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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 1-13625
EOP OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
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DELAWARE 36-4156801
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization) 60606
TWO NORTH RIVERSIDE PLAZA, (Zip Code)
SUITE 2200, CHICAGO, ILLINOIS
(Address of principal executive offices)
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(312) 466-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest ("Units")
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (of for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ] Yes [ ] No
The aggregate market value of the Units held by non-affiliates of the
registrant as of March 12, 1999 was $7,121,975,052.
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EOP OPERATING LIMITED PARTNERSHIP
TABLE OF CONTENTS
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PAGE
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PART 1.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 25
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 26
Item 6. Selected Financial Data..................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 32
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 57
Item 8. Financial Statements........................................ 59
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 97
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 98
Item 11. Executive Compensation...................................... 102
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 108
Item 13. Certain Relationships and Related Transactions.............. 109
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 111
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PART I
ITEM 1. BUSINESS.
THE COMPANY
As used herein, the terms "we," "us," "our," "EOP Operating," "Operating
Partnership" or the "Company" refer to EOP Operating Limited Partnership, a
Delaware limited partnership, individually or together with its subsidiaries and
predecessors. Together with our sole managing general partner, Equity Office
Properties Trust, a Maryland real estate investment trust ("Equity Office" or
the "Trust"), we were formed to continue and expand the national office property
business organized by Mr. Samuel Zell, the Chairman of the Board of Equity
Office, and to complete the consolidation of our predecessors. We are a fully
integrated, self-managed real estate company engaged in acquiring, owning,
managing and leasing office properties and parking facilities.
As of December 31, 1998, we owned or had an interest in 284 office
properties containing approximately 75.1 million rentable square feet of office
space and owned 19 stand-alone parking facilities containing approximately
18,059 parking spaces. The weighted average occupancy for our office properties
at December 31, 1998 was approximately 95.0%. Our office properties are located
in 80 submarkets in 36 markets in 24 states and the District of Columbia. The
office properties, by rentable square feet, are located approximately 53% in
central business districts, or "CBDs," and 47% in suburban markets.
Equity Office has elected to be taxed as a real estate investment trust, or
"REIT," for federal income tax purposes. To facilitate maintenance of Equity
Office's qualification as a REIT for federal income tax purposes, we generally
conduct the management of properties that are not wholly owned by us and our
subsidiaries and certain other business activities through taxable corporations
in which we own substantially all of the equity but little or no voting stock.
We refer to these corporations as our "noncontrolled subsidiaries."
Our executive offices are located at Two North Riverside Plaza, Suite 2200,
Chicago, Illinois 60606, and our telephone number is (312) 466-3300.
ACQUISITION ACTIVITY
During the period from 1987 through 1998, we invested approximately $12.5
billion, averaging $2.7 billion annually for the four years ended December 31,
1998, calculated on a cost basis, in acquisitions of institutional quality
office properties and parking facilities throughout the United States. During
the year ended December 31, 1998, we completed 12 acquisition transactions in
which we acquired 28 office properties, containing an aggregate of approximately
10.4 million square feet of rentable space and two parking facilities containing
1,310 spaces. The aggregate consideration we paid for these acquisitions during
1998 was approximately $2,534.5 million, comprised of $1,923.7 million in cash,
$204.0 million in Equity Office's common shares and units of limited partnership
interest in EOP Operating and $406.8 million in assumed liabilities.
BUSINESS AND GROWTH STRATEGIES
Our primary business objective is to achieve sustainable long-term growth
in cash flow and portfolio value. We intend to achieve this objective by owning
and operating institutional quality office buildings and providing a superior
level of service to tenants across the United States. We supplement this
strategy by owning parking facilities.
INTERNAL GROWTH. We believe that our 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, (iv) the reduction of various expenses as a
percentage of revenues, and (v) capital market efficiencies.
As of December 31, 1998, 3.7 million rentable square feet of our office
property space was vacant. During the period from December 31, 1998 through
December 31, 2003, 5,376 leases for 43.3 million rentable square
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feet of space are scheduled to expire. As of December 31, 1998, the average rent
for this space was $23.22 per square foot. The actual rental rates at which
available space will be relet will depend on prevailing market factors at the
time.
We own undeveloped land on which office space could be developed, assuming
our receipt of all necessary permits and licenses. Our policy is to develop land
only when market conditions warrant. Although we may develop properties
ourselves, a portion of this activity may be conducted with joint venture
partners.
EXTERNAL GROWTH. Assuming that capital is available to us on reasonable
terms, we expect to actively pursue, over the long term, acquisitions of
additional office properties and parking facilities. Properties may be acquired
separately or as part of a portfolio, and may be acquired for cash and/or in
exchange for our equity or debt securities. Such acquisitions may be customary
real estate transactions and/or mergers or other business combinations.
PARKING FACILITIES. We intend to focus any acquisition efforts for parking
facilities on municipal or private parking facilities that have limited
competition, minimal or no rental rate restrictions, and/or a superior location
proximate to or affiliated with airports, CBDs, entertainment projects or
healthcare facilities.
EMPLOYEES
As of December 31, 1998, we had approximately 1,680 employees providing
in-house expertise in:
- property management
- leasing
- finance
- tax
- acquisition
- development
- disposition
- marketing
- accounting
- information systems
- law
Equity Office's five most senior executives have an average tenure of 9
years with us or our affiliates and an average of 23 years experience in the
real estate industry.
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EXECUTIVE AND SENIOR OFFICERS OF EQUITY OFFICE
As of March 12, 1999, the following executive and senior officers of Equity
Office held the offices indicated until their successors are chosen and
qualified after the next annual meeting of shareholders.
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NAME AGE OFFICE HELD
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Timothy H. Callahan.... 48 President and Chief Executive Officer
Michael A. Steele...... 52 Executive Vice President -- Real Estate Operations and Chief
Operating Officer
Richard D. Kincaid..... 37 Executive Vice President and Chief Financial Officer
Stanley M. Stevens..... 50 Executive Vice President, Chief Legal Counsel and Secretary
Gary A. Beller......... 52 Executive Vice President -- Parking Facilities
Peter H. Adams......... 52 Senior Vice President -- Pacific Region
Sybil J. Ellis......... 45 Senior Vice President -- Acquisitions
Maureen O. Fear........ 42 Senior Vice President -- Treasurer
Debra L. Ferruzzi...... 38 Senior Vice President and Executive Advisor
Frank Frankini......... 44 Senior Vice President -- Design & Construction
David A. Helfand....... 34 Senior Vice President -- New Business Development
Jeffrey L. Johnson..... 39 Senior Vice President -- Investments and Chief Investment
Officer
Peter D. Johnston...... 42 Senior Vice President -- Southwest Region
Kim J. Koehn........... 43 Senior Vice President -- West Region
Frances P. Lewis....... 45 Senior Vice President -- Corporate Communications
Anita A. Loch.......... 50 Senior Vice President -- Human Resources
Gregory S. Mancuso..... 41 Senior Vice President -- Information Systems
Diane M. Morefield..... 40 Senior Vice President -- Investor Relations
Christopher P. Mundy... 37 Senior Vice President -- Northwest Region
David H. Naus.......... 44 Senior Vice President -- Acquisitions
Arvid J. Povilaitis.... 38 Senior Vice President -- Central Region
John C. Schneider...... 40 Senior Vice President -- Legal and Associate General Counsel
for Property Operations
Mark E. Scully......... 40 Senior Vice President -- Southeast Region
Michael E. Sheinkop.... 36 Senior Vice President -- Real Estate Services
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Timothy H. Callahan has been a trustee, Chief Executive Officer and
President of Equity Office since October 1996. Mr. Callahan served on the Board
of Managers and was the Chief Executive Officer of Equity Office Holdings, L.L.C
("EOH"), and Equity Office Properties, L.L.C. ("EOP LLC"), predecessors of
Equity Office, from August 1996 until October 1997. Mr. Callahan was Executive
Vice President and Chief Financial Officer of Equity Group Investments, Inc.
("EGI"), an owner, manager and financier of real estate and corporate
investments, from January 1995 until August 1996, was Executive Vice President
of EGI from November 1994 through January 1995 and was Senior Vice President of
EGI from July 1992 until November 1994. Mr. Callahan was Vice
President -- Finance of the Edward J. DeBartolo Corporation, a developer, owner
and operator of shopping centers, in Youngstown, Ohio, from July 1988 until July
1992. Mr. Callahan was employed by Chemical Bank, a commercial bank located in
New York, New York, from July 1973 until March 1987.
Michael A. Steele has been Executive Vice President -- Real Estate
Operations and Chief Operating Officer for Equity Office since March 1998 and
was Executive Vice President -- Real Estate Operations of Equity Office 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
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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 Equity Office since March 1997 and was Senior Vice President and
Chief Financial Officer of Equity Office 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 Equity Office 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 -- Parking Facilities of
Equity Office 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 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.
Peter H. Adams has been Senior Vice President -- Pacific Region of Equity
Office since March 1998 and was Regional Vice President -- Pacific Region of
Equity Office from March 1997 until February 1998. Mr. Adams was Vice
President -- Group Manager of EOH from July 1994 until July 1995, and Vice
President -- Regional Manager from July 1995 until March 1997. Mr. Adams was
President of Adams Equities, a private real estate consulting firm, from 1990 to
1994.
Sybil J. Ellis has been Senior Vice President -- Acquisitions of Equity
Office 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.
Maureen O. Fear has been Senior Vice President -- Treasurer of Equity
Office since November 1998. Ms. Fear was Assistant Treasurer of Comdisco, Inc.
from 1992 until November 1998. From 1989 until 1992, Ms. Fear was Cash Manager
of Comdisco, Inc. and from 1984 until 1989, Ms. Fear was Transaction Analyst,
Private Placement Group of Comdisco, Inc.
Debra L. Ferruzzi has been Senior Vice President and Executive Advisor of
Equity Office since June 1998. Ms. Ferruzzi was Senior Vice President -- Finance
for EGI from December 1995 until June 1998. Ms. Ferruzzi was Vice President of
EAM from December 1992 until December 1995. She was employed by EGI from 1982
until May 1998.
Frank Frankini has been Senior Vice President -- Design and Construction of
Equity Office 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.
David A. Helfand has been Senior Vice President -- New Business Development
of Equity Office since July 1998. Mr. Helfand was Managing Director of Equity
International Properties, Ltd. from December 1997 until
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July 1998. Mr. Helfand was Chief Executive Officer of Manufactured Home
Communities, Inc. from August 1996 until December 1997 and was President of
Manufactured Home Communities, Inc. from January 1995 until July 1996. From
December 1992 until February 1995, Mr. Helfand was Chief Financial Officer and
from March 1994 until January 1995, he was Vice President of Manufactured Home
Communities, Inc. Since May 1995, Mr. Helfand has been a member of the Board of
Directors of Manufactured Home Communities, Inc.
Jeffrey L. Johnson has been Senior Vice President -- Investments and Chief
Investment Officer for Equity Office since March 1998 and was Senior Vice
President -- Investments for Equity Office 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. Mr. Johnson was an Investor and Asset Manager for
Aldrich Eastman Waltch, Inc., a real estate advisor in Boston, Massachusetts,
from August 1987 until August 1990. Mr. Johnson was Senior Project Manager in
the real estate investment group for First Wachovia, Inc., a commercial bank in
Winston-Salem, North Carolina, from July 1983 until August 1987.
Peter D. Johnston has been Senior Vice President -- Southwest Region of
Equity Office since March 1998 and was Regional Vice President -- Southwest
Region from January 1998 until February 1998. Mr. Johnston was Senior Vice
President -- National Accounts from April 1993 until February 1998.
Kim J. Koehn has been Senior Vice President -- West Region of Equity Office
since March 1998 and was Regional Vice President -- West Region from March 1997
until February 1998 and was also Regional Vice President Southwest Region from
March 1997 until December 1997. Mr. Koehn was Senior Vice President -- Asset
Management of EOH from December 1995 to February 1997. Mr. Koehn was a Vice
President of EOH from June 1993 until December 1995.
Frances P. Lewis has been Senior Vice President -- Corporate Communications
of Equity Office 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.
Anita A. Loch has been Senior Vice President -- Human Resources of Equity
Office since January 1999. Ms. Loch was Vice President of Human Resources of
Moore Corporation, Ltd. from 1997 until December 1998. From 1992 until 1997, Ms.
Loch was Vice President of Human Resources of Continental Can Europe, White Cap,
Inc. Division.
Gregory S. Mancuso has been Senior Vice President -- Information Systems of
Equity Office since October 1998. Mr. Mancuso was Senior Vice President,
Business Systems Integration Group of ERE Yarmouth from 1997 until September
1998. Mr. Mancuso was Senior Vice President/CIO of The Yarmouth Group, Inc.,
from 1994 until 1997, and was Senior Vice President of The Yarmouth Group, Inc.
from 1991 until 1994. Mr. Mancuso held various positions at The Yarmouth Group,
Inc. from 1982 through 1997.
Diane M. Morefield has been Senior Vice President -- Investor Relations
since January 1999 and was Senior Vice President -- Finance/Capital Markets of
Equity Office from July 1997 until December 1998. 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 Vice President and Team Leader for the Real
Estate Group division, in the Midwest, of Barclays Bank PLC from August 1983
until November 1993.
Christopher P. Mundy has been Senior Vice President -- Northeast Region of
Equity Office since March 1998, and was Regional Vice President -- Northeast
Region from July 1997 until February 1998. Mr. Mundy was Vice
President -- Leasing of EOH from November 1991 until July 1997.
David H. Naus has been Senior Vice President -- Acquisitions of Equity
Office since March 1997. Mr. Naus was Senior Vice President -- Acquisitions for
EOH from December 1995 until October 1997.
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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.
Arvid A. Povilaitis has been Senior Vice President -- Central Region of
Equity Office since March 1998 and was Regional Vice President -- Central Region
from March 1997 until February 1998. Mr. Povilaitis was Vice President -- Asset
Management of EOH from August 1994 until February 1997. Mr. Povilaitis was Vice
President Investment Properties of Strategic Realty Advisors, Inc., a real
estate and advisory company, from January 1994 until August 1994. Mr. Povilaitis
was employed at VMS Realty Partners, a sponsor of public and private real estate
limited partnerships, from January 1983 until January 1994, most recently
serving as Second Vice President.
John C. Schneider has been Senior Vice President -- Legal and Associate
General Counsel for Property Operations of Equity Office since July 1998. From
January 1997 until June 1998, Mr. Schneider was a Vice President of Equity
Office. From January 1994 until December 1996, Mr. Schneider was a vice
president of Rosenberg & Liebentritt, P.C.
Mark E. Scully has been Senior Vice President -- Southeast Region of Equity
Office since March 1998 and was Regional Vice President for the Southeast Region
from March 1997 until February 1998. Mr. Scully was Vice President -- Regional
Leasing Director of EOH from January 1995 until February 1997. Mr. Scully was
Regional Leasing Director of EOH from September 1991 until December 1994.
Michael E. Sheinkop has been Senior Vice President -- Real Estate Services
of Equity Office since January 1999 and was Senior Vice President -- Portfolio
Management of Equity Office from November 1997 until December 1998. Mr. Sheinkop
was Senior Vice President -- Divisional Manager of EOH from March 1997 until
October 1997 and for Equity Office 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.
RISK FACTORS
Set forth below are the risks that we believe are material to investors who
purchase or own our units of limited partnership interest. Our units of limited
partnership interest are redeemable on a one-for-one basis for Equity Office's
common shares of beneficial interest or their cash equivalent, at the election
of Equity Office. We refer to our units as our "securities," and the investors
who own units as our "securityholders."
WE MAY BE UNABLE TO MANAGE EFFECTIVELY OUR RAPID GROWTH AND EXPANSION INTO
NEW MARKETS. We have grown rapidly since Equity Office's IPO in July 1997. As
of December 31, 1998, we owned interests in 284 office properties containing
75.1 million square feet. We also owned interests in 19 parking facilities
containing approximately 18,059 parking spaces. On a square footage basis, our
office portfolio grew by 133% and our parking portfolio grew by 22%, based on
the number of parking spaces, from the time of the IPO in July 1997 through the
end of 1998. If we do not effectively manage our rapid growth, we may not be
able to make expected distributions to our securityholders.
OUR PERFORMANCE AND PROPERTY VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE
REAL ESTATE INDUSTRY. If our assets do not generate income sufficient to pay
our expenses, service our debt and maintain our properties, we may not be able
to make expected distributions to our securityholders. Factors that may
adversely affect the economic performance and value of our properties include:
- changes in the national, regional and local economic climates;
- local conditions such as an oversupply of office properties or a
reduction in demand for office properties;
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- the attractiveness of our properties to tenants;
- competition from other available office properties;
- changes in market rental rates and the need to periodically repair,
renovate and relet space;
- our ability to collect rent from tenants; and
- our ability to pay for adequate maintenance, insurance and other
operating costs, including real estate taxes which may increase over
time as markets stabilize, and which are not necessarily reduced when
circumstances such as market factors and competition cause a reduction
in income from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE. When our
tenants decide not to renew their leases upon expiration, we may not be able to
relet the space. Even if the tenants do renew or we can relet the space, the
terms of renewal or reletting, including the cost of required renovations, may
be less favorable than current lease terms or less favorable than the market has
anticipated in the valuation of our shares. From now through December 31, 2003,
leases will expire on a total of 61% of the currently occupied rentable square
feet at our current properties. If we are unable to promptly renew the leases or
relet this space, or if the rental rates upon such renewal or reletting are
significantly lower than expected rates, then our cash flow and ability to
service debt and make distributions to securityholders would be adversely
affected.
NEW ACQUISITIONS MAY FAIL TO PERFORM AS EXPECTED. Assuming we are able to
obtain capital on commercially reasonable terms, we intend to continue to
actively acquire office and parking properties. Newly acquired properties may
fail to perform as expected. We may underestimate the costs necessary to bring
an acquired property up to standards established for its intended market
position.
COMPETITION FOR ACQUISITIONS COULD RESULT IN INCREASED PRICES FOR
PROPERTIES. We expect other major real estate investors with significant
capital will compete with us for attractive investment opportunities. These
competitors include publicly traded REITs, private REITs, investment banking
firms and private institutional investment funds. This competition could
increase prices for office properties.
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO SELL
PROPERTIES WHEN APPROPRIATE. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. This inability to respond to changes in the
performance of our investments could adversely affect our financial condition
and ability to service debt and make distributions to our securityholders. In
addition, sales of appreciated real property could generate adverse tax
consequences, which may make it disadvantageous for us to sell properties.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE. We carry comprehensive
liability, fire, extended coverage and rental loss insurance on all of our
properties. There are, however, certain types of losses, such as lease and other
contract claims, that generally are not insured. Should an uninsured loss or a
loss in excess of insured limits occur, we could lose all or a portion of the
capital we have invested in a property, as well as the anticipated future
revenue from the property. In such an event, we might nevertheless remain
obligated for any mortgage debt or other financial obligations related to the
property.
We carry earthquake insurance on all of our properties, including those
located in California. Our earthquake policies are subject to coverage
limitations. We cannot assure securityholders that material losses in excess of
insurance proceeds will not occur in the future.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION. Our business is subject to risks normally associated with 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,
our cash flow will not be sufficient in all years to repay all maturing debt. If
prevailing interest rates or other factors at the time of refinancing, such as
the possible reluctance of lenders to make commercial real estate loans, result
in higher interest rates, increased interest expense would adversely affect cash
flow and our ability to service debt and make distributions to securityholders.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Debt Financing."
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OUR OBLIGATION TO COMPLY WITH FINANCIAL COVENANTS IN OUR DEBT COULD
RESTRICT OUR RANGE OF OPERATING ACTIVITIES. The mortgages on our properties
contain customary negative covenants, including limitations on our ability,
without the prior consent of the lender, to further mortgage the property, to
enter into new leases or materially modify existing leases. In addition, our
credit facilities contain customary restrictions, requirements to and other
limitations on our ability to incur indebtedness, including 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 our senior unsecured debt is issued contains financial and operating
covenants including coverage ratios and limitations on our ability to incur
secured and unsecured indebtedness. These covenants reduce our flexibility in
conducting our operations and create a risk of default on our debt if we cannot
satisfy them.
OUR DEGREE OF LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING. Our "debt to market capitalization" ratio, which we calculate as
total debt as a percentage of total debt plus the value of our preferred units
and the market value of our units, was approximately 44.4% as of December 31,
1998. Our leverage could have important consequences to securityholders,
including affecting our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, development or other
general corporate purposes and making us more vulnerable to a downturn in
business or the economy generally.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW. Advances under
our three credit facilities bear interest at variable rates based upon one-month
and 90-day LIBOR. We may borrow additional money with variable interest rates in
the future, and may enter into other transactions to limit our exposure to
rising interest rates as appropriate and cost effective. Increases in interest
rates, or the loss of the benefits of hedging agreements, would increase our
interest expenses, which would adversely affect cash flow and our ability to
service our debt and make distributions to securityholders.
WE DO NOT CONTROL OUR MANAGEMENT AND SERVICES BUSINESSES. To facilitate
maintenance of Equity Office's REIT qualification, we have "noncontrolled
subsidiaries" that provide management and other services for properties that we
do not wholly own. While we generally own from 95% to 99% of the economic
interest in the noncontrolled subsidiaries, their voting stock is owned directly
or indirectly by private companies controlled by Mr. Zell. We therefore do not
control the timing or amount of distributions or the management and operation of
the noncontrolled subsidiaries, and this prevents us from controlling decisions
relating to the declaration and payment of distributions and the business
policies and operations of the noncontrolled subsidiaries. As of December 31,
1998, we had five noncontrolled subsidiaries, including:
- Equity Office Properties Management Corp. and Beacon Property Management
Corporation, which we refer to as the "management companies," which
manage several properties that we do not wholly own;
- Beacon Construction Company, Inc., which provides third-party
construction services; and
- EOP Office Company, which owns a noncontrolling interest in Wright
Runstad Associates Limited Partnership, a provider of third-party
development and management services.
MR. ZELL'S AFFILIATES CONTROL OUR MANAGEMENT COMPANIES AND CERTAIN OF THE
PROPERTIES WE MANAGE BUT DO NOT OWN. The management companies and Beacon
Property Management, L.P. provide property management services and, in most
cases, asset management services to several properties, certain of which are
owned or controlled by affiliates of Mr. Zell. Most of these management
contracts were not negotiated on an arm's length basis. While we believe that
the management fees we receive from these properties are at current market
rates, we cannot assure securityholders that these management fees will equal at
all times those fees that would be charged by an unaffiliated third party. In
this regard, Mr. Zell controls and has a substantial interest in the private
company which has voting control of the management companies. See "We do not
control our management and services businesses" above.
MR. ZELL AND HIS AFFILIATES CONTINUE TO BE INVOLVED IN OTHER INVESTMENT
ACTIVITIES. Although Mr. Zell entered into a noncompetition agreement at the
time of Equity Office's IPO, he and his affiliates have a broad and varied range
of investment interests, including interests in other real estate investment
companies.
10
<PAGE> 11
Mr. Zell's continued involvement in other investment activities could result in
competition for us as well as management decisions which might not reflect the
interests of our securityholders. Mr. Zell's noncompetition agreement does not
apply to activities outside the United States.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY. Federal, state and
local laws and regulations relating to the protection of the environment may
require a current or previous owner or operator of real estate to investigate
and clean up hazardous or toxic substances or petroleum product releases at such
property. If unidentified environmental problems arise, we may have to make
substantial payments which could adversely affect our cash flow and our ability
to make distributions to our securityholders because:
- the owner or operator may have to pay a governmental entity or 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 or caused the presence of
the contaminants;
- even if more that one person may have been responsible for the
contamination, each person covered by the environmental laws may be held
responsible for all of the clean-up costs incurred; and
- third parties may sue the owner or operator of a site for damages and
costs resulting from environmental contamination emanating from that
site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. Such laws require (1) that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, (2) that they notify and
train those who may come into contact with asbestos, and (3) that they undertake
special precautions, including removal or other abatement, if asbestos would be
disturbed during renovation or demolition of a building. Such laws may impose
fines and penalties on building owners or operators who fail 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.
Independent environmental consultants have conducted Phase I environmental
site assessments at all of our properties. 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, these consultants have conducted
additional testing, including sampling for asbestos, for lead in drinking water,
for soil contamination where underground storage tanks are or were located or
where other past site usages create a potential environmental problem, and for
contamination in groundwater.
These environmental assessments have not revealed any environmental
liabilities at the properties that would require us to make payments of amounts
material to our business, nor are we aware of any such material environmental
liability. Asbestos is in a number of the office properties, but most of these
buildings contain only minor amounts. We believe this asbestos is in good
condition and almost none of it is easily crumbled so as to cause the release of
asbestos fibers. We are currently properly managing and maintaining all of the
asbestos and we are following other requirements relating to asbestos. The
presence of asbestos should not present a significant risk as long as compliance
with these requirements continues.
For a few of the properties, the environmental assessments note potential
offsite sources of contamination such as underground storage tanks. For some of
the properties, the environmental assessments note previous uses, such as the
former presence of underground storage tanks. 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/or financial commitments from
certain prior owners and tenants to cover costs related to mitigation should
prevent the contamination from becoming a significant liability.
WE ARE DEPENDENT ON KEY PERSONNEL. We depend on the efforts of Mr. Zell
and Equity Office's executive officers, particularly Mr. Callahan. If they
resigned, our operations could be adversely affected. Equity Office does not
have employment agreements with Mr. Zell or its executive officers.
11
<PAGE> 12
CONTINGENT OR UNDISCLOSED LIABILITIES ACQUIRED IN MERGERS OR SIMILAR
TRANSACTIONS COULD REQUIRE US TO MAKE SUBSTANTIAL PAYMENTS. The properties we
acquired in our formation and in our merger with Beacon Properties L.P. were
acquired subject to liabilities and without any recourse with respect to unknown
liabilities. In addition, we have acquired numerous other properties where we
have only limited recourse with respect to unknown liabilities. As a result, if
liability were asserted against us based upon any of those properties, we might
have to pay substantial sums to settle it. Any such payments could adversely
affect our cash flow and our ability to service debt and make distributions to
securityholders. Unknown liabilities with respect to properties acquired might
include:
- liabilities for clean-up or remediation of undisclosed environmental
conditions;
- unasserted claims of tenants, vendors or other persons dealing with the
former entities of the properties;
- liabilities incurred in the ordinary course of business; and
- claims for indemnification by general partners, directors, officers and
others indemnified by the former owners of the properties.
In the future, we may face additional risks of contingent or undisclosed
liabilities as a result of mergers, other business combinations or similar
transactions.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL FOR FUTURE GROWTH. To
qualify as a REIT, Equity Office must distribute to its shareholders each year
at least 95% of its net taxable income, excluding any net capital gain. Our
partnership agreement generally requires us to distribute substantially all of
our net cash revenues each quarter and to make reasonable efforts to distribute
to Equity Office enough cash for it to meet the 95% distribution requirement.
Because of these distribution requirements, it is not likely that we will be
able to fund all future capital needs, including for acquisitions, from income
from operations. We therefore will have to rely on third-party sources of
capital which may or may not be available on favorable terms or at all. Our
access to third-party sources of capital depends on a number of things,
including the market's perception of our growth potential and our current and
potential future earnings. Moreover, additional equity offerings may result in
substantial dilution of securityholders' interests, and additional debt
financing may substantially increase our leverage.
EQUITY OFFICE INTENDS TO QUALIFY AS A REIT, BUT WE CANNOT GUARANTEE THAT IT
WILL QUALIFY. We believe that, since 1997, the year of the IPO, Equity Office
has qualified for taxation as a REIT for federal income tax purposes. If Equity
Office qualifies as a REIT, it generally will not be subject to federal income
tax on its income that it distributes currently to shareholders. Equity Office
plans to continue to meet the requirements for taxation as a REIT but we cannot
assure shareholders that it will qualify as a REIT. Many of the REIT
requirements are highly technical and complex. The determination that Equity
Office is a REIT requires an analysis of various factual matters and
circumstances that may not be totally within our control. For example, to
qualify as a REIT, at least 95% of Equity Office's gross income must be income
specified in the REIT tax laws, including "rents from real property." Equity
Office is also required to distribute to shareholders at least 95% of its REIT
taxable income, excluding capital gains. The fact that Equity Office holds its
assets through EOP Operating and its subsidiaries further complicates the
application of the REIT requirements. Even a technical or inadvertent mistake
could jeopardize its REIT status. Furthermore, Congress and the IRS might make
changes to the tax laws and regulations, and the courts might issue new rulings
that make it more difficult, or impossible, for Equity Office to remain
qualified as a REIT. We do not believe, however, that any pending or proposed
tax law changes would jeopardize its REIT status.
If Equity Office failed to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. Also, unless the IRS granted
relief under statutory provisions, Equity Office would remain disqualified as a
REIT for the four years following the year Equity Office first failed to
qualify. If Equity Office failed to qualify as a REIT, it would have to pay
significant income taxes and would therefore have less money available for
investments or for distributions to shareholders. This would likely have a
significant adverse effect on the value of our securities. In addition, Equity
Office would no longer be required to make any distributions
12
<PAGE> 13
to shareholders but EOP Operating would still be required to distribute
quarterly substantially all of its net cash revenues to its securityholders,
including Equity Office as holder of a majority of our units.
EQUITY OFFICE PAYS SOME TAXES. Even if Equity Office qualifies as a REIT,
it may be required to pay some federal, state and local taxes on its income and
property. In addition, any net taxable income earned directly by the
noncontrolled subsidiaries is subject to federal and state corporate income tax.
WE INTEND TO QUALIFY AS A PARTNERSHIP, BUT CANNOT GUARANTEE THAT WE WILL
QUALIFY. We intend to qualify as a partnership for federal income tax purposes.
However, we will be treated as a corporation for federal income tax purposes if
we are a "publicly traded partnership," unless at least 90% of our income is
qualifying income as defined in the tax code. The income requirements applicable
to REITs and the definition of qualifying income for purposes of this 90% test
are similar in most respects. Qualifying income for the 90% test generally
includes passive income, such as specified types of real property rents,
dividends and interest. We believe that we will meet this qualifying income
test, but we cannot guarantee that we will. If we were to be taxed as a
corporation, we would incur substantial tax liabilities, Equity Office would
fail to qualify as a REIT for tax purposes and Equity Office's and our ability
to raise additional capital would be impaired.
PROPOSED LEGISLATION, IF ENACTED, COULD REQUIRE US TO RESTRUCTURE OUR
OWNERSHIP OF THE NONCONTROLLED SUBSIDIARIES. The Clinton Administration's fiscal
year 2000 budget proposal, announced February 1, 1999, includes a proposal that
would prohibit a REIT from owning more than 10% of the vote or value of the
outstanding securities of any corporation, except for a qualified REIT
subsidiary or another REIT. Currently, a REIT cannot own more than 10% of the
outstanding voting securities of any one issuer. A REIT can, however, own more
than 10% of the value of the stock of a corporation, so long as not more than
25% of the REIT's total assets are comprised of stock of corporations, except
for qualified REIT subsidiaries or other REITs, and the stock of any single
corporation does not account for more than 5% of the value of the REIT's total
assets. The proposal also contains an exception to the 5% and 10% asset tests
that would allow a REIT to have "taxable REIT subsidiaries," including both
"qualified independent contractor subsidiaries," which could perform
noncustomary and other currently prohibited services for tenants and other
customers, and "qualified business subsidiaries," which could undertake
third-party management and development activities as well as other non-real
estate related activities. Under the proposal, no more than 15% of a REIT's
total assets could consist of taxable REIT subsidiaries and no more than 5% of a
REIT's total assets could consist of qualified independent contractor
subsidiaries. Under the budget proposal, a taxable REIT subsidiary would not be
entitled to deduct any interest on debt funded directly or indirectly by the
REIT. This proposal would be effective after the date of enactment and a REIT
would be allowed to combine and convert existing corporate subsidiaries into
taxable REIT subsidiaries tax-free prior to a certain date. A transition period
would allow for conversion of existing corporate subsidiaries before the 10%
vote or value test would become effective. For Equity Office's taxable years
after the effective date of the proposal and after any applicable transition
period, the 10% vote or value test would apply to Equity Office's ownership in
any of the noncontrolled subsidiaries not converted into taxable REIT
subsidiaries. It is presently uncertain whether any proposal regarding REIT
subsidiaries, including the budget proposal, will be enacted or, if enacted,
what the terms, including the effective date, of such proposal will be.
13
<PAGE> 14
ITEM 2. PROPERTIES.
All capitalized terms used herein and not otherwise defined shall have the
meaning given in the Financial Statements set forth in Item 8.
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. As of December 31, 1998, the Company owned
or had an interest in 284 Office Properties containing approximately 75.1
million rentable square feet of office space and owned an interest in 19 Parking
Facilities containing approximately 18,059 parking spaces. The Office Properties
are located in 80 submarkets in 36 markets in 24 states and the District of
Columbia. The Office Properties by rentable square feet are located
approximately 53% in central business districts and approximately 47% in
suburban markets. As of December 31, 1998, the Office Properties were, on a
weighted average basis, 95.0% occupied by a total of 6,422 tenants, with no
single tenant accounting for more that 1.7% of the Company's aggregate
annualized rent (except for the U.S. General Services Administration, which
accounted for 3.5% of annualized rent.)
All Property data is as of December 31, 1998.
OFFICE PROPERTIES BY REGION
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE PERCENT OF TOTAL ANNUALIZED
OFFICE RENTABLE SQUARE OFFICE PROPERTIES RENT
PRIMARY MARKET PROPERTIES FEET RENTABLE SQUARE FEET PERCENT OCCUPIED (000'S)(1)
- -------------- ---------- --------------- -------------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Central......................... 31 13,339,779 17.8% 95.1% $ 297,249
Northeast....................... 90 21,497,179 28.5% 97.1% 604,024
Southeast....................... 47 7,774,199 10.4% 95.5% 140,771
Southwest....................... 32 10,866,482 14.5% 91.4% 177,224
West............................ 40 11,606,805 15.5% 94.3% 220,329
Pacific......................... 44 10,016,283 13.3% 94.8% 230,400
--- ---------- ------ ------ ----------
Total/Weighted Average.......... 284 75,100,727 100.0% 95.0% $1,669,996
=== ========== ====== ====== ==========
<CAPTION>
PERCENT OF ANNUALIZED RENT
PORTFOLIO NUMBER OF PER OCCUPIED
PRIMARY MARKET ANNUALIZED RENT LEASES SQUARE FEET(1)
- -------------- --------------- --------- ---------------
<S> <C> <C> <C>
Central......................... 17.8% 1,196 $23.43
Northeast....................... 36.2% 1,508 $28.90
Southeast....................... 8.4% 577 $18.96
Southwest....................... 10.6% 1,155 $17.85
West............................ 13.2% 1,279 $20.13
Pacific......................... 13.8% 707 $24.26
------ ----- ------
Total/Weighted Average.......... 100.0% 6,422 $23.40
====== ===== ======
</TABLE>
- ---------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
December 31, 1998, 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,
1998, for the 12 months ending December 31, 1999, are approximately $7.1
million.
