1600 Duke Street............... 10 15.14 23.54
Crystal City
Polk and Taylor
Buildings(3)(11)............. 6 20.25 27.60
Fairfax Center
Centerpointe I & II............ 15 9.74 17.50
Fair Oaks Plaza................ 33 8.97 15.91
Herndon/Dulles
Northridge I................... 1 19.94 26.64
Reston
Reston Town Center............. 82 17.57 27.38
Rosslyn/Ballston
1300 North 17th Street......... 25 16.83 25.38
1616 N. Fort Myer Drive........ 14 14.84 24.22
Tyson's Corner
E. J. Randolph................. 15 13.92 21.86
John Marshall I................ 2 13.30 20.16
</TABLE>
58
<PAGE> 63
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Boston
Downtown - Financial District
150 Federal Street............. 1 1988 529,730 0.8 100.0 18,158 1.4
175 Federal Street............. 1 1977 207,366 0.3 92.2 4,693 0.3
2 Oliver Street - 147 Milk
Street....................... 1 1988 270,302 0.4 92.8 4,637 0.3
225 Franklin Street............ 1 1966/96 938,632 1.4 99.4 34,222 2.5
28 State Street (6)............ 1 1968/97 570,040 0.9 57.8 11,067 0.8
75-101 Federal Street(3)(9).... 2 1988 810,963 1.2 93.9 25,405 1.9
One Post Office
Square(3)(10)................ 1 1981 765,780 1.2 98.7 22,599 1.7
Rowes Wharf(3)(10)............. 3 1987 344,698 0.5 96.5 11,445 0.9
Russia Wharf................... 1 1978/82 312,563 0.5 99.9 5,033 0.4
South Station(4)............... 1 1988 146,149 0.2 100.0 5,427 0.4
Downtown - Government Center
Center Plaza................... 1 1969 637,002 1.0 93.7 15,089 1.1
East Cambridge
One Canal Park................. 1 1987 97,912 0.1 98.6 2,317 0.2
Riverview I & II............... 2 1985/86 263,892 0.4 100.0 7,257 0.5
Ten Canal Park................. 1 1987 110,843 0.2 100.0 2,179 0.2
Northwest
Crosby Corporate Center........ 6 1996 337,292 0.5 97.8 4,683 0.3
New England Executive Park..... 9 1970/85 807,521 1.2 92.2 15,990 1.2
South
Westwood Business Center....... 1 1985 165,851 0.3 95.7 3,269 0.2
West
Wellesley Office Park.......... 8 1963/84 638,229 1.0 98.4 16,022 1.2
New York City
Midtown
850 Third Avenue............... 1 1960/96 562,567 0.9 100.0 16,687 1.2
Philadelphia
Conshohocken
Four Falls Corporate
Center(3).................... 1 1988 254,355 0.4 99.8 6,229 0.5
Center City
1601 Market Street............. 1 1970 681,289 1.0 95.0 13,454 1.0
1700 Market Street............. 1 1969 825,547 1.3 85.6 14,355 1.1
King of Prussia/Valley Forge
Oak Hill Plaza(3).............. 1 1982 164,360 0.3 100.0 2,959 0.2
Walnut Hill Plaza(3)........... 1 1985 149,716 0.2 97.5 2,863 0.2
Main Line
One Devon Square(3)............ 1 1984 73,267 0.1 100.0 1,494 0.1
Two Devon Square(3)............ 1 1985 63,226 0.1 91.8 904 0.1
Three Devon Square(3).......... 1 6,000 0.0 100.0 218 0.0
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
Boston
Downtown - Financial District
150 Federal Street............. 22 21.48 34.28
175 Federal Street............. 31 12.96 24.54
2 Oliver Street - 147 Milk
Street....................... 48 11.94 18.48
225 Franklin Street............ 20 21.12 36.68
28 State Street (6)............ 12 23.68 33.60
75-101 Federal Street(3)(9).... 67 19.45 33.35
One Post Office
Square(3)(10)................ 67 17.51 29.90
Rowes Wharf(3)(10)............. 42 15.36 34.40
Russia Wharf................... 46 7.67 16.12
South Station(4)............... 28 15.73 37.14
Downtown - Government Center
Center Plaza................... 82 12.13 25.29
East Cambridge
One Canal Park................. 4 11.47 24.01
Riverview I & II............... 4 15.60 27.50
Ten Canal Park................. 1 11.13 19.66
Northwest
Crosby Corporate Center........ 6 10.38 14.19
New England Executive Park..... 90 11.16 21.47
South
Westwood Business Center....... 17 9.96 20.60
West
Wellesley Office Park.......... 86 16.45 25.51
New York City
Midtown
850 Third Avenue............... 28 16.50 29.66
Philadelphia
Conshohocken
Four Falls Corporate
Center(3).................... 43 16.45 24.55
Center City
1601 Market Street............. 68 11.98 20.79
1700 Market Street............. 46 10.45 20.31
King of Prussia/Valley Forge
Oak Hill Plaza(3).............. 4 10.51 18.00
Walnut Hill Plaza(3)........... 21 13.13 19.61
Main Line
One Devon Square(3)............ 10 14.93 20.40
Two Devon Square(3)............ 5 10.10 15.57
Three Devon Square(3).......... 1 30.90 36.37
</TABLE>
59
<PAGE> 64
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Plymouth Meeting/Blue Bell
One Valley Square(3)........... 1 1982 70,289 0.1 100.0 1,125 0.1
Two Valley Square(3)........... 1 1990 70,622 0.1 100.0 1,314 0.1
Three Valley Square(3)......... 1 1984 84,605 0.1 98.3 1,577 0.1
Four and Five Valley
Square(3).................... 2 1988 68,321 0.1 100.0 1,331 0.1
Norfolk
Norfolk
Dominion Tower(3).............. 1 1987 403,276 0.6 96.2 6,367 0.5
--- ---------- ----- ---------- -----
NORTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... 83 17,707,551 27.1% 95.8% $ 436,121 32.5%
CENTRAL REGION
Chicago
Downtown-Central Loop
161 N. Clark................... 1 1992 1,010,520 1.5% 80.1% $ 19,240 1.4%
200 West Adams................. 1 1985/96 677,222 1.0 89.6 12,560 0.9
30 N. LaSalle Street(4)........ 1 1974/90 925,950 1.4 95.2 19,197 1.4
One North Franklin............. 1 1991 617,592 0.9 99.3 14,007 1.0
Downtown-West Loop
10 & 30 S Wacker............... 2 1983/87 2,003,288 3.1 95.8 60,880 4.5
101 N. Wacker.................. 1 1980/1990 575,294 0.9 89.4 9,896 0.7
Civic Opera House.............. 1 1929/1996 826,472 1.3 82.6 11,903 0.9
O'Hare
Presidents Plaza............... 4 1980/82 794,396 1.2 93.2 16,140 1.2
1700 Higgins................... 1 1986 133,876 0.2 100.0 2,224 0.2
East-West Corridor
AT&T Plaza..................... 1 1984 224,847 0.3 98.0 4,922 0.4
Oakbrook Terrace Tower......... 1 1988 772,928 1.2 87.9 17,561 1.3
Westbrook Corporate Center..... 5 1985/96 1,106,608 1.7 89.3 26,130 1.9
Lake County
Tri-State International........ 5 1986 546,263 0.8 84.6 9,656 0.7
Indianapolis
Downtown
Bank One Center/Tower.......... 2 1990 1,057,877 1.6 93.3 18,650 1.4
Cleveland
Downtown
BP Tower....................... 1 1985 1,242,144 1.9 94.0 18,767 1.4
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
Plymouth Meeting/Blue Bell
One Valley Square(3)........... 7 10.08 16.00
Two Valley Square(3)........... 6 11.60 18.60
Three Valley Square(3)......... 6 12.62 18.96
Four and Five Valley
Square(3).................... 5 12.93 19.48
Norfolk
Norfolk
Dominion Tower(3).............. 54 8.89 16.42
-----
NORTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... 1,395 $14.65 $25.72
CENTRAL REGION
Chicago
Downtown-Central Loop
161 N. Clark................... 56 $10.68 $23.78
200 West Adams................. 59 9.19 20.70
30 N. LaSalle Street(4)........ 113 8.04 21.78
One North Franklin............. 55 9.49 22.83
Downtown-West Loop
10 & 30 S Wacker............... 125 16.41 31.74
101 N. Wacker.................. 37 6.54 19.24
Civic Opera House.............. 204 6.96 17.43
O'Hare
Presidents Plaza............... 58 9.77 21.81
1700 Higgins................... 16 8.65 16.61
East-West Corridor
AT&T Plaza..................... 25 14.79 22.34
Oakbrook Terrace Tower......... 56 17.10 25.85
Westbrook Corporate Center..... 95 17.94 26.45
Lake County
Tri-State International........ 40 13.25 20.90
Indianapolis
Downtown
Bank One Center/Tower.......... 83 10.47 18.89
Cleveland
Downtown
BP Tower....................... 37 7.79 16.07
</TABLE>
60
<PAGE> 65
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Columbus
Downtown
One Columbus Building.......... 1 1987 407,472 0.6 92.6 8,911 0.7
Suburban
Community Corporate Center..... 1 1987 250,169 0.4 99.1 4,900 0.4
One Crosswoods Center.......... 1 1984 129,583 0.2 96.4 1,935 0.1
--- ---------- ----- ---------- -----
CENTRAL REGION
TOTAL/WEIGHTED AVERAGE......... 31 13,302,501 20.3% 91.4% $ 277,477 20.5%
PACIFIC REGION
Los Angeles
Downtown
550 S. Hope.................... 1 1991 566,434 0.9% 86.8% $ 12,064 0.9%
Two California Plaza(4)........ 1 1992 1,329,809 2.0 87.4 25,984 1.9
Pasadena
Pasadena Towers................ 2 1990/91 439,367 0.7 90.9 10,849 0.8
Westwood
10880 Wilshire Boulevard(4).... 1 1970/92 534,007 0.8 85.1% 12,772 1.0
10960 Wilshire Boulevard....... 1 1971/92 550,430 0.8 83.3% 15,686 1.2
Orange County
Central Orange
500 Orange Tower(5)............ 1 1988 290,765 0.4 94.5 5,138 0.4
1100 Executive Tower........... 1 1987 366,747 0.6 100.0 6,330 0.5
Irvine/Airport
1920 Main Plaza................ 1 1988 305,662 0.5 97.1 6,060 0.5
2010 Main Plaza................ 1 1988 280,882 0.4 94.3 5,791 0.4
San Diego
University Town Center
The Plaza at La Jolla
Village(3)................... 5 1987/90 635,419 1.0 99.9 15,233 1.1
Smith Barney Tower............. 1 1987 187,999 0.3 82.2 3,404 0.3
San Francisco
Downtown
201 Mission Street............. 1 1981 483,289 0.7 99.6 9,654 0.7
580 California................. 1 1984 313,012 0.5 100.0 8,242 0.6
60 Spear Street Building....... 1 1967/87 133,782 0.2 100.0 3,265 0.2
One Maritime Plaza............. 1 1967/90 523,929 0.8 84.0 12,718 0.9
One Market..................... 1 1976/95 1,460,081 2.2 93.8 36,285 2.7
San Jose
Mountain View
Shoreline Technology Park...... 12 1985/91 726,508 1.1 100.0 13,509 1.0
Santa Clara
Lake Marriott Business Park.... 7 1981 400,058 0.6 84.6 4,200 0.3
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
Columbus
Downtown
One Columbus Building.......... 30 16.32 23.60
Suburban
Community Corporate Center..... 43 12.55 19.77
One Crosswoods Center.......... 20 8.61 15.50
-----
CENTRAL REGION
TOTAL/WEIGHTED AVERAGE......... 1,152 $10.80 $22.83
PACIFIC REGION
Los Angeles
Downtown
550 S. Hope.................... 39 $13.97 $24.55
Two California Plaza(4)........ 30 13.21 22.34
Pasadena
Pasadena Towers................ 32 17.54 27.18
Westwood
10880 Wilshire Boulevard(4).... 44 16.86 28.12
10960 Wilshire Boulevard....... 34 22.36 34.23
Orange County
Central Orange
500 Orange Tower(5)............ 50 11.79 18.70
1100 Executive Tower........... 26 9.81 17.26
Irvine/Airport
1920 Main Plaza................ 40 11.52 20.43
2010 Main Plaza................ 32 13.66 21.87
San Diego
University Town Center
The Plaza at La Jolla
Village(3)................... 90 16.59 24.00
Smith Barney Tower............. 17 13.54 22.02
San Francisco
Downtown
201 Mission Street............. 18 9.44 20.05
580 California................. 29 16.03 26.33
60 Spear Street Building....... 9 13.07 24.41
One Maritime Plaza............. 39 18.29 28.91
One Market..................... 114 15.35 26.49
San Jose
Mountain View
Shoreline Technology Park...... 12 15.52 18.59
Santa Clara
Lake Marriott Business Park.... 15 8.44 12.40
</TABLE>
61
<PAGE> 66
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sunnyvale
Sunnyvale Business Center...... 3 1990 175,000 0.3 100.0 3,219 0.2
--- ---------- ----- ---------- -----
PACIFIC REGION
TOTAL/WEIGHTED AVERAGE......... 43 $9,703,180 14.9% 92.1% $ 210,402 15.7%
WEST REGION
Anchorage
Midtown
Calais Office Center(4)........ 2 1975 190,599 0.3% 100.0% $ 3,505 0.3%
Phoenix
Central Corridor
49 East Thomas Road(7)......... 1 1974/93 18,892 0.0 60.8 93 0.0
One Phoenix Plaza(8)........... 1 1989 586,403 0.9 100.0 7,338 0.5
Minneapolis
Downtown
LaSalle Plaza.................. 1 1991 589,432 0.9 97.1 15,065 1.1
Denver
Southeast
Denver Corporate
Center II & III.............. 2 1981/93-97 358,357 0.5 100.0 6,331 0.5
The Quadrant................... 1 1985 313,302 0.5 83.8 4,900 0.4
St. Louis
Mid County
Interco Corporate Tower........ 1 1986 339,163 0.5 100.0 7,559 0.6
Albuquerque
Downtown
500 Marquette Building......... 1 1985 230,022 0.4 93.6 3,324 0.2
Oklahoma City
Northwest
Atrium Towers.................. 2 1980/95 155,865 0.2 94.2 1,321 0.1
5100 Brookline(3).............. 1 1974 105,459 0.2 76.4 738 0.1
Portland
Downtown
1001 Fifth Avenue.............. 1 1980 368,018 0.6 95.7 6,028 0.4
Dallas
LBJ/Quorum Plaza
Four Forest(3)................. 1 1985 394,324 0.6 96.1 5,906 0.4
Lakeside Square................ 1 1987 392,537 0.6 99.1 7,879 0.6
North Central Plaza Three...... 1 1986/94 346,575 0.5 90.7 4,962 0.4
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
Sunnyvale
Sunnyvale Business Center...... 3 16.24 18.40
-----
PACIFIC REGION
TOTAL/WEIGHTED AVERAGE......... 673 $13.50 $23.54
WEST REGION
Anchorage
Midtown
Calais Office Center(4)........ 39 $ 9.73 $18.39
Phoenix
Central Corridor
49 East Thomas Road(7)......... 12 0.91 8.08
One Phoenix Plaza(8)........... 1 11.95 12.51
Minneapolis
Downtown
LaSalle Plaza.................. 29 10.21 26.32
Denver
Southeast
Denver Corporate
Center II & III.............. 15 10.12 17.67
The Quadrant................... 38 10.40 18.66
St. Louis
Mid County
Interco Corporate Tower........ 33 12.63 22.29
Albuquerque
Downtown
500 Marquette Building......... 32 7.70 15.44
Oklahoma City
Northwest
Atrium Towers.................. 43 4.91 9.00
5100 Brookline(3).............. 61 3.82 9.15
Portland
Downtown
1001 Fifth Avenue.............. 48 10.24 17.12
Dallas
LBJ/Quorum Plaza
Four Forest(3)................. 57 8.67 15.59
Lakeside Square................ 24 11.66 20.26
North Central Plaza Three...... 39 8.03 15.79
</TABLE>
62
<PAGE> 67
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Central
8080 NCX..................... 1 1984/95 283,707 0.4 87.1 4,159 0.3
North Central Expressway
9400 NCX..................... 1 1981/95 379,556 0.6 91.0 4,895 0.4
Preston Center
Preston Commons................ 3 1986 418,604 0.6 91.8 8,046 0.6
Sterling Plaza................. 1 1984/94 302,747 0.5 91.1 5,016 0.4
Ft. Worth
W/SW Fort Worth
Summitt Office Park............ 2 1974/93 239,095 0.4 94.3 2,705 0.2
Seattle
Bellevue
One Bellevue Center(4)......... 1 1983 344,715 0.5 91.7 6,407 0.5
Rainer Plaza(4)................ 1 1986 410,855 0.6 99.4 8,634 0.6
Central Business District
1111 Third Avenue(4)........... 1 1980 528,282 0.8 96.7 8,991 0.7
First Interstate............... 1 1983 915,883 1.4 97.9 18,995 1.4
Second and Seneca.............. 2 1991/1996 480,272 0.7 99.5 9,522 0.7
Nordstrom Medical Tower........ 1 1986 101,431 0.2 96.1 2,057 0.2
--- ---------- ----- ---------- -----
WEST REGION
TOTAL/WEIGHTED AVERAGE......... 32 8,794,095 13.5% 95.3% $ 154,376 11.5%
SOUTHEAST REGION
Ft. Lauderdale
Downtown
First Union Center............. 1 1991 225,500 0.3% 99.0% $ 6,078 0.5%
Orlando
Central Business District
SunTrust Center................ 1 1988 640,385 1.0 94.4 15,120 1.1
Palm Beach County, FL
West Palm Beach
One Clearlake Centre........... 1 1987 215,104 0.3 90.2 3,811 0.3
Sarasota
Downtown
Sarasota City Center........... 1 1989 247,891 0.4 90.5 4,145 0.3
Tampa
Westshore/Airport
Tampa Commons.................. 1 1985 254,808 0.4 99.2 4,779 0.4
Westshore Center............... 1 1984 215,523 0.3 96.8 3,532 0.3
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
Central
8080 NCX..................... 41 9.12 16.82
North Central Expressway
9400 NCX..................... 70 6.82 14.17
Preston Center
Preston Commons................ 68 15.28 20.95
Sterling Plaza................. 74 9.82 18.18
Ft. Worth
W/SW Fort Worth
Summitt Office Park............ 63 6.06 11.99
Seattle
Bellevue
One Bellevue Center(4)......... 38 12.59 20.26
Rainer Plaza(4)................ 61 13.46 21.15
Central Business District
1111 Third Avenue(4)........... 57 11.05 17.60
First Interstate............... 74 14.09 21.19
Second and Seneca.............. 31 12.51 19.92
Nordstrom Medical Tower........ 21 13.19 21.09
-----
WEST REGION
TOTAL/WEIGHTED AVERAGE......... 1,069 $10.41 $18.41
SOUTHEAST REGION
Ft. Lauderdale
Downtown
First Union Center............. 21 $17.67 $27.22
Orlando
Central Business District
SunTrust Center................ 46 14.89 25.00
Palm Beach County, FL
West Palm Beach
One Clearlake Centre........... 36 10.37 19.64
Sarasota
Downtown
Sarasota City Center........... 35 10.97 18.48
Tampa
Westshore/Airport
Tampa Commons.................. 21 11.42 18.90
Westshore Center............... 36 9.13 16.93
</TABLE>
63
<PAGE> 68
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta
Central Perimeter
125 Perimeter Center West...... 1 1972 223,059 0.3 100.0 997 0.1
20 - 26 Perimeter Center
East......................... 4 1973 69,664 0.1 98.4 1,052 0.1
219 - 223 Perimeter Center
Parkway...................... 2 1978/97 255,657 0.4 100.0 4,790 0.4
245 Perimeter Center Parkway... 1 1981 229,131 0.4 100.0 4,116 0.3
28 - 32 Perimeter Center
East......................... 3 1974 105,287 0.2 99.0 1,585 0.1
301 - 303 Perimeter Center
North........................ 2 1982/98 317,116 0.5 100.0 6,388 0.5
41 - 47 Perimeter Center
East......................... 2 1974 172,374 0.3 98.3 2,854 0.2
50 - 66 Perimeter Center
East......................... 5 1971/98 738,803 1.1 99.1 12,968 1.0
70 - 76 Perimeter Center
East......................... 4 1972 60,351 0.1 97.5 969 0.1
8 - 16 Perimeter Center East... 5 1970 65,435 0.1 93.9 932 0.1
Central Park................... 2 1986 612,733 0.9 97.5 12,042 0.9
Lakeside Office Park........... 5 1972/97 390,238 0.6 94.0 5,437 0.4
Park Place Shopping Center..... 1 1979 61,830 0.1 98.9 1,264 0.1
Perimeter -- North/South
Terraces..................... 2 1984/98 966,779 1.5 91.9 18,887 1.4
Midtown
Promenade II................... 1 1990 770,840 1.2 97.1 16,803 1.3
Northwest
Paces West..................... 2 1988 641,263 1.0 95.1 12,551 0.9
Charlotte
Uptown
Wachovia Center................ 1 1972/94 581,666 0.9 100.0 6,897 0.5
Raleigh/Durham
South Durham
University Tower............... 1 1987/92 181,221 0.3 93.4 3,142 0.2
Nashville
Downtown
Nations Bank Plaza............. 1 1977/95 421,513 0.6 97.9 5,637 0.4
--- ---------- ----- ---------- -----
SOUTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... 51 8,664,171 13.3% 96.5% $ 156,776 11.7%
SOUTHWEST REGION
New Orleans
Central Business District
LL&E Tower..................... 1 1987 545,157 0.8% 84.4% $ 7,199 0.5%
Texaco Center.................. 1 1984 619,714 0.9 87.1 8,882 0.7
Metairie/E. Jefferson
One Lakeway Center............. 1 1981/96 289,112 0.4 90.8 3,972 0.3
Two Lakeway Center............. 1 1984/96 440,826 0.7 94.4 6,309 0.5
Three Lakeway Center........... 1 1987/96 462,890 0.7 97.6 7,079 0.5
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
Atlanta
Central Perimeter
125 Perimeter Center West...... 1 (2.26) 4.47
20 - 26 Perimeter Center
East......................... 23 8.62 15.35
219 - 223 Perimeter Center
Parkway...................... 7 12.00 18.73
245 Perimeter Center Parkway... 1 11.23 17.96
28 - 32 Perimeter Center
East......................... 16 8.47 15.20
301 - 303 Perimeter Center
North........................ 5 13.42 20.15
41 - 47 Perimeter Center
East......................... 34 10.12 16.85
50 - 66 Perimeter Center
East......................... 20 10.97 17.70
70 - 76 Perimeter Center
East......................... 15 9.73 16.46
8 - 16 Perimeter Center East... 18 8.43 15.16
Central Park................... 75 12.97 20.16
Lakeside Office Park........... 38 7.20 14.82
Park Place Shopping Center..... 18 13.95 20.68
Perimeter -- North/South
Terraces..................... 114 14.53 21.26
Midtown
Promenade II................... 24 15.11 22.46
Northwest
Paces West..................... 42 13.79 20.57
Charlotte
Uptown
Wachovia Center................ 9 6.50 11.86
Raleigh/Durham
South Durham
University Tower............... 36 11.41 18.56
Nashville
Downtown
Nations Bank Plaza............. 21 6.57 13.66
----- ------ ------
SOUTHEAST REGION
TOTAL/WEIGHTED AVERAGE......... 712 $11.11 18.75
SOUTHWEST REGION
New Orleans
Central Business District
LL&E Tower..................... 33 $ 9.14 $15.64
Texaco Center.................. 26 10.30 16.46
Metairie/E. Jefferson
One Lakeway Center............. 49 8.75 15.13
Two Lakeway Center............. 85 9.67 15.16
Three Lakeway Center........... 54 9.96 15.68
</TABLE>
64
<PAGE> 69
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR BUILT/ SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Austin
Central Business District
Franklin Plaza................. 1 1987 517,849 0.8 91.5 9,698 0.7
One American Center(4)......... 1 1984 505,770 0.8 92.8 8,969 0.7
San Jacinto Center............. 1 1987 400,329 0.6 98.0 7,398 0.6
Houston
Galleria/West Loop
San Felipe Plaza(3)............ 1 1984 959,466 1.5 93.6 14,803 1.1
North/North Belt
Intercontinental Center........ 1 1983/91 194,801 0.3 99.4 2,710 0.2
Northborough Tower(3).......... 1 1983/90 207,908 0.3 95.1 2,734 0.2
North Loop/Northwest
Brookhollow Central............ 3 1972-1981 797,971 1.2 88.8 10,702 0.8
West
Destec Tower................... 1 1982 574,216 0.9 97.6 10,287 0.8
San Antonio
Airport
Union Square................... 1 1986 194,398 0.3 88.7 2,511 0.2
Northwest
Colonade I..................... 1 1983 168,637 0.3 92.4 2,361 0.2
Northwest Center............... 1 1984/94 241,248 0.4 88.2 2,805 0.2
--- ---------- ----- ---------- -----
SOUTHWEST REGION
TOTAL/WEIGHTED AVERAGE......... 18 7,120,292 10.9 92.2% $ 108,416 8.1%
--- ---------- ----- ---------- -----
PORTFOLIO TOTAL/WEIGHTED AVERAGE... 258 65,291,790 100.0% 94.0% $1,343,568 100.0%
=== ========== ===== ========== =====
<CAPTION>
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
<S> <C> <C> <C>
Austin
Central Business District
Franklin Plaza................. 39 11.45 20.47
One American Center(4)......... 36 9.51 19.11
San Jacinto Center............. 47 8.89 18.85
Houston
Galleria/West Loop
San Felipe Plaza(3)............ 125 9.22 16.49
North/North Belt
Intercontinental Center........ 12 6.81 13.99
Northborough Tower(3).......... 14 7.28 13.83
North Loop/Northwest
Brookhollow Central............ 53 8.34 15.10
West
Destec Tower................... 24 11.41 18.36
San Antonio
Airport
Union Square................... 18 7.44 14.57
Northwest
Colonade I..................... 26 7.80 15.15
Northwest Center............... 34 6.76 13.18
-----
SOUTHWEST REGION
TOTAL/WEIGHTED AVERAGE......... 675 $ 8.60 $16.51
-----
PORTFOLIO TOTAL/WEIGHTED AVERAGE... 5,676 $11.99 $21.90
=====
</TABLE>
- ---------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
December 31, 1997 multiplied by 12. This amount reflects total base rent
before any rent abatements, but includes expense reimbursements, which may
be estimates. Total rent abatements for leases in effect as of December 31,
1997 for the 12 months ending December 31, 1998 are approximately $9.5
million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of
December 31, 1997 as follows: Annualized Rent, calculated as described
above, was reduced by the estimated operating expenses per square foot,
based on 1997 actual operating expenses for Properties owned as of January
1, 1997 and based on the Company's estimate of annual operating expenses
for Properties acquired subsequent to January 1, 1997.
(3) This Office Property is held in a partnership with an unaffiliated third
party and, in the case of San Felipe Plaza, an affiliated party.
(4) This Office Property is held subject to a ground lease. See Note 8 to the
1996 Combined Financial Statements of the Equity Office Predecessors
included herein.
(5) This Office Property is owned subject to an interest in the improvements at
the Property held by an unaffiliated third party. In addition, the Company
has a mortgage interest in such improvements. See Note 5 to the 1996
Combined Financial Statements of the Equity Office Predecessors included
herein.
(6) This Office Property recently underwent major redevelopment and tenants
commenced occupancy in May 1997.
(7) This Office Property was purchased in conjunction with the purchase of One
Phoenix Plaza for the sole purpose of providing additional parking for the
tenants of One Phoenix Plaza.
65
<PAGE> 70
(8) This 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 the Company. The amounts shown above for annualized
rent include the amounts for reimbursement of expenses paid by the Company
but do not make any adjustments for expenses paid directly by the tenant.
(9) This Office Property is held in a private REIT in which the Company and the
Trust own 51.6% of the outstanding shares.
(10) As of the date of this Prospectus, the Company is involved in continuing
discussions with its joint venture partner in One Post Office Square and
Rowes Wharf with respect to the Company's control over property management
of such Office Properties. Such joint venture partner did not consent to
the transfer to the Company of Beacon's joint venture interest in these
Properties which occurred as a result of the Beacon Merger. Although the
Company believes that such consent was not required, unless the Company is
able to reach an agreement with respect to day-to-day management of such
Properties, it is possible that the joint venture partner could challenge
the transfer of the Properties in the Beacon Merger, or seek to trigger the
buy-sell remedy found in the joint venture documents.
(11) The Company owns a 10% interest in this Office Property. The Company's
joint venture partner has advised the Company of its exercise of its
buy-sell right under the joint venture documents. Accordingly, the Company
may either sell its interest in the Office Property or acquire the joint
venture partner's interest in the Office Property, in either case based on
an assumed value for the Property of $175.5 million.
66
<PAGE> 71
PARKING FACILITIES
Information concerning the Parking Facilities as of December 31, 1997 is
set forth below.
<TABLE>
<CAPTION>
NUMBER
APPROXIMATE MANAGEMENT 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
Adams Wabash Garage..................... 670 Chicago Standard Parking 1
Stanwix Parking Garage.................. 712 Pittsburgh Standard Parking 1
Milwaukee Center(2)..................... 876 Milwaukee Standard Parking 1
Capitol Commons Garage(2)(3)............ 950 Indianapolis Central Parking 1
601 Tchoupitoulas Garage................ 759 New Orleans Central Parking 1
North Loop Transportation Center(3)..... 1,172 Chicago Standard Parking 1
Theater District Garage(3).............. 1,006 Chicago Standard Parking 1
Civic Parking(4)........................ 7,464 St. Louis Central Parking 4
------ --
Total................................. 16,749 17
====== ==
</TABLE>
- ---------------
(1) With the exception of Capitol Commons Garage, all of the named Parking
Facilities are operated by the designated third-party Service Company (as
defined in the Glossary) under a lease agreement whereby the Company and the
Service Company share the gross receipts from the parking operation or the
Company receives a fixed payment from the Service Company, and the Company
bears none of the operating expenses. In the case of the Capitol Commons
Garage, the operating agreement provides for the Company's receipt of a
percentage of net receipts and, therefore, results in an insignificant
amount of nonqualifying gross income for REIT qualification purposes
relative to the total gross income of the Company.
(2) This Parking Facility is held subject to a ground lease. See Note 8 to the
1996 Combined Financial Statements of the Equity Office Predecessors
included herein.
(3) Each of these Parking Facilities is held in a partnership with an
unaffiliated third party. The Company or a subsidiary is the managing
general partner of each such partnership. See Note 6 to the 1996 Combined
Financial Statements of the Equity Office Predecessors included herein.
(4) The Company has a 50% membership interest in a portfolio of four Parking
Facilities serving the St. Louis, Missouri area.
TENANTS
As of December 31, 1997, the Office Properties were leased to 5,676
tenants; no single tenant accounted for more than 1.6% of the Company's
aggregate annualized rent or 1.3% of aggregate occupied square feet (except for
the U.S. General Services Administration, which accounted for 3.6% of annualized
rent and 3.1% of occupied square feet).
67
<PAGE> 72
LEASE EXPIRATION BY REGION AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION TOTALS Square Feet(1)......... 1,468,199 1,403,658 1,797,439 2,535,563 2,849,213
% Square Feet(2)....... 8.3% 7.9% 10.2% 14.3% 16.1%
Annualized Rent(3)..... 35,968,046 $ 35,511,991 $ 46,612,300 $ 67,724,851 $ 75,666,379
Number of Leases....... 250 196 235 212 195
Rent Per Square Foot... $ 24.50 $ 25.30 $ 25.93 $ 26.71 $ 26.56
CENTRAL REGION TOTALS Square Feet(1)......... 956,638 938,971 1,366,749 893,497 1,092,626
% Square Feet(2)....... 7.2% 7.1% 10.3% 6.7% 8.2%
Annualized Rent(3)..... $ 22,607,154 $ 24,445,635 $ 33,459,470 $ 19,840,138 $ 26,200,266
Number of Leases....... 196 172 174 150 141
Rent Per Square Foot... $ 23.63 $ 26.03 $ 24.48 $ 22.21 $ 23.98
PACIFIC REGION TOTALS Square Feet(1)......... 523,215 1,123,666 1,311,607 1,657,927 852,121
% Square Feet(2)....... 5.4% 11.6% 13.5% 17.1% 8.8%
Annualized Rent(3)..... $ 13,343,037 $ 25,799,415 $ 27,844,671 $ 35,819,707 $ 22,067,131
Number of Leases....... 121 114 110 111 76
Rent Per Square Foot... $ 25.50 $ 22.96 $ 21.23 $ 21.61 $ 25.90
WEST REGION TOTALS Square Feet(1)......... 950,557 981,408 1,235,372 1,264,733 963,339
% Square Feet(2)....... 10.8% 11.2% 14.0% 14.4% 11.0%
Annualized Rent(3)..... $ 17,324,712 $ 16,900,464 $ 21,845,638 $ 24,462,927 $ 17,936,972
Number of Leases....... 312 202 187 151 108
Rent Per Square Foot... $ 18.23 $ 17.22 $ 17.68 $ 19.34 $ 18.62
SOUTHEAST REGION TOTALS Square Feet(1)......... 731,862 1,406,101 1,229,731 1,417,873 823,210
% Square Feet(2)....... 8.4% 16.2% 14.2% 16.4% 9.5%
Annualized Rent(3)..... $ 12,803,930 $ 23,079,524 $ 25,386,337 $ 27,164,526 $ 15,317,589
Number of Leases....... 147 149 138 113 103
Rent Per Square Foot... $ 17.50 $ 16.41 $ 20.64 $ 19.16 $ 18.61
SOUTHWEST REGION TOTALS Square Feet(1)......... 824,455 615,933 1,394,002 1,007,272 914,422
% Square Feet(2)....... 11.6% 8.7% 19.6% 14.1% 12.8%
Annualized Rent(3)..... $ 12,983,956 $ 9,630,778 $ 24,574,823 $ 16,989,284 $ 15,971,348
Number of Leases....... 182 114 129 88 97
Rent Per Square Foot... $ 15.75 $ 15.64 $ 17.63 $ 16.87 $ 17.47
PORTFOLIO TOTALS Square Feet(1)......... 5,454,926 6,469,737 8,334,900 8,776,865 7,494,931
% Square Feet(2)....... 8.4% 9.9% 12.8% 13.4% 11.5%
Annualized Rent(3)..... $115,030,835 $135,367,809 $179,723,239 $192,001,433 $173,159,684
Number of Leases....... 1,208 947 973 825 720
Rent Per Square Foot... $ 21.09 $ 20.92 $ 21.56 $ 21.88 $ 23.10
<CAPTION>
2008 AND
2003 2004 2005 2006 2007 BEYOND TOTALS
------------ ----------- ----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION TOTALS 1,104,907 1,158,431 955,209 1,001,195 940,102 1,745,470 16,959,386
6.2% 6.5% 5.4% 5.7% 5.3% 9.9% 95.8%
$ 26,782,214 $27,925,360 $24,869,807 $21,563,734 $22,523,196 $ 50,972,720 $ 436,120,599
89 63 46 48 28 33 1,395
$ 24.24 $ 24.11 $ 26.04 $ 21.54 $ 23.96 $ 29.20 $ 25.72
CENTRAL REGION TOTALS 1,246,839 948,068 1,056,897 667,908 485,950 2,500,874 12,155,017
9.4% 7.1% 7.9% 5.0% 3.7% 18.8% 91.4%
$ 35,621,560 $20,967,084 $22,027,009 $13,967,501 $ 9,654,575 $ 48,686,853 $ 277,477,246
75 81 51 44 32 36 1,152
$ 28.57 $ 22.12 $ 20.84 $ 20.91 $ 19.87 $ 19.47 $ 22.83
PACIFIC REGION TOTALS 480,685 344,178 719,364 411,700 794,246 717,531 8,936,240
5.0% 3.5% 7.4% 4.2% 8.2% 7.4% 92.1%
$ 12,104,920 $ 8,787,839 $15,423,632 $13,581,995 $24,500,345 $ 11,129,561 $ 210,402,252
41 21 27 18 15 19 673
$ 25.18 $ 25.53 $ 21.44 $ 32.99 $ 30.85 $ 15.51 $ 23.54
WEST REGION TOTALS 1,017,366 981,178 281,007 309,239 216,330 182,766 8,383,295
11.6% 11.2% 3.2% 3.5% 2.5% 2.1% 95.3%
$ 21,095,964 $14,345,575 $ 5,523,336 $ 6,441,399 $ 6,163,374 $ 2,335,969 $ 154,376,329
51 21 12 9 7 9 1,069
$ 20.74 $ 14.62 $ 19.66 $ 20.83 $ 28.49 $ 12.78 $ 18.41
SOUTHEAST REGION TOTALS 298,491 347,833 418,831 595,444 23,488 1,070,353 8,363,217
3.4% 4.0% 4.8% 6.9% 0.3% 12.4% 96.5%
$ 6,615,672 $ 5,170,466 $ 5,837,916 $14,169,239 $ 543,826 $ 20,686,841 $ 156,775,866
16 17 9 8 3 9 712
$ 22.16 $ 14.86 $ 13.94 $ 23.80 $ 23.15 $ 19.33 $ 18.75
SOUTHWEST REGION TOTALS 425,305 520,933 72,924 446,126 171,843 171,729 6,564,944
6.0% 7.3% 1.0% 6.3% 2.4% 2.4% 92.2%
$ 6,733,658 $ 9,226,058 $ 1,324,953 $ 7,264,419 $ 3,017,761 $ 699,402 $ 108,416,439
32 18 4 7 2 2 675
$ 15.83 $ 17.71 $ 18.17 $ 16.28 $ 17.56 $ 4.07 $ 16.51
PORTFOLIO TOTALS 4,573,593 4,300,621 3,504,232 3,431,612 2,631,959 6,388,723 61,362,099
7.0% 6.6% 5.4% 5.3% 4.0% 9.8% 94.0%
$108,953,988 $86,422,383 $75,006,652 $76,988,287 $66,403,077 $134,511,346 $1,343,568,733
304 221 149 134 87 108 5,676
$ 23.82 $ 20.10 $ 21.40 $ 22.44 $ 25.23 $ 21.05 $ 21.90
</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
December 31, 1997 multiplied by 12. This amount reflects total base rent
before any rent abatements, but includes expense reimbursements. Total rent
abatements for leases in effect as of December 31, 1997 for the 12 months
ending December 31, 1998 are approximately $9.5 million.
68
<PAGE> 73
LEASE EXPIRATIONS -- TOTAL PORTFOLIO
The following table sets forth a summary schedule of the lease expirations
for the Office Properties for leases in place as of December 31, 1997, assuming
that none of the tenants exercise renewal options or termination rights, if any,
at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE ANNUALIZED
SQUARE OF TOTAL ANNUALIZED RENT PERCENTAGE OF
NUMBER OF FOOTAGE OF OCCUPIED RENT OF OF EXPIRING ANNUALIZED RENT
LEASES EXPIRING SQUARE EXPIRING LEASES PER OF EXPIRING
YEAR OF LEASE EXPIRATION EXPIRING LEASES FEET LEASES SQUARE FOOT LEASES(1)
- ------------------------ --------- ---------- ---------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1998(2)............... 1,208 5,454,926 9.0% $ 115,030,835 $21.09 8.6%
1999.................. 947 6,469,737 10.6 135,367,809 20.92 10.1
2000.................. 973 8,334,900 13.7 179,723,239 21.56 13.4
2001.................. 825 8,776,865 14.5 192,001,433 21.88 14.3
2002.................. 720 7,494,931 12.4 173,159,684 23.10 12.9
2003.................. 304 4,573,593 7.5 108,953,988 23.82 8.1
2004.................. 221 4,300,621 7.1 86,422,383 20.10 6.4
2005.................. 149 3,504,232 5.8 75,006,652 21.40 5.6
2006.................. 134 3,431,612 5.7 76,988,287 22.44 5.7
2007.................. 87 2,631,959 4.3 66,403,077 25.23 4.9
2008.................. 43 1,859,287 3.1 45,585,979 24.52 3.4
2009.................. 21 774,932 1.3 19,203,150 24.78 1.4
2010 and beyond....... 44 3,057,645 5.0 69,722,217 22.80 5.2
----- ---------- ----- -------------- -----
Total/Weighted
Average.......... 5,676 60,665,240 100.0%(3) $1,343,568,733 $21.90 100.0%
===== ========== ===== ============== =====
</TABLE>
- ---------------
(1) Based on currently payable rent.
(2) Represents lease expirations from January 1, 1998 to December 31, 1998 and
month-to-month leases.
(3) Reconciliation of total net rentable square footage is as follows:
<TABLE>
<CAPTION>
SQUARE FOOTAGE PERCENTAGE OF TOTAL
-------------- -------------------
<S> <C> <C>
Square footage occupied by tenants.......................... 60,665,240 92.9%
Square footage used for management offices and building use,
and remeasurement adjustments............................. 696,859 1.1
Square footage vacant....................................... 3,929,691 6.0
---------- -----
Total net rentable square footage......................... 65,291,790 100.0%
========== =====
</TABLE>
69
<PAGE> 74
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the Office Property leases, based on rentable square feet under lease, as of
December 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
TOTAL OF AGGREGATE ANNUALIZED OF AGGREGATE
PERCENT OCCUPIED PORTFOLIO RENT PORTFOLIO
NUMBER OF ALL SQUARE OCCUPIED ANNUALIZED PER SQUARE ANNUALIZED
SQUARE FEET UNDER LEASE OF LEASES LEASES FEET SQUARE FEET RENT FOOT RENT
----------------------- --------- ------- ---------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
2,500 or Less................. 2,111 37.1% 2,651,327 4.5% $ 53,306,953 $20.11 4.0%
2,501-5,000................... 1,241 21.9 4,425,891 7.3 91,348,801 20.64 6.7
5,001-7,500................... 645 11.4 3,941,275 6.5 81,850,253 20.77 6.1
7,501-10,000.................. 335 5.9 2,901,540 4.8 62,623,563 21.58 4.7
10,001-20,000................. 687 12.1 9,709,038 16.0 207,045,803 21.33 15.4
20,001-40,000................. 363 6.4 9,854,438 16.1 220,294,918 22.35 16.4
40,001-60,000................. 125 2.2 6,024,324 9.9 136,425,729 22.65 10.2
60,001-100,000................ 90 1.6 6,675,284 11.0 162,617,086 24.36 12.1
100,001 or Greater............ 79 1.4 14,482,123 23.9 328,055,628 22.65 24.4
----- ----- ---------- ----- -------------- -----
Total/Weighted Average...... 5,676 100.0% 60,665,240 100.0% $1,343,568,733 $21.90 100.0%
===== ===== ========== ===== ============== =====
</TABLE>
OCCUPANCY
The table below sets forth weighted average occupancy rates, based on
square feet occupied, of the Office Properties owned by the Company at the
indicated dates:
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE RENTABLE SQUARE
DATE RENTABLE SQUARE 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
December 31, 1997........................................... 65,291,790 94
</TABLE>
LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is presently subject to any
material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company or any of the 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 the Company.