OFFICE PROPERTY STATISTICS
The following table sets forth certain information relating to each Office
Property as of December 31, 1998.
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF APPROXIMATE PERCENT OF TOTAL ANNUALIZED PORTFOLIO
PRIMARY MARKET OFFICE YEAR BUILT/ RENTABLE OFFICE PROPERTIES PERCENT RENT ANNUALIZED
SUB MARKET PROPERTIES RENOVATED SQUARE FEET RENTABLE SQUARE FEET OCCUPIED (000'S)(1) RENT
- -------------- ---------- ----------- ----------- -------------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CENTRAL REGION
Chicago
Central Loop
161 N. Clark................ 1 1992 1,010,520 1.3% 98.4% $ 22,103 1.3%
200 West Adams.............. 1 1985/1996 677,222 0.9% 85.7% 12,747 0.8%
30 N. LaSalle Street(2)..... 1 1974/1990 925,950 1.2% 98.6% 21,366 1.3%
One North Franklin.......... 1 1991 617,592 0.8% 98.3% 13,583 0.8%
Lake County
Tri-State International..... 5 1986 546,263 0.7% 96.2% 11,872 0.7%
<CAPTION>
ANNUALIZED
RENT
PER OCCUPIED
PRIMARY MARKET NUMBER OF SQUARE
SUB MARKET LEASES FEET(1)
- -------------- --------- --------------
<S> <C> <C>
CENTRAL REGION
Chicago
Central Loop
161 N. Clark................ 48 $22.22
200 West Adams.............. 59 $21.96
30 N. LaSalle Street(2)..... 125 $23.39
One North Franklin.......... 55 $22.38
Lake County
Tri-State International..... 42 $22.60
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF APPROXIMATE PERCENT OF TOTAL ANNUALIZED PORTFOLIO
PRIMARY MARKET OFFICE YEAR BUILT/ RENTABLE OFFICE PROPERTIES PERCENT RENT ANNUALIZED
SUB MARKET PROPERTIES RENOVATED SQUARE FEET RENTABLE SQUARE FEET OCCUPIED (000'S)(1) RENT
- -------------- ---------- ----------- ----------- -------------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
O'Hare
Presidents Plaza............ 4 1980-1982 815,604 1.1% 97.4% 17,420 1.0%
1700 Higgins................ 1 1986 133,876 0.2% 100.0% 2,585 0.2%
Oak Brook
AT&T Plaza.................. 1 1984 224,847 0.3% 86.6% 4,416 0.3%
Oakbrook Terrace Tower...... 1 1988 772,928 1.0% 89.4% 16,545 1.0%
Westbrook Corporate
Center..................... 5 1985-1996 1,107,372 1.5% 90.0% 27,824 1.7%
West Loop
10 & 30 South Wacker........ 2 1983-1987 2,003,288 2.7% 98.0% 64,766 3.9%
101 N. Wacker............... 1 1980/1990 575,294 0.8% 92.9% 12,294 0.7%
Civic Opera House........... 1 1929/1996 841,778 1.1% 98.2% 14,360 0.9%
Indianapolis
Downtown
Bank One Center/Tower(2).... 2 1990 1,057,877 1.4% 94.8% 19,783 1.2%
Cleveland
Downtown
BP Tower.................... 1 1985 1,242,144 1.7% 97.1% 20,100 1.2%
Columbus
Downtown
One Columbus Building....... 1 1987 407,472 0.5% 86.1% 8,293 0.5%
Suburban
Community Corporate Center.. 1 1987 250,169 0.3% 98.7% 4,976 0.3%
One Crosswoods Center....... 1 1984 129,583 0.2% 97.1% 2,215 0.1%
--- ---------- ------ ------ ---------- ------
CENTRAL REGION TOTAL/WEIGHTED
AVERAGE....................... 31 13,339,779 17.8% 95.1% $ 297,249 17.8%
=== ========== ====== ====== ========== ======
NORTHEAST REGION
Stamford
Shelton
Shelton Point............... 1 1985/1993 159,848 0.2% 96.0% $ 2,688 0.2%
Stamford
177 Broad Street............ 1 1989 187,573 0.2% 96.3% 4,445 0.3%
300 Atlantic Street......... 1 1987/1996 272,458 0.4% 100.0% 7,417 0.4%
Canterbury Green(2)......... 1 1987 224,405 0.3% 99.0% 6,481 0.4%
One Stamford Plaza.......... 1 1986/1994 212,244 0.3% 100.0% 5,479 0.3%
Two Stamford Plaza.......... 1 1986/1994 253,020 0.3% 98.2% 7,104 0.4%
Three Stamford Plaza........ 1 1980/1994 241,575 0.3% 100.0% 5,707 0.3%
Four Stamford Plaza......... 1 1979/1994 260,581 0.3% 100.0% 5,497 0.3%
Washington D.C
CBD
1111 19th Street............ 1 1979/1993 252,014 0.3% 99.5% 7,593 0.5%
1620 L Street............... 1 1989 156,272 0.2% 99.3% 4,490 0.3%
One Lafayette Centre........ 1 1980/1993 314,634 0.4% 99.9% 10,047 0.6%
East End
1333 H Street............... 1 1982 244,585 0.3% 100.0% 6,928 0.4%
Boston
East Cambridge
One Canal Park.............. 1 1987 98,154 0.1% 98.6% 2,570 0.2%
Riverview I & II............ 2 1985-1986 263,892 0.4% 100.0% 7,262 0.4%
Ten Canal Park.............. 1 1987 110,843 0.1% 100.0% 2,208 0.1%
Financial District
100 Summer Street........... 1 1974/1990 1,037,801 1.4% 99.8% 30,186 1.8%
150 Federal Street.......... 1 1988 529,730 0.7% 100.0% 15,109 0.9%
175 Federal Street.......... 1 1977 207,366 0.3% 99.2% 5,338 0.3%
2 Oliver Street-147 Milk
Street..................... 1 1988 270,302 0.4% 96.5% 5,256 0.3%
225 Franklin Street......... 1 1966/1996 916,722 1.2% 100.0% 36,794 2.2%
28 State Street............. 1 1968/1997 570,040 0.8% 100.0% 18,429 1.1%
75-101 Federal Street(4).... 2 1988 811,054 1.1% 96.1% 27,769 1.7%
One Post Office Square(3)... 1 1981 765,780 1.0% 100.0% 24,509 1.5%
Rowes Wharf(2)(3)........... 3 1987 344,698 0.5% 99.2% 12,622 0.8%
Russia Wharf................ 1 1978-1982 312,833 0.4% 98.8% 5,485 0.3%
South Station(2)............ 1 1988 178,959 0.2% 99.9% 6,763 0.4%
Government Center
Center Plaza................ 1 1969 637,069 0.8% 96.7% 17,432 1.0%
<CAPTION>
ANNUALIZED
RENT
PER OCCUPIED
PRIMARY MARKET NUMBER OF SQUARE
SUB MARKET LEASES FEET(1)
- -------------- --------- --------------
<S> <C> <C>
O'Hare
Presidents Plaza............ 66 $21.93
1700 Higgins................ 15 $19.31
Oak Brook
AT&T Plaza.................. 27 $22.67
Oakbrook Terrace Tower...... 60 $23.95
Westbrook Corporate
Center..................... 101 $27.91
West Loop
10 & 30 South Wacker........ 135 $32.98
101 N. Wacker............... 41 $23.00
Civic Opera House........... 216 $17.38
Indianapolis
Downtown
Bank One Center/Tower(2).... 81 $19.72
Cleveland
Downtown
BP Tower.................... 38 $16.67
Columbus
Downtown
One Columbus Building....... 28 $23.64
Suburban
Community Corporate Center.. 41 $20.16
One Crosswoods Center....... 18 $17.60
----- ------
CENTRAL REGION TOTAL/WEIGHTED
AVERAGE....................... 1,196 $23.43
===== ======
NORTHEAST REGION
Stamford
Shelton
Shelton Point............... 12 $17.51
Stamford
177 Broad Street............ 14 $24.60
300 Atlantic Street......... 24 $27.22
Canterbury Green(2)......... 16 $29.16
One Stamford Plaza.......... 11 $25.81
Two Stamford Plaza.......... 20 $28.59
Three Stamford Plaza........ 13 $23.62
Four Stamford Plaza......... 10 $21.10
Washington D.C
CBD
1111 19th Street............ 29 $30.29
1620 L Street............... 18 $28.95
One Lafayette Centre........ 22 $31.98
East End
1333 H Street............... 22 $28.33
Boston
East Cambridge
One Canal Park.............. 7 $26.57
Riverview I & II............ 4 $27.52
Ten Canal Park.............. 1 $19.92
Financial District
100 Summer Street........... 26 $29.14
150 Federal Street.......... 23 $28.52
175 Federal Street.......... 31 $25.95
2 Oliver Street-147 Milk
Street..................... 42 $20.15
225 Franklin Street......... 18 $40.14
28 State Street............. 27 $32.33
75-101 Federal Street(4).... 69 $35.63
One Post Office Square(3)... 63 $32.01
Rowes Wharf(2)(3)........... 45 $36.89
Russia Wharf................ 51 $17.75
South Station(2)............ 31 $37.83
Government Center
Center Plaza................ 86 $28.31
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF APPROXIMATE PERCENT OF TOTAL ANNUALIZED PORTFOLIO
PRIMARY MARKET OFFICE YEAR BUILT/ RENTABLE OFFICE PROPERTIES PERCENT RENT ANNUALIZED
SUB MARKET PROPERTIES RENOVATED SQUARE FEET RENTABLE SQUARE FEET OCCUPIED (000'S)(1) RENT
- -------------- ---------- ----------- ----------- -------------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Northwest
Crosby Corporate Center..... 6 1996 337,285 0.4% 100.0% 5,061 0.3%
Crosby Corporate Center
II......................... 3 1998 257,528 0.3% 54.3% 3,126 0.2%
New England Executive Park.. 9 1970-1985 817,008 1.1% 98.1% 19,101 1.1%
The Tower at New England
Executive Park............. 1 1971/1998 194,911 0.3% 20.4% 961 0.1%
South
Westwood Business Center.... 1 1985 164,985 0.2% 91.8% 3,134 0.2%
West
Wellesley Office Park....... 8 1963-1984 641,793 0.9% 98.1% 16,997 1.0%
New York
Columbus Circle
Worldwide Plaza(5).......... 1 1989 1,704,624 2.3% 98.8% 70,357 4.2%
Park/Lexington
Park Avenue Tower(6)........ 1 1986 550,894 0.7% 99.5% 35,061 2.1%
Third Avenue
850 Third Avenue............ 1 1960/1996 562,567 0.7% 100.0% 16,888 1.0%
Philadelphia
Center City
1601 Market Street.......... 1 1970 681,289 0.9% 93.9% 13,039 0.8%
1700 Market Street.......... 1 1969 841,172 1.1% 93.0% 16,071 1.0%
Conshohocken
Four Falls Corporate
Center(3).................. 1 1988 254,355 0.3% 98.5% 6,211 0.4%
King of Prussia/Valley Forge
Oak Hill Plaza(3)........... 1 1982 164,360 0.2% 100.0% 3,015 0.2%
Walnut Hill Plaza(3)........ 1 1985 149,716 0.2% 99.4% 3,013 0.2%
Main Line
One Devon Square(2)(3)...... 1 1984 73,267 0.1% 65.6% 877 0.1%
Two Devon Square(3)......... 1 1985 63,226 0.1% 100.0% 1,032 0.1%
Three Devon Square(2)(3).... 1 1988 6,000 0.0% 100.0% 171 0.0%
Plymouth Meeting/Blue Bell
One Valley Square(3)........ 1 1982 70,289 0.1% 100.0% 1,285 0.1%
Two Valley Square(3)........ 1 1990 70,622 0.1% 100.0% 1,359 0.1%
Three Valley Square(3)...... 1 1984 84,605 0.1% 100.0% 1,677 0.1%
Four and Five Valley
Square(3).................. 2 1988 68,321 0.1% 100.0% 1,377 0.1%
Norfolk
Norfolk
Dominion Tower(3)........... 1 1987 403,276 0.5% 99.2% 6,817 0.4%
Washington D.C
Alexandria/Old Town
1600 Duke Street............ 1 1985 68,770 0.1% 100.0% 1,667 0.1%
Crystal City
Polk and Taylor Buildings... 2 1970 902,371 1.2% 100.0% 24,589 1.5%
Fairfax/Center
Centerpointe I & II......... 2 1988-1990 407,723 0.5% 97.3% 7,302 0.4%
Fair Oaks Plaza............. 1 1986 177,917 0.2% 92.7% 2,885 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 1.0% 100.0% 19,755 1.2%
Rosslyn/Ballston
1300 North 17th Street...... 1 1980 380,199 0.5% 98.3% 9,663 0.6%
1616 N. Fort Myer Drive..... 1 1974 292,826 0.4% 100.0% 7,427 0.4%
Tyson's Corner
E.J. Randolph............... 1 1983 164,906 0.2% 100.0% 3,815 0.2%
John Marshall I............. 1 1981 255,558 0.3% 100.0% 5,370 0.3%
--- ---------- ------ ------ ---------- ------
NORTHEAST REGION TOTAL/WEIGHTED
AVERAGE....................... 90 21,497,179 28.5% 97.1% $ 604,024 36.2%
=== ========== ====== ====== ========== ======
SOUTHEAST REGION
Orlando
Central Business District
SunTrust Center............. 1 1988 640,385 0.9% 94.3% $ 14,964 0.9%
<CAPTION>
ANNUALIZED
RENT
PER OCCUPIED
PRIMARY MARKET NUMBER OF SQUARE
SUB MARKET LEASES FEET(1)
- -------------- --------- --------------
<S> <C> <C>
Northwest
Crosby Corporate Center..... 6 $15.01
Crosby Corporate Center
II......................... 4 $22.37
New England Executive Park.. 85 $23.84
The Tower at New England
Executive Park............. 3 $24.15
South
Westwood Business Center.... 18 $20.69
West
Wellesley Office Park....... 83 $27.00
New York
Columbus Circle
Worldwide Plaza(5).......... 22 $41.79
Park/Lexington
Park Avenue Tower(6)........ 25 $63.99
Third Avenue
850 Third Avenue............ 26 $30.03
Philadelphia
Center City
1601 Market Street.......... 77 $20.38
1700 Market Street.......... 60 $20.54
Conshohocken
Four Falls Corporate
Center(3).................. 41 $24.79
King of Prussia/Valley Forge
Oak Hill Plaza(3)........... 4 $18.34
Walnut Hill Plaza(3)........ 22 $20.26
Main Line
One Devon Square(2)(3)...... 8 $18.24
Two Devon Square(3)......... 6 $16.32
Three Devon Square(2)(3).... 1 $28.47
Plymouth Meeting/Blue Bell
One Valley Square(3)........ 6 $18.28
Two Valley Square(3)........ 7 $19.24
Three Valley Square(3)...... 6 $19.83
Four and Five Valley
Square(3).................. 5 $20.16
Norfolk
Norfolk
Dominion Tower(3)........... 54 $17.05
Washington D.C
Alexandria/Old Town
1600 Duke Street............ 9 $24.24
Crystal City
Polk and Taylor Buildings... 9 $27.25
Fairfax/Center
Centerpointe I & II......... 12 $18.40
Fair Oaks Plaza............. 35 $17.49
Herndon/Dulles
Northridge I................ 1 $26.64
Reston
Reston Town Center.......... 82 $27.21
Rosslyn/Ballston
1300 North 17th Street...... 29 $25.86
1616 N. Fort Myer Drive..... 11 $25.36
Tyson's Corner
E.J. Randolph............... 14 $23.13
John Marshall I............. 2 $21.01
----- ------
NORTHEAST REGION TOTAL/WEIGHTED
AVERAGE....................... 1,508 $28.90
===== ======
SOUTHEAST REGION
Orlando
Central Business District
SunTrust Center............. 47 $24.77
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF APPROXIMATE PERCENT OF TOTAL ANNUALIZED PORTFOLIO
PRIMARY MARKET OFFICE YEAR BUILT/ RENTABLE OFFICE PROPERTIES PERCENT RENT ANNUALIZED
SUB MARKET PROPERTIES RENOVATED SQUARE FEET RENTABLE SQUARE FEET OCCUPIED (000'S)(1) RENT
- -------------- ---------- ----------- ----------- -------------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sarasota
Downtown
Sarasota City Center........ 1 1989 247,891 0.3% 97.5% 4,560 0.3%
Atlanta
Central Perimeter
Central Park................ 2 1986 612,733 0.8% 95.8% 12,530 0.8%
Lakeside Office Park........ 5 1972-1978 390,721 0.5% 98.2% 6,101 0.4%
One Perimeter Center........ 4 1972-1986 1,264,027 1.7% 89.3% 21,577 1.3%
Two Perimeter Center........ 11 1971-1985 980,708 1.3% 93.7% 15,096 0.9%
Three Perimeter Center...... 14 1970-1989 557,435 0.7% 94.5% 10,086 0.6%
Four Perimeter Center....... 3 1978-1981 483,796 0.6% 100.0% 9,300 0.6%
Midtown
Promenade II................ 1 1990 770,840 1.0% 98.7% 17,361 1.0%
Northwest
Paces West.................. 2 1988 641,263 0.9% 96.5% 13,084 0.8%
Charlotte
Uptown
Wachovia Center............. 1 1972/1994 581,666 0.8% 100.0% 6,927 0.4%
Raleigh/Durham
South Durham
University Tower............ 1 1987/1992 181,221 0.2% 95.5% 3,375 0.2%
Nashville
Downtown
Nations Bank Plaza.......... 1 1977/1995 421,513 0.6% 98.5% 5,809 0.3%
--- ---------- ------ ------ ---------- ------
SOUTHEAST REGION TOTAL/WEIGHTED
AVERAGE....................... 47 7,774,199 10.4% 95.5% $ 140,771 8.4%
=== ========== ====== ====== ========== ======
SOUTHWEST REGION
New Orleans
CBD
LL&E Tower.................. 1 1987 545,157 0.7% 82.2% $ 7,117 0.4%
Texaco Center 1 1984 619,714 0.8% 87.7% 8,955 0.5%
Metairie/E. Jefferson
One Lakeway Center.......... 1 1981/1996 289,112 0.4% 93.2% 4,259 0.3%
Two Lakeway Center.......... 1 1984/1996 440,826 0.6% 98.3% 7,338 0.4%
Three Lakeway Center........ 1 1987/1996 462,890 0.6% 97.3% 6,927 0.4%
Austin
CBD
Franklin Plaza.............. 1 1987 517,849 0.7% 97.6% 10,353 0.6%
One American Center(2)...... 1 1984 505,770 0.7% 99.0% 10,143 0.6%
San Jacinto Center.......... 1 1987 400,329 0.5% 97.9% 8,222 0.5%
Dallas
Central
Eighty-Eighty Central....... 1 1984/1995 283,707 0.4% 93.6% 4,647 0.3%
LBJ/Quorum
Colonnade I & II............ 2 1983-1985 606,615 0.8% 93.9% 11,152 0.7%
Colonnade III............... 1 1998 377,639 0.5% 60.1% 4,681 0.3%
Four Forest Plaza(3)........ 1 1985 394,324 0.5% 92.5% 6,325 0.4%
Lakeside Square............. 1 1987 397,328 0.5% 82.2% 7,412 0.4%
North Central Plaza Three... 1 1986/1994 346,575 0.5% 82.3% 5,048 0.3%
N. Central Expressway
9400 NCX.................... 1 1981/1995 379,556 0.5% 91.7% 5,408 0.3%
Preston Center
Preston Commons............. 3 1986 418,604 0.6% 84.5% 7,693 0.5%
Sterling Plaza.............. 1 1984/1994 302,747 0.4% 92.6% 5,410 0.3%
Ft. Worth
W/SW Fort Worth
Summitt Office Park......... 2 1974/1993 239,095 0.3% 97.8% 2,928 0.2%
Houston
Galleria/West Loop
San Felipe Plaza(3)......... 1 1984 959,466 1.3% 93.5% 15,846 0.9%
North Loop/Northwest
Brookhollow Central......... 3 1972-1981 797,971 1.1% 86.9% 10,602 0.6%
<CAPTION>
ANNUALIZED
RENT
PER OCCUPIED
PRIMARY MARKET NUMBER OF SQUARE
SUB MARKET LEASES FEET(1)
- -------------- --------- --------------
<S> <C> <C>
Sarasota
Downtown
Sarasota City Center........ 35 $18.88
Atlanta
Central Perimeter
Central Park................ 67 $21.34
Lakeside Office Park........ 38 $15.90
One Perimeter Center........ 128 $19.11
Two Perimeter Center........ 69 $16.43
Three Perimeter Center...... 50 $19.16
Four Perimeter Center....... 8 $19.22
Midtown
Promenade II................ 26 $22.82
Northwest
Paces West.................. 42 $21.14
Charlotte
Uptown
Wachovia Center............. 9 $11.91
Raleigh/Durham
South Durham
University Tower............ 36 $19.50
Nashville
Downtown
Nations Bank Plaza.......... 22 $14.00
----- ------
SOUTHEAST REGION TOTAL/WEIGHTED
AVERAGE....................... 577 $18.96
===== ======
SOUTHWEST REGION
New Orleans
CBD
LL&E Tower.................. 31 $15.89
Texaco Center 30 $16.47
Metairie/E. Jefferson
One Lakeway Center.......... 48 $15.80
Two Lakeway Center.......... 80 $15.98
Three Lakeway Center........ 47 $16.29
Austin
CBD
Franklin Plaza.............. 45 $20.48
One American Center(2)...... 33 $20.25
San Jacinto Center.......... 40 $20.97
Dallas
Central
Eighty-Eighty Central....... 36 $17.49
LBJ/Quorum
Colonnade I & II............ 77 $19.58
Colonnade III............... 8 $20.64
Four Forest Plaza(3)........ 52 $17.35
Lakeside Square............. 22 $22.70
North Central Plaza Three... 33 $17.71
N. Central Expressway
9400 NCX.................... 69 $15.53
Preston Center
Preston Commons............. 68 $21.74
Sterling Plaza.............. 70 $19.31
Ft. Worth
W/SW Fort Worth
Summitt Office Park......... 57 $12.53
Houston
Galleria/West Loop
San Felipe Plaza(3)......... 125 $17.66
North Loop/Northwest
Brookhollow Central......... 50 $15.29
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF APPROXIMATE PERCENT OF TOTAL ANNUALIZED PORTFOLIO
PRIMARY MARKET OFFICE YEAR BUILT/ RENTABLE OFFICE PROPERTIES PERCENT RENT ANNUALIZED
SUB MARKET PROPERTIES RENOVATED SQUARE FEET RENTABLE SQUARE FEET OCCUPIED (000'S)(1) RENT
- -------------- ---------- ----------- ----------- -------------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
North/North Belt
Intercontinental Center..... 1 1983/1991 194,801 0.3% 100.0% 2,881 0.2%
Northborough Tower(3)....... 1 1983/1990 207,908 0.3% 98.5% 3,036 0.2%
West
2500 CityWest............... 1 1982 574,216 0.8% 99.7% 12,156 0.7%
San Antonio
Northwest
Colonnade I................. 1 1983 168,637 0.2% 95.6% 2,589 0.2%
Northwest Center............ 1 1984/1994 241,248 0.3% 94.2% 3,011 0.2%
Union Square................ 1 1986 194,398 0.3% 92.2% 3,086 0.2%
--- ---------- ------ ------ ---------- ------
SOUTHWEST REGION TOTAL/WEIGHTED
AVERAGE....................... 32 10,866,482 14.5% 91.4% $ 177,224 10.6%
=== ========== ====== ====== ========== ======
WEST REGION
Anchorage
Midtown
Calais Office Center(2)..... 2 1975 190,599 0.3% 99.8% $ 3,710 0.2%
Phoenix
Central Corridor
49 East Thomas Road(7)...... 1 1974/1993 18,892 0.0% 61.4% 111 0.0%
One Phoenix Plaza(8)........ 1 1989 586,403 0.8% 100.0% 7,316 0.4%
Denver
Downtown
410 17th Street............. 1 1978 388,953 0.5% 88.1% 5,132 0.3%
Denver Post Tower(2)........ 1 1984 579,999 0.8% 85.6% 7,453 0.4%
Dominion Plaza.............. 1 1983 571,468 0.8% 86.4% 7,206 0.4%
Tabor Center................ 2 1985 674,278 0.9% 84.0% 11,836 0.7%
Trinity Place............... 1 1983 189,163 0.3% 90.0% 2,266 0.1%
Southeast
4949 S. Syracuse............ 1 1982 62,633 0.1% 86.4% 935 0.1%
Denver Corporate Center II &
III........................ 2 1981/93-97 358,357 0.5% 100.0% 6,703 0.4%
Metropoint.................. 1 1987 263,719 0.4% 96.7% 5,164 0.3%
Millennium Plaza............ 1 1982 330,033 0.4% 100.0% 7,808 0.5%
Solarium 1 1982 162,817 0.2% 99.4% 2,952 0.2%
Terrace Building............ 1 1982 115,408 0.2% 83.5% 1,885 0.1%
The Quadrant................ 1 1985 313,302 0.4% 97.2% 6,040 0.4%
Minneapolis
I-494
Northland Plaza............. 1 1985 296,965 0.4% 95.7% 7,042 0.4%
Minneapolis CBD
LaSalle Plaza............... 1 1991 588,908 0.8% 97.5% 15,577 0.9%
St. Louis
Mid County
Interco Corporate Tower..... 1 1986 339,163 0.5% 98.9% 7,337 0.4%
Albuquerque
Downtown
500 Marquette Building...... 1 1985 230,022 0.3% 92.7% 3,357 0.2%
Uptown
One Park Square............. 4 1985 262,020 0.3% 81.8% 3,812 0.2%
Oklahoma City
Northwest
5100 Brookline(3)........... 1 1974 105,459 0.1% 81.1% 832 0.0%
Atrium Towers............... 2 1980/1995 155,865 0.2% 93.2% 1,361 0.1%
Portland
Downtown
1001 Fifth Avenue(2)........ 1 1980 368,138 0.5% 93.9% 6,425 0.4%
Seattle
Bellevue CBD
One Bellevue Center(2)...... 1 1983 344,715 0.5% 98.1% 7,595 0.5%
Rainier Plaza(2)............ 1 1986 410,855 0.5% 99.0% 8,966 0.5%
<CAPTION>
ANNUALIZED
RENT
PER OCCUPIED
PRIMARY MARKET NUMBER OF SQUARE
SUB MARKET LEASES FEET(1)
- -------------- --------- --------------
<S> <C> <C>
North/North Belt
Intercontinental Center..... 12 $14.79
Northborough Tower(3)....... 16 $14.83
West
2500 CityWest............... 26 $21.23
San Antonio
Northwest
Colonnade I................. 28 $16.05
Northwest Center............ 32 $13.25
Union Square................ 20 $17.22
----- ------
SOUTHWEST REGION TOTAL/WEIGHTED
AVERAGE....................... 1,155 $17.85
===== ======
WEST REGION
Anchorage
Midtown
Calais Office Center(2)..... 35 $19.50
Phoenix
Central Corridor
49 East Thomas Road(7)...... 11 $ 9.58
One Phoenix Plaza(8)........ 1 $12.48
Denver
Downtown
410 17th Street............. 72 $14.97
Denver Post Tower(2)........ 30 $15.01
Dominion Plaza.............. 65 $14.59
Tabor Center................ 135 $20.90
Trinity Place............... 41 $13.30
Southeast
4949 S. Syracuse............ 7 $17.27
Denver Corporate Center II &
III........................ 13 $18.71
Metropoint.................. 20 $20.25
Millennium Plaza............ 2 $23.66
Solarium 34 $18.24
Terrace Building............ 18 $19.54
The Quadrant................ 38 $19.84
Minneapolis
I-494
Northland Plaza............. 52 $24.77
Minneapolis CBD
LaSalle Plaza............... 32 $27.14
St. Louis
Mid County
Interco Corporate Tower..... 32 $21.87
Albuquerque
Downtown
500 Marquette Building...... 33 $15.74
Uptown
One Park Square............. 47 $17.79
Oklahoma City
Northwest
5100 Brookline(3)........... 58 $ 9.73
Atrium Towers............... 33 $ 9.37
Portland
Downtown
1001 Fifth Avenue(2)........ 55 $18.60
Seattle
Bellevue CBD
One Bellevue Center(2)...... 34 $22.46
Rainier Plaza(2)............ 60 $22.05
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF APPROXIMATE PERCENT OF TOTAL ANNUALIZED PORTFOLIO
PRIMARY MARKET OFFICE YEAR BUILT/ RENTABLE OFFICE PROPERTIES PERCENT RENT ANNUALIZED
SUB MARKET PROPERTIES RENOVATED SQUARE FEET RENTABLE SQUARE FEET OCCUPIED (000'S)(1) RENT
- -------------- ---------- ----------- ----------- -------------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CBD
1111 Third Avenue........... 1 1980 528,282 0.7% 97.9% 10,171 0.6%
Columbia Seafirst Center.... 2 1985 1,537,932 2.0% 97.0% 35,321 2.1%
First Interstate Center..... 1 1983 915,883 1.2% 96.6% 20,950 1.3%
Nordstrom Medical Tower..... 1 1986 101,431 0.1% 98.5% 2,667 0.2%
Second and Seneca
Buildings.................. 2 1991 480,272 0.6% 100.0% 10,249 0.6%
Second and Spring
Building................... 1 1906/1989 134,871 0.2% 80.6% 2,150 0.1%
--- ---------- ------ ------ ---------- ------
WEST REGION TOTAL/WEIGHTED
AVERAGE....................... 40 11,606,805 15.5% 94.3% $ 220,329 13.2%
=== ========== ====== ====== ========== ======
PACIFIC REGION
Los Angeles
Downtown
550 S. Hope................. 1 1991 566,434 0.8% 82.4% $ 10,235 0.6%
Two California Plaza(2)..... 1 1992 1,329,809 1.8% 88.9% 26,957 1.6%
Pasadena
Pasadena Towers............. 2 1990-91 439,367 0.6% 92.2% 11,369 0.7%
Westwood
10880 Wilshire Boulevard
(2)........................ 1 1970/1992 534,047 0.7% 94.7% 14,863 0.9%
10960 Wilshire Boulevard.... 1 1971/1992 543,804 0.7% 99.4% 15,974 1.0%
Orange County
Airport Office Area
1920 Main Plaza............. 1 1988 305,662 0.4% 97.7% 6,980 0.4%
2010 Main Plaza............. 1 1988 280,882 0.4% 93.6% 6,675 0.4%
Anaheim Stadium Area
500 Orange Tower(9)......... 1 1988 290,765 0.4% 94.3% 5,161 0.3%
Town & Country
1100 Executive Tower........ 1 1987 366,747 0.5% 99.1% 6,542 0.4%
San Diego
UTC
Smith Barney Tower.......... 1 1987 187,999 0.3% 94.6% 3,993 0.2%
The Plaza at La Jolla
Village(3)................. 5 1987-1990 635,419 0.8% 89.9% 13,743 0.8%
San Francisco
Financial District
201 Mission Street.......... 1 1981 483,289 0.6% 99.7% 8,395 0.5%
301 Howard Building......... 1 1988 307,396 0.4% 86.8% 6,736 0.4%
580 California.............. 1 1984 313,012 0.4% 100.0% 8,585 0.5%
60 Spear Street Building.... 1 1967/1987 133,782 0.2% 100.0% 3,487 0.2%
One Maritime Plaza.......... 1 1967/1990 534,878 0.7% 100.0% 16,943 1.0%
One Market(2)............... 1 1976/1995 1,460,081 1.9% 96.9% 40,928 2.5%
San Jose
Mountain View
Shoreline Technology Park... 12 1985-1991 726,508 1.0% 100.0% 13,665 0.8%
Santa Clara
Lake Marriott Business
Park....................... 7 1981 401,402 0.5% 100.0% 5,949 0.4%
Sunnyvale
Sunnyvale Business Center... 3 1990 175,000 0.2% 100.0% 3,219 0.2%
--- ---------- ------ ------ ---------- ------
PACIFIC REGION TOTAL/WEIGHTED
AVERAGE....................... 44 10,016,283 13.3% 94.8% $ 230,400 13.8%
--- ---------- ------ ------ ---------- ------
PORTFOLIO TOTAL/WEIGHTED
AVERAGE....................... 284 75,100,727 100.0% 95.0% $1,669,996 100.0%
=== ========== ====== ====== ========== ======
<CAPTION>
ANNUALIZED
RENT
PER OCCUPIED
PRIMARY MARKET NUMBER OF SQUARE
SUB MARKET LEASES FEET(1)
- -------------- --------- --------------
<S> <C> <C>
CBD
1111 Third Avenue........... 47 $19.67
Columbia Seafirst Center.... 149 $23.67
First Interstate Center..... 66 $23.68
Nordstrom Medical Tower..... 23 $26.71
Second and Seneca
Buildings.................. 30 $21.34
Second and Spring
Building................... 6 $19.79
----- ------
WEST REGION TOTAL/WEIGHTED
AVERAGE....................... 1,279 $20.13
===== ======
PACIFIC REGION
Los Angeles
Downtown
550 S. Hope................. 38 $21.94
Two California Plaza(2)..... 35 $22.81
Pasadena
Pasadena Towers............. 35 $28.07
Westwood
10880 Wilshire Boulevard
(2)........................ 47 $29.38
10960 Wilshire Boulevard.... 32 $29.54
Orange County
Airport Office Area
1920 Main Plaza............. 43 $23.38
2010 Main Plaza............. 27 $25.39
Anaheim Stadium Area
500 Orange Tower(9)......... 47 $18.82
Town & Country
1100 Executive Tower........ 24 $17.99
San Diego
UTC
Smith Barney Tower.......... 21 $22.44
The Plaza at La Jolla
Village(3)................. 84 $24.07
San Francisco
Financial District
201 Mission Street.......... 19 $17.43
301 Howard Building......... 25 $25.24
580 California.............. 27 $27.43
60 Spear Street Building.... 8 $26.07
One Maritime Plaza.......... 42 $31.68
One Market(2)............... 121 $28.91
San Jose
Mountain View
Shoreline Technology Park... 12 $18.81
Santa Clara
Lake Marriott Business
Park....................... 17 $14.82
Sunnyvale
Sunnyvale Business Center... 3 $18.40
----- ------
PACIFIC REGION TOTAL/WEIGHTED
AVERAGE....................... 707 $24.26
----- ------
PORTFOLIO TOTAL/WEIGHTED
AVERAGE....................... 6,422 $23.40
===== ======
</TABLE>
- ---------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
December 31, 1998, 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,
1998, for the 12 months ending December 31, 1999, are approximately $7.1
million.
(2) All or a portion of this Office Property is held subject to a ground lease.
(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.
19
<PAGE> 20
(4) This Office Property is held in a private real estate investment trust in
which the Company and the Trust own 51.6% of the outstanding shares.
(5) The Company's interest in the amenities component of this Office Property is
primarily attributable to its ownership of mortgage indebtedness encumbering
the theatre/plaza, retail, health club and parking facilities associated
therewith.
(6) The Company acquired a $295 million first mortgage note secured by this
Office Property for approximately $244.9 million. In accordance with certain
agreements concerning the first mortgage note, the Company controls
financial and operational decisions for the Property and is entitled to
substantially all cash flow and residual profit. Accordingly, the Company
consolidated the financial position and results of operations of the
Property.
(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.
(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 of 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 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.
PARKING FACILITIES
Information concerning the Parking Facilities as of December 31, 1998 is
set forth below.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF MANAGEMENT
REGION NAME PROPERTY NAME STATE CITY SPACES GARAGES COMPANY(1)
- ----------- -------------------------------------- ----- ------------ --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
CENTRAL
Adams-Wabash Garage IL Chicago 670 1 Standard Parking
Theater District Garage(2) IL Chicago 1,006 1 Standard Parking
203 North LaSalle Garage(2) IL Chicago 1,172 1 Standard Parking
Capitol Commons Garage(2)(3) IN Indianapolis 950 1 Central Parking
Milwaukee Center Garage(3) WI Milwaukee 876 1 Standard Parking
NORTHEAST
Boston Harbor Garage MA Boston 1,380 1 Standard Parking
1616 Sansom Street Garage PA Philadelphia 240 1 Central Parking
1111 Sansom Street Garage PA Philadelphia 250 1 Central Parking
Juniper/Locust Street Garage PA Philadelphia 541 1 Central Parking
15th & Sansom Street Garage PA Philadelphia 313 1 Central Parking
1602-34 Chancellor Garage PA Philadelphia 416 1 Central Parking
Stanwix Parking Garage PA Pittsburgh 712 1 Standard Parking
Forbes & Allies Garage(4) PA Pittsburgh 1,310 2 Central Parking
SOUTHWEST
601 Tchoupitoulas LA New Orleans 759 1 Central Parking
WEST
St. Louis Parking Garages(5) MO St. Louis 7,464 4 Central Parking
------ ---
TOTAL EOP STAND-ALONE 18,059 19
TOTAL EOP PORTFOLIO 69,497 85
------ ---
GRAND TOTAL 87,556 104
====== ===
</TABLE>
- ---------------
(1) With the exception of Capitol Commons Garage, all of the named Parking
Facilities are operated by the designated third-party service companies
(each, a "Service Company") 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 operational expenses. In the case of 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
20
<PAGE> 21
non-qualifying gross income for REIT qualification purpose relative to the
total gross income of the Company.
(2) 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.
(3) This Parking Facility is held subject to a ground lease.
(4) The Company acquired a leasehold interest in these Parking Facilities. The
lease is for a term of 50 years with four five-year options to renew.
Pursuant to the lease, the Company is required to make annual rent payments
of $172,500, and is required to make certain capital improvements to the
garages of approximately $10.0 million during the first ten years of the
lease. The Company has accounted for this transaction as a capital lease.
(5) 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, 1998, the Office Properties were leased to 6,422
tenants; no single tenant accounted for more than 1.7% of the Company's
aggregate annualized rent or 1.5% of aggregate occupied square feet (except for
the U.S. General Services Administration, acting on behalf of various agencies
or departments of the U.S. government, which accounted for 3.5% of annualized
rent and 3.2% of occupied square feet).
LEASE EXPIRATIONS BY REGION AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 AND
MONTH TO
MONTH 2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CENTRAL REGION TOTALS
Square Feet (1).............. 1,058,880 1,189,236 971,560 1,072,414 1,702,602 964,295
% Square Feet (2)............ 7.9% 8.9% 7.3% 8.0% 12.8% 7.2%
Annualized Rent (3).......... $ 25,806,328 $ 29,143,061 $ 21,965,146 $ 26,531,315 $ 48,716,986 $ 23,280,366
Number of Leases............. 245 179 190 152 144 83
Rent Per Square Foot......... $ 24.37 $ 24.51 $ 22.61 $ 24.74 $ 28.61 $ 24.14
NORTHEAST REGION TOTALS
Square Feet (1).............. 1,451,785 1,766,261 3,286,026 3,208,015 2,124,409 1,299,915
% Square Feet (2)............ 6.8% 8.2% 15.3% 14.9% 9.9% 6.0%
Annualized Rent (3).......... $ 36,618,104 $ 46,553,668 $105,003,832 $ 88,593,793 $ 61,781,333 $ 32,835,283
Number of Leases............. 255 234 236 229 218 87
Rent Per Square Foot......... $ 25.22 $ 26.36 $ 31.95 $ 27.62 $ 29.08 $ 25.26
SOUTHEAST REGION TOTALS
Square Feet (1).............. 1,312,362 1,045,440 1,405,445 772,519 387,564 370,319
% Square Feet (2)............ 16.9% 13.4% 18.1% 9.9% 5.0% 4.8%
Annualized Rent (3).......... $ 21,944,149 $ 21,426,163 $ 25,891,378 $ 16,082,280 $ 8,407,677 $ 5,718,163
Number of Leases............. 149 103 117 101 48 22
Rent Per Square Foot......... $ 16.72 $ 20.49 $ 18.42 $ 20.82 $ 21.69 $ 15.44
SOUTHWEST REGION TOTALS
Square Feet (1).............. 1,315,199 1,876,183 1,438,426 1,398,074 1,424,566 854,365
% Square Feet (2)............ 12.1% 17.3% 13.2% 12.9% 13.1% 7.9%
Annualized Rent (3).......... $ 22,552,831 $ 33,382,204 $ 26,538,168 $ 26,406,887 $ 25,660,899 $ 15,989,205
Number of Leases............. 317 247 181 151 159 46
Rent Per Square Foot......... $ 17.15 $ 17.79 $ 18.45 $ 18.89 $ 18.01 $ 18.71
WEST REGION TOTALS
Square Feet (1).............. 1,332,693 1,462,005 1,732,283 1,220,739 1,513,115 1,188,782
% Square Feet (2)............ 11.5% 12.6% 14.9% 10.5% 13.0% 10.2%
Annualized Rent (3).......... $ 24,150,502 $ 28,220,660 $ 36,282,625 $ 25,090,787 $ 34,992,002 $ 19,184,479
Number of Leases............. 399 220 226 158 148 38
Rent Per Square Foot......... $ 18.12 $ 19.30 $ 20.94 $ 20.55 $ 23.13 $ 16.14
<CAPTION>
2009 AND
2005 2006 2007 2008 BEYOND TOTALS
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
CENTRAL REGION TOTALS
Square Feet (1).............. 1,296,086 683,110 440,291 1,160,460 2,150,197 12,689,131
% Square Feet (2)............ 9.7% 5.1% 3.3% 8.7% 16.1% 95.1%
Annualized Rent (3).......... $ 28,863,959 $ 14,653,053 $ 9,181,483 $ 21,928,508 $ 47,178,901 $ 297,249,106
Number of Leases............. 61 45 32 34 31 1,196
Rent Per Square Foot......... $ 22.27 $ 21.45 $ 20.85 $ 18.90 $ 21.94 $ 23.43
NORTHEAST REGION TOTALS
Square Feet (1).............. 1,290,649 1,122,132 1,015,868 1,042,912 3,289,966 20,897,938
% Square Feet (2)............ 6.0% 5.2% 4.7% 4.9% 15.3% 97.1%
Annualized Rent (3).......... $ 35,955,383 $ 27,459,285 $ 25,732,532 $ 31,021,301 $112,469,010 $ 604,023,525
Number of Leases............. 72 52 38 47 40 1,508
Rent Per Square Foot......... $ 27.86 $ 24.47 $ 25.33 $ 29.74 $ 34.19 $ 28.90
SOUTHEAST REGION TOTALS
Square Feet (1).............. 465,161 555,370 33,750 346,336 729,800 7,424,066
% Square Feet (2)............ 6.0% 7.1% 0.4% 4.5% 9.4% 95.5%
Annualized Rent (3).......... $ 6,998,489 $ 12,813,908 $ 558,017 $ 8,622,891 $ 12,307,455 $ 140,770,569
Number of Leases............. 14 6 5 7 5 577
Rent Per Square Foot......... $ 15.05 $ 23.07 $ 16.53 $ 24.90 $ 16.86 $ 18.96
SOUTHWEST REGION TOTALS
Square Feet (1).............. 233,304 564,265 256,513 278,707 288,778 9,928,380
% Square Feet (2)............ 2.1% 5.2% 2.4% 2.6% 2.7% 91.4%
Annualized Rent (3).......... $ 3,903,360 $ 9,647,066 $ 4,826,063 $ 6,162,961 $ 2,154,574 $ 177,224,218
Number of Leases............. 20 14 5 10 5 1,155
Rent Per Square Foot......... $ 16.73 $ 17.10 $ 18.81 $ 22.11 $ 7.46 $ 17.85
WEST REGION TOTALS
Square Feet (1).............. 498,332 474,956 540,939 704,254 275,078 10,943,176
% Square Feet (2)............ 4.3% 4.1% 4.7% 6.1% 2.4% 94.3%
Annualized Rent (3).......... $ 11,148,911 $ 9,776,078 $ 11,426,913 $ 18,808,208 $ 1,248,207 $ 220,329,372
Number of Leases............. 29 17 22 17 5 1,279
Rent Per Square Foot......... $ 22.37 $ 20.58 $ 21.12 $ 26.71 $ 4.54 $ 20.13
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
1999 AND
MONTH TO
MONTH 2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PACIFIC REGION TOTALS
Square Feet (1).............. 1,268,789 1,322,935 1,682,256 821,437 708,969 436,892
% Square Feet (2)............ 12.7% 13.2% 16.8% 8.2% 7.1% 4.4%
Annualized Rent (3).......... $ 26,644,154 $ 29,575,581 $ 38,500,310 $ 22,728,014 $ 19,700,363 $ 11,274,429
Number of Leases............. 148 118 136 87 81 29
Rent Per Square Foot......... $ 21.00 $ 22.36 $ 22.89 $ 27.67 $ 27.79 $ 25.81
PORTFOLIO TOTALS
Square Feet (1).............. 7,739,708 8,662,060 10,515,996 8,493,198 7,861,225 5,114,568
% Square Feet (2)............ 10.3% 11.5% 14.0% 11.3% 10.5% 6.8%
Annualized Rent (3).......... $157,716,068 $188,301,337 $254,181,460 $205,433,075 $199,259,260 $108,281,926
Number of Leases............. 1,513 1,101 1,086 878 798 305
Rent Per Square Foot......... $ 20.38 $ 21.74 $ 24.17 $ 24.19 $ 25.35 $ 21.17
<CAPTION>
2009 AND
2005 2006 2007 2008 BEYOND TOTALS
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
PACIFIC REGION TOTALS
Square Feet (1).............. 940,473 599,153 824,068 268,500 623,343 9,496,815
% Square Feet (2)............ 9.4% 6.0% 8.2% 2.7% 6.2% 94.8%
Annualized Rent (3).......... $ 22,111,007 $ 16,915,716 $ 25,901,334 $ 8,722,571 $ 8,326,128 $ 230,399,606
Number of Leases............. 37 23 19 12 17 707
Rent Per Square Foot......... $ 23.51 $ 28.23 $ 31.43 $ 32.49 $ 13.36 $ 24.26
PORTFOLIO TOTALS
Square Feet (1).............. 4,724,005 3,998,986 3,111,429 3,801,169 7,357,162 71,379,506
% Square Feet (2)............ 6.3% 5.3% 4.1% 5.1% 9.8% 95.0%
Annualized Rent (3).......... $108,981,108 $ 91,265,106 $ 77,626,341 $ 95,266,440 $183,684,275 $1,669,996,396
Number of Leases............. 233 157 121 127 103 6,422
Rent Per Square Foot......... $ 23.07 $ 22.82 $ 24.95 $ 25.06 $ 24.97 $ 23.40
</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, 1998 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, 1998 for the 12 months
ending December 31, 1999 are approximately $7.1 million.
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, 1998, assuming
that none of the tenants exercise renewal options or termination rights, if any,
at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
ANNUALIZED PERCENTAGE
RENT OF OF
PERCENTAGE EXPIRING ANNUALIZED
SQUARE OF TOTAL ANNUALIZED LEASES RENT OF
NUMBER OF FOOTAGE OF OCCUPIED RENT OF PER EXPIRING
YEAR OF LEASE LEASES EXPIRING SQUARE EXPIRING SQUARE LEASES
EXPIRATION EXPIRING LEASES FEET LEASES FOOT (1)
------------- --------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1999(2).................... 1,513 7,739,708 11.0% $ 157,716,068 $20.38 9.4%
2000....................... 1,101 8,662,060 12.3% 188,301,337 21.74 11.3%
2001....................... 1,086 10,515,996 14.8% 254,181,460 24.17 15.3%
2002....................... 878 8,493,198 12.1% 205,433,075 24.19 12.3%
2003....................... 798 7,861,225 11.2% 199,259,260 25.35 11.9%
2004....................... 305 5,114,568 7.3% 108,281,926 21.17 6.5%
2005....................... 233 4,724,005 6.7% 108,981,108 23.07 6.5%
2006....................... 157 3,998,986 5.7% 91,265,106 22.82 5.5%
2007....................... 121 3,111,429 4.4% 77,626,341 24.95 4.6%
2008....................... 127 3,801,169 5.4% 95,266,440 25.06 5.7%
2009....................... 41 2,282,470 3.2% 83,312,753 36.50 5.0%
2010 and beyond............ 62 4,137,495 5.9% 100,371,522 24.26 6.0%
----- ---------- -------- -------------- ------ -----
TOTAL/WEIGHTED AVERAGE..... 6,422 70,442,309 100.0%(3) $1,669,996,396 $23.40 100.0%
===== ========== ======== ============== ====== =====
</TABLE>
- ---------------
(1) Based on currently payable rent.
(2) Represents lease expirations from January 1, 1999 to December 31, 1999 and
month-to-month leases.
(3) Reconciliation of total net rentable square footage is as follows:
22
<PAGE> 23
<TABLE>
<CAPTION>
PERCENTAGE
SQUARE OF
FOOTAGE TOTAL
----------- ----------
<S> <C> <C>
Square footage occupied by tenants.......................... 70,442,309 93.8%
Square footage used for management offices and building use,
and remeasurement adjustments............................. 937,197 1.2%
----------- -----
Total occupied square footage............................... 71,379,506 95.0%
Square footage vacant....................................... 3,721,221 5.0%
----------- -----
Total net rentable square footage........................... 75,100,727 100.0%
=========== =====
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
PERCENT PORTFOLIO ANNUALIZED
NUMBER OF OF ALL TOTAL OCCUPIED OCCUPIED RENT PER
SQUARE FEET UNDER LEASE LEASES LEASES SQUARE FEET SQUARE FEET ANNUALIZED RENT SQUARE FOOT
- ----------------------- --------- ------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
2,500 or Less.................. 2,403 37.5% 2,882,846 4.1% $ 61,653,195 21.39
2,501 -- 5,000................. 1,374 21.4% 4,918,011 7.0% 108,101,012 21.98
5,001 -- 7,500................. 730 11.4% 4,469,543 6.3% 97,691,367 21.86
7,500 -- 10,000................ 384 6.0% 3,327,753 4.7% 74,952,238 22.52
10,001 -- 20,000............... 780 12.1% 11,084,179 15.7% 252,474,321 22.78
20,001 -- 40,000............... 425 6.6% 11,599,388 16.4% 276,178,123 23.81
40,001 -- 60,000............... 138 2.1% 6,683,070 9.5% 158,315,153 23.69
60,001 -- 100,000.............. 97 1.5% 7,381,212 10.5% 179,441,485 24.31
100,001 or Greater............. 91 1.4% 18,096,307 25.8% 461,189,502 25.49
----- ------ ---------- ------ -------------- -----
TOTAL/WEIGHTED AVERAGE......... 6,422 100.0% 70,442,309 100.0% $1,669,996,396 23.40
===== ====== ========== ====== ============== =====
<CAPTION>
PERCENTAGE
OF AGGREGATE
PORTFOLIO
SQUARE FEET UNDER LEASE ANNUALIZED RENT
- ----------------------- ---------------
<S> <C>
2,500 or Less.................. 3.7%
2,501 -- 5,000................. 6.5%
5,001 -- 7,500................. 5.8%
7,500 -- 10,000................ 4.5%
10,001 -- 20,000............... 15.1%
20,001 -- 40,000............... 16.5%
40,001 -- 60,000............... 9.5%
60,001 -- 100,000.............. 10.7%
100,001 or Greater............. 27.7%
------
TOTAL/WEIGHTED AVERAGE......... 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 date:
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
RENTABLE RENTABLE SQUARE
DATE 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%
December 31, 1998........................................... 75,100,727 95%
</TABLE>
23
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor any of its Properties is presently subject to
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.
24
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
25
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Units. The Trust's
Common Shares are traded on the New York Stock Exchange ("NYSE") under the
symbol EOP. The following table sets forth, for the periods indicated, the high
and low closing prices of the Trust's Common Shares and the distributions paid
on the Company's Units:
<TABLE>
<CAPTION>
YEAR QUARTER HIGH LOW CLOSE DISTRIBUTION
- ---- ------- ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
1998 Fourth $25.63 $22.94 $24.00 $0.37
Third $28.69 $20.75 $24.50 $0.37
Second $31.00 $24.94 $28.38 $0.32
First $31.88 $28.00 $30.63 $0.32
1997 Fourth $34.69 $29.00 $31.56 $0.30
Third $33.94 $26.06 $33.94 $0.26*
</TABLE>
- ---------------
* Prorated from IPO date of July 11, 1997 based on $.30 for full quarter.
The number of holders of record of Units on March 12, 1999 was 184. The
number of outstanding Units was 288,560,466 as of March 12, 1999.
ISSUANCES OF UNREGISTERED SECURITIES. Unless stated otherwise, the Company
received cash consideration in connection with each of the following issuances
of unregistered securities. Any Units issued by the Company are convertible into
Common Shares of the Trust on a one-for-one basis, or the cash equivalent
thereof, subject to certain restrictions.
In September 1997, the Company purchased two Office Properties and a
Parking Facility from an unaffiliated party for a purchase price of
approximately $140 million. Of this amount, the Company issued, in a private
placement of securities in reliance on an exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 4(2) and Rule 506 of Regulation D promulgated thereunder,
1,692,546 Units at a price of $29 per Unit for a total of approximately $49.1
million.
In September 1997, the Company issued $180 million of unsecured notes (the
"$180 Million Notes") in a private placement to an institutional investor, in
reliance on an exemption from the registration requirements of the Securities
Act pursuant to Rule 144A, and used the proceeds therefrom to repay amounts
outstanding under the Company's $600 million unsecured revolving line of credit
entered into in July 1997.
In October 1997, the Trust sold 9.7 million restricted Common Shares for
$274 million in two separate private placements to institutional investors in
reliance on an exemption from the registration requirements of the Securities
Act pursuant to Section 4(2) and Rule 506 of Regulation D promulgated
thereunder, and contributed the proceeds to the Company in exchange for 9.7
million Units.
Also in October 1997, the Company purchased four Office Properties from an
unaffiliated party for a purchase price of $289 million. Of this amount, the
Company issued, in a private placement of securities in reliance on an exemption
from the registration requirements of the Securities Act pursuant to Section
4(2) and Rule 506 of Regulation D promulgated thereunder, 2,900,000 Units at a
price of $24.50 per Unit for a total of approximately $71.1 million.
Also in October 1997, the Company purchased interests in nine Office
Properties from an unaffiliated party for a purchase price of approximately
$127.5 million. Of this amount, the Company issued, in a private placement of
securities in reliance on an exemption from the registration requirements of the
Securities Act pursuant to Section 4(2) and Rule 506 of Regulation D promulgated
thereunder, 499,977 Units at a price of $28.755 per Unit for a total of
approximately $14.4 million.
26
<PAGE> 27
Also in October 1997, the Company purchased an Office Property from an
unaffiliated party for a purchase price of approximately $81.7 million. Of this
amount, the Company issued, in a private placement of securities in reliance on
an exemption from the registration requirements of the Securities Act pursuant
to Section 4(2) and Rule 506 of Regulation D promulgated thereunder, 741,159
Units at a price of $32.975 per Unit for a total of approximately $24.4 million.
In November 1997, the Company purchased two Office Properties from an
unaffiliated party for a purchase price of $17.2 million. Of this amount, the
Company issued, in a private placement of securities in reliance on an exemption
from the registration requirements of the Securities Act pursuant to Section
4(2) and Rule 506 of Regulation D promulgated thereunder, 124,348 Units at a
price of $28.775 per Unit for a total of approximately $3.6 million.
In December 1997, the Company purchased ten Office Properties in the Wright
Runstad Acquisition for a purchase price of $640 million. Of this amount, the
Company issued, in a private placement of securities in reliance on an exemption
from the registration requirements of the Securities Act pursuant to Section
4(2) and Rule 506 of Regulation D promulgated thereunder, 2,615,700 Units at a
price of $29.11 per Unit for a total of approximately $76.1 million and the
Trust issued, also in a private placement of securities in reliance on an
exemption from the registration requirements of the Securities Act pursuant to
Section 4(2) and Rule 506 of Regulation D promulgated thereunder, 3,435,688
Common Shares at a price of $29.11 per Common Share for a total of approximately
$100 million. The Company issued 3,435,688 Units to the Trust in connection with
the issuance of these Common Shares. The sellers also received five year
warrants (valued at approximately $15 million) to purchase an additional
5,000,000 Common Shares of the Trust at an exercise price of $39.375 per share.
In addition, the Company, through a noncontrolled subsidiary, acquired a
non-controlling interest in the management company of the seller for
approximately $20 million. Of this amount, the Company issued, in a private
placement of securities in reliance on an exemption from the registration
requirements of the Securities Act pursuant to Section 4(2) and Rule 506 of
Regulation D promulgated thereunder, 137,427 Units at a price of $29.11 per Unit
for a total of approximately $4.0 million.
In February 1998, the Company, in two private placements to institutional
investors in reliance on an exemption from the registration requirements of the
Securities Act pursuant to Rule 144A, sold $1.25 billion of unsecured notes in
four series, ranging in maturities from five to 20 years, and $250 million of
unsecured 6.376% MandatOry Par Put Remarketed Securities(SM) due 2012 (which are
subject to mandatory tender on February 15, 2002). The proceeds of approximately
$1.5 billion were used to pay down borrowings under the Company's existing
unsecured credit facility.
Also in February 1998, the Trust, in a private placement to institutional
investors in reliance on an exemption from the registration requirements of the
Securities Act pursuant to Section 4(2) and Rule 506 of Regulation D promulgated
thereunder, sold 6,000,000 5.25% Series B Preferred Income Equity Redeemable
Shares, at $50 liquidation preference per share (the "Series B Preferred
Shares"). This offering generated net proceeds of approximately $290.3 million
after offering costs of $9.7 million. The net proceeds were used to pay down
borrowings on unsecured credit facilities. The Series B Preferred Shares are
convertible at any time by the holder into Common Shares at a conversion price
of $35.70 per Common Share, equivalent to a conversion ratio of 1.40056 Common
Shares for each Series B Preferred Share. The Series B Preferred Shares are
non-callable for five years with a mandatory call on February 15, 2008. Each
Series B Preferred Share is entitled to receive a quarterly distribution of
$0.65625. The proceeds of this offering were contributed to the Company in
exchange for 6,000,000 5.25% Series B Convertible, Cumulative Redeemable
Preferred Units.
In April 1998, the Company acquired an Office Property from an unaffiliated
third party for approximately $52.9 million. The acquisition was paid for with a
combination of approximately $52.8 million in cash and $.1 million in Units. The
Company issued 3,368 Units at $29.70 per Unit. The Units were issued in a
private placement of securities in reliance on an exemption from the
registration requirements of the Securities Act pursuant to Section 4(2) and
Rule 506 of Regulation D promulgated thereunder.
In April 1998, the Trust sold 1,628,009 restricted Common Shares. This
offering generated gross proceeds of approximately $44.1 million. The proceeds
were used to pay down borrowings on unsecured credit facilities. The shares were
issued in a private placement to an institutional investor in reliance on an
exemption
27
<PAGE> 28
from the registration requirements of the Securities Act pursuant to Section
4(2) and Rule 506 of Regulation D promulgated thereunder, at a price of $28.5625
per Common Share. The proceeds of this offering were contributed to the Company
in exchange for 1,628,009 Units.
In June 1998, the Company, in a private placement to institutional
investors in reliance on an exemption from the registration requirements of the
Securities Act pursuant to Rule 144A, sold $775 million of unsecured notes and
300,000 warrants to purchase an additional $300 million in unsecured notes at a
later date. The notes were issued in three series, ranging in maturities from
six to 30 years. The 300,000 warrants were issued concurrently with the issue of
$300 million, nine-year notes. Each warrant entitles its holder to purchase a
new $1,000 note at par on December 15, 1999 (or in certain circumstances on
January 18, 2000) at a stated rate of 6.763%, which will mature on June 15, 2008
and will have other terms substantially similar to the $300 million, nine-year
notes. Total proceeds to the Company, net of selling commissions, were
approximately $768.6 million which were used to pay down borrowings under the
Company's existing unsecured credit facility.
In July 1998, the Company acquired an Office Property from an unaffiliated
party for approximately $19.7 million. Of this amount, the Company issued, in a
private placement of securities in reliance on an exemption from the
registration requirements of the Securities Act pursuant to Section 4(2) and
Rule 506 of Regulation D promulgated thereunder, 178,976 Units at a price of
$25.69 per Unit for a total of approximately $4.6 million.
In October 1998, the Company acquired an Office Property from an
unaffiliated party for approximately $624.6 million. Of this amount, the Company
issued, in a private placement of securities in reliance on an exemption from
the registration requirements of the Securities Act pursuant to Section 4 (2)
and Rule 506 of Regulation D promulgated thereunder, 6,861,166 Units at a price
of $25.05 per Unit for a total of approximately $171.9 million.
28
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA.
EOP OPERATING LIMITED PARTNERSHIP SELECTED FINANCIAL DATA(1)
The following sets forth selected consolidated and combined financial and
operating information on a historical basis for EOP Operating Limited
Partnership and the Company's predecessors ("Equity Office Predecessors") (the
"Company"). 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 Form 10-K.
<TABLE>
<CAPTION>
EOP OPERATING LIMITED EQUITY OFFICE PREDECESSORS
PARTNERSHIP (COMBINED HISTORICAL)
----------------------------- ---------------------------------------------------
FOR THE
FOR THE PERIOD PERIOD FROM
FOR THE FROM JULY 11, JANUARY 1,
YEAR ENDED 1997 THROUGH 1997 THROUGH FOR THE YEARS ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, JULY 10, ------------------------------------
1998 1997 1997 1996 1995 1994
------------ -------------- ------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental, parking and other.............. $ 1,658,420 $ 406,713 $ 327,017 $ 493,396 $ 356,959 $ 230,428
----------- ----------- --------- ---------- ---------- ----------
Total revenues....................... 1,679,699 412,968 339,104 508,124 371,457 240,878
----------- ----------- --------- ---------- ---------- ----------
EXPENSES:
Interest............................... 338,611 76,675 80,481 119,595 100,566 59,316
Depreciation and amortization.......... 305,982 70,346 66,034 96,237 74,156 46,905
Property operating and ground
rent(2).............................. 600,367 155,679 127,285 201,067 151,488 107,412
General and administrative............. 63,564 17,690 17,201 23,145 21,987 15,603
Provision for value impairment......... -- -- -- -- 20,248 --
----------- ----------- --------- ---------- ---------- ----------
Total expenses....................... 1,308,524 320,390 291,001 440,044 368,445 229,236
----------- ----------- --------- ---------- ---------- ----------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on
sales of real estate and extraordinary
items.................................. 371,175 92,578 48,103 68,080 3,012 11,642
Minority interests....................... (2,114) (789) (912) (2,086) (2,129) 1,437
Income from investment in unconsolidated
joint ventures......................... 11,267 3,173 1,982 2,093 2,305 1,778
Gain/(loss) on sales of real estate and
extraordinary items.................... 4,927 (16,240) 12,236 5,338 31,271 1,705
----------- ----------- --------- ---------- ---------- ----------
Net income............................... 385,255 78,722 61,409 73,425 34,459 16,562
Preferred distributions.................. (32,202) (649) -- -- -- --
----------- ----------- --------- ---------- ---------- ----------
Net income available for Units........... $ 353,053 $ 78,073 $ 61,409 $ 73,425 $ 34,459 $ 16,562
=========== =========== ========= ========== ========== ==========
Net income available per weighted average
Unit outstanding -- Basic.............. $1.25 $0.44
=========== ===========
Net income available per weighted average
Unit outstanding -- Diluted............ $1.24 $0.43
=========== ===========
Weighted average Units outstanding --
Basic.................................. 282,114,343 178,647,562
=========== ===========
Weighted average Units outstanding --
Diluted................................ 283,974,532 180,014,027
=========== ===========
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EOP OPERATING LIMITED EQUITY OFFICE PREDECESSORS
PARTNERSHIP (COMBINED HISTORICAL)
----------------------------- ---------------------------------------------------
FOR THE
FOR THE PERIOD PERIOD FROM
FOR THE FROM JULY 11, JANUARY 1,
YEAR ENDED 1997 THROUGH 1997 THROUGH FOR THE YEARS ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, JULY 10, ------------------------------------
1998 1997 1997 1996 1995 1994
------------ -------------- ------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at end of period):
Investment in real estate after
accumulated depreciation............... $13,331,560 $10,976,319 -- $3,291,815 $2,393,403 $1,815,160
Total Assets............................. $14,261,291 $11,751,672 -- $3,912,565 $2,650,890 $2,090,933
Mortgage debt, unsecured notes and lines
of credit.............................. $ 6,025,405 $ 4,284,317 -- $1,964,892 $1,434,827 $1,261,156
Total Liabilities........................ $ 6,472,613 $ 4,591,697 -- $2,174,483 $1,529,334 $1,350,552
Minority Interests....................... $ 28,360 $ 29,612 -- $ 11,080 $ 31,587 $ 9,283
Partners' Capital/Owners' Equity......... $ 7,760,318 $ 7,130,363 -- $1,727,002 $1,089,969 $ 731,098
OTHER DATA:
General and administrative expenses as a
Percentage of total revenues........... 3.8% 4.3% 5.1% 4.6% 5.9% 6.5%
Number of Office Properties.............. 284 258 -- 84 73 63
Net rentable square feet of Office
Properties (in millions)............... 75.1 65.3 -- 29.2 23.1 18.5
Occupancy of Office Properties........... 95% 94% -- 90% 86% 88%
Number of Parking Facilities............. 19 17 -- 10 3 --
Number of spaces at Parking Facilities... 18,059 16,749 -- 7,321 3,323 --
Funds from Operations(3)................. $ 662,585 $ 163,253 $ 113,022 $ 160,460 $ 96,104 $ 60,372
Property Net Operating Income(4)......... $ 1,065,714 $ 253,418 $ 202,108 $ 294,556 $ 206,341 $ 123,684
EBITDA(5)................................ $ 1,049,577 $ 242,969 $ 197,489 $ 286,128 $ 200,438 $ 121,927
Cash flow from operating activities...... $ 759,151 $ 190,754 $ 95,960 $ 165,975 $ 93,878 $ 73,821
Cash flow used for investing
activities............................. $(2,231,712) $(1,592,272) $(571,068) $ (924,227) $ (380,615) $ (513,965)
Cash flow from financing activities...... $ 1,310,788 $ 1,630,346 $ 245,851 $1,057,551 $ 276,513 $ 514,923
</TABLE>
- ---------------
(1) The selected financial data at December 31, 1998, 1997, 1996 and 1995 and
for the five years ended December 31, 1998 has been derived from the
historical consolidated or combined financial statements of the Company and
Equity Office Predecessors, audited by Ernst & Young LLP, independent
auditors. The selected financial data at December 31, 1994 has been derived
from the historical unaudited combined financial statements of Equity Office
Predecessors.
(2) Property operating expenses includes real estate taxes, insurance, repairs
and maintenance expenses and other property operating expenses.
(3) 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, nor does it represent cash available to pay distributions 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
30
<PAGE> 31
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".
(4) Property Net Operating Income is defined as rental income including tenant
reimbursements, parking and other income less property operating expenses
including real estate taxes, insurance, repairs and maintenance and other
property operating expenses.
(5) EBITDA is defined as net income excluding interest expense, federal, state
and franchise taxes, depreciation and amortization, gain on sales of real
estate, gains/losses from extraordinary items and income from investment in
unconsolidated joint ventures plus the Company's share of the EBITDA for the
unconsolidated joint ventures.