70
<PAGE> 75
OFFICE PROPERTY MARKET INFORMATION
The Company operates in most of the top office markets in the United
States. Emerging Trends in Real Estate 1998, Cognetics Real Estate, Inc. in June
1997, and 1998 Landauer Real Estate Market Forecast have each ranked the top
office markets. Of the 23 markets listed below, the Company owns Office
Properties in 19 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 1998 EMPLOYMENT GROWTH -- 1997 TO 2007 OFFICE MARKETS -- 1998
------------------------ ---------------------------------- -------------------------
<C> <S> <C> <C> <C> <C>
1. SAN FRANCISCO, CA 1. LOS ANGELES, CA 1. PHOENIX, AZ
2. SEATTLE, WA 2. NEW YORK, NY 2. DENVER, CO
3. BOSTON, MA 3. SAN FRANCISCO/OAKLAND/SAN JOSE, CA 3. ORLANDO, FL
4. CHICAGO, IL 4. CHICAGO, IL 4. SEATTLE, WA
5. NEW YORK, NY 5. WASHINGTON, DC 5. NASHVILLE, TN
6. WASHINGTON, D.C. 6. DALLAS/FORT WORTH, TX 6. BOSTON, MA
7. SAN DIEGO, CA 7. ATLANTA, GA 7. MINNEAPOLIS, MN
8. LOS ANGELES, CA 8. BOSTON, MA 8. ATLANTA, GA
9. MINNEAPOLIS, MN 9. HOUSTON/GALVESTON, TX 9. DALLAS, TX
10. Miami, FL 10. PHILADELPHIA, PA 10. Kansas City, KS
11. DENVER, CO 11. PHOENIX, AZ 11. CHARLOTTE, NC
12. DALLAS, TX 12. Detroit, MI 12. CHICAGO, IL
13. HOUSTON, TX 13. MINNEAPOLIS, MN 13. Cincinnati, OH
14. PHOENIX, AZ 14. MIAMI/FT. LAUDERDALE, FL 14. SAN FRANCISCO, CA
15. ATLANTA, GA 15. TAMPA/ST. PETERSBURG, FL 15. HOUSTON, TX
- ------------------------------------------------------------------------------------------------------
Source: Emerging Trends in
Source: Cognetics Real Estate, Inc. Source: 1998 Landauer Real
Real Estate 1998 (Equitable (June 1997) Estate Market Forecast
Real Estate Investment
Management, Inc. and Real
Estate Research Corporation)
</TABLE>
71
<PAGE> 76
The Company's 25 largest markets, based on percentage of annualized rent,
are set forth below.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
MARKET ANNUALIZED RENT RENTABLE AREA
------ --------------- -------------
<S> <C> <C>
Chicago, IL................................................. 16.7% 15.6%
Boston, MA.................................................. 15.6 12.2
Washington, DC.............................................. 8.4 6.8
Atlanta, GA................................................. 7.7 8.7
Los Angeles, CA............................................. 5.8 5.2
San Francisco, CA........................................... 5.2 4.5
Seattle, WA................................................. 4.1 4.3
Philadelphia, PA............................................ 3.6 3.8
Stamford, CT................................................ 3.2 2.8
Houston, TX................................................. 3.1 4.2
Dallas, TX.................................................. 3.0 3.9
New Orleans, LA............................................. 2.5 3.6
Austin, TX.................................................. 1.9 2.2
Orange County, CA........................................... 1.7 1.9
San Jose, CA................................................ 1.6 2.0
Cleveland, OH............................................... 1.4 1.9
Indianapolis, IN............................................ 1.4 1.6
San Diego, CA............................................... 1.4 1.3
New York, NY................................................ 1.2 0.9
Columbus, OH................................................ 1.2 1.2
Orlando, FL................................................. 1.1 1.0
Minneapolis, MN............................................. 1.1 0.9
Denver, CO.................................................. 0.8 1.0
Tampa, FL................................................... 0.6 0.7
San Antonio, TX............................................. 0.6 0.9
----- -----
Total..................................................... 94.9% 93.1%
===== =====
</TABLE>
The Company believes that the current economic environment and lack of new
office space are allowing the office building industry to gradually reestablish
favorable supply and demand fundamentals. Continued office employment growth,
when combined with the continuing disparity in certain markets between current
rental rates and the rental rates required to support new development, is
expected to result in continuing increases in occupancy, rental rates and
profitability.
72
<PAGE> 77
MAJOR U.S. OFFICE MARKET SPACE COMPLETIONS, NET ABSORPTION(1) AND
VACANCY RATES
[GRAPH]
<TABLE>
<CAPTION>
3rd Qtr
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Completions 1,100,000 1,077,000 8,610,000 4,800,000 3,270,000 5,000,000 4,000,000 6,000,000 1,300,000 1,600,000
Net Absorption 1,040,000 8,510,000 7,000,000 4,300,000 3,450,000 4,800,000 4,850,000 4,350,000 6,100,000 6,250,000
Direct Vacancy
Rate 18 18 17.88 18 17.94 17 15 14 12.28 10.2
</TABLE>
Source: CB Commercial Real Estate Group, Inc./Torto Wheaton Research
(1) CB Commercial Real Estate Group, Inc./Torto Wheaton Research defines net
absorption as the net change in multi-tenant occupied space, in square feet,
during that period.
73
<PAGE> 78
In the Company's 25 largest office markets, rental rates have begun to
trend upwards as vacancies have decreased, and the Company believes that trends
prevailing in these markets, taken as a whole, are characteristic of the trends
prevailing in the markets in which 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.
THE COMPANY'S LARGEST MARKETS -- VACANCY RATE AND TW
RENT INDEX(1)
[GRAPH]
<TABLE>
<CAPTION>
3rd Qtr
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vacancy Rate 18 18 19 19.36 19 17.48 16 14.14 12.36 10
TW Rent Index 16.19 15.94 16.53 16.34 16 15.15 15.75 16.3 17.77 19.85
</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 Company's
25 largest markets excluding New Orleans and San Antonio which are not
covered by Torto Wheaton Research.
74
<PAGE> 79
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
Company's 25 largest office markets peaked at approximately 20%, it has steadily
declined. For these 25 markets, the overall vacancy rate for all office space is
currently approximately 10.2%, and the vacancy rate for Class A office buildings
is 9.8%. The Company 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.
THE COMPANY'S 25 LARGEST MARKETS -- NET ABSORPTION(1),
COMPLETIONS AND VACANCY RATES
[Graph]
<TABLE>
<CAPTION>
3rd Qtr
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Completions 68,432,600 68,009,200 60,228,700 35,001,800 19,862,200 3,479,790 1,792,260 3,097,390 5,138,590 7,930,930
Vacancy Rate 17.7 17.49 18.29 18.51 18.12 16.72 15.28 13.88 12.15 10.18
Net Absorption 65,281,900 59,583,300 44,023,300 27,591,900 21,143,900 31,003,900 32,454,300 30,852,100 41,312,800 44,188,600
</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 space, in square feet,
during that period.
75
<PAGE> 80
FOR THE COMPANY'S 25 LARGEST MARKETS
VACANCY RATES OF CLASS A OFFICE SPACE
COMPARED TO VACANCY RATES FOR ALL OFFICE SPACE AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DIRECT VACANCY RATE FOR DIRECT VACANCY RATE FOR
CLASS A OFFICE SPACE ALL OFFICE SPACE
----------------------- -----------------------
<S> <C> <C>
San Jose, CA............................................ 1.4% 1.8%
San Francisco, CA....................................... 2.6 3.7
Seattle, WA............................................. 3.3 5.6
Minneapolis, MN......................................... 3.5 5.8
Boston, MA.............................................. 4.1 5.3
Austin, TX.............................................. 4.6 6.4
San Antonio, TX......................................... 4.7 9.1
Washington, DC.......................................... 4.8 7.4
Orlando, FL............................................. 5.2 6.9
Tampa, FL............................................... 6.5 9.9
Orange County, CA....................................... 6.6 10.2
Denver, CO.............................................. 6.8 8.5
New York, NY............................................ 7.4 8.6
Houston, TX............................................. 7.6 15.4
Cleveland, OH........................................... 7.9 12.9
San Diego, CA........................................... 8.0 11.1
Stamford, CT............................................ 8.2 12.0
Chicago, IL............................................. 8.2 12.3
Atlanta, GA............................................. 9.1 10.1
Columbus, OH............................................ 9.7 8.2
Dallas, TX.............................................. 9.8 14.6
Indianapolis, IN........................................ 10.6 13.2
Philadelphia, PA........................................ 10.8 11.6
New Orleans, LA......................................... 11.3 19.0
Los Angeles, CA......................................... 12.8 16.0
---- ----
All 25 Markets.......................................... 9.8% 10.2%
==== ====
</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.
The Company believes that office property markets across the country are in
a recovery. Given prospects for limited new development in many markets and
continued growth in office demand, the Company believes that the office property
market recovery will continue for the foreseeable future and will lead to
increased rental rates and reduced concessions in most office property 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 1998 through 2003 anticipate continued growth in U.S.
employment with office-based employment growing at approximately 1.9% compared
to total U.S. employment growth of approximately 1.6% per annum.
76
<PAGE> 81
MANAGEMENT
TRUSTEES AND EXECUTIVE AND SENIOR OFFICERS OF THE TRUST
The Board of Trustees of the Trust, the managing general partner of the
Company, currently consists of ten trustees, seven of whom are not employees or
affiliates of the Trust, the Company or the Equity Group. The Board of Trustees
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. The Trust believes that classification of
the Board of Trustees will help to assure the continuity and stability of the
Company's business strategies and policies as determined by the Board of
Trustees.
Information concerning the trustees and executive and senior officers of
the Trust is set forth below.
<TABLE>
<CAPTION>
NAME AGE OFFICES HELD
- ---- --- ------------
<S> <C> <C>
Samuel Zell.................... 56 Chairman of the Board, Trustee
Timothy H. Callahan............ 47 President, Chief Executive Officer, Trustee
Michael A. Steele.............. 51 Chief Operating Officer and Executive Vice President -- Real
Estate Operations
Richard D. Kincaid............. 36 Executive Vice President, Chief Financial Officer
Stanley M. Stevens............. 49 Executive Vice President, Chief Legal Counsel and Secretary
Gary A. Beller................. 51 Executive Vice President -- Parking Facilities
Jeffrey L. Johnson............. 38 Chief Investment Officer and Senior Vice President --
Investments
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
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............. 56 Trustee (term expires in 2000)
Thomas E. Dobrowski............ 54 Trustee (term expires in 1998)
James D. Harper, Jr. .......... 64 Trustee (term expires in 1999)
Peter Linneman................. 46 Trustee (term expires in 2000)
Jerry M. Reinsdorf............. 62 Trustee (term expires in 1998)
William M. Goodyear............ 49 Trustee (term expires in 2000)
David K. McKown................ 60 Trustee (term expires in 2000)
H. Jon Runstad................. 56 Trustee (term expires in 1998)
Edwin N. Sidman................ 55 Trustee (term expires in 1998)
</TABLE>
Samuel Zell has been a trustee and Chairman of the Board of the Trust since
October 1996. For more than five years, Mr. Zell has served as Chairman of the
Board of Directors of Equity Group Investments, L.L.C. an owner, manager and
financier of real estate and corporations ("EGI"). For more than five years, Mr.
Zell has served as Chairman of the Boards 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"), and
Manufactured Home Communities, Inc., a real estate investment trust specializing
in the ownership and management of manufactured home communities ("MHC"). 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 Equity Residential Properties Trust, an owner and
operator of multifamily residential properties ("EQR"). 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,
77
<PAGE> 82
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 the Trust since October 1996. Mr. Callahan has 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 a Director of MHC from May 1996 until October 1997. 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, New York, from July 1973 until March 1987.
Michael A. Steele has been Chief Operating Officer and Executive Vice
President -- Real Estate Operations for the Trust since February 1998 and was
Executive Vice President -- Real Estate Operations for the Trust from October
1996 until February 1998. Mr. Steele was 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.
Richard D. Kincaid has been Executive Vice President and Chief Financial
Officer of the Trust since March 1997 and was Senior Vice President and Chief
Financial Officer of the Trust 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.
Stanley M. Stevens has been Executive Vice President, Chief Legal Counsel
and Secretary of the Trust 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.
Gary A. Beller has been Executive Vice President of the Trust 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.
Jeffrey L. Johnson has been Chief Investment Officer and Senior Vice
President -- Investments for the Trust since March 1998 and was Senior Vice
President -- Investments for the Trust from March 1997 until February 1998. 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.
78
<PAGE> 83
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.
David H. Crawford has been Senior Vice President -- Administration and
General Counsel for Property Operations of the Trust 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 July 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 the Trust
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
the Trust 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.
Frances P. Lewis has been Senior Vice President -- Corporate Communications
for the Trust 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 of the Trust 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, a commercial bank located in Chicago, Illinois, from 1982 until November
1993.
David H. Naus has been Senior Vice President -- Acquisitions of the Trust
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 the Trust since January 1998. Mr. Sheinkop was Senior Vice President --
Divisional Manager of EOH from March 1997 until October 1997 and for the Trust
from March 1997 through December 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 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.
79
<PAGE> 84
Sheli Z. Rosenberg has been a trustee of the Trust since March 1997. Since
November 1994, Ms. Rosenberg has been Chief Executive Officer and President of
EGI. From 1980 until 1997, Ms. Rosenberg was a principal of the law firm of
Rosenberg & Liebentritt, P.C. and is now of counsel to the firm. For more than
five years, Ms. Rosenberg has served on the Board of Directors of each of the
following companies: EGI, AVC, and Anixter. 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 March 1996, Ms. Rosenberg
has been a director of QFC. Since August 1986, Ms. Rosenberg has been a 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 the Trust 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 the Trust 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 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 the Trust 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 the Trust 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.
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William M. Goodyear has been a trustee of the Trust 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 the Trust since July 1997. Since
1993, Mr. McKown has been Group Executive of the Diversified Finance and Real
Estate Operating Partnership 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.
H. Jon Runstad was appointed a trustee of the Trust effective January 1,
1998. See "Recent Developments -- Wright Runstad Acquisition." Since 1971, Mr.
Runstad has been President and Chief Executive Officer of Wright Runstad &
Company, a Seattle, Washington based owner, manager and developer of office
buildings in the western United States, primarily in the Pacific Northwest.
Since 1987, Mr. Runstad has served as a member of the Board of Regents for the
University of Washington. Since July 1975, Mr. Runstad has served as a trustee
for the Downtown Seattle Association.
Edwin N. Sidman was appointed a trustee of the Trust effective March 1,
1998, pursuant to the Merger Agreement. Mr. Sidman served as Chairman of the
Board and a director of Beacon from 1994 until the consummation of the Beacon
Merger in December 1997. He is currently the managing partner of The Beacon
Companies, a private company involved in real estate investment, development and
management. Prior to joining Beacon in 1971, Mr. Sidman practiced law with the
predecessor to the firm of Rubin and Rudman in Boston. Mr. Sidman's professional
affiliations include service as Senior Vice Chairman of the National Realty
Committee. Mr. Sidman is a member of the Board of Trustees of Duke University
and a member of the Board of Directors and Executive Committee for the United
Way of Massachusetts Bay.
COMMITTEES OF THE BOARD OF TRUSTEES
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 nonaudit fees and reviews the adequacy of the Trust's (and the
Company's) internal accounting controls. The members of the Audit Committee are
Messrs. Dobrowski, Goodyear and Reinsdorf.
EXECUTIVE COMMITTEE. The Executive Committee has the authority within
certain parameters to acquire, dispose of and finance investments for the Trust
(including the issuance by the Company of additional Units or other equity
interests) and approve the execution of contracts and agreements, including
those related to the borrowing of money by the Company, and generally exercise
all other powers of the Board of Trustees except as prohibited by law. The
members of the Executive Committee are Messrs. Zell, Callahan and Linneman.
COMPENSATION COMMITTEE. The Compensation Committee determines compensation
for the Trust's executive officers. The Compensation Committee reviews and makes
recommendations concerning proposals by management with respect to compensation,
bonuses, employment agreements and other benefits and policies respecting such
matters for the executive officers of the Trust. The members of the Compensation
Committee are Ms. Rosenberg and Messrs. Harper and McKown.
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The Board of Trustees does not have a nominating committee and the entire
Board will perform the function of such a committee.
COMPENSATION OF THE BOARD OF TRUSTEES; PAYMENT IN COMMON SHARES
The Trust pays its nonemployee trustees an annual fee of $40,000. In
addition, nonemployee 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 Common
Shares. Trustees who are employees of the Trust are not paid any trustees' or
committee fees. The Company reimburses its trustees for travel expenses incurred
in connection with their activities on behalf of the Trust. After the IPO, each
trustee (other than Messrs. Zell and Callahan and Ms. Rosenberg) received a
grant of options to purchase 10,000 Common Shares at the IPO price. Under the
Trust's 1997 Employee 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 Common Shares at the then current market price on the date of
the meeting of the Board of Trustees held immediately after the annual meeting
of the Trust shareholders. These grants of options to purchase 10,000 Common
Shares will vest as follows: options for 3,333 Common Shares will vest six
months after the grant date, options for an additional 3,333 Common Shares will
vest on the first anniversary of the grant date, and options for the remaining
3,334 Common Shares will vest on the second anniversary of the grant date.
Trustees who perform other functions for the Trust may receive additional
options under the Employee Plan.
EXECUTIVE COMPENSATION
The following table sets forth the annual base salary levels and bonuses
awarded for 1997, and options and restricted share awards granted in 1997, to
the Trust's Chief Executive Officer and the Trust's four other most highly paid
executive officers (the "Named Executive Officers"). Information for 1996 is not
presented because the Trust had no operations during such period and the Named
Executive Officers were employed by other affiliated entities, as well as by the
Equity Office Predecessors.
<TABLE>
<CAPTION>
1997 RESTRICTED
1998 BASE 1997 OPTIONS SHARE
NAME TITLE BASE SALARY BONUS ALLOCATED(1) AWARDS(2)
---- ----- -------- -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Timothy H. Callahan..... President and Chief Executive Officer $700,000 $600,000 $1,050,000 450,000 $5,152,188
Michael A. Steele....... Chief Operating Officer and Executive 350,000 265,000 525,000 250,000 1,558,438
Vice President -- Real Estate
Operations
Richard D. Kincaid...... Executive Vice President, Chief 300,000 235,000 465,000 250,000 1,558,438
Financial Officer
Stanley M. Stevens...... Executive Vice President, Chief Legal 375,000 325,000 375,000 225,000 627,000
Counsel
Jeffrey L. Johnson...... Chief Investment Officer and Senior 275,000 225,000 275,000 183,500 330,000
Vice President -- Investments
</TABLE>
- ---------------
(1) See "-- Option and Restricted Share Plan" below.
(2) On September 14, 1997 and December 16, 1997, the Compensation Committee of
the Board of Trustees granted restricted shares to certain of the Trust's
executive officers pursuant to the Employee Plan. Mr. Callahan was granted
awards of 85,000 and 70,000 Common Shares, respectively, and Mr. Steele and
Mr. Kincaid were each granted awards of 17,000 and 30,000 Common Shares,
respectively. In addition, on December 16, 1997, the Compensation Committee
of the Board of Trustees granted Mr. Stevens an award of 19,000 Common
Shares and Mr. Johnson an award of 10,000 Common Shares. These awards will
vest over a five-year period after being granted (50% after year three, 25%
after year four, and 25% after year five). The dollar value shown in the
table for the restricted shares is based on the closing price of the Common
Shares on the NYSE on September 12, 1997 and December 16, 1997.
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<PAGE> 87
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT 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 9.4% $21.00 July 7, 2007 $2,642,000 $ 6,694,000
250,000 33.00 December 16, 2007 5,187,500 13,147,500
Michael A. Steele.... 150,000 5.2 21.00 July 7, 2007 1,981,500 5,020,500
100,000 33.00 December 16, 2007 2,075,000 5,259,000
Richard D. Kincaid... 150,000 5.2 21.00 July 7, 2007 1,981,500 5,020,500
100,000 33.00 December 16, 2007 2,075,000 5,259,000
Stanley M. Stevens... 150,000 5.1 21.00 July 7, 2007 1,981,500 5,020,500
75,000 33.00 December 16, 2007 1,556,250 3,944,250
Jeffrey L. Johnson... 125,000 3.8 21.00 July 7, 2007 1,651,250 4,183,750
58,500 33.00 December 16, 2007 1,213,875 3,076,515
</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 gain to the optionee is possible without an increase in the price
of Common Shares, which would benefit all shareholders.
(2) All options are granted at the fair market value of the 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 Common Share) over three years.
(3) The exercise price for the initial grant of options on July 7, 1997 was
based on the IPO price. The exercise price for the grant of options on
December 16, 1997 was the closing price of the Common Shares on the date of
grant.
(4) An annual compound share price appreciation of 5% from the IPO price of
$21.00 and the December 16, 1997 closing price of $33.00 per Common Share
yields a price of $34.21 and $53.75 per Common Share, respectively.
(5) An annual compound share price appreciation of 10% from the IPO price of
$21.00 and the December 16, 1997 closing price of $33.00 per Common Share
yields a price of $54.47 and $85.59 per Common Share, respectively.
OPTION AND RESTRICTED SHARE PLAN
In July 1997, the Trust adopted the Employee Plan for the purpose of
attracting and retaining highly qualified executive officers, trustees,
employees and consultants. The Trust has reserved Common Shares for issuance
pursuant to the Employee Plan. In connection with the establishment of the
Employee Plan, the Trust granted additional options to purchase Common Shares to
certain officers, trustees, employees and consultants of the Trust 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 the
Trust's
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outstanding Common Shares (calculated on a fully diluted basis) to executive or
other employees of the Trust. Share options may be granted in the form of
"incentive stock options" (as defined in Section 422 of the Code) or
nonstatutory share options, and are exercisable for up to ten 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 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 Trust 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.
401(K) PLAN
The Trust has established the Equity Office Properties Trust Section 401(k)
Savings/Retirement Plan (the "401(k) Plan") to cover eligible employees of the
Trust and any designated affiliate (including the Company).
The 401(k) Plan permits eligible employees of the Trust 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.
EMPLOYEE SHARE PURCHASE PLAN
In July 1997, the Trust 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. The Trust has
reserved 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 is administered by the Compensation Committee and allows eligible
employees and trustees to acquire an interest in the Trust through the purchase
of Common Shares from the Trust at a price equal to 85% of the lesser of (i) the
closing price of the Common Shares on the NYSE on the day prior to the purchase
or (ii) the average closing price of the Common Shares on the NYSE for the
six-month period prior to the purchase. A total of 2,000,000 Common Shares
(subject to adjustment for share splits, share distributions, recapitalizations
or other corporate restructurings) has been reserved for issuance under the
Purchase Plan.
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 Common Shares at a price less
than the fair market value of the Common Shares on the date of purchase.
INCENTIVE COMPENSATION
The Trust has an incentive compensation plan for key officers of the Trust
and its subsidiaries and affiliates. This plan provides for payment of cash
bonuses to each participating officer after evaluating the officer's performance
and the overall performance of the Trust. The Chief Executive Officer makes
recommendations to the Compensation Committee of the Board of Trustees, which
makes the final determination for the award of bonuses. The Compensation
Committee determines such bonuses, if any, for the Chief Executive Officer.
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<PAGE> 89
BEACON STOCK OPTION PLANS
In connection with the Beacon Merger, the Company assumed the obligations
of Beacon under Beacon's 1994 Stock Option and Incentive Plan (the "Beacon 1994
Plan") and Beacon's 1996 Stock Option Plan (the "Beacon 1996 Plan" and, together
with the Beacon 1994 Plan, the "Beacon Plans"). The Trust reserved 4,749,095
Common Shares for issuance pursuant to the options outstanding under the Beacon
Plans as of the date of the consummation of the Beacon Merger, and, as of
December 31, 1997, had issued 3,829,739 of such Common Shares to former Beacon
employees who exercised such options. The Company will not grant any new options
pursuant to the Beacon Plans and no additional Common Shares will be reserved
for issuance under the Beacon Plans (other than pursuant to anti-dilution
provisions).
The Beacon 1994 Plan provided for the grant to officers, certain other
employees and, on a limited basis, nonemployee directors of Beacon of (i) stock
options that qualify as "incentive stock options" (as defined in Section 422 of
the Code), (ii) stock options that do not so qualify, (iii) stock options in
lieu of cash for directors' fees and employee bonuses, (iv) shares of Beacon
Common Stock contingent on the attainment of performance goals or subject to
other restrictions and (v) grants of shares of Beacon Common Stock in lieu of
cash compensation. The Beacon 1996 Plan provided for the grant of stock options
to Beacon employees other than senior executive officers. The Beacon Plans were
each qualified under Rule 16b-3 of the Exchange Act. The Company's obligations
under the Beacon Plans are administered by the Compensation Committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Title 8 of the Corporations and Associations Article of the Annotated Code
of Maryland, as amended from time to time (the "Maryland REIT Law"), permits a
Maryland REIT 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 Trust's declaration of trust, as amended from time to time,
and as filed with the State Department of Assessments and Taxation of Maryland
(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 the Trust, 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 the Trust and at the request of the Trust, 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 the Trust. The Bylaws obligate the Trust, to the
maximum extent permitted by Maryland law, 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 who is made party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
trustee or officer of the Trust and at the request of the Trust, serves or has
served another corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a trustee, director, officer or partner of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service in
that capacity, against any claim or liability to which he may become subject by
reason of such status. The Declaration of Trust and Bylaws also permit the Trust
to indemnify and advance expenses to any person who served a predecessor of the
Trust in any of the capacities described above and to any employee or agent of
the Trust or a predecessor of the Trust. The Bylaws require the Trust to
indemnify a trustee or officer (or any former trustee or officer) who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity against
reasonable expenses incurred in connection with the proceeding.
The Maryland REIT Law permits a Maryland REIT to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent as
permitted by the Maryland General Corporation Law, as amended from time to time
(the "MGCL"), for directors and officers of Maryland corporations. The MGCL
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<PAGE> 90
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 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. Under the MGCL, as a condition to
advancing expenses, as required by the Bylaws, the Trust must first receive (a)
a written affirmation by the trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Trust and
(b) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the Trust if it shall ultimately be determined that the standard
of conduct was not met. 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 Board.
The limited partnership agreement of the Company (the "Partnership
Agreement") also provides for indemnification of the Trust and its officers and
trustees to the same extent that indemnification is provided to officers and
trustees of the Trust in its Declaration of Trust, and limits the liability of
the Trust and its officers and trustees to the Company and its respective
partners to the same extent that the Declaration of Trust limits the liability
of the officers and trustees of the Trust to the Trust and its shareholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION TRANSACTIONS
BACKGROUND. The Trust was formed pursuant to the consolidation (the
"Consolidation") in July 1997 of the ownership of the 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 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 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, the Trust
engaged in the transactions described below, which were designed to consolidate
the ownership of the Office Properties, the Parking Facilities and the
Management Business, to facilitate the IPO and to enable the Trust 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 Office
Properties and Parking Facilities that comprised the Company's initial
portfolio, contributed to the Company all of their interests in such
Office Properties and Parking Facilities.
- The ZML REITs (each a majority or sole limited partner of a ZML
Opportunity Partnership) merged into the Trust, with the Trust succeeding
to their interest in, and also 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 the Company substantially all
of the interests in the Management Business.
- Shareholders in the ZML REITs received Common Shares in exchange for
their interests in the ZML REITs.
- Partners in the ZML Opportunity Partnerships (including the Trust as the
successor to the ZML REITs) received Units (to be distributed over the
two-year period ending July 11, 1999). Such Units are intended to
correspond in value to, and be exchangeable commencing two years
following the closing of the IPO for, Common Shares or, at the Trust's
option, cash equal to the fair market value of such Common Shares.
- Units in the Company were issued to the Equity Group in exchange for the
Management Business, which Units will be exchangeable for Common Shares,
or, at the Trust'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 the Trust pursuant to the Consolidation. Affiliates of Mr. Zell
received approximately $11.4 million of such distribution.
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- The Company and EOH transferred the Managed Property Business to EOP
Management Company, in which the Company now owns nonvoting stock
representing 95% of the equity interest and EOH owns all of the voting
stock, representing 5% of the equity interest.
LEASES AND PARKING OPERATIONS
The Company 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 the Company and its predecessors
with certain administrative, office facility services and other services with
respect to certain aspects of the Company's business, including, but not limited
to, financial and accounting services, tax services, investor relations, and
other services. The Company paid approximately $12,786,000 and $12,500,000
during the years ended December 31, 1996 and 1997, respectively, to EGI and its
affiliates for such office space and services, which amounts were calculated to
approximate a market rental rate for the office space and the actual cost of
providing these services. See Note 9 of the Notes to the 1996 Combined Financial
Statements of Equity Office Predecessors included elsewhere in this Prospectus.
The independent members of the Board of Trustees annually review and approve the
rates charged by EGI for services rendered to the Company.
EQR and certain other affiliates of the Trust and the Company 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,
$3,471,500 and $2,657,500 for the nine months ended September 30, 1997 and for
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 Office
Properties. Management believes amounts paid to SPLP are equivalent to market
rates for such services.
The Company entered into various lease agreements with SPLP or affiliates
of SPLP whereby SPLP or its affiliates lease certain Parking Facilities from the
Company. 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 in the years ended December 31, 1997, 1996 and 1995 under these
lease agreements was approximately $11,049,000, $3,161,500 and $1,691,600,
respectively. In addition, the Company may receive additional rent based upon
actual gross revenues generated by these Parking Facilities. In accordance with
certain of these leases, the Company 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 the Company through their ownership
interests in the ZML Partners of approximately $22,646,100 and $8,603,600 for
the nine months ended September 30, 1997 and for the year ended December 31,
1996, respectively.
WRIGHT RUNSTAD ACQUISITION
In connection with the Wright Runstad Acquisition, H. Jon Runstad was
elected as a trustee of the Trust effective January 1, 1998. Mr. Runstad
received, directly and indirectly, 552,968 Units in exchange for his interest in
the ten Office Properties and WRALP. Also, Thomas E. Dobrowski, a trustee of the
Trust, is the managing director of real estate and alternative investments of
General Motors Investment Management Corporation, an investment advisor to
several pension funds of General Motors Corporation ("GM") and its subsidiaries
and to several clients also controlled by GM, including First Plaza, which
received $192.4 million in cash, 3,435,688 Common Shares and warrants to
purchase 3,350,000 Common Shares in exchange for First Plaza's interest in the
Office Properties acquired in the Wright Runstad Acquisition.
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MISCELLANEOUS
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 Company has entered into third-party management contracts,
on terms equivalent to third-party transactions, with respect to properties not
owned by the Company, but that are owned or controlled by the Equity Group. See
"Risk Factors -- Conflicts of Interest in Connection with Formation and Business
of the Trust and the Company." Income recognized for similar services rendered
for the nine months ended September 30, 1997 and for the years ended December
31, 1996 and 1995, was approximately $3,841,000, $5,120,000, and $5,899,000,
respectively.
Rosenberg & Liebentritt, P.C., a law firm in which Ms. Rosenberg, a
trustee, was a principal until September 11, 1997 and is now of counsel,
received legal fees from the Company of $1,900,000, $3,480,500 and $3,230,100
for the nine months ended September 30, 1997 and for the years ended December
31, 1996 and 1995, respectively.
Certain services for the Company'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. The Company pays such service
corporation a fee for such services. The Company has no control over, or
ownership interest in, such service corporation, which operates as an
independent contractor. The Company may terminate such services at any time upon
30-days' notice.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the policies with respect to investments,
financing and certain other activities of the Company and the Trust. These
policies are determined by the Board of Trustees and may be amended or revised
from time to time at the discretion of the Board without notice to or a vote of
the Trust's shareholders, or the limited partners of the Company, 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 the Trust are conducted through the Company. The
Company's investment objectives are to increase cash flow and the value of the
Properties and to acquire established income-producing office properties and
parking facilities with cash flow growth potential. Additionally, where prudent
and possible, the Company will seek to upgrade the existing Properties and any
newly acquired office properties. The Company's business will be focused on
office properties and will include parking facilities. Where appropriate, and
subject to REIT qualification rules, the Company may sell certain of its
Properties.
The Company expects to pursue its investment objectives through the direct
and indirect ownership of properties and the ownership of interests in other
entities. The Company will focus on properties in those markets where the
Company currently has operations and in new markets targeted by management. See
"Business and Growth Strategies." The Company has no current plans to acquire
properties outside 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 the Trust's assets.
The Company 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 the Company's equity
interest in such property.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company'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 the
Company's interest in two Office Properties, and in two Parking Facilities,
consists of ownership of the mortgage securing such properties. The Company does
not intend to invest to a significant extent in mortgages or deeds of trust but
may acquire mortgages as a strategy for acquiring ownership of a property or the
economic equivalent thereof, subject to the investment restrictions applicable
to REITs. In addition, the Company 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.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Although the Company has no current intention of
making such an investment, the Company 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. The Company
may acquire all or substantially all of the securities or assets of other REITs
or similar entities where such investments would be consistent with the
Company's investment policies. In any event, the Company does not intend that
its investments in securities will require it or the Trust to register as an
"investment company" under the Investment Company Act of 1940, as amended.
FINANCING POLICIES
In addition to the limitations on indebtedness which are imposed on the
Company under the Credit Facilities and the Indenture, the Company 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. The Company's Debt to Market Capitalization Ratio is equal
to the total consolidated and unconsolidated debt of the Company as a percentage
of the market value of outstanding Common Shares and Units (not owned by the
Trust) plus total consolidated and unconsolidated debt, but excluding (i) all
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nonrecourse consolidated debt in excess of the Company's proportionate share of
such debt and (ii) all nonrecourse unconsolidated debt of partnerships in which
the Trust is a limited partner. The Company, 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 the Trust and the Company 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 Bylaws or
the Partnership Agreement. To the extent that the Trust determines to obtain
additional capital, the Trust may issue equity securities, cause the Company to
issue additional Units or debt securities, 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 the Company is in
existence, the net proceeds of all equity capital raised by the Trust will be
contributed to the Company in exchange for additional Units in the Company,
which will dilute the ownership interest, if any, of the Equity Group and any
other holders of Units.
It is the Trust's policy that it 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 the Company to the extent necessary to
fund the business activities conducted by the Company and its Subsidiaries. To
the extent that the Trust as managing general partner of the Company determines
to obtain debt financing in addition to the existing mortgage indebtedness, the
Company intends to do so generally through mortgages on its Properties, the
Credit Facilities and offerings similar to the February 1998 Notes Offering;
however, the Trust may cause the Company to issue additional debt securities in
the future. Such indebtedness may be recourse, nonrecourse or
cross-collateralized and may contain cross-default provisions. The net proceeds
of any debt securities issued directly by the Trust (rather than by the Company)
will be lent to the Company on substantially the same terms and conditions as
are incurred by the Trust. The Company 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, the Company 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, providing working capital or meeting the
taxable income distribution requirements for REITs under the Code.
LENDING POLICIES
The Company may consider offering purchase money financing in connection
with the sale of Properties where the provision of such financing will increase
the value received by the Company for the property sold.
CONFLICT OF INTEREST POLICIES
OFFICERS AND TRUSTEES OF THE TRUST. Mr. Zell, the Chairman of the Board of
Trustees, 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 the Trust and the Trust's shareholders. See
"Risk Factors -- Conflicts of Interest in Connection with Formation and Business
of the Trust and the Company." Under Maryland law, contracts or other
transactions between the Trust and a trustee or officer (or an entity in which a
trustee or officer 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 or (b) it is
fair 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 the Trust and its trustees. The
Trust believes that this procedure and Mr. Zell's noncompetition agreement will
help to eliminate or minimize certain potential conflicts of interest. Pursuant
to the Bylaws, without the approval of a majority of the disinterested trustees,
the Trust and its Subsidiaries will not (i) acquire from or sell to any trustee,
officer or employee of the Trust, or any entity in which a trustee, officer or
employee of the Trust owns more than a 1% interest, or
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acquire from or sell to any affiliate of any of the foregoing, any assets or
other property of the Trust 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
the Trust and its Subsidiaries. The foregoing does not apply to the
Noncontrolled Subsidiaries.
POLICIES APPLICABLE TO ALL TRUSTEES. Under Maryland law, each trustee is
obligated to offer to the Trust any opportunity (with certain limited
exceptions) which comes to him or her and which the Trust 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. The Trust 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. The Trust expects to pay in the
aggregate approximately $1.13 million in base rent and escalations during 1997.
The Trust believes it is paying fair market rent for this space. The
disinterested members of the Board of Trustees will annually review and approve
the rates charged to the Trust for such office space.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Trust and the Company may, but do not presently intend to, make
investments other than as previously described. All investments will be related
to the office property and parking facility business. The Trust will make
investments only through the Company. The Trust will have authority to offer
Common Shares or other equity or debt securities of the Trust in exchange for
property and to repurchase or otherwise reacquire Common Shares or any other
securities and may engage in such activities in the future. Similarly, the
Company may offer additional Units or other equity interests in the Company that
are exchangeable into Common Shares or Preferred Shares in exchange for
property. The Company also may make loans to joint ventures in which it may or
may not participate in the future. Neither the Trust nor the Company will engage
in trading, underwriting or the agency distribution or sale of securities of
other issuers. At all times, the Trust intends to cause the Company 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 Board of Trustees
determines that it is no longer in the best interests of the Trust to continue
to qualify as a REIT. The Trust's policies with respect to such activities may
be reviewed and modified from time to time by the Board of Trustees without
notice to holders of the Notes.
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<PAGE> 97
PRINCIPAL SHAREHOLDERS OF THE TRUST
The following table sets forth certain information regarding the beneficial
ownership of Common Shares (or Common Shares for which Units are exchangeable)
as of December 31, 1997 by (i) each trustee of the Trust, (ii) each named
executive officer of the Trust, (iii) all trustees and officers of the Trust as
a group and (iv) each person or entity which is the beneficial owner of 5% or
more of the outstanding Common Shares. Except as indicated below, all of such
Common Shares are owned directly, and the indicated person or entity has sole
voting and investment power. The extent to which a person will hold Common
Shares as opposed to Units is set forth in the footnotes below.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
COMMON SHARES PERCENTAGE OF ALL
AND UNITS OF ALL COMMON SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON SHARES(1) AND UNITS(2)
------------------------ ------------------ ---------------- -------------
<S> <C> <C> <C>
State Street Bank & Trust Co., as
trustee(3).............................. 19,645,472 7.86% 7.04%
Samuel Zell(4)(5)......................... 7,888,014 3.08 2.83
Timothy H. Callahan(4)(6)................. 510,584 * *
Richard D. Kincaid(4)..................... 48,143 * *
Michael A. Steele(4)...................... 50,124 * *
Stanley M. Stevens(4)(7).................. 348,996 * *
Jeffrey L. Johnson(4)..................... 12,072 * *
Sheli Z. Rosenberg(4)(8).................. 7,955,559 3.10 2.85
Thomas E. Dobrowski(9).................... 0 * *
James D. Harper(10)....................... 633 * *
Peter Linneman(11)........................ 3,326 * *
Jerry M. Reinsdorf(12).................... 3,626 * *
William M. Goodyear(13)................... 3,641 * *
David K. McKown(14)....................... 3,638 * *
H. Jon Runstad(15)(16).................... 4,348,945 1.71 1.56
Edwin N. Sidman(17)....................... 1,199,780 4.78 4.30
All trustees and executive officers as a ---------- ---- ----
group (15 persons)...................... 13,840,774 5.30 4.96
========== ==== ====
</TABLE>
- ---------------
* Less than 1%.
(1) Assumes Common Shares outstanding as of December 31, 1997. Assumes that all
Units and/or warrants beneficially held by the identified person (and no
other person) are redeemed and/or exchanged for Common Shares.
(2) Assumes a total of 279,190,093 Common Shares and Units outstanding as of
December 31, 1997 (250,030,403 Common Shares and 29,159,690 Units). Assumes
that all outstanding Units are redeemed for Common Shares.
(3) Includes 19,645,472 Common Shares held as trustee of three BellSouth
Corporation employee benefit plans. The business address of this
shareholder is Master Trust Dept., Solomon Willard Bldg., W5C, One
Enterprise Drive, North Quincy, Massachusetts 02171.
(4) The business address for this shareholder is Two North Riverside Plaza,
Chicago, Illinois 60606.
(5) Includes 7,886,675 Common Shares (assuming exchange of 6,048,130 Units)
held by the ZML Partners, ZFT Partnership, EGI Holdings, Inc., EGIL
Investments, Inc., Samstock/ZFT, L.L.C., Samstock/SZRT, L.L.C., and
Samstock/Alpha, L.L.C., which may be deemed to be beneficially owned by Mr.
Zell; however, Mr. Zell disclaims beneficial ownership of 3,983,492 Common
Shares, including Units exchangeable for Common Shares.
(6) Includes 324,816 Common Shares held by the ZML Partners which may be deemed
to be beneficially owned by Mr. Callahan as he is a director and/or
executive officer of such entity; however, Mr. Callahan disclaims
beneficial ownership of 309,433 of such Common Shares.
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(7) Includes 324,816 Common Shares held by the ZML Partners which may be deemed
to be beneficially owned by Mr. Stevens as he is a director and/or
executive officer of such entity; however, Mr. Stevens disclaims beneficial
ownership of 322,968 of such Common Shares, including Units exchangeable
for Common Shares.
(8) Includes 7,886,675 Common Shares (assuming exchange of 6,048,130 Units)
held by the ZML Partners, ZFT Partnership, EGI Holdings, Inc., EGIL
Investments, Inc., Samstock/ZFT, L.L.C., Samstock/SZRT, L.L.C., and
Samstock/Alpha, L.L.C., which may be deemed to be beneficially owned by Ms.
Rosenberg as she is a director and/or executive officer of such entities;
however, Ms. Rosenberg disclaims beneficial ownership of 7,886,675 of such
Common Shares, including Units exchangeable for Common Shares.
(9) The business address for this trustee is General Motors Investment
Management Corporation, 767 5th Avenue, 16th Floor, New York, New York
10153.
(10) The business address for this trustee is JDH Realty Company, 3250 Mary
Street, Suite 206, Coconut Grove, Florida 33133.
(11) The business address for this trustee is The Wharton School of The
University of Pennsylvania, 56 South 37th Street, Lauder-Fischer Hall,
Philadelphia, Pennsylvania 19104.
(12) The business address for this trustee is Chicago White Sox, 333 W. 35th
Street, Chicago, Illinois 60616.
(13) The business address for this trustee is Bank of America Illinois, 231
South LaSalle Street, Suite 1322, Chicago, Illinois 60697.
(14) The business address for this trustee is BankBoston, N.A., 100 Federal
Street, Boston, Massachusetts 02110.
(15) The business address for this trustee is Wright Runstad & Company, 1191
Second Avenue, Suite 2000, Seattle, Washington 98101.
(16) Includes 4,265,700 Common Shares (assuming exchange of 2,615,700 Units and
exercise of 1,650,000 warrants to purchase Common Shares) held by Wright
Runstad Asset Management L.P. and Wright Runstad Holdings L.P., which may
be deemed to be beneficially owned by Mr. Runstad; however, Mr. Runstad
disclaims beneficial ownership of 4,265,700 Common Shares, including Units
and warrants exchangeable for Common Shares.
(17) The business address for this trustee is 50 Rowes Wharf, Boston,
Massachusetts 02110.
(18) Includes 898,605 Common Shares (assuming exchange of 652,650 Units) held by
The Leventhal Family Limited Partnership (the "Partnership"). Paula Sidman,
Mr. Sidman's spouse, is a general partner of the Partnership, with a
one-third interest. Mrs. Sidman disclaims beneficial ownership of the
Common Shares and Units beneficially owned by the Partnership, except for
81,895 Common Shares and 217,550 Units in which she has a pecuniary
interest.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is designed to provide holders of Private Notes the
opportunity to acquire Exchange Notes which, unlike the Private Notes, will be
freely transferable under the Securities Act at all times (subject to certain
exceptions relating to the nature of the holders, as described below under the
caption "-- Resale of Exchange Notes"). The $1.25 Billion Exchange Notes and the
Exchange MOPPRS will only be transferable in blocks of at least $100,000
aggregate principal amount.
The $1.25 Billion Notes were sold by the Company on February 18, 1998 to
the Initial Purchasers (as defined in the Glossary) pursuant to a purchase
agreement, dated as of February 12, 1998, among the Company and the Initial
Purchasers. The MOPPRS were sold by the Company on February 18, 1998 to Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Initial Purchaser, pursuant to a
purchase agreement, dated as of February 12, 1998, between the Company and the
Initial Purchaser. The Initial Purchasers subsequently sold the $1.25 Billion
Notes and the MOPPRS to "qualified institutional buyers" ("QIBs"), as defined in
Rule 144A under the Securities Act ("Rule 144A"), in reliance on Rule 144A. As a
condition to the sale of the $1.25 Billion Notes and the MOPPRS, the Company and
the Initial Purchasers entered into a registration rights agreement, dated as of
February 12, 1998 (the "Registration Rights Agreement"). Pursuant to the
Registration Rights Agreement, the Company agreed that it would use its
reasonable best efforts to (i) cause an exchange offer registration statement
under the Securities Act with respect to the $1.25 Billion Exchange Notes and
the Exchange MOPPRS to be filed with the Commission and (ii) cause such
registration statement to remain effective under the Securities Act until the
closing of the Exchange Offer or such date as is otherwise required by law to
consummate the Exchange Offer on or before August 17, 1998. A copy of the
Registration Rights Agreement has been filed as an exhibit to the registration
statement of which this Prospectus is a part (the "Registration Statement"). If,
(i) because of any change in law or in currently prevailing interpretations of
the staff of the Commission, the Company is not permitted to effect the Exchange
Offer, (ii) the Exchange Offer is not consummated within 180 days of the Closing
Date, or (iii) in the case of any holder that participates in the Exchange
Offer, such holder does not receive Exchange Notes on the date of the exchange
that may be sold without restriction under state and federal securities laws
(other than due solely to the status of such holder as an affiliate of the
Company within the meaning of the Securities Act or as a broker-dealer), then in
each case, the Company will (x) promptly deliver to the holders written notice
thereof and (y) at the Company's sole expense (a) as promptly as practicable
(but in no event more than 60 days after so required or requested pursuant to
the Registration Rights Agreement), file a shelf registration statement covering
resales of the $1.25 Billion Notes and the MOPPRS (the "Shelf Registration
Statement"), (b) use its reasonable best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) use its
reasonable best efforts to keep effective the Shelf Registration Statement until
the earlier of two years (or, if Rule 144(k) is amended to provide a shorter
restrictive period, such shorter period) after the Closing Date or such time as
all of the applicable Notes have been sold thereunder. If the Company fails to
consummate the Exchange Offer with respect to the $1.25 Billion Notes and the
MOPPRS prior to August 17, 1998 or, if applicable, fails to fulfill its
obligations under the Registration Rights Agreement to obtain and maintain
effectiveness of the Shelf Registration Statement during specified time periods,
then liquidated damages will accrue on the principal amounts of the $1.25
Billion Notes and the MOPPRS at an annual rate of 0.50%.