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis of the consolidated financial
condition and consolidated and combined results of operations should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Combined Financial Statements of Equity Office Predecessors, and Notes thereto
contained herein. All references to the historical activities of the Company
prior to July 11, 1997, the date of the Trust's initial public offering (the
"IPO") contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refer to the activities of the Equity
Office Predecessors. Terms employed herein as defined terms, but without
definition, shall have the meaning set forth in the financial statements.
Statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" including without limitation, the "Market
Risk," "Developments" and "Year 2000" disclosures, 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 or anticipated. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of December 31,
1998. Among the factors that the Company has made assumptions about are the
following:
- Future economic conditions which may impact upon the demand for office
space and tenant ability to pay rent, either at current or at increased
levels.
- Prevailing interest rates.
- The extent of any inflation in operating expenses.
- The Company's ability to reduce various expenses as a percent of
revenues.
- The Company's continuing ability to pay amounts due to its noteholders
and preferred unitholders prior to any distribution to holders of its
Units.
- The cost to complete and lease-up pending developments.
- The continued availability of the $1.0 Billion Credit Facility.
During 1998, the Company acquired an additional 28 Office Properties (and
the remaining interest in the Polk and Taylor Buildings) containing
approximately 10.4 million square feet and two Parking Facilities. The aggregate
purchase price for these acquisitions was approximately $2.5 billion. Excluded
from these amounts is the 215 Fremont Street Property acquired on April 29,
1998, which contains approximately 265,000 square feet and is currently vacant.
In 1998, the Company disposed of five office properties consisting of
approximately 1.0 million square feet for approximately $132.6 million.
The Company was also active in the capital markets during 1998 as
summarized below:
- Issued $2.3 billion of unsecured notes in three separate offerings with
various tranches maturing between 2002 and 2028 with a weighted average
interest rate of 6.9%.
- Increased its line of credit from $600 million to $1.0 billion maturing
in May 2001.
- Obtained $528.0 million of unsecured credit facilities maturing over the
next two years at varying spreads over LIBOR.
- The Trust issued $415.0 million of preferred shares of beneficial
interest in two separate offerings with a weighted average distribution
rate of 6.2%. The Trust contributed the net proceeds to the Company in
exchange for a corresponding number of preferred units.
- The Trust issued 1,628,009 Common Shares for gross proceeds of $44.1
million and contributed the gross proceeds to the Company in exchange
for a corresponding number of Units.
32
<PAGE> 33
RESULTS OF OPERATIONS
GENERAL
The following discussion is based primarily on the Consolidated Financial
Statements of the Company and the Combined Financial Statements of Equity Office
Predecessors, as applicable, as of December 31, 1998 and December 31, 1997 and
for the years ended December 31, 1998, 1997 and 1996.
The Company receives income primarily from rental revenue from the Office
Properties (including reimbursements from tenants for certain operating costs)
and from parking revenue from Office Properties and Parking Facilities.
Below is a summary of the Company's acquisition and disposition activity
since January 1, 1997:
<TABLE>
<CAPTION>
OFFICE PROPERTIES PARKING FACILITIES
------------------------------ -------------------
BUILDINGS TOTAL SQUARE FEET GARAGES SPACES
--------- ----------------- -------- -------
<S> <C> <C> <C> <C>
PROPERTIES OWNED AS OF:
January 1, 1997..................................... 84 29,277,826 10 7,144
Acquisitions...................................... 176 36,549,956 7 9,605
Dispositions...................................... (2) (535,992) -- --
--- ---------- -- ------
December 31, 1997................................... 258 65,291,790 17 16,749
Acquisitions...................................... 28 10,425,595 2 1,310
Developments placed in service.................... 3 257,528 -- --
Dispositions...................................... (5) (986,391) -- --
Building remeasurements........................... -- 112,205 -- --
--- ---------- -- ------
December 31, 1998 ("Total Portfolio")............... 284 75,100,727 19 18,059
=== ========== == ======
</TABLE>
As a result of this rapid growth in the size of the Total Portfolio and the
disposition of properties, the financial data presented shows large changes in
revenues and expenses from period to period. 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 the Total Portfolio. The 28 State Street
Property, a 570,040 square foot Office Property acquired by the Company on
January 23, 1995, was undergoing major redevelopment until May 1997, therefore,
it has been excluded from the Core Portfolio in both comparisons.
33
<PAGE> 34
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO DECEMBER 31, 1997
The table below represents selected operating information for the Total
Portfolio and for the Core Portfolio consisting of 77 Office Properties and ten
Parking Facilities acquired or placed in service prior to January 1, 1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
---------------------------------------------- --------------------------------------------
INCREASE/ % INCREASE/ %
1998 1997 (DECREASE) CHANGE 1998 1997 (DECREASE) CHANGE
---------- -------- ---------- ------ -------- -------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues..... $1,658,420 $733,730 $924,690 126.0% $624,598 $587,006 $ 37,592 6.4%
Fees from noncombined
affiliates.......... 9,571 4,950 4,621 93.4 -- -- -- --
Interest/dividend
income.............. 11,708 13,392 (1,684) (12.6) 1,199 1,408 (209) (14.8)
---------- -------- -------- ------ -------- -------- -------- ------
Total revenues.... 1,679,699 752,072 927,627 123.3 625,797 588,414 37,383 6.4
---------- -------- -------- ------ -------- -------- -------- ------
Interest expense...... 338,611 157,156 181,455 115.5 83,296 118,583 (35,287) (29.8)
Depreciation and
amortization........ 305,982 136,380 169,602 124.4 113,005 106,782 6,223 5.8
Property operating
expenses............ 592,706 278,204 314,502 113.0 221,855 217,748 4,107 1.9
Ground rent........... 7,661 4,760 2,901 60.9 4,413 4,611 (198) (4.3)
General and
administrative...... 63,564 34,891 28,673 82.2 334 440 (106) (24.1)
---------- -------- -------- ------ -------- -------- -------- ------
Total expenses.... 1,308,524 611,391 697,133 114.0 422,903 448,164 (25,261) (5.6)
---------- -------- -------- ------ -------- -------- -------- ------
Income before
allocation to
minority interests,
income from
investment in
unconsolidated joint
ventures, gain on
sales of real estate
and extraordinary
items............... 371,175 140,681 230,494 163.8 202,894 140,250 62,644 44.7
Minority interests.... (2,114) (1,701) (413) 24.3 (2,026) (1,679) (347) 20.7
Income from investment
in unconsolidated
joint ventures...... 11,267 5,155 6,112 118.6 2,605 2,432 173 7.1
Gain on sales of real
estate and
extraordinary
items............... 4,927 (4,004) 8,931 (223.1) -- (14,971) 14,971 (100.0)
---------- -------- -------- ------ -------- -------- -------- ------
Net income............ $ 385,255 $140,131 $245,124 174.9% $203,473 $126,032 $ 77,441 61.4%
========== ======== ======== ====== ======== ======== ======== ======
Property revenue less
property operating
expenses before
depreciation and
amortization,
general and
administrative,
ground rent and
interest expense.... $1,065,714 $455,526 $610,188 134.0% $402,743 $369,258 $ 33,485 9.1%
========== ======== ======== ====== ======== ======== ======== ======
</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 91.9% at January 1,
1997 to
34
<PAGE> 35
96.1% as of December 31, 1998. This increase represents approximately 1.2
million square feet of additional occupancy in the Core Portfolio between
January 1, 1997 and December 31, 1998.
Property Revenues for the Total Portfolio include lease termination fees of
approximately $15.5 million and $3.9 million for the years ended December 31,
1998 and 1997, respectively, and Property Revenues for the Core Portfolio
include lease termination fees of approximately $3.7 million and $3.8 million
for the years ended December 31, 1998 and 1997, respectively, (included in the
"other revenue" category on the consolidated and combined statements 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
their leases. 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 included in rental revenues for the Total
Portfolio for the years ended December 31, 1998 and 1997 was approximately $68.1
million and $27.7 million, respectively. The straight-line rent adjustment
included in rental revenues for the Core Portfolio for the years ended December
31, 1998 and 1997 was approximately $26.2 million and $23.4 million,
respectively.
Fees from Noncombined Affiliates
The increase in fees from noncombined affiliates for the Total Portfolio is
mainly due to lease commissions received of approximately $2.8 million at a
single property and the addition of several fee managed properties. As of
December 31, 1998, the Company managed 18 properties.
Interest/Dividend Income
Interest/dividend income for the Total Portfolio decreased mainly as a
result of less cash and cash equivalents on deposit during 1998 partially offset
by dividend income earned during the year ended December 31, 1998 of
approximately $1.7 million on the Company's $48.5 million investment in 50,000
shares of Capital Trust's 8.25% Step-Up Convertible Trust Preferred Securities
acquired in July 1998.
Interest Expense
Interest expense increased for the Total Portfolio as a result of having
more debt outstanding during 1998 than 1997. The increase in total debt and the
related increase in interest expense were directly attributable to Property
acquisitions. The Company's total debt as a percentage of total assets increased
from approximately 36.5% of total assets at December 31, 1997 to 42.3% of total
assets at December 31, 1998. Although the Company's total debt has increased,
the weighted average interest rate on the Company's debt decreased from
approximately 7.2% at December 31, 1997 to approximately 7.1% at December 31,
1998 and the Company's interest coverage ratio increased from approximately 2.8
times in 1997 to 3.0 times in 1998. The decrease in interest expense in the Core
Portfolio is primarily due to the pay down of outstanding indebtedness with the
IPO proceeds and the replacement of secured debt with unsecured debt, which has
not been allocated to the Core Portfolio.
Depreciation and Amortization
Depreciation and amortization expense for the Total Portfolio increased as
a result of Properties acquired and capital and tenant improvements made during
1998 and 1997. Depreciation and amortization expense for the Core Portfolio
increased as a result of capital and tenant improvements. In addition, a portion
of the increase in the depreciation and amortization expense for the Total and
Core Portfolio was due to recording substantially all the Company's assets and
liabilities at their fair market value in connection with the Consolidation and
the IPO.
Property Operating Expenses
Real estate taxes, insurance, repairs and maintenance and other property
operating expenses ("Property Operating Expenses") increased for the Core
Portfolio mainly as a result of real estate taxes. Real estate taxes
35
<PAGE> 36
increased approximately $4.6 million from the prior period of which
approximately $2.3 million related to higher property tax assessments in certain
markets and $2.3 million related to lower real estate tax refunds. Insurance
expense decreased approximately $1.6 million from the prior period as the
Company's ability to achieve economies of scale on its insurance coverage
resulted in lower premiums in 1998.
General and Administrative Expenses
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 currently anticipated that the Company's general and
administrative expenses as a percentage of total revenues will remain stable
with future growth. General and administrative expense was approximately 3.8%
and 4.6% of total revenues for the years ended December 31, 1998 and 1997,
respectively.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996
The table below represents selected operating information for the Total
Portfolio and for the Core Portfolio consisting of 70 Office Properties and
three Parking Facilities acquired or placed in service prior to January 1, 1996.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
-------- -------- ---------- ------ -------- -------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues.......... $733,730 $493,396 $240,334 48.7% $458,968 $427,936 $ 31,032 7.3%
Fees from noncombined
affiliates............... 4,950 5,120 (170) (3.3) -- -- -- --
Interest income............ 13,392 9,608 3,784 39.4 1,056 1,882 (826) (43.9)
-------- -------- -------- ------ -------- -------- -------- -----
Total revenues......... 752,072 508,124 243,948 48.0 460,024 429,818 30,206 7.0
-------- -------- -------- ------ -------- -------- -------- -----
Interest expense........... 157,156 119,595 37,561 31.4 93,606 110,566 (16,960) (15.3)
Depreciation and
amortization............. 136,380 96,237 40,143 41.7 85,999 84,411 1,588 1.9
Property operating
expenses................. 278,204 198,840 79,364 39.9 177,069 175,529 1,540 0.9
Ground rent................ 4,760 2,227 2,533 113.7 903 903 -- --
General and
administrative........... 34,891 23,145 11,746 50.7 -- -- -- --
-------- -------- -------- ------ -------- -------- -------- -----
Total expenses......... 611,391 440,044 171,347 38.9 357,577 371,409 (13,832) (3.7)
-------- -------- -------- ------ -------- -------- -------- -----
Income before allocation to
minority interests,
income from investment in
unconsolidated joint
ventures, gain on sales
of real estate and
extraordinary items...... 140,681 68,080 72,601 106.6 102,447 58,409 44,038 75.4
Minority interests......... (1,701) (2,086) 385 (18.5) (1,679) (1,986) 307 (15.5)
Income from investment in
unconsolidated joint
ventures................. 5,155 2,093 3,062 146.3 2,432 2,093 339 16.2
Gain on sales of real
estate and extraordinary
items.................... (4,004) 5,338 (9,342) (175.0) (16,311) -- (16,311) --
-------- -------- -------- ------ -------- -------- -------- -----
Net income................. $140,131 $ 73,425 $ 66,706 90.8% $ 86,889 $ 58,516 $ 28,373 48.5%
======== ======== ======== ====== ======== ======== ======== =====
Property revenues less
property operating
expenses before
depreciation and
amortization, general and
administrative, ground
rent and interest
expense.................. $455,526 $294,556 $160,970 54.6% $281,899 $252,407 $ 29,492 11.7%
======== ======== ======== ====== ======== ======== ======== =====
</TABLE>
36
<PAGE> 37
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 88.5% at January 1,
1996 to 94.8% as of December 31, 1997. This increase represents approximately
1.4 million square feet of additional occupancy in the Core Portfolio between
January 1, 1996 and December 31, 1997.
Included in Property Revenues for the Core Portfolio are lease termination
fees of approximately $3.7 million and $5.6 million for 1997 and 1996,
respectively (included in the "other revenue" category on the consolidated and
combined statements 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 included in rental revenues for the Core
Portfolio for 1997 and 1996 was approximately $14.6 million and $13.9 million,
respectively. The straight-line rent adjustment included in rental revenues for
the Total Portfolio for 1997 and 1996 was approximately $27.7 million and $18.4
million, respectively. Other income for 1996 also includes approximately $8.8
million relating to the Company's share of a litigation settlement.
Fees from Noncombined Affiliate
Fees from noncombined affiliates decreased in 1997 from approximately $5.1
million in 1996 to $4.9 million in 1997 mainly as a result of properties sold.
Fee income for the years ended December 31, 1997 and 1996, of approximately $0.4
million and $1.3 million, respectively, was related to properties which have
been sold.
Interest Income
Interest income for the Total Portfolio increased primarily due to having a
greater amount of cash reserves invested in short term investments pending
investment in property acquisitions prior to 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 credit facilities, the Company currently
maintains lower cash reserves which are targeted to be between $25 million and
$50 million (although the cash balance may at times be more or less in
anticipation of pending acquisitions or other transactions). Although the lower
cash balance will result in lower interest income in future periods, this loss
in income is expected to be offset by savings on interest expense on the credit
facilities.
Interest Expense
Interest expense for the Total Portfolio increased as a result of having
more debt outstanding in 1997. The increase in total debt and the related
increase in interest expense were directly related to Property acquisitions.
While the Company's total debt and total interest expense have increased due to
acquisition activity, the total debt as a percentage of total assets decreased
from 50% of total assets at December 31, 1996 to 36.5% of total assets at
December 31, 1997, and the Company's interest coverage ratio increased from 2.4
times in 1996 to 2.8 times in 1997. In addition, the weighted average interest
rate on the Company's debt decreased from approximately 7.7% at December 31,
1996 to approximately 7.2% at December 31, 1997. The decrease in interest
expense in the Core Portfolio was primarily due to the replacement of secured
debt with unsecured debt, which has not been allocated to the Core Portfolio.
Depreciation and Amortization
Depreciation and amortization expense increased for the Total Portfolio as
a result of Properties acquired during 1997 and the recording of substantially
all the Company's assets and liabilities at their fair market value
37
<PAGE> 38
in connection with the Consolidation and the IPO. The increase in depreciation
in the Core Portfolio resulted from the recording of substantially all the
Company's assets and liabilities at their fair market value in connection with
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, insurance, repairs and maintenance and
other property operating expenses ("Property Operating Expenses") in the Core
Portfolio relates primarily to increases in real estate taxes due to higher
property valuations partially offset by real estate tax refunds recorded in
1997.
General and Administrative Expenses
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 decrease with
future growth. General and administrative expenses were approximately 4.6% of
total revenues for the years ended December 31, 1997 and 1996.
38
<PAGE> 39
PARKING OPERATIONS
The Total Portfolio and Core Portfolio selected operating information for
1998, 1997 and 1996 presented above includes results of operations from the
Parking Facilities. Summarized information for the Parking Facilities is
presented below.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO DECEMBER 31, 1997
The Total Portfolio and Core Portfolio consists of 19 and ten Parking
Facilities, respectively.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO CORE PARKING PORTFOLIO
--------------------------------------- ----------------------------------------
INCREASE/ % INCREASE/ %
1998 1997 (DECREASE) CHANGE 1998 1997 (DECREASE) CHANGE
------- ------- ---------- ------ ------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues.......... $30,539 $22,577 $7,962 35.3% $23,467 $20,669 $2,798 13.5%
Interest income............ 140 249 (109) (43.8) 139 249 (110) (44.2)
------- ------- ------ ------ ------- ------- ------ -------
Total revenues........ 30,679 22,826 7,853 34.4 23,606 20,918 2,688 12.9
------- ------- ------ ------ ------- ------- ------ -------
Interest expense........... 5,496 5,427 69 1.3 5,490 5,426 64 1.2
Depreciation and
amortization............. 5,880 4,031 1,849 45.9 4,628 3,755 873 23.2
Property operating
expenses................. 8,353 5,023 3,330 66.3 6,401 4,613 1,788 38.8
Ground rent................ 50 46 4 8.7 50 46 4 8.7
General and
administrative........... 72 55 17 30.9 53 55 (2) (3.6)
------- ------- ------ ------ ------- ------- ------ -------
Total expenses........ 19,851 14,582 5,269 36.1 16,622 13,895 2,727 19.6
------- ------- ------ ------ ------- ------- ------ -------
Income before allocation to
minority interests and
income from investment in
unconsolidated joint
ventures................. 10,828 8,244 2,584 31.3 6,984 7,023 (39) (0.6)
Minority interests......... (360) (323) (37) 11.5 (360) (323) (37) 11.5
Income from investment in
unconsolidated joint
ventures................. 1,884 2,461 (577) (23.4) -- -- -- --
------- ------- ------ ------ ------- ------- ------ -------
Net income................. $12,352 $10,382 $1,970 19.0% $ 6,624 $ 6,700 $ (76) (1.1)%
======= ======= ====== ====== ======= ======= ====== =======
Property revenues less
property operating
expenses before
depreciation and
amortization, general and
administrative, ground
rent and interest
expense.................. $22,186 $17,554 $4,632 26.4% $17,066 $16,056 $1,010 6.3%
======= ======= ====== ====== ======= ======= ====== =======
</TABLE>
39
<PAGE> 40
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996
The Total Portfolio and Core Portfolio consists of 17 and three Parking
Facilities, respectively.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO CORE PARKING PORTFOLIO
--------------------------------------- ----------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
------- ------- ---------- ------ ------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues.......... $22,577 $10,203 $12,374 121.3% $10,238 $ 9,873 $ 365 3.7%
Interest income............ 249 141 108 76.6 239 141 98 69.5
------- ------- ------- ------ ------- ------- ------ -------
Total revenues........ 22,826 10,344 12,482 120.7 10,477 10,014 463 4.6
------- ------- ------- ------ ------- ------- ------ -------
Interest expense........... 5,427 1,814 3,613 199.2 2,724 1,645 1,079 65.6
Depreciation and
amortization............. 4,031 1,432 2,599 181.5 1,708 1,359 349 25.7
Property operating
expenses................. 5,023 3,102 1,921 61.9 2,573 3,031 (458) (15.1)
Ground rent................ 46 50 (4) (8.0) 46 50 (4) (8.0)
General and
administrative........... 55 -- 55 -- -- -- -- --
------- ------- ------- ------ ------- ------- ------ -------
Total expenses........ 14,582 6,398 8,184 127.9 7,051 6,085 966 15.9
------- ------- ------- ------ ------- ------- ------ -------
Income before allocation to
minority interests and
income from investment in
unconsolidated joint
ventures................. 8,244 3,946 4,298 108.9 3,426 3,929 (503) (12.8)
Minority interests......... (323) (252) (71) 28.2 (323) (252) (71) 28.2
Income from investment in
unconsolidated joint
ventures................. 2,461 -- 2,461 -- -- -- -- --
------- ------- ------- ------ ------- ------- ------ -------
Net income................. $10,382 $ 3,694 $ 6,688 181.1% $ 3,103 $ 3,677 $ (574) (15.6)%
======= ======= ======= ====== ======= ======= ====== =======
Property revenues less
property operating
expenses before
depreciation and
amortization, general and
administrative, ground
rent and interest
expense.................. $17,554 $ 7,101 $10,453 147.2% $ 7,665 $ 6,842 $ 823 12.0%
======= ======= ======= ====== ======= ======= ====== =======
</TABLE>
40
<PAGE> 41
PROPERTY DISPOSITIONS
The Company disposed of the following five office properties in November
1998: First Union Center, One Clearlake Centre, Tampa Commons and Westshore
Center, all located in Florida, and the Walker Building located in Washington,
D.C. These properties consisted of approximately 986,391 net rentable square
feet. The Company will continue managing the properties in Florida for one year
after the disposal date for a fee as defined in the management agreement. In
addition, Equity Office Predecessors sold Barton Oaks Plaza II in January 1997
and 8383 Wilshire in May 1997. These properties consisted of approximately
535,992 net rentable square feet. In January 1996, Equity Office Predecessors
sold the condominium portion of Three Lakeway, a mixed-use property. Below is a
summary of the operations of these office properties through their respective
disposition dates:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property revenues........................................... $18,075 $21,711 $31,383
Interest income............................................. 9 77 96
------- ------- -------
Total revenues......................................... 18,084 21,788 31,479
------- ------- -------
Interest expense............................................ 428 2,051 6,111
Depreciation and amortization............................... 2,603 4,176 7,839
Property operating expenses................................. 6,700 9,335 13,477
General and administrative.................................. 2 4 --
------- ------- -------
Total expenses......................................... 9,733 15,566 27,427
------- ------- -------
Income before gain on sales of real estate and extraordinary
items..................................................... 8,351 6,222 4,052
Gain on sales of real estate and extraordinary items........ 12,433 11,740 5,338
------- ------- -------
Net income.................................................. $20,784 $17,962 $ 9,390
======= ======= =======
Property revenues less property operating expenses before
depreciation and amortization, general and administrative
and interest expense...................................... $11,375 $12,376 $17,906
======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Net cash provided from operations represents the primary source of
liquidity to fund distributions, debt service, recurring capital costs and
non-revenue enhancing tenant improvements. The Company currently intends to
continue to make, but has not contractually bound itself to make, regular
quarterly distributions to holders of Series A Preferred Units, Series B
Preferred Units, Series C Preferred Units and Units. The Company has established
annual distribution rates as follows: 8.98% per annum ($2.245 per unit) for each
Series A Preferred Unit, 5.25% per annum ($2.625 per unit) for each Series B
Preferred Unit, 8.625% per annum ($2.15625 per unit) for each Series C Preferred
Unit and $1.48 per annum per Unit. The Company increased its Unit distribution
from $1.28 per annum to $1.48 per annum effective for the quarter ended
September 30, 1998.
The Company intends to continue to fund distributions, debt service,
recurring capital costs and non-revenue enhancing tenant improvements from cash
from operations and draws under the $1.0 Billion Credit Facility. The Company
also expects that the $1.0 Billion Credit Facility will provide for temporary
working capital, the funding of capital improvements and revenue enhancing
tenant improvements, unanticipated cash needs and funding of acquisitions and
development costs.
Since 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, the Company will be required to repay maturing debt with funds from
debt and/or equity financing.
41
<PAGE> 42
DEBT FINANCING
The table below summarizes the mortgage debt, unsecured notes and lines of
credit indebtedness outstanding at December 31, 1998 and 1997, including a net
premium on mortgage debt and unsecured notes (net of accumulated amortization of
approximately $2.7 million and $2.1 million) of approximately $17.8 million and
$1.2 million, respectively, recorded in connection with the Company's
Consolidation, debt assumed in connection with certain of the Company's
acquisitions, and unsecured notes.
<TABLE>
<CAPTION>
DECEMBER 31,1998 DECEMBER 31, 1997
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT SUMMARY:
Balance
Fixed rate................................................ $4,739,018 $2,219,496
Variable rate............................................. 1,286,387 2,064,821
---------- ----------
Total.................................................. $6,025,405 $4,284,317
========== ==========
Percent of total debt:
Fixed rate................................................ 78.7% 51.8%
Variable rate............................................. 21.3% 48.2%
---------- ----------
Total.................................................. 100.0% 100.0%
========== ==========
Weighted average interest rate at end of period:
Fixed rate................................................ 7.3% 7.5%
Variable rate............................................. 6.4% 6.9%
---------- ----------
Weighted average....................................... 7.1% 7.2%
========== ==========
</TABLE>
A majority of the variable rate debt shown above bears interest at an
interest rate based on LIBOR.
MORTGAGE FINANCING
As of December 31, 1998, the Company's total mortgage debt (excluding the
Company's share of unconsolidated debt of approximately $124.3 million)
consisted of approximately $2.3 billion of fixed rate debt with a weighted
average interest rate of approximately 7.6% and $70.4 million of variable rate
debt based on various spreads over LIBOR. The Company's mortgage debt at
December 31, 1998 will mature as follows:
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
----------
<S> <C>
1999........................................................ $ 116,346
2000........................................................ 185,888
2001........................................................ 488,968
2002........................................................ 78,398
2003........................................................ 298,014
Thereafter.................................................. 1,168,957
----------
Subtotal............................................... 2,336,571
Net premium (net of accumulated amortization of $3.0
million).................................................. 13,517
----------
Total.................................................. $2,350,088
==========
</TABLE>
In the first quarter of 1999, the Company repaid approximately $257.0
million of mortgage debt (of which approximately $90.7 million was scheduled to
mature in 1999) and anticipates repaying an additional $240.0 million with
proceeds from the Company's $1.0 billion unsecured notes offering in January
1999.
The instruments encumbering the Properties restrict transfer of the
mortgaged Properties subject to the terms of the mortgage indebtedness, prohibit
additional liens and require payment of taxes on the mortgaged
42
<PAGE> 43
Properties, maintenance of the mortgaged Properties in good condition,
maintenance of insurance on the mortgaged Properties and obtaining lender
consent to leases with material tenants.
CREDIT FACILITIES
Lines of Credit
On May 29, 1998, the Company amended and restated the $600 Million Credit
Facility to a $1.0 billion unsecured revolving credit facility (the "$1.0
Billion Credit Facility"). The $1.0 Billion Credit Facility matures on May 29,
2001. The Company incurred fees of approximately $2.5 million at the closing of
the $1.0 Billion Credit Facility which will be amortized over the term along
with approximately $1.0 million of unamortized deferred financing costs on the
$600 Million Credit Facility. The interest rate is based on the Company's
investment grade credit rating on its unsecured debt and is currently LIBOR plus
60 basis points with a facility fee equal to 20 basis points in respect to the
entire facility, payable quarterly. In addition, a competitive bid option,
whereby the lenders participating in the facility bid on the interest rate to be
charged, is available for up to $350 million of the facility. The outstanding
balance on the $1.0 Billion Credit Facility was $688.0 million as of December
31, 1998. Subsequent to December 31, 1998, the Company repaid $663.0 million on
the $1.0 Billion Credit Facility.
Term Loan Facilities
On August 14, 1998, the Company closed on the $328 Million Credit Facility.
The facility is priced at 90-day LIBOR plus 80 basis points and is prepayable on
any interest payment date. The facility matures on August 15, 2000. The proceeds
from the facility were used to pay down the $1.0 Billion Credit Facility.
On September 22, 1998, the Company closed on the $200 Million Credit
Facility. Interest accrues under the $200 Million Credit Facility at an initial
rate of LIBOR plus 50 basis points with a facility fee equal to 20 basis points
per annum. Pricing for the first twelve months is based on a matrix tied to the
Company's credit rating and may be reset after the first twelve months for an
additional six months and again after eighteen months for an additional six
months for a ten basis point fee. The proceeds from the facility were used to
pay down the $1.0 Billion Credit Facility.
UNSECURED NOTES
$180 Million Notes Offering
In September 1997, the Company issued the $180 Million Notes. The $180
Million Notes were issued in four tranches with maturities from seven to ten
years.
$1.25 Billion Notes Offering
In February 1998, the Company issued the $1.25 Billion Notes. The $1.25
Billion Notes were issued in four tranches with maturities of five to twenty
years.
$250 Million MandatOry Par Put Remarketed Securities Offering
Also in February 1998, the Company issued the $250 Million MOPPRS which are
subject to mandatory tender to the remarketing agent on February 15, 2002.
$775 Million Notes and 300,000 Warrants Offering
In June 1998, the Company issued the $775 Million Notes in three tranches
with maturities of six to thirty years, along with 300,000 warrants to purchase
an additional $300 million in unsecured notes at a later date. Each warrant
entitles the holder thereof to purchase a new $1,000 note at par on December 15,
1999 (or in certain circumstances on January 18, 2000) at a stated rate of
6.763%, which will mature on June 15, 2008 and will have other terms
substantially similar to the $300 million nine year notes due 2007.
43
<PAGE> 44
$1.0 Billion Unsecured Notes Offering
In January 1999, the Company issued the $1.0 Billion Notes in three
tranches with maturities of three to ten years and will use the net proceeds of
approximately $990.1 million to repay $497.0 million of mortgage debt, $16.0
million in prepayment penalties and $477.1 million of amounts outstanding on the
$1.0 Billion Credit Facility.
The table below summarizes the Company's unsecured notes as of February 28,
1999:
<TABLE>
<CAPTION>
AMOUNT STATED EFFECTIVE
TRANCHE (IN THOUSANDS) RATE RATE(1)
------- -------------- ------ ---------
<S> <C> <C> <C>
3 Year Notes due 2002...................................... $ 200,000 6.4% 6.6%
4 Year MOPPRS due 2002(2).................................. 250,000 6.4% 6.3%
5 Year Notes due 2003...................................... 300,000 6.4% 6.8%
5 Year Notes due 2004...................................... 300,000 6.5% 6.7%
6 Year Notes due 2004...................................... 250,000 6.5% 6.7%
7 Year Notes due 2004...................................... 30,000 7.2% 7.3%
7 Year Notes due 2005...................................... 400,000 6.6% 7.0%
8 Year Notes due 2005...................................... 50,000 7.4% 7.7%
9 Year Notes due 2006...................................... 50,000 7.4% 7.7%
9 Year Notes due 2007...................................... 300,000 6.8% 6.8%
10 Year Notes due 2007..................................... 50,000 7.4% 7.7%
10 Year Notes due 2008..................................... 300,000 6.8% 7.0%
10 Year Notes due 2009..................................... 500,000 6.8% 6.9%
20 Year Notes due 2018..................................... 250,000 7.3% 7.6%
30 Year Notes due 2028..................................... 225,000 7.3% 7.3%
---------- ---- ----
Subtotal................................................. 3,455,000 6.7% 6.9%
==== ====
Net premium (net of accumulated amortization of $.3
million)................................................. 992
----------
Total.................................................... $3,455,992
==========
</TABLE>
(1) Includes the cost of the terminated interest rate protection agreements,
offering and transaction costs, the premium on the warrants and the discount
on unsecured notes.
(2) The MOPPRS are subject to mandatory redemption to the remarketing agent in
2002 but do not mature until 2012.
The Company filed a registration statement, which was declared effective on
June 18, 1998, relating to an offer to exchange the privately offered $180
Million Notes, the $1.25 Billion Notes and the $250 Million MOPPRS for
registered and, therefore, tradeable securities of the Company with terms
identical in all material respects to the terms of the previously issued
securities. This exchange offer expired on July 30, 1998 and a majority of the
holders exchanged their notes for registered notes of the Company.
The Company filed a shelf registration statement, which was declared
effective on July 22, 1998, relating to the potential issuance from time to time
of up to $2.0 billion of unsecured debt securities and warrants exercisable for
debt securities in amounts, at initial prices and on terms to be determined at
the time of offering. The securities may be issued separately or together, in
separate series and in amounts, at prices and on terms to be described in one or
more supplements to the prospectus. The Company sold $1.0 billion of unsecured
notes in January 1999 under this registration statement.
The Company filed a registration statement, which was declared effective on
September 4, 1998, relating to an offer to exchange (a) the $775 Million Notes;
(b) 300,000 warrants to purchase an additional $300 million in unsecured notes
at a later date; and (c) portions of the $1.25 Billion Notes and $250 Million
MOPPRS for registered securities of the Company with terms identical in all
material respects to the terms of the existing securities. This exchange offer
expired on October 27, 1998 and a majority of the holders exchanged their
restricted securities for registered notes and warrants of the Company.
44
<PAGE> 45
Restrictions and Covenants
Agreements or instruments relating to the unsecured notes and lines of
credit contain certain restrictions and requirements regarding total debt to
assets ratios, secured debt to total assets ratios, debt service coverage
ratios, minimum ratio of unencumbered assets to unsecured debt and other
limitations.
EQUITY SECURITIES
Below is a summary of the equity securities issued in connection with
various transactions occurring since January 1, 1998:
- In February 1998, the Trust issued the Series B Preferred Shares which
are convertible at any time at the option of the holder to Common Shares
at a conversion price of $35.70 per Common Share (equivalent to a
conversion ratio of 1.40056 Common Shares for each Series B Preferred
Share). The Series B Preferred Shares are non-callable for five years
with a mandatory call in year 2008. Proceeds from the Series B Preferred
Share Offering were contributed to the Company in exchange for a
corresponding number of Series B Preferred Units and were used to pay
down amounts outstanding under the line of credit.
- In April 1998, the Trust privately placed 1,628,009 restricted Common
Shares at $28.5625 per share for net proceeds of approximately $44.1
million which were contributed to the Company in exchange for a
corresponding number of Units and were used to pay down the credit
facilities.