The $180 Million Notes were sold by the Company in a private placement on
September 3, 1997 to Teachers Insurance and Annuity Association of America
("Teachers") pursuant to a Note Purchase Agreement, dated September 2, 1997,
between the Company and Teachers (the "Teachers Purchase Agreement"). Pursuant
to the Teachers Purchase Agreement, the Company agreed that, subject to and
following an additional offering of senior notes of the Company, it would file
with the Commission an exchange offer registration statement under the
Securities Act with respect to the Exchange Notes and use its best efforts to
cause such registration statement to be declared effective under the Securities
Act and remain effective until the closing of the Exchange Offer or such date as
is otherwise required by law to consummate the Exchange Offer on or before
, 1998. A copy of the Teachers Purchase Agreement has been filed
as an exhibit to the Registration Statement. If (i) the Company determines that
such an exchange offer
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<PAGE> 100
registration is not available or may not be consummated as soon as practicable
after the Expiration Date because it would violate applicable law or an
applicable interpretation of the staff of the Commission or (ii) in the opinion
of counsel to the holders of not less than 51% of the aggregate principal amount
of the outstanding $180 Million Notes, a registration statement must be filed
and a prospectus must be delivered in connection with any offering or sale of
$180 Million Notes, then, in each case, the Company will use its best efforts to
cause to be filed, as soon as practicable after such determination by, or notice
of opinion of counsel is given to, the Company, a shelf registration statement
covering resales of the $180 Million Notes and to have such shelf registration
statement declared effective by the Commission.
The Exchange Offer is intended to satisfy the Company's obligations under
the Registration Rights Agreement and the Teachers Purchase Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1.25 Billion Exchange Notes, Exchange MOPPRS and
$180 Million Exchange Notes in exchange for an equal aggregate principal amount
of outstanding $1.25 Billion Notes, MOPPRS and $180 Million Notes, respectively,
validly tendered pursuant to the Exchange Offer and not withdrawn prior to the
Expiration Date. Private Notes may only be tendered in integral multiples of
$1,000 principal amount and, in the case of the $1.25 Billion Notes and the
Exchange MOPPRS, minimum denominations of $100,000 aggregate principal amount.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting the
transfer thereof and (ii) holders of the Exchange Notes will not be entitled to
any of the registration rights of holders of Private Notes under the
Registration Rights Agreement or the Teachers Purchase Agreement, as applicable,
which rights will terminate upon the consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of, the
Indenture, which also authorized the issuance of the Private Notes, such that
each of the 2003 Notes, the 6.375% Exchange Notes due 2003, the 2005 Notes, the
6.625% Exchange Notes due 2005, the 2008 Notes, the 6.750% Exchange Notes due
2008, the 2018 Notes, the 7.250% Exchange Notes due 2018, the MOPPRS, the
Exchange MOPPRS, the 2004 Senior Notes, the 7.24% Exchange Notes due 2004, the
2005 Senior Notes, the 7.36% Exchange Notes due 2005, the 2006 Senior Notes, the
7.44% Exchange Notes due 2006, the 2007 Senior Notes and the 7.41% Exchange
Notes due 2007 will respectively be treated as a single series under the
Indenture.
In the Letter of Transmittal, holders of $1.25 Billion Notes or MOPPRS, as
the case may be, whose $1.25 Billion Notes or MOPPRS are accepted for exchange
will waive the right to receive any payment in respect of interest on the $1.25
Billion Notes or MOPPRS, as the case may be, accrued from the later of February
18, 1998 or the Interest Payment Date immediately preceding the date of issuance
of the $1.25 Billion Exchange Notes or Exchange MOPPRS, as applicable, to the
date of issuance of the $1.25 Billion Exchange Notes or Exchange MOPPRS, as
applicable. In the Letter of Transmittal, holders of $180 Million Notes whose
$180 Million Notes are accepted for exchange will waive the right to receive any
payment in respect of interest on the $180 Million Notes accrued from the
Interest Payment Date immediately preceding the date of issuance of the $180
Million Exchange Notes (currently expected to be the Interest Payment Date on
March 1, 1998) to the date of issuance of the $180 Million Exchange Notes.
As of the date of this Prospectus, $300 million in aggregate principal
amount of the 2003 Notes is outstanding, $400 million in aggregate principal
amount of the 2005 Notes is outstanding, $300 million in aggregate principal
amount of the 2008 Notes is outstanding, $250 million in aggregate principal
amount of the 2018 Notes is outstanding, $250 million in aggregate principal
amount of the MOPPRS is outstanding, $30 million in aggregate principal amount
of the 2004 Senior Notes is outstanding, $50 million in aggregate principal
amount of the 2005 Senior Notes is outstanding, $50 million in aggregate
principal amount of the
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2006 Senior Notes is outstanding and $50 million in aggregate principal amount
of the 2007 Senior Notes is outstanding. Only a registered holder of the Private
Notes (or such holder's legal representative or attorney-in-fact), as reflected
on the records of the Trustee under the Indenture, may participate in the
Exchange Offer. There will be no fixed record date for determining registered
holders of the Private Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters'
rights under the Delaware Revised Uniform Limited Partnership Act or the
Indenture in connection with the Exchange Offer. The Company intends to conduct
the Exchange Offer in accordance with the provisions of the Registration Rights
Agreement, the applicable provisions of the Teachers Purchase Agreement and the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, and if, the Company has given oral or written notice of acceptance to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purpose of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will notify the registered
holders through a press release or other public announcement thereof, each prior
to 9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay, extension,
termination or amendment will be followed as promptly as practicable by notice
thereof to the registered holders through a press release or other public
announcement. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and the Company will extend the Exchange Offer to the extent
required by the rules promulgated under the Exchange Act.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than as required by
law or by making a timely release to an appropriate news agency.
INTEREST ON THE EXCHANGE NOTES AND ACCRUED INTEREST ON THE PRIVATE NOTES
The 6.375% Exchange Notes due 2003, the 6.625% Exchange Notes due 2005, the
6.750% Exchange Notes due 2008 and the 7.250% Exchange Notes due 2018 will bear
interest at an annual rate of 6.375%, 6.625%, 6.750% and 7.250%, respectively,
payable semi-annually in arrears on February 15 and August 15 of each year,
commencing August 15, 1998. The annual interest rate on the Exchange MOPPRS to
the Remarketing Date is 6.376%, payable semi-annually in arrears on February 15
and August 15 of each year,
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commencing August 15, 1998. The 7.24% Exchange Notes due 2004, the 7.36%
Exchange Notes due 2005, the 7.44% Exchange Notes due 2006 and the 7.41%
Exchange Notes due 2007 will bear interest at an annual rate of 7.24%, 7.36%,
7.44% and 7.41%, respectively, payable semi-annually in arrears on March 1 and
September 1 of each year, commencing September 1, 1998. The Exchange Notes will
bear interest from their date of issuance. Interest on the Private Notes which
are exchanged for the Exchange Notes will cease to accrue on the day preceding
the date of issuance of the Exchange Notes. Interest payable on the first
Interest Payment Date with respect to the Exchange Notes will include accrued
but unpaid interest due on the Private Notes (which they replace) for the period
from the later of (i) with respect to the $1.25 Billion Exchange Notes and the
Exchange MOPPRS, February 18, 1998 or (ii) the Interest Payment Date immediately
preceding the date of issuance of the applicable Exchange Notes (currently
expected to be the Interest Payment Date of March 1, 1998 with respect to the
$180 Million Notes) to the date of such issuance and will be paid to the persons
in whose names the applicable Exchange Notes are registered in the security
register applicable to the Exchange Notes as of the close of business on the
date 15 days prior to such payment date.
RESALE OF THE EXCHANGE NOTES
Based upon interpretations by the staff of the Commission set forth in
certain no-action letters issued to third parties, the Company believes that a
holder who exchanges Private Notes for Exchange Notes in the ordinary course of
business, who is not participating, does not intend to participate, and has no
arrangement with any person to participate, in a distribution of the Exchange
Notes, and who is not an "affiliate" of the Company within the meaning of Rule
405 of the Securities Act, will be allowed to resell Exchange Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. If, however, any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enumerated in certain no-action
letters issued to third parties and instead must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction, unless an exemption from registration is otherwise
available. In addition, each broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities must acknowledge that it
will deliver a prospectus in connection with any resale of Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Such broker-dealer may
use this Prospectus in connection with resales of any Exchange Notes received in
exchange for Private Notes acquired by such broker-dealer (other than Private
Notes acquired directly from the Company) as a result of market-making or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed to make this Prospectus available to any such broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any such resale for a period not to exceed 180 days after the
closing of the Exchange Offer. The Company will undertake to update such
Prospectus during such 180-day period. See "Plan of Distribution."
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile or an
Agent's Message (as defined below) to the Exchange Agent at the address set
forth below under "-- Exchange Agent" for receipt prior to the Expiration Date.
In addition, prior to the Expiration Date, either (i) certificates for such
Private Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Private Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company, New York, New York
("DTC"), pursuant to the procedure for book-entry transfer described below, must
be received by the Exchange Agent or (iii) the holder must comply with the
guaranteed delivery procedures described below.
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A tender of Private Notes by a holder that is not withdrawn prior to the
Expiration Date will constitute an agreement between such holder and the Company
in accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY
THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY PRIVATE
NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner either must make appropriate arrangements to register
ownership of the Private Notes in such owner's name or must obtain a properly
completed bond power from the registered holder prior to completing and
executing the Letter of Transmittal and delivering such owner's Private Notes.
The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder to whom Exchange Notes
are to be issued directly and who has not completed the box titled "Special
Delivery Instructions" nor the box titled "Special Registration Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be made
by a member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder exactly as such registered holder's name appears on such
Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may utilize DTC's Automated Tender Offer
Program ("ATOP") to tender Private Notes. Accordingly, participants in DTC's
ATOP may, in lieu of physically completing and signing the Letter of Transmittal
and delivering it to the Exchange Agent, electronically transmit their
acceptance of the Exchange Offer by causing DTC to transfer the Private Notes to
the Exchange Agent in accordance with DTC's ATOP procedures for transfer. DTC
will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received an express acknowledgment from a participant in DTC's ATOP
that is tendering Private Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal (or, in the case of an Agent's Message
relating to guaranteed delivery, that such
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participant has received and agrees to be bound by the applicable notice of
guaranteed delivery), and that the agreement may be enforced against such
participant.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be resolved
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Private Notes, none of the Company, the Exchange Agent or any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer, the Company reserves the right in its sole
discretion to purchase or make offers for any Private Notes that remain
outstanding subsequent to the Expiration Date and, to the extent permitted by
applicable law, to purchase Private Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) any Exchange Notes acquired in exchange for
Private Notes tendered thereby are being acquired in the ordinary course of
business of the person receiving such Exchange Notes, (ii) the person receiving
such Exchange Notes is not engaging in and does not intend to engage in a
distribution of the Exchange Notes, (iii) the person receiving such Exchange
Notes does not have an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and (iv) neither the
holder nor any other person receiving the Exchange Notes from the holder is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company. If
the holder is a broker-dealer that will receive Exchange Notes for its own
account in exchange for Private Notes that were acquired as a result of
market-making activities or other trading activities, such holder will be
required to acknowledge in the Letter of Transmittal that such holder will
deliver a prospectus in connection with any resale of such Exchange Notes. Such
acknowledgement and prospectus delivery by such holder will not be deemed to
constitute an admission by such holder that it is an "underwriter" within the
meaning of the Securities Act. By tendering, each holder of Private Notes will
be required to acknowledge that, if it is participating in the Exchange Offer
for the purpose of distributing the Exchange Notes, (i) it cannot rely on the
position of the staff of the Commission in certain no-action letters and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes, in which case the
registration statement must contain the selling security holder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Securities Act and (ii) failure to comply with such requirements in such
instance could result in such holder incurring liability under the Securities
Act for which it is not indemnified by the Company.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at DTC pursuant to the book-entry transfer procedures described below, such
Private Notes will be credited to an account maintained with DTC) as promptly as
practicable.
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BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes with DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus, and any financial institution
that is a participant in DTC's system may make book-entry delivery of Private
Notes by causing DTC to transfer such Private Notes into the Exchange Agent's
account at DTC in accordance with DTC's procedures for transfer. However,
although delivery of Private Notes may be effected through book-entry transfer
at DTC, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth below
under "-- Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available, (ii) who cannot deliver their Private Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date or (iii) who are unable to complete the procedure
for book-entry transfer on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed notice of
guaranteed delivery (a "Notice of Guaranteed Delivery") substantially in
the form provided by the Company (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the certificate
number(s) of such Private Notes and the principal amount of Private Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three (3) New York Stock Exchange, Inc. ("NYSE") trading days
after the Expiration Date, either (x) the Letter of Transmittal (or
facsimile thereof) together with the Private Notes (or a Book-Entry
Confirmation) in proper form for transfer will be deposited by the Eligible
Institution with the Exchange Agent or (y) an Agent's Message will be
properly transmitted to the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) for all physically tendered shares
of Private Notes, in proper form for transfer, or Book-Entry Confirmation,
as the case may be, and all other documents required by the Letter of
Transmittal or a properly transmitted Agent's Message, are received by the
Exchange Agent within three (3) NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date. To withdraw a tender of
Private Notes in the Exchange Offer, a written or facsimile transmission notice
of withdrawal must be received by the Exchange Agent at its address set forth
herein prior to the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Private Notes to be
withdrawn, (ii) identify the Private Notes to be withdrawn (including the
certificate number or numbers) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer, and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "-- Procedures for Tendering" at any time prior to the Expiration
Date.
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TERMINATION OF CERTAIN RIGHTS
All registration rights under the Registration Rights Agreement and the
Teachers Purchase Agreement accorded to holders of the Private Notes eligible to
participate in the Exchange Offer (and all rights to receive additional interest
due to failure to consummate the Exchange Offer on a timely basis, if the
Exchange Offer is not consummated on or before August 17, 1998, with respect to
the $1.25 Billion Notes and the MOPPRS) will terminate upon consummation of the
Exchange Offer except with respect to the Company's duty to keep the
Registration Statement effective until the closing of the Exchange Offer and,
for a period of 180 days after the closing of the Exchange Offer, to provide
copies of the latest version of the Prospectus to any broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any resale by such broker-dealer of Exchange Notes received for
its own account pursuant to the Exchange Offer in exchange for Private Notes
that were acquired for its own account as a result of market-making or other
trading activities.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Facsimile Transmission:
(For Eligible Institutions Only)
(617) 664-5290
Confirm by Telephone:
(617) 664-5249
<TABLE>
<CAPTION>
By Mail: By Overnight Delivery: By Hand:
<S> <C> <C>
State Street Bank and Trust State Street Bank and Trust State Street Bank and Trust
Company Company Company
P.O. Box 778 Two International Place Two International Place
Boston, Massachusetts 4th Floor 4th Floor
02102-0778 Boston, Massachusetts 02110 Boston, Massachusetts 02110
Attention: Corporate Trust Attention: Corporate Trust Window Attention: Corporate Trust
Window Window
</TABLE>
State Street Bank and Trust Company also serves as Trustee under the
Indenture.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and their affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable, out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$ . Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
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The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer tax (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act or
to a person whom the seller reasonably believes is a qualified institutional
buyer purchasing for its own account in a transaction meeting the requirements
of Rule 144A, (ii) to the Company or any subsidiary thereof, (iii) pursuant to
an effective registration statement under the Securities Act or (iv) to
institutional accredited investors for investment purposes and not with a view
to, or for offer or sale in connection with, any distribution in violation of
the Securities Act, in a transaction exempt from the registration requirements
of the Securities Act, and, in each case, in accordance with all other
applicable securities laws and the transfer restrictions set forth in the
Indenture.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under the Indenture, a copy of which is
filed as an exhibit to the Registration Statement and which will be made
available upon request. The terms of the Exchange Notes include those provisions
contained in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Exchange Notes are subject to all such terms, and holders of Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of certain provisions of the Exchange Notes and the
Indenture does not purport to be complete and is subject to and qualified in its
entirety by reference to the actual provisions of the Exchange Notes and the
Indenture. As used in this section, the term "Company" means EOP Operating
Limited Partnership and not any of its Subsidiaries unless otherwise expressly
stated or the context otherwise requires.
GENERAL
Each of the 6.375% Exchange Notes due 2003, the 6.625% Exchange Notes due
2005, the 6.750% Exchange Notes due 2008, the 7.250% Exchange Notes due 2018,
the Exchange MOPPRS, the 7.24% Exchange Notes due 2004, the 7.36% Exchange Notes
due 2005, the 7.44% Exchange Notes due 2006 and the 7.41% Exchange Notes due
2007 constitute a separate series of securities under the Indenture and is
limited to an aggregate principal amount of $300 million, $400 million, $300
million, $250 million, $250 million, $30 million, $50 million, $50 million and
$50 million, respectively. The Exchange Notes will be direct, unsecured and
unsubordinated obligations of the Company and will rank equally with each other
and with all other unsecured and unsubordinated indebtedness of the Company from
time to time outstanding. The Exchange Notes will be effectively subordinated to
mortgages and other secured indebtedness of the Company to the extent of the
value of the property securing such indebtedness. The Exchange Notes also will
be effectively subordinated, in the context of a bankruptcy proceeding, to all
existing and future third-party indebtedness and other liabilities of the
Company's Subsidiaries. As of September 30, 1997, on a Pro Forma Basis, such
secured indebtedness of the Company and its Subsidiaries aggregated
approximately $2.0 billion and the total liabilities of the Company's
Subsidiaries was approximately $2.2 billion. See "Capitalization." Subject to
certain limitations set forth in the Indenture, and as described under
"-- Certain Covenants -- Limitations on Incurrence of Debt" below, the Indenture
will permit the Company to incur additional secured and unsecured indebtedness.
Such additional indebtedness may consist of, but is not limited to, indebtedness
issued under the Indenture.
Unless redeemed prior to maturity as described under "-- Optional
Redemption," the 6.375% Exchange Notes due 2003 will mature on February 15,
2003; the 6.625% Exchange Notes due 2005 will mature on February 15, 2005; the
6.750% Exchange Notes due 2008 will mature on February 15, 2008; the 7.250%
Exchange Notes due 2018 will mature on February 15, 2018; the 7.24% Exchange
Notes due 2004 will mature on September 1, 2004; the 7.36% Exchange Notes due
2005 will mature on September 1, 2005; the 7.44% Exchange Notes due 2006 will
mature on September 1, 2006; and the 7.41% Exchange Notes due 2007 will mature
on September 1, 2007 (each, a "Stated Maturity Date"). The stated maturity date
of the Exchange MOPPRS is February 15, 2012 (also a "Stated Maturity Date"). The
Exchange Notes are not subject to any sinking fund provisions.
Except as described under "-- Certain Covenants -- Limitations on
Incurrence of Debt" and "-- Merger, Consolidation or Sale" below, the Indenture
does not contain any other provisions that would limit the ability of the
Company to incur indebtedness or that would afford holders of the Exchange Notes
protection in the event of (i) a highly leveraged or similar transaction
involving the Company, the management of the Company or the Trust, or any
Subsidiary of any of them, (ii) a change of control of the Company or the Trust
or (iii) a reorganization, restructuring, merger or similar transaction
involving the Company that may adversely affect the holders of the Exchange
Notes. In addition, subject to the limitations set forth under "-- Merger,
Consolidation or Sale," the Company may, in the future, enter into certain
transactions such as the sale of all or substantially all of its assets or the
merger or consolidation of the Company that would increase the amount of the
Company's indebtedness or substantially reduce or eliminate the Company's
assets, which may have an adverse effect on the Company's ability to service its
indebtedness,
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including the Exchange Notes. The Company and its management have no present
intention of engaging in a highly leveraged or similar transaction involving the
Company.
PRINCIPAL AND INTEREST
The 6.375% Exchange Notes due 2003, the 6.625% Exchange Notes due 2005, the
6.750% Exchange Notes due 2008 and the 7.250% Exchange Notes due 2018 will bear
interest at an annual rate of 6.375%, 6.625%, 6.750% and 7.250%, respectively,
payable semi-annually in arrears on February 15 and August 15 of each year,
commencing August 15, 1998 (each, an "Interest Payment Date"), and on the
applicable Stated Maturity Date or date of earlier redemption or accelerated
payment, as the case may be (each, a "Maturity Date"). The annual interest rate
on the Exchange MOPPRS to the Remarketing Date is 6.376%, payable semi-annually
in arrears on February 15 and August 15 of each year, commencing August 15, 1998
(each, also an "Interest Payment Date") and on the applicable Stated Maturity
Date or date of accelerated payment (each, also a "Maturity Date"). The 7.24%
Exchange Notes due 2004, the 7.36% Exchange Notes due 2005, the 7.44% Exchange
Notes due 2006 and the 7.41% Exchange Notes due 2007 will bear interest at an
annual rate of 7.24%, 7.36%, 7.44% and 7.41%, respectively, payable
semi-annually in arrears on March 1 and September 1 of each year, commencing
September 1, 1998 (each, also an "Interest Payment Date"), and on the applicable
Stated Maturity Date or date of earlier redemption or accelerated payment, as
the case may be (each, also a "Maturity Date"). The Exchange Notes will bear
interest from their date of issuance. Interest on the Private Notes which are
exchanged for the Exchange Notes will cease to accrue on the day preceding the
date of issuance of the Exchange Notes. Interest payable on the first Interest
Payment Date with respect to the Exchange Notes will include accrued but unpaid
interest due on the Private Notes (which they replace) for the period from the
later of (i) with respect to the $1.25 Billion Exchange Notes and the Exchange
MOPPRS, February 18, 1998, and with respect to the $180 Million Exchange Notes,
September 3, 1997, or (ii) the Interest Payment Date immediately preceding the
date of issuance of the Exchange Notes (currently expected to be the Interest
Payment Date of March 1, 1998, with respect to the $180 Million Notes) to the
date of such issuance and will be paid to the persons in whose names the
applicable Exchange Notes are registered in the security register applicable to
the Exchange Notes (the "Holders") as of the close of business on the date 15
days prior to such payment day, regardless of whether such day is a Business
Day, as defined below (each, a "Regular Record Date"). Interest on the Exchange
Notes will be computed on the basis of a 360-day year composed of twelve 30-day
months.
The principal of, and Make-Whole Amount (as defined below), if any, with
respect to, each Exchange Note payable on the applicable Maturity Date will be
paid against presentation and surrender of such Exchange Note at the corporate
trust office of the Trustee, located initially at Two International Place,
Financial Services, Corporate Trust Department, Boston, Massachusetts 02110, or
at the corporate trust window of the Trustee initially maintained at 61
Broadway, Concourse Level, New York, New York 10006, in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts.
If any Interest Payment Date or a Maturity Date falls on a day that is not
a Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or such Maturity Date, as the case may be, to such next Business Day. "Business
Day" means any day, other than a Saturday or Sunday, on which banking
institutions in New York, New York, and Boston, Massachusetts, are open for
business.
OPTIONAL REDEMPTION
The Exchange Notes other than the Exchange MOPPRS may be redeemed at any
time at the option of the Company, in whole or from time to time in part
(provided that the remaining principal amount of any $1.25 Billion Exchange Note
is at least $100,000), at a redemption price equal to the sum of (i) 100% of the
principal amount of the Exchange Notes being redeemed plus accrued interest
thereon to the redemption date and (ii) the Make-Whole Amount, if any, with
respect to such Exchange Notes (collectively, the "Redemption Price"); provided,
however, that interest installments due on an Interest Payment Date which is
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on or prior to the Redemption Date will be payable to the Holders of such
Exchange Notes (or one or more predecessor Exchange Notes) as of the close of
business on the Record Date preceding such Interest Payment Date.
If notice has been given as provided in the Indenture and funds for the
redemption of any Exchange Notes called for redemption shall have been made
available on the redemption date referred to in such notice, such Exchange Notes
will cease to bear interest on the date fixed for such redemption specified in
such notice and the only right of the Holders of such Exchange Notes will be to
receive payment of the Redemption Price.
Notice of any optional redemption of any Exchange Notes will be given to
Holders at their addresses, as shown in the security register for the Exchange
Notes, not more than 60 nor less than 30 days prior to the date fixed for
redemption. The notice of redemption will specify, among other items, the
Redemption Price and the principal amount of Exchange Notes held by such Holder
to be redeemed.
If less than all the Exchange Notes are to be redeemed at the option of the
Company, the Company will notify the Trustee at least 45 days prior to giving
notice of redemption (or such shorter period as is satisfactory to the Trustee)
of the series and aggregate principal amount of Exchange Notes to be redeemed
and their redemption date. The Trustee shall select, in such manner as it shall
deem fair and appropriate, Exchange Notes to be redeemed of such series in whole
or in part.
As used herein:
"Make-Whole Amount" means, in connection with any optional redemption
or accelerated payment of any Exchange Notes, the excess, if any, of (i)
the aggregate present value as of the date of such redemption or
accelerated payment of each dollar of principal being redeemed or paid and
the amount of interest (exclusive of interest accrued to the date of
redemption or accelerated payment) that would have been payable in respect
of each such dollar if such redemption or accelerated payment had not been
made, determined by discounting, on a semi-annual basis, such principal and
interest at the Reinvestment Rate (determined on the third Business Day
preceding the date such notice of redemption or accelerated payment is
given) from the respective dates on which such principal and interest would
have been payable if such redemption or accelerated payment had not been
made to the date of redemption or accelerated payment, over (ii) the
aggregate principal amount of the Exchange Notes being redeemed or paid.
"Reinvestment Rate" means .25% plus the arithmetic mean of the yields
under the heading "Week Ending" published in the most recent Statistical
Release under the caption "Treasury Constant Maturities" for the maturity
(rounded to the nearest month) corresponding to the remaining life to
maturity, as of the payment date of the principal being redeemed or paid.
If no maturity exactly corresponds to such maturity, yields for the two
published maturities most closely corresponding to such maturity shall be
calculated pursuant to the immediately preceding sentence and the
Reinvestment Rate shall be interpolated or extrapolated from such yields on
a straight-line basis, rounding in each of such relevant periods to the
nearest month. For the purposes of calculating the Reinvestment Rate, the
most recent Statistical Release published prior to the date of
determination of the Make-Whole Amount shall be used. If the format or
content of the Statistical Release changes in a manner that precludes
determination of the Treasury yield in the above manner, then the Treasury
yield shall be determined in the manner that most closely approximates the
above manner, as reasonably determined by the Company.
"Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which reports yields on actively traded United
States government securities adjusted to constant maturities, or, if such
statistical release is not published at the time of any determination under
the Indenture, then such other reasonably comparable index which shall be
designated by the Company.
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TENDER OF EXCHANGE MOPPRS; REMARKETING
The following description sets forth the terms and conditions of the
remarketing of the Exchange MOPPRS, in the event that the Remarketing Dealer
elects to purchase the Exchange MOPPRS and remarkets the Exchange MOPPRS on the
Remarketing Date.
MANDATORY TENDER. Provided that the Remarketing Dealer gives notice to the
Company and the Trustee on a Business Day not later than five Business Days
prior to the Remarketing Date of its intention to purchase the Exchange MOPPRS
for remarketing (the "Notification Date"), each Exchange MOPPRS will be
automatically tendered, or deemed tendered, to the Remarketing Dealer for
purchase on the Remarketing Date, except in the circumstances described under
"-- Repurchase of Exchange MOPPRS" or "--Redemption of Exchange MOPPRS" below.
The purchase price for the tendered Exchange MOPPRS to be paid by the
Remarketing Dealer will equal 100% of the principal amount thereof. See
"-- Notification of Results; Settlement" below. When the Exchange MOPPRS are
tendered for remarketing, the Remarketing Dealer may remarket the Exchange
MOPPRS for its own account at varying prices to be determined by the Remarketing
Dealer at the time of each sale. From and after the Remarketing Date, the
Exchange MOPPRS will bear interest at the Interest Rate to Maturity. If the
Remarketing Dealer elects to remarket the Exchange MOPPRS, the obligation of the
Remarketing Dealer to purchase the Exchange MOPPRS on the Remarketing Date is
subject, among other things, to the conditions that, since the Notification
Date, no material adverse change in the condition of the Company and its
Subsidiaries, considered as one enterprise, shall have occurred and that no
Event of Default (as defined in the Indenture), or any event which, with the
giving of notice or passage of time, or both, would constitute an Event of
Default, with respect to the Exchange MOPPRS shall have occurred and be
continuing. If for any reason the Remarketing Dealer does not purchase all
tendered Exchange MOPPRS on the Remarketing Date, the Company will be required
to repurchase the Exchange MOPPRS from the Beneficial Owners thereof at a price
equal to the principal amount thereof plus all accrued and unpaid interest, if
any, on the Exchange MOPPRS to the Remarketing Date. See "-- Repurchase of
Exchange MOPPRS" below.
The Interest Rate to Maturity shall be determined by the Remarketing Dealer
by 3:30 p.m., New York City time, on the third Business Day immediately
preceding the Remarketing Date (the "Determination Date") to the nearest one
hundred-thousandth (0.00001) of one percent per annum and will be equal to
5.488% (the "Base Rate") plus the Applicable Spread (as defined below) which
will be based on the Dollar Price (as defined below) of the Exchange MOPPRS.
The "Applicable Spread" will be the lowest bid indication, expressed as a
spread (in the form of a percentage or in basis points) above the Base Rate,
obtained by the Remarketing Dealer on the Determination Date from the bids
quoted by five Reference Corporate Dealers (as defined below) for the full
aggregate principal amount of the Exchange MOPPRS at the Dollar Price, but
assuming (i) an issue date equal to the Remarketing Date, with settlement on
such date without accrued interest, (ii) a maturity date equal to the Stated
Maturity Date of the Exchange MOPPRS, and (iii) a stated annual interest rate,
payable semiannually on each Interest Payment Date, equal to the Base Rate plus
the spread bid by the applicable Reference Corporate Dealer. If fewer than five
Reference Corporate Dealers bid as described above, then the Applicable Spread
shall be the lowest of such bid indications obtained as described above. The
Interest Rate to Maturity announced by the Remarketing Dealer, absent manifest
error, shall be binding and conclusive upon the Beneficial Owners and Holders of
the Exchange MOPPRS, the Company and the Trustee.
"Dollar Price" means, with respect to the Exchange MOPPRS, the present
value, as of the Remarketing Date, of the Remaining Scheduled Payments (as
defined below) discounted to the Remarketing Date, on a semiannual basis
(assuming a 360-day year consisting of twelve 30-day months), at the Treasury
Rate (as defined below).
"Reference Corporate Dealers" mean leading dealers of publicly traded debt
securities of the Company in The City of New York (which may include the
Remarketing Dealer or one of its affiliates) selected by the Remarketing Dealer.
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"Treasury Rate" means, with respect to the Remarketing Date, the rate per
annum equal to the semiannual equivalent yield to maturity or interpolated (on a
day count basis) yield to maturity of the Comparable Treasury Issues (as defined
below), assuming a price for the Comparable Treasury Issues (expressed as a
percentage of its principal amount), equal to the Comparable Treasury Price (as
defined below) for such Remarketing Date.
"Comparable Treasury Issues" means the United States Treasury security or
securities selected by the Remarketing Dealer as having an actual or
interpolated maturity or maturities comparable to the remaining term of the
Exchange MOPPRS being purchased.
"Comparable Treasury Price" means, with respect to the Remarketing Date,
(a) the offer prices for the Comparable Treasury Issues (expressed in each case
as a percentage of its principal amount) on the Determination Date, as set forth
on "Telerate Page 500" (or such other page as may replace Telerate Page 500) or
(b) if such page (or any successor page) is not displayed or does not contain
such offer prices on such Business Day, (i) the average of the Reference
Treasury Dealer Quotations for such Remarketing Date, after excluding the
highest and lowest of such Reference Treasury Dealer Quotations, or (ii) if the
Remarketing Dealer obtains fewer than four such Reference Treasury Dealer
Quotations, the average of all such Reference Treasury Dealer Quotations.
"Telerate Page 500" means the display designated as "Telerate Page 500" on Dow
Jones Markets Limited (or such other page as may replace Telerate Page 500 on
such service) or such other service displaying the offer prices specified in (a)
above as may replace Dow Jones Markets Limited. "Reference Treasury Dealer
Quotations" means, with respect to each Reference Treasury Dealer and the
Remarketing Date, the offer prices for the Comparable Treasury Issues (expressed
in each case as a percentage of its principal amount) quoted to the Remarketing
Dealer by such Reference Treasury Dealer by 3:30 p.m., New York City time, on
the Determination Date.
"Reference Treasury Dealer" means each of Credit Suisse First Boston
Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and Salomon Brothers Inc and
their respective successors; provided, however, that if any of the foregoing or
their affiliates shall cease to be a primary U.S. Government securities dealer
in The City of New York (a "Primary Treasury Dealer"), the Remarketing Dealer
shall substitute therefor another Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to the Exchange MOPPRS,
the remaining scheduled payments of the principal thereof and interest thereon,
calculated at the Base Rate only, that would be due after the Remarketing Date
to and including the Stated Maturity Date; provided, however, that if the
Remarketing Date is not an Interest Payment Date with respect to the Exchange
MOPPRS, the amount of the next succeeding scheduled interest payment thereon,
calculated at the Base Rate only, will be reduced by the amount of interest
accrued thereon, calculated at the Base Rate only, to the Remarketing Date.
NOTIFICATION OF RESULTS; SETTLEMENT. Provided the Remarketing Dealer has
previously notified the Company and the Trustee on the Notification Date of its
intention to purchase all tendered Exchange MOPPRS on the Remarketing Date, the
Remarketing Dealer will notify the Company, the Trustee and DTC by telephone,
confirmed in writing (which may include facsimile or other electronic
transmission), by 4:00 p.m., New York City time, on the Determination Date, of
the Interest Rate to Maturity.
All of the tendered Exchange MOPPRS will be automatically delivered to the
account of the Trustee, by book-entry through DTC pending payment of the
purchase price therefor, on the Remarketing Date.
In the event that the Remarketing Dealer purchases the tendered Exchange
MOPPRS on the Remarketing Date, the Remarketing Dealer will make or cause the
Trustee to make payment to the DTC Participant of each tendering Beneficial
Owner of Exchange MOPPRS, by book entry through DTC by the close of business on
the Remarketing Date against delivery through DTC of such Beneficial Owner's
tendered Exchange MOPPRS, of 100% of the principal amount of the tendered
Exchange MOPPRS that have been purchased for remarketing by the Remarketing
Dealer. If the Remarketing Dealer does not purchase all of the Exchange MOPPRS
on the Remarketing Date, it will be the obligation of the Company to make or
cause to be made such payment for the Exchange MOPPRS, as described below under
"Repurchase." In any case, the Company will make or cause the Trustee to make
payment of interest to each Beneficial Owner of Exchange
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MOPPRS due on the Remarketing Date by book-entry through DTC by the close of
business on the Remarketing Date.
The transactions described above will be executed on the Remarketing Date
through DTC in accordance with the procedures of DTC, and the accounts of the
respective DTC Participants will be debited and credited and the Exchange MOPPRS
delivered by book entry as necessary to effect the purchases and sales thereof.
Transactions involving the sale and purchase of Exchange MOPPRS remarketed
by the Remarketing Dealer on and after the Remarketing Date will settle in
immediately available funds through DTC's Same-Day Funds Settlement System.
The tender and settlement procedures described above, including provisions
for payment by purchasers of Exchange MOPPRS in the remarketing or for payment
to selling Beneficial Owners of tendered Exchange MOPPRS, may be modified to the
extent required by DTC or to the extent required to facilitate the tender and
remarketing of Exchange MOPPRS in certificated form, if the book-entry system is
no longer available for the Exchange MOPPRS at the time of the remarketing. In
addition, the Remarketing Dealer may, in accordance with the terms of the
Indenture, modify the tender and settlement procedures set forth above in order
to facilitate the tender and settlement process.
As long as DTC's nominee holds the certificates representing any Exchange
MOPPRS in the book-entry system of DTC, no certificates for such Exchange MOPPRS
will be delivered by any selling Beneficial Owner to reflect any transfer of
such Exchange MOPPRS effected in the remarketing. In addition, under the terms
of the Exchange MOPPRS and the Remarketing Agreement (described below), the
Company has agreed that, notwithstanding any provision to the contrary set forth
in the Indenture, (i) it will use its best efforts to maintain the Exchange
MOPPRS in book-entry form with DTC or any successor thereto and to appoint a
successor depositary to the extent necessary to maintain the Exchange MOPPRS in
book-entry form, and (ii) it will waive any discretionary right it otherwise has
under the Indenture to cause the Exchange MOPPRS to be issued in certificated
form.
For further information with respect to transfers and settlement through
DTC, see "-- Global Securities" below.
THE REMARKETING DEALER. The Company and the Remarketing Dealer have entered
into a Remarketing Agreement, the general terms and provisions of which are
summarized below.
The Remarketing Dealer will not receive any fees or reimbursement of
expenses from the Company in connection with the remarketing.
The Company has agreed to indemnify the Remarketing Dealer against certain
liabilities, including liabilities under the Securities Act, arising out of or
in connection with its duties under the Remarketing Agreement.
In the event that the Remarketing Dealer elects to remarket the Exchange
MOPPRS as described herein, the obligation of the Remarketing Dealer to purchase
Exchange MOPPRS from tendering Beneficial Owners of Exchange MOPPRS will be
subject to several conditions precedent set forth in the Remarketing Agreement,
including the conditions that, since the Notification Date, no material adverse
change in the condition of the Company and its Subsidiaries, considered as one
enterprise, shall have occurred, and that no Event of Default (as defined in the
Indenture), or any event which, with the giving of notice or passage of time, or
both, would constitute an Event of Default, with respect to the Exchange MOPPRS
shall have occurred and be continuing. In addition, the Remarketing Agreement
provides for the termination thereof, or redetermination of the Interest Rate to
Maturity, by the Remarketing Dealer on or before the Remarketing Date, upon the
occurrence of certain events as set forth in the Remarketing Agreement.
No Holder or Beneficial Owner of any Exchange MOPPRS shall have any rights
or claims under the Remarketing Agreement or against the Remarketing Dealer as a
result of the Remarketing Dealer not purchasing such Exchange MOPPRS.
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The Remarketing Agreement also provides that the Remarketing Dealer may
resign at any time as Remarketing Dealer, such resignation to be effective 10
days after the delivery to the Company and the Trustee of notice of such
resignation. In such case, it shall be the sole obligation of the Company to
appoint a successor Remarketing Dealer.
The Remarketing Dealer, in its individual or any other capacity, may buy,
sell, hold and deal in any of the Exchange MOPPRS. The Remarketing Dealer may
exercise any vote or join in any action which any Beneficial Owner of Exchange
MOPPRS may be entitled to exercise or take with like effect as if it did not act
in any capacity under the Remarketing Agreement. The Remarketing Dealer, in its
individual capacity, either as principal or agent, may also engage in or have an
interest in any financial or other transaction with the Company as freely as if
it did not act in any capacity under the Remarketing Agreement.
REPURCHASE OF EXCHANGE MOPPRS
In the event that (i) the Remarketing Dealer for any reason does not notify
the Company of the Interest Rate to Maturity by 4:00 p.m., New York City time,
on the Determination Date, (ii) prior to the Remarketing Date, the Remarketing
Dealer has resigned and no successor has been appointed on or before the
Determination Date, (iii) since the Notification Date, a material adverse change
in the condition of the Company and its Subsidiaries, considered as one
enterprise, shall have occurred or an Event of Default, or any event which, with
the giving of notice or passage of time, or both, would constitute an Event of
Default, with respect to the Exchange MOPPRS shall have occurred and be
continuing, or any other event constituting a termination event under the
Remarketing Agreement shall have occurred, (iv) the Remarketing Dealer elects
not to remarket the Exchange MOPPRS or (v) the Remarketing Dealer for any reason
does not purchase all tendered Exchange MOPPRS on the Remarketing Date, the
Company will repurchase the Exchange MOPPRS as a whole on the Remarketing Date
at a price equal to 100% of the principal amount of the Exchange MOPPRS plus all
accrued and unpaid interest, if any, on the Exchange MOPPRS to the Remarketing
Date. In any such case, payment will be made by the Company to the DTC
Participant of each tendering Beneficial Owner of Exchange MOPPRS, by book-entry
through DTC by the close of business on the Remarketing Date against delivery
through DTC of such Beneficial Owner's tendered Exchange MOPPRS.
REDEMPTION OF EXCHANGE MOPPRS
If the Remarketing Dealer elects to remarket the Exchange MOPPRS on the
Remarketing Date, the Exchange MOPPRS will be subject to mandatory tender to the
Remarketing Dealer for remarketing on such date, in each case subject to the
conditions described above under "-- Tender of Exchange MOPPRS; Remarketing" and
"-- Repurchase of Exchange MOPPRS" and to the Company's right to redeem the
Exchange MOPPRS from the Remarketing Dealer as described in the next sentence.
The Company will notify the Remarketing Dealer and the Trustee, not later than
the Business Day immediately preceding the Determination Date, if the Company
irrevocably elects to exercise its right to redeem the Exchange MOPPRS, in whole
but not in part, from the Remarketing Dealer on the Remarketing Date at the
Optional Redemption Price.
The "Optional Redemption Price" shall be the greater of (i) 100% of the
principal amount of the Exchange MOPPRS and (ii) the sum of the present values
of the Remaining Scheduled Payments thereon, as determined by the Remarketing
Dealer, discounted to the Remarketing Date on a semiannual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate, plus in
either case accrued and unpaid interest from the Remarketing Date on the
principal amount being redeemed to the date of redemption. If the Company elects
to redeem the Exchange MOPPRS, it shall pay the redemption price therefor in
same-day funds by wire transfer to an account designated by the Remarketing
Dealer on the Remarketing Date.
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CERTAIN COVENANTS
LIMITATIONS ON INCURRENCE OF DEBT. The Company will not, and will not
permit a Subsidiary to, incur any Debt (as defined below), other than
intercompany Debt (representing Debt to which the only parties are the Trust,
the Company and any of their Subsidiaries, but only so long as such Debt is held
solely by any of the Trust, the Company and any Subsidiary and provided that, in
the case of Debt owed to Subsidiaries of the Company, such Debt is subordinate
in right of payment to the Exchange Notes), if, immediately after giving effect
to the incurrence of such additional Debt, the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries on a consolidated basis
determined in accordance with GAAP is greater than 60% of the sum of (i) Total
Assets (as defined below) as of the end of the fiscal quarter covered in the
Company's Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the
case may be, most recently filed with the Commission (or, if such filing is not
required under the Exchange Act, with the Trustee) prior to the incurrence of
such additional Debt and (ii) the increase or decrease in Total Assets from the
end of such quarter including, without limitation, any increase in Total Assets
resulting from the incurrence of such additional Debt (such increase or decrease
together with the Company's Total Assets is referred to as the "Adjusted Total
Assets") (Section 1004(a)).
In addition to the foregoing limitations on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Secured Debt
(as defined below) of the Company or any Subsidiary if, immediately after giving
effect to the incurrence of such additional Secured Debt, the aggregate
principal amount of all outstanding Secured Debt of the Company and its
Subsidiaries on a consolidated basis is greater than 40% of Adjusted Total
Assets (Section 1004(b)). The Exchange Notes do not require that, for the
purpose of calculating compliance with Sections 1004(b) and (d) of the
Indenture, the amount of "Secured Debt" of any Subsidiary be deemed to include
all Debt of that Subsidiary, whether or not that Debt provides recourse to the
general assets of that Subsidiary, other than (i) intercompany Debt
(representing Debt to which the only parties are the Company, the Trust and any
of their Subsidiaries, but only so long as such Debt is held solely by any of
the Company, the Trust and any Subsidiary) that is subordinate in right of
payment to the $180 Million Notes and (ii) trade payables incurred in the
ordinary course of business. The Teachers Purchase Agreement imposed such an
additional covenant upon the $180 Million Notes until such time as they were
registered for resale or replaced by the $180 Million Exchange Notes.
In addition to the foregoing limitation on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Debt, other
than intercompany Debt (provided that, in the case of Debt owed to Subsidiaries
of the Company, such Debt is subordinate in right of payment to the Exchange
Notes), if the ratio of Consolidated Income Available for Debt Service to the
Annual Debt Service Charge (in each case as defined below) for the period
consisting of the four consecutive fiscal quarters most recently ended prior to
the date on which such additional Debt is to be incurred shall have been less
than 1.5 to 1 on a pro forma basis after giving effect to the incurrence of such
Debt and to the application of the proceeds therefrom, and calculated on the
assumption that (i) such Debt and any other Debt incurred by the Company or its
Subsidiaries since the first day of such four-quarter period, which was
outstanding at the end of such period, had been incurred at the beginning of
such period and continued to be outstanding throughout such period, and the
application of the proceeds of such Debt, including to refinance other Debt, had
occurred at the beginning of such period, (ii) the repayment or retirement of
any other Debt by the Company or its Subsidiaries since the first day of such
four-quarter period had been repaid or retired at the beginning of such period
(except that, in determining the amount of Debt so repaid or retired, the amount
of Debt under any revolving credit facility shall be computed based upon the
average daily balance of such Debt during such period), (iii) in the case of
Acquired Indebtedness or Debt incurred in connection with any acquisition since
the first day of the four-quarter period, the related acquisition had occurred
as of the first day of the period with the appropriate adjustments with respect
to the acquisition being included in the pro forma calculation and (iv) in the
case of any increase or decrease in Total Assets, or any other acquisition or
disposition by the Company or any Subsidiary of any asset or group of assets,
since the first day of such four-quarter period, including, without limitation,
by merger, stock purchase or sale, or asset purchase or sale, such increase,
decrease or other acquisition or disposition or any related repayment of Debt
had occurred as of the first day of such period with the appropriate adjustments
to revenues, expenses and Debt levels with respect to such
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increase, decrease or other acquisition or disposition being included in such
pro forma calculation (Section 1004(c)).
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The Company is required at all
times to maintain Total Unencumbered Assets of not less than 150% of the
aggregate outstanding principal amount of all outstanding Unsecured Debt of the
Company and its Subsidiaries on a consolidated basis (Section 1004(d)).
As used in the Indenture and the description thereof herein:
"Acquired Indebtedness" means Debt of a Person (i) existing at the
time the Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from the Person, in each case, other than Debt
incurred in connection with, or in contemplation of, the Person becoming a
Subsidiary or that acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person
or the date the acquired Person becomes a Subsidiary.
"Annual Debt Service Charge" as of any date means the amount which is
expensed in any 12-month period for Consolidated Interest Expense of the
Company and its Subsidiaries.
"Consolidated Income Available for Debt Service" for any period means
Consolidated Net Income plus amounts which have been deducted in
determining Consolidated Net Income during such period for (i) Consolidated
Interest Expense, (ii) provision for taxes of the Company and its
Subsidiaries based on income, (iii) amortization (other than amortization
of debt discount) and depreciation, (iv) provisions for losses from sales
or joint ventures, (v) increases in deferred taxes and other noncash items,
(vi) charges resulting from a change in accounting principles, and (vii)
charges for early extinguishment of debt, and less amounts which have been
added in determining Consolidated Net Income during such period for (a)
provisions for gains from sales or joint ventures and (b) decreases in
deferred taxes and other noncash items.
"Consolidated Interest Expense" means, for any period, and without
duplication, all interest (including the interest component of rentals on
leases reflected in accordance with GAAP as capitalized leases on the
Company's consolidated balance sheet, letter of credit fees, commitment
fees and other like financial charges) and all amortization of debt
discount on all Debt (including, without limitation, payment-in-kind, zero
coupon and other securities) of the Company and its Subsidiaries, but
excluding legal fees, title insurance charges and other out-of-pocket fees
and expenses incurred in connection with the issuance of Debt, all
determined in accordance with GAAP.
"Consolidated Net Income" for any period means the amount of net
income (or loss) of the Company and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP.
"Debt" of the Company or any Subsidiary means, without duplication,
any indebtedness of the Company and its Subsidiaries, whether or not
contingent, in respect of (i) borrowed money evidenced by bonds, notes,
debentures or similar instruments, (ii) indebtedness secured by any
mortgage, pledge, lien, charge, encumbrance or any security interest
existing on property owned by the Company and its Subsidiaries, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued or amounts representing the balance
deferred and unpaid of the purchase price of any property except any such
balance that constitutes an accrued expense or trade payable or (iv) any
lease of property by the Company and its Subsidiaries as lessee which is
reflected in the Company's consolidated balance sheet as a capitalized
lease in accordance with GAAP, in the case of items of indebtedness under
(i) through (iii) above to the extent that any such items (other than
letters of credit) would appear as a liability on the Company's
consolidated balance sheet in accordance with GAAP, and also includes, to
the extent not otherwise included, any obligation by the Company or any
Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise
(other than for purposes of collection in the ordinary course of business),
indebtedness of another person (other than the Company or any Subsidiary)
(it being understood that "Debt" shall be deemed to be incurred by the
Company and its Subsidiaries on a consolidated basis whenever the Company
and its Subsidiaries on a consolidated basis shall create, assume,
guarantee or otherwise become liable in respect thereof; Debt of a
Subsidiary of the
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Company existing prior to the time it became a Subsidiary of the Company
shall be deemed to be incurred upon such Subsidiary's becoming a Subsidiary
of the Company; and Debt of a person existing prior to a merger or
consolidation of such person with the Company or any Subsidiary of the
Company in which such person is the successor to the Company or such
Subsidiary shall be deemed to be incurred upon the consummation of such
merger or consolidation); provided, however, the term Debt shall not
include any such indebtedness that has been the subject of an "in
substance" defeasance in accordance with GAAP.
"Secured Debt" means, without duplication, Debt secured by any
mortgage, trust deed, deed of trust, deed to secure debt, security
agreement, pledge, conditional sale or other title retention agreement,
capitalized lease, or other like agreement granting or conveying security
title to or a security interest in real property or other tangible assets.
Secured Debt shall be deemed to be incurred (i) on the date the Company or
any Subsidiary creates, assumes, guarantees or otherwise becomes liable in
respect thereof if it is secured in the manner described in the preceding
sentence on such date or (ii) on the date the Company or any Subsidiary
first secures such Debt in the manner described in the preceding sentence
if such Debt was not so secured on the date it was incurred.
"Subsidiary" means (i) a corporation, partnership, limited liability
company, trust, real estate investment trust or other entity a majority of
the voting power of the voting equity securities of which are owned,
directly or indirectly, by the Company or by one or more Subsidiaries of
the Company, (ii) a partnership, limited liability company, trust, real
estate investment trust or other entity not treated as a corporation for
federal income tax purposes, the majority of the value of the equity
interests of which are owned, directly or indirectly, by the Company or by
one or more other Subsidiaries of the Company and (iii) one or more
corporations which, either individually or in the aggregate, would be
Significant Subsidiaries (as defined below, except that the investment,
asset and equity thresholds for purposes of this definition shall be 5%),
the majority of the value of the equity interests of which are owned,
directly or indirectly, by the Company or by one or more Subsidiaries.
"Total Assets" as of any date means the sum of (i) Undepreciated Real
Estate Assets and (ii) all other assets of the Company and its Subsidiaries
on a consolidated basis determined in accordance with GAAP (but excluding
intangibles and accounts receivable).
"Total Unencumbered Assets" as of any date means the sum of (i) those
Undepreciated Real Estate Assets not securing any portion of Secured Debt
and (ii) all other assets of the Company and its Subsidiaries on a
consolidated basis not securing any portion of Secured Debt determined in
accordance with GAAP (but excluding intangibles and accounts receivable).
"Undepreciated Real Estate Assets" as of any date means the cost
(original cost plus capital improvements) of real estate assets of the
Company and its Subsidiaries on such date, before depreciation and
amortization, determined on a consolidated basis in accordance with GAAP.
"Unsecured Debt" means Debt of the Company or any Subsidiary that is
not Secured Debt.
EXISTENCE. Except as permitted under "-- Merger, Consolidation or Sale"
below, the Company is required to do or cause to be done all things necessary to
preserve and keep in full force and effect its existence, rights and franchises;
provided, however, that the Company shall not be required to preserve any right
or franchise if the Board of Trustees of the Trust determines that the
preservation thereof is no longer desirable in the conduct of the Company's
business and that the loss thereof is not disadvantageous in any material
respect to the Holders (Section 1006).
MAINTENANCE OF PROPERTIES. The Company is required to cause all of its
material properties used or useful in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and to cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the reasonable judgment of the Company may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that the Company and
its Subsidiaries shall not be prevented from discontinuing the operation and
maintenance of any of the properties if such
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discontinuance is, in the judgment of the Company, desirable in the conduct of
its business and not disadvantageous in any material respect to the Holders
(Section 1007).
INSURANCE. The Company is required to, and is required to cause each of
its Subsidiaries to, maintain insurance coverage by financially sound and
reputable insurance companies in such forms and amounts and against such risks
as are customary for companies of established reputation engaged in the same or
a similar business (Section 1008).
PAYMENT OF TAXES AND OTHER CLAIMS. The Company is required to pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent (i) all material taxes, assessments and governmental charges levied
or imposed upon it or any Subsidiary or upon its income, profits or property or
that of any Subsidiary and (ii) all material lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien upon the property of
the Company or any Subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings so long as appropriate
reserves are established therefor in accordance with GAAP (Section 1009).
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act and for so long as any Exchange Notes
are outstanding, the Company will, to the extent permitted under the Exchange
Act, be required to file with the Commission the annual reports, quarterly
reports and other documents which the Company would have been required to file
with the Commission pursuant to such Section 13 or 15(d) if the Company were so
subject (the "Financial Statements"), such documents to be filed with the
Commission on or prior to the respective dates by which the Company would have
been required to file such documents if the Company were so subject (the
"Required Filing Dates"). The Company will also in any event (x) within 15 days
of each Required Filing Date (i) transmit by mail to all Holders of Exchange
Notes, as their names and addresses appear in the security register for the
Exchange Notes, without cost to such Holders, copies of the annual reports and
quarterly reports which the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were subject to such Sections and (ii) file with the Trustee copies of the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act if the Company were subject to such Sections and (y) if
filing such documents by the Company with the Commission is not made under the
Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any prospective
Holder (Section 1010).
MERGER, CONSOLIDATION OR SALE
The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into, any other
corporation, limited liability company, association, partnership, real estate
investment trust, company or business trust (collectively, a "Corporation"),
provided that (a) the Company shall be the continuing Corporation, or the
successor Corporation or its transferees or assignees of such assets (if other
than the Company) formed by or resulting from any such consolidation or merger
or which shall have received the transfer of such assets by lease (subject to
the continuing obligations of the Company set forth in the Indenture) or
otherwise, either directly or indirectly, shall expressly assume payment of the
principal of (and premium or Make-Whole Amount, if any) and interest on all the
debt securities issued by the Company under the Indenture ("Debt Securities")
and the due and punctual performance and observance of all of the covenants and
conditions contained in the Indenture; (b) the successor Corporation formed by
or resulting from any such consolidation or merger or which shall have received
the transfer of assets shall be a United States Corporation; (c) immediately
after giving effect to such transaction and treating any indebtedness which
becomes an obligation of the Company or any Subsidiary of the Company as a
result thereof as having been incurred by the Company or such Subsidiary at the
time of such transaction, no Event of Default under the Indenture, and no event
which, after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (d) an officer's certificate
and legal opinion covering such conditions shall be delivered to the Trustee
(Sections 801 and 803).
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EVENTS OF DEFAULT, NOTICE AND WAIVER
The following events are "Events of Default" with respect to the Notes of a
series: (a) default for 30 days in the payment of any installment of interest on
any Note of such series; (b) default in the payment of the principal of (or
premium or Make-Whole Amount, if any, on) any Note at its maturity; (c) default
in the performance of any other covenant of the Company contained in the
Indenture, such default having continued for 60 days after written notice as
provided pursuant to the Indenture; (d) default in the payment of an aggregate
principal amount exceeding $5,000,000 of any evidence of recourse indebtedness
of the Company or any mortgage, indenture or other instrument under which such
indebtedness is issued or by which such indebtedness is secured, such default
having occurred after the expiration of any applicable grace period and having
resulted in the acceleration of the maturity of such indebtedness, but only if
such indebtedness is not discharged or such acceleration is not rescinded or
annulled, such default having continued for a period of 10 days after written
notice as provided pursuant to the Indenture; and (e) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee of the Company or any Significant Subsidiary or any of
their respective property. The term "Significant Subsidiary" means each
significant subsidiary (as defined in Regulation S-X promulgated under the
Securities Act) of the Company (Section 501).
If an Event of Default under the Indenture occurs and is continuing, then
in every such case the Trustee or the Holders of not less than 25% in principal
amount of the Outstanding Notes of a series may declare the principal amount of
all of the Notes of such series to be due and payable immediately by written
notice thereof to the Company (and to the Trustee if given by the Holders).
However, at any time after such a declaration of acceleration with respect to
such Notes has been made, but before a judgment or decree for payment of the
money due has been obtained by the Trustee, the Holders of not less than a
majority in principal amount of such Outstanding Notes may rescind and annul
such declaration and its consequences if (a) the Company shall have paid or
deposited with the Trustee all required payments of the principal of (and
premium or Make-Whole Amount, if any) and interest on such Notes, plus certain
fees, expenses, disbursements and advances of the Trustee and (b) all Events of
Default, other than the nonpayment of accelerated principal of (or specified
portion thereof) or premium (if any) or interest on such Notes have been cured
or waived as provided in the Indenture (Section 502). The Indenture also
provides that the Holders of not less than a majority in principal amount of the
Outstanding Notes of a series may waive any past default with respect to such
series and its consequences, except a default (x) in the payment of the
principal of (or premium or Make-Whole Amount, if any) or interest on any such
Note or (y) in respect of a covenant or provision contained in the Indenture
that cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected thereby (Section 513).
The Trustee will be required to give notice to the Holder of Exchange Notes
within 90 days of a default under the Indenture unless such default has been
cured or waived; provided, however, that the Trustee may withhold notice to the
Holders of any default (except a default in the payment of the principal of (or
premium or Make-Whole Amount, if any) or interest on any Exchange Note or in the
payment of any sinking fund installment in respect of any Exchange Note) if
specified Responsible Officers of the Trustee consider such withholding to be in
the interest of such Holders (Section 601).
The Indenture provides that no Holder of Exchange Notes may institute any
proceedings, judicial or otherwise, with respect to the Indenture or for any
remedy thereunder, except in the case of failure of the Trustee, for 60 days, to
act after it has received a written request to institute proceedings in respect
of an Event of Default from the Holders of not less than 25% in principal amount
of the Outstanding Notes of a series, as well as an offer of indemnity
reasonably satisfactory to it (Section 507). This provision will not prevent,
however, any holder of Notes from instituting suit for the enforcement of
payment of the principal of (and premium or Make-Whole Amount, if any) and
interest on such Exchange Notes at the respective due dates thereof (Section
508).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
Exchange Notes then Outstanding under the Indenture, unless such Holders shall
have offered to the
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Trustee thereunder reasonable security or indemnity (Section 602). The Holders
of not less than a majority in principal amount of the Outstanding Notes of a
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee in respect of such Notes,
or of exercising any trust or power conferred upon the Trustee in respect of
such Notes. However, the Trustee may refuse to follow any direction which is in
conflict with any law or the Indenture, which may involve the Trustee in
personal liability or which may be unduly prejudicial to the holders of Notes of
such series not joining therein (Section 512).
Within 120 days after the close of each fiscal year, the Company must
deliver to the Trustee a certificate, signed by one of several specified
officers of the Company, stating whether or not such officer has knowledge of
any default under the Indenture and, if so, specifying each such default and the
nature and status thereof (Section 1011).
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Debt Securities of each series which is affected by
such modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the Holders of each such Debt Security
affected thereby, (a) change the Stated Maturity of the principal of, or premium
or Make-Whole Amount, if any, or any installment of interest on, any such Debt
Security; (b) reduce the principal amount of, or the rate or amount of interest
on, or any premium or Make-Whole Amount, if any, payable on redemption of, any
such Debt Security; (c) change the place of payment, or the coin or currency,
for payment of principal of, or premium or Make-Whole Amount, if any, or
interest on any such Debt Security; (d) impair the right to institute suit for
the enforcement of any payment on or with respect to any such Debt Security; (e)
reduce the above stated percentage in principal amount of Outstanding Debt
Securities of any series necessary to modify or amend the Indenture, to waive
compliance with certain provisions thereof or certain defaults and consequences
thereunder or to reduce the quorum or voting requirements set forth in the
Indenture; or (f) modify any of the foregoing provisions or any of the
provisions relating to the waiver of certain past defaults or certain covenants,
except to increase the required percentage to effect such action or to provide
that certain other provisions may not be modified or waived without the consent
of the Holders of each such Debt Security affected thereby (Section 902). A Debt
Security shall be deemed outstanding ("Outstanding") if it has been
authenticated and delivered under the Indenture unless, among other things, such
Debt Security has been cancelled or redeemed.
The Indenture provides that the Holders of not less than a majority in
principal amount of Outstanding Debt Securities of a series have the right to
waive compliance by the Company with certain covenants in the Indenture in
respect of such Debt Securities (Section 1013). Compliance with the covenants
described herein and such additional covenants with respect to the Debt
Securities of a series generally may not be waived by the Board of Trustees of
the Trust, as managing general partner of the Company, or by the Trustee.
Modifications and amendments of the Indenture will be permitted to be made
by the Company and the Trustee without the consent of any Holder for any of the
following purposes: (i) to evidence the succession or addition of another Person
to the Company as obligor under the Indenture; (ii) to add to the covenants of
the Company for the benefit of the Holders or to surrender any right or power
conferred upon the Company in the Indenture; (iii) to add Events of Default for
the benefit of the Holders; (iv) to permit or facilitate the issuance of Debt
Securities in uncertificated form, provided, that such action shall not
adversely affect the interests of the Holders in any material respect; (v) to
secure the Debt Securities; (vi) to establish the form or terms of additional
Debt Securities of any series; (vii) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under the Indenture by more than one Trustee; (viii) to cure any
ambiguity, defect or inconsistency in the Indenture, provided that such action
shall not adversely affect the interests of Holders in any material respect; or
(ix) to supplement any of the provisions of the Indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series of Debt
Securities under the Indenture, provided that such action shall not adversely
affect the interests of the Holders in any material respect (Section 901).
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The Indenture contains provisions for convening meetings of the Holders of
Debt Securities (Section 1501). A meeting will be permitted to be called at any
time by the Trustee, and also, upon request, by the Company or the Holders of at
least 10% in principal amount of the Outstanding Debt Securities, in any such
case upon notice given as provided in the Indenture (Section 1502). Except for
any consent that must be given by the Holder of each Debt Security affected by
certain modifications and amendments of the Indenture, any resolution presented
at a meeting or adjourned meeting duly reconvened at which a quorum is present
will be permitted to be adopted by the affirmative vote of the Holders of a
majority in principal amount of the Outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the Holders of a
specified percentage, which is less than a majority, in principal amount of the
Outstanding Debt Securities may be adopted at a meeting or adjourned meeting
duly reconvened at which a quorum is present by the affirmative vote of the
Holders of such specified percentage in principal amount of the Outstanding Debt
Securities. Any resolution passed or decision taken at any meeting of Holders of
Debt Securities duly held in accordance with the Indenture will be binding on
all Holders of Debt Securities of such series. The quorum at any meeting called
to adopt a resolution, and at any reconvened meeting, will be Persons holding or
representing a majority in principal amount of the Outstanding Debt Securities;
provided, however, that if any action is to be taken at such meeting with
respect to a consent or waiver which may be given by the Holders of not less
than a specified percentage in principal amount of the Outstanding Debt
Securities of a series, the Persons holding or representing such specified
percentage in principal amount of the Outstanding Debt Securities of such series
will constitute a quorum (Section 1504).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Debt Securities
affected thereby, or of the Holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting and
(ii) the principal amount of the Outstanding Debt Securities that vote in favor
of such request, demand, authorization, direction, notice, consent, waiver or
other action shall be taken into account in determining whether such request,
demand, authorization, direction, notice, consent, waiver or other action has
been made, given or taken under the Indenture (Section 1504).
SATISFACTION AND DISCHARGE
The Company may discharge certain obligations to Holders of Exchange Notes
that have not already been delivered to the Trustee for cancellation and that
either have become due and payable or will become due and payable within one
year (or scheduled for redemption within one year) by irrevocably depositing
with the Trustee, in trust, funds in such currency or currencies, currency unit
or units or composite currency or currencies in which such Exchange Notes are
payable in an amount sufficient to pay the entire indebtedness on such Exchange
Notes in respect of principal (and premium or Make-Whole Amount, if any) and
interest to the date of such deposit (if such Exchange Notes have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be
(Section 401).
The defeasance and covenant defeasance provisions of Article Fourteen of
the Indenture will apply to the Exchange Notes upon satisfaction of certain
conditions specified therein.
NO CONVERSION RIGHTS
The Exchange Notes will not be convertible into or exchangeable for any
equity interest in or debt security of the Trust or equity interest in the
Company.
GLOBAL SECURITIES
Exchange Notes issued in exchange for Private Notes currently evidenced by
one or more fully registered global notes will be evidenced by one or more
global notes of the related series (the "Global Securities"), which will be
deposited upon issuance with, or on behalf of, DTC and registered in the name of
Cede & Co.
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("Cede"), as DTC's nominee. Exchange Notes issued in exchange for Private Notes
in non-book-entry-form will be issued in registered, certificated form.
Holders may hold their interests in any of the Global Securities directly
through DTC, or indirectly through organizations which are participants in DTC
("Participants"). Transfers between Participants will be effected in the
ordinary way in accordance with DTC rules and will be settled in immediately
available funds.
Holders who are not Participants may beneficially own interests in a Global
Security held by DTC only through Participants, including certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly, and have indirect access to the DTC system ("Indirect
Participants"). So long as Cede, as the nominee of DTC, is the registered owner
of any Global Security, Cede for all purposes will be considered the sole holder
of such Global Security. Except as provided below, owners of beneficial
interests in a Global Security will not be entitled to have certificates
registered in their names, will not receive or be entitled to receive physical
delivery of certificates in definitive form, and will not be considered the
holder thereof.
Neither the Company nor the Trustee (nor any registrar or paying agent)
will have any responsibility for the performance by DTC or their Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations. DTC has advised the Company that it will
take any action permitted to be taken by a holder of Notes only at the direction
of one or more Participants whose accounts are credited with DTC interests in a
Global Security.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions, such as transfers and pledges, among Participants in
deposited securities through electronic book-entry changes to accounts of its
Participants, thereby eliminating the need for physical movement of securities
certificates. Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Certain of
such Participants (or their representatives), together with other entities, own
DTC. The rules applicable to DTC and its Participants are on file with the
Commission.
DTC has further advised the Company that pursuant to the procedures
established by it, (i) upon deposit of the Global Securities representing
Private Notes, DTC will credit the accounts of its Participants with portions of
the principal amount of the Global Securities representing the Exchange Notes
issued in exchange for the Private Notes that each such Participant has
instructed DTC to surrender for exchange and (ii) ownership of such interests in
the Global Securities will be shown on, and the transfer of ownership thereof
will be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global Securities).
Purchases of Exchange Notes under the DTC system must be made by or through
Participants, which will receive a credit for the Exchange Notes on DTC's
records. The ownership interest of each actual purchaser of each Exchange Note
(a "Beneficial Owner") is in turn to be recorded on the Participant's and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchase, but Beneficial Owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the Participant or Indirect
Participant through which the Beneficial Owner entered into the transaction.
Transfers of ownership interests in the Exchange Notes are to be accomplished by
entries made on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Exchange Notes, except in the event that use of the book-entry
system for the Exchange Notes is discontinued.
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The deposit of Exchange Notes with DTC and their registration in the name
of Cede effect no change in beneficial ownership. DTC has no knowledge of the
actual Beneficial Owners of the Exchange Notes; DTC's records reflect only the
identity of the Participants whose accounts such Exchange Notes are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Redemption notices shall be sent to Cede. If less than all of the principal
amount of the Global Securities of the same series is being redeemed, DTC's
practice is to determine by lot the amount of the interest of each Participant
therein to be redeemed.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time.
Principal, Make-Whole Amount, if any, and interest payments on the Exchange
Notes will be made to DTC by wire transfer of immediately available funds. DTC's
practice is to credit Participants' accounts on the payable date in accordance
with their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on the payable date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payments of principal, Make-Whole Amount, if any, and interest to DTC is the
responsibility of the Company, disbursement of such payments to Participants
shall be the responsibility of DTC, and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Participants and Indirect
Participants. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
DTC may discontinue providing its services as securities depository with
respect to the Exchange Notes at any time by giving reasonable notice to the
Company. In the event that DTC notifies the Company that it is unwilling or
unable to continue as depository for any Global Security or if at any time DTC
ceases to be a clearing agency registered as such under the Exchange Act when
DTC is required to be so registered to act as such depository and no successor
depository shall have been appointed within 90 days of such notification or of
the Company becoming aware of DTC's ceasing to be so registered, as the case may
be, certificates for the relevant Exchange Notes will be printed and delivered
in exchange for interests in such Global Security. Any Global Security that is
exchangeable pursuant to the preceding sentence shall be exchangeable for
relevant Exchange Notes in authorized denominations registered in such names as
DTC shall direct. It is expected that such instruction will be based upon
directions received by DTC from its Participants with respect to ownership of
beneficial interests in such Global Security.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
certificates representing the Exchange Notes will be printed and delivered.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax
considerations relating to the exchange of the Private Notes for the Exchange
Notes pursuant to the Exchange Offer. 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 addresses only Notes held as capital assets by initial holders who
purchased Private Notes at the "issue price" (generally, the first price to the
public (excluding bond houses, brokers or similar persons or organizations
acting as underwriters, placement agents or wholesalers) at which a substantial
amount of the issue of which such Private Notes were a part was sold
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for money). This summary does not purport to deal with persons in special tax
situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, persons holding Notes
as a hedge against currency risk or as a position in a "straddle" for U.S. tax
purposes, persons whose functional currency is not the U.S. dollar, tax-exempt
organizations or foreign corporations and persons who are not citizens or
residents of the United States (except as described under the heading "--
Taxation of Non-U.S. Holders"). In addition, this summary only addresses the
federal income tax consequences of the Exchange MOPPRS until the Remarketing
Date. It does not give a detailed discussion of any state, local or foreign tax
consequences and does not discuss all aspects of federal income taxation that
might be relevant to a specific holder in light of its particular investment or
tax circumstances.
As used herein, the term "U.S. Holder" means a holder of Notes 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 the income of which is subject to United
States federal income taxation regardless of its source or (iv) is a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust. The term "Non-U.S. Holder" means
a holder of Notes who is not a U.S. Holder.
The information in this section is based on the Internal Revenue Code of
1986, as amended (the "Code"), current, temporary and proposed Treasury
Regulations thereunder, the legislative history of the Code, current
administrative interpretations and practices of the IRS 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. 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.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT WITH ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE EXCHANGE OF THE PRIVATE
NOTES FOR THE EXCHANGE NOTES IN LIGHT OF ITS SPECIFIC TAX AND INVESTMENT
SITUATIONS AND THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS
APPLICABLE TO IT.
THE EXCHANGE
The exchange of Private Notes for Exchange Notes pursuant to the Exchange
Offer will not be treated as an exchange for federal income tax purposes because
the Exchange Notes will not differ materially in kind or extent from the Private
Notes and because the exchange will occur by operation of the original terms of
the Private Notes. As a result, Holders who exchange their Private Notes for
Exchange Notes will not recognize any income, gain or loss for federal income
tax purposes. A Holder will have the same adjusted basis and holding period in
the Exchange Notes immediately after the exchange as it had in the Private Notes
immediately before the exchange.
TAXATION OF U.S. HOLDERS
INTEREST ON NOTES. Except as described below with respect to Exchange
MOPPRS, interest on the Notes will be taxable to a U.S. Holder as ordinary
interest income at the time such payments are accrued or received (in accordance
with the U.S. Holder's method of tax accounting).
SALE, EXCHANGE OR RETIREMENT OF NOTES. Except as described below with
respect to Exchange MOPPRS, upon the sale, exchange or retirement of a Note, a
U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement
(other than amounts representing accrued and unpaid interest) and such U.S.
Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a
Note generally will equal such U.S. Holder's initial investment in the Note.
Such gain or loss will be capital if the Note is held as a capital asset. In the
case of a U.S. Holder who is an individual or an estate or trust, such gain or
loss will be long-term capital gain or loss, subject to a 28% tax
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rate, if the Notes have been held for more than one year but not more than 18
months, and long-term capital gain or loss, subject to a 20% tax rate, if the
Notes have been held for more than 18 months. In the case of a U.S. Holder that
is a corporation, such gain or loss will be long-term capital gain or loss if
the Notes have been held for more than one year.
INTEREST ON EXCHANGE MOPPRS. The federal income tax treatment of debt
obligations such as the Exchange MOPPRS is not certain. Because the Exchange
MOPPRS are subject to mandatory tender on the Remarketing Date, the Company
intends to treat the Exchange MOPPRS as maturing on the Remarketing Date for
federal income tax purposes. By purchasing the Exchange MOPPRS, the U.S. Holder
agrees to follow such treatment for federal income tax purposes. There can be no
assurance that the Internal Revenue Service ("IRS") will agree with the
Company's treatment of the Exchange MOPPRS and it is possible that the IRS could
assert another treatment. For instance, it is possible that the IRS could seek
to treat the Exchange MOPPRS as maturing on the Stated Maturity Date. See "--
Possible Characterization of Exchange MOPPRS as Having Contingent Interest"
below.
In accordance with such treatment, interest on the Exchange MOPPRS will
constitute "qualified stated interest" and the Exchange MOPPRS will be taxed as
described above under the headings "-- Interest on Notes" and "Sale, Exchange or
Retirement of Notes."
POSSIBLE CHARACTERIZATION OF EXCHANGE MOPPRS AS HAVING CONTINGENT
INTEREST. It is possible that the IRS might seek to treat the MOPPRS as maturing
on their Stated Maturity Date (instead of on the Remarketing Date, as discussed
under "-- Interest on Exchange MOPPRS" above) for federal income tax purposes.
Pursuant to such treatment, since the Interest Rate to Maturity will not be
determined until the Determination Date, the Exchange MOPPRS would be treated as
having contingent interest under the Code. In such event, under Treasury
Regulations governing debt instruments that provide for contingent payments (the
"Contingent Payment Regulations"), the Company would be required to construct a
projected payment schedule for the Exchange MOPPRS, based upon the Company's
current borrowing costs for comparable debt instruments of the Company, from
which an estimated yield on the Exchange MOPPRS would be calculated. A U.S.
Holder would be required to include in income original issue discount in an
amount equal to the sum of the daily portions of original issue discount on the
Exchange MOPPRS that would be deemed to accrue at this estimated yield for each
day during the U.S. Holder's taxable year on which the U.S. Holder holds the
Exchange MOPPRS. The amount of original issue discount that would be deemed to
accrue in any accrual period would equal the product of this estimated yield
(properly adjusted for the length of the accrual period) and the Exchange
MOPPRS' adjusted issue price (as defined below) at the beginning of the accrual
period. The daily portions of original issue discount would be determined by
allocating to each day in the accrual period the ratable portion of the original
issue discount that would be deemed to accrue during the accrual period. In
general, for these purposes, an Exchange MOPPRS' adjusted issue price would
equal the Exchange MOPPRS' issue price increased by the original issue discount
previously accrued on the Exchange MOPPRS and reduced by all payments made on
the Exchange MOPPRS. As a result of the application of the Contingent Payment
Regulations, it is possible that a U.S. Holder would be required to include
original issue discount in income in excess of actual cash payments received for
certain taxable years.
Under the Contingent Payment Regulations, upon the sale or exchange of an
Exchange MOPPRS (including a sale pursuant to the mandatory tender on the
Remarketing Date), a U.S. Holder would be required to recognize taxable income
or loss in an amount equal to the difference, if any, between the amount
realized by the U.S. Holder upon such sale or exchange and the U.S. Holder's
adjusted tax basis in the Exchange MOPPRS as of the date of disposition. A U.S.
Holder's adjusted tax basis in an Exchange MOPPRS generally would equal such
U.S. Holder's initial investment in the Exchange MOPPRS increased by any
original issue discount previously included in income with respect to the
Exchange MOPPRS by the U.S. Holder and decreased by any payments received by the
U.S. Holder. Any such taxable income generally would be treated as ordinary
income. Any such taxable loss generally would be treated (i) first as an offset
to any interest otherwise includible in income by the U.S. Holder with respect
to the Exchange MOPPRS for the taxable year in which the sale or exchange occurs
to the extent of the amount of such includible interest and (ii) then as an
ordinary loss to the extent of the U.S. Holder's total interest inclusions on
the Exchange MOPPRS in previous taxable years. Any remaining loss in excess of
the amounts described in (i) and
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(ii) above generally would be treated as short-term, mid-term or long
term-capital loss (depending upon the U.S. Holder's holding period for the
Exchange MOPPRS). All amounts includible in income by a U.S. Holder as ordinary
interest pursuant to the Contingent Payment Treasury Regulations would be
treated as original issue discount.
TAXATION OF NON-U.S. HOLDERS
A Non-U.S. Holder will not be subject to federal income taxes on payments
of principal, premium (if any) or interest on a Note unless such Non-U.S. Holder
is a direct or indirect 10% or greater partner of the Company, a controlled
foreign corporation related to the Company or a bank receiving interest
described in section 881(c)(3)(A) of the Code, and provided that the interest
(including original issue discount, if any) is not effectively connected with
the conduct of a trade or business in the United States by the Non-U.S. Holder.
To qualify for the exemption from taxation, the last United States payor in the
chain of payment prior to payment to a Non-U.S. Holder (the "Withholding Agent")
must have received in the year in which a payment of interest or principal
occurs, or in either of the two preceding calendar years, a statement that (i)
is signed by the beneficial owner of the Note under penalties of perjury, (ii)
certifies that such owner is not a U.S. Holder and (iii) provides the name and
address of the beneficial owner. The statement may be made on an IRS Form W-8 or
a substantially similar form, and the beneficial owner must inform the
Withholding Agent of any change in the information on the statement within 30
days of such change. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However, in
such case, the signed statement must be accompanied by a copy of the IRS Form
W-8 or the substitute form provided by the beneficial owner to the organization
or institution. The Treasury Department is considering implementation of further
certification requirements aimed at determining whether the issuer of a debt
obligation is related to holders thereof.
Generally, a Non-U.S. Holder will not be subject to federal income taxes on
any amount which constitutes gain upon retirement or disposition of a Note,
provided the gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Holder. Certain other exceptions
may be applicable, and a Non-U.S. Holder should consult its tax advisor in this
regard.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States and interest (including original issue discount, if any) or gain
on the Note is effectively connected with the conduct of such trade or business,
such holder, although exempt from U.S. federal withholding tax as discussed in
the preceding paragraph (or by reason of the delivery of properly completed Form
4224), is subject to U.S. federal income tax on such interest (including
original issue discount) and on any gain realized on the sale, exchange or other
dispositions of a Note in the same manner as if it were a U.S. Holder. In
addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its effectively connected earnings and
profits for that taxable year, unless it qualifies for a lower rate under an
applicable income tax treaty.
The Note will not be includible in the estate of a Non-U.S. Holder unless
the individual is a direct or indirect 10% or greater partner of the Company or,
at the time of such individual's death, payments in respect of the Note would
have been effectively connected with the conduct by such individual of a trade
or business in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of federal income tax at a rate of 31% may apply to
payments made in respect of the Notes to registered owners who are not "exempt
recipients" and who fail to provide certain identifying information (such as the
registered owner's taxpayer identification number) in the required manner.
Generally, individuals are not exempt recipients, whereas corporations and
certain other entities generally are exempt recipients. Payments made in respect
of the Notes to a U.S. Holder must be reported to the IRS, unless the U.S.
Holder is an exempt recipient or establishes an exemption. Compliance with the
identification procedures described in the preceding section would establish an
exemption from backup withholding for those Non-U.S. Holders who are not exempt
recipients.
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In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, kin the required manner, certain identifying information
and, in the case of a Non-U.S. Holder, certifies that such seller is a Non-U.S.
Holder (and certain other conditions are met). Such a sale must also be reported
by the broker to the IRS unless either (i) the broker determines that the seller
is an exempt recipient or (ii) the seller certifies its non-U.S. status (and
certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8 under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to 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 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.
Holder should consult its own advisor regarding the effect of the new Treasury
Regulations.
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer for its
own account as a result of market-making or other trading activities. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
such Private Notes pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Company has agreed that for a period of up to 180 days after the closing of the
Exchange Offer, it will make this Prospectus, as amended or supplemented,
available to any such broker-dealer that requests copies of this Prospectus in
the Letter of Transmittal for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes,
or a combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker-dealer
that participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus a
broker-dealer that receives Exchange Notes in exchange for Private Notes
acquired by such broker-dealer as a result of market-making or other trading
activities will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and the
Teachers Purchase Agreement, and will indemnify the holders of Private Notes
(including any broker-dealers), and certain parties related to such holders,
against certain liabilities, including liabilities under the Securities Act.
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EXPERTS
The combined financial statements of Equity Office 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,
PPM Properties and Wright Runstad Properties, all appearing in this Prospectus
and Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
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 Properties, L.P. as of December
31, 1996 and 1995 and the related statements of operations, partners' capital
and cash flows for the years ended December 31, 1996 and 1995 and the period May
26, 1994 to December 31, 1994, the combined statement of operations, owners'
equity and cash flows of the Predecessor for the period January 1, 1994 to May
25, 1994 and the related financial statement schedules of Beacon Properties,
L.P. as of December 31, 1996, included herein have been so included 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.
LEGAL MATTERS
The legality of the Exchange Notes will be passed upon for the Company by
Hogan & Hartson L.L.P., Washington, D.C.
AVAILABLE INFORMATION
The Trust and the Company are subject to the informational requirements of
the Exchange Act, and, in accordance therewith, are required to file reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of the reports, proxy
statements and other information can be obtained form the Public Reference
Section of the Commission, Washington, D.C. 20549, upon payment of prescribed
rates, or in certain cases by accessing the Commission's World Wide Web site at
http://www.sec.gov. The Common Shares of the Trust are listed on the NYSE under
the symbol "EOP." The Series A Preferred Shares of the Trust are listed on the
NYSE under the symbol "EOPpfA."
In order to preserve the exemption for resales and other transfers under
Rule 144A, the Company has agreed, if it is no longer subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, to furnish upon request
to Holders of Notes and to prospective purchasers designated by such Holders the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act to permit compliance with Rule 144A in connection with resales
and other transfers of Notes.
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GLOSSARY
For purposes of this Prospectus, the following capitalized terms shall have
the meanings set forth below:
"ACBMs" means asbestos-containing building materials.
"Adjusted Total Assets" means Total Assets together with the increase or
decrease in Total Assets, as described in "Description of the Exchange Notes --
Certain Covenants -- Limitations on Incurrence of Debt."
"Agent's Message" means a message transmitted by DTC, received by the
Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received an express acknowledgement from a participant in DTC's
ATOP that is tendering Private Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal (or, in the case of an Agent's Message
relating to guaranteed delivery, that such participant has received and agrees
to be bound by the applicable notice of guaranteed delivery), and that the
agreement may be enforced against such participant.
"Applicable Spread" means the lowest bid indication, expressed as a spread
above the Base Rate, obtained by the Remarketing Dealer on the Determination
Date from the bids quoted by five Reference Corporate Dealers.
"ATOP" means Automated Tender Offer Program.
"Base Rate" means 5.488%.
"Beacon" means Beacon Properties Corporation, a Maryland corporation.
"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 Facility" means the credit facility under which the $533 million of
unsecured indebtedness of Beacon was issued and subsequently assumed by the
Company in the Beacon Merger.
"Beacon Management Company" means Beacon Property Management Corporation, a
Delaware corporation.
"Beacon Merger" means the merger of Beacon with and into the Trust and the
merger of Beacon Partnership with and into the Company.
"Beacon 1994 Plan" means Beacon's 1994 Stock Option and Incentive Plan.
"Beacon 1996 Plan" means Beacon's 1996 Stock Option Plan.
"Beacon Partnership" means Beacon Properties, L.P., a Delaware limited
partnership.
"Beacon Plans" means the Beacon 1994 Plan and the Beacon 1996 Plan.
"Beacon Preferred Shares" means the 8.98% Series A Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share, of Beacon.
"Beacon Properties" means the office properties the Company acquired
pursuant to the Beacon Merger.
"Beneficial Owner" means an actual purchaser of an Exchange Note.
"Book-Entry Confirmation" means a confirmation of a book-entry transfer.
"BPMLP" means Beacon Property Management, L.P., a Delaware limited
partnership.
"Business Day" means any day, other than a Saturday or Sunday, on which
banking institutions in New York, New York, and Boston, Massachusetts, are open
for business.
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"Bylaws" means the bylaws adopted by the Board of Trustees of the Trust.
"CBDs" means central business districts.
"Cede" means Cede & Co., as DTC's nominee.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest, $0.01 par
value per share, of the Trust.
"Company" means either EOP Operating Limited Partnership, a Delaware
limited partnership, alone as an entity, or, as the context may require, the
combined enterprise consisting of EOP Operating Limited Partnership and one or
more of its subsidiaries, and the predecessors thereof, except as defined in
"Description of the Exchange Notes," where "the Company" does not include the
subsidiaries. All references to the historical activities of EOP Operating
Limited Partnership refer to the activities of the Equity Office Predecessors.
"Consolidation" means all of the transactions described under "Certain
Relationships and Related Transactions -- Formation Transactions."
"Contribution Agreement" means the agreement pursuant to which the ZML
Funds and the Trust agreed to consolidate.
"Core Portfolio" means the properties that were held by the Equity Office
Predecessors during the entire period for both periods being compared.
"Corporation" means any corporation, limited liability company,
association, partnership, real estate investment trust, company or business
trust.
"Credit Facilities" means both the $600 Million Credit Facility and the
$1.5 Billion Credit Facility.
"Debt Securities" means all the debt securities issued by the Company under
the Indenture.
"Debt to Market Capitalization Ratio" means the total consolidated and
unconsolidated debt of the Company as a percentage of the market value of
outstanding Common Shares and Units plus total consolidated and unconsolidated
debt, but excluding (i) all nonrecourse consolidated debt in excess of the
Company's proportionate share of such debt and (ii) all nonrecourse
unconsolidated debt of partnerships in which the Company is a partner in excess
of the Company's proportionate share of such debt.
"Declaration of Trust" means the Trust's declaration of trust, as amended
from time to time, and as filed with the State Department of Assessments and
Taxation of Maryland.
"Determination Date" means the third business day immediately preceding the
Remarketing Date.
"DTC" means The Depository Trust Company, New York, New York.
"EGI" means Equity Group Investments, Inc., an owner, manager and financier
of real estate and corporations.
"Eligible Institution" means an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act.
"Employee Plan" means the Trust's 1997 Employee 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.
"EOP Management Company" means Equity Office Properties Management Corp., a
Delaware corporation.
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"EOP Office Company" means EOP Office Company, a Delaware corporation.
"EQR" means Equity Residential Properties Trust, a Maryland real estate
investment trust, which is an equity REIT focused solely on multifamily
properties and is affiliated with Mr. Zell.
"Equitable" means Equitable Life Insurance Society of the United States, on
behalf of its Prime Property Fund.
"Equity Group" means one or both of EGI and EOH.
"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.
"Equity Office Predecessors" means, on a combined basis, the Office
Properties and Parking Facilities of the ZML Funds and the Management Business
of the Equity Group that were combined into the Company pursuant to the
Consolidation.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means State Street Bank and Trust Company.
"Exchange MOPPRS" means the MOPPRS issued in a registered exchange offer
for the MOPPRS of the same series with terms identical in all material respects
to the MOPPRS.
"Exchange Notes" means the 6.375% Notes due 2003, 6.625% Notes due 2005,
6.750% Notes due 2008, 7.250% Notes due 2018, 6.376% MOPPRS due 2012, 7.24%
Senior Notes due 2004, 7.36% Senior Notes due 2005, 7.44% Senior Notes due 2006
and 7.41% Senior Notes due 2007 offered in this Exchange Offer.
"Exchange Offer" means the offer by the Company to exchange the $1.25
Billion Exchange Notes, the Exchange MOPPRS and the $180 Million Exchange Notes,
which have been registered under the Securities Act, for an equal principal
amount of the Company's outstanding $1.25 Billion Notes, MOPPRS and $180 Million
Notes, respectively.
"Exchange Offer Registration Statement" means the registration statement
filed with the Commission relating to the Exchange Offer.
"Expiration Date" means , 1998.
"February 1998 Notes Offering" means the Notes Offering and the MOPPRS
Offering.
"Financial Statements" means the annual reports, quarterly reports and
other documents which the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were so subject.
"401(k) Plan" means the Equity Office Properties Trust Section 401(k)
Savings/Retirement Plan.
"Formation Transactions" means the transactions pursuant to which the Trust
and the Company were formed.
"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 the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by 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 the Company's
financial performance or to cash flow from operating activities (determined in
accordance with
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GAAP) as a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Trust's cash needs, including its ability to make
distributions.
"GAAP" means generally accepted accounting principles in the United States.
"Global Securities" means one or more global notes evidencing each series
of Exchange Notes in book-entry form.
"Holders" means the persons in whose names the applicable Notes are
registered in the security register applicable to the Notes.
"Indenture" means the indenture, dated as of September 2, 1997, as amended
or supplemented, between the Company and the Trustee.
"Indirect Participants" means Participants, including certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly, and have indirect access to the DTC system.