- The Trust filed a shelf registration statement which was declared
effective on July 22, 1998, relating to the registration of $1.5 billion
of Common Shares, preferred shares of beneficial interest and warrants
to be issued at prices and on terms to be determined at the time of
offering. The Trust may or may not issue the securities separately or
together, in separate series, in amounts, at prices and on terms
described in one or more supplements to the prospectus. The Series C
Preferred Shares were issued under this registration statement in
December 1998.
- In December 1998, the Trust issued the Series C Preferred Shares. The
shares are non-redeemable for five years, and after five years may be
redeemed by the Trust at par plus accumulated distributions. This
offering generated net proceeds of approximately $111.4 million after
offering costs of $3.6 million. The net proceeds were contributed to the
Company in exchange for a corresponding number of Series C Preferred
Units and were used to pay down the $1.0 Billion Credit Facility. Each
unit will be entitled to receive an annual distribution of $2.15625 to
be paid quarterly.
- During 1998, the Trust issued 809,653 Common Shares as a result of share
options exercised and issued 380,000 restricted Common Shares and, as a
result, the Company issued a corresponding number of Units to the Trust.
The Company issued 7,043,510 Units in connection with property
acquisitions, 7,556,332 Units were redeemed into Common Shares on a
one-for-one basis, and 1,169 Units were converted into cash.
- Effective as of August 13, 1998, the Trust amended a pre-existing put
option agreement with certain sellers of the Wright Runstad Properties
(the "WR Holders"). The WR Holders have the option on August 13, 1999 to
require the Trust to purchase all or a portion of the 3,435,688 Common
Shares, issued at acquisition, at a price equal to $31.50 per Common
Share. Prior to August 13, 1999, if the WR Holders sell all or a portion
of their Common Shares to a third party for a price less than $29.10625
per Common Share, then the Trust shall pay to the WR Holders an amount
equal to the difference between such sale price and $29.10625 multiplied
by the number of Common Shares sold, not to exceed $3.00 per Common
Share. Any amounts paid by the Trust as a result of such sales,
calculated as the difference between the sale price and $29.10625 not
exceeding $3.00 per Common Share, shall be recorded as a reduction of
shareholders' equity. For options exercised on August 13, 1999, any
amounts paid up to $29.10625 per Common Share would be reflected as a
reduction of shareholders' equity; the portion of any amounts paid in
excess of $29.10625 per Common Share (not to exceed $31.50 per Common
Share) would be expensed. The portion expensed would not exceed $2.39375
per Common Share.
45
<PAGE> 46
- Effective as of September 3, 1998, the Company amended its pre-existing
put option agreement with the seller of the Columbus America Properties
(the "CA Holder") related to 1,692,546 Units issued at acquisition. The
CA Holder has the option at any time after January 1, 1999 until the
earlier of a) September 3, 2000 or b) the date the CA Holder has
converted all of its Units to Common Shares, to require the Company to
purchase the Units at a price equal to $29.00 per Unit. Under the terms
of the agreement, prior to September 3, 1999, the option shall be
limited to an aggregate of 846,273 Units. In the event of any option
exercise, the Company will recognize any cash paid as a reduction of
partners' capital.
- In connection with the acquisition of Worldwide Plaza on October 1,
1998, the Company issued a transferable put option on Units exercisable
only on the third anniversary of closing with an estimated fair value of
approximately $27.4 million. This option entitles its holder to
additional Common Shares, the number of which shall be determined using
a formula based on the extent, if any, that the Common Shares are then
trading at less than $29.05 per share. Upon the issuance of Common
Shares by the Trust, the Company will issue a corresponding number of
Units to the Trust.
MARKET RISK
The Company's future earnings, cash flows and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market risk is
the risk of loss from adverse changes in market prices and interest rates. The
Company manages its market risk by matching projected cash inflows from
operating activities, financing activities and investing activities with
projected cash outflows to fund debt payments, acquisitions, capital
expenditures, distributions and other cash requirements. The majority of the
Company's outstanding debt (maturing at various times through 2028) has a fixed
interest rate, which minimizes the interest rate risk. The Company also utilizes
certain derivative financial instruments at times to limit market risk. Interest
rate protection agreements are used to convert floating rate debt to a fixed
rate basis or to hedge anticipated financing transactions. Derivatives are used
for hedging purposes rather than speculation. The Company does not enter into
financial instruments for trading purposes.
The Company has total outstanding debt of approximately $6.0 billion at
December 31, 1998, of which approximately $1.3 billion, or 21%, is variable rate
debt. If market rates of interest on the Company's variable rate debt increase
by ten percent (or approximately 64 basis points), the increase in interest
expense on the Company's variable rate debt would decrease future earnings and
cash flows by approximately $8.2 million. If market rates of interest increase
by ten percent, the fair value of the Company's total outstanding debt would
decrease by approximately $141.0 million. If market rates of interest on the
Company's variable rate debt decrease by ten percent (or approximately 64 basis
points), the decrease in interest expense on the Company's variable rate debt
would increase future earnings and cash flows by approximately $8.2 million. If
market rates of interest decrease by ten percent, the fair value of the
Company's total outstanding debt would increase by approximately $146.0 million.
At December 31, 1998, the Trust and the Company have put option agreements
outstanding in connection with the acquisition of the Wright Runstad Properties
and Columbus America Properties, respectively. On August 13, 1999, the holders
of Wright Runstad options (the "WR Holders"), can require the Trust to purchase
all or a portion of the 3,435,668 Common Shares issued at acquisition at a price
equal to $31.50 per Common Share. Prior to August 13, 1999, if the WR Holders
sell all or a portion of their Common Shares to a third party for a price less
than $29.10625, then the Trust is obligated to pay to the WR Holders an amount
equal to the difference between such sale price and $29.10625 multiplied by the
number of Common Shares sold, not to exceed $3.00 per Common Share. Any amounts
paid by the Trust as a result of such sales, calculated as the difference
between the sale price and $29.10625 not exceeding $3.00 per Common Share, shall
be recorded as a reduction of shareholders' equity. For options exercised on
August 13, 1999, any amounts paid up to $29.10625 per Common Share would be
reflected as a reduction of shareholders' equity; the portion of any amounts
paid in excess of $29.10625 per Common Share (not to exceed $2.39375 per Common
Share up to an aggregate of approximately $8.2 million) would be expensed. The
Company will not incur any loss on this transaction if the put option is not
exercised.
46
<PAGE> 47
The Company's cash flows could decrease by up to $10.3 million if, prior to
August 13, 1999, the WR Holders sell all their Common Shares to third parties.
Cash flows of the Company may decrease by up to approximately $108 million if
the WR Holders exercise their rights under the put option agreement on August
13, 1999. There will be no impact on cash flows from this transaction if the put
option is not exercised.
The Company has a put option agreement outstanding with the seller of the
Columbus America Properties (the "CA Holder") related to 1,692,546 Units issued
at acquisition. The CA Holder has the option at any time after January 1, 1999
until the earlier of September 3, 2000 or the date the CA Holder has converted
all of its Units to Common Shares, to require the Company to purchase the Units
at a price equal to $29.00 per Unit. Under the terms of the agreement, prior to
September 3, 1999, the option shall be limited to an aggregate of 846,273 Units.
In the event of any option exercise the Company will recognize any cash paid as
a reduction of partners' capital. Cash flows of the Company may decrease by up
to approximately $49.1 million if the CA Holders exercise their rights under the
put option agreement. There will be no impact on cash flows from this
transaction if the put option is not exercised.
These amounts were determined by considering the impact of hypothetical
interest rates and equity prices on the Company's financial instruments. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, these analyses
assume no changes in the Company's financial structure.
CASH FLOWS
For discussion purposes, the cash flows for 1997 combined the cash flows of
Equity Office Predecessors for the period January 1, 1997 through July 10, 1997
and the cash flows of the Company for the period July 11, 1997 through December
31, 1997. The cash flows for 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.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Cash and cash equivalents decreased by approximately $161.8 million to
$67.1 million at December 31, 1998, from $228.9 million at December 31, 1997.
This decrease was the result of approximately $759.1 million provided by
operating activities, $2,231.7 million used for investing activities and
$1,310.8 million provided by financing activities. Net cash provided by
operating activities increased by approximately $472.4 million from $286.7
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 approximately $68.4 million from $2,163.3 million mainly due to an increase
in the amount of cash used for real estate assets purchased during 1998 compared
to 1997. Net cash provided by financing activities decreased by approximately
$565.4 million from $1,876.2 million due primarily to a net pay down of the
credit facilities and distributions to unitholders and preferred unitholders
partially offset by proceeds from unsecured notes and the line of credit.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Cash and cash equivalents decreased by approximately $181.5 million, to
approximately $228.9 million at December 31, 1997, compared to $410.4 million at
December 31, 1996. This decrease was the result of approximately $2.2 billion
invested in new acquisitions, capital and tenant improvements, and payment of
leasing commissions reduced by approximately $286.7 million of cash generated by
operations and $1.9 billion generated from financing activities (including the
$181.1 million contributed by Equity Office Predecessors). Net cash provided by
operating activities increased by approximately $120.7 million to approximately
$286.7 million from $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 approximately $1.3 billion from $0.9 billion
to $2.2 billion mainly due to an increase in the amount of real estate assets
purchased during 1997 compared to 1996. Net cash provided by financing
activities increased by approximately $0.8 billion from
47
<PAGE> 48
$1.1 billion to $1.9 billion due to net proceeds contributed to the Company from
the sale of the Trust's Common Shares, an increase in proceeds from lines of
credit and unsecured notes, partially offset by a decrease in proceeds from
mortgage notes and an increase in principal payments on mortgage notes and lines
of credit.
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 capital and debt financing required to purchase the property and
fund the improvements. Therefore, capital improvements made during the first
five years after acquisition of these Properties are treated separately from
typical recurring capital expenditures, non-revenue enhancing tenant
improvements and leasing commissions required once these Properties have reached
stabilized occupancy, and deferred maintenance and renovations planned at the
time of acquisition have been completed. Capital improvements (including tenant
improvements and leasing commissions for shell space) for the years ended
December 31, 1998, 1997 and 1996 were approximately $44.1 million, $46.8 million
and $53.0 million, respectively or $0.59, $.72 and $1.85 per square foot,
respectively. These amounts exclude capital and tenant improvements of
approximately $70.0 million, $31.2 million and $47.3 million incurred for the
years ended December 31, 1998, 1997 and 1996, respectively for developments.
The Company considers capital expenditures to be recurring expenditures
relating to the ongoing maintenance of the Office Properties. The table below
summarizes capital expenditures (excluding Properties disposed of) for the years
ended December 31, 1998, 1997 and 1996. The capital expenditures set forth below
are not necessarily indicative of future capital expenditures.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Number of Office Properties................................. 284 258 82
Rentable square feet (in millions).......................... 75.1 65.3 28.7
Annual capital expenditures per square foot................. $0.17 $0.08 $0.16
</TABLE>
48
<PAGE> 49
TENANT IMPROVEMENTS AND LEASING COMMISSION COSTS
The Company distinguishes its tenant improvements and leasing commissions
between those that are revenue enhancing (i.e., required for space which is
vacant at the time of acquisition or that has been vacant for nine months or
more) and non-revenue enhancing (i.e., required to maintain the revenue being
generated from currently leased space). The table below summarizes the revenue
enhancing and non-revenue enhancing tenant improvements and leasing commissions
(excluding Properties disposed of) for the years ended December 31, 1998, 1997
and 1996 excluding amounts attributable to developments in process. The tenant
improvement and leasing commission costs set forth below are presented on an
aggregate basis and do not reflect significant regional variations and, in any
event, are not necessarily indicative of future tenant improvements and leasing
commission costs:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 (1) 1997 (1) 1996 (1)
-------- -------- --------
<S> <C> <C> <C>
Number of Office Properties................................. 284 258 82
Rentable square feet (in millions).......................... 75.1 65.3 28.7
Revenue enhancing tenant improvements and leasing
Commissions:
Amounts (in thousands).................................... $42,817 $18,272 $31,534
Per square foot improved.................................. $ 16.33 $ 19.74 $ 30.26
Per total square foot..................................... $ 0.57 $ 0.27 $ 1.10
Non-revenue enhancing tenant improvements and leasing
commissions:
Renewal space:
Amounts (in thousands).................................... $27,176 $ 8,334 $15,486
Per square foot improved.................................. $ 7.74 $ 5.73 $ 6.79
Per total square foot..................................... $ 0.36 $ 0.12 $ 0.54
Retenanted space:
Amounts (in thousands).................................... $33,324 $14,806 $31,987
Per square foot improved.................................. $ 16.97 $ 15.10 $ 20.64
Per total square foot..................................... $ 0.44 $ 0.22 $ 1.11
------- ------- -------
Total non-revenue enhancing (in thousands).................. $60,500 $23,140 $47,473
Per square foot improved.................................... $ 11.05 $ 9.50 $ 12.39
Per total square foot....................................... $ 0.80 $ 0.35 $ 1.65
</TABLE>
- ---------------
(1) The per square foot calculations as of December 31, 1998, 1997 and 1996 are
calculated taking the total dollars anticipated to be incurred on tenant
improvements for tenants taking occupancy during the year ended December 31,
1998 and 1997, and tenant improvements in process at December 31, 1996,
divided by the total square footage being improved or total building square
footage. The actual amounts incurred as of December 31, 1998, 1997 and 1996
for revenue enhancing, non-revenue enhancing renewal and retenanted space
are summarized below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actual Amounts Expended:
Revenue enhancing....................................... $ 39.0 $ 18.4 $ 30.6
Non-revenue enhancing renewal........................... $ 33.2 $ 12.4 $ 14.0
Non-revenue enhancing retenanted........................ $ 51.9 $ 33.5 $ 20.8
</TABLE>
49
<PAGE> 50
DEVELOPMENT
In connection with the Beacon Merger and other acquisitions, the Company
acquired certain Properties that are currently in various stages of development
or pre-development. The Company funds these developments with proceeds from
working capital and the credit facilities. Specifically identifiable direct and
indirect acquisition, development and construction costs are capitalized
including, where applicable, salaries and related costs, real estate taxes,
interest and certain pre-construction costs essential to the development of a
property. As of December 31, 1998, the Company had incurred approximately $268.4
million of costs in connection with the Properties being developed. The
Properties under development as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
PLACE RENTABLE TOTAL
IN SERVICE PERCENT SQUARE COSTS ESTIMATED
PROPERTY LOCATION DATE(1) LEASED FOOTAGE INCURRED COST(1)
- -------- ----------------- ---------- ------- --------- -------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Developments in Service:
Tower at New England Executive Park Burlington, MA 3/98 22% 194,911 $ 31,102 $ 41,000
Colonnade III Dallas, TX 9/98 70% 377,639 64,044 68,000
Crosby Corporate Center II Bedford, MA 10/98 69% 257,528 34,886 42,000
------- -------- --------
Total 830,078 $130,032 $151,000
======= ======== ========
Developments:
Reston Town Center Garage Reston, VA 4Q/1999 N/A (2) $ 2,937 $ 13,000
150 California San Francisco, CA 1Q/2000 0% 201,554 16,938 66,000
John Marshall III McLean, VA 1Q/2000 100% 180,000 18,081 46,000
Riverside Center Newton, MA 2Q/2000 0% 494,710 33,635 112,000
Other Projects (3) -- -- -- -- 66,127 --
------- -------- --------
Total 876,264 $137,718 $237,000
======= ======== ========
</TABLE>
In addition, the Company has entered into agreements to acquire the
following properties upon completion:
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
PLACE RENTABLE TOTAL
IN SERVICE PERCENT SQUARE COSTS ESTIMATED
PROPERTY LOCATION DATE(1) LEASED FOOTAGE INCURRED COST(1)
- -------- --------------- ---------- ------- --------- -------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Rand Tower Garage Minneapolis, MN 2Q/1999 N/A (4) $ 71 $ 19,000
Prominence (5) Atlanta, GA 3Q/1999 1% 425,706 535 87,000
World Trade Center Seattle, WA 1Q/2000 100% 186,787 17 39,000
------- ---- --------
Total 612,493 $623 $145,000
======= ==== ========
</TABLE>
The above transactions are contingent upon certain terms and conditions as
set forth in their respective purchase agreements. There can be no assurance
that these transactions will be consummated as described above.
In addition, the Company has entered into separate joint ventures to
develop the following properties:
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
PLACE IN RENTABLE TOTAL
SERVICE PERCENT SQUARE COSTS ESTIMATED
PROPERTY LOCATION DATE(1) LEASED FOOTAGE INCURRED COST(1)
- -------- ------------ --------- ------- --------- -------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Metropoint II (6) Denver, CO 1Q/1999 19% 150,181 $ 7,676 $ 17,000
Sunset North Corporate Campus(7) Bellevue, WA 4Q/1999 41% 460,663 27,861 81,000
Three Bellevue Center (8) Bellevue, WA 1Q/2000 0% 471,635 4,501 72,000
--------- ------- --------
Total 1,082,479 $40,038 $170,000
========= ======= ========
</TABLE>
50
<PAGE> 51
- ---------------
(1) The Estimated Place in Service Date represents the date the certificate of
occupancy has been or is anticipated to be obtained. Subsequent to obtaining
the certificate of occupancy, the Property will undergo a lease up period.
The Total Estimated Cost includes amounts attributable to tenanting the
Property.
(2) This property is a parking facility that will consist of approximately 530
parking spaces and 34,700 square feet of retail space.
(3) These projects are in various stages of development or pre-development. The
Company has taken the necessary steps to continue the development process
while it evaluates its alternatives with respect to these projects.
(4) This property is a parking facility that will consist of approximately 589
parking spaces.
(5) The estimated cost of this property excludes a vacant land parcel valued at
approximately $7.0 million, that will be purchased with the building.
(6) The Cost Incurred and Total Estimated Cost reflect the Company's 70%
interest in this project. The total cost of the project including the joint
venture partner's share is approximately $24.0 million.
(7) The Cost Incurred and Total Estimated Cost reflect the Company's 80%
interest in this project including the Company's pro-rata share of the
development loan. The total cost of the project including the joint venture
partner's share is approximately $101.0 million of which up to $68.0 million
will be funded by a development loan. The Company's share of the development
loan outstanding at December 31, 1998 is approximately $3.1 million.
(8) The Cost Incurred and Total Estimated Cost reflect the Company's 80%
interest in this project including the Company's pro-rata share of the
development loan. The total cost of the project including the joint venture
partner's share is approximately $90.0 million of which up to $60.0 million
will be funded by a development loan. The Company's share of the development
loan outstanding at December 31, 1998 is approximately $.3 million.
In addition to the properties described above, the Company owns various
land parcels available for development. However, no significant development
activity is taking place on these sites at this time.
YEAR 2000
OVERVIEW OF Y2K PROBLEM
The Year 2000 or "Y2K" problem refers to the inability of many existing
computer programs to properly recognize a year that begins with "20" instead of
the familiar "19". If left uncorrected, many computer programs having
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The failure to accurately recognize the year 2000 and other
key dates could result in a variety of problems from data miscalculations to the
failure of entire systems. Among the assumptions the Company has made in the
course of this discussion are the following:
- The Company's ability to accurately determine its Y2K readiness on a
cost effective basis.
- The availability of personnel and systems as required to correct any Y2K
problems known to the Company.
- The continued availability of such personnel and systems on a
commercially reasonable basis throughout 1999.
THE YEAR 2000 PROGRAM
In the early months of 1998, the Company formed a Year 2000 committee for
the purpose of creating a program (the "Program") to identify, understand and
address the myriad of issues associated with the Y2K problem. Such committee is
comprised of representatives from senior management and various departments at
the home and regional offices, including the legal, engineering,
telecommunications, information systems
51
<PAGE> 52
and office services departments. Due to the wide ranging implications of the Y2K
problem, management decided to carry out the Program in multiple phases during
1998 and the remainder of 1999. What follows is a description of the activities
that have been or are expected to be conducted in each phase of the Program,
including a summary of the results obtained to date and a time table for
completion. Although many of the phases of the Program are being carried out
simultaneously, the various phases will be discussed separately.
PHASE ONE -- ASSESSING THE COMPANY'S Y2K READINESS
The initial step in assessing the Company's Y2K readiness consists of
conducting a study to identify any systems that are date sensitive and,
accordingly, could have potential Y2K problems. The study includes an
examination of information technology and non-information technology systems at
the Company's home and regional offices and at the Company's Properties. For the
most part, the initial step of identifying potentially problematic systems has
been completed by the Company's information services department and building
engineers through a combination of physical inspections and informational
interviews with Company employees. However, the initial study of the Company's
secondary systems (described below) remains to be completed and is being handled
with the assistance of an outside consultant.
After identifying systems that could have a potential Y2K problem, the
Company is attempting to determine which of the systems actually have a Y2K
problem. Much of the required information is within the exclusive control of the
Company's vendors and manufacturers, who are being contacted through standard
form letters and telephone calls requesting information. In addition to
examining the Company's systems for compliance, the Company continues to assess
the progress of the Building Owners and Managers Association ("BOMA"), the
General Services Administration ("GSA") and other industry leaders that are
monitoring the compliance efforts of the major utility and telecommunications
companies. The following is a summary of the Phase One results obtained to date.
BUILDING MANAGEMENT SYSTEMS
The Company has identified six categories of building management systems in
which it has the most exposure to potential Y2K problems. These categories
include:
- Building automation (e.g. energy management, HVAC)
- Security card access
- Fire and life safety
- Elevator
- Garage revenue control
- Office equipment
In January 1999, the Company completed a preliminary Y2K compliance study
of the building management systems outlined above at each of the Company's
Properties. Based upon this study, the Company will upgrade or replace specific
building management systems that were determined not to be compliant. The
estimated cost of such upgrades and replacements is described in the Phase Two
summary that follows.
INFORMATION SYSTEMS
The Company's information systems falls into four general categories:
accounting and property management, network operating systems, desktop software
and secondary systems.
52
<PAGE> 53
ACCOUNTING AND PROPERTY MANAGEMENT
Management has determined the Company's exposure with respect to the
Company's accounting and property management software. Specifically, although
the general ledger system is compliant, the accounts payable and property
management systems are not. The Company's current expected schedule for
compliance is as follows:
- Test software upgrades -- In Progress
- Begin installation of upgrades -- First Quarter 1999
- Full Y2K compliance -- Second Quarter 1999
NETWORK OPERATING SYSTEMS
Management believes that the network operating servers are currently
approximately 50% compliant. The non-compliant servers require a software patch
that is being acquired from the software manufacturer in order to become
compliant. Upgrades of the Company's network operating systems are expected to
be installed in the first and second quarters of 1999, bringing the network
operating servers into full compliance. Management believes that testing of this
new software will not be necessary, as it has already been proven in the
industry to be Y2K compliant.
DESKTOP SOFTWARE
Management believes that all of the Company's desktop systems and software
applications have been reviewed. Management has identified those that are not in
compliance and compiled a list of necessary upgrades. The efforts to ready the
Company's desktop systems for Y2K are being directed towards a broader Company
initiative referred to as EO 2000. As part of the EO 2000 program, the Company
currently intends to install Windows 98 and Microsoft Office 97 in all field and
home office desktop systems.
The Company's timeframe for EO 2000 is expected to be as follows:
- Systems (hardware and software) testing for Y2K compliance -- Complete
- Install updated software that will also provide Y2K compliance -- In
Progress
- Complete installation/full compliance -- October 1999
SECONDARY INFORMATION SYSTEMS
The Company's "secondary" information systems include, but are not limited
to: payroll, human resources, fixed-asset system, forecasting modeling software,
and all types of internally developed software, such as the Company's budget
program and tenant-services system. As discussed above, the Company has retained
a third party consultant to assist in identifying and assessing the compliance
of the secondary systems. The initial step of identifying any non-compliant
secondary systems should be completed by the end of the first quarter 1999 at a
cost of approximately $300,000. Thereafter, a budget and timetable for the
replacement or upgrade of any non-compliant secondary systems will be developed.
TELECOMMUNICATION SYSTEMS
Management generally believes that the Company's internal telephone systems
are not date sensitive and should not be materially affected by Y2K problems.
Although there could be some convenience issues such as inaccurate voice-mail
message date stamps, such problems are not expected to be material and, in large
part, should be corrected prior to the year 2000.
PHASE TWO -- DETERMINING THE COST OF ACHIEVING Y2K READINESS AND IMPLEMENTING
THE Y2K ACTION PLAN
Except as described above with respect to the secondary systems, the work
to date on Phase One of the Program has been performed by the Company's
employees without additional cost. Based upon the
53
<PAGE> 54
preliminary studies that were completed in January 1999, the Company has
budgeted approximately $7.4 million for the upgrade and replacement of building
management systems having potential Y2K related problems. This amount equates to
an average of approximately $.10 per rentable square foot at each of the
Company's Properties. It is management's belief that a large part of the cost of
bringing the building management systems into compliance will be considered to
be reimbursable to the Company under most tenant leases or is being incurred as
part of a broader initiative to improve building operating systems. The
estimated cost of the EO 2000 initiative is $1.7 million. Most of the work
related to EO 2000 is not Y2K related. The Company is still in the process of
completing Phases One and Two of the Program with respect to Information
Systems. Upon completion, the Company will prepare a budget and action plan for
bringing the Information Systems into compliance.
PHASE THREE -- ASSESSING THE RISKS TO THE COMPANY OF NON-COMPLIANCE
Management does not currently believe that the impact of the Y2K problem
will have a material adverse effect on the Company's financial condition and
results of operations. Such belief is based on management's analysis of the
risks to the Company related to the Company's own potential Y2K problems
discussed above, as well as its assessment of the Y2K problems of the Company's
vendors, suppliers and customers.
FAILURE OF BUILDING MANAGEMENT SYSTEMS
Management believes that the Y2K risks to the Company's financial condition
and operation associated with a failure of building management systems is
immaterial due to the fact that most building management systems can be operated
in a manual or by-pass mode, thereby negating the Y2K problem until it can be
corrected. In addition, each of the Company's Properties has, for the most part,
separate building management systems. Accordingly, a Y2K problem that is
experienced at one Property should have no effect on other Properties. In
addition, based upon the study results received to date, management believes
that the Company will have sufficient time to correct those system problems
within its control before the year 2000. The Company has previously begun
preliminary testing of building systems at several of its buildings sites,
including Westbrook Corporate Center, Two California Plaza and State Street Bank
Building. Testing of essential building management systems will continue
throughout 1999.
In the event the Company does experience a failure of essential building
management systems at one or more of the Company's buildings, whether due to a
failure of one of its systems or an interruption of utilities, management
believes that the individual tenant leases will protect the Company from claims
of constructive eviction or other remedies that could result in a termination of
lease rights. It is also management's belief that most of its leases eliminate,
limit or quantify the rights of a tenant to receive an abatement under such
circumstances. Although there is always a risk of claims being brought on a
non-contractual basis (e.g. in tort), it is the Company's belief that its
efforts to identify and solve Y2K problems will minimize such risk. The Company
has also attempted to allocate the risk of non-compliance to the vendors and
manufacturers of the building management and information systems by establishing
standard riders and addenda to be attached to new contracts for systems using
time sensitive data.
FAILURE OF INFORMATION SYSTEMS
Since the Company's major source of income is rental payments under long
term leases, the failure of key information systems is not expected to have a
material adverse effect on the Company's financial condition and results of
operations. Even if the Company were to experience problems with its information
systems, the payment of rent under the leases would not be excused. In addition,
the Company expects to correct those information system problems within its
control before the year 2000, thereby minimizing or avoiding the increased cost
of correcting problems after the fact.
THE Y2K PROBLEMS OF THE COMPANY'S VENDORS
The success of the Company's business is not closely tied to the operations
of any one manufacturer, vendor or supplier. Accordingly, if any of the
Company's manufacturers, vendors or suppliers ceases to
54
<PAGE> 55
conduct business due to Y2K related problems, the Company expects to be able to
contract with alternate providers without experiencing any material adverse
effect on the Company's financial condition and results of operations.
THE Y2K PROBLEMS OF THE COMPANY'S CUSTOMERS
Due to our broad customer/tenant base, the success of the Company's
business is not closely tied to the success of any particular tenant.
Accordingly, management believes that there should not be a material adverse
effect on the Company's financial condition and results of operations if any one
of its tenants ceased to conduct business (and pay rent) due to Y2K related
problems. This would not necessarily be the case, however, were Y2K problems
sufficiently pervasive as to affect the financial conditions of a material
number of the Company's tenants. As part of its efforts to keep its tenants
advised as to the steps the Company is taking to address potential Y2K problems,
the Company has also requested that its tenants provide it with periodic updates
as to their Y2K readiness.
DOOMSDAY SCENARIO
The Company is aware that it is generally believed that the world's Y2K
problem, if uncorrected, may result in an economic crisis of global proportions.
The Company is unable to determine whether such predictions are true or false.
As mentioned above, the Company expects that the nature of its income (rent from
good credit tenants under long term leases) should serve as a hedge against any
short term disruptions of business. However, if the doomsday scenarios prove
true, all companies (including the Company) will experience the effects.
PHASE FOUR -- DEVELOPING CONTINGENCY PLANS
The Company currently does not have a contingency plan in place. Once the
Company has proceeded further in the completion of the initial phases of the
Program, contingency plans are expected to be developed.
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 escalations (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.
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 generally accepted accounting principles ("GAAP"), and it should not
be considered as an alternative to these indicators in evaluating liquidity or
operating performance of the Company.
55
<PAGE> 56
The following table reflects the calculation of the Company's and Equity
Office Predecessors' combined Funds from Operations for the years ended December
31, 1998, 1997 and 1996 on a historical basis:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997(1) 1996
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, gains on sales of real estate and
extraordinary items:............................. $ 371,175 $ 140,681 $ 68,080
Add back (deduct):
(Income) allocated to minority interests......... (2,114) (1,701) (2,086)
Income from investment in unconsolidated joint
ventures...................................... 11,267 5,155 2,093
Depreciation and amortization (real estate
related)...................................... 313,519 130,465 92,373
Net amortization of net premium on mortgage
debt.......................................... 940 2,324 --
Preferred distributions.......................... (32,202) (649) --
----------- ----------- ----------
Funds from Operations before effect of adjusting
straight-line rental revenue and expense included
in Funds from Operations to a cash basis(2)...... 662,585 276,275 160,460
Deferred rental revenue.......................... (68,107) (27,740) (18,427)
Deferred rental expense.......................... 2,613 2,206 788
----------- ----------- ----------
Funds from Operations excluding straight-line
rental revenue and expense adjustments........... $ 597,091 $ 250,741 $ 142,821
=========== =========== ==========
Cash Flow Provided By (Used For):
Operating Activities............................. $ 759,151 $ 286,714 $ 165,975
Investing Activities............................. $(2,231,712) $(2,163,340) $ (924,227)
Financing Activities(3).......................... $ 1,310,788 $ 1,876,197 $1,057,551
Ratio of earnings to combined fixed charges and
preferred unit distributions.................. 1.8 1.8 1.5
</TABLE>
- ---------------
(1) Represents the combined results of Equity Office Predecessors for the period
from January 1 through July 10, 1997 and the Company from July 11 through
December 31, 1997.
(2) 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, nor does it represent cash available to pay distributions 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.
(3) For the year ended December 31, 1997, cash flow provided by financing
activities includes approximately $181.1 million in cash contributed from
Equity Office Predecessors in connection with the Consolidation.
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<PAGE> 57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's future earnings, cash flows and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market risk is
the risk of loss from adverse changes in market prices and interest rates. The
Company manages its market risk by matching projected cash inflows from
operating activities, financing activities and investing activities with
projected cash outflows to fund debt payments, acquisitions, capital
expenditures, distributions and other cash requirements. The majority of the
Company's outstanding debt (maturing at various times through 2028) has a fixed
interest rate, which minimizes the interest rate risk. The Company also utilizes
certain derivative financial instruments at times to limit market risk. Interest
rate protection agreements are used to convert floating rate debt to a fixed
rate basis or to hedge anticipated financing transactions. Derivatives are used
for hedging purposes rather than speculation. The Company does not enter into
financial instruments for trading purposes.
The Company has total outstanding debt of approximately $6.0 billion at
December 31, 1998, of which approximately $1.3 billion, or 21%, is variable rate
debt. If market rates of interest on the Company's variable rate debt increase
by ten percent (or approximately 64 basis points), the increase in interest
expense on the Company's variable rate debt would decrease future earnings and
cash flows by approximately $8.2 million. If market rates of interest increase
by ten percent, the fair value of the Company's total outstanding debt would
decrease by approximately $141.0 million. If market rates of interest on the
Company's variable rate debt decrease by ten percent (or approximately 64 basis
points), the decrease in interest expense on the Company's variable rate debt
would increase future earnings and cash flows by approximately $8.2 million. If
market rates of interest decrease by ten percent, the fair value of the
Company's total outstanding debt would increase by approximately $146.0 million.
At December 31, 1998, the Trust and the Company have put option agreements
outstanding in connection with the acquisition of the Wright Runstad Properties
and Columbus America Properties, respectively. On August 13, 1999, the holders
of Wright Runstad options (the "WR Holders"), can require the Trust to purchase
all or a portion of the 3,435,668 Common Shares issued at acquisition at a price
equal to $31.50 per Common Share. Prior to August 13, 1999, if the WR Holders
sell all or a portion of their Common Shares to a third party for a price less
than $29.10625, then the Trust is obligated to pay to the WR Holders an amount
equal to the difference between such sale price and $29.10625 multiplied by the
number of Common Shares sold, not to exceed $3.00 per Common Share. Any amounts
paid by the Trust as a result of such sales, calculated as the difference
between the sale price and $29.10625 not exceeding $3.00 per Common Share, shall
be recorded as a reduction of shareholders' equity. For options exercised on
August 13, 1999, any amounts paid up to $29.10625 per Common Share would be
reflected as a reduction of shareholders' equity; the portion of any amounts
paid in excess of $29.10625 per Common Share (not to exceed $2.39375 per Common
Share up to an aggregate of approximately $8.2 million) would be expensed. The
Company will not incur any loss on this transaction if the put option is not
exercised.
The Company's cash flows could decrease by up to $10.3 million if, prior to
August 13, 1999, the WR Holders sell all their Common Shares to third parties.
Cash flows of the Company may decrease by up to approximately $108 million if
the WR Holders exercise their rights under the put option agreement on August
13, 1999. There will be no impact on cash flows from this transaction if the put
option is not exercised.
The Company has a put option agreement outstanding with the seller of the
Columbus America Properties (the "CA Holder") related to 1,692,546 Units issued
at acquisition. The CA Holder has the option at any time after January 1, 1999
until the earlier of September 3, 2000 or the date the CA Holder has converted
all of its Units to Common Shares, to require the Company to purchase the Units
at a price equal to $29.00 per Unit. Under the terms of the agreement, prior to
September 3, 1999, the option shall be limited to an aggregate of 846,273 Units.
In the event of any option exercise the Company will recognize any cash paid as
a reduction of partners' capital. Cash flows of the Company may decrease by up
to approximately $49.1 million if the CA Holders exercise their rights under the
put option agreement. There will be no impact on cash flows from this
transaction if the put option is not exercised.
57
<PAGE> 58
These amounts were determined by considering the impact of hypothetical
interest rates and equity prices on the Company's financial instruments. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, these analyses
assumes no changes in the Company's financial structure.
58
<PAGE> 59
ITEM 8. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT AUDITORS
The Partners of EOP Operating Limited Partnership
We have audited the accompanying consolidated balance sheets of EOP
Operating Limited Partnership (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, partners' capital and
cash flows of the Company for the year ended December 31, 1998 and the period
from July 11, 1997 to December 31, 1997, and the related combined statements of
operations, owners' equity and cash flows of the Equity Office Predecessors, as
defined in Note 1, for the period from January 1, 1997 to July 10, 1997, and for
the year ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. 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 consolidated financial position of EOP Operating
Limited Partnership at December 31, 1998 and 1997, the consolidated results of
EOP Operating Limited Partnership's operations and cash flows for the year ended
December 31, 1998 and the period from July 11, 1997 to December 31, 1997, and
the combined results of the Equity Office Predecessors', as defined in Note 1,
operations and cash flows for the period from January 1, 1997 to July 10, 1997
and for the year 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
February 9, 1999, except for Note 23,
as to which the date is February 16, 1999
59
<PAGE> 60
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C> <C>
ASSETS:
Investment in real estate................................. $13,349,627 $10,746,424
Developments in process................................... 268,373 259,718
Land available for development............................ 65,819 34,872
Accumulated depreciation.................................. (352,259) (64,695)
----------- -----------
13,331,560 10,976,319
Cash and cash equivalents................................. 67,080 228,853
Tenant and other receivables (net of allowance for
doubtful accounts of $1,013 and $675, respectively)..... 36,193 32,531
Deferred rent receivable.................................. 87,115 20,050
Escrow deposits and restricted cash....................... 159,576 25,772
Investment in unconsolidated joint ventures............... 378,534 387,332
Deferred financing costs (net of accumulated amortization
of $6,242 and $1,855,
respectively)............................................. 53,181 5,090
Deferred leasing costs (net of accumulated amortization of
$9,714 and $1,473,
respectively)............................................. 65,090 26,994
Prepaid expenses and other assets......................... 82,962 48,731
----------- -----------
Total Assets............................................ $14,261,291 $11,751,672
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Mortgage debt (including a net premium of $13,517 and
$1,157, respectively)................................... $ 2,350,088 $ 2,063,017
Unsecured notes (including a net premium of $4,317 and $0,
respectively)........................................... 2,459,317 180,000
Lines of credit........................................... 1,216,000 2,041,300
Accounts payable and accrued expenses..................... 347,970 260,401
Due to affiliates......................................... 1,136 733
Distribution payable...................................... 5,080 1,191
Other liabilities......................................... 93,022 45,055
----------- -----------
Total Liabilities....................................... 6,472,613 4,591,697
----------- -----------
Commitments and contingencies (Note 22)...................
Minority Interests -- partially owned properties.......... 28,360 29,612
----------- -----------
Preferred Units, 100,000,000 authorized:
8.98% Series A Cumulative Redeemable Preferred Units,
liquidation preference $25.00 per unit, 8,000,000
issued and outstanding................................. 200,000 200,000
5.25% Series B Convertible, Cumulative Redeemable
Preferred Units, liquidation preference $50.00 per
unit, 6,000,000 issued and outstanding................. 300,000 --
8.625% Series C Cumulative Redeemable Preferred Units,
liquidation preference $25.00 per unit, 4,600,000
issued and outstanding................................. 115,000 --
General Partners Capital.................................. 118,309 115,230
Limited Partners Capital.................................. 7,027,009 6,815,133
----------- -----------
Total Partners' Capital................................. 7,760,318 7,130,363
----------- -----------
Total Liabilities and Partners' Capital................. $14,261,291 $11,751,672
=========== ===========
</TABLE>
See accompanying notes.
60
<PAGE> 61
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EOP OPERATING LIMITED PARTNERSHIP EQUITY OFFICE PREDECESSORS
------------------------------------------ ------------------------------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM
FOR THE YEAR ENDED JULY 11, 1997 THROUGH JANUARY 1, 1997 FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 THROUGH JULY 10, 1997 DECEMBER 31, 1996
------------------ --------------------- --------------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenues:
Rental................................ $ 1,299,044 $ 314,233 $256,146 $386,481
Tenant reimbursements................. 239,390 63,196 43,241 62,036
Parking............................... 94,241 25,960 21,091 27,253
Other................................. 25,745 3,324 6,539 17,626
Fees from noncombined affiliates...... 9,571 2,440 2,510 5,120
Interest / dividends.................. 11,708 3,815 9,577 9,608
------------ ------------ -------- --------
Total revenues...................... 1,679,699 412,968 339,104 508,124
------------ ------------ -------- --------
Expenses:
Interest:
Expense incurred.................... 338,611 76,675 80,481 119,595
Amortization of deferred financing
costs............................. 6,404 4,178 2,771 4,275
Depreciation.......................... 291,213 64,695 57,379 82,905
Amortization.......................... 8,365 1,473 5,884 9,057
Real estate taxes..................... 203,805 47,579 34,000 52,182
Insurance............................. 7,736 3,196 3,060 4,863
Repairs and maintenance............... 191,588 50,285 45,540 71,156
Property operating.................... 189,577 52,235 42,309 70,639
Ground rent........................... 7,661 2,384 2,376 2,227
General and administrative............ 63,564 17,690 17,201 23,145
------------ ------------ -------- --------
Total expenses...................... 1,308,524 320,390 291,001 440,044
------------ ------------ -------- --------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on
sales of real estate and extraordinary
items................................. 371,175 92,578 48,103 68,080
Minority Interests -- partially owned
properties............................ (2,114) (789) (912) (2,086)
Income from investment in unconsolidated
joint ventures........................ 11,267 3,173 1,982 2,093
Gain on sales of real estate............ 12,433 126 12,510 5,338
------------ ------------ -------- --------
Income before extraordinary items....... 392,761 95,088 61,683 73,425
Extraordinary items..................... (7,506) (16,366) (274) --
------------ ------------ -------- --------
Net income.............................. 385,255 78,722 61,409 73,425
Preferred distributions................. (32,202) (649) -- --
------------ ------------ -------- --------
Net income available for Units.......... $ 353,053 $ 78,073 $ 61,409 $ 73,425
============ ============ ======== ========
Net income available per weighted
average Unit outstanding -- Basic..... $ 1.25 $ 0.44
============ ============
Weighted average Units outstanding --
Basic................................. 282,114,343 178,647,562
============ ============
Net income available per weighted
average Unit outstanding -- Diluted... $ 1.24 $ 0.43
============ ============
Weighted average Units outstanding --
Diluted............................... 283,974,532 180,014,027
============ ============
</TABLE>
See accompanying notes.
61
<PAGE> 62
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
AND EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
<TABLE>
<CAPTION>
EOP OPERATING LIMITED PARTNERSHIP EQUITY OFFICE PREDECESSORS
------------------------------------------ ---------------------------------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM FOR THE YEAR ENDED
FOR THE YEAR ENDED JULY 11, 1997 THROUGH JANUARY 1, 1997 THROUGH DECEMBER 31,
DECEMBER 31, 1998 DECEMBER 31, 1997 JULY 10, 1997 1996
------------------ --------------------- ------------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL:
Balance, beginning of period.......... $7,130,363 $ -- $ -- $ --
Net proceeds from IPO............... -- 564,506 -- --
Contribution of net assets from
Consolidation at fair value in
exchange for Units................ -- 2,830,919 -- --
Issuance of Units, put options and
warrants for acquisitions......... 204,008 357,672 -- --
Amortization of restricted share
awards............................ 3,129 -- -- --
Issuance of Units through exercise
of share options.................. 15,435 -- -- --
Issuance of preferred units......... 415,000 200,000
Preferred units and other offering
costs............................. (14,630) -- -- --
Sale of Units, net.................. 43,983 273,950 -- --
Issuance of Units for Beacon
Merger............................ -- 2,921,838 -- --
Units issued for restricted units
and trustee fees.................. -- 165 -- --
Net income.......................... 385,255 78,722 -- --
Preferred distributions............. (32,202) (649) -- --
Distribution declared to partners... (390,023) (96,760) -- --
---------- ---------- ----------- ----------
Balance, end of period................ $7,760,318 $7,130,363 $ -- $ --
========== ========== =========== ==========
OWNERS' EQUITY:
Balance, beginning of period/year..... $ -- $ -- $ 1,727,002 $1,089,969
Contributions....................... -- -- 285,542 661,265
Offering expenses................... -- -- -- (1,157)
Distributions....................... -- -- (189,752) (96,500)
Net income.......................... -- -- 61,409 73,425
Contribution of Owners' Equity to
the Company in connection with the
Consolidation..................... -- -- (1,884,201) --
---------- ---------- ----------- ----------
Balance, end of period/year........... $ -- $ -- $ -- $1,727,002
========== ========== =========== ==========
ALLOCATION OF PARTNERS' CAPITAL:
General Partners Capital............ $ 118,309 $ 115,230 $ -- $ --
========== ========== =========== ==========
Limited Partners Capital............ $7,027,009 $6,815,133 $ -- $ --
========== ========== =========== ==========
8.98% Series A Cumulative Redeemable
Preferred Units................... $ 200,000 $ 200,000 $ -- $ --
========== ========== =========== ==========
5.25% Series B Convertible,
Cumulative Redeemable Preferred
Units............................. $ 300,000 $ -- $ -- $ --
========== ========== =========== ==========
8.625% Series C Cumulative
Redeemable Preferred Units........ $ 115,000 $ -- $ -- $ --
========== ========== =========== ==========
</TABLE>
See accompanying notes.
62
<PAGE> 63
EOP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS
OF CASH FLOWS AND EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EOP OPERATING LIMITED PARTNERSHIP EQUITY OFFICE PREDECESSORS
------------------------------------------ ------------------------------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM
FOR THE YEAR ENDED JULY 11, 1997 THROUGH JANUARY 1, 1997 FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 THROUGH JULY 10, 1997 DECEMBER 31, 1996
------------------ --------------------- --------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income before preferred
distributions....................... $ 385,255 $ 78,722 $ 61,409 $ 73,425
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 305,982 70,202 66,034 96,237
Amortization of premiums/discounts
on unsecured notes and terminated
interest rate protection
agreements........................ 2,898 144 -- --
Compensation related to restricted
shares issued to employees by the
Trust............................. 2,829 -- -- --
(Income) from unconsolidated joint
ventures............................ (11,267) (3,173) (1,982) (2,093)
(Gain) on sales of real estate........ (12,433) (126) (12,510) (5,338)
Extraordinary items................... 7,506 16,366 274 --
Provision for doubtful accounts....... 890 1,686 1,175 2,284
Allocation to minority interests...... 2,114 789 912 2,086
Changes in assets and liabilities:
(Increase) decrease in rents
receivable........................ (4,552) 2,064 2,664 (1,550)
(Increase) in deferred rent
receivables....................... (67,065) (21,421) (8,061) (20,421)
Decrease (increase) in prepaid
expenses and other assets......... 10,756 (29,551) (8,839) (9,747)
Increase in accounts payable and
accrued expenses.................. 87,569 54,076 2,916 19,241
Increase (decrease) in due to
affiliates........................ 403 (898) (722) 1,235
Increase (decrease) in other
liabilities....................... 48,266 21,874 (7,310) 10,616
----------- ----------- --------- ---------
Net cash provided by operating
activities..................... 759,151 190,754 95,960 165,975
----------- ----------- --------- ---------
INVESTING ACTIVITIES:
Property acquisitions................. (1,930,172) (1,508,928) (531,968) (768,906)
Proceeds from sales of real estate.... 130,123 -- 72,078 14,502
Payments for capital and tenant
improvements........................ (207,093) (99,586) (59,511) (129,485)
Cash received from Beacon Merger...... -- 79,786 -- --
Payment of Beacon Merger costs........ -- (62,069) -- --
Distributions from unconsolidated
joint ventures...................... 46,122 4,571 -- 1,688
Investments in unconsolidated joint
ventures............................ (42,019) -- (44,260) --
Payments of lease acquisition costs... (46,337) (15,043) (9,260) (29,793)
Investment in preferred securities.... (48,532) -- -- --
(Increase) decrease in escrow deposits
and restricted cash................. (133,804) 8,997 1,853 (12,233)
----------- ----------- --------- ---------
Net cash (used for) investing
activities..................... (2,231,712) (1,592,272) (571,068) (924,227)
----------- ----------- --------- ---------
</TABLE>
See accompanying notes.
63
<PAGE> 64
EOP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS
OF CASH FLOWS AND EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
EOP OPERATING LIMITED PARTNERSHIP EQUITY OFFICE PREDECESSORS
------------------------------------------ ------------------------------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM
FOR THE YEAR ENDED JULY 11, 1997 THROUGH JANUARY 1, 1997 FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 THROUGH JULY 10, 1997 DECEMBER 31, 1996
------------------ --------------------- --------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from Units, net of offering
costs............................... 43,983 838,456 -- --
Proceeds from exercise of share
options............................. 15,435 68,191 -- --
Distributions to unitholders.......... (388,954) (95,569) -- --
Capital contributions................. -- -- 287,949 661,265
Capital distributions................. -- -- (288,652) (12,508)
Payments for offering expenses........ (117) -- -- (1,157)
Payment of preferred distributions.... (29,581) -- -- --
Proceeds from sale of preferred units,
net of offering costs............... 400,487 -- -- --
(Distributions to) minority interest
in partially owned properties....... (3,366) (371) (3,401) (22,593)
Cash contributed from net assets at
the IPO............................. -- 181,138 -- --
Proceeds from mortgage debt........... 10,865 84,466 154,090 640,953
Proceeds from unsecured notes......... 2,279,572 180,000 -- --
Proceeds from lines of credit......... 4,922,500 2,530,425 218,000 216,943
Principal payments on mortgage debt... (38,370) (838,354) (47,472) (254,104)
Principal payments on lines of
credit.............................. (5,841,197) (1,294,750) (72,500) (165,818)
Payments of loan costs................ (22,192) (7,039) (1,889) (5,430)
Termination of interest rate
protection agreements............... (38,277) -- -- --
Prepayment penalties on early
extinguishments of debt............. -- (16,247) (274) --
----------- ----------- --------- ---------
Net cash provided by financing
activities..................... 1,310,788 1,630,346 245,851 1,057,551
----------- ----------- --------- ---------
Net (decrease) increase in cash and
cash equivalents.................... (161,773) 228,828 (229,257) 299,299
Cash and cash equivalents at the
beginning of the period............. 228,853 25 410,420 111,121
----------- ----------- --------- ---------
Cash and cash equivalents at the end
of the period....................... $ 67,080 $ 228,853 $ 181,163 $ 410,420
=========== =========== ========= =========
SUPPLEMENTAL INFORMATION:
Interest paid during the period,
including capitalized interest of
$15,077, $1,890, $3,669 and $4,640,
respectively........................ $ 302,415 $ 70,658 $ 82,969 $ 121,813
=========== =========== ========= =========
</TABLE>
See accompanying notes.
64
<PAGE> 65
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND FORMATION OF THE COMPANY
As used herein, "Company" means EOP Operating Limited Partnership, a
Delaware limited partnership, and the predecessors thereof ("Equity Office
Predecessors"). The Company is a subsidiary of Equity Office Properties Trust
(the "Trust") which 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, and to complete the consolidation of the Equity
Office Predecessors (the "Consolidation") and the Trust's initial public
offering (the "IPO") on July 11, 1997. The Company is a fully integrated,
self-administered and self-managed real estate company engaged in acquiring,
owning, managing, leasing and renovating office properties and parking
facilities. The 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
elected to be taxed as a real estate investment trust ("REIT") for federal
income tax purposes and generally will not be subject to federal income tax if
it distributes 100% of its taxable income and complies with a number of
organizational and operational requirements. As of December 31, 1998, the
Company owned or had an interest in 284 office properties (the "Office
Properties") containing approximately 75.1 million rentable square feet of
office space and owned 19 stand-alone parking facilities (the "Parking
Facilities" and, together with the Office Properties, the "Properties")
containing approximately 18,059 parking spaces. The weighted average occupancy
for the Office Properties at December 31, 1998 was approximately 95.0%. The
Office Properties are located in 80 submarkets in 36 markets in 24 states and
the District of Columbia. The Office Properties, by rentable square feet, are
located approximately 53% in central business districts ("CBDs") and 47% in
suburban markets.
On July 11, 1997, the Company completed the Consolidation in connection
with the IPO of the Trust, in which the Trust sold 28,750,000 of its common
shares of beneficial interest, $0.01 par value per share ("Common Shares") at
$21.00 per Common Share generating gross proceeds of approximately $603.8
million. The Trust contributed the net proceeds from the IPO of approximately
$564.5 million 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
and available cash reserves to repay debt of approximately $678.4 million, of
which $598.4 million was mortgage debt and $80 million 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 Partnership IV (collectively the "ZML Opportunity
Partnerships"), the predecessor owner of the Properties, contributed
their interest 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 "ZML REITs") merged into the
Trust, with the Trust succeeding to their interest in, and becoming the
managing general partner 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.
65
<PAGE> 66
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BUSINESS AND FORMATION OF THE COMPANY -- (CONTINUED)
- 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 then 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 95% of the economic value in the
EOP Management Company and EOH contributed $150,000 to the EOP
Management Company in exchange for 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 its
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 of the Trust in exchange for 26,458
Common Shares.
- The ZML Opportunity Partnerships transferred their 95% interest in
certain corporations which owned a 1% general partner interest in
certain of the property title holding entities to a subsidiary of the
Trust in exchange for 502,740 Common Shares which in turn were
contributed to the Company. Such Common Shares have been treated as
treasury stock in the accompanying financial statements as of December
31, 1997 and were retired in 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidation and the Beacon Merger (as described in Note 4) were
accounted for as purchases in accordance with Accounting Principles Board
Opinion No. 16. Accordingly, the fair value of the consideration given by the
Company was used as the valuation basis for these transactions. The assets
acquired and liabilities assumed by the Company were recorded at their fair
values as of the closing dates of the Consolidation and the Beacon Merger 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 and the IPO 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 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. All intercompany transactions and balances have been eliminated in
combination.
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.
66
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Investment in Real Estate
Rental property and improvements, including interest and other costs
capitalized during construction, 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>
Deferred Leasing and Financing Costs
Deferred leasing and financing costs are recorded at cost. The deferred
leasing costs are amortized over the terms of the respective leases and the
deferred financing costs are amortized over the terms of the respective
financings on a straight-line basis, which approximates the effective yield
method.
Rental Income
Certain leases provide for tenant occupancy during periods for which no
rent is due or where minimum rent payments increase during the term of the
lease. The Company records rental income for the full term of each lease on a
straight-line basis. Accordingly, the Company records a receivable from tenants
that the Company expects to collect over the remaining lease term rather than
currently ("Deferred Rent Receivable"). When the Company acquires a property the
term of existing leases is considered to commence as of the acquisition date for
purposes of this calculation. The amounts included in rental income for the year
ended December 31, 1998, the period from July 11, 1997 through December 31,
1997, the period from January 1, 1997 through July 10, 1997 and the year ended
December 31, 1996, which were not currently collectible as of such dates, were
approximately $68.1 million, $20.0 million, $7.7 million and $18.4 million,
respectively. Deferred Rent Receivable is not recognized for income tax
purposes.
Cash Equivalents
The Company considers cash equivalents to be all highly liquid investments
purchased with a maturity of three months or less at the date of purchase.
Escrow Deposits and Restricted Cash
Escrow deposits primarily consist of amounts held by lenders to provide for
future real estate tax expenditures and tenant improvements, earnest money
deposits on acquisitions and net proceeds from dispositions (see Note 5).
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 the Company's long-term debt
consisting of secured and unsecured borrowings and an interest rate protection
agreement approximate their respective fair market values as of December 31,
1998 and 1997, respectively. The current value of debt was computed by
67
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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, tenant
and other rents receivable, accounts payable and accrued expenses are reasonable
estimates of their fair value.
Interest Rate Protection Agreements
The Company 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 future 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 as an adjustment to interest expense over
the term of the related financing transaction on the straight-line method, which
approximates the effective yield amount.
Derivatives and Hedging Activities
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The statement requires recording all
derivative instruments as assets or liabilities, measured at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. This standard is effective for fiscal years
beginning after June 15, 1999. The Company is planning to adopt the standard
effective January 1, 2000 and does not anticipate that the adoption will have a
material impact on the Company's financial condition and results of operations.
Income Taxes
The Company is not liable for federal taxes as the partners recognize their
proportionate share of the Company's income or loss in their tax returns. The
Office Properties and Parking Facilities are primarily owned by limited
partnerships or limited liability companies, which are substantially
pass-through entities. Some of the pass-through entities have corporate general
partners or members, which are subject to federal and state income and franchise
taxes. In addition, the Management Business is owned by a corporation and is
subject to federal and state income taxes. The Company incurred federal and
state income and franchise taxes of approximately $1.7 million, $0.2 million,
$0.9 million and $1.4 million for the year ended December 31, 1998, the period
from July 11, 1997 through December 31, 1997, the period from January 1, 1997
through July 10, 1997 and the year ended December 31, 1996, respectively, which
are included in general and administrative expenses.
The Trust elected to be taxed as a REIT, under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Trust
generally will not be subject to federal income tax if it distributes 100% of
its taxable income for each tax year to its shareholders. REITs are subject to a
number of organization and operational requirements. If the Trust fails to
qualify as a REIT in any taxable year, the Trust will be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate tax rates. Even if the Trust qualifies for taxation
as a REIT, the Trust may be subject to state and local income taxes and to
federal income tax and excise tax on its undistributed income. The aggregate
cost of land and depreciable property for federal income tax purposes as of
December 31, 1998 and 1997 was approximately $9.7 billion and $7.5 billion,
respectively.
68
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Minority Interests -- partially owned properties
The Company reflects minority interests in partially owned properties on
the balance sheet for the portion of properties consolidated by the Company that
are not wholly owned by the Company. The earnings or losses from these
properties attributable to the minority interests are reflected as minority
interests in partially owned properties in the statements of operations.
Use of Estimates
The preparation of the consolidated financial statements of the Company and
the combined financial statements of Equity Office Predecessors 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.
Reclassifications
Certain reclassifications have been made to the previously reported 1997
and 1996 statements in order to provide comparability with the 1998 statements
reported herein. These reclassifications have not changed the 1997 or 1996
results, partners' capital or owners' equity.
NOTE 3 -- INVESTMENT IN REAL ESTATE
Investment in real estate, including Office Properties, Parking Facilities,
properties under development and vacant land was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,343,308 $ 1,026,801
Land available for development.............................. 65,819 34,872
Building.................................................... 11,729,616 9,621,345
Building improvements....................................... 76,631 19,956
Tenant improvements......................................... 191,936 74,408
Furniture and fixtures...................................... 8,136 3,914
Developments in process..................................... 268,373 259,718
----------- -----------
Gross investment in real estate........................... 13,683,819 11,041,014
Accumulated depreciation.................................... (352,259) (64,695)
----------- -----------
Net investment in real estate............................. $13,331,560 $10,976,319
=========== ===========
</TABLE>
69
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVESTMENT IN REAL ESTATE -- (CONTINUED)
During the year ended December 31, 1998, the Company acquired the
Properties listed below. Each Property was purchased from an unaffiliated party
and was funded from credit facilities, working capital, assumption of mortgage
debt and the issuance of promissory notes, Units and Common Shares by the Trust.
In addition, during 1997 the Company acquired 176 Office Properties and seven
Parking Facilities, including those acquired in connection with the Beacon
Merger (see Note 4), for a total cost of approximately $6.6 billion.
<TABLE>
<CAPTION>
DATE RENTABLE TOTAL
ACQUIRED PROPERTY LOCATION SQUARE FEET ACQUISITION COST(1)
- -------- ----------------------------------- ----------------- ----------- ----------------------
(DOLLARS IN THOUSANDS)
<C> <S> <C> <C> <C>
1/29/98 BP Tower Garage Cleveland, OH -- $ 10,227
3/18/98 100 Summer Street Boston, MA 1,037,801 222,710
3/31/98 The Tower at New England Executive Burlington, MA 194,911 27,929
Park (2)
4/2/98 Westbrook Corporate Center Vacant Westchester, IL -- 3,973
Land
4/21/98 Denver Post Tower Denver, CO 579,999 52,937
4/29/98 301 Howard Street and 215 Fremont San Francisco, CA 572,396 90,015
Street(3)
4/30/98 410 17th Street Denver, CO 388,953 44,737
4/30/98 Tabor Center (4) Denver, CO 674,278 144,485
4/30/98 Trinity Place Denver, CO 189,163 19,034
5/14/98 Dominion Plaza Denver, CO 571,468 59,901
5/19/98 Millennium Plaza Englewood, CO 330,033 46,071
5/22/98 Polk and Taylor Buildings (5) Arlington, VA 902,371 153,463
6/1/98 Walker Building Washington, D.C. 75,456 8,624
6/26/98 Columbia Seafirst Center Seattle, WA 1,537,932 401,750
7/2/98 Northland Plaza Bloomington, MN 296,965 47,051
7/15/98 4949 S. Syracuse Denver, CO 62,633 8,223
7/15/98 Metropoint I and Metropoint III Denver, CO 263,719 45,749
vacant land
7/15/98 One Park Square Albuquerque, NM 262,020 36,343
7/15/98 Park Avenue Tower (6) New York, NY 550,894 244,880
7/15/98 Terrace Building Englewood, CO 115,408 15,464
7/15/98 The Solarium Englewood, CO 162,817 19,511
7/29/98 Second and Spring Seattle, WA 134,871 19,684
9/30/98 Colonnade I, II and III (7) Dallas, TX 984,254 151,958
10/1/98 Worldwide Plaza (8) New York, NY 1,704,624 624,595
11/3/98 Central Park vacant land Atlanta, GA -- 3,975
12/17/98 Forbes Garage and Allies Garages Pittsburgh, PA -- 31,251
(9)
---------- ----------
Total 11,592,966 $2,534,540
========== ==========
</TABLE>
- ---------------
(1) Total acquisition cost includes the purchase price specified in the purchase
contract, closing costs, acquisition costs and accounting adjustments
recorded in accordance with GAAP.
(2) The Tower at New England Executive Park is currently undergoing a
significant renovation in an effort to re-tenant the Property.
(3) 215 Fremont Street is currently vacant.
70
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVESTMENT IN REAL ESTATE -- (CONTINUED)
(4) The total acquisition cost of Tabor Center includes a $15.0 million vacant
land parcel and a 1,694 space parking facility.
(5) The total acquisition cost of the Polk and Taylor Buildings represents the
cost to acquire the remaining 90% limited partnership interest in the
Properties.
(6) The Company acquired a $295.0 million first mortgage note secured by Park
Avenue Tower for approximately $244.9 million. In accordance with certain
agreements concerning the first mortgage note, the Company controls the
financial and operational decisions for the Property and is entitled to
substantially all cash flow and residual profit. Accordingly, the Company
consolidated the financial position and results of operations of the
Property.
(7) Colonnade III was acquired from an unaffiliated party upon substantial
completion and is approximately 70.0% leased as of December 31, 1998. The
seller may be entitled to receive an earnout payment for leases executed in
accordance with terms outlined in the purchase agreement. The maximum
earnout payment is approximately $2.5 million.
(8) The $578.0 million purchase price specified in the purchase contract was
adjusted to $624.6 million for the following: (1) the assumption of a $268.6
million first mortgage with an estimated mark to market adjustment of $11.2
million; (2) the assumption of a deferred real estate tax liability (a
portion of which is expected to be recovered from tenants) with a present
value of $31.2 million; (3) the issuance of 6,861,166 Units with an
estimated fair value of $171.9 million based on a fair value of $25.05 per
Unit; (4) a cash payment of approximately $110.1 million; (5) closing and
transaction costs of approximately $4.2 million; and (6) the issuance of a
transferable put option on Units exercisable only on the third anniversary
of closing with an estimated fair value of approximately $27.4 million. This
option entitles its holder to additional Common Shares, the number of which
shall be determined using a formula based on the extent, if any, that the
Common Shares are then trading at less than $29.05 per share. The office
building consists of approximately 1,575,445 square feet of office space and
approximately 20,788 square feet of retail space. The acquisition also
includes a controlling financial interest in an amenities component that
consists of approximately 108,391 square feet of retail space, a health club
and movie theaters, and a 473-space parking garage. The complex also
includes a residential condominium tower that was not acquired by the
Company.
(9) The Company acquired a leasehold interest in Forbes Garage and Allies Garage
for approximately $31.3 million. The lease is for a term of 50 years with
four five-year options to renew. Pursuant to the lease, the Company is
required to make annual rent payments of $172,500, and is required to make
certain capital improvements to the garages of approximately $10.0 million
during the first ten years of the lease. The Company has accounted for this
transaction as a capital lease.
NOTE 4 -- BEACON MERGER
On December 19, 1997, the Trust, the Company, Beacon Properties
Corporation, a Maryland corporation ("Beacon") and Beacon Partnership L.P.
("Beacon Partnership") consummated the merger of Beacon with and into the Trust
and Beacon Partnership with and into the Company (the "Beacon Merger") at a cost
of approximately $4.3 billion. 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 exchanged its 8,000,000 Series A Preferred Shares 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 in exchange for the outstanding common units of
Beacon Partnership held by Beacon when it merged into the Trust and 8,000,000
Series A preferred units in exchange for the corresponding preferred units of
Beacon Partnership held by Beacon when it merged into the Trust. In addition,
the Trust assumed the obligation to issue 4,732,822 Common Shares, of which
71
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- BEACON MERGER -- (CONTINUED)
773,599 and 3,829,739 had been issued during 1998 and 1997, respectively, upon
the exercise of certain outstanding Beacon employee stock options, which
resulted in the Company issuing a corresponding number of Units to the Trust.
The $4.3 billion purchase price is comprised of the following: (1) based on a
Unit price of $31.30, the Units, including Units issued for stock options, were
valued at approximately $2.853 billion (which is net of a reduction for cash
received or to be received upon exercise of the stock options of $86 million);
(2) the issuance of 8,000,000 Series A Cumulative Redeemable Preferred Units
valued at their liquidation value of $200 million; (3) the assumption of
approximately $627 million of secured debt and $533 million of unsecured debt;
(4) merger costs of approximately $85 million; and (5) net of the receipt of
approximately $8 million of net assets.
As a result of the Beacon Merger, the Company acquired an interest in 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.
NOTE 5 - DISPOSITIONS
During 1998, the Company disposed of four office properties located in
Florida and one office property located in Washington, D.C. The combined square
footage of these office properties was approximately 986,391 square feet. These
office properties were sold for approximately $132.6 million generating a gain
on sale of approximately $12.4 million. The net proceeds of approximately $119.9
million from the sale of the office properties located in Florida were held in
an escrow account at December 31, 1998. The Company used the entire net proceeds
plus accrued interest income in the escrow account to partially fund the
acquisition of three Office Properties in January 1999 (see Note 23).
During 1997, the Company disposed of one office property located in
California and one office property located in Texas. These office properties
were sold for approximately $72.5 million generating a gain on sale of
approximately $12.6 million. The combined square footage of these office
properties was approximately 535,992 square feet.
During 1996, the Company disposed of a mixed-use property that included a
210-room hotel and an 18-story office complex located in Louisiana. This
property was sold for approximately $14.8 million generating a gain on sale of
approximately $5.3 million.
72
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The following is a summary of the Company's ownership in the unconsolidated
joint ventures:
<TABLE>
<CAPTION>
COMPANY'S OWNERSHIP
ENTITY PROPERTY AS OF DECEMBER 31, 1998
- ------ ----------------------------- -----------------------
<S> <C> <C>
EOP -- Orange, L.L.C and EOP -- Ramlessview
Investors, L.L.C.(1)..................... 500 Orange Tower 100%
Civic Parking, L.L.C(2).................... St. Louis Parking Garages 50%
Wright Runstad Associates Limited
Partnership(3)........................... N/A 28.5%
One Post Office Square Associates(4)....... One Post Office Square 50%
BeaMetFed, Inc.(5)......................... 75-101 Federal Street 52%
Rowes Wharf Associates(6).................. Rowes Wharf 50%
Lehndorff Four Oaks Place Associates(7).... Four Oaks Place 2.55%
Metropoint II Associates(8)................ Metropoint II 70%
WRC Sunset North, L.L.C.(9)................ Sunset North Corporate Campus 80%
Three Bellevue, L.L.C(10).................. Three Bellevue Center 80%
</TABLE>
- ---------------
(1) The Company owns a mortgage note receivable secured by the property and land
underlying and adjacent to the property.
(2) The Company owns a 50% membership interest.
(3) The Company owns a 28.5% non-controlling interest in this property
management and development company, Wright Runstad Associates Limited
Partnership ("WRALP"), (see Note 22).
(4) The Company is a 50% general partner in this joint venture.
(5) The Company and the Trust are shareholders in the corporation (a private
REIT) which owns the property.
(6) The Company owns a 50% equity interest in the property and, subject to a
subparticipation which the Company expects to redeem for approximately
$500,000, 50% of a first mortgage note.
(7) The Company owns a 3% general partner interest in this general partnership
which owns an 85% general partnership interest in the property.
(8) In July 1998, the Company entered into a joint venture agreement with an
unaffiliated party to develop Metropoint II, a 150,181 square foot office
building, which is under construction in Denver, CO. The total cost of the
project, including the joint venture partner's share, is approximately $24.0
million. The completion of this project is scheduled for the first quarter
1999. The Company acquired a 70% interest in this joint venture, while the
unaffiliated party retained a 30% interest and will continue as the
developer of the project. The Company has invested approximately $7.7
million in this project as of December 31, 1998. A buy/sell option may be
exercised to acquire the other venturer's interest by either the Company or
its joint venture partner if certain conditions are met as defined in the
joint venture agreement.