"Initial Purchasers" means, in the case of the $1.25 Billion Notes, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc., J.P. Morgan
Securities Inc., Salomon Brothers Inc, and, in the case of the 2003 Notes, the
2005 Notes and the 2018 Notes, UBS Securities LLC and, in the case of the 2008
Notes, BancAmerica Robertson Stephens. In the case of the MOPPRS, "Initial
Purchaser" means Merrill Lynch, Pierce, Fenner & Smith Incorporated.
"Interest Payment Date" means the semi-annual dates February 15 and August
15, commencing August 15, 1998, with respect to the $1.25 Billion Exchange Notes
and the Exchange MOPPRS, and the semi-annual dates of March 1 and September 1,
commencing September 1, 1998, with respect to the $180 Million Exchange Notes.
"Interest Rate to Maturity" means interest at the rate determined by the
Remarketing Dealer equal to the Base Rate plus the Applicable Spread.
"Investor Limited Partners" means the several institutional investor
limited partners in ZML Opportunity Partnerships I and II.
"IPO" means the Trust's July 1997 initial public offering of 28,750,000
Common Shares.
"IRS" means the United States Internal Revenue Service.
"Joint Venture Properties" means the Properties which are held in
partnerships or subject to participation agreements with unaffiliated third
parties.
"leased" means all space for which leases have been executed, whether or
not the lease term has commenced.
"Letter of Transmittal" means the letter of transmittal accompanying this
Prospectus.
"LIBOR" means the London Interbank Offering Rate.
"Managed Properties" means the properties managed by the Management
Companies.
"Managed Property Business" means that portion of the Management Business
that relates to property management of the Managed Properties and the Joint
Venture Properties that were contributed to the Company in the Consolidation,
which business is owned and conducted by EOP Management Company.
"Management Business" means the office property management business of EOH
and the office property asset management business and the parking asset
management business of EGI and EOH relating to those Properties that were
contributed to the Company in the Formation Transactions.
"Management Companies" means EOP Management Company and Beacon Management
Company.
128
<PAGE> 133
"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 September 30, 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.
"Maturity Date" means the applicable Stated Maturity Date or date of
earlier redemption or acceleration, as the case may be.
"Merger Agreement" means the Agreement and Plan of Merger, dated September
15, 1997, as amended, among the Trust, the Company, Beacon and Beacon
Partnership.
"Merrill Lynch" means Merrill Lynch, Pierce, Fenner & Smith Incorporated.
"MGCL" means the Maryland General Corporation Law, as amended from time to
time.
"MOPPRS" means the $250 million of 6.376% MandatOry Par Put Remarketed
Securities which the Company has agreed to sell in the MOPPRS Offering.
"MOPPRS Offering" means the Company's private placement of the MOPPRS in
February 1998.
"Named Executive Officers" means the Trust's Chief Executive Officer and
the Trust's four other most highly paid executive officers.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Noncontrolled Subsidiaries" means the Management Companies, EOP Office
Company, Beacon Design Company and Beacon Construction Company.
"Notes" means the Private Notes and the Exchange Notes.
"Notes Offering" means the Company's private placement of the $1.25 Billion
Notes in February 1998.
"Notice of Guaranteed Delivery" means a properly completed and duly
executed notice of guaranteed delivery.
"Notification Date" means a Business Day not later than five Business Days
prior to the Remarketing Date on which the Remarketing Dealer gives notice to
the Company and the Trustee of its intention to purchase the MOPPRS for
remarketing.
"NYSE" means the New York Stock Exchange, Inc.
"occupied" means all space which is leased and for which the lease term has
commenced.
"Office Properties" means the office properties owned by the Company or in
which the Company has an interest.
"$1.25 Billion Notes" means the 2003 Notes, the 2005 Notes, the 2008 Notes
and the 2018 Notes.
"$1.25 Billion Exchange Notes" means the 6.375% Exchange Notes due 2003,
the 6.625% Exchange Notes due 2005, the 6.750% Exchange Notes due 2008 and the
7.250% Exchange Notes due 2018.
"$1.5 Billion Credit Facility" means the Company's $1.5 billion unsecured
term loan facility entered into on October 2, 1997 with Morgan Guaranty Trust
Company of New York.
"$180 Million Exchange Notes" means the 7.24% Exchange Notes due 2004, the
7.36% Exchange Notes due 2005, the 7.44% Exchange Notes due 2006 and the 7.41%
Exchange Notes due 2007.
"$180 Million Notes" means the 2004 Senior Notes, the 2005 Senior Notes,
the 2006 Senior Notes and the 2007 Senior Notes.
"Other Recent Acquisitions" means the acquisition transactions described in
this Prospectus under "Recent Developments -- Other Recent Acquisitions."
129
<PAGE> 134
"Outstanding" means the Debt Security has been authenticated and delivered
under the Indenture unless, among other things, such Debt Security has been
cancelled or redeemed.
"Parking Facilities" means the stand-alone parking facilities owned by the
Company.
"Participants" means organizations which are participants in DTC.
"Partnership Agreement" means the limited partnership agreement of the
Company.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, joint-stock company, trust, unincorporated organization,
real estate investment trust, or government or any agency or political
subdivision thereof.
"Preferred Offering" means the Trust's sale of 6,000,000 Series B Preferred
Shares, in a private placement, in February 1998.
"Private Debt Offering" means the Company's private placement to an
institutional investor of the $180 Million Notes in September 1997.
"Private Notes" means the $1.25 Billion Notes, the MOPPRS and the $180
Million Notes.
"Pro Forma Basis" means giving effect to the following transactions which
occurred subsequent to September 30, 1997: (a) the acquisition of 35 Office
Properties and one Parking Facility; (b) the issuance of 9.7 million Units in
connection with property acquisition transactions; (c) draws on the Credit
Facilities to fund acquisitions and repay mortgage indebtedness; (d) the
acquisition of an interest in a mortgage note; (e) the Beacon Merger; (f) the
February 1998 Notes Offering and (g) the Preferred Offering.
"Properties" means both the Office Properties and the Parking Facilities.
"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.
"Prospectus" means this prospectus, as the same may be amended or
supplemented from time to time.
"Purchase Agreement" means the Purchase Agreement, dated February 12, 1998,
between the Company and the Initial Purchasers.
"Purchase Plan" means the Trust's 1997 Non-Qualified Employee Share
Purchase Plan.
"QIB" means "qualified institutional buyer," as defined in Rule 144A.
"Redemption Price" means the sum of (i) the principal amount of the
Exchange Notes other than the Exchange MOPPRS being redeemed plus accrued
interest thereon the redemption date and (ii) the Make-Whole Amount, if any,
with respect to such Exchange Notes.
"Reference Corporate Dealers" means leading dealers of publicly traded debt
securities of the Company in the City of New York (which may include the
Remarketing Dealer or one of its affiliates) selected by the Remarketing Dealer.
"Registration Rights Agreement" means the registration rights agreement
between the Company and the Initial Purchasers, dated as of February 12, 1998.
"Registration Statement" means the registration statement of the Company on
Form S-4, together with all amendments and exhibits, of which this Prospectus is
a part.
"Regular Record Date" means the date 15 calendar days prior to such payment
day, regardless of whether such day is a Business Day.
"REIT" means a real estate investment trust as defined under Sections 856
through 860 of the Code and applicable Treasury regulations.
"Remarketing Date" means February 15, 2002.
130
<PAGE> 135
"Remarketing Dealer" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
"Required Filing Dates" means the dates by which the Company would have
been required to file the Financial Statements if the Company were subject to
Section 13 or 15(d) of the Exchange Act.
"Resale Restriction Termination Date" means the date that is two years
after the later of the date of original issue and the last date on which the
Company or any affiliate of the Company was the owner of such Notes (or any
predecessor thereto).
"Restricted Common Shares" means Common Shares issued in transactions not
registered under the Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the 8.98% Series A Cumulative Redeemable
Preferred Shares, liquidation preference $25.00 per share, of the Trust.
"Series A Preferred Units" means the 8.98% Series A Cumulative Redeemable
Preferred Units of partnership interest in the Company.
"Series B Preferred Shares" means the 5.25% Preferred Income Equity
Redeemable Shares(SM), designated by the Trust as its 5.25% Series B
Convertible, Cumulative Preferred Shares of Beneficial Interest, $.01 par value
per share, $50.00 liquidation preference per share.
"Service Companies" means the third-party parking garage service companies
that the Parking Facilities are leased to and operated by.
"Shelf Registration Statement" means the shelf registration statement
covering resales of the $1.25 Billion Notes and the MOPPRS.
"Significant Subsidiary" means each significant subsidiary (as defined in
Regulation S-X promulgated under the Securities Act) of the Company.
"$600 Million Credit Facility" means the Company's $600 million unsecured
revolving line of credit.
"SPLP" means Standard Parking Limited Partnership.
"Staff" means the staff of the Commission.
"Stated Maturity Date" means February 15, 2003, in the case of the 6.375%
Exchange Notes due 2003; February 15, 2005, in the case of the 6.625% Exchange
Notes due 2005; February 15, 2008, in the case of the 6.750% Exchange Notes due
2008; February 15, 2018, in the case of the 7.250% Exchange Notes due 2018;
September 1, 2004, in the case of the 7.24% Exchange Notes due 2004; September
1, 2005, in the case of the 7.36% Exchange Notes due 2005; September 1, 2006, in
the case of the 7.44% Exchange Notes due 2006; September 1, 2007, in the case of
the 7.41% Exchange Notes due 2007; and February 15, 2012, in the case of the
Exchange MOPPRS.
"Subsidiary" or "Subsidiaries" of any Person 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 the Noncontrolled Subsidiaries.
"Tax Counsel" means Hogan & Hartson L.L.P., special tax counsel to the
Company.
"Teachers" means Teachers Insurance and Annuity Association of America.
131
<PAGE> 136
"Teachers Purchase Agreement" means the Note Purchase Agreement, dated
September 2, 1997, between the Company and Teachers.
"Total Portfolio" means the 93 Office Properties and the 16 stand-alone
Parking Facilities which the Company owned or had an interest in as of September
30, 1997.
"Trust" means Equity Office Properties Trust, a Maryland real estate
investment trust.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Trustee" means State Street Bank and Trust Company.
"2003 Notes" means the Company's 6.375% Notes due 2003.
"2004 Senior Notes" means the 7.24% Senior Notes due 2004.
"2005 Notes" means the Company's 6.625% Notes due 2005.
"2005 Senior Notes" means the 7.36% Senior Notes due 2005.
"2006 Senior Notes" means the 7.44% Senior Notes due 2006.
"2007 Senior Notes" means the 7.41% Senior Notes due 2007.
"2008 Notes" means the Company's 6.750% Notes due 2008.
"2018 Notes" means the Company's 7.250% Notes due 2018.
"UPREIT" means umbrella partnership REIT.
"Units" means the common units of partnership interest in the Company.
"USTs" means underground storage tanks.
"WRALP" means Wright Runstad Asset Limited Partnership.
"Wright Runstad Acquisition" means the acquisition transaction described in
this Prospectus under "Recent Developments -- Wright Runstad Acquisition."
"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.
"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.
132
<PAGE> 137
"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, each of which is a limited partnership
organized under the laws of the State of Illinois.
"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 Escrows" means, collectively, the four separate escrows set up
for the Escrowed Common Shares of the ZML REIT shareholders.
"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.
133
<PAGE> 138
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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<S> <C>
EOP OPERATING LIMITED PARTNERSHIP
Pro Forma Condensed Combined Financial Statements
(Unaudited):
Basis of Presentation..................................... F-4
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997..................................... F-5
Pro Forma Condensed Combined Statement of Operations for
the nine months ended September 30, 1997............... F-6
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1996....................... F-7
Notes to the Pro Forma Condensed Combined Financial
Statements............................................. F-8
Historical Consolidated and Combined Financial Statements
(Unaudited)
Consolidated and Combined Balance Sheets of EOP
Operating Limited Partnership and Equity Office
Predecessors as of September 30, 1997 and December 31,
1996.................................................. F-16
Consolidated Statement of Operations of EOP Operating
Limited Partnership 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-17
Consolidated Statement of Operations of EOP Operating
Limited Partnership 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-18
Consolidated Statement of Cash Flows of EOP Operating
Limited Partnership 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-19
Notes to Consolidated and Combined Financial
Statements............................................ F-20
EQUITY OFFICE PREDECESSORS
Report of Independent Auditors............................ F-31
Combined Balance Sheets as of December 31, 1996 and
1995................................................... F-32
Combined Statements of Operations for the years ended
December 31, 1996, 1995 and 1994....................... F-33
Combined Statements of Owners' Equity for the years ended
December 31, 1996, 1995 and 1994....................... F-34
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-35
Notes to Combined Financial Statements.................... F-36
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 1996................................ F-49
177 BROAD STREET
Report of Independent Auditors............................ F-52
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996................................ F-53
Notes to Statement of Revenue and Certain Expenses........ F-54
PRESTON COMMONS
Report of Independent Auditors............................ F-55
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996................................ F-56
Notes to Statement of Revenue and Certain Expenses........ F-57
OAKBROOK TERRACE TOWER
Report of Independent Auditors............................ F-58
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-59
Notes to Statements of Revenue and Certain Expenses....... F-60
</TABLE>
F-1
<PAGE> 139
<TABLE>
<CAPTION>
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<S> <C>
ONE MARITIME PLAZA
Report of Independent Auditors............................ F-61
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-62
Notes to Statements of Revenue and Certain Expenses....... F-63
201 MISSION STREET
Report of Independent Auditors............................ F-64
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-65
Notes to Statements of Revenue and Certain Expenses....... F-66
30 N. LASALLE
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
COLUMBUS AMERICA PROPERTIES
Report of Independent Auditors............................ F-70
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-71
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-72
PRUDENTIAL PROPERTIES
Report of Independent Auditors............................ F-74
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-75
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-76
550 SOUTH HOPE STREET
Report of Independent Auditors............................ F-77
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-78
Notes to Statements of Revenue and Certain Expenses....... F-79
ACORN PROPERTIES
Report of Independent Auditors............................ F-80
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-81
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-82
10 & 30 SOUTH WACKER DRIVE
Report of Independent Auditors............................ F-84
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-85
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-86
ONE LAFAYETTE CENTRE
Report of Independent Auditors............................ F-87
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-88
Notes to Statements of Revenue and Certain Expenses....... F-89
</TABLE>
F-2
<PAGE> 140
<TABLE>
<CAPTION>
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<S> <C>
PPM PROPERTIES
Report of Independent Auditors............................ F-90
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-91
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-92
WRIGHT RUNSTAD PROPERTIES
Report of Independent Auditors............................ F-93
Combined Statements of Revenue and Certain Expenses for
the period from October 1, 1996 to August 31, 1997 and
the year ended September 30, 1996...................... F-94
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-95
BEACON PROPERTIES, L.P.
Pro Forma Condensed Combined Financial Statements
(unaudited):
Basis of Presentation.................................. F-97
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997.................................... F-100
Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1996....... F-102
Notes to Pro Forma Condensed Consolidated Statement of
Operations............................................ F-105
Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30,
1997.................................................. F-112
Notes to Pro Forma Condensed Consolidated Statement of
Operations............................................ F-114
Historical Consolidated Financial Statements:
Report of Independent Accountants...................... F-117
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................. F-118
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995 and for the periods
May 26, 1994 to December 31, 1994 and January 1, 1994
to May 25, 1994....................................... F-119
Consolidated Statements of Partners' Capital for the
period January 1, 1994 to December 31, 1996........... F-120
Consolidated Statements of Cash Flows for the period
January 1, 1994 to December 31, 1996.................. F-121
Notes to Consolidated Financial Statements............. F-123
Report of Independent Accountants on Financial
Statement Schedules................................... F-136
Schedule III -- Real Estate and Accumulated
Depreciation as of December 31, 1996.................. F-137
Schedule IV -- Mortgage Loans on Real Estate as of
December 31, 1996..................................... F-141
</TABLE>
F-3
<PAGE> 141
EOP OPERATING LIMITED PARTNERSHIP
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
subsequent to September 30, 1997: (a) the acquisition of 35 office properties
and one parking facility; (b) the sale of 9.7 million units of partnership
interest ("Units") in EOP Operating Limited Partnership (the "Company"); (c)
draws on the Credit Facilities to fund acquisitions and repay mortgage
indebtedness; (d) the acquisition of an interest in a mortgage note; (e) the
merger of Beacon Properties, L.P. ("Beacon Partnership") with and into the
Company on December 19, 1997 (the "Beacon Merger"); (f) the February 1998 debt
offering (the "$1.25 Billion Notes" and the "MOPPRS") of $1.5 billion of notes;
and (g) the preferred share offering of $300 million consisting of six million
shares of 5.25% Series B Preferred Shares, liquidation preference of $50.00 per
share (the "Preferred Offering").
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
46 office properties and seven parking facilities, including an interest in four
parking facilities, acquired between January 1, 1997 and December 17, 1997, and
the disposition of two office properties; (b) the $180 million private debt
offering (the "$180 Million Notes") which occurred on September 3, 1997; (c) the
transactions that occurred in connection with the consolidation of the entities
which comprise the predecessors ("Equity Office Predecessors") of the Company
(the "Consolidation") and the initial public offering (the "IPO"), 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 change in
interest expense from draws on the Credit Facilities used to refinance existing
mortgage debt; (e) interest income from an interest in a mortgage note; (f) the
Beacon Merger; (g) the $1.25 Billion Notes and the MOPPRS; and (h) the Preferred
Offering.
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
57 office properties and 14 parking facilities, including an interest in four
parking facilities, acquired between January 1, 1996 and December 17, 1997 and
the disposition of two office properties; (b) the $180 Million Notes; (c) the
Consolidation and the IPO, and the decrease in interest expense resulting from
the use of the net proceeds for the repayment of mortgage debt; (d) the net
change in interest expense from draws on the Credit Facilities used to refinance
existing mortgage debt; (e) interest income from an interest in a mortgage note;
(f) the Beacon Merger; (g) the $1.25 Billion Notes and the MOPPRS; and (g) the
Preferred Offering.
The accompanying unaudited pro forma condensed combined financial
statements 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 condensed combined financial statements
should be read in conjunction with the accompanying notes to the pro forma
condensed combined financial statements as of and for the nine month period
ended September 30, 1997 and the year ended December 31, 1996, included
elsewhere herein.
F-4
<PAGE> 142
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EOP OPERATING BEACON
LIMITED PROPERTIES L.P. BEACON
PARTNERSHIP ACQUIRED OTHER PRE-MERGER MERGER
HISTORICAL PROPERTIES ACTIVITY PRO FORMA ADJUSTMENTS
------------- ----------- ---------- --------------- -----------
(A) (H) (I)
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in real estate, net.... $5,000,159 $ 1,942,807 $ -- $2,459,465 $1,597,516 (J)
Cash and cash equivalents......... 132,649 (1,365,916) 1,237,659 (B) 9,798 (9,234)(K)
Rents and other receivables....... 16,190 -- -- 85,196 --
Escrow deposits and restricted
cash............................ 42,966 -- -- -- --
Investment in mortgage notes...... -- -- 25,150 (C) -- --
Investment in unconsolidated joint
ventures........................ 93,826 20,000 -- 50,472 --
Other assets...................... 70,132 -- 4,875 (D) 62,514 (46,203)(L)
---------- ----------- ---------- ---------- ----------
Total Assets.................. $5,355,922 $ 596,891 $1,267,684 $2,667,445 $1,542,010
========== =========== ========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage debt..................... $1,325,333 $ 257,674 $ (233,921)(E) $ 618,698 $ (6,000)(M)
Notes payable..................... 180,000 -- -- -- --
Revolving line of credit/term
loan............................ 211,125 -- 1,229,065 (F) 407,017 --
Distribution payable.............. 42,964 -- -- -- --
Other liabilities................. 132,748 30,629 -- 74,795 (24,051)(M)
---------- ----------- ---------- ---------- ----------
Total Liabilities............. 1,892,170 288,303 995,144 1,100,510 (30,051)
Minority interests:
Partially owned properties...... 28,118 -- -- -- --
Preferred shares.................. 300,000
Partners' capital................. 3,435,634 308,588 272,540 (G) 1,566,935 1,572,130 (N)
---------- ----------- ---------- ---------- ----------
Total Liabilities and
Partners' Capital........... $5,355,922 $ 596,891 $1,267,684 $2,667,445 $1,542,079
========== =========== ========== ========== ==========
<CAPTION>
EOP OPERATING
LIMITED
$1.25 BILLION NOTES PREFERRED PARTNERSHIP
AND MOPPRS OFFERING PRO FORMA
------------------- --------- -------------
(R)
<S> <C> <C> <C>
ASSETS
Investment in real estate, net.... $ -- $ -- $10,999,947
Cash and cash equivalents......... -- -- 4,956
Rents and other receivables....... -- -- 101,386
Escrow deposits and restricted
cash............................ -- -- 42,966
Investment in mortgage notes...... -- -- 25,150
Investment in unconsolidated joint
ventures........................ -- -- 164,298
Other assets...................... 43,371 (O) -- 134,689
----------- --------- -----------
Total Assets.................. $ 43,371 $ -- $11,473,392
=========== ========= ===========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage debt..................... $ -- $ -- $ 1,961,784
Notes payable..................... 1,504,452 (P) -- 1,684,452
Revolving line of credit/term
loan............................ (1,461,081)(Q) (289,500)(S) 96,626
Distribution payable.............. -- -- 42,964
Other liabilities................. -- -- 214,121
----------- --------- -----------
Total Liabilities............. 43,371 (289,500) 3,999,947
Minority interests:
Partially owned properties...... -- -- 28,118
Preferred shares.................. 300,000 (T) 300,000
Partners' capital................. -- (10,500)(U) 7,145,327
----------- --------- -----------
Total Liabilities and
Partners' Capital........... $ 43,371 $ -- $11,473,392
=========== ========= ===========
</TABLE>
F-5
<PAGE> 143
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BEACON
PROPERTIES
EOP OPERATING L.P.
LIMITED 1997 CONSOLIDATION PRE-BEACON BEACON
PARTNERSHIP ACQUIRED FINANCING AND IPO MERGER MERGER
HISTORICAL PROPERTIES DISPOSITIONS ACTIVITY ADJUSTMENTS PRO FORMA ADJUSTMENTS
------------- ---------- ------------ --------- ------------- ---------- -----------
(V) (W) (X) (AG)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental.................... $381,108 $169,133 $ (2,558) $ -- $ 8,983 (AB) $271,273 $ 1,412 (AH)
Tenant reimbursements..... 66,855 41,748 (62) -- -- 38,164 --
Parking................... 33,744 15,114... (573) -- -- -- --
Other..................... 7,600 3,013 (26) -- -- 11,039 --
Management fees........... 3,841 -- -- -- -- 2,445 --
Interest.................. 10,524 65 -- 2,188(Y) -- 7,153 --
-------- -------- -------- -------- -------- -------- --------
503,672 229,073 (3,219) 2,188 8,983 330,074 1,412
-------- -------- -------- -------- -------- -------- --------
Expenses:
Property operating........ 190,170 87,299 (1,595) -- -- 104,285 --
Interest.................. 110,419 67,176 (36) 12,761(Z) (25,343)(AC) 53,831 514 (AI)
Depreciation.............. 80,166 38,837 -- -- 1,205 (AD) 61,690 6,772 (AJ)
Amortization.............. 5,884 -- (54) 4,141(AA) (1,699)(AE) -- --
General and
administrative.......... 23,056 -- -- -- 1,800 (AF) 29,717 (15,000)(AK)
-------- -------- -------- -------- -------- -------- --------
409,695 193,312 (1,685) 16,902 (24,037) 249,523 (7,714)
-------- -------- -------- -------- -------- -------- --------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint
ventures, gain on sales of
real estate and
extraordinary items....... 93,977 35,761 (1,534) (14,714) 33,020 80,551 9,126
Discontinued operations:
Loss from operations --
Construction Company.... -- -- -- -- -- (2,263) --
Minority interests:
Partially owned
properties.............. (1,191) -- -- -- (42) -- --
Income from investment in
unconsolidated joint
venture................... 3,408 1,463 -- -- -- 4,602 --
Gain on sales of real
estate.................... 12,510 -- (12,510) -- -- --
Preferred dividends........ -- -- -- -- -- (13,470) --
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary
items..................... 108,704 37,224 (14,044) (14,714) 32,978 69,420 9,126
Extraordinary items........ (13,204) -- 275 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income................. $ 95,500 $ 37,224 ($13,769) ($14,714) $ 32,978 $ 69,420 $ 9,126
======== ======== ======== ======== ======== ======== ========
Net income per Unit........
Weighted Average Units
Outstanding...............
<CAPTION>
EOP OPERATING
$1.25 BILLION LIMITED
NOTES PREFERRED PARTNERSHIP
AND MOPPRS OFFERING PRO FORMA
------------- --------- -------------
<S> <C> <C> <C>
Revenues:
Rental.................... $ -- $ -- $ 829,351
Tenant reimbursements..... -- -- 146,705
Parking................... -- -- 48,285
Other..................... -- -- 21,626
Management fees........... -- -- 6,286
Interest.................. -- -- 19,930
-------- ------- ----------
-- -- 1,072,183
-------- ------- ----------
Expenses:
Property operating........ -- -- 380,159
Interest.................. 2,414(AL) (15,199)(AM) 206,537
Depreciation.............. -- -- 188,670
Amortization.............. -- -- 8,272
General and
administrative.......... -- -- 39,573
-------- ------- ----------
2,414 (15,199) 823,211
-------- ------- ----------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint
ventures, gain on sales of
real estate and
extraordinary items....... (2,414) 15,199 248,972
Discontinued operations:
Loss from operations --
Construction Company.... -- -- (2,263)
Minority interests:
Partially owned
properties.............. -- -- (1,233)(AO)
Income from investment in
unconsolidated joint
venture................... -- -- 9,509
Gain on sales of real
estate.................... -- -- --
Preferred dividends........ -- (11,813)(AN) (25,283)
-------- ------- ----------
Income before extraordinary
items..................... (2,414) 3,033 229,702
Extraordinary items........ -- -- (12,929)
-------- ------- ----------
Net income................. $ (2,414) $ 3,033 $ 216,773
======== ======= ==========
Net income per Unit........ $ 0.78(AP)
==========
Weighted Average Units
Outstanding............... 279,411
==========
</TABLE>
F-6
<PAGE> 144
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EOP OPERATING
LIMITED CONSOLIDATION
PARTNERSHIP 1996 ACQUIRED 1997 ACQUIRED FINANCING AND IPO
HISTORICAL PROPERTIES PROPERTIES DISPOSITIONS ACTIVITY ADJUSTMENTS
------------- ------------- ------------- ------------ --------- -------------
(V) (W) (W) (X)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental.......................... $386,481 $53,340 $239,256 ($8,303) $ -- $ 16,264(AB)
Tenant reimbursements........... 62,036 9,967 51,795 (88) -- --
Parking......................... 27,253 13,518 20,900 (1,462) -- --
Other........................... 17,626 1,797 6,176 (99) -- --
Management fees................. 5,120 --........ -- -- -- --
Interest........................ 9,608 -- 249 (7) 2,917(Y) --
-------- ------- -------- ------- -------- --------
508,124 78,622 318,376 (9,959) 2,917 16,264
-------- ------- -------- ------- -------- --------
Expenses:
Property operating.............. 201,067 30,971 125,661 (5,046)
Interest........................ 119,595 24,178 103,290 (956) 11,606(Z) (43,041)(AC)
Depreciation.................... 82,905 13,090 59,205 (1,941) -- 7,183(AD)
Amortization.................... 13,332 --........ -- (346) 4,387(AA) (8,591)(AE)
General and administrative...... 23,145 --........ -- -- -- 2,400(AF)
-------- ------- -------- ------- -------- --------
440,044 68,239 288,156 (8,289) 15,993 (42,049)
-------- ------- -------- ------- -------- --------
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 30,220 (1,670) (13,076) 58,313
Discontinued operations:
Loss from operations -
Construction Company.......... -- -- -- -- -- --
Loss on sale - Construction
Company....................... -- -- -- -- -- --
Minority interests:
Partially owned properties...... (2,086) -- -- -- -- (56)
Income from investment in
unconsolidated joint ventures... 2,093 -- 3,218 -- -- --
Gain on sale of real estate...... 5,338 -- -- -- -- --
Preferred dividends.............. -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Income before extraordinary
items........................... 73,425 10,383 33,438 (1,670) (13,076) 58,257
Extraordinary items.............. -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Net income....................... $ 73,425 $10,383 $ 33,438 ($1,670) ($13,076) $ 58,257
======== ======= ======== ======= ======== ========
Net income per Unit..............
Weighted average Units
outstanding.....................
<CAPTION>
BEACON PROPERTIES EOP OPERATING
L.P. BEACON $1.25 BILLION LIMITED
PRE BEACON MERGER MERGER NOTES PREFERRED PARTNERSHIP
PRO FORMA ADJUSTMENTS AND MOPPRS OFFERING PRO FORMA
----------------- ----------- ------------- ---------- ----------------
(AG)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental.......................... $332,309 $ 3,750(AH) $ -- $ -- $1,023,097
Tenant reimbursements........... 46,885 -- -- -- 170,595
Parking......................... -- -- -- -- 60,209
Other........................... 18,026 -- -- -- 43,526
Management fees................. 3,005 -- -- -- 8,125
Interest........................ 8,376 -- -- -- 21,143
-------- -------- ------- ---------- ----------
408,601 3,750 -- -- 1,326,695
-------- -------- ------- ---------- ----------
Expenses:
Property operating.............. 132,230 -- -- -- 484,883
Interest........................ 73,888 632(AI) 3,218(AL) (20,265)(AM) 272,145
Depreciation.................... 78,745 12,537(AJ) -- -- 251,724
Amortization.................... -- -- -- -- 8,782
General and administrative...... 27,099 (20,000)(AK) -- -- 32,644
-------- -------- ------- ---------- ----------
311,962 (6,831) 3,218 (20,265) 1,058,178
-------- -------- ------- ---------- ----------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures, gain on sale of
real estate and extraordinary
items........................... 96,639 10,581 (3,218) 20,265 276,517
Discontinued operations:
Loss from operations -
Construction Company.......... (2,609) -- -- -- (2,609)
Loss on sale - Construction
Company....................... (249) -- -- -- (249)
Minority interests:
Partially owned properties...... -- -- -- -- (2,142)(AO)
Income from investment in
unconsolidated joint ventures... 4,539 -- -- -- 9,850
Gain on sale of real estate...... 16,505 -- -- -- 21,843
Preferred dividends.............. (17,980) -- -- (15,750)(AN) (33,710)
-------- -------- ------- ---------- ----------
Income before extraordinary
items........................... 96,865 10,581 (3,218) 4,044 269,500
Extraordinary items.............. -- -- -- -- --
-------- -------- ------- ---------- ----------
Net income....................... $ 96,865 $ 10,581 $(3,218) $ 4,044 $ 269,500
======== ======== ======= ========== ==========
Net income per Unit.............. $ 0.97(AP)
==========
Weighted average Units
outstanding..................... 279,411
==========
</TABLE>
F-7
<PAGE> 145
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
A. To reflect the following acquisitions acquired during the period from
October 1, 1997 to December 31, 1997, as previously reported in Equity Office
Properties Trust's Current Report on Form 8-K dated October 1, 1997 and the
Company's Current Report on Form 8-K dated December 17, 1997, respectively:
<TABLE>
<CAPTION>
LIABILITIES VALUE OF
PROPERTY NOTE PURCHASE COST CASH PAID ASSUMED UNITS ISSUED
-------- ---- ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Prudential Properties.................... (1) $ 289,000 $ 211,950 $ 6,000 $ 71,050
550 South Hope Street.................... (2) 99,500 99,500 -- --
Acorn Properties......................... (3) 127,500 98,364 14,749 14,387
10 & 30 South Wacker Drive............... (4) 481,301 462,000 19,301 --
One Lafayette Centre..................... (5) 81,680 51,910 5,330 24,440
Acorn Properties......................... (6) 17,161 10,659 2,923 3,579
PPM Properties........................... (7) 91,940 91,940 -- --
LaSalle Office Plaza..................... (8) 97,425 97,425 -- --
Stanwix Parking Facility................. (9) 17,300 17,300 -- --
Wright Runstad Properties................ (10) 640,000 208,867 240,000 191,133
---------- ---------- -------- --------
1,942,807 1,349,915 288,303 304,589
Investment in Wright Runstad Associates
Limited Partnership.................... (11) 20,000 16,001 -- 3,999
---------- ---------- -------- --------
Total $1,962,807 $1,365,916 $288,303 $308,588
========== ========== ======== ========
</TABLE>
- ---------------
(1) Acquired on October 1, 1997, and consists of six properties.
(2) Acquired on October 6, 1997.
(3) Acquired on October 7, 1997, and consists of nine properties.
(4) Acquired on October 7, 1997, and consists of two properties. The purchase
price includes approximately $19.3 million related to a real estate tax
liability from closing prorations.
(5) Acquired on October 17, 1997.
(6) Acquired on November 21, 1997, and consists of two properties.
(7) Acquired on November 24, 1997, and consists of three properties.
(8) Acquired on November 25, 1997.
(9) Acquired on November 25, 1997.
(10) Acquired on December 17, 1997, and consists of ten properties.
(11) Acquired on December 17, 1997.
B. To reflect the following transactions:
<TABLE>
<S> <C>
Issuance of 3.0 million Units at $24.50 each which occurred
on October 1, 1997........................................ $ 73,950
Issuance of 6.7 million Units at $30.00 each which occurred
on October 20, 1997....................................... 200,000
Net proceeds from the $1.5 Billion Credit Facility to fund
acquisitions and other activity (see Note F).............. 968,584
Payment of fees related to the $1.5 Billion Credit Facility
(see Note D).............................................. (4,875)
----------
Net cash proceeds...................................... $1,237,659
==========
</TABLE>
C. To reflect the investment in a mortgage note made in November, 1997. The
Company owns a 50% interest in the mortgage note which bears interest at LIBOR
plus 6%.
F-8
<PAGE> 146
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
D. To reflect fees paid by the Company pertaining to the $1.5 Billion
Credit Facility which was obtained in October, 1997. The fees will be amortized
to interest expense over the term of the $1.5 Billion Credit Facility, which is
nine months.
E. To reflect the mortgage debt repaid from draws on the $1.5 Billion
Credit Facility and to write-off the unamortized mark-to-market adjustments for
the following properties recorded at the time of the Consolidation and the IPO
based on the outstanding principal balances as of September 30, 1997:
<TABLE>
<CAPTION>
MATURITY BALANCE AT
PROPERTY INTEREST RATE DATE 9/30/97
-------- ------------------------ ------------- ----------
<S> <C> <C> <C>
1601 Market.................... LIBOR + 1.25% June 30, 2001 $ 24,152
1620 L Street.................. 8.00% Feb. 4, 2000 21,086
9400 NCX....................... LIBOR + 1.65% May 10, 2001 14,218
Bank One Center................ LIBOR + 1.1% Mar. 19, 1999 83,500
NationsBank.................... 8.00% Dec. 1, 2003 18,855
North Central Plaza............ LIBOR + 1.75% Aug. 3, 1999 14,930
San Jacinto.................... LIBOR + 1.125% Dec. 13, 1998 18,212
Sterling Plaza................. LIBOR + 1.75% Dec. 8, 1998 15,628
The Quadrant................... EURODOLLAR + 2.00% May 31, 1999 18,000
Union Square................... EURODOLLAR + 2.00% May 31, 1999 6,750
--------
Subtotal....................................................................... 235,331
Less: Write-off of unamortized mark-to-market adjustments for debt repaid on San
Jacinto, NationsBank and Bank One Center.......................................... (1,410)
--------
$233,921
========
</TABLE>
F. To record draws on the $1.5 Billion Credit Facility for the following
transactions:
<TABLE>
<S> <C>
Draws to fund acquisitions and other activity (see Note
B)........................................................ $ 968,584
Draws to repay mortgage debt (see Note E)................... 235,331
Draw to fund investment in mortgage note (see Note C)....... 25,150
----------
$1,229,065
==========
</TABLE>
G. To reflect the net increase in partners' capital due to the following
transactions:
<TABLE>
<S> <C>
Units issued after September 30, 1997 (see Note B).......... $ 273,950
Write-off unamortized mark-to-market adjustments on mortgage
debt repaid with the $1.5 Billion Credit Facility (see
Note E)................................................... (1,410)
----------
$ 272,540
==========
</TABLE>
H. Represents Beacon's pre-Beacon Merger pro forma balance sheet as of
September 30, 1997 which includes certain acquisitions and other transactions
that occurred subsequent to September 30, 1997.
F-9
<PAGE> 147
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
I. Represents adjustments to record the Beacon Merger which was accounted
for using the purchase method of accounting, based upon the purchase price of
approximately $4.3 billion and a market value of $31.30 per Unit, as follows:
<TABLE>
<S> <C>
Issuance of 93.9 million Units based on the 1.4063 exchange
rate, in exchange for 66.8 million units of partnership
interest in Beacon Partnership ("Beacon Units")........... $2,939,065
Issuance of $200 million of preferred units to preferred
unitholders of Beacon Partnership......................... 200,000
Assumption of mortgage debt and other liabilities of Beacon
Partnership............................................... 1,100,510
Adjustment to mortgage debt and other liabilities of Beacon
Partnership's to market value (see Note O)................ (30,051)
Beacon Merger costs (see calculation below)................. 93,897
----------
$4,303,421
==========
</TABLE>
The following is a calculation of the estimated fees and other expenses
related to the Beacon Merger:
<TABLE>
<S> <C>
Employee termination costs.................................. $ 70,120
Debt assumption fees........................................ 2,600
Transfer taxes.............................................. 2,200
Advisory fees............................................... 4,500
Legal and accounting fees................................... 4,100
Other, including printing and filing costs.................. 10,377
----------
$ 93,897
==========
</TABLE>
J. Represents the increase in Beacon's investment in real estate, net,
based upon the Company's purchase price as adjusted to reflect the allocation to
other tangible assets of Beacon Partnership being acquired:
<TABLE>
<S> <C>
Purchase price (see Note I)................................. $4,303,421
----------
Less: Pre-merger pro forma basis of Beacon Partnership's net
assets acquired:
Rental property, net...................................... 2,459,465
Cash and cash equivalents, including $84.7 million received
in connection with the exercise of options related to 3.37
million Beacon Partnership Units.......................... 94,461
Investment in unconsolidated joint ventures................. 50,472
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 L)................................ 101,507
----------
Subtotal.................................................... 2,705,905
----------
Step-up to record fair value of Beacon Partnership's
investment in real estate, net............................ $1,597,516
==========
</TABLE>
K. To record the net decrease in cash from the following transactions:
<TABLE>
<S> <C>
Cash received from the exercise of Beacon Partnership
options (see Note J)...................................... $ 84,663
Transaction costs associated with the Beacon Merger (see
Note I)................................................... (93,897)
--------
Net decrease in cash................................... $ (9,234)
========
</TABLE>
L. To eliminate Beacon Partnership's deferred rents receivable of $27.0
million which arose from the historical straight-lining of rents, and Beacon
Partnership's deferred financing and leasing costs of $19.2 million which were
not assigned any value in the allocation of the purchase price.
F-10
<PAGE> 148
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
M. To adjust Beacon Partnership's mortgage debt and other liabilities to
market value.
N. To reflect the net increase in partners' capital associated with the
Beacon Merger, as follows:
<TABLE>
<S> <C>
Issuance of 93.9 million Units based on the 1.4063 exchange
rate, in exchange for 66.8 million Beacon Partnership
Units..................................................... $ 2,939,065
Less: Beacon Partnership pro forma partners' capital
excluding preferred units................................. (1,366,935)
-----------
Net increase to partners' capital........................... $ 1,572,130
===========
</TABLE>
O. To reflect the following costs incurred in connection with the $1.25
Billion Notes and the MOPPRS and the costs associated with terminating hedge
agreements in connection with the $1.25 Billion Notes and the MOPPRS:
<TABLE>
<S> <C>
Underwriting fees........................................... $ 9,812
Offering costs.............................................. 1,000
Hedge agreements termination costs.......................... 32,559
-------
Total.................................................. $43,371
=======
</TABLE>
P. To reflect the $1.25 Billion Notes and the MOPPRS, the premium related
to the put option on the MOPPRS and the discount related to the $1.25 Billion
Notes and the MOPPRS.
Q. To reflect the use of the net proceeds of the $1.25 Billion Notes and
the MOPPRS:
<TABLE>
<S> <C>
Proceeds from the $1.25 Billion Notes and the MOPPRS, net of
the discount, and including the amount received in
connection with the MOPPRS put............................ $ 1,504,452
Costs incurred in connection with the $1.25 Billion Notes
and the MOPPRS and the costs associated with terminating
hedge agreements in connection with the issuance of the
$1.25 Billion Notes and the MOPPRS (see Note O)........... (43,371)
-----------
Net proceeds from $1.25 Billion Notes and the MOPPRS... $ 1,461,081
===========
Paydown of $1.5 Billion Credit Facility..................... $(1,054,064)
Paydown of revolving credit facility........................ (407,017)
-----------
Total.................................................. $(1,461,081)
===========
</TABLE>
R. Represents adjustments to reflect the Preferred Offering of $300 million
consisting of six million preferred units of 5.25% Series B Preferred Units,
liquidation preference of $50.00 per share.
S. To reflect the paydown of the $1.5 Billion Credit Facility with the net
proceeds of the Preferred Offering as follows:
<TABLE>
<S> <C>
Gross proceeds.............................................. $300,000
Less: Underwriting and other costs (see Note U)............. (10,500)
--------
Net proceeds........................................... $289,500
========
</TABLE>
T. To reflect the anticipated Preferred Offering.
U. To reflect the underwriting and other costs incurred in connection with
the Preferred Offering.
V. Represents the combined historical statements of operations of the
Company 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
F-11
<PAGE> 149
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
W. 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 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 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 NOTE 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
Adams-Wabash Parking Facility.............................. August 11, 1997 2
Columbus America Properties................................ September 3, 1997 2
Prudential Properties...................................... October 1, 1997 2
550 South Hope Street...................................... October 6, 1997 2
10 & 30 South Wacker Drive................................. October 7, 1997 2
Acorn Properties........................................... October 7, 1997 2
One Lafayette Centre....................................... October 17, 1997 2
Acorn Properties........................................... November 21, 1997 2
PPM Properties............................................. November 24, 1997 2
LaSalle Office Plaza....................................... November 25, 1997 2
Stanwix Parking Facility................................... November 25, 1997 2
Wright Runstad Properties.................................. December 17, 1997 2
Wright Runstad Associates Limited Partnership.............. December 17, 1997 2
</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".
F-12
<PAGE> 150
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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".
The depreciation adjustment of $38.8 million in the "1997 Acquired
Properties" 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 and $59.2 million in the "1997 Acquired
Properties" 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.
X. 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.
Y. To reflect interest income from the 50% investment in the mortgage note
(see Note C).
Z. 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 $180 Million Notes which occurred on September 3, 1997, and paydown
of the revolving credit facility for the nine months ended September 30, 1997
and the year ended December 31, 1996, and to reflect the $235.3 million of
mortgage indebtedness repaid from draws on the $1.5 Billion Credit Facility (see
Note E) and the repayment of the revolving credit facility balance.
AA. To eliminate the $.7 and $.5 million of amortization expense recorded
on the mark-to-market adjustment on debt repaid from draws on the $1.5 Billion
Credit Facility and to reflect amortization of $4.9 million related to the fees
associated with the $1.5 Billion Credit Facility (see Note D) for the nine
months ended September 30, 1997 and the year ended December 31, 1996.
AB. To reflect the adjustment for the straight-line effect of scheduled
rent increases, assuming the Consolidation and the IPO 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.
AC. To reflect the net change in 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 the net proceeds of the IPO and cash
held by Equity Office Predecessors.
F-13
<PAGE> 151
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AD. 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 $5,022,946
Less: Portion allocated to land estimated to be 10%......... (502,295) (502,295)
---------- ----------
Depreciable basis........................................... $4,520,651 $4,520,651
========== ==========
Depreciation expense based on an estimated useful life of 40
years..................................................... $ 84,762 $ 113,016
---------- ----------
Less: Historical depreciation expense....................... (80,166) (82,905)
Pro forma depreciation expense on 1996 Acquired
Properties................................................ -- (13,090)
Pro forma depreciation expense on properties acquired in
1997 prior to the Consolidation and the IPO............... (3,391) (11,779)
Depreciation expense on disposed properties................. -- 1,941
---------- ----------
Depreciation expense adjustment............................. $ 1,205 $ 7,183
========== ==========
</TABLE>
AE. 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 the IPO, 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.
AF. To reflect additional general and administrative expenses expected to
be incurred as a result of reporting as a public entity as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Trustees and officers insurance............................. $ 375 $ 500
Printing and mailing........................................ 375 500
Trustees and directors fees................................. 225 300
Investor relations.......................................... 225 300
Other....................................................... 600 800
------ ------
Total.................................................. $1,800 $2,400
====== ======
</TABLE>
AG. Represents Beacon Partnership's pre-Beacon Merger pro forma statement
of operations for the nine months ended September 30, 1997 and the year ended
December 31, 1996, respectively, which includes certain acquisitions and other
transactions that occurred subsequent to September 30, 1997.