(9) In July 1998, the Company entered into a joint venture agreement with WRALP,
an affiliated party, to develop Sunset North Corporate Campus, a three
building, 460,663 square-foot office complex in Bellevue, WA. The total cost
to develop the campus is estimated to be approximately $101.0 million, of
which up to $68.0 million is anticipated to be funded by a development loan.
The completion of this project is scheduled for the fourth quarter 1999. The
Company will own 80% of the project during its development and will have the
option to acquire the remaining 20% interest once stabilized occupancy has
been achieved. The Company has incurred costs of approximately $27.9
million, which includes the Company's share of the development loan, in this
project as of December 31, 1998. A buy/sell option may be exercised to
acquire the other venturer's interest by either the Company or its joint
venture partner if certain conditions are met as defined in the joint
venture agreement.
73
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES -- (CONTINUED)
(10) In December 1998, the Company entered into a joint venture agreement with
WRALP to develop Three Bellevue Center, a 471,635 square foot office
building in Bellevue, WA. Completion of the 22-story office building is
scheduled for the first quarter 2000. The total cost to develop the project
is estimated to be approximately $90.0 million, of which up to $60.0
million is anticipated to be funded by a development loan. The Company has
an 80% interest in this joint venture and will have an option to acquire
the remaining 20% interest at a later date from WRALP. The Company has
incurred costs of approximately $4.5 million, which includes the Company's
share of the development loan, in this project as of December 31, 1998.
These investments are accounted for utilizing the equity method of
accounting except for the Company's investment in Lehndorff Four Oaks Place
Associates, which is accounted for utilizing the cost method of accounting.
Under the equity method of accounting, the net equity investment of the Company
is reflected on the consolidated balance sheets, and the consolidated and
combined statements of operations include the Company's share of net income or
loss from the unconsolidated joint ventures. Any difference between the carrying
amount of these investments on the balance sheet of the Company and the
underlying equity in net assets is amortized as an adjustment to income from
unconsolidated joint ventures over 40 years.
Combined summarized financial information of the unconsolidated joint
ventures is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance Sheets:
Real estate, net....................................... $488,997 $523,670
Other assets........................................... 78,623 73,450
-------- --------
Total Assets........................................ $567,620 $597,120
======== ========
Mortgage debt.......................................... $243,096 $344,427
Other liabilities...................................... 16,059 15,271
Partners' and shareholders' equity..................... 308,465 237,422
-------- --------
Total Liabilities and Partners' and Shareholders'
Equity............................................ $567,620 $597,120
======== ========
Company's share of equity.............................. $159,092 $155,522
Excess of cost of investments over the net book value
of underlying net assets, net of accumulated
depreciation of $5,854 and $99, respectively........ 219,442 231,810
-------- --------
Carrying value of investments in unconsolidated joint
ventures............................................ $378,534 $387,332
======== ========
Company's share of unconsolidated mortgage debt........ $124,282 $ 92,400
======== ========
</TABLE>
74
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statement of Operations:
Revenues.................................................. $107,617 $16,687 $4,775
-------- ------- ------
Expenses:
Operating expenses..................................... 37,489 4,638 1,852
Interest expense....................................... 17,004 793 --
Depreciation and amortization.......................... 18,916 2,752 830
-------- ------- ------
Total expenses....................................... 73,409 8,183 2,682
-------- ------- ------
Net income................................................ $ 34,208 $ 8,504 $2,093
======== ======= ======
Company's share of net income............................. $ 11,267 $ 5,155 $2,093
======== ======= ======
Company's share of interest expense....................... $ 8,580 $ -- $ --
======== ======= ======
Company's share of depreciation and amortization (real
estate related)........................................ $ 14,412 $ 1,524 $ 830
======== ======= ======
</TABLE>
NOTE 7 -- MORTGAGE DEBT
The Company had outstanding mortgage indebtedness of approximately $2.4
billion and $2.1 billion as of December 31, 1998 and 1997, respectively. The
historical cost, net of accumulated depreciation of encumbered properties at
December 31, 1998 and 1997 was approximately $5.3 billion and $4.3 billion,
respectively. During the years ended December 31, 1998 and 1997, the Company (a)
repaid approximately $38.4 million and $885.8 million, respectively, of mortgage
debt with proceeds from the IPO, the credit facilities, available cash reserves,
and proceeds from property disposition; (b) assumed approximately $313.4 million
and $890.5 million, respectively, of mortgage debt in connection with the
acquisition of certain Properties; and (c) obtained proceeds from the financing
of certain Properties and draws on existing mortgages totaling $10.9 million and
$238.6 million, respectively.
A summary of the Company's fixed and variable rate mortgage debt is as
follows:
Fixed Rate Mortgage Debt
As of December 31, 1998 and 1997, the Company had outstanding fixed rate
mortgage indebtedness of approximately $2.3 billion and $2.0 billion,
respectively. Payments on fixed rate mortgage debt are generally due in monthly
installments of principal and interest or interest only. As of December 31, 1998
and 1997, fixed interest rates ranged from 6.88% to 9.06% and 6.67% to 8.63%,
respectively. The weighted average fixed interest rate was approximately 7.61%
and 7.53% as of December 31, 1998 and 1997, respectively. The Company entered
into an interest rate swap agreement in 1995 which effectively fixed the
interest rate on a $93.6 million variable rate mortgage loan at 6.94% through
the maturity of the loan on June 30, 2000.
Variable Rate Mortgage Debt
As of December 31, 1998 and 1997, the Company had outstanding variable rate
mortgage indebtedness of approximately $70.4 million and $23.5 million,
respectively. Payments on variable rate mortgage debt are generally due in
monthly installments of principal and interest or interest only. The variable
interest rates are based on a variety of options including LIBOR-based interest
rates. As of December 31, 1998 and 1997, the weighted average variable interest
rate was 6.35% and 6.94%, respectively.
75
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- MORTGAGE DEBT -- (CONTINUED)
Equity Office Predecessors sold several interest rate protection agreements
(aggregating $173.0 million of LIBOR -- based agreements) in June 1997 at a cost
of approximately $1.1 million.
Repayment Schedule
Scheduled payments of principal on mortgage debt for each of the next five
years and thereafter as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1999........................................................ $ 116,346
2000........................................................ 185,888
2001........................................................ 488,968
2002........................................................ 78,398
2003........................................................ 298,014
Thereafter.................................................. 1,168,957
----------
Subtotal.................................................... 2,336,571
Net premium (net of accumulated amortization of $3,002)..... 13,517
----------
Total..................................................... $2,350,088
==========
</TABLE>
NOTE 8 -- LINES OF CREDIT
Lines of Credit
The Company assumed $533 million in unsecured debt in connection with the
Beacon Merger. The Company repaid $95 million prior to December 31, 1997 and
repaid the remaining balance in February 1998 with the proceeds from the $1.25
Billion Notes Offering, the $250 Million MOPPRS Offering and the Series B
Preferred Share Offering.
On May 29, 1998, the Company completed a revolving credit agreement to
provide the Company a $1.0 billion unsecured line of credit (the "$1.0 Billion
Credit Facility"). This agreement amended the Company's previous unsecured line
of credit of $600 million. (The $600 million line of credit was obtained in July
1997 as an amendment to the $475 million line of credit, which was obtained in
April 1997 as an amendment to the $275 million line of credit). The $1.0 Billion
Credit Facility matures on May 29, 2001. The Company incurred fees of
approximately $2.5 million at the closing of the $1.0 Billion Credit Facility.
These fees are being amortized over the term along with approximately $1.0
million of unamortized deferred financing costs on the previous $600 million
line of credit. The interest rate is based on the Company's investment grade
rating on its unsecured debt and is currently LIBOR plus 60 basis points with a
facility fee equal to 20 basis points per annum. In addition, a competitive bid
option, whereby the lenders participating in the line of credit bid on the
interest rate to be charged, is available for up to $350 million of the $1.0
Billion Credit Facility. As of December 31, 1998 there was approximately $688.0
million outstanding on the $1.0 Billion Credit Facility.
Term Loan Facilities
In October 1997, the Company obtained a $1.5 billion unsecured credit
facility (the "$1.5 Billion Credit Facility"). The $1.5 Billion Credit Facility
was available for the acquisition of properties and general corporate purposes.
The $1.5 Billion Credit Facility carried an interest rate equal to LIBOR plus
100 basis points subject to an increase or decrease upon receipt of an
investment grade unsecured debt rating. The Company received an investment grade
rating in December 1997 resulting in a reduction in the interest rate to LIBOR
plus 80 basis points. The Company paid an underwriting fee on the $1.5 Billion
Credit Facility at closing of
76
<PAGE> 77
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LINES OF CREDIT -- (CONTINUED)
approximately $4.9 million. In addition, an unused commitment fee of .15% to
.25% was payable quarterly in arrears based upon the unused amount of the $1.5
Billion Credit Facility. 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 property mortgage indebtedness outstanding as of September
30, 1997. The Company repaid $150 million on the $1.5 Billion Credit Facility
with the proceeds from the Trust's $200 million private placement of Common
Shares which were contributed to the Company in October 1997. 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. The $1.5 Billion Credit Facility was repaid and terminated in May 1998
with amounts borrowed from the $1.0 Billion Credit Facility.
On August 14, 1998, the Company completed a term loan agreement with
various financial institutions to provide the Company a $328 million unsecured
term loan facility (the "$328 Million Credit Facility"). The term loan is priced
at 90-day LIBOR plus 80 basis points and is prepayable on any interest payment
date. The term loan matures on August 15, 2000. The proceeds were used to pay
down the $1.0 Billion Credit Facility.
On September 22, 1998, the Company completed a term loan to provide the
Company a $200 million unsecured term loan facility (the "$200 Million Credit
Facility"). Interest accrues under the term loan at an initial rate of LIBOR
plus 50 basis points with a facility fee equal to 20 basis points per annum.
Pricing for the first twelve months is based on a matrix tied to the Company's
credit rating and may be reset after the first twelve months for an additional
six months and again after eighteen months for an additional six months for a
ten basis point fee. The proceeds were used to pay down the $1.0 Billion Credit
Facility.
NOTE 9 -- UNSECURED NOTES
$180 Million Notes Offering
On September 3, 1997, the Company privately placed (the "$180 Million Notes
Offering") $180 million of unsecured notes (the "$180 Million Notes"). The notes
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 to repay a portion of its credit facilities. In
connection with the offering, the Company terminated $150 million of hedge
agreements at a cost of approximately $3.9 million which is being amortized over
the terms of the respective tranches as an adjustment to interest expense.
$1.25 Billion Notes Offering
In February 1998, the Company privately placed (the "$1.25 Billion Notes
Offering") $1.25 billion of unsecured notes (the "$1.25 Billion Notes"). The
notes consist of four tranches with maturities of five to 20 years priced at an
interest rate spread over the corresponding U.S. Treasury rate. The notes were
issued as a discount of approximately $2.0 million, which is being amortized
over the terms of the respective tranches as an adjustment to interest expense.
$250 Million MandatOry Par Put Remarketed Securities Offering
Also in February 1998, the Company privately placed $250 million of 6.376%
MandatOry Par Put Remarketed Securities, due February 15, 2012 ("MOPPRS"), which
are subject to mandatory tender on February 15, 2002 (the "$250 Million MOPPRS
Offering"). The MOPPRS are unsecured obligations of the Company. The MOPPRS were
issued at a premium of approximately $6.5 million which is being amortized over
the terms of the MOPPRS as an adjustment to interest expense.
The proceeds to the Company from the $1.25 Billion Notes Offering and the
$250 Million MOPPRS Offering, net of offering costs, were approximately $1.5
billion. The Company terminated $700 million of
77
<PAGE> 78
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- UNSECURED NOTES -- (CONTINUED)
hedge agreements in connection with the issuance of the $1.25 Billion Notes and
the MOPPRS at a cost of approximately $31.3 million which is being amortized as
an adjustment to interest expense. The net proceeds were used to pay down the
line of credit and other unsecured borrowings.
$775 Million Notes and 300,000 Warrants Offering
In June 1998, the Company privately placed $775 million of unsecured notes
(the "$775 Million Notes") and 300,000 warrants to purchase an additional $300
million in unsecured notes at a later date (the "$775 Million Notes Offering").
The notes consist of three tranches with maturities of six to 30 years. The $775
Million Notes and warrants were issued at a net premium of $119,250, which is
being amortized over the terms of the respective tranches as an adjustment to
interest expense. Each of the 300,000 warrants entitles its holder to purchase a
new $1,000 note at par on December 15, 1999 (or in certain circumstances on
January 18, 2000) at a stated rate of 6.763%, which will mature on June 15, 2008
and will have other terms substantially similar to the $300 million, nine-year
notes due 2007. In exchange for issuing the warrants, the Company received a
$2.4 million premium (80 basis points) at closing. Total proceeds to the
Company, net of selling commissions, were approximately $768.6 million and were
used to pay down borrowings under the $1.0 Billion Credit Facility.
A summary of the terms of the unsecured notes outstanding as of December
31, 1998 is presented below:
<TABLE>
<CAPTION>
EFFECTIVE
TRANCHE AMOUNT STATED RATE RATE (1)
- ------- -------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
4 Year MOPPRS due 2002 (2)............................. $ 250,000 6.4% 6.3%
5 Year Notes due 2003.................................. 300,000 6.4% 6.8%
6 Year Notes due 2004.................................. 250,000 6.5% 6.7%
7 Year Notes due 2004.................................. 30,000 7.2% 7.3%
7 Year Notes due 2005.................................. 400,000 6.6% 7.0%
8 Year Notes due 2005.................................. 50,000 7.4% 7.7%
9 Year Notes due 2006.................................. 50,000 7.4% 7.7%
9 Year Notes due 2007.................................. 300,000 6.8% 6.8%
10 Year Notes due 2007................................. 50,000 7.4% 7.7%
10 Year Notes due 2008................................. 300,000 6.8% 7.0%
20 Year Notes due 2018................................. 250,000 7.3% 7.6%
30 Year Notes due 2028................................. 225,000 7.3% 7.3%
---------- ---- ----
Subtotal............................................. 2,455,000 6.8% 7.0%
==== ====
Net premium (net of accumulated amortization of $0.3
million)............................................. 4,317
----------
Total................................................ $2,459,317
==========
</TABLE>
- ---------------
(1) Includes the cost of the terminated interest rate protection agreements,
offering and transaction costs, the premium on the warrants and the discount
on unsecured notes.
(2) The MOPPRS are subject to mandatory redemption in 2002, but do not mature
until 2012.
The Company filed a registration statement, which was declared effective on
June 18, 1998, relating to an offer to exchange the $180 Million Notes, the
$1.25 Billion Notes and the $250 million MOPPRS for registered securities of the
Company with terms identical in all material respects to the terms of the
existing notes and MOPPRS. This exchange offer expired on July 30, 1998 and a
majority of the holders exchanged their notes for registered notes of the
Company.
78
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- UNSECURED NOTES -- (CONTINUED)
The Company filed a shelf registration statement, which was declared
effective on July 22, 1998, relating to the issuance from time to time of up to
$2.0 billion of unsecured debt securities and warrants exercisable for debt
securities in amounts, at initial prices and on terms to be determined at the
time of offering. The securities may be issued separately or together, in
separate series and in amounts, at prices and on terms to be described in one or
more supplements to the prospectus. The Company sold $1.0 billion of unsecured
notes in January 1999 under this registration statement.
The Company filed a registration statement, which was declared effective on
September 4, 1998, relating to an offer to exchange (a) the $775 Million Notes;
(b) the 300,000 warrants to purchase an additional $300 million in unsecured
notes at a later date; and (c) portions of the $1.25 Billion Notes and MOPPRS
for registered securities of the Company with terms identical in all material
respects to the terms of the existing securities. This exchange offer expired on
October 27, 1998 and a majority of the holders exchanged their notes for
registered securities of the Company.
NOTE 10 -- MINORITY INTERESTS IN PARTIALLY OWNED PROPERTIES
The following Properties are controlled and partially owned by the Company
but have partners with minority interests. The Company has included 100% of the
financial condition and results of operations of these properties in the
consolidated financial statements of the Company and the combined financial
statements of Equity Office Predecessors. The equity interests of the
unaffiliated partners are reflected as minority interests:
<TABLE>
<CAPTION>
COMPANY'S OWNERSHIP AS OF
PROPERTY DECEMBER 31, 1998 AND 1997
- -------- --------------------------
<S> <C>
5100 Brookline (CIGNA Center)............................... 95%(1)
The Plaza at La Jolla Village............................... 66.67%(1)
San Felipe Plaza............................................ 35%(2)
Capitol Commons Garage...................................... 50%(3)
Acorn Properties............................................ 89%(4)
</TABLE>
- ---------------
(1) The Company owns a controlling interest and is the managing general partner.
(2) The Company is the managing general partner and receives preferential
allocations resulting in the Company receiving 100% of the economic
benefits. Prior to the IPO, an affiliate of the Company was the managing
general partner.
(3) The Company owns a controlling interest and receives preferential
allocations. The unaffiliated partner is entitled to receive 50% of the
remaining cash flow after the Company receives its preferential allocations.
(4) The Company has an 89% managing general partner interest in 11 Office
Properties and receives preferential allocations entitling the Company to
99% of the economic benefits. The Company has the option of purchasing the
remaining interest in the 11 Office Properties, exercisable for a designated
period commencing three years after the respective closing dates on the
initial purchases, for additional consideration in the amount of
approximately $2.1 million, all payable in Units valued at $28.775 per Unit.
NOTE 11 -- PARTNERS' CAPITAL
Units
During the period from July 11, 1997 through December 31, 1997, in the
course of acquiring 28 Office Properties, one Parking Facility and an interest
in a management company, the Company issued 8,711,157 Units and the Trust issued
3,435,688 Common Shares, which resulted in the Company issuing
79
<PAGE> 80
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- PARTNERS' CAPITAL -- (CONTINUED)
3,435,688 Units to the Trust, for a total of approximately $342.7 million. The
total acquisition cost of these Properties and the interest in the management
company was approximately $1,315.4 million. In addition, the Company issued
8,570,886 Units and the Trust issued 84,425,856 Common Shares in connection with
the Beacon Merger (see Note 4). In July 1998, the Trust filed a Form S-3 shelf
registration statement with the SEC, which was declared effective on September
4, 1998, to register the resale of 20,210,129 Common Shares which may be sold by
the holders of previously privately issued Common Shares and/or certain Common
Shares issued in exchange for Units.
In December 1998, the Trust filed a Form S-3 shelf registration statement
with the SEC to register 137,427 Common Shares which may be sold by the holders
thereof after the issuance of such Common Shares in exchange for Units.
In October 1997, the Trust completed two private placements for a total of
9,685,034 restricted Common Shares for a total value of approximately $273.9
million, which was contributed to the Company in exchange for a corresponding
number of Units, and subsequently registered a portion of the shares with the
SEC.
In April 1998, the Trust privately placed 1,628,009 Common Shares at
$28.5625 per share for net proceeds of approximately $44.1 million (the "UIT
Offering"), which was contributed to the Company in exchange for a corresponding
number of Units. The Company used the net proceeds to fund property
acquisitions. These shares were subsequently registered with the SEC.
During 1998, the Company issued 7,043,510 Units at a weighted average price
of $25.07 per Unit for a total of approximately $176.6 million in connection
with the separate acquisition of three Office Properties located in Denver, CO.,
Seattle, WA. and New York, NY. These Units represented a portion of the total
acquisition cost of these Office Properties of approximately $697.2 million. In
September 1998, the Trust filed a Form S-3 shelf registration statement with the
SEC to register the resale of 6,854,451 Common Shares which may be sold by the
holders thereof or by holders of Units upon the issuance of Common Shares in
exchange for such Units.
In July 1998, the Trust filed a Form S-3 shelf registration statement with
the SEC, which was declared effective on July 22, 1998, to register the issuance
of $1.5 billion of Common Shares, preferred shares of beneficial interest and
warrants to be issued at prices and on terms to be determined at the time of
offering. The Company may issue the securities separately or together, in
separate series, in amounts, at prices and on terms described in one or more
supplements to the prospectus. The Series C Preferred Shares were issued under
this registration statement in December 1998.
80
<PAGE> 81
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- PARTNERS' CAPITAL -- (CONTINUED)
The following table presents the changes in the Company's issued and
outstanding Units:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OUTSTANDING AT JANUARY 1,............................... 278,687,353 --
Outstanding upon completion of the Consolidation and the
IPO................................................... -- 163,555,677
Issued in exchange for Properties....................... 7,043,510 12,146,845
Units issued to the Trust related to Restricted Shares
awarded to Officers................................... 380,000 298,000
Issued to the Trust related to Common Shares issued as
Trustee compensation.................................. -- 5,055
Issued to Trust in exchange for contribution of net
proceeds from sale of Common Shares................... 1,628,009 9,685,034
Issued in the Beacon Merger (including 84,425,856 Units
issued to the Trust of which 3,829,739 were for Beacon
options exercised).................................... -- 92,996,742
Issued to the Trust related to Common Shares issued for
share option exercises................................ 809,653 --
Converted to cash....................................... (1,169) --
----------- -----------
OUTSTANDING AT DECEMBER 31,............................. 288,547,356 278,687,353
=========== ===========
</TABLE>
Ownership of the Company
As of December 31, 1998, the Trust and its subsidiaries had a 2% general
partnership interest and an approximate 88.1% limited partnership interest in
the Company. The remaining limited partners had an approximate 9.9% interest in
the Company and consist of various individuals and entities that contributed
their properties to the Company in exchange for partnership interests and are
represented by 28,645,699 Units which are exchangeable on a one-for-one basis
into the Trust's Common Shares.
In regards to the Trust, net proceeds from the various offerings of the
Trust have been contributed by the Trust to the Company in return for Units,
which results in an increased ownership percentage that the Trust has in the
Company.
Warrants
In connection with the December 1997 acquisition of 10 Office Properties,
the Trust issued warrants that expire in December 2002 to purchase an aggregate
of 5,000,000 Common Shares at an exercise price of $39.375 per Common Share. The
warrants were valued at $3.00 per warrant utilizing the Black-Scholes valuation
model at the time of issuance, and are reflected as a component of partners'
capital due to the fact that upon exercise, the Company will issue Units to the
Trust on a one-for-one basis.
Preferred Units
On December 19, 1997, the Trust exchanged its 8,000,000 8.98% Series A
Cumulative Redeemable Preferred Shares, liquidation preference of $25.00 per
share for the Beacon Series A Preferred Shares in connection with the Beacon
Merger. Holders of the shares are entitled to receive, when and as authorized by
the Trust, cumulative preferential cash distributions at the rate of 8.98% of
the $25.00 liquidation preference per annum (equivalent to a fixed annual amount
of $2.245 per share). Such distributions are cumulative from December 19, 1997
and are payable quarterly in arrears of $.56125 per share on or before March 15,
June 15, September 15 and December 15 of each year. Holders of the shares have
no other voting rights except as provided by law and have no preemptive rights.
On and after June 15, 2022, the Trust, at its option and upon
81
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- PARTNERS' CAPITAL -- (CONTINUED)
not less than 30, nor more than 60 days written notice, may redeem the shares,
in whole or in part, at any time or from time to time, for cash at a redemption
price of $25.00 per share, plus all accrued and unpaid distributions thereon to
the date fixed for redemption. As a result of this transaction, the Company
issued preferred units to the Trust on a one-for-one basis.
In February 1998, the Trust privately placed (the "Series B Preferred Share
Offering") 6,000,000 of its 5.25% Series B Convertible, Cumulative Redeemable
Preferred Shares, $50 liquidation preference per share (the "Series B Preferred
Shares"). This offering generated net proceeds of approximately $290.3 million
after offering costs of $9.7 million. Proceeds from the Series B Preferred
Offering were contributed to the Company in exchange for a corresponding number
of Series B Preferred Units. The net proceeds were used to pay down the line of
credit. The Series B Preferred Shares are convertible at any time by the holder
into Common Shares at a conversion price of $35.70 per Common Share, equivalent
to a conversion ratio of 1.40056 Common Shares for each Series B Preferred
Share. The Series B Preferred Shares are non-callable for five years with a
mandatory call on February 15, 2008. Each Series B Preferred Share will receive
a quarterly distribution of $0.65625 per share.
The Trust filed a registration statement, which was declared effective on
September 4, 1998, relating to the resale of the Series B Preferred Shares. The
shares were required to be registered under the terms of a registration rights
agreement entered into at the time of the original private placement.
In December 1998, the Trust completed the offering (the "Series C Preferred
Share Offering") of 4,600,000 of its 8.625% Series C Cumulative Redeemable
Preferred Shares, $25 liquidation preference per share (the "Series C Preferred
Shares"). This offering generated net proceeds of approximately $111.4 million
after offering costs of $3.6 million. Proceeds from the Series C Preferred
Offering were contributed to the Company in exchange for a corresponding number
of Series C Preferred Units. The net proceeds were used to pay down the $1.0
Billion Credit Facility. On and after December 8, 2003, the Trust may redeem the
shares, in whole or in part, at any time or from time to time, for cash at a
redemption price of $25.00 per share, plus all accrued and unpaid distributions
thereon to the date fixed for redemption. Each Series C Preferred Share will
receive a quarterly distribution of $0.5390625 per share which will commence in
1999.
Distributions
The following table summarizes the distributions paid to unitholders and
preferred unitholders related to the period from July 11, 1997 through December
31, 1997 and the year ended December 31, 1998.
<TABLE>
<CAPTION>
FOR THE QUARTER
DISTRIBUTION DATE OR PERIOD RECORD
AMOUNT PAID ENDED DATE
------------ -------- --------------- --------
<S> <C> <C> <C> <C>
Unitholders............................... $ 0.26(1) 10-9-97 9-30-97 9-29-97
$ 0.30 12-19-97 12-31-97 12-10-97
$ 0.32 4-10-98 3-31-98 3-31-98
$ 0.32 7-10-98 6-30-98 6-30-98
$ 0.37 10-9-98 9-30-98 9-30-98
$ 0.37 12-29-98 12-31-98 12-15-98
Series A Preferred Unit holders........... $ 0.56125 3-15-98 3-31-98 3-9-98
$ 0.56125 6-15-98 6-30-98 6-1-98
$ 0.56125 9-15-98 9-30-98 9-1-98
$ 0.56125 12-15-98 12-31-98 12-1-98
Series B Preferred Unit holders........... $0.619792(2) 5-15-98 6-30-98 5-1-98
$ 0.65625 8-17-98 9-30-98 8-3-98
$ 0.65625 11-16-98 12-31-98 11-2-98
</TABLE>
82
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- PARTNERS' CAPITAL -- (CONTINUED)
- ---------------
(1) Prorated from IPO date of July 11, 1997 based on $.30 for the full quarter.
(2) Partial distribution of $0.619792 covers the period from February 19 through
May 15, 1998.
NOTE 12 -- FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancelable operating leases at the
Office Properties and Parking Facilities as of December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1999........................................................ $1,384,661
2000........................................................ 1,288,011
2001........................................................ 1,129,233
2002........................................................ 940,647
2003........................................................ 754,906
Thereafter.................................................. 2,635,815
----------
Total..................................................... $8,133,273
==========
</TABLE>
The Company is subject to the usual business risks associated with the
collection of the above scheduled rents. The future minimum rents from the
Company's investment in unconsolidated joint ventures have not been included in
the above schedule.
NOTE 13 -- FUTURE MINIMUM LEASE PAYMENTS
As of December 31, 1998, the Company's ownership of 16 Office Properties
and four Parking Facilities are subject to ground leases. 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 19, the Company leases its office space from an
affiliate. Future minimum lease obligations under these noncancelable leases as
of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1999........................................................ $ 8,379
2000........................................................ 8,593
2001........................................................ 8,498
2002........................................................ 8,324
2003........................................................ 5,665
Thereafter.................................................. 499,368
--------
Total..................................................... $538,827
========
</TABLE>
Rental expense for the year ended December 31, 1998, the period from July
11, 1997 through December 31, 1997, the period from January 1, 1997 through July
10, 1997, and the year ended December 31, 1996 was approximately $11.1 million,
$3.4 million, $3.8 million and $4.5 million, respectively.
NOTE 14 -- EXTRAORDINARY ITEMS
The Company incurred an extraordinary loss of approximately $7.5 million
during the year ended December 31, 1998. This loss consisted of approximately
$7.0 million of fees charged upon the termination of $300 million of interest
rate protection agreements in connection with the Series B Preferred Share
Offering and approximately $0.5 million of unamortized deferred financing costs
related to the termination of the $1.0 Billion Credit Facility.
83
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- EXTRAORDINARY ITEMS -- (continued)
In addition, the Company and Equity Office Predecessors reported an
extraordinary loss of approximately $16.4 million and $0.3 million, for the
period July 11 through December 31, 1997 and January 1 through July 10, 1997,
respectively, related to pre-payment penalties on debt retired prior to maturity
during the respective periods with net proceeds from the IPO and available cash
reserves.
NOTE 15 -- EARNINGS PER UNIT
The following table sets forth the computation of basic and diluted
earnings per Unit:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED JULY 11, 1997 THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C>
NUMERATOR:
Net income available to Units before gain on sales of real
estate and extraordinary items.......................... $ 348,126 $ 94,313
Gain on sales of real estate.............................. 12,433 126
Extraordinary items....................................... (7,506) (16,366)
----------- -----------
Numerator for basic earnings per Unit -- income available
to Units................................................ $ 353,053 $ 78,073
=========== ===========
DENOMINATOR:
Denominator for basic earnings per Unit -- weighted
average Units........................................... 282,114,343 178,647,562
Effect of dilutive securities:
Units issuable upon exercise of Trust share options and
put options........................................... 1,860,189 1,366,465
----------- -----------
Denominator for diluted earnings per Unit -- adjusted
weighted average Units.................................. 283,974,532 180,014,027
=========== ===========
BASIC EARNINGS AVAILABLE TO UNITS PER WEIGHTED AVERAGE UNIT:
Net income before gain on sales of real estate and
extraordinary items..................................... $ 1.23 $ 0.53
Gain on sales of real estate.............................. 0.05 --
Extraordinary items....................................... (0.03) (0.09)
----------- -----------
Net income per Unit....................................... $ 1.25 $ 0.44
=========== ===========
DILUTED EARNINGS AVAILABLE TO UNITS PER WEIGHTED AVERAGE
UNIT:
Net income before gain on sales of real estate and
extraordinary items..................................... $ 1.23 $ 0.52
Gain on sales of real estate.............................. 0.04 --
Extraordinary items....................................... (0.03) (0.09)
----------- -----------
Net income per Unit....................................... $ 1.24 $ 0.43
=========== ===========
</TABLE>
For additional disclosures regarding the employee stock options and the
restricted shares see Note 21.
Options to purchase 2,969,608 Common Shares at a weighted average exercise
price of $30.27 per Common Share, warrants to purchase 5,000,000 Common Shares
at an exercise price of $39.375 per Common Share and the Series B Preferred
Shares at a conversion price of $35.70 per Common Share were outstanding during
the year ended December 31, 1998, and were not included in the computation of
diluted earnings per Unit for the year ended December 31, 1998, since they would
have an antidilutive effect. In addition, options to purchase 726,500 Common
Shares at a weighted average exercise price of $32.93 per Common Share and
warrants to purchase 5,000,000 Common Shares at an exercise price of $39.375 per
Common Share were outstanding during 1997 and were not included in the
computation of diluted earnings per Unit for the period from July 11, 1997
through December 31, 1997 since they would have an antidilutive effect. Upon
exercise, the Company would issue a corresponding number of Units to the Trust,
on a one-for-one basis.
84
<PAGE> 85
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SEGMENT INFORMATION
As discussed in Note 1, the Company's primary business is the ownership and
operation of Office Properties. The Company's long-term tenants are in a variety
of businesses and no single tenant is significant to the Company's business.
Information related to this segment for the years ended December 31, 1998, 1997
and 1996 is below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------
OFFICE PROPERTIES CORPORATE AND OTHER TOTAL CONSOLIDATED
----------------- ------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property Operating Revenues............................. $ 1,627,881 $ 30,539 $ 1,658,420
Property Operating Expenses............................. (584,353) (8,353) (592,706)
----------- --------- -----------
Net operating income.................................. 1,043,528 22,186 1,065,714
----------- --------- -----------
Adjustments to arrive at net income:
Other revenues........................................ 1,879 19,400 21,279
Interest expense (1).................................. (144,989) (193,622) (338,611)
Depreciation and amortization......................... (294,308) (11,674) (305,982)
Ground rent........................................... (7,611) (50) (7,661)
General and administrative............................ (415) (63,149) (63,564)
----------- --------- -----------
Total adjustments to arrive at net income........... (445,444) (249,095) (694,539)
----------- --------- -----------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures, gain
on sales of real estate and extraordinary items....... 598,084 (226,909) 371,175
Minority interests...................................... (1,755) (359) (2,114)
Income from investment in unconsolidated joint
ventures.............................................. 7,832 3,435 11,267
Gain on sales of real estate and extraordinary items.... 12,433 (7,506) 4,927
----------- --------- -----------
Net income............................................ $ 616,594 $(231,339) $ 385,255
=========== ========= ===========
Capital and tenant improvements......................... $ 200,033 $ 7,060 $ 207,093
=========== ========= ===========
Total Assets............................................ $13,633,546 $ 627,745 $14,261,291
=========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
OFFICE PROPERTIES CORPORATE AND OTHER TOTAL CONSOLIDATED
----------------- ------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property Operating Revenues............................. $ 711,153 $ 22,577 $ 733,730
Property Operating Expenses............................. (273,181) (5,023) (278,204)
----------- --------- -----------
Net operating income.................................. 437,972 17,554 455,526
----------- --------- -----------
Adjustments to arrive at net income:
Other revenues........................................ 1,236 17,106 18,342
Interest expense (1).................................. (114,122) (43,034) (157,156)
Depreciation and amortization......................... (128,137) (8,243) (136,380)
Ground rent........................................... (4,714) (46) (4,760)
General and administrative............................ (955) (33,936) (34,891)
----------- --------- -----------
Total adjustments to arrive at net income........... (246,692) (68,153) (314,845)
----------- --------- -----------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures, gain
on sales of real estate and extraordinary items....... 191,280 (50,599) 140,681
Minority interests...................................... (1,376) (325) (1,701)
Income from investment in unconsolidated joint
ventures.............................................. 2,432 2,723 5,155
Gain on sales of real estate and extraordinary items.... (3,278) (726) (4,004)
----------- --------- -----------
Net income............................................ $ 189,058 $ (48,927) $ 140,131
=========== ========= ===========
Capital and tenant improvements......................... $ 156,419 $ 2,678 $ 159,097
=========== ========= ===========
Total Assets............................................ $11,352,556 $ 399,116 $11,751,672
=========== ========= ===========
</TABLE>
85
<PAGE> 86
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SEGMENT INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------
OFFICE PROPERTIES CORPORATE AND OTHER TOTAL CONSOLIDATED
----------------- ------------------- ------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Property Operating Revenues............................. $ 483,193 $ 10,203 $ 493,396
Property Operating Expenses............................. (195,738) (3,102) (198,840)
----------- --------- -----------
Net operating income.................................. 287,455 7,101 294,556
----------- --------- -----------
Adjustments to arrive at net income:
Other revenues........................................ 1,954 12,774 14,728
Interest expense (1).................................. (112,500) (7,095) (119,595)
Depreciation and amortization......................... (92,077) (4,160) (96,237)
Ground rent........................................... (2,177) (50) (2,227)
General and administrative............................ (281) (22,864) (23,145)
----------- --------- -----------
Total adjustments to net income..................... (205,081) (21,395) (226,476)
----------- --------- -----------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures, gain
on sales of real estate and extraordinary items....... 82,374 (14,294) 68,080
Minority interests...................................... (1,733) (353) (2,086)
Income from investment in unconsolidated joint
ventures.............................................. 2,093 -- 2,093
Gain on sales of real estate and extraordinary items.... 5,338 -- 5,338
----------- --------- -----------
Net income............................................ $ 88,072 $ (14,647) $ 73,425
=========== ========= ===========
</TABLE>
- ---------------
(1) Interest expense for the Office Properties does not include allocation of
interest expense on corporate unsecured debt.