AH. To reflect the adjustment for the straight-line effect of scheduled
rent increases, assuming the Beacon Merger closed on January 1, 1997 and January
1, 1996, respectively, for the pro forma condensed combined statements of
operations for the nine months ended September 30, 1997 and the year ended
December 31, 1996, respectively.
AI. To reflect amortization of mark-to-market adjustment of Beacon
Partnership's mortgage debt.
AJ. 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
F-14
<PAGE> 152
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Beacon Partnership's mortgage debt for the nine months ended September 30, 1997
and the year ended December 31, 1996 associated with the Beacon Merger, as
follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Beacon pro forma investment in real estate, net (see Note
H)........................................................ $2,459,465 $2,459,465
Adjustment to the basis of the investment in real estate
(see Note J).............................................. 1,597,516 1,597,516
---------- ----------
Total investment in real estate, post-Beacon Merger......... 4,056,981 4,056,981
Less: portion allocated to land, estimated to be 10%........ (405,698) (405,698)
---------- ----------
Pro Forma depreciable basis of Beacon's investment in real
estate, net............................................... $3,651,283 $3,651,283
========== ==========
Depreciation expense based on an estimated useful life of 40
years..................................................... $ 68,462 $ 91,282
Beacon pre-Beacon Merger pro forma depreciation expense..... 61,690 78,745
---------- ----------
Adjustment to depreciation expense.......................... $ 6,772 $ 12,537
========== ==========
</TABLE>
AK. To reflect the anticipated reduction of general and administrative
expenses as a result of the Beacon Merger.
AL. To reflect the net increase in interest expense in connection with the
$1.25 Billion Notes and the MOPPRS and the paydown of the revolving credit
facility and the $1.5 Billion Credit Facility with the net proceeds of the $1.25
Billion Notes and the MOPPRS (see Note Q) and to reflect amortization of the
financing costs incurred in connection with the $1.25 Billion Notes and the
MOPPRS (see Note O).
AM. To reflect the decrease in interest expense in connection with the
paydown of the $1.5 Billion Credit Facility with the net proceeds of the
Preferred Offering (see Note P).
AN. To reflect preferred dividends in connection with the Preferred
Offering of 5.25% per annum.
AO. To reflect the 5% economic interest that the Company does not own in
Equity Office Properties Management Corp. (the "EOP Management Company"):
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Historical ownership interest in partially owned
properties................................................ $ 1,191 $ 2,086
------- -------
Fees from noncombined affiliates............................ 3,840 5,120
Less: EOP Management Company expenses....................... 3,000 4,000
------- -------
Estimated EOP Management Company net income................. 840 1,120
------- -------
Economic interest of 5% in the EOP Management Company....... 42 56
------- -------
Net income allocated to minority interests ownership in
partially owned properties................................ $ 1,233 $ 2,142
======= =======
</TABLE>
AP. Net income per Unit is based upon 279.4 million Units outstanding upon
acquisition of certain properties, issuance of additional Units, and the Beacon
Merger.
F-15
<PAGE> 153
EOP OPERATING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEET
AND EQUITY OFFICE PREDECESSORS COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
EOP OPERATING EQUITY OFFICE
LIMITED PARTNERSHIP PREDECESSORS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------- -------------
($ 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 PARTNERS' CAPITAL/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 -- Partially Owned Properties............ 28,118 11,080
---------- ----------
Partners' Capital/Owners' Equity............................ 3,435,634 1,727,002
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL/OWNERS' EQUITY...... $5,355,922 $3,912,565
========== ==========
</TABLE>
See accompanying notes.
F-16
<PAGE> 154
EOP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF OPERATIONS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
PREDECESSORS EQUITY OFFICE
EOP OPERATING FOR PREDECESSORS
LIMITED PARTNERSHIP THE PERIOD FOR THE THREE
FOR THE PERIOD FROM FROM MONTHS ENDED
JULY 11, 1997 TO JULY 1, 1997 TO SEPTEMBER 30,
SEPTEMBER 30, 1997 JULY 10, 1997 1996
------------------- --------------- -------------
($ 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 -- Partially Owned Properties... (279) (33) (468)
Income from unconsolidated joint ventures.......... 1,426 (43) 477
------------ ------- --------
Income before extraordinary items.................. 47,021 (214) 11,024
Extraordinary items................................ (12,930) -- --
------------ ------- --------
Net income (loss).................................. $ 34,091 $ (214) $ 11,024
============ ======= ========
Net income per Unit:
Income before extraordinary items................ $ 0.29 $ -- $ --
Extraordinary items.............................. (0.08) -- --
------------ ------- --------
Net income per Unit................................ $ .21 $ -- $ --
============ ======= ========
Weighted average Units outstanding................. 164,146,710 -- --
============ ======= ========
</TABLE>
See accompanying notes.
F-17
<PAGE> 155
EOP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF OPERATIONS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
EOP OPERATING EQUITY OFFICE PREDECESSORS
LIMITED PARTNERSHIP PREDECESSORS FOR FOR THE NINE
FOR THE PERIOD FROM THE PERIOD FROM MONTHS ENDED
JULY 11, 1997 TO JANUARY 1, 1997 TO SEPTEMBER 30,
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 -- 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............... 47,021 61,683 43,042
Extraordinary items............................. (12,930) (274) --
------------ -------- --------
Net income...................................... $ 34,091 $ 61,409 $ 43,042
============ ======== ========
Net income per Unit:
Income before extraordinary items............. $ 0.29 $ -- $ --
Extraordinary items........................... (0.08) -- --
------------ -------- --------
Net income per Unit............................. $ 0.21 $ -- $ --
============ ======== ========
Weighted average Units outstanding.............. 164,146,710 -- --
============ ======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE> 156
EOP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF CASH FLOWS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
EOP OPERATING EQUITY OFFICE PREDECESSORS
LIMITED PARTNERSHIP PREDECESSORS FOR FOR THE NINE
FOR THE PERIOD FROM THE PERIOD FROM MONTHS ENDED
JULY 11, 1997 TO JANUARY 1, 1997 TO SEPTEMBER 30,
SEPTEMBER 30, 1997 JULY 10, 1997 1996
------------------- ------------------ -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income............................................ $ 34,091 $ 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.................... 279 912 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-19
<PAGE> 157
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
EOP Operating Limited Partnership, an Illinois limited partnership
(together with its subsidiaries, the "Company"), was formed to conduct the
office property business of Equity Office Properties Trust, a Maryland real
estate investment trust (the "Trust"), and the predecessors thereof ("Equity
Office Predecessors"). The Trust 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 Trust. 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. 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 Trust's assets, which include investments in joint ventures, are owned
by, and substantially all of its operations are conducted through, the Company.
The Trust is the managing general partner of the Company. The Trust expects to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes.
On July 11, 1997, the Company completed the consolidation of the entities
which comprised Equity Office Predecessors (the "Consolidation") in connection
with the consummation of the Company's initial public offering (the "IPO"). In
the IPO, the Trust 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 Trust contributed the net proceeds from
the IPO (after deducting the underwriting discount of $39,243,750) of
$564,506,250 to the Company in exchange for 28,750,000 units of partnership
interest in the Company ("Units"). The Company used the net proceeds of the IPO
contributed to it by the Trust 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 IPO, 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 Company 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 Trust, with the Trust 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 Trust 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 Company in exchange for
8,358,822 Units.
F-20
<PAGE> 158
- The Company 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 "EOP Management
Company"), in exchange for non-voting stock representing 95% of the
economic value in the EOP Management Company and EOH contributed $150,000
to the EOP Management Company in exchange for voting stock representing
5% of the economic value of the EOP Management Company.
- 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 Company 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 upon the completion
of the transactions described above:
<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 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
F-21
<PAGE> 159
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
herein in order to provide comparability with the 1997 statements reported
herein. These reclassifications have not changed the 1996 results or owners'
equity.
6. 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 $29 per Unit).
7. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Equity Office Predecessors acquired a mortgage receivable secured by the
500 Orange Tower office property ("500 Orange") and purchased land underlying
and adjacent to 500 Orange in July 1994, and acquired a 50% limited partnership
interest in Civic Parking, L.L.C. in April 1997. These transactions were
accounted for utilizing the equity method of accounting. Under this method of
accounting, the net equity investment of the Company is reflected on the
consolidated and combined balance sheets, and the
F-22
<PAGE> 160
consolidated and combined statements of operations include the Company's share
of net income or loss from 500 Orange and Civic Parking, L.L.C. The Company's
share of net income or loss from 500 Orange and Civic Parking, L.L.C. is
approximately 100% and 50%, respectively. Selected balance sheets and statements
of operations data for the Company's interest in 500 Orange and Civic Parking,
L.L.C. is as follows:
<TABLE>
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
BALANCE SHEETS ---------------------------- ----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1997 1996 1997 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
<CAPTION>
(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 $52,654 --
======= ======= ======= ==
</TABLE>
<TABLE>
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
----------------------------- -----------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
STATEMENTS OF OPERATIONS ----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
<CAPTION>
(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>
F-23
<PAGE> 161
<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
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
<CAPTION>
(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.
8. 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 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 $975,000. 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 "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
U.S. Treasury rate. The Company used the proceeds of the 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 Private Debt Offering. This amount will be
amortized to
F-24
<PAGE> 162
interest expense over the respective terms of each tranche. A summary of the
terms of the Private Debt Offering is as follows:
<TABLE>
<CAPTION>
TRANCHE AMOUNT STATED RATE EFFECTIVE 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 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 Operating
Partnership 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, 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 has terminated $700 million of hedge agreements in connection with
the February 1998 Notes Offering at a cost of $32.6 million. Upon the occurrence
of the termination of the remaining hedge agreements, the Company will either
owe money or be entitled to receive money 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.
9. PARTNERS' CAPITAL
As discussed in Note 1 above, the Company issued 163,555,677 Units in
connection with the Consolidation and IPO. On September 3, 1997, the Company
issued 1,692,546 Units in connection with the Columbus America Properties
acquisition.
On September 26, 1997, the Trust as general partner of the Company,
declared a distribution of $.26 per Unit outstanding, representing a pro rata
distribution since the closing of the IPO on July 11, 1997, based upon a full
quarterly distribution of $.30 per Unit and an annual distribution of $1.20 per
Unit, totaling approximately $42,964,500. The distribution was paid on October
9, 1997 to Unit holders of record on September 29, 1997.
F-25
<PAGE> 163
10. 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 Trust and 11,877,647 Units of the Company 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>
EOP OPERATING EQUITY OFFICE
LIMITED PARTNERSHIP PREDECESSORS EQUITY OFFICE
FOR 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>
11. 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 IPO 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 IPO 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 $1.5 Billion Credit Facility (see Note 17 (7)) used to
refinance existing debt.
F-26
<PAGE> 164
The accompanying unaudited pro forma consolidated statement of operations
have been prepared by management of the Company and do not purport to be
indicative of the results which would actually have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The pro forma consolidated statement of operations
should be read in conjunction with the accompanying notes to the financial
statements contained herein.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE NINE MONTHS ENDED
------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------- ------------- -------------
($ 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 -- 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.................. 50,415 153,224 120,002
Extraordinary items................................ (12,929) (12,929) --
------------ ------------ ------------
Net income....................................... $37,486...... $140,295..... $ 120,002
============ ============ ============
Net income per Unit:
Income before extraordinary items................ $ .29 $.86......... $ .67
Extraordinary items.............................. (.08) (.08) --
------------ ------------ ------------
Net income per Unit................................ $ .21 $ .78 $ .67
============ ============ ============
Number of Units outstanding........................ 179,195,816 179,195,816 179,195,816
============ ============ ============
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company has become a party to various legal actions resulting from the
operating activities transferred to it 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 (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").
F-27
<PAGE> 165
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.
13. MERGER
On September 15, 1997, the Trust and the Company entered into a definitive
agreement and plan of merger with Beacon Properties Corporation and Beacon
Properties, L.P. (collectively "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 Trust's Board of
Trustees and Beacon's Board of Directors. The merger plan calls for the Company
to issue 1.4063 Class A Units of the Company for each Common Partnership Unit of
Beacon Properties, L.P. which is anticipated to result in the issuance of
approximately 9.8 million Units and the assumption of outstanding liabilities of
approximately $1.0 billion as well as approximately 84.0 million Common Shares
and $200 million in preferred shares to be issued in the connection the Merger
of the Trust and Beacon Properties Corporation. 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,
unitholders of Beacon and other conditions. There can be no assurance that this
transaction will be consummated as described above.
14. 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;
- One Devon Square, consisting of 77,267 square feet;
F-28
<PAGE> 166
- 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 Trust's Board of Trustees approved the purchase by the
Company 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 Trust's Board of Trustees approved the purchase
by the Company 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 Trust completed a private placement of Common
Shares with an unaffiliated party receiving approximately $200 million at $30
per share.
(9) In November, 1997, the Trust's Board of Trustees approved the purchase
by the Company of LaSalle Plaza, a 588,908 square foot office building, located
in Minneapolis, Minnesota, for approximately
F-29
<PAGE> 167
$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 Trust's Board of Trustees approved the purchase
by the Company 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 Trust'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 Units at the IPO through
November 14, 1997:
<TABLE>
<CAPTION>
TRANSACTION DATE UNITS
----------- -------- -----------
<S> <C> <C>
Outstanding upon completion of the IPO(A)................... 7/11/97 163,555,677
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........................ 9/30/97 165,369,647
Common Shares and Units issued to seller of Properties (Note
17 (1))................................................... 10/7/97 5,918,367
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......................... 179,195,817
===========
</TABLE>
- ---------------
(A) Excludes 502,740 common shares held by the Company which are deemed not to
be outstanding for accounting purposes and are eliminated in consolidation.
F-30
<PAGE> 168
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-31
<PAGE> 169
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-32
<PAGE> 170
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-33
<PAGE> 171
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-34
<PAGE> 172
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-35
<PAGE> 173
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 Offering Memorandum. These footnotes should be read in conjunction with the
Offering Memorandum.
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 "Trust") 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 Trust pursuant to the
Consolidation and the IPO. 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
(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.
F-36
<PAGE> 174
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 to sell. Subsequent to the
date that a property is held for disposition, depreciation expense is not
provided for in the statement of operations.
F-37
<PAGE> 175
EQUITY OFFICE PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-38
<PAGE> 176
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-39
<PAGE> 177
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-40
<PAGE> 178
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-41
<PAGE> 179
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-42
<PAGE> 180
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-43
<PAGE> 181
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>
January 1, 1995 -- December 31,
Term: 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-44
<PAGE> 182
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-45
<PAGE> 183
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-46
<PAGE> 184
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-47
<PAGE> 185
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-48
<PAGE> 186
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
Ft. Lauderdale,
First Union Center 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
</TABLE>
<TABLE>
<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-49
<PAGE> 187
<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-50
<PAGE> 188
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-51
<PAGE> 189
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 a 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-52
<PAGE> 190
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-53
<PAGE> 191
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 a 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-54
<PAGE> 192
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 a 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-55
<PAGE> 193
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-56
<PAGE> 194
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 a 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-57
<PAGE> 195
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 a 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-58
<PAGE> 196
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-59
<PAGE> 197
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 a 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-60
<PAGE> 198
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 a 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-61
<PAGE> 199
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-62
<PAGE> 200
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 a 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-63
<PAGE> 201
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 a 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-64
<PAGE> 202
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-65
<PAGE> 203
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 a 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-66
<PAGE> 204
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 a 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-67
<PAGE> 205
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-68
<PAGE> 206
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 a 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-69
<PAGE> 207
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 a 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-70
<PAGE> 208
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-71
<PAGE> 209
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 a 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-72
<PAGE> 210
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-73
<PAGE> 211
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 a 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-74
<PAGE> 212
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-75
<PAGE> 213
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 a 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 $289 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-76
<PAGE> 214
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 a 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-77
<PAGE> 215
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-78
<PAGE> 216
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 a 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-79
<PAGE> 217
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 a 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-80
<PAGE> 218
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-81
<PAGE> 219
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 a 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-82
<PAGE> 220
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-83
<PAGE> 221
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 a 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-84
<PAGE> 222
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-85
<PAGE> 223
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 a 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 $481 million by Equity
Office Properties Trust from an unrelated party.
F-86
<PAGE> 224
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 a 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-87
<PAGE> 225
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-88
<PAGE> 226
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 a 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
315,000 rentable square feet, located in Washington, D.C. (the "Property"). It
is expected that the Property will be acquired for $81.7 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-89
<PAGE> 227
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 a 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-90
<PAGE> 228
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-91
<PAGE> 229
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 a 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............................................. 392,500
1600 Duke Street............................................ 68,800
Fair Oaks Plaza............................................. 177,900
-------
639,200
=======
</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-92
<PAGE> 230
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 Wright Runstad Properties (the Properties) as described in Note
2 for the year ended September 30, 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 a Current Report on Form 8-K 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
September 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 26, 1997
F-93
<PAGE> 231
WRIGHT RUNSTAD PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1, 1996
YEAR ENDED THROUGH
SEPTEMBER 30, 1996 AUGUST 31, 1997
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Base rents................................................ $57,191 $54,796
Tenant reimbursements..................................... 3,294 3,293
Parking income............................................ 5,838 5,780
Other income.............................................. 1,052 446
------- -------
Total revenue............................................. 67,375 64,315
------- -------
EXPENSES
Property operating and maintenance........................ 15,427 14,890
Real estate taxes......................................... 4,881 4,616
Management fee............................................ 1,855 1,793
Insurance................................................. 468 427
Ground rent and air rights................................ 1,577 1,440
------- -------
Total expenses............................................ 24,208 23,166
------- -------
Revenue in excess of certain expenses....................... $43,167 $41,149
======= =======
</TABLE>
See accompanying notes.
F-94
<PAGE> 232
WRIGHT RUNSTAD 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 a Current Report on Form 8-K
of Equity Office Properties Trust. The accompanying financial statements are not
representative of the actual operations of the Wright Runstad Properties (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 Properties which are to be acquired by Equity
Office Properties Trust for approximately $640 million from an unrelated party.
The Properties have been presented on a combined basis because all of the
Properties are under common ownership and management. The following office
properties are included in the combined financial statements:
<TABLE>
<CAPTION>
APPROXIMATE
RENTABLE
SQUARE
PROPERTY NAME LOCATION FOOTAGE
------------- -------- -----------
<S> <C> <C>
1111 Third Avenue............................ Seattle, Washington 528,282
First Interstate Center...................... Seattle, Washington 915,883
Second & Seneca Building..................... Seattle, Washington 480,272
Nordstrom Medical Tower...................... Seattle, Washington 101,431
One Bellevue Center.......................... Bellevue, Washington 344,715
Rainier Plaza................................ Bellevue, Washington 410,855
1001 Fifth Avenue............................ Portland, Oregon 368,018
Calais Office Center......................... Anchorage, Alaska 190,599
---------
3,340,055
=========
</TABLE>
F-95
<PAGE> 233
WRIGHT RUNSTAD 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 seller, except
for Nordstrom Medical Tower, which is managed by a third party. The management
agreements provided for a fee of 3.0% of gross receipts and reimbursements for
on-site personnel.
The Partnership owning the Properties is a member of the J. Nordstrom
Medical Tower Condominium Association (the Association), which provides
administrative services relating to building operations of the Nordstrom Medical
Tower. The Association is managed by an affiliate. The Association pays all
operating expenses associated with the building and is reimbursed annually by
condominium unit owners, including Nordstrom Medical Tower. The Properties
incurred $510,000 under this agreement during 1996.
The Properties lease each of their parking garages to an affiliate of the
seller in exchange for a percentage of the parking revenue, net of expenses.
5. COMMITMENTS
The land underlying Rainier Plaza is leased under a 55-year lease agreement
expiring in 2040, plus an option for an additional 35 years. The minimum annual
rent is $566,800 at September 30, 1996. The lease also provides for contingent
rent based upon the gross income of the property, as defined in the lease. No
contingent rentals were due for 1996.
The land underlying One Bellevue Center is leased under a 70-year lease
expiring on June 30, 2052 with an option to extend for an additional 20 years.
The basic rent under the ground lease agreement is $39,055 per month at
September 30, 1996, plus all taxes, utility charges, and other assessments on
the property. In July of each year, the basic rent increases 2%. Additional rent
may be due based on adjusted gross revenue, as defined in the lease agreement.
No additional rent was due in 1996.
The parking garage facilities located adjacent to the 1001 Fifth Avenue are
leased through May 31, 1998, with renewal options for ten and five years. The
lease provides for minimum payments of $175,000 per year, plus 50% of the
adjusted gross annual revenues in excess of $300,000 from the garage operations.
Rent expense under this lease was $637,000 in 1996.
The land underlying the Calais I & II are leased under a ground lease,
expiring in 2029, with four ten-year options to extend. Monthly rental payments
are $8,000 per month until December 31, 1999, at which time monthly payments
will increase to approximately $9,000. Beginning in 2005, monthly payments are
subject to annual adjustments based on office rentals and changes in the
consumer price index.
There is an agreement with a bank through 2037, whereby the bank agreed to
certain building restrictions that limit the height and bulk of current and
future improvements, if any, to be placed on the bank's land, which is adjacent
to 1111 Third Avenue. There are options to extend this agreement for at least an
additional 39 years. In return for these restrictions, 1111 Third Avenue is
obligated to pay the bank $75,000 per year, plus 4% of annual net proceeds from
the property (prior to debt service) in excess of $4,847,000 on an annual basis.
Total amounts paid or accrued under this agreement were $75,000 for the year
ended September 30, 1996.
F-96
<PAGE> 234
BEACON PROPERTIES, L.P.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma Condensed Consolidated Balance Sheet of
Beacon Properties, L.P. (the "Operating Partnership") as of September 30, 1997,
is presented as if the Civic Opera Building, 200 West Adams, 101 North Wacker
and Lakeside properties were acquired on September 30, 1997.
The pro forma Condensed Consolidated Statements of Operations for the year
ended December 31, 1996 and nine months ended September 30, 1997 are presented
as if the acquisition of the Properties acquired from January 1, 1996 to October
20, 1997 (as more fully described below) and 101 North Wacker, the closing of
the MetLife Mortgage loan, the Beacon Properties Corporation common stock
offerings from January 1996 to April 1997 (as more fully described below) and
the Beacon Properties Corporation 8.98% Series A Cumulative Redeemable Preferred
Stock Offering at $25.00 per share had occurred as of January 1, 1996.
In management's opinion, all adjustments necessary to reflect the above
discussed transactions have been made. The unaudited pro forma Condensed
Consolidated Balance Sheet and Statement of Operations are not necessarily
indicative of what actual results of operations of the Operating Partnership
would have been for the period, nor does it purport to represent the Operating
Partnership's results of operations for future periods.
F-97
<PAGE> 235
Acquisitions included in pro forma:
<TABLE>
<CAPTION>
RENTABLE YEAR BUILT/ DATE OF
PROPERTY NAME SQ FT RENOVATED ACQUISITION
------------- -------- ----------- -----------
<S> <C> <C> <C>
1996 Acquisitions
Perimeter Center, Atlanta, GA............................. 3,302,000 1970-1989 02/15/96
New York Life Portfolio, Chicago, IL and Washington,
D.C..................................................... 1,012,000 1984-1986 08/16/96
Fairfax County Portfolio, McLean, VA and Herndon, VA...... 550,000 1981-1988 09/05/96
Rosslyn Virginia Portfolio, Rosslyn, VA................... 666,000 1974-1980 10/18/96
New England Executive Park, Burlington, MA................ 817,000 1970-1985 11/15/96
245 First Street, Cambridge, MA........................... 263,000 1985-1986 11/21/96
10960 Wilshire Boulevard, Westwood, CA.................... 544,000 1971-1992 11/21/96
Shoreline Technology Park, Mountain View, CA.............. 727,000 1985-1991 12/20/96
Lake Marriott Business Park, Santa Clara, CA.............. 400,000 1981 12/20/96
Presidents Plaza, Chicago, IL............................. 791,000 1980-1982 12/27/96
</TABLE>
<TABLE>
<CAPTION>
PURCHASE PRICE
--------------------------------------------
SELLER CASH DEBT O.P. UNITS TOTAL
------ ---- ---- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996 Acquisitions
- --------------------------------------------------
Metropolitan Life Insurance Company............... $ 322,200 $ 13,800 $336,000
New York Life Insurance Company................... 150,000 150,000
Greensboro Associates, John Marshall Associates
Limited Partnership and Woodland-Northridge I
Limited Partnership............................. $55,400 21,600 77,000
LaSalle Fund II................................... 99,050 99,050
New England Executive Park Limited Partnership, et
al.............................................. 75,000 75,000
Riverview Building Combined Limited Partnership... 45,000 45,000
10960 Property Corporation........................ 133,000 133,000
Teachers Insurance and Annuity Association
(TIAA).......................................... 139,080 139,080
Teachers Insurance and Annuity Association
(TIAA).......................................... 43,920 43,920
Metropolitan Life Insurance Company............... 38,000 39,000 77,000
</TABLE>
<TABLE>
<CAPTION>
RENTABLE YEAR BUILT/ DATE OF
SELLER SQ FT RENOVATED ACQUISITION
------ -------- ----------- -----------
<S> <C> <C> <C>
1997 Acquisitions
- ----------------------------------------------------------
10880 Wilshire Boulevard, Westwood, CA.................... 531,000 1970 4/23/97
Centerpointe I and II, Fairfax, VA........................ 409,000 1988-1990 4/30/97
Westbrook Corporate Center, Westchester, IL............... 1,106,000 1985-1996 5/23/97
175 Wyman Street, Waltham, MA............................. (1) (1) 5/13/97
225 Franklin Street, Boston, MA........................... 929,545 1966 6/4/97
Sunnyvale Business Center, Sunnyvale, CA.................. 175,000 1990 7/1/97
Riverside, Newton, MA..................................... (2) (2) 8/21/97
150 California, San Francisco, CA......................... (3) (3) 9/25/97
Media Center , Los Angeles, CA............................ (4) (4) 9/29/97
Civic Opera Building, Chicago, IL......................... 824,000 1994 10/1/97
200 West Adams, Chicago, IL............................... 677,000 1985 10/8/97
Lakeside, Atlanta, GA..................................... 391,000 1972-1978 10/20/97
101 North Wacker, Chicago, IL............................. 575,000 1980 Pending
</TABLE>
F-98
<PAGE> 236
<TABLE>
<CAPTION>
PURCHASE PRICE
-------------------------------------------
SELLER CASH DEBT O.P. UNITS TOTAL
------ ---- ---- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997 Acquisitions
10880 Property Corporation.......................... $ 99,800 $ 99,800
Joshua Realty Corporation........................... 25,000 $ 30,000 55,000
Westbrook Corporate Center Associates, Westbrook
Corporate Center IV Associates Limited Partnership
and Westbrook Corporate Center V Associates
Limited Partnership............................... 42,700 106,000 $ 33,400 182,100
Hewlett-Packard Company............................. 24,000 24,000
Hexalon Real Estate, Inc............................ 280,000 280,000
O.M. Sunnyvale Associates, L.P. .................... 33,800 33,800
Cabot, Cabot & Forbes of New England, Inc. ......... 32,500 32,500
CalProp, Inc. ...................................... 10,600 10,600
City of Burbank, Ishverbhai Patel, Patel Charitable
Remainder Unitrust and Burbank Holdings, Inc. .... 18,850 18,850
Windy Point LLC and Range Line LLC.................. 21,136 31,773 6,701 59,610
Adams Family LLC.................................... 72,175 72,175
Mutual Life Insurance Company of New York........... 38,000 38,000
Dai-Ichi and Metropolitan Life Insurance Co. ....... 58,965 58,965
</TABLE>
- -------------------------
(1) 175 Wyman Street consists of a vacant 335,000 square for office/research and
development complex and 26.7 acres of land suitable for development. The
Operating partnership plans to redevelop the property into 400,000 square
feet of class A office space.
(2) The Riverside investment consists of a mortgage loan receivable from
Riverside Project LLC in the amount of $26,000 which bears interest at 9%
and is due upon sale along with 50% of any excess sale proceeds. In
addition, loans bearing interest at 7% in the amount of $3,250 each are due
from Beacon Property Management Corporation and Beacon Design Corporation,
the proceeds of which were used by these entities to capitalize Riverside
Project LLC.
(3) 150 California land consists of a parcel of land on which the Operating
Partnership plans to develop a 207,000 square foot class A office property.
(4) Media Center consists of a parcel of land on which the Operating Partnership
plans to develop a 585,000 square feet of class A office space.
Common and Preferred Stock Offerings included in pro forma:
<TABLE>
<CAPTION>
GROSS NET
PRICE PER PROCEEDS PROCEEDS
YEAR MONTH SHARES TYPE SHARE (IN THOUSANDS) (IN THOUSANDS)
---- ----- ------ ---- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1996..................... March 7,036,000 Common $26.25 $184,695 $173,800
1996..................... August 5,750,000 Common 25.75 148,063 139,400
1996..................... November 13,723,000 Common 30.75 421,982 398,900
1996..................... December 1,132,400 Common 33.465 37,896 37,800
1997..................... April 7,000,000 Common 32.125 224,875 212,722
1997..................... June 8,000,000 Preferred 25.00 200,000 193,350
</TABLE>
F-99
<PAGE> 237
BEACON PROPERTIES, L.P.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------------------------
BEACON
PROPERTIES,
L.P. CIVIC OPERA 200 WEST 101 NORTH
HISTORICAL BUILDING ADAMS LAKESIDE WACKER
----------- ----------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate, net......................... $2,230,715 $59,610 $72,175 $38,000 $58,965
Deferred financing and leasing costs,
net.................................... 19,179
Cash and cash equivalents................ 36,609 (20,136) (6,675)
Mortgages and notes receivable........... 85,196
Other assets............................. 48,783 (1,000) (500) (1,000) (2,948)
Investments in and advance to joint
ventures and corporations.............. 50,472
---------- ------- ------- ------- -------
Total assets........................ $2,470,954 $38,474 $65,000 $37,000 $56,017
========== ======= ======= ======= =======
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable................... $ 586,925 $31,773(A)
Note payable, Credit Facility............ 249,000 $65,000 $37,000 $56,017
Other liabilities........................ 50,743
Investment in joint venture.............. 24,052
---------- ------- ------- ------- -------
Total liabilities................... 910,720 31,773 65,000 37,000 $56,017
Limited partners' capital interest at
redemption value....................... 336,422 6,701(B)
Partners' capital........................ 1,223,812
---------- ------- ------- ------- -------
Total liabilities and partners'
capital........................... $2,470,954 $38,474 $65,000 $37,000 $56,017
========== ======= ======= ======= =======
</TABLE>
F-100
<PAGE> 238
BEACON PROPERTIES, L.P.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
PRO FORMA
PRO FORMA CONSOLIDATED
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate, net............................................ $2,459,465
Deferred financing and leasing costs, net................... 19,179
Cash and cash equivalents................................... 9,798
Mortgages and notes receivable.............................. 85,196
Other assets................................................ 43,335
Investments in and advance to joint ventures and
corporations.............................................. 50,472
------- ----------
Total assets........................................... -- $2,667,445
======= ==========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable...................................... $ 618,698
Note payable, Credit Facility............................... 407,017
Other liabilities........................................... 50,743
Investment in joint venture................................. 24,052
------- ----------
Total liabilities...................................... 1,100,510
Limited partners' capital interest at redemption value...... $ 480(C) 343,603
Partners' capital........................................... (480) 1,223,332
------- ----------
Total liabilities and partners' capital................ -- $2,667,445
======= ==========
</TABLE>
- -------------------------
(A) The mortgage debt has an interest rate of 7.37% and requires monthly
principal and interest payments based on a 25 year amortization schedule.
The mortgage matures March 15, 2000 but maybe extended until March 15, 2003
based on compliance with certain covenant requirements.
(B) The seller of Civic Opera Building was issued $6,701 of Operating
Partnership Units consisting of 156,756 units valued at $42.745 each.
(C) Pro forma adjustment required to adjust the issuance of 156,756 units (See
(B)) to September 30, 1997 redemption value of $45.8125 per Unit. The
$45.8125 value per Unit is based on the closing price of Beacon Properties
Corporation's common stock on September 30, 1997.
F-101
<PAGE> 239
BEACON PROPERTIES, L.P.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER &
BEACON NEW YORK LIFE NOVEMBER
PROPERTIES, L.P. PERIMETER AND FAIRFAX VA. 1996
HISTORICAL CENTER(A) PORTFOLIOS(B) ACQUISITIONS(G)
---------------- --------- --------------- ---------------
(DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS AND UNITS
OUTSTANDING)
<S> <C> <C> <C> <C>
Revenue:
Rental income............................ $147,825 $ 6,420 $19,098 $38,886
Management fees.......................... 3,005
Recoveries from tenants.................. 16,719 304 3,788 3,674
Mortgage interest income................. 4,970
Other income............................. 11,272 208 845 3,012
-------- ------- ------- -------
Total revenue............................ 183,791 6,932 23,731 45,572
-------- ------- ------- -------
Expenses:
Property expenses........................ 37,211 1,562 4,875 11,716
Real estate taxes........................ 18,124 591 1,708 3,991
General and administrative............... 19,331 378 812 1,700
Mortgage interest expense................ 30,300 1,895(C) 2,954(F)
Interest -- amortization of financing
costs................................. 2,084 15(D)
Depreciation and amortization............ 33,184 1,196(E) 4,374(E) 9,105(E)
-------- ------- ------- -------
Total expenses........................... 140,234 5,637 14,723 26,512
-------- ------- ------- -------
Income from operations..................... 43,557 1,295 9,008 19,060
Equity in net income of joint ventures and
corporation.............................. 4,989
-------- ------- ------- -------
Income from continuing operations.......... 48,546 1,295 9,008 19,060
Discontinued operations:
Loss from operations -- Construction
Company..................................
Loss on sale -- Construction Company....... (2,609)
Gain on sale -- Westlakes Office Park...... (249)
-------- ------- ------- -------
Income before extraordinary items.......... 45,688 1,295 9,008 19,060
Series A Preferred distributions...........
-------- ------- ------- -------
Net income available for units before
extraordinary items...................... $ 45,688 $ 1,295 $ 9,008 $19,060
======== ======= ======= =======
</TABLE>
- -------------------------
Units Outstanding (Excluding Preferred Units)
Net income per unit
(1) Includes Depreciation and amortization of $4,033
F-102
<PAGE> 240
<TABLE>
<CAPTION>
PROPERTIES ACQUIRED WESTLAKES
DECEMBER 1996 AS OF OFFICE PARK
ACQUISITIONS(H) SEPTEMBER 30, 1997(I) SALE (K)
--------------- --------------------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER UNIT
AMOUNTS AND UNITS OUTSTANDING)
<S> <C> <C> <C>
Revenue:
Rental income........................................ $26,858 $69,302 $ (8,422)
Management fees......................................
Recoveries from tenants.............................. 6,099 8,203 (1,020)
Mortgage interest income.............................
Other income......................................... 470 2,783 (1,293)
------- ------- --------
Total revenue..................................... 33,427 80,288 (10,735)
------- ------- --------
Expenses:
Property expenses.................................... 4,509 14,299 (2,588)
Real estate taxes.................................... 5,036 8,700 (626)
General and administrative........................... 1,250 2,011 (471)
Mortgage interest expense............................ 10,380(J)
Interest -- amortization of financing costs..........
Depreciation and amortization........................ 6,555(E) 19,927(E) (2,458)
------- ------- --------
Total expenses.................................... 17,350 55,317 (6,143)
------- ------- --------
Income from operations................................. 16,077 24,971 (4,592)
Equity in net income of joint ventures and
corporation..........................................
------- ------- --------
Income from continuing operations...................... 16,077 24,971 (4,592)
Discontinued operations:
Loss from operations -- Construction Company...........
Loss on sale -- Construction Company...................
Gain on sale -- Westlakes Office Park.................. 16,505
Income before extraordinary items...................... 16,077 24,971 11,913
------- ------- --------
Series A Preferred distributions.......................
Net income available for units before extraordinary
items................................................ $16,077 $24,971 $ 11,913
======= ======= ========
Units Outstanding (Excluding Preferred Units)
Net income per unit....................................
</TABLE>
- ---------------
(1) Includes Depreciation and amortization of $ 4,033
F-103
<PAGE> 241
<TABLE>
<CAPTION>
PROPERTIES
ACQUIRED OR TO
BE ACQUIRED AFTER PRO FORMA PRO FORMA
SEPTEMBER 30, 1997 (L) ADJUSTMENTS CONSOLIDATED
---------------------- ----------- ------------
(DOLLARS IN THOUSANDS EXCEPT PER UNIT
AMOUNTS AND UNITS OUTSTANDING)
<S> <C> <C> <C>
Revenue:
Rental income................................. $32,342 $ 332,309
Management fees............................... 3,005
Recoveries from tenants....................... 9,118 46,885
Mortgage interest income...................... $ 3,406(M) 8,376
Other income.................................. 729 18,026
------- -------- -----------
Total revenue.............................. 42,189 3,406 408,601
------- -------- -----------
Expenses:
Property expenses............................. 12,792 84,375
Real estate taxes............................. 10,330 47,854
General and administrative.................... 2,087 27,099
Mortgage interest expense..................... 26,261(N) 71,789
Interest -- amortization of financing costs... 2,099
Depreciation and amortization................. 6,863(E) 78,745
------- -------- -----------
Total expenses............................. 32,072 26,261 311,962
------- -------- -----------
Income from operations.......................... 10,118 (22,854) 96,640
Equity in net income of joint ventures and
corporation................................... (450)(O) 4,539(1)
------- -------- -----------
Income from continuing operations............... 10,118 (23,365) 101,178
Discontinued operations:
Loss from operations -- Construction Company.... (2,609)
Loss on sale -- Construction Company............ (249)
Gain on sale -- Westlakes Office Park........... 16,505
------- -------- -----------
Income before extraordinary items............... 10,118 (23,305) 114,825
Series A Preferred distributions................ (17,960)(P) (17,960)
------- -------- -----------
Net income available for units before
extraordinary items........................... $10,118 $(41,265) $ 96,865
======= ======== ===========
Units Outstanding (Excluding Preferred Units)... 63,156,724
Net income per unit............................. $ 1.53
</TABLE>
- ---------------
(1) Includes Depreciation and amortization of $4,033
See accompanying notes to pro forma condensed consolidated statement of
operations.
F-104
<PAGE> 242
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(A) Results of operations of Perimeter Center for the period ended February
14, 1996.
<TABLE>
<S> <C>
Rental income -- historical................................. $6,128
Pro forma straight-line rent adjustment..................... 292
------
Pro forma rental income..................................... $6,420
======
</TABLE>
(B) Results of operations of the Fairfax County Portfolio and the New York
Life Portfolio for the periods ended September 4, 1996 and August 15, 1996,
respectively.
<TABLE>
<CAPTION>
NEW
FAIRFAX YORK
COUNTY LIFE
PORTFOLIO PORTFOLIO TOTAL
--------- --------- -----
<S> <C> <C> <C>
REVENUE:
Rental income-historical......................... $7,284 $11,048 $18,332
Pro forma straight-line rent adjustment.......... 377 389 766
------ ------- -------
Pro forma rental income.......................... 7,661 11,437 19,098
Management fees..................................
Recoveries from tenants.......................... 542 3,247 3,788
Mortgage interest income.........................
Other income..................................... 72 773 845
------ ------- -------
Total revenue................................. 8,274 15,457 23,731
------ ------- -------
EXPENSES:
Property expenses................................ 1,581 3,294 4,875
Real estate taxes................................ 364 1,345 1,708
General and administrative....................... 80 732 812
Mortgage interest expense (F) 2,954 2,954
Interest -- amortization of financing costs......
Depreciation and amortization (E)................ 1,568 2,806 4,374
------ ------- -------
Total expenses................................ 6,546 8,177 14,723
------ ------- -------
Income from operations............................. $1,728 $ 7,280 $ 9,008
====== ======= =======
</TABLE>
(C) Net interest expense associated with the MetLife Mortgage Loan in the
amount of $218 million based on a 7.08% interest rate for the period ended prior
to March 15, 1996.
(D) Amortization of the costs of obtaining the permanent financing at $1.2
million over 10 years.
F-105
<PAGE> 243
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
(UNAUDITED)
(E) Detail of depreciation expense by property is presented as follows:
<TABLE>
<CAPTION>
BASIS LIFE DEPRECIATION
----- ---- ------------
<S> <C> <C> <C>
Perimeter Center............................................ $287,130 30 yrs $ 1,196
=======
Fairfax County Portfolio.................................... 69,300 30 yrs $ 1,568
The New York Life Portfolio................................. 135,000 30 yrs 2,806
-------
$ 4,374
=======
October & November 1996 Acquisitions:
- ------------------------------------------------------------
Rosslyn, Virginia Portfolio................................. 89,145 30 yrs $ 2,352
New England Executive Park.................................. 67,500 30 yrs 1,969
245 First Street............................................ 40,500 30 yrs 1,209
10960 Wilshire Boulevard.................................... 119,700 30 yrs 3,574
-------
$ 9,105
=======
December 1996 Acquisitions:
- ------------------------------------------------------------
Lake Marriott Business Park................................. 31,110 30 yrs $ 1,008
Shoreline Technology Park................................... 100,650 30 yrs 3,263
Presidents Plaza............................................ 69,250 30 yrs 2,284
-------
$ 6,555
=======
1997 acquisitions as of September 30, 1997
- ------------------------------------------------------------
10880 Wilshire Boulevard.................................... 102,000 30 yrs $ 3,400
Centerpointe................................................ 49,500 30 yrs 1,650
Westbrook Corporate Center.................................. 163,890 30 yrs 5,463
225 Franklin Street......................................... 252,000 30 yrs 8,400
Sunnyvale Business Center................................... 30,420 30 yrs 1,014
-------
$19,927
=======
Properties acquired or to be acquired after September 30,
1997:
- ------------------------------------------------------------
Civic Opera Building........................................ 53,649 30 yrs $ 1,788
200 West Adams.............................................. 64,958 30 yrs 2,165
Lakeside.................................................... 34,200 30 yrs 1,140
101 North Wacker............................................ 53,069 30 yrs 1,769
-------
$ 6,863
=======
</TABLE>
(F) Fairfax County Portfolio interest expense on debt assumed for period
prior to acquisition:
<TABLE>
<CAPTION>
PRINCIPAL RATE EXPENSE
--------- ---- -------
<S> <C> <C> <C>
John Marshall......................................... $21,068 8.38% $1,197
EJ Randolph (1)....................................... 18,016 7.78% 951
Northridge............................................ 16,306 7.28% 806
------- ------
$55,390 $2,954
======= ======
</TABLE>
- ---------------
(1) Paid off by Credit Facility proceeds at closing.
F-106
<PAGE> 244
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
(UNAUDITED)
(G) Results of operations of the Rosslyn, Virginia Portfolio, New England
Executive Park, 245 First Street and 10960 Wilshire Boulevard for the period
prior acquisition.
<TABLE>
<CAPTION>
NEW
ROSSLYN ENGLAND 10960
VIRGINIA EXECUTIVE WILSHIRE
PORTFOLIO PARK 245 FIRST ST. BLVD. TOTAL
--------- --------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Rental income -- historical........................ $11,640 $11,766 $4,552 $ 9,650 $37,607
Pro forma straight -- line rent adjustment......... 361 283 510 124 1,278
------- ------- ------ ------- -------
Pro forma rental income............................ 12,001 12,049 5,062 9,774 38,885
Management fees....................................
Recoveries from tenants............................ 528 1,113 1,776 257 3,674
Mortgage interest income...........................
Other income....................................... 1,066 533 1,413 3,012
------- ------- ------ ------- -------
Total revenue................................... 13,595 13,162 7,371 11,444 45,571
------- ------- ------ ------- -------
Expenses:
Property expenses.................................. 2,611 4,958 1,020 3,126 11,716
Real estate taxes.................................. 747 1,421 913 910 3,991
General and administrative......................... 575 471 81 572 1,700
Mortgage interest expense..........................
Interest -- amortization of financing costs........
Depreciation and amortization (E).................. 2,352 1,969 1,209 3,574 9,105
------- ------- ------ ------- -------
Total expenses.................................. 6,286 8,819 3,223 8,183 26,512
------- ------- ------ ------- -------
Income from operations............................... $ 7,308 $ 4,342 $4,148 $ 3,261 $19,059
======= ======= ====== ======= =======
</TABLE>
F-107
<PAGE> 245
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
(UNAUDITED)
(H) Results of operations of Lake Marriott Business Park, Shoreline
Technology Park and Presidents Plaza for the period prior to acquisition.
<TABLE>
<CAPTION>
SHORELINE LAKE MARRIOTT
TECHNOLOGY BUSINESS PRESIDENTS
PARK PARK PLAZA TOTAL
---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Revenue:
Rental income-historical.......................... $12,942 $3,824 $ 9,244 $26,009
Pro forma straight-line rent adjustment........... 237 611 848
------- ------ ------- -------
Pro forma rental income........................... 12,942 4,061 9,855 26,857
Management fees...................................
Recoveries from tenants........................... 1,068 996 4,035 6,099
Mortgage interest income..........................
Other income...................................... 470 470
------- ------ ------- -------
Total revenue.................................. 14,010 5,057 14,359 33,426
------- ------ ------- -------
Expenses:
Property expenses................................. 105 718 3,685 4,509
Real estate taxes................................. 1,068 395 3,572 5,036
General and administrative........................ 71 8 1,171 1,250
Mortgage interest expense.........................
Interest -- amortization of financing costs.......
Depreciation and amortization(E).................. 3,263 1,008 2,284 6,555
------- ------ ------- -------
Total expenses................................. 4,508 2,130 10,712 17,350
------- ------ ------- -------
Income from operations.............................. $ 9,503 $2,927 $ 3,647 $16,077
======= ====== ======= =======
</TABLE>
F-108
<PAGE> 246
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
(UNAUDITED)
(I) Results of operations of 10880 Wilshire Boulevard, Centerpointe,
Westbrook Corporate Center, 225 Franklin Street and Sunnyvale Business Center
for the year 1996.
<TABLE>
<CAPTION>
10880 WESTBROOK 225 SUNNYVALE
WILSHIRE CORPORATE FRANKLIN BUSINESS
BOULEVARD CENTERPOINTE CENTER STREET CENTER TOTAL
--------- ------------ --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental income -- historical..... $8,687 $7,293 $21,029 $24,172 $3,209 $64,390
Pro forma straight-line rent
adjustment................... 399 300 2,778 1,435 4,912
------ ------ ------- ------- ------ -------
Pro forma rental income......... 9,086 7,593 23,807 25,607 3,209 69,302
Management fees.................
Recoveries from tenants......... 80 578 1,806 5,527 212 8,203
Mortgage interest income........
Other income.................... 1,306 99 136 1,230 12 2,783
------ ------ ------- ------- ------ -------
Total revenue................... 10,472 8,270 25,749 32,364 3,433 80,288
------ ------ ------- ------- ------ -------
Expenses:
Property expenses............... 3,066 1,740 4,400 5,093 14,299
Real estate taxes............... 1,043 497 3,113 3,846 201 8,700
General and administrative...... 720 180 208 844 59 2,011
Mortgage interest expense(J).... 1,914 8,466 10,380
Interest -- amortization of
financing costs..............
Depreciation and
amortization(E).............. 3,400 1,650 5,463 8,400 1,014 19,927
------ ------ ------- ------- ------ -------
Total expenses.................. 8,229 5,981 21,650 18,183 1,274 55,317
------ ------ ------- ------- ------ -------
Income from operations............ $2,243 $2,289 $ 4,099 $14,181 $2,159 $24,971
====== ====== ======= ======= ====== =======
</TABLE>
(J) Interest expense in mortgage debt assumed:
Centerpointe - historical 1996 expense.
Westbrook Corporate Center - based on a principal balance of $106,000
with interest at 8%.
(K) Historical results of operations of Westlakes Office Park.
F-109
<PAGE> 247
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
(UNAUDITED)
(L) Results of operations of Civic Opera Building, 200 West Adams, Lakeside
and 101 North Wacker for the year 1996.
<TABLE>
<CAPTION>
CIVIC 101
OPERA 200 WEST NORTH
BUILDING ADAMS LAKESIDE WACKER TOTAL
-------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental income-historical....................... $10,358 $10,467 $4,408 $6,426 $31,659
Pro forma straight-line rent adjustment........ 69 (68) 105 577 683
------- ------- ------ ------ -------
Pro forma rental income........................ 10,427 10,399 4,513 7,003 32,342
Management fees................................
Recoveries from tenants........................ 1,545 2,647 241 4,685 9,118
Mortgage interest income
Other income................................... 551 67 36 75 729
------- ------- ------ ------ -------
Total revenue............................... 12,523 13,113 4,790 11,763 42,189
------- ------- ------ ------ -------
Expenses:
Property expenses.............................. 6,070 2,393 1,795 2,534 12,792
Real estate taxes.............................. 1,990 3,539 358 4,443 10,330
General and administrative..................... 937 339 462 349 2,087
Mortgage interest expense (J)..................
Interest -- amortization of financing costs....
Depreciation and amortization (E).............. 1,788 2,165 1,140 1,769 6,863
------- ------- ------ ------ -------
Total expenses.............................. 10,785 8,436 3,755 9,095 32,072
------- ------- ------ ------ -------
Income from operations........................... $ 1,738 $ 4,677 $1,035 $2,668 $10,118
======= ======= ====== ====== =======
(M) Interest income related to the acquisition of the Rowes
Wharf mortgage............................................ $ 611
------
Interest income on Riverside notes receivable:
Interest income - note receivable from Riverside Project LLC
($26,000 X 9%)............................................ 2,340
Interest income - note receivable from Beacon Design Corp.
($3,250 X 7%)............................................. 228
Interest income - note receivable from Beacon Property
Management Corp. ($3,250 X 7%)............................ 228
------
Total.................................................. 2,795
------
Grand total............................................ $3,406
======
</TABLE>
F-110
<PAGE> 248
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
(UNAUDITED)
(N) Credit facility interest expense:
<TABLE>
<S> <C>
Credit Facility balance per pro forma balance sheet......... $ 407,017
Less Credit Facility balances relating to development
projects in which the associated interest expense would be
capitalized:
Development projects owned or underdevelopment as of September 30,
1997:
Crosby Phase II........................................... (6,350)
175 Wyman Street.......................................... (24,840)
150 California............................................ (10,640)
Media Center.............................................. (19,030)
---------
Adjusted pro forma Credit Facility balance.................. 346,157
Average Credit Facility rate through December 31, 1996...... 7.78%
---------
Pro Forma Credit Facility interest expense full year........ 26,931
Less historical 1996 Credit Facility interest expense....... 3,294
---------
Pro Forma Credit Facility adjustment........................ 23,637
---------
Mortgage Interest:
Pro forma mortgage interest on Centerpointe full year
based on principal balance of $30,000 with interest at
7.32%.................................................. 2,196
Less: Historical 1996 interest expense.................... 1,914
---------
282
---------
Mortgage Interest:
Pro forma mortgage interest on Civic Opera Building full
year based on principal balance of $31,773 with
interest at 7.37%...................................... 2,342
---------
Grand total............................................ $ 26,261
=========
</TABLE>
(O) Adjustment to equity in net income of corporations as a result of
Riverside notes:
<TABLE>
<S> <C>
Beacon Design Corp. note payable ($3,250 X 7%).............. $ (228)
Beacon Property Management Corp. note payable ($3,250 X
7%)....................................................... (228)
--------
Total interest expense adjustment...................... (455)
Operating Partnership ownership % of entities............... 98.99%
--------
Adjustment to equity in net income of corporations.......... $ (450)
========
</TABLE>
(P) Series A preferred units based on 8,000,000 units with a $25.00 per
unit redemption price at 8.98%.
F-111
<PAGE> 249
BEACON PROPERTIES, L.P.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
BEACON PROPERTIES ACQUIRED WESTLAKES
PROPERTIES, L.P. AS OF OFFICE PARK
HISTORICAL SEPTEMBER 30, 1997(A) SALE(B)
---------------- --------------------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS
AND UNITS OUTSTANDING)
<S> <C> <C> <C>
Revenue:
Rental income............................. $218,544 $30,761 $(3,087)
Management fees........................... 2,445
Recoveries from tenants................... 29,376 3,066 (408)
Mortgage interest income.................. 5,320
Other income.............................. 10,350 276 (405)
-------- ------- -------
Total revenue............................. 266,035 34,102 (3,900)
-------- ------- -------
Expenses:
Property expenses......................... 51,169 5,943 (878)
Real estate taxes......................... 27,960 3,821 (237)
General and administrative................ 27,920 548 (283)
Mortgage interest expense................. 36,313 4,065
Interest -- amortization of financing
costs.................................. 1,131
Depreciation and amortization............. 50,756 7,858(D) (2,071)
-------- ------- -------
Total expenses............................ 195,249 22,236 (3,469)
-------- ------- -------
Income from operations...................... 70,786 11,867 (431)
Equity in net income of joint ventures and
corporations.............................. 4,940
-------- ------- -------
Income from continuing operations........... 75,726 11,867 (431)
Discontinued operations:
Loss from operations -- Construction
Company................................ (2,263)
-------- ------- -------
Income before extraordinary items........... 73,463 11,867 (431)
Series A Preferred distributions............ (5,388)
-------- ------- -------
Net income available for units before
extraordinary items....................... $ 68,075 $11,867 $ (431)
======== ======= =======
Units Outstanding (Excluding Preferred
Units)
Net income per unit.........................
</TABLE>
- ---------------
(1) Includes Depreciation and amortization of $3,086
F-112
<PAGE> 250
BEACON PROPERTIES, L.P.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
PROPERTIES ACQUIRED OR
TO BE ACQUIRED AFTER PRO FORMA PRO FORMA
SEPTEMBER 30, 1997(C) ADJUSTMENTS CONSOLIDATED
---------------------- ----------- ------------
(DOLLARS IN THOUSANDS EXCEPT PER UNIT
AMOUNTS AND UNITS OUTSTANDING)
<S> <C> <C> <C>
Revenue:
Rental income............................. $ 25,055 $271,273
Management fees........................... 2,445
Recoveries from tenants................... 6,131 38,164
Mortgage interest income.................. $ 1,833(E) 7,153
Other income.............................. 818 11,039
----------- -------- --------
Total revenue............................. 32,003 1,833 330,074
----------- -------- --------
Expenses:
Property expenses......................... 8,369 64,602
Real estate taxes......................... 8,139 39,683
General and administrative................ 1,532 29,717
Mortgage interest expense................. 12,322(F) 52,700
Interest -- amortization of financing
costs.................................. 1,131
Depreciation and amortization............. 5,147(D) 61,690
----------- -------- --------
Total expenses............................ 23,186 12,322 249,523
----------- -------- --------
Income from operations...................... 8,817 (10,488) 80,551
Equity in net income of joint ventures and
corporations.............................. (338)(G) 4,602(1)
Income from continuing operations........... 8,817 (10,826) 85,153
Discontinued operations:
Loss from operations -- Construction
Company................................... (2,263)
----------- -------- --------
Income before extraordinary items........... 8,817 (10,826) 82,890
Series A Preferred distributions............ (8,082)(H) (13,470)
----------- -------- --------
Net income available for units before
extraordinary items....................... $ 8,817 $(18,908) $ 69,420
----------- -------- --------
Units Outstanding (Excluding Preferred
Units).................................... 63,156,724
Net income per unit......................... $ 1.10
</TABLE>
- ---------------
(1) Includes Depreciation and amortization of $3,086
See accompanying notes to pro forma condensed consolidated statement of
operations.
F-113
<PAGE> 251
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(A) Results of operations of 10880 Wilshire Boulevard, Centerpointe,
Westbrook Corporate Center, 225 Franklin Street and Sunnyvale Business Center
for the period prior to the date of acquisition.
<TABLE>
<CAPTION>
10880 WESTBROOK 225 SUNNYVALE
WILSHIRE CORPORATE FRANKLIN BUSINESS
BOULEVARD CENTERPOINTE CENTER STREET CENTER TOTAL
--------- ------------ --------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental income -- historical......... $4,078 $2,411 $ 9,961 $11,512 $1,610 $29,572
Pro forma straight-line rent
adjustment....................... 660 99 464 (34) 1,189
------ ------ ------- ------- ------ -------
Pro forma rental income............. 4,738 2,510 10,425 11,478 1,610 30,761
Management fees.....................
Recoveries from tenants............. 37 191 475 2,260 102 3,066
Mortgage interest income............
Other income........................ 81 33 2 154 7 276
------ ------ ------- ------- ------ -------
Total revenue.................... 4,856 2,734 10,901 13,893 1,719 34,102
------ ------ ------- ------- ------ -------
Expenses:
Property expenses................... 1,274 575 1,941 2,153 5,943
Real estate taxes................... 360 164 1,617 1,578 102 3,821
General and administrative.......... 31 60 27 344 87 548
Mortgage interest expense........... 726 3,339 4,065
Interest -- amortization of
financing costs..................
Depreciation and amortization(E).... 1,058 545 2,155 3,593 507 7,858
------ ------ ------- ------- ------ -------
Total expenses................... 2,723 2,070 9,079 7,667 696 22,236
------ ------ ------- ------- ------ -------
Income from operations................ $2,133 $ 663 $ 1,822 $ 6,225 $1,023 $11,867
====== ====== ======= ======= ====== =======
</TABLE>
(B) The results of operations for Westlakes Office Park for the period
January 1, 1997 to May 7, 1997.
F-114
<PAGE> 252
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 -- (CONTINUED)
(UNAUDITED)
(C) Results of operations of Civic Opera Building, 200 West Adams, Lakeside
and 101 North Wacker for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
CIVIC 200 101
OPERA WEST NORTH
BUILDING ADAMS LAKESIDE WACKER TOTAL
-------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental income -- historical........... $7,406 $8,315 $ 3,522 $5,333 $24,575
Pro forma straight-line rent
adjustment......................... 89 (51) 29 415 481
------ ------ ------- ------ -------
Pro forma rental income............... 7,494 8,264 3,551 5,747 25,055
Management fees.......................
Recoveries from tenants............... 857 1,746 218 3,311 6,131
Mortgage interest income..............
Other income.......................... 219 57 32 510 818
------ ------ ------- ------ -------
Total revenue...................... 8,570 10,067 3,800 9,568 32,003
------ ------ ------- ------ -------
Expenses:
Property expenses..................... 3,309 1,733 1,440 1,887 8,369
Real estate taxes..................... 1,575 2,957 278 3,330 8,139
General and administrative............ 671 222 378 261 1,532
Mortgage interest expense.............
Interest -- amortization of financing
costs..............................
Depreciation and amortization(E)...... 1,341 1,624 855 1,327 5,147
------ ------ ------- ------ -------
Total expenses..................... 6,896 6,535 2,951 6,805 23,186
------ ------ ------- ------ -------
Income from operations.................. $1,674 $3,532 $ 849 $2,763 $ 8,817
====== ====== ======= ====== =======
</TABLE>
(D) Detail of depreciation expense by property is presented as follows:
<TABLE>
<CAPTION>
BASIS LIFE DEPRECIATION
-------- ------ ------------
<S> <C> <C> <C>
1997 acquisitions as of September 30, 1997
10880 Wilshire Boulevard......................... $102,000 30 yrs $1,058
Centerpointe..................................... 49,500 30 yrs 545
Westbrook Corporate Center....................... 163,890 30 yrs 2,155
225 Franklin Street.............................. 252,000 30 yrs 3,593
Sunnyvale Business Center........................ 30,420 30 yrs 507
------
$7,858
======
Properties acquired or to be acquired after
September 30, 1997:
Civic Opera Building............................. $ 53,649 30 yrs $1,341
200 West Adams................................... 64,958 30 yrs 1,624
Lakeside......................................... 34,200 30 yrs 855
101 North Wacker................................. 53,069 30 yrs 1,327
------
$5,147
======
</TABLE>
F-115
<PAGE> 253
BEACON PROPERTIES, L.P.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 -- (CONTINUED)
(UNAUDITED)
(E) Interest income on Riverside notes receivable:
<TABLE>
<S> <C>
Interest income -- note receivable from Riverside Project
LLC ($26,000 X 9%)........................................ $ 1,755
Interest income -- note receivable from Beacon Design Corp.
($3,250 X 7%)............................................. 171
Interest income -- note receivable from Beacon Property
Management Corp. ($3,250 X 7)............................. 171
--------
Total....................................................... $ 2,096
Less: Historical 1997 Interest Income....................... (263)
--------
$ 1,833
========
</TABLE>
(F) Credit facility interest expense:
<TABLE>
<S> <C>
Credit Facility balance per pro forma balance sheet......... $407,017
Less Credit Facility balances relating to development
projects in which the associated interest expense would be
capitalized:
Development projects owned or underdevelopment as of
September 30, 1997:
Crosby Phase II............................................. (6,350)
175 Wyman Street............................................ (24,840)
150 California.............................................. (10,640)
Media Center................................................ (19,030)
--------
Adjusted pro forma Credit Facility balance.................. 346,157
Average Credit Facility rate through September 30, 1997..... 7.21%
--------
Pro Forma Credit Facility interest expense full year........ 24,958
75%
--------
Pro Forma Credit Facility interest expense 3/4 year......... 18,718
Less historical 1997 Credit Facility interest expense....... (8,153)
--------
Pro Forma Credit Facility adjustment........................ 10,565
--------
Mortgage Interest:
Pro forma mortgage interest on Civic Opera Building 3/4 year
based on principal balance of $31,773 with interest at
7.37%..................................................... 1,756
--------
Grand total................................................. $ 12,322
========
</TABLE>
(G) Adjustment to equity in net income of corporations as a result of
Riverside notes:
<TABLE>
<S> <C>
Beacon Design Corp. note payable ($3,250 X 7%).............. $ (171)
Beacon Property Management Corp. note payable ($3,250 X
7%)....................................................... (171)
--------
Total interest expense adjustment........................... (341)
Operating Partnership ownership % of entities............... 98.99%
--------
Adjustment to equity in net income of corporations.......... $ (338)
========
</TABLE>
(H) Series A preferred units based on 8,000,000 units with a $25.00 per
unit redemption price at 8.98%.
F-116
<PAGE> 254
BEACON PROPERTIES, L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS OF
BEACON PROPERTIES, L.P.:
We have audited the consolidated balance sheets of Beacon Properties, L.P.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, partners' capital and cash flows for the years ended December 31,
1996 and 1995 and the period May 26, 1994 to December 31, 1994. We have also
audited the combined statement of operations, owners' equity and cash flows of
the Predecessor, more fully described in Note 1, for the period January 1, 1994
to May 25, 1994. These consolidated financial statements are the responsibility
of the Operating Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beacon Properties, L.P. as of December 31, 1996 and 1995 and the consolidated
results of its operations and its cash flows for the years ended December 31,
1996 and 1995 and the period May 26, 1994 to December 31, 1994, and the combined
results of operations and cash flows of the Predecessor for the period January
1, 1994 to May 25, 1994 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 21, 1997
F-117
<PAGE> 255
BEACON PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Real estate:
Land...................................................... $ 213,858 $ 43,077
Buildings, improvements and equipment..................... 1,477,672 428,065
---------- --------
1,691,530 471,142
Less accumulated depreciation............................. 97,535 66,571
---------- --------
1,593,995 404,571
Deferred financing and leasing costs, net of accumulated
amortization of $16,334 and $14,487....................... 17,287 9,438
Cash and cash equivalents................................... 35,896 4,481
Restricted cash............................................. 2,599 2,764
Accounts receivable......................................... 11,596 6,111
Accrued rent................................................ 13,065 6,493
Prepaid expenses and other assets........................... 808 8,060
Mortgage notes receivable................................... 51,491 34,778
Investments in and advance to joint ventures and
corporations.............................................. 52,176 58,027
---------- --------
Total assets........................................... $1,778,913 $534,723
========== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable.................................... $ 452,212 $ 70,536
Note payable, Credit Facility............................. 153,000 130,500
Accounts payable, accrued expenses and other
liabilities............................................ 41,336 14,018
Investment in joint venture............................... 24,735 23,955
---------- --------
Total liabilities...................................... 671,283 239,009
Commitments and contingencies............................... -- --
Limited partners' capital interest, 6,273,928 and 3,788,549
units outstanding, at redemption value.................... 229,783 87,137
---------- --------
Partners' capital:
Operating units issued and outstanding, 48,116,480 and
20,215,822
General partner--outstanding 543,904 and 240,044....... 10,530 2,926
Limited partner--outstanding 47,572,576 and
19,975,788............................................ 867,317 205,651
---------- --------
Total partners' capital................................ 877,847 208,577
---------- --------
Total liabilities and partners' capital................ $1,778,913 $534,723
========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-118
<PAGE> 256
BEACON PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
---------------
FOR THE FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED MAY 26, 1994 TO JANUARY 1, 1994
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 TO MAY 25, 1994
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental income.................. $ 147,825 $ 69,781 $ 23,702 $5,776
Management fees................ 3,005 2,203 -- 1,521
Recoveries from tenants........ 16,719 9,524 4,395 1,040
Mortgage interest income....... 4,970 2,546 -- --
Other income................... 11,249 5,985 2,671 675
---------- ---------- ---------- ------
183,768 90,039 30,768 9,012
---------- ---------- ---------- ------
Expenses:
Property expenses.............. 37,210 17,698 6,497 2,086
Real estate taxes.............. 18,124 9,950 3,015 595
General and administrative..... 19,218 9,444 2,943 1,399
Mortgage interest expense...... 30,300 15,220 4,970 2,798
Interest -- amortization of
financing costs............. 2,084 1,370 617 373
Depreciation and
amortization................ 33,170 17,233 6,727 2,385
---------- ---------- ---------- ------
140,106 70,915 24,769 9,636
---------- ---------- ---------- ------
Income (loss) from operations.... 43,662 19,124 5,999 (624)
Equity in net income of joint
ventures and corporations...... 4,899 3,103 858 198
---------- ---------- ---------- ------
Income (loss) from continuing
operations before minority
interest....................... 48,561 22,227 6,857 (426)
Minority interest in partnerships
and corporations............... (15) (36) (8) 931
---------- ---------- ---------- ------
Income from continuing
operations..................... 48,546 22,191 6,849 505
Discontinued operations --
construction company:
Income (loss) from
operations.................. (2,609) (12) 477 102
Loss on sale................... (249) -- -- --
---------- ---------- ---------- ------
Income before extraordinary
items.......................... 45,688 22,179 7,326 607
Extraordinary items.............. (3,876) -- -- 8,898
---------- ---------- ---------- ------
Net income....................... $ 41,812 $ 22,179 $ 7,326 $9,505
========== ========== ========== ======
Income before extraordinary items
per unit....................... $ 1.32 $ 1.09 $ 0.48
========== ========== ==========
Extraordinary items per unit..... $ (0.11) -- --
========== ========== ==========
Net income per unit.............. $ 1.21 $ 1.09 $ 0.48
========== ========== ==========
Weighted average units
outstanding.................... 34,446,907 20,323,327 15,270,899
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-119
<PAGE> 257
BEACON PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE PERIOD JANUARY 1, 1994 TO DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
LIMITED
GENERAL LIMITED TOTAL PARTNERS'
PARTNER'S PARTNER'S PARTNER'S CAPITAL
CAPITAL CAPITAL CAPITAL INTEREST
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Owner's equity (Predecessor), at January 1, 1994... $(57,954)
Contributions and other, net of distributions from
January 1, 1994 to May 25, 1994.................. 1,083
Net income from January 1, 1994 through May 25,
1994............................................. 9,505
------- --------- --------- --------
Balance, at May 25, 1994........................... (47,366)
Capital contributions, net, May 26 - December 31,
1994............................................. $ 2,373 $ 182,884 $ 185,257 9,200
Net income, May 26 - December 31, 1994............. 73 5,582 5,655 1,671
Distributions, May 26 - December 31, 1994 ($0.96
per unit)........................................ (147) (11,197) (11,344) (3,382)
Adjustment to reflect limited partners' equity
interest at redemption value..................... (1,123) (111,128) (112,251) 112,251
------- --------- --------- --------
Partners' capital, at December 31, 1994............ 1,176 66,141 67,317 72,374
Capital contributions, net -- 1995................. 1,940 157,781 159,721 307
Net income -- 1995................................. 222 17,838 18,060 4,119
Distributions -- 1995 ($1.24 per unit)............. (262) (21,216) (21,478) (4,706)
Adjustment to reflect limited partners' equity
interest at redemption value..................... (150) (14,893) (15,043) 15,043
------- --------- --------- --------
Partners' capital, at December 31, 1995............ 2,926 205,651 208,577 87,137
Capital contributions, net -- 1996................. 8,466 744,792 753,258 75,143
Net income -- 1996................................. 418 35,914 36,332 5,480
Distributions -- 1996 ($1.765 per unit)............ (583) (50,083) (50,666) (7,631)
Adjustment to reflect limited partners' equity
interest at redemption value..................... (697) (68,957) (69,654) 69,654
------- --------- --------- --------
Partners' capital, at December 31, 1996............ $10,530 $ 867,317 $ 877,847 $229,783
======= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-120
<PAGE> 258
BEACON PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
---------------
FOR THE FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED MAY 26, 1994 TO JANUARY 1, 1994
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 TO MAY 25, 1994
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ 41,812 $ 22,179 $ 7,326 $ 9,505
----------- --------- --------- -------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Increase in accrued rent........ (6,572) (3,741) (915) (1,181)
Depreciation, amortization and
interest amortization of
financing costs............... 35,254 18,603 7,344 2,848
Equity in net income of joint
ventures and corporations..... (2,026) (3,055) (1,327) (201)
Loss from minority interest in
combined partnerships......... -- -- -- (1,519)
Extraordinary items............. 3,876 -- -- (8,898)
Deferred interest............... -- -- -- 367
Increase in accounts
receivable.................... (5,485) (1,746) (3,075) (376)
Decrease (increase) in prepaid
expenses and other assets..... (48) (58) 2,541 (1,940)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities............. 25,421 781 (739) 1,636
----------- --------- --------- -------
Total adjustments.......... 50,420 10,784 3,829 (9,264)
----------- --------- --------- -------
Net cash provided by
operating activities..... 92,232 32,963 11,155 241
----------- --------- --------- -------
Cash flows from investing
activities:
Property additions................ (1,088,775) (67,610) (190,015) (978)
Loans receivable--affiliate....... -- -- (14,594) --
Payment of deferred leasing
costs........................... (6,157) (2,646) (1,010) (124)
Decrease (increase) in prepaid
expenses and other assets....... 5,000 (5,000) -- --
Purchase of minority interests.... -- -- (11,688) --
Investments in joint ventures..... -- -- (15,802) --
Capital distributions from joint
ventures........................ 8,610 3,518 2,508 --
Investments in and advance to
corporations.................... -- (41,471) (5,800) --
Cash from contributed assets...... -- -- 6,978 --
Restricted cash from contributed
assets.......................... -- -- 420 --
Purchase of mortgage notes
receivable...................... (16,713) (34,778) -- --
Decrease (increase) in restricted
cash............................ 165 2,063 (4,827) --
----------- --------- --------- -------
Net cash used by investing
activities............... (1,097,870) (145,924) (233,830) (1,102)
----------- --------- --------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-121
<PAGE> 259
BEACON PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
---------------
FOR THE FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED MAY 26, 1994 TO JANUARY 1, 1994
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 TO MAY 25, 1994
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from financing
activities:
Capital contributions............. $ 754,175 $ 160,028 $173,452 $ 412
Borrowings on Credit Facility..... 468,000 124,700 130,300 --
Borrowings on mortgage notes...... 608,000 -- -- 874
Payments on Credit Facility....... (445,500) (124,500) -- --
Repayments on mortgage notes...... (281,814) (20,400) (49,677) (460)
Advances (repayments) of amounts
due to affiliates............... -- -- (5,355) 2,800
Payment of deferred financing
costs............................. (9,811) (2,457) (2,764) (13)
Decrease (increase) in prepaid
expenses and other assets......... 2,300 (2,300) -- --
Distributions....................... (58,297) (32,435) (8,475) (4,329)
---------- --------- -------- -------
Net cash provided by (used
by) financing
activities............... 1,037,053 102,636 237,481 (716)
---------- --------- -------- -------
Net increase (decrease) in cash and
cash equivalents.................. 31,415 (10,325) 14,806 (1,577)
Cash and cash equivalents, beginning
of period......................... 4,481 14,806 -- 6,150
---------- --------- -------- -------
Cash and cash equivalents, end of
period............................ $ 35,896 $ 4,481 $ 14,806 $ 4,573
========== ========= ======== =======
Supplemental disclosures:
Cash paid during the period for
interest (net of capitalized
interest)....................... $ 28,777 $ 14,738 $ 5,278 $ 2,811
========== ========= ======== =======
Noncash activities:
Acquisition of interests in
properties...................... -- -- $ 22,721
========== ========= ========
Increase in partners' capital as a
result of acquisition of
interests in properties......... $ 74,226 -- $ 9,200
========== ========= ========
Liabilities assumed in connection
with contributions and
acquisition of properties....... $ 55,529 $ 861 $ 93,518
========== ========= ========
Distributions payable to unit
holders......................... -- -- $ 6,251
========== ========= ========
Receivable from equity
investment...................... $ 769 $ 1,040
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-122
<PAGE> 260
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION, OFFERINGS AND ACQUISITIONS:
Beacon Properties, L.P. (the "Operating Partnership") was organized as a
Delaware limited partnership in April 1994 and commenced operations effective on
May 26, 1994. The Operating Partnership was formed to continue and expand the
commercial real estate development, construction, acquisition, leasing, design
and management business of The Beacon Group (the "Predecessor").
Simultaneously with the closing of the initial public offering (the "IPO")
of Beacon Properties Corporation (the "Company"), which is the sole general
partner and a limited partner of the Operating Partnership, the Company
contributed its interests in two properties and approximately $173.4 million,
the net proceeds of the IPO, to the Operating Partnership in exchange for
partnership interests ("Units").
The following schedule summarizes the Operating Partnership's interest in
the properties as a result of the initial and subsequent capital contributions
of the Company, and the related acquisition of properties and partnership
interests. All properties have been consolidated unless otherwise indicated in
the notes:
<TABLE>
<CAPTION>
RENTABLE OWNERSHIP
DATE AREA IN INTEREST AT ACCOUNTING
ACQUIRED SQUARE FEET 12/31/96 METHOD NOTES
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
PROPERTIES:
Wellesley Office Park -- Buildings 1-8, Wellesley,
MA................................................... (A) 622,862 100% (E)
Crosby Corporate Center, Bedford, MA................... (B) 336,000 100%
South Station, Boston, MA.............................. (B) 148,591 100%
175 Federal Street, Boston, MA......................... (B) 203,349 100% (E)
One Post Office Square, Boston, MA..................... (B) 764,129 50% (D)
Center Plaza, Boston, MA............................... (B) 649,359 100%
Rowes Wharf, Boston, MA................................ (B) 344,326 45% (F)
150 Federal Street, Boston, MA......................... (B) 530,279 100%
Polk and Taylor Buildings, Arlington, VA............... (B) 890,000 9% (G)
One Canal Park, Cambridge, MA.......................... 6/10/94 100,300 100%
Westwood Business Centre, Westwood, MA................. 6/10/94 160,400 100%
Russia Wharf, Boston, MA............................... 8/10/94 314,596 100%
Westlakes Office Park -- Buildings 1-3 and 5, Berwyn,
PA................................................... (C) 443,592 100%
75-101 Federal Street, Boston, MA...................... 9/29/95 812,000 51% (H)
2 Oliver Street--147 Milk Street, Boston, MA........... 10/6/95 271,000 100%
Ten Canal Park, Cambridge, MA.......................... 12/21/95 110,000 100%
New England Executive Park, Burlington, MA............. 11/15/96 817,013 100%
245 First Street, Cambridge, MA........................ 11/21/96 263,227 100%
Perimeter Center, Atlanta, GA.......................... 2/15/96 3,302,136 100%
1300 North 17th Street, Rosslyn, VA.................... 10/18/96 372,865 100%
1616 North Fort Myer Drive, Rosslyn, VA................ 10/18/96 292,826 100%
John Marshall I, McLean, VA............................ 9/5/96 261,364 100%
E.J. Randolph, McLean, VA.............................. 9/5/96 164,677 100%
Northridge I, Reston/Herndon, VA....................... 9/5/96 124,319 100%
1333 H Street, N.W., Washington, D.C................... 8/16/96 238,694 100%
AT&T Plaza, Oak Brook, IL.............................. 8/16/96 225,318 100%
Tri-State International, Lincolnshire, IL.............. 8/16/96 548,000 100%
10960 Wilshire Boulevard, Westwood, CA................. 11/21/96 543,804 100%
Shoreline Technology Park, Mountain View, CA........... 12/20/96 727,000 100%
Lake Marriott Business Park, Santa Clara, CA........... 12/20/96 400,000 100%
Presidents Plaza, Chicago, IL.......................... 12/27/96 791,000 100%
----------
15,773,026
==========
</TABLE>
F-123
<PAGE> 261
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RENTABLE OWNERSHIP
DATE AREA IN INTEREST AT ACCOUNTING
ACQUIRED SQUARE FEET 12/31/96 METHOD NOTES
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
SERVICE ENTITIES:
Beacon Construction Company, Inc....................... (B) 99% (I)
Beacon Property Management, L.P........................ (B) 100%
Beacon Property Management Corporation................. (B) 99% (I)
Beacon Design Corporation.............................. (B) 99% (I)
Beacon Design L.P...................................... (B) 100%
</TABLE>
- -------------------------
(A) Wellesley Building 8 was acquired May 4, 1995. Interests in the remaining
Wellesley Buildings were contributed as part of the initial public offering.
(B) Interests in this property or company were contributed or acquired as part
of the initial public offering.
(C) Westlakes Buildings 1, 3 and 5 were acquired October 21, 1994, Westlakes
Building 2 was acquired July 26, 1995.
(D) The Operating Partnership is a general partner in the joint venture which
owns the property and utilizes the equity method of accounting for its
investment.
(E) On October 28, 1994, the Operating Partnership acquired the remaining
interest in the 175 Federal Street and Wellesley 6 Joint Venture which
owned these properties. Prior to the acquisition of the remaining interest,
the Operating Partnership used the equity method of accounting for its
investments.
(F) The Operating Partnership owns an indirect limited partner interest and
utilizes the equity method of accounting for its investment. (See Note 2.)
(G) The Operating Partnership owns a 9% limited partner interest and utilizes
the equity method of accounting for its investment.
(H)The Operating Partnership is a shareholder in the corporation (private real
estate investment trust) which owns the property, and utilizes the equity
method of accounting for its investment.
(I) The Operating Partnership used the cost method of accounting for its
investments in these subsidiaries prior to 1995. The Operating Partnership
currently uses the equity method of accounting for its investments. (See
Note 2.)
F-124
<PAGE> 262
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
The Operating Partnership currently has interests in a portfolio of 104
Class A office properties and other commercial properties containing
approximately 15.8 million rentable square feet located in Boston, Atlanta,
Chicago, Los Angeles, San Francisco and Washington, D.C.
The Operating Partnership also owns and operates commercial real estate
development, acquisition, leasing, design and management businesses. The
Operating Partnership currently manages approximately 2.9 million square feet of
commercial and office space owned by third parties in various locations,
including Boston, Waltham, and Springfield, Massachusetts and Chicago, Illinois.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements of the Operating Partnership have
been prepared on a consolidated basis which include all the accounts of the
Operating Partnership and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. The Operating Partnership's
consolidated financial statements reflect the properties acquired at their
historical basis of accounting to the extent of the acquisition of interests
from the Predecessors' owners who continued on as investors. The remaining
interests acquired from the Predecessors' owners have been accounted for as a
purchase and the excess of the purchase price over the related historical cost
basis was allocated to real estate.
The accompanying financial statements of the Predecessor have been
presented on a combined basis which include all the contributed properties and
the management, leasing and design entities.
REAL ESTATE
Buildings and improvements are recorded at cost and are depreciated on the
straight-line and declining balance methods over their estimated useful lives of
nineteen to forty years and fifteen to twenty years, respectively. The cost of
buildings and improvements includes the purchase price of the property or
interests in property, legal fees, acquisition costs and interest, property
taxes, capitalized interest, and other costs incurred during the period of
construction. The Operating Partnership capitalized interest costs of $1.0
million in 1996, $0.1 million in 1995, and $0 in 1994. In accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the
Operating Partnership periodically reviews its properties to determine if its
carrying costs will be recovered from future operating cash flows. In cases
where the Operating Partnership does not expect to recover its carrying costs,
the Operating Partnership recognizes an impairment loss. No such losses have
been recognized to date.
Tenant improvements are depreciated over the terms of the related leases.
Furniture, fixtures and equipment are depreciated using the straight-line and
declining balance methods over their expected useful lives of five to seven
years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations or betterments which extend the economic
useful life of the assets are capitalized.
DEFERRED FINANCING AND LEASING COSTS
Deferred financing costs include fees and costs incurred to obtain
long-term financings, and are amortized over the terms of the respective loans
on a basis which approximates the interest method. Deferred leasing costs
incurred in the successful negotiation of leases, including brokerage, legal and
other costs, have been deferred and are being amortized on a straight-line basis
over the terms of the respective leases.
F-125
<PAGE> 263
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid assets with original
maturities of three months or less from the date of purchase. The majority of
the Operating Partnership's cash and cash equivalents are held at major
commercial banks. The Operating Partnership has not experienced any losses to
date on its invested cash. The carrying value of the cash and cash equivalents
approximates market.
RESTRICTED CASH
Restricted cash consists of cash held in escrow as required by lenders to
satisfy real estate taxes and tenant improvement costs.
INVESTMENTS IN AND ADVANCE TO JOINT VENTURES AND CORPORATIONS
The Operating Partnership uses the equity method of accounting for its
earnings in property joint ventures and corporations which it does not control.
Losses in excess of investments are not recorded where the Operating Partnership
is a limited partner and has not guaranteed nor intends to provide any future
financial support to the respective properties.
MORTGAGE NOTES RECEIVABLE
Discounts from the principal balance on mortgage loans receivable, net of
acquisition costs, are amortized as interest income over the due date of the
related loans using the effective yield method, based on management's evaluation
of the current facts and circumstances and the ultimate ability to collect the
principal balances of such loans.
REVENUE RECOGNITION
Base rental income is reported on a straight-line basis over the terms of
the respective leases. The impact of the straight-line rent adjustment increased
revenues for the Operating Partnership by $6.6 million, $3.7 million and $1.9
million and increased its proportionate share of equity in net income of
property joint ventures and corporations by $0.1 million, $0.2 million and $0.3
million for the years ended December 31, 1996 and 1995 and the period May 26,
1994 to December 31, 1994, respectively. Management fees are recognized as
revenue as they are earned.
INCOME TAXES
Income taxes are not considered in the accompanying financial statements
since such taxes, if any, are the responsibility of the partners.
INTEREST RATE PROTECTION AGREEMENTS
The Operating Partnership has entered into interest rate protection
agreements to reduce the impact of certain changes in interest rates. These
agreements are held for purposes other than trading. Amounts paid for the
agreements are amortized over the lives of the agreements on a basis which
approximates the interest method. Payments under interest rate swap agreements
are recognized as adjustments to interest expense when incurred. The Operating
Partnership's policy is to write off unamortized amounts paid under interest
rate protection agreements, when the related debt is paid off or there is a
termination prior to the maturity of the agreements. The Operating Partnership
is exposed to credit loss in the event of nonperformance by the other parties to
the interest rate protection agreements. However, the Operating Partnership does
not anticipate nonperformance by the counterparties.
F-126
<PAGE> 264
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassed to conform with current
year presentation.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
---- ----
<S> <C> <C>
Tenants..................................................... $ 5,072 $2,137
Other....................................................... 4,228 1,006
Affiliates.................................................. 3,670 3,305
Allowance for uncollectible amounts......................... (1,374) (337)
------- ------
$11,596 $6,111
======= ======
</TABLE>
4. MORTGAGE NOTES RECEIVABLE:
The Operating Partnership acquired a fifty percent interest in certain
mortgages collateralized by property owned by a joint venture in which the
Operating Partnership has an indirect interest. The terms of the notes require
interest-only payments at 8.71% quarterly on a principal balance of
approximately $63.0 million and are due on April 1, 1999. The term may be
extended for up to three years under certain conditions. The Operating
Partnership also has an option to purchase from an affiliate other mortgage
interests collateralized by the same property.
F-127
<PAGE> 265
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
5. INVESTMENTS IN AND ADVANCE TO JOINT VENTURES AND CORPORATIONS:
The following is summarized financial information for the property joint
ventures and corporation:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Balance sheet:
Real estate, net.......................................... $410,207 $419,096
Other assets.............................................. 51,669 55,714
-------- --------
$461,876 $474,810
======== ========
Mortgage notes payable.................................... $377,754 $380,827
Loans and notes payable................................... 72,136 68,606
Other liabilities......................................... 13,040 14,072
Partners' and shareholders' equity (deficiency)........... (1,054) 11,305
-------- --------
$461,876 $474,810
======== ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
----------------
FOR THE YEAR FOR THE YEAR FOR THE PERIOD FOR THE PERIOD
ENDED ENDED MAY 26, 1994 TO JANUARY 1, 1994
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 TO MAY 25, 1994
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Summary of operations:
Rentals........................ $117,283 $91,048 $59,983 $38,386
Other income................... 3,453 3,861 5,717 2,941
Operating expenses............. 61,086 49,472 34,688 22,632
Mortgage interest expense...... 28,712 23,232 16,261 13,432
Depreciation and
amortization................ 18,592 14,537 11,427 8,228
-------- ------- ------- -------
Net income (loss).............. $ 12,346 $ 7,668 $ 3,324 $(2,965)
======== ======= ======= =======
</TABLE>
A reconciliation of interests in property joint ventures and corporation to
the underlying net assets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Partners' and shareholders' (deficiency) capital, as
above..................................................... $(1,054) $11,305 $(51,742)
Deficits of other partners and shareholders................. 23,555 13,270 38,459
------- ------- --------
Operating Partnership's share of equity (deficiency)........ 22,501 24,575 (13,283)
Excess of cost of investments over the net book value of
underlying net assets, net of amortization and accumulated
amortization of $122, $75 and $28, respectively........... 1,310 1,357
------- ------- --------
Carrying value of property investments in joint ventures and
corporation............................................... $23,811 $25,932 $(11,899)
======= ======= ========
</TABLE>
F-128
<PAGE> 266
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The following is summarized financial information for the service
corporations:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Balance sheet:
Equipment, net............................................ $ 1,806 $ 715
Other assets.............................................. 34,155 29,560
------- -------
$35,961 $30,275
======= =======
Other liabilities......................................... 37,360 27,124
Shareholders' equity (deficiency)......................... (1,399) 3,151
------- -------
$35,961 $30,275
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED MAY 26, 1994 TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Summary of operations:
Construction income........................... $140,903 $108,913 $52,429
Consulting and management fees................ 2,537 7,576 4,848
Interest and other income..................... 266 383 184
Construction, consulting and management fee
costs...................................... 141,167 110,835 52,388
General and administrative expense............ 5,121 4,880 3,564
Depreciation and amortization................. 584 336 186
Minority interest in net income of joint
venture.................................... 52 130 90
Interest expense to stockholder............... -- 650 --
-------- -------- -------
Net income (loss)............................... $ (3,218) $ 41 $ 1,233
======== ======== =======
</TABLE>
A reconciliation of the underlying net assets to the Operating
Partnership's carrying value of investments in and advance to service
corporations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Shareholders' equity, as above.............................. $ (1,399) $ 3,151
(Deficit) equity of other shareholders...................... (29) 11
-------- --------
Operating Partnership's share of equity..................... (1,370) 3,140
Advance..................................................... 5,000 5,000
-------- --------
Carrying value of investments in and advance to service
corporations.............................................. 3,630 8,140
Carrying value of property investments in joint ventures and
corporation per above..................................... 23,811 25,932
-------- --------
$ 27,441 $ 34,072
======== ========
Per consolidated balance sheet:
Investments in and advance to joint ventures and
corporations........................................... $ 52,176 $ 58,027
Investment in joint venture............................... (24,735) (23,955)
-------- --------
$ 27,441 $ 34,072
======== ========
</TABLE>
F-129
<PAGE> 267
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
6. MORTGAGE NOTES PAYABLE:
The mortgage notes payable collateralized by the certain properties and
assignment of leases, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Mortgage notes with fixed interest at:
8.00% maturing July 1, 1998............................... $ 12,970 $13,236
6.67% maturing November 1, 1998........................... 56,920 57,300
7.23% maturing February 1, 2003........................... 55,000 --
7.23% maturing March 1, 2003.............................. 60,000 --
7.08% maturing March 31, 2006............................. 218,000 --
8.19% maturing January 1, 2007............................ 15,000 --
8.19% maturing January 1, 2007............................ 13,600 --
8.38% maturing December 1, 2008........................... 20,722 --
-------- -------
Total mortgage notes payable........................... $452,212 $70,536
======== =======
</TABLE>
The Operating Partnership's restricted cash consists of cash required by
these mortgages to be held in escrow for capital expenditures and/or real estate
taxes.
Scheduled maturities of mortgage notes payable are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 2,127
1998........................................................ 72,611
1999........................................................ 6,602
2000........................................................ 7,608
2001........................................................ 8,171
Thereafter.................................................. 355,093
--------
Total..................................................... $452,212
========
</TABLE>
The Operating Partnership determines the fair value of its mortgage notes
payable based upon the discounted cash flows at a discount rate that
approximates the Operating Partnership's effective borrowing rate. Based on its
evaluation, the Operating Partnership has determined that the fair value of its
mortgage notes approximates their carrying value.
In March 1996, the Operating Partnership repaid a debt and recorded an
extraordinary item of $2.2 million in connection with the write-off of fees and
costs to acquire the debt. The extraordinary item during the period January 1,
1994 through May 25, 1994 represents the gains resulting from the settlement of
certain mortgage notes payable. As the prepayments were a condition to transfer
the assets to the Operating Partnership, these items were recorded by the
Predecessor entity.
7. NOTE PAYABLE -- CREDIT FACILITY:
The Operating Partnership presently has a three-year, $300 million
revolving credit facility (the "Credit Facility"). The Credit Facility matures
in June 1999 and is collateralized by cross-collateralized mortgages and
assignment of rents on certain properties.
Outstanding balances under the Credit Facility bear interest, at the
Company's option, at either (i) the higher of (x) Bank of Boston's base interest
rate and (y) one-half of one percent (1/2%) above the overnight
F-130
<PAGE> 268
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
federal funds effective rate or (ii) the Eurodollar rate plus 175 basis points
(1.75%). The Company has an interest rate protection agreement through May 1997
with respect to $135 million of the Credit Facility, which provides for
offsetting payments to the Company in the event that 90-day LIBOR exceeds 9.47%
per annum. Effective May 1997 through May 1999, the Company has an interest rate
protection agreement with respect to $137.5 million of the Credit Facility,
which provides for offsetting payments to the Company in the event that 90-day
LIBOR exceeds 8.75% per annum. This interest rate protection arrangement may be
applied during four quarters of the period May 1997 to May 1999.
The outstanding balance of the Credit Facility at December 31, 1996 was
$153.0 million. The weighted average amount outstanding during the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994 was
$42.3 million, $99.7 million and $50.4 million, respectively. The weighted
average interest rate on amounts outstanding during the years ended December 31,
1996 and 1995 and the period May 26, 1994 to December 31, 1994 was approximately
7.78%, 8.25% and 7.57%, respectively. The applicable interest rate under the
Credit Facility at December 31, 1996 was 8.25%.
Based upon the Credit Facility's variable interest rate, the Operating
Partnership has determined that the fair value of the Credit Facility
approximates its carrying value. The Operating Partnership determines the fair
value of its interest rate agreement based upon the quoted market prices of
similar instruments. Based on this analysis, the Operating Partnership has
determined that the fair value of this instrument approximates its carrying
value.
As a result of the substantial modification of the terms of the Credit
Facility, the Company recorded an extraordinary item of $1.7 million in
connection with the write-off of fees and costs relating to the prior Credit
Facility.
8. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Accounts payable and accrued expenses....................... $29,139 $ 8,088
Deferred revenue and other.................................. 4,912 1,164
Affiliates.................................................. 1,595 2,952
Other liabilities........................................... 504 647
Security deposits........................................... 5,186 1,167
------- -------
$41,336 $14,018
======= =======
</TABLE>
9. TRANSACTIONS WITH AFFILIATES:
<TABLE>
<CAPTION>
PREDECESSOR
---------------
FOR THE FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED MAY 26, 1994 TO JANUARY 1, 1994
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 TO MAY 25, 1994
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Management, rental, design,
construction fees and interest
income......................... $9,176 $ 5,640 -- $1,809
Construction costs............... 8,352 11,108 $241 --
Administrative salaries and
expenses....................... -- -- -- 469
</TABLE>
In 1995, the Operating Partnership entered into an agreement to lease its
home office from a joint venture in which the Operating Partnership has an
indirect interest. It previously subleased home office space from
F-131
<PAGE> 269
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
another affiliate. Rental expense related to these arrangements was $1.3
million, $0.3 million and $0.1 million for the years ended December 31, 1996 and
1995 and the period May 26, 1994 to December 31, 1994, respectively.
Future minimum rental payments at December 31, 1996 for the Operating
Partnership's home office are $1.3 million for 1997, $1.4 million for 1998
through 2001, and $1.0 million for 2002.
10. LIMITED PARTNERS' CAPITAL INTEREST
Pursuant to the Operating Partnership Agreement, certain limited partners
in the Operating Partnership have the right to redeem all or any portion of
their Units for cash from the Operating Partnership or, at the election of the
Company, for shares of common stock or cash as selected by the Company. The
amount of cash to be paid to the limited partner if the redemption right is
exercised and the cash option is selected will be based on the trading price of
the Company's common stock at that time.
Such limited partners' redemption rights are not included in partners'
capital. Accordingly, the accompanying consolidated balance sheets have been
retroactively reclassified to reflect the limited partners' capital interest in
the Operating Partnership, measured at redemption value. This reclassification
results in a reduction of partners' equity of $69.7 million and $15.0 million as
of December 31, 1996 and 1995, respectively as a result of the increase in the
redemption value.
11. COMMITMENTS AND CONTINGENCIES:
PENSION PLAN
The Operating Partnership participates in a multiemployer defined-benefit
pension plan with some of its affiliates. This plan covered substantially all
full-time nonunion employees. The Operating Partnership's portion of pension
expense for the years ended December 31, 1996 and 1995 and the period May 26,
1994 to December 31, 1994, was $0.2 million, $0.1 million, and $0.1 million,
respectively. The Predecessor's comparable allocated portion of pension expense
amounted to $0.1 million for the period January 1, 1994 to May 25, 1994.
401(K) PLAN
The eligible employees of the Operating Partnership participate in a
contributory savings plan with some of its affiliates. Under the plan, the
Operating Partnership may match contributions made by eligible employees based
on a percentage of the employee's salary. Currently, the Operating Partnership
matches 25% of contributions up to 3% of such employee's salary (up to $30). The
matching amount may be changed from time to time by the Board of Directors of
the Company. Expenses under this plan for 1996, 1995 and 1994 were not material.
CONTINGENCIES
The Operating Partnership is subject to various legal proceedings and
claims that arise in the ordinary course of business. These matters are
generally covered by insurance. Management believes that the final outcome of
such matters will not have a material adverse effect on the financial position,
results of operations or liquidity of the Operating Partnership.
LEASE
The South Station property is subject to a ground lease expiring in 2024.
The lease provides two 15-year extension options. Under certain conditions, the
lessor reserves the right to terminate the lease at the end of
F-132
<PAGE> 270
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
the initial term or at the end of the first extension period and pay the lessee
an amount based on a formula payment of fair value. The minimum rents in
connection with the lease are substantially based on percentage rent until 1997.
The Operating Partnership is obligated to provide loans to the lessor under
certain conditions subject to a maximum of $0.9 million. As of December 31,
1996, no loans were outstanding.
ENVIRONMENTAL
A former tenant of Crosby Corporate Center has agreed to perform the
necessary investigation and cleanup actions regarding remediation of possible
contamination, bear all costs associated with such cleanup activities and
indemnify the Operating Partnership for any costs or damages it incurs in
connection with such contamination. As the owner of the property, however, the
Operating Partnership could be held liable for the costs of such activities if
the former tenant fails to undertake such actions.
As a lessee of certain property, the Operating Partnership has received an
indemnity from the owner to the extent the Operating Partnership is assessed
costs relating to environmental cleanup.
Site assessments at the New England Executive Park have identified
contamination in the groundwater at a monitoring well which flows into an
aquifer, which supplies drinking water to the Town of Burlington. The Town of
Burlington has allocated funds for, and is in the process of constructing, a
groundwater treatment facility at its drinking water supply that draws from the
subject aquifer. The Operating Partnership has been advised that such treatment
facility has the capacity to treat any contaminants which may be derived from
the groundwater passing beneath the New England Executive Park. Although the
Town's water treatment facility does not relieve the Operating Partnership of
potential liability for the presence of the contaminants, the Operating
Partnership does not believe that any such liability would have a material
adverse effect on the Operating Partnership.
Based on site assessments performed at 245 First Street which have
identified the presence of oil that slightly exceeds the concentration that
requires reporting to the Massachusetts Department of Environmental Protection,
an environmental consultant has advised the Operating Partnership that
applicable regulatory requirements can be satisfied without the need to perform
any remediation at the property. The Operating Partnership could be held liable
for costs associated with the contamination that has been identified, although
the Operating Partnership does not believe that such costs would have a material
adverse effect on the Operating Partnership.
In connection with the acquisition of the John Marshall land, the sellers
have reported the findings of contamination to the Virginia Department of
Environmental Quality and have retained an environmental consultant to prepare a
remediation plan. Units valued at approximately $1.0 million were escrowed from
the purchase price to be released to the seller upon performance of remediation
pursuant to a remediation plan approved by the Operating Partnership. The escrow
further provides that the Operating Partnership may receive some or all of the
remaining escrowed Units upon certain conditions.
Management does not believe that any costs, if incurred, would have a
material adverse effect on the financial condition, annual results of
operations, or liquidity of the Operating Partnership.
OTHER
The Operating Partnership has an obligation to pay $17.0 million in
connection with the acquisition of real estate upon the achievement of
conditions regarding occupancy or rental income levels.
In connection with the acquisition of the John Marshall I, E.J. Randolph
and Northridge I properties, the Operating Partnership has agreed to maintain
the non-recourse financing assumed from the sellers for a five year period and
not to dispose of the property for a seven year period. If the Operating
Partnership should
F-133
<PAGE> 271
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
choose not to maintain the non-recourse provisions of the existing or new debt,
or sell the properties, within these respective time periods it shall be
required to make payments to the sellers of approximately $6.0 million in 1997,
reducing ratably to zero through 2003.
12. FUTURE MINIMUM RENTS:
Future minimum rentals to be received under noncancelable tenant leases for
all fully consolidated properties at December 31, 1996 are due for years ended
December 31 as follows:
<TABLE>
<CAPTION>
<S> <C>
1997........................................................ $ 188,032
1998........................................................ 175,732
1999........................................................ 170,086
2000........................................................ 143,288
2001........................................................ 113,718
Thereafter.................................................. 370,698
----------
Total future minimum rents............................. $1,161,554
==========
</TABLE>
13. GEOGRAPHIC CONCENTRATION:
The Operating Partnership owns properties with a total cost at December 31,
1996 as follows:
<TABLE>
<CAPTION>
<S> <C>
Downtown Boston............................................. $ 284,574
Suburban Boston............................................. 279,987
Suburban Atlanta............................................ 343,014
Suburban Philadelphia....................................... 59,018
Suburban Virginia........................................... 178,166
Downtown Los Angeles........................................ 133,307
Suburban San Francisco...................................... 184,207
Suburban Chicago............................................ 175,819
Downtown Washington......................................... 53,438
----------
$1,691,530
==========
</TABLE>
14. PRO FORMA RESULTS (UNAUDITED):
The following unaudited pro forma operating results for the Operating
Partnership have been prepared as if capital contributions and property
acquisitions during 1995 and 1996 had occurred on January 1, 1995. Unaudited pro
forma financial information is presented for informational purposes only and may
not be indicative of what the actual results of operations of the Operating
Partnership would have been had the events occurred as of January 1, 1995, nor
does it purport to represent the results of operations for future periods. Pro
forma results have not been presented for 1994 as the Operating Partnership's
operations did not commence until May 26, 1994.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Revenues................................................. $299,124 $265,878
Income before extraordinary items........................ 84,619 79,007
Net income............................................... 80,728 79,007
Net income per unit...................................... 1.48 1.45
</TABLE>
F-134
<PAGE> 272
BEACON PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
15. DISCONTINUED OPERATIONS:
On December 31, 1996, certain assets of the construction company were sold.
These assets included fixed assets, general construction contracts in progress,
and the receivables and payables related to these contracts. All employees were
transferred to the buyer who is expected to complete all outstanding
construction work for projects not purchased as part of the sale.
16. SUBSEQUENT EVENTS:
DECLARATION OF DISTRIBUTION
On January 28, 1997, the Operating Partnership declared a quarterly
distribution of $25.2 million, payable on February 28, 1997 to partners of
record on February 10, 1997.
F-135
<PAGE> 273
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Partners of Beacon Properties L.P.:
Our report on the consolidated financial statements of Beacon Properties
L.P. is included on page F-1 of this Form 10. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedules listed in the Item 15(a) of this Form 10.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 21, 1997
F-136
<PAGE> 274
SCHEDULE III
BEACON PROPERTIES, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST
------------------------
BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS
----------- ------------ ---- -------------
<S> <C> <C> <C>
Commercial Property:
Wellesley Office Park -- Buildings 1-8 -- Wellesley, MA... $ 55,000 $ 9,110 $ 75,829
Crosby Corporate Center -- Bedford, MA.................... --(1) 978 10,478
South Station -- Boston, MA............................... -- -- 21,487
175 Federal St. -- Boston, MA............................. 12,970 1,404 24,505
Center Plaza -- Boston, MA................................ 60,000 7,301 65,712
150 Federal St. -- Boston, MA............................. 56,920(2) 11,265 101,280
One Canal Park -- Cambridge, MA........................... --(1) 931 8,444
Ten Canal Park -- Cambridge, MA........................... --(1) 1,179 10,609
2 Oliver Street -- Boston, MA............................. --(1) 1,796 16,166
Westwood Business Centre -- Westwood, MA.................. --(1) 1,159 10,498
Russia Wharf -- Boston, MA................................ --(1) 1,442 12,974
Westlakes Office Park -- Buildings 1, 2, 3 and 5 --
Berwyn, PA.............................................. --(1) 6,335 46,267
Perimeter Center -- Atlanta, GA........................... 218,000 46,438 292,305
AT&T Plaza -- Oak Brook, IL............................... --(1) 3,510 31,587
Tri-State International -- Lincolnshire, IL............... --(1) 6,222 55,999
1333H Street, N.W. -- Washington, D.C..................... --(1) 5,337 48,033
E.J. Randolph -- McLean, VA............................... 15,000 3,590 19,520
John Marshall I -- McLean, VA............................. 20,722 5,996 27,991
Northridge I -- Herndon, VA............................... 13,600 1,911 19,264
1300 North 17th Street -- Rosslyn, VA..................... --(1) 8,007 46,758
1616 North Fort Myer Drive -- Rosslyn, VA................. --(1) 6,156 38,651
New England Executive Park -- Burlington, MA.............. --(1) 7,067 68,259
10960 Wilshire Boulevard -- Westwood, CA.................. -- 11,200 122,039
245 First Street -- Cambridge, MA......................... -- 4,513 40,616
Shoreline Technology Park -- Mountain View, CA............ -- 39,547 101,444
Lake Marriott Business Park -- Santa Clara, CA............ -- 12,032 31,128
Presidents Plaza -- Chicago, IL........................... -- 7,750 69,752
-------- -------- ----------
$452,212 $212,176 $1,417,595
======== ======== ==========
</TABLE>
F-137
<PAGE> 275
SCHEDULE III
BEACON PROPERTIES, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- CONTINUED
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSEQUENT GROSS AMOUNT AT WHICH
TO ACQUISITION CARRIED AT CLOSE OF PERIOD
---------------------- --------------------------------------
BUILDINGS BUILDINGS
COST CAPITALIZED AND AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ---- ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C>
Commercial Property:
Wellesley Office Park -- Buildings 1-8 --
Wellesley, MA.......................... -- $12,866 $ 9,110 $ 88,695 $ 97,805
Crosby Corporate Center -- Bedford, MA... $1,505 14,880 2,483 25,358 27,841
South Station -- Boston, MA.............. -- 861 -- 22,348 22,348
175 Federal St. -- Boston, MA............ -- 3,196 1,404 27,701 29,105
Center Plaza -- Boston, MA............... -- 8,810 7,301 74,522 81,823
150 Federal St. -- Boston, MA............ -- 1,326 11,265 102,606 113,871
One Canal Park -- Cambridge, MA.......... -- 139 931 8,583 9,514
Ten Canal Park -- Cambridge, MA.......... -- 135 1,179 10,744 11,923
2 Oliver Street -- Boston, MA............ -- 1,376 1,796 17,542 19,338
Westwood Business Centre -- Westwood,
MA..................................... -- 674 1,159 11,172 12,331
Russia Wharf -- Boston, MA............... 177 3,496 1,619 16,470 18,089
Westlakes Office Park -- Buildings 1, 2,
3 and 5 -- Berwyn, PA.................. -- 6,416 6,335 52,683 59,018
Perimeter Center -- Atlanta, GA.......... -- 4,271 46,438 296,576 343,014
AT&T Plaza -- Oak Brook, IL.............. -- 18 3,510 31,605 35,115
Tri-State International -- Lincolnshire,
IL..................................... -- 950 6,222 56,949 63,171
1333H Street, N.W. -- Washington, D.C.... -- 68 5,337 48,101 53,438
E.J. Randolph -- McLean, VA.............. -- 36 3,590 19,556 23,146
John Marshall I -- McLean, VA............ -- 147 5,996 28,138 34,134
Northridge I --Herndon, VA............... -- 41 1,911 19,305 21,216
1300 North 17th Street -- Rosslyn, VA.... -- 11 8,007 46,769 54,776
1616 North Fort Myer Drive -- Rosslyn,
VA..................................... -- 87 6,156 38,738 44,894
New England Executive Park -- Burlington,
MA..................................... -- 64 7,067 68,323 75,390
10960 Wilshire Boulevard -- Westwood,
CA..................................... -- 68 11,200 122,107 133,307
245 First Street -- Cambridge, MA........ -- 54 4,513 40,670 45,183
Shoreline Technology Park -- Mountain
View, CA............................... -- 49 39,547 101,493 141,040
Lake Marriott Business Park -- Santa
Clara, CA.............................. -- 7 12,032 31,135 43,167
Presidents Plaza -- Chicago, IL.......... -- 31 7,750 69,783 77,533
------ ------- -------- ---------- ----------
$1,682 $60,077 $213,858 $1,477,672 $1,691,530
====== ======= ======== ========== ==========
</TABLE>
F-138
<PAGE> 276
SCHEDULE III
BEACON PROPERTIES, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- CONTINUED
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
DATE OF INCOME
ACCUMULATED CONSTRUCTION/ DATE STATEMENTS
DESCRIPTION DEPRECIATION RENOVATION ACQUIRED IS COMPUTED
----------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C>
Commercial Property:
Wellesley Office Park -- Buildings 1-8 --
Wellesley, MA.............................. $33,913 1963-1984 1994/1995 (3)
Crosby Corporate Center -- Bedford, MA....... 6,702 1981 5/26/94 (3)
South Station -- Boston, MA.................. 13,434 1988 5/26/94 (3)
175 Federal St. -- Boston, MA................ 7,258 1977 10/28/94 (3)
Center Plaza -- Boston, MA................... 5,884 1966-1969 12/01/94 (3)
150 Federal St. -- Boston, MA................ 8,961 1988 5/26/94 (3)
One Canal Park -- Cambridge, MA.............. 770 1987 6/10/94 (3)
Ten Canal Park -- Cambridge, MA.............. 386 1987 12/20/95 (3)
2 Oliver Street -- Boston, MA................ 783 1982-1988 10/06/95 (3)
Westwood Business Centre -- Westwood, MA .... 1,083 1985 6/10/94 (3)
Russia Wharf -- Boston, MA................... 1,453 1978-1982 8/10/94 (3)
Westlakes Office Park -- Buildings 1, 2, 3
and 5 -- Berwyn, PA........................ 3,931 1988-1990 7/95 & 10/94 (3)
Perimeter Center -- Atlanta, GA.............. 8,822 1970-1989 2/15/96 (3)
AT&T Plaza -- Oak Brook, IL.................. 395 1984 8/16/96 (3)
Tri-State International -- Lincolnshire,
IL......................................... 710 1986 8/16/96 (3)
1333H Street, N.W. -- Washington, D.C........ 601 1984 8/16/96 (3)
E.J. Randolph -- McLean, VA.................. 217 1983 9/05/96 (3)
John Marshall I -- McLean, VA................ 306 1981 9/05/96 (3)
Northridge I -- Herndon, VA.................. 214 1988 9/05/96 (3)
1300 North 17th Street -- Rosslyn, VA........ 325 1980 10/18/96 (3)
1616 North Fort Myer Drive -- Rosslyn, VA.... 271 1974 10/18/96 (3)
New England Executive Park -- Burlington,
MA......................................... 291 1970-1985 11/15/96 (3)
10960 Wilshire Boulevard -- Westwood, CA..... 439 1971-1992 11/21/96 (3)
245 First Street -- Cambridge, MA............ 170 1985-1986 11/21/96 (3)
Shoreline Technology Park -- Mountain View,
CA......................................... 141 1985-1991 12/20/96 (3)
Lake Marriott Business Park -- Santa Clara,
CA......................................... 43 1981 12/20/96 (3)
Presidents Plaza -- Chicago, IL.............. 32 1980-1982 12/27/96 (3)
-------
$97,535
=======
</TABLE>
- -------------------------
(1) These properties are collateral for a Note Payable under the Credit
Facility. The outstanding balance under the Note at December 31, 1996 is
$153,000.
(2) This property is comprised of two Units. Unit A is collateral for a Note
Payable under the Credit Facility. Unit B is collateral for a Mortgage Note
Payable in the amount of $56,920.
(3) Buildings and improvements -- 19 to 40 years; Personal property -- 5 to 10
years; tenant improvements -- over the terms of the related leases.
F-139
<PAGE> 277
SCHEDULE III
BEACON PROPERTIES, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- CONTINUED
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
Depreciation of building and improvements and personal property is
calculated over the following estimated useful lives, using straight line and
declining balance methods:
Buildings and improvements -- 19 to 40 years
Tenant Improvements -- over the terms of the related leases
Personal property -- 5 to 10 years
The aggregate cost for federal income tax purposes was approximately
$1,390.3 million at December 31, 1996.
The changes in total real estate assets for the years ended December 31,
1996 and 1995, the period May 26, 1994 to December 31, 1994 and the period
January 1, 1994 to May 25, 1994 are as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------- ------------
MAY 26, 1994 JAN. 1, 1994
TO TO
1996 1995 DEC. 31, 1994 MAY 25, 1994
---- ---- ------------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of period................... $ 471,142 $400,419 $207,013* $81,220
Acquisitions, Construction Costs and
Improvements................................. 1,220,388 70,723 193,406 978
---------- -------- -------- -------
Balance, end of period......................... $1,691,530 $471,142 $400,419 $82,198
========== ======== ======== =======
</TABLE>
- -------------------------
* Represents initial acquisition cost of properties in the formation of the
Company.
The changes in accumulated depreciation for the years ended December 31,
1996 and 1995, the period May 26, 1994 to December 31, 1994 and the period
January 1, 1994 to May 25, 1994 are as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------ ------------
MAY 26, 1994 JAN. 1, 1994
TO TO
1996 1995 DEC. 31, 1994 MAY 25, 1994
---- ---- ------------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of period...................... $66,571 $51,115 $45,044** $37,167
Depreciation for period........................... 30,964 15,456 6,071 2,055
------- ------- ------- -------
Balance, end of period............................ $97,535 $66,571 $51,115 $39,222
======= ======= ======= =======
</TABLE>
- -------------------------
** Balance reflects prior accumulated depreciation carried over due to
accounting for formation acquisitions as poolings of interests.
F-140
<PAGE> 278
SCHEDULE IV
BEACON PROPERTIES, L.P.
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
FACE LOANS SUBJECT TO
FINAL PERIODIC AMOUNT CARRYING DELINQUENT
INTEREST MATURITY PAYMENT PRIOR OF AMOUNT OF PRINCIPAL
COMMERCIAL PROPERTY RATE DATE TERM LIENS MORTGAGES MORTGAGES(1) OR INTEREST
------------------- -------- -------- -------- ----- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rowes Wharf...................... 8.71% 4/1/99 Interest-only -- $63,000 $51,491 --
Boston, MA
</TABLE>
- -------------------------
(1) The aggregate cost of the Company's mortgage loans for federal income tax
purposes $51,491 at December 31, 1996.
Reconciliation of Mortgage Loans on real estate for the year ended December
31:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Balance at beginning of year................................ $34,778
Additions during period:
Acquisition of mortgage loans.......................... 16,713
Deductions during period:
Principal collections.................................. --
-------
Balance at end of year...................................... $51,491
=======
</TABLE>
F-141
<PAGE> 279
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................ 2
Risk Factors........................... 16
The Company............................ 25
Recent Developments.................... 27
Business and Growth Strategies......... 29
No Cash Proceeds to the Company........ 30
Ratios of Earnings to Fixed Charges.... 31
Capitalization......................... 31
Selected Combined Financial
Information.......................... 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 34
The Properties......................... 52
Management............................. 77
Certain Relationships and Related
Transactions......................... 87
Policies with Respect to Certain
Activities........................... 92
Principal Shareholders of the Trust.... 93
The Exchange Offer..................... 95
Description of the Exchange Notes...... 104
Plan of Distribution................... 123
Certain United States Federal Income
Tax Considerations...................
Experts................................ 124
Legal Matters.......................... 124
Available Information.................. 124
Glossary............................... 125
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
EOP OPERATING
LIMITED PARTNERSHIP
OFFER TO EXCHANGE
6.375% NOTES DUE 2003 FOR ANY AND ALL
OUTSTANDING 6.375% NOTES DUE 2003
6.625% NOTES DUE 2005 FOR ANY AND ALL
OUTSTANDING 6.625% NOTES DUE 2005
6.750% NOTES DUE 2008 FOR ANY AND ALL
OUTSTANDING 6.750% NOTES DUE 2008
7.250% NOTES DUE 2018 FOR ANY AND ALL
OUTSTANDING 7.250% NOTES DUE 2018
6.376% MANDATORY PAR PUT REMARKETED
SECURITIES(SM) DUE 2012 FOR ANY AND ALL
OUTSTANDING 6.376% MANDATORY PAR
PUT REMARKETED SECURITIES(SM) DUE 2012
7.24% SENIOR NOTES DUE 2004 FOR ANY AND ALL
OUTSTANDING 7.24% SENIOR NOTES DUE 2004
7.36% SENIOR NOTES DUE 2005 FOR ANY AND ALL
OUTSTANDING 7.36% SENIOR NOTES DUE 2005
7.44% SENIOR NOTES DUE 2006 FOR ANY AND ALL
OUTSTANDING 7.44% SENIOR NOTES DUE 2006
7.41% SENIOR NOTES DUE 2007 FOR ANY AND ALL
OUTSTANDING 7.41% SENIOR NOTES DUE 2007
------------------------
PROSPECTUS
------------------------
, 1998
======================================================
<PAGE> 280
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF TRUSTEES AND OFFICERS
Pursuant to its Agreement of Limited Partnership, the Company 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 the Company or any general partner
and such other persons or entities as the Trust 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 the Company or the
general partners or the operation of, or the ownership of property by, any of
them as set forth in the 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 unlawful. Any indemnification shall be made
only out of the assets of the Company, 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 the Company or otherwise provide funds to enable the Company
to fund its indemnity obligations. The Company 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 addition 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. The Company is authorized to purchase and maintain insurance on
behalf of the Indemnitees with respect to the foregoing matters. The Company
shall be deemed to have requested an Indemnitee to serve as fiduciary of an
employee benefit plan whenever the performance by it of its duties to the
Company 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 the Company. 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 Partnership Agreement.
II-1
<PAGE> 281
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S> <C>
1.1* -- Form of Purchase Agreement, dated February 12, 1998, among
the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Lehman Brothers Inc., J.P.
Morgan Securities Inc., Salomon Brothers Inc, BancAmerica
Robertson Stephens and UBS Securities LLC, relating to the
$1.25 Billion Notes.
1.2* -- Form of Purchase Agreement, dated February 12, 1998, among
the Registrant, Merrill Lynch & Co., and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, relating to the MOPPRS.
1.3* -- Form of Note Purchase Agreement, dated September 2, 1997,
between the Registrant and Teachers Insurance and Annuity
Association of America, relating to the $180 Million Notes.
4.1* -- Indenture, dated as of September 2, 1997, between the
Registrant and State Street Bank and Trust Company, as
supplemented.
4.2* -- Amended and Restated Declaration of Trust of the Trust
(filed as Exhibit 3.1 to the Trust's Registration Statement
on Form S-11 (Commission File No. 333-26629), and
incorporated herein by reference).
4.3* -- Bylaws of the Trust (filed as Exhibit 3.2 to the Trust's
Registration Statement on Form S-11 (Commission File No.
333-26629), and incorporated herein by reference).
4.4* -- Form of 6.375% Note due 2003.
4.5* -- Form of 6.625% Note due 2005.
4.6* -- Form of 6.750% Note due 2008.
4.7* -- Form of 7.250% Note due 2018.
4.8* -- Form of 6.376% MOPPRS due 2012.
4.9* -- Form of 7.24% Senior Note due 2004.
4.10* -- Form of 7.36% Senior Note due 2005.
4.11* -- Form of 7.44% Senior Note due 2006.
4.12* -- Form of 7.41% Senior Note due 2007.
4.13* -- Registration Rights Agreement, dated as of February 12,
1998, among the Registrant and (i) in the case of the 2003
Notes, the 2005 Notes and the 2018 Notes, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Lehman Brothers Inc. ("Lehman"), J.P. Morgan Securities Inc.
("J.P. Morgan"), Salomon Brothers Inc ("Salomon") and UBS
Securities LLC, (ii) in the case of the 2008 Notes, Merrill
Lynch, Lehman, J.P. Morgan, Salomon and BancAmerica
Robertson Stephens and (iii) in the case of the MOPPRS,
Merrill Lynch.
5.1* -- Opinion of Hogan & Hartson L.L.P. regarding the validity of
the securities being registered.
10.1* -- Form of Agreement of Limited Partnership of the Registrant
(filed as Exhibit 10.1 to the Trust's Registration Statement
on Form S-11 (Commission File No. 333-26629), and
incorporated herein by reference).
10.2* -- Contribution Agreement (filed as Exhibit 10.2 to the Trust's
Registration Statement on Form S-11 (Commission File No.
333-26629), and incorporated herein by reference).
12.1* -- Statement of Computation of Ratios.
21.1* -- List of Subsidiaries (filed as Exhibit 21.1 to the Trust's
Registration Statement on Form S-11 (Commission File No.
333-26629), and incorporated herein by reference).
23.1* -- Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5.1).
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (included in the Signature Page at page
II-4).
25.1 -- Statement of Eligibility of the Trustee on Form T-1.
27.1* -- Financial Data Schedule.
99.1* -- Form of Letter of Transmittal.
99.2* -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* To be filed by amendment.
II-2
<PAGE> 282
ITEM 22. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, such
changes in volume and price represent no more than a 20% change in the
maximum aggregated offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE> 283
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chicago, Illinois, on this 4th day of
March, 1998.
EOP Operating Limited Partnership
By: Equity Office Properties Trust
By: /s/ TIMOTHY H. CALLAHAN
------------------------------------
Timothy H. Callahan
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of the 4th day of March, 1998.
Each person whose signature appears below hereby constitutes and appoints
Samuel Zell and Timothy H. Callahan, and each of them, as his attorney-in-fact
and agent, with full power of substitution and resubstitution for him in any and
all capacities, to sign any or all amendments or post-effective amendments to
this Registration Statement, or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary in connection with such matters
and hereby ratifying and confirming all that such attorney-in-fact and agent or
his substitutes may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ TIMOTHY H. CALLAHAN President, Chief Executive Officer and
- -------------------------------------------------------- Trustee (principal executive officer)
Timothy H. Callahan
/s/ RICHARD D. KINCAID Chief Financial Officer (principal
- -------------------------------------------------------- financial officer and principal
Richard D. Kincaid accounting officer)
/s/ SAMUEL ZELL Chairman of the Board of Trustees
- --------------------------------------------------------
Samuel Zell
/s/ SHELI Z. ROSENBERG Trustee
- --------------------------------------------------------
Sheli Z. Rosenberg
/s/ THOMAS E. DOBROWSKI Trustee
- --------------------------------------------------------
Thomas E. Dobrowski
/s/ JAMES D. HARPER, JR. Trustee
- --------------------------------------------------------
James D. Harper, Jr.
/s/ PETER LINNEMAN Trustee
- --------------------------------------------------------
Peter Linneman
/s/ JERRY M. REINSDORF Trustee
- --------------------------------------------------------
Jerry M. Reinsdorf
</TABLE>
II-4
<PAGE> 284
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ WILLIAM M. GOODYEAR Trustee
- --------------------------------------------------------
William M. Goodyear
Trustee
- --------------------------------------------------------
David K. McKown
/s/ H. JON RUNSTAD Trustee
- --------------------------------------------------------
H. Jon Runstad
/s/ EDWIN N. SIDMAN Trustee
- --------------------------------------------------------
Edwin N. Sidman
</TABLE>
II-5
<PAGE> 285
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
- ------- ---------------------- ----
<C> <C> <S> <C>
1.1* -- Form of Purchase Agreement, dated February 12, 1998, among
the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Lehman Brothers Inc., J.P.
Morgan Securities Inc., Salomon Brothers Inc, BancAmerica
Robertson Stephens and UBS Securities LLC, relating to the
$1.25 Billion Notes.
1.2* -- Form of Purchase Agreement, dated February 12, 1998, among
the Registrant, Merrill Lynch & Co., and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, relating to the
MOPPRS.
1.3* -- Form of Note Purchase Agreement, dated September 2, 1997,
between the Registrant and Teachers Insurance and Annuity
Association of America, relating to the $180 Million Notes.
4.1* -- Indenture, dated as of September 2, 1997, between the
Registrant and State Street Bank and Trust Company, as
supplemented.
4.2* -- Amended and Restated Declaration of Trust of the Trust
(filed as Exhibit 3.1 to the Trust's Registration Statement
on Form S-11 (Commission File No. 333-26629), and
incorporated herein by reference).
4.3* -- Bylaws of the Trust (filed as Exhibit 3.2 to the Trust's
Registration Statement on Form S-11 (Commission File No.
333-26629), and incorporated herein by reference).
4.4* -- Form of 6.375% Note due 2003.
4.5* -- Form of 6.625% Note due 2005.
4.6* -- Form of 6.750% Note due 2008.
4.7* -- Form of 7.250% Note due 2018.
4.8* -- Form of 6.376% MOPPRS due 2012.
4.9* -- Form of 7.24% Senior Note due 2004.
4.10* -- Form of 7.36% Senior Note due 2005.
4.11* -- Form of 7.44% Senior Note due 2006.
4.12* -- Form of 7.41% Senior Note due 2007.
4.13* -- Registration Rights Agreement, dated as of February 12,
1998, among the Registrant and (i) in the case of the 2003
Notes, the 2005 Notes and the 2018 Notes, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Lehman Brothers Inc. ("Lehman"), J.P. Morgan Securities Inc.
("J.P. Morgan"), Salomon Brothers Inc ("Salomon") and UBS
Securities LLC, (ii) in the case of the 2008 Notes, Merrill
Lynch, Lehman, J.P. Morgan, Salomon and BancAmerica
Robertson Stephens and (iii) in the case of the MOPPRS,
Merrill Lynch.
5.1* -- Opinion of Hogan & Hartson L.L.P. regarding the validity of
the securities being registered.
10.1* -- Form of Agreement of Limited Partnership of the Registrant
(filed as Exhibit 10.1 to the Trust's Registration Statement
on Form S-11 (Commission File No. 333-26629), and
incorporated herein by reference).
10.2* -- Contribution Agreement (filed as Exhibit 10.2 to the Trust's
Registration Statement on Form S-11 (Commission File No.
333-26629), and incorporated herein by reference).
12.1* -- Statement of Computation of Ratios.
21.1* -- List of Subsidiaries (filed as Exhibit 21.1 to the Trust's
Registration Statement on Form S-11 (Commission File No.
333-26629), and incorporated herein by reference).
</TABLE>
II-6
<PAGE> 286
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
- ------- ---------------------- ----
<C> <C> <S> <C>
23.1* -- Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5.1).
23.2 -- Consent of Ernst & Young L.L.P.
23.3 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (included in the Signature Page at page
II-4).
25.1 -- Statement of Eligibility of the Trustee on Form T-1.
27.1* -- Financial Data Schedule.
99.1* -- Form of Letter of Transmittal.
99.2* -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* To be filed by amendment.
II-7
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Combined Financial Information" and to the use of our reports
indicated below in this registration statement on Form S-4 of EOP Operating
Limited Partnership.
DATE OF AUDITORS
FINANCIAL STATEMENTS REPORT
- --------------------------------------------------------------------------------
Combined Financial Statements of Equity Office March 25, 1997
Predecessors as of December 31, 1996 and 1995 and for
each of the three years in the period ended
December 31, 1996
Statement of Revenue and Certain Expenses of 177 Broad March 28, 1997
Street for the year ended December 31, 1996
Statement of Revenue and Certain Expenses of Preston April 16, 1997
Commons for the year ended December 31, 1996
Statement of Revenue and Certain Expenses of Oakbrook May 30, 1997
Terrace Tower for the year ended December 31, 1996
Statement of Revenue and Certain Expenses of One June 6, 1997
Maritime Plaza for the year ended December 31, 1996
Statement of Revenue and Certain Expenses of 201 Mission April 30, 1997
Street for the year ended December 31, 1996
Statement of Revenue and Certain Expenses of 30 N. LaSalle June 13, 1997
for the year ended December 31, 1996
Combined Statement of Revenue and Certain Expenses of September 3, 1997
the Columbus America Properties for the year ended
December 31, 1996
Combined Statement of Revenue and Certain Expenses of September 3, 1997
the Prudential Properties for the year ended
December 31, 1996
Statement of Revenue and Certain Expenses of 550 South September 24, 1997
Hope Street for the year ended March 31, 1997
Combined Statement of Revenue and Certain Expenses of September 9, 1997
the Acorn Properties for the year ended December 31, 1996
Combined Statement of Revenue and Certain Expenses of September 5, 1997
10 & 30 South Wacker Drive for the year ended
December 31, 1996
Statement of Revenue and Certain Expenses of One September 5, 1997
Lafayette Centre for the year ended December 31, 1996
Combined Statement of Revenue and Certain Expenses of January 22, 1997
the PPM Properties for the year ended December 31, 1996
Combined Statement of Revenue and Certain Expenses of September 26, 1997
the Wright Runstad Properties for the year ended
September 30, 1996
/s/Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
March 3, 1998
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 of EOP
Operating Limited Partnership of our reports dated January 21, 1997, on our
audits of the consolidated balance sheets of Beacon Properties, L.P. (the
"Operating Partnership") as of December 31, 1996 and 1995 and the related
consolidated statements of operations, partners' capital 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 results of operations, owners' equity and cash
flows of The Beacon Group, predecessor to the Operating Partnership, for the
period January 1, 1994 to May 25, 1994, and the related financial statement
schedules of the Operating Partnership as of December 31, 1996.
We also consent to the reference to our Firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 4, 1998
<PAGE> 1
EXHIBIT 25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
_________
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
EOP OPERATING LIMITED PARTNERSHIP
(Exact name of obligor as specified in its charter)
DELAWARE 36-4156801
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
7.24% SENIOR NOTES DUE 2004
7.36% SENIOR NOTES DUE 2005
7.44% SENIOR NOTES DUE 2006
7.41% SENIOR NOTES DUE 2007
6.375% NOTES DUE 2003
6.625% NOTES DUE 2005
6.750% NOTES DUE 2008
7.250% NOTES DUE 2018
6.376% MANDATORY PAR PUT REMARKETED SECURITIES ("MOPPRS") DUE FEBRUARY 15, 2012
(Title of indenture securities)
<PAGE> 2
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington,
D.C., Federal Deposit Insurance Corporation, Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its
parent, State Street Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as
now in effect, is on file with the Securities and
Exchange Commission as Exhibit 1 to Amendment No. 1 to the
Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Morse Shoe, Inc.
(File No. 22-17940) and is incorporated herein by reference
thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee
to commence business was necessary or issued is on file with
the Securities and Exchange Commission as Exhibit 2 to
Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the
Registration Statement of Morse Shoe, Inc. (File No. 22-17940)
and is incorporated herein by reference thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS
SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise
corporate trust powers is on file with the Securities and
Exchange Commission as Exhibit 3 to Amendment No. 1 to the
Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Morse Shoe,
Inc. (File No. 22-17940) and is incorporated herein by
reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect,
is on file with the Securities and Exchange Commission as
Exhibit 4 to the Statement of Eligibility and Qualification of
Trustee (Form T-1) filed with the Registration Statement of
Eastern Edison Company (File No. 33-37823) and is
incorporated herein by reference thereto.
1
<PAGE> 3
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS
IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(B) OF THE ACT.
The consent of the trustee required by Section 321(b) of the
act is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY.
A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority is annexed hereto as
Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the 26th day of February 1998.
STATE STREET BANK AND TRUST COMPANY
By:
-------------------------------
NAME: DONALD E. SMITH
TITLE: VICE PRESIDENT
2
<PAGE> 4
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by EOP
OPERATING LIMITED PARTNERSHIP of its 7.24% SENIOR NOTES DUE 2004, 7.36% SENIOR
NOTES DUE 2005, 7.44% SENIOR NOTES DUE 2006, 7.41% SENIOR NOTES DUE 2007, 6.375%
NOTES DUE 2003, 6.625% NOTES DUE 2005, 6.750% NOTES DUE 2008, 7.250% NOTES DUE
2018, AND 6.376% MANDATORY PAR PUT REMARKETED SECURITIES ("MOPPRS") DUE FEBRUARY
15, 2012, we hereby consent that reports of examination by Federal, State,
Territorial or District authorities may be furnished by such authorities to the
Securities and Exchange Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ DONALD E. SMITH
----------------------------
NAME: DONALD E. SMITH
TITLE: VICE PRESIDENT
DATED: FEBRUARY 26, 1998
<PAGE> 5
3
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking
institution organized and operating under the banking laws of this
commonwealth and a member of the Federal Reserve System, at the close of
business December 31, 1997, published in accordance with a call made by the
Federal Reserve Bank of this District pursuant to the provisions of the
Federal Reserve Act and in accordance with a call made by the Commissioner
of Banks under General Laws, Chapter 172, Section 22(a).
<TABLE>
<CAPTION>
Thousands of
ASSETS Dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ......................................... 2,220,829
Interest-bearing balances .................................................................. 10,076,045
Securities .......................................................................................... 10,373,821
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary ........................................................ 5,124,310
Loans and lease financing receivables:
Loans and leases, net of unearned income ............ 6,270,348
Allowance for loan and lease losses ................. 82,820
Allocated transfer risk reserve...................... 0
Loans and leases, net of unearned income and allowances .................................... 6,187,528
Assets held in trading accounts ..................................................................... 1,241,555
Premises and fixed assets ........................................................................... 410,029
Other real estate owned ............................................................................. 100
Investments in unconsolidated subsidiaries .......................................................... 38,831
Customers' liability to this bank on acceptances outstanding ........................................ 44,962
Intangible assets ................................................................................... 224,049
Other assets ........................................................................................ 1,507,650
----------
Total assets ........................................................................................ 37,449,709
==========
LIABILITIES
Deposits:
In domestic offices ........................................................................ 10,115,205
Noninterest-bearing ....................... 7,739,136
Interest-bearing .......................... 2,376,069
In foreign offices and Edge subsidiary ..................................................... 14,791,134
Noninterest-bearing ....................... 71,889
Interest-bearing .......................... 14,719,245
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary ........................................................ 7,603,920
Demand notes issued to the U.S. Treasury and Trading Liabilities .................................... 194,059
Trading liabilities.................................................................................. 1,036,905
Other borrowed money ................................................................................ 459,252
Subordinated notes and debentures ................................................................... 0
Bank's liability on acceptances executed and outstanding ............................................ 44,962
Other liabilities ................................................................................... 972,782
Total liabilities ................................................................................... 35,218,219
----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus........................................................ 0
Common stock ........................................................................................ 29,931
Surplus ............................................................................................. 444,620
Undivided profits and capital reserves/Net unrealized holding gains (losses) ........................ 1,763,076
Cumulative foreign currency translation adjustments ................................................. (6,137)
Total equity capital ................................................................................ 2,231,490
----------
Total liabilities and equity capital ................................................................ 37,449,709
----------
</TABLE>
<PAGE> 6
4
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true
and correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
<PAGE> 7
5
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS
IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(B) OF THE ACT.
The consent of the trustee required by Section 321(b) of the
Act is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING
AUTHORITY.
A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority is annexed hereto as
Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter of the
obligor, the trustee has relied upon the information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer to Item 2. of this statement will be amended, if necessary,
to reflect any facts which differ from those stated and which would have been
required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation duly
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the 26TH DAY OF FEBRUARY 1998.
STATE STREET BANK AND TRUST COMPANY
By: /s/ DONALD E. SMITH
----------------------
NAME: DONALD E. SMITH
TITLE: VICE PRESIDENT
<PAGE> 8
2
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by EOP
OPERATING LIMITED PARTNERSHIP of its 7.24% SENIOR NOTES DUE 2004, 7.36% SENIOR
NOTES DUE 2005, 7.44% SENIOR NOTES DUE 2006, 7.41% SENIOR NOTES DUE 2007, 6.375%
NOTES DUE 2003, 6.625% NOTES DUE 2005, 6.750% NOTES DUE 2008, 7.250% NOTES DUE
2018, AND 6.376% MANDATORY PAR PUT REMARKETED SECURITIES ("MOPPRS") DUE FEBRUARY
15, 2012, we hereby consent that reports of examination by Federal, State,
Territorial or District authorities may be furnished by such authorities to the
Securities and Exchange Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ DONALD E. SMITH
--------------------
NAME: DONALD E. SMITH
TITLE: VICE PRESIDENT
DATED: FEBRUARY 26, 1998