NOTE 17 -- PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
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 accompanying unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1998, reflects the following
transactions as if they had occurred on January 1, 1998: (a) the acquisition of
28 Office Properties, and two Parking Facilities, acquired during 1998; (b) the
disposition of five office properties; (c) the purchase of the remaining
partnership interests in one of the Company's unconsolidated joint ventures; (d)
the February 1998 $1.5 Billion Notes Offering; (e) the Series B Preferred
Offering and the Series C Preferred Offering; (f) the increase in the $600
Million Credit Facility to $1.0 billion; (g) the UIT Offering in April 1998, (h)
the June 1998 $775 Million Notes Offering and (i) the $48.5 million investment
in preferred shares of Capital Trust.
The accompanying unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1997 reflects the following
transactions as if they had occurred on January 1, 1997: (a) the acquisition of
66 Office Properties, including 20 Office Properties acquired by Beacon prior to
the Beacon Merger, and seven Parking Facilities, including an interest in four
Parking Facilities, acquired during the year ended December 31, 1997; (b) the
disposition of eight office properties; (c) the $180 Million Notes Offering
which closed on September 3, 1997; (d) the transactions that occurred in
connection with the Consolidation of Equity Office Predecessors and 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; (e) the net
change in interest expense from draws on the $1.5 Billion Credit Facility used
to refinance existing mortgage debt; (f) the Beacon Merger; (g) the acquisition
of 28 Office Properties and two Parking Facilities acquired during 1998; (h) the
purchase of the remaining partnership interest in one of the Company's
unconsolidated joint ventures; (i) the February 1998 $1.5 Billion Notes
Offering; (j) the Series B Preferred Offering and the Series C Preferred
Offering; (k) the increase in the $600 Million Credit Facility to $1.0 billion;
(l) the UIT
86
<PAGE> 87
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) -- (CONTINUED)
Offering; (m) the June 1998 $775 Million Notes Offering and (n) the $48.5
million investment in preferred shares of Capital Trust.
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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997
-------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C>
Total Revenues.............................................. $ 1,812,898 $ 1,705,598
=========== ===========
Income before extraordinary items........................... $ 381,998 $ 305,435
=========== ===========
Net income available for Units.............................. $ 330,586 $ 246,614
=========== ===========
Net income per Unit -- Basic................................ $ 1.14 $ 0.86
=========== ===========
Units outstanding -- Basic.................................. 288,547,000 286,363,000
=========== ===========
Net income per Unit -- Diluted.............................. $ 1.14 $ 0.85
=========== ===========
Units outstanding -- Diluted................................ 290,824,000 289,136,000
=========== ===========
</TABLE>
NOTE 18 -- QUARTERLY DATA (UNAUDITED)
The quarterly data for the last three years are presented in the tables
below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
12/31/98 9/30/98 6/30/98 3/31/98
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Total revenues.............................. $ 469,002 $ 436,933 $ 399,944 $ 373,820
=========== =========== =========== ===========
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on
sales of real estate and extraordinary
items..................................... $ 92,789 $ 96,176 $ 97,879 $ 84,331
=========== =========== =========== ===========
Net income.................................. $ 107,828 $ 98,733 $ 98,226 $ 80,468
=========== =========== =========== ===========
Net income available for Units.............. $ 98,756 $ 90,306 $ 89,794 $ 74,197
=========== =========== =========== ===========
Net income available per weighted average
Unit outstanding -- Basic................. $ 0.34 $ 0.32 $ 0.32 $ 0.27
=========== =========== =========== ===========
Net income available per weighted average
Unit outstanding -- Diluted............... $ 0.34 $ 0.32 $ 0.32 $ 0.27
=========== =========== =========== ===========
Weighted average Units outstanding --
Basic..................................... 288,159,705 281,223,315 280,183,422 278,797,811
=========== =========== =========== ===========
Weighted average Units outstanding --
Diluted................................... 291,437,262 281,929,910 281,200,962 280,327,761
=========== =========== =========== ===========
</TABLE>
87
<PAGE> 88
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- QUARTERLY DATA (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
12/31/97 9/30/97(1) 6/30/97 3/31/97
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Total revenues.............................. $ 248,400 $ 183,886 $ 165,219 $ 154,567
=========== =========== =========== ===========
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on
sales of real estate and extraordinary
items..................................... $ 46,704 $ 45,736 $ 23,331 $ 24,910
=========== =========== =========== ===========
Net income.................................. $ 44,631 $ 33,877 $ 30,853 $ 30,769
=========== =========== =========== ===========
Net income available for Units.............. $ 43,982 $ 33,877 $ 30,853 $ 30,769
=========== =========== =========== ===========
Net income available per weighted average
Units outstanding -- Basic................ $ 0.23 $ 0.21 -- --
=========== =========== =========== ===========
Net income available per weighted average
Units outstanding -- Diluted.............. $ 0.22 $ 0.21 -- --
=========== =========== =========== ===========
Weighted average Units outstanding --
Basic..................................... 191,572,234 164,146,710 -- --
=========== =========== =========== ===========
Weighted average Units outstanding --
Diluted................................... 193,055,145 165,384,651 -- --
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total revenues.............................. $ 154,887 $ 126,117 $ 116,970 $ 110,150
=========== =========== =========== ===========
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures, gain on
sale of real estate and extraordinary
items..................................... $ 29,688 $ 11,015 $ 14,543 $ 12,834
=========== =========== =========== ===========
Net income.................................. $ 30,383 $ 11,024 $ 14,040 $ 17,978
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) This column includes the operations of Equity Office Predecessors from July
1 through July 10, 1997 and the operations of the Company from July 11
through September 30, 1997. The earnings per Unit disclosures pertain only
to the operations of the Company from July 11 through September 30, 1997.
88
<PAGE> 89
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 - RELATED PARTY TRANSACTIONS
Affiliates provide various services to the Company. Fees and reimbursements
paid by the Company to affiliates for the years ended December 31, 1998, 1997
and 1996 and payable as of December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
PAYABLE AS OF
PAID IN YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------------- -------------
1998 1997 1996 1998 1997
--------- -------- --------- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Legal fees and expenses(1)....................... $ 3,507 $3,006 $ 3,481 $ 978 $550
Insurance reimbursements and brokerage fees(2)... 3,323 2,279 1,868 (139) 32
Development, management and leasing fees(3)...... 4,405 434 702 -- --
Office rent(4)................................... 1,792 1,068 777 128 79
Administrative, accounting and consulting
services(5).................................... 750 1,373 1,893 169 72
Acquisition Fees(6).............................. -- 777 3,068 -- --
Organization and offering expenses(7)............ -- 106 778 -- --
Disposition fees................................. -- -- 124 -- --
------- ------ ------- ------ ----
Total....................................... $13,777 $9,043 $12,691 $1,136 $733
======= ====== ======= ====== ====
</TABLE>
- ---------------
(1) Represents amounts primarily paid to Rosenberg & Liebentritt, P.C., a law
firm, for legal fees and expenses incurred in connection with acquisition,
corporate and leasing activity. A trustee of the Trust was a principal of
this law firm until September 1, 1997.
(2) Represents amounts paid to EGI Risk Services Inc. for reimbursement of
property insurance premiums to an affiliated company and fees for risk
management services including reviewing, obtaining and/or researching
various insurance policies. EGI Risk Services, Inc. is a wholly owned
subsidiary of the Equity Group, of which Samuel Zell is the Chairman of the
Board
(3) In December 1997, the Company acquired ten office properties from an entity
affiliated with Wright Runstad & Company for approximately $640 million. Mr.
Runstad, a principal of the Wright Runstad & Company, is a trustee of the
Trust. In addition, the Company and an affiliate of the Equity Group
acquired a 30% non-controlling interest in WRALP, a subsidiary of Wright
Runstad & Company, which provides property management, leasing and
development services. The Company has agreed to make available to WRALP up
to $20 million in additional financing or credit support for future
development. As of December 31, 1998, no amounts have been funded. The
Company recorded income of approximately $1.3 million from it's investment
in WRALP for the year ended December 31, 1998.
WRALP serves as co-property manager with the Company for the properties
acquired from its affiliates in December, 1997 in addition to two properties
acquired during 1998. WRALP also serves as the developer on two projects
under construction, Sunset North Corporate Campus and Three Bellevue Center.
The Company has an 80% interest in each development project, and WRALP owns
the remaining 20% interest. WRALP is the developer of the World Trade Center
project in Seattle, Washington. The Company has agreed to acquire that
building after its completion and occupancy by a third party tenant which is
scheduled for the first quarter of 2000.
The amounts for 1997 and 1996 represent development fees paid to an
affiliate of the Equity Group to manage the renovation project at the 28
State Street Office Building.
(4) The Company leases its corporate office space from an affiliate of the
Equity Group.
(5) Administrative services include fees paid to EGI for consulting services
such as economic and demographic research for possible acquisitions and real
estate tax consulting. In 1997 and 1996, administrative services also
includes fees paid to EGI for centralized services such as payroll
processing, employee benefits and telecommunications.
89
<PAGE> 90
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 - RELATED PARTY TRANSACTIONS -- (CONTINUED)
(6) Represents amounts paid by Equity Office Predecessors to Merrill Lynch, a
limited partner of the general partner of the ZML Funds.
(7) Affiliates of the Equity Group 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.
An affiliate of the Equity Group has an indirect minority interest in
Standard Parking Limited Partnership ("SPLP"). An affiliate of SPLP manages the
parking operations at certain Properties owned by the Company. Management
believes that amounts paid to SPLP's affiliate are equal to market for such
services.
On July 28, 1998, the Company completed the purchase of 50,000 shares of
Capital Trust 8.25% Step Up Convertible Trust Preferred Securities, $1,000
liquidation preference per share, for $48.5 million, in a private placement. Mr.
Zell is also Chairman of the Board of Capital Trust. The preferred shares are
convertible at any time by the holders into common shares of Capital Trust at a
conversion price of $11.70, reflecting a 30% conversion premium over Capital
Trust's common share price at the close of business on July 24, 1998. The
preferred shares are non-callable for five years, and have a 20-year maturity.
The Company earned approximately $1.7 million in dividends in 1998. The dividend
is payable each calendar quarter; commencing in year seven, the dividend will
increase by 75 basis points per annum. In connection with the investment,
Capital Trust has granted the Company and other investors the right to
participate in certain strategic lending opportunities. The Company classified
this investment with other assets on the balance sheet.
Amounts Received from Affiliates
Affiliates of the Company leased space in certain of the Office Properties
owned by the Company. 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 $0.3 million, $3.0
million and $3.5 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company entered into various lease agreements with affiliates of SPLP
whereby such affiliates leased certain of the Company's stand-alone Parking
Facilities. Certain of these lease agreements provide such lessees with annual
successive options to extend the term of the lease through various dates. The
rent paid in the years ended December 31, 1998, 1997 and 1996 under these lease
agreements was approximately $13.1 million, $11.0 million and $3.2 million,
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
for future periods.
90
<PAGE> 91
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20 -- NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing
activities of the Company are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JULY 11, 1997
FOR THE YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans and lines of credit assumed through
Beacon Merger......................................... $ -- $1,160,451
======== ==========
Net liabilities assumed through Beacon Merger........... $ -- $ 72,034
======== ==========
Units issued through Beacon Merger (assuming exercise of
4,732,822 options).................................... $ -- $2,853,266
======== ==========
8.98% Series A Cumulative Redeemable Preferred Units
exchanged in the Beacon Merger........................ $ -- $ 200,000
======== ==========
Units and put options issued through property
acquisitions (including warrants valued at $15.0
million in 1997)...................................... $204,008 $ 357,672
======== ==========
Mortgage loans assumed/promissory notes issued through
property acquisitions................................. $406,837 $ 263,048
======== ==========
Mortgage loans and line of credit assumed in the
Consolidation......................................... $ -- $2,196,708
======== ==========
Net liabilities assumed in the Consolidation............ $ -- $ 62,706
======== ==========
Units issued in the Consolidation....................... $ -- $2,830,918
======== ==========
</TABLE>
In addition, Equity Office Predecessors assumed mortgage debt through
property acquisitions of $92.1 million for the year ended December 31, 1996.
NOTE 21 -- SHARE OPTION PLAN AND SHARE AWARD PLAN
The following is a description of the Trust's 1997 Share Option and Share
Award Plan, as amended, (the "Employee Plan"), which is included in the
financial statements because any Common Shares issued pursuant to the Employee
Plan will result in the Company issuing Units to the Trust, on a one-for-one
basis.
In July 1997, the Trust adopted the Employee Plan. The purpose of the
Employee Plan is to attract and retain highly qualified executive officers,
trustees, employees and consultants. Through the Employee Plan, certain
officers, trustees, certain employees and consultants of the Trust are offered
the opportunity to acquire Common Shares pursuant to grants of (i) options to
purchase Common Shares ("Options"); and (ii) Share Awards. The Employee Plan is
administered by the Compensation and Option Committee (the "Compensation
Committee") which is appointed by the Board of Trustees of the Trust. The
Compensation Committee determines those officers, trustees, key employees and
consultants to whom, and the time or times of which, grants of Options and Share
Awards will be made. The Compensation Committee interprets the Employee Plan,
adopts rules relating thereto and determines the terms and provisions of
Options. In 1997 and 1998, the number of Common Shares subject to Options and
Share Awards under the Employee Plan was limited to 11,121,786. The maximum
aggregate number of Common Shares that may be granted for all rights under the
Plan shall not exceed 6.8% of the outstanding shares, calculated on a fully
diluted basis and determined annually on the first day of each calendar year. No
more than one-half of the maximum aggregate number of Common Shares shall be
granted as Share Awards. To the extent that Options expire unexercised or are
terminated, surrendered or canceled, the Common Shares allocated to such Options
shall become available for
91
<PAGE> 92
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21 -- SHARE OPTION PLAN AND SHARE AWARD PLAN -- (CONTINUED)
future grants under the Plan, unless the Plan has terminated. The Employee Plan
will terminate at such times as it issues all of the unissued Common Shares
reserved for the Plan. The Board of Trustees may at any time amend or terminate
the Employee Plan, but termination will not affect Options and Share Awards
previously granted. Any Options or Share Awards which had vested prior to such
termination would remain exercisable by the holder thereof.
The Compensation Committee determines the vesting schedule of each Option
and the term, which term shall not exceed ten years from the date of the grant.
As to the Options that have been granted through December 31, 1998, the vesting
schedules range from the entire option grant being exercisable as of the grant
date, to one-third of the Options being exercisable as of the first anniversary
of the grant date, an additional one-third being exercisable as of the second
anniversary of the grant date and the remaining one-third of the Options being
exercisable as of the third anniversary of the grant date. The exercise price
for all Options under the Employee Plan shall not be less than the fair market
value of the underlying Common Shares at the time the Option is granted.
In addition, the Employee Plan permits the Trust to issue Share Awards to
executive officers, other key employees and trustees upon such terms and
conditions as shall be determined by the Compensation Committee in its sole
discretion. A share award is an award of Common Shares which (i) may be fully
vested upon issuance ("Share Awards") or (ii) may be subject to risk of
forfeiture under Section 83 of the Internal Revenue Code ("Restricted Share
Award"). Generally, for 1997 and 1998, members of the Board of Trustees have
been granted Share Awards pursuant to the Employee Plan as payment of their
board fees. In addition, certain senior officers were issued Share Awards as
part of their bonus for fiscal year 1998. In each case, the number of Share
Awards granted to trustees and senior officers was equal to the dollar value of
the fees or bonus earned divided by the fair market value of the shares on the
date the fee or bonus would have been paid. In addition to these Share Awards,
Restricted Share Awards were granted to certain senior officers in 1997 and
1998. The Restricted Share Awards vest over a five year period as follows: (i)
fifty percent of the Restricted Share Awards vest on the third anniversary of
the initial grant date; (ii) an additional twenty-five percent of the Restricted
Share Awards vest on the fourth anniversary of the initial grant date; and (iii)
the remaining twenty-five percent of the Restricted Share Awards vest on the
fifth anniversary of the initial grant date.
The Trust has elected to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25")
in the computation of compensation expense. Under APB No. 25's intrinsic value
method, compensation expense is determined by computing the excess of the market
price of the shares over the exercise price on the measurement date. For the
Trust's Options, the intrinsic value on the measurement date (or grant date) is
zero, and no compensation expense is recognized. Financial Accounting Standards
Board No. 123 ("FASB No. 123") requires the Trust to disclose pro forma net
income and income per share as if a fair value based accounting method had been
used in the computation of compensation expense. The fair value of the Options
computed under FASB No. 123 would be recognized over the vesting period of the
Options. The fair value for the Trust's Options granted in 1998 and 1997 was
estimated at the time the Options were granted using the Black-Scholes option
pricing model with the following weighted average assumptions for 1998 and 1997,
respectively: risk-free interest rate of 5.4% and 5.6%; dividend yields of 5.8%
and 4.0%; volatility factors of the expected market price of the Trust's Common
Shares of 0.30 and 0.24; and a weighted average expected life of the Options of
five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Trust's Options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Options.
92
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EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21 -- SHARE OPTION PLAN AND SHARE AWARD PLAN -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
Options is amortized to expense over the Options' vesting period. The following
is the unaudited pro forma information for the year ended December 31, 1998 and
the period from July 11, 1997 through December 31, 1997 had a fair value based
accounting method been used in the computation of compensation expense for the
share options.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED JULY 11, 1997 THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Pro forma net income available to Units before gain on
sales of real estate and extraordinary items........ $346,277 $ 92,664
Gain on sales of real estate and extraordinary
items............................................... 4,927 (16,240)
-------- --------
Pro forma net income available to Units............... $351,204 $ 76,424
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED JULY 11, 1997 THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------------
BASIC DILUTED BASIC DILUTED
------ -------- ------ -------
EARNINGS PER UNIT
<S> <C> <C> <C> <C>
Pro forma net income available to Units before gain
on sales of real estate and extraordinary items... $1.22 $1.22 $ 0.53 $ 0.51
Gain on sales of real estate and extraordinary
items............................................. .02 .02 (0.10) (0.09)
----- ----- ------ ------
Pro forma net income per weighted average Units
outstanding....................................... $1.24 $1.24 $ 0.43 $ 0.42
===== ===== ====== ======
</TABLE>
The table below summarizes the Option activity of the Employee Plan for the
year ended December 31, 1998 and the period from July 11, 1997 through December
31, 1997:
<TABLE>
<CAPTION>
COMMON SHARES SUBJECT TO WEIGHTED AVERAGE EXERCISE
OPTIONS PRICE PER COMMON SHARE
------------------------ -------------------------
<S> <C> <C>
Balance at July 11, 1997........................ -- $ --
Options granted................................. 5,814,583 22.22
Options cancelled............................... (67,275) 21.16
--------- ------
Balance at December 31, 1997.................... 5,747,308 22.23
Options granted................................. 4,695,072 26.38
Options cancelled............................... (93,145) 25.54
Options exercised............................... (916,451) 19.74
--------- ------
Balance at December 31, 1998.................... 9,432,784 $24.50
========= ======
</TABLE>
As of December 31, 1998, there were 2,678,831 Options under the Employee
Plan that were exercisable and 6,753,953 Options that were not exercisable.
Exercise prices for the 9,432,784 Options outstanding as of December 31, 1998
ranged from $12.09 to $33.00, with a weighted average exercise price of $24.50.
Expiration dates ranged from July 11, 2007 to December 31, 2008. The remaining
weighted average contractual life of Options was 9.06 years. The weighted
average grant date fair value of Options granted during 1998 and 1997 was $4.88
and $4.44, respectively. In addition, there were 380,000 and 298,000 Restricted
Shares issued during 1998 and 1997, respectively, which vest over three to five
years.
93
<PAGE> 94
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22 -- COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Company maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution periodically
exceed 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 the Company believes that the risk is not significant. The Company
from time to time enters into interest rate protection agreements to effectively
convert floating rate debt to a fixed rate basis, as well as to hedge
anticipated financing transactions. The Company 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 its non-performance. Currently, the Company has one interest rate
protection agreement 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.
Environmental
The Company, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance by the Company
with existing laws has not had a material adverse effect on the Company's
financial condition and results of operations, and management does not believe
it will have such an impact in the future. However, the Company 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.
Litigation
The Company has become a party to various legal actions resulting from the
operational activities transferred in connection with the Consolidation and the
Beacon Merger. 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.
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 actions
which the Company does not believe to be material, or 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, business, results of operations or
financial condition of the Company.
Geographical
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 44 Properties
located in California, 13 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.
Commitments
In February 1998, the Company entered into a contract to purchase the Rand
Tower Garage in Minneapolis, Minnesota upon completion of the parking structure.
The purchase price for this 589 space parking facility will be approximately
$19.0 million and is scheduled for completion in the second quarter of
94
<PAGE> 95
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
1999. 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.
In March 1998, the Board of Trustees of the Trust approved the purchase of
Prominence, an office building development in Atlanta, Georgia. The property
will consist of approximately 425,706 square feet of office space and 1,350
parking spaces, and is expected to be acquired upon its completion in the third
quarter of 1999. The purchase price for the described assets and amounts to be
incurred for tenanting the property is expected to be approximately $87.0
million. The purchase price does not include the acquisition of an 11.88-acre
site that may be used to develop Phase II of Prominence. 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.
In July 1998, the Company entered into an agreement to purchase the World
Trade Center project in Seattle, Washington. The property will consist of
approximately 186,787 square feet of office space, is scheduled for shell
completion in the first quarter of 2000 and is 100% preleased to a single
tenant. After the tenant takes full occupancy in early 2000, the Company is
expected to purchase the building for approximately $39.0 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.
In accordance with the agreement governing the Company's investment in
WRALP (see Note 6), the Company agreed to make available to WRALP up to $20.0
million in additional financing or credit support for future development. As of
December 31, 1998, no amounts have been funded pursuant to this agreement.
Contingencies
Effective as of August 13, 1998, the Trust amended a pre-existing put
option agreement with certain sellers of the Wright Runstad Properties (the "WR
Holders"). The WR Holders have the option on August 13, 1999 to require the
Trust to purchase all or a portion of the 3,435,688 Common Shares, issued at
acquisition, at a price equal to $31.50 per Common Share. Prior to August 13,
1999, if the WR Holders sell all or a portion of their Common Shares to a third
party for a price less than $29.10625 per Common Share, then the Trust shall pay
to the WR Holders an amount equal to the difference between such sales price and
$29.10625 multiplied by the number of Common Shares sold, not to exceed $3.00
per Common Share. Any amounts paid by the Company as a result of such sale,
calculated as the difference between the sales price and $29.10625 not exceeding
$3.00 per Common Share, shall be recorded as a reduction of shareholders'
equity. For options exercised on August 13, 1999, any amounts paid up to
$29.10625 per Common Share would be reflected as a reduction of shareholders'
equity; the portion of any amounts paid in excess of $29.10625 per Common Share
(not to exceed $31.50 per Common Share) would be expensed. The portion expensed
would not exceed $2.39375 per Common Share.
Effective as of September 3, 1998, the Company amended its pre-existing put
option agreement with the seller of the Columbus America Properties (the "CA
Holder") related to 1,692,546 Units issued at acquisition. The CA Holder has the
option at any time after January 1, 1999 until the earlier of a) September 3,
2000 or b) the date the CA Holder has converted all of its Units to Common
Shares, to require the Company to purchase the Units at a price equal to $29.00
per Unit. Under the terms of the agreement, prior to September 3, 1999, the
option shall be limited to an aggregate of 846,273 Units. In the event of any
option exercise, the Company will recognize any cash paid as a reduction of
partners' capital.
In connection with the acquisition of Worldwide Plaza on October 1, 1998,
the Company issued a transferable put option on Units exercisable only on the
third anniversary of closing with an estimated fair value of approximately $27.4
million. This option entitles its holder to additional Common Shares, the number
of which shall be determined using a formula based on the extent, if any, that
the Common Shares are then trading at less than $29.05 per share.
95
<PAGE> 96
EOP OPERATING LIMITED PARTNERSHIP AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23 -- SUBSEQUENT EVENTS
1) On January 7, 1999, the Company acquired Texas Commerce Tower located
in Irving, Texas from an unaffiliated party for approximately $55.2
million in cash. The office building contains approximately 357,121
square feet of office space and approximately 12,013 square feet of
retail space and was approximately 96.8% occupied as of December 31,
1998.
2) On January 7, 1999, the Company acquired Computer Associates Tower
located in Irving, Texas from an unaffiliated party for approximately
$51.2 million in cash. The office building contains approximately
345,539 square feet of office space and approximately 15,276 square
feet of retail space and was approximately 97.5% occupied as of
December 31, 1998.
3) On January 15, 1999, the Board of Trustees of the Trust declared a
first quarter distribution for the Series B Preferred Shares of
$0.65625 per share. The distribution was paid on February 16, 1999 to
holders of record as of February 1, 1999.
4) On January 26, 1999, the Company issued $1.0 billion of unsecured
notes (the "1.0 Billion Notes") in an offering to institutional
investors (the "1.0 Billion Notes Offering"). The offering consisted
of three tranches: $200 million of 6.375% notes due 2002, $300 million
of 6.5% notes due 2004, and $500 million of 6.8% notes due 2009. Total
proceeds to the Company, net of discounts and selling commissions,
were approximately $990.1 million. The net proceeds were used to pay
down certain secured debt and borrowings under the $1.0 Billion Credit
Facility. Including amortized offering expenses, the weighted average
interest cost of the notes is 6.8%.
5) On January 28, 1999, the Company acquired City Center Bellevue located
in Bellevue, Washington from an unaffiliated party for approximately
$115.3 million in cash. The office building contains approximately
448,881 square feet of office space and approximately 23,706 square
feet of retail space and was approximately 99.0% occupied as of
December 31, 1998.
6) On February 16, 1999, the Board of Trustees of the Trust declared a
first quarter dividend for the Series A Preferred Shares and the
Series C Preferred Shares of $0.56125 and $0.580989583, respectively.
The Series A distribution will be paid on March 15, 1999 to holders of
record as of March 1, 1999. The Series C distribution represents a pro
rata distribution from December 8, 1998 through March 14, 1999 and
will be paid on March 15, 1999 to holders of record as of March 1,
1999.
96
<PAGE> 97
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
97
<PAGE> 98
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company does not have any trustees or executive officers.
The following table sets forth certain information with respect to the
trustees of the Trust, which is the managing general partner of the Company, as
of March 12, 1999. The balance of the response to this item is contained in the
discussion entitled Executive and Senior Officers of Equity Office in Part I of
this Form 10-K.
<TABLE>
<CAPTION>
NAME AGE OFFICE HELD
---- --- -----------
<S> <C> <C>
Samuel Zell............................................. 57 Chairman of the Board and
Trustee (term expires in 2001)
Timothy H. Callahan..................................... 48 President, Chief Executive
Officer and Trustee (term
expires in 1999)
Sheli Z. Rosenberg...................................... 57 Trustee (term expires in 2000)
Thomas E. Dobrowski..................................... 55 Trustee (term expires in 2001)
James D Harper, Jr...................................... 65 Trustee (term expires in 1999)
Jerry M. Reinsdorf...................................... 63 Trustee (term expires in 2001)
William M. Goodyear..................................... 50 Trustee (term expires in 1999)
David K, McKown......................................... 61 Trustee (term expires in 2000)
H. Jon Runstad.......................................... 57 Trustee (term expires in 2001)
Edwin N. Sidman......................................... 56 Trustee (term expires in 2001)
D. J. Andre de Bock..................................... 60 Trustee (term expires in 1999)
</TABLE>
The following is a biographical summary of the experience of the trustees
of the Trust.
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 been Chairman of the Board
of Directors of EGI. Since January 1999, Mr. Zell has served as Chairman of
Equity Group Investments, LLC. 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") and American Classic
Voyages Co., an owner and operator of cruise lines ("ACV"). Since March 1995,
Mr. Zell has served as Chairman of the Board of Manufactured Home Communities,
Inc, a REIT engaged in the ownership and management of manufactured home
communities ("MHC"). Since March 1993, Mr. Zell has served as Chairman of the
Board of Trustees of Equity Residential Properties Trust, a REIT that owns and
operates multifamily residential properties ("EQR"). Since July 1997, Mr. Zell
has been Chairman of the Board of Capital Trust, Inc, a specialized finance
company ("Capital Trust"). 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 and since May 1998, Mr. Zell has been
Chairman of the Board. Since June 1998, Mr. Zell has served as a member of the
Board of Directors of Davel Communications, Inc., an operator of public pay
telephones. Since April 1997, Mr. Zell has served as the chairman of the Board
of Directors of Jacor Communications, Inc., an owner of radio stations
("Jacor"). Since March 1998, Mr. Zell has served as a director of Fred Meyer,
Inc., a large domestic food retailer and operator of multi-department stores.
Mr. Zell currently is the Chairman of the Trust's Executive Committee.(1)
Sheli Z. Rosenberg has been a trustee of the Trust since March 1997. Ms.
Rosenberg was Chief Executive Officer and President of EGI, from November 1994
through December 31, 1998 and, since January 1, 1999, has been Chief Executive
Officer and President of Equity Group Investments, LLC. From 1980 until
September 1997, Ms. Rosenberg was a principal of the law firm of Rosenberg &
Liebentritt, P.C. For more than five years, Ms. Rosenberg has served on the
Board of Directors of Anixter, and previously served for more than five years on
the Board of Directors of EGI. 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
98
<PAGE> 99
the Vice Chairman of its Board of Directors. Ms. Rosenberg was a vice president
of First Capital Benefit Administrators, Inc., a wholly owned indirect
subsidiary of Great American Management and Investment, Inc., which filed a
Chapter 7 Bankruptcy petition on January 3, 1995, resulting in First Capital's
liquidation. On November 15, 1995, an order closing the First Capital bankruptcy
case was entered by the Bankruptcy Court for the Central District of California.
Since August 1996, 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. Since July
1997, Ms. Rosenberg has been a member of the board of Capital Trust.(3)
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
located in New York, New York, an investment advisor to several pension funds of
General Motors Corporation, its subsidiaries and affiliates. For more than five
years, Mr. Dobrowski has been a director of MHC and Red Roof Inns, Inc., an
owner and operator of hotels. Since August 1998, Mr. Dobrowski has been a
trustee of Capital Trust.(2)
James D. Harper, Jr. has been a trustee of the Trust since July 1997. Mr.
Harper has been president of JDH Realty Co., a real estate development and
investment company since 1992. 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. Mr. Harper currently is the Chairman of the Trust's Compensation and
Option and Special Conflicts Committees.(2)(3)(4).
Jerry M. Reinsdorf has been a trustee of the Trust since July 1997. 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, for more
than five years. 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. Mr. Reinsdorf is a stockholder, officer and
director of Jerbo Holdings I, Inc., which is the corporate general partner of a
limited partnership which is the general partner of Bojer Realty Limited
Partnership-I. Bojer Realty was a limited partner of Smith Dairy Partnership,
Ltd., and a stockholder of the corporate general partner of Smith Dairy which
filed a voluntary petition for relief under Chapter 11 Bankruptcy on January 24,
1994. On February 14, 1995, an order dismissing the Smith Dairy bankruptcy case
was entered by the Bankruptcy Court for the Southern District of Florida.
William M. Goodyear has been a trustee of the Trust since July 1997. From
July 1997 until January 1999, Mr. Goodyear was Chairman of Bank of America,
Illinois, the Midwest business unit of BankAmerica Corporation, a commercial
bank. From July 1997 until January 1999, he was also President of Bank of
America, Private Bank. Effective January 15, 1999, Mr. Goodyear resigned both
positions. 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. 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 currently is
Chairman of the Trust's Audit Committee.(2)(4)
99
<PAGE> 100
David K. McKown has been a trustee of the Trust since July 1997. Mr. McKown
has been Group Executive of Diversified Finance of BankBoston, N.A., a
commercial bank since 1993. Mr. McKown was director of Loan Review for
BankBoston, N.A. from 1990 until 1993.(1)(3)(4)
H. Jon Runstad has been a trustee of the Trust since January 1998. Since
1971, Mr. Runstad has been 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; and since January
1998, he has served as its Chairman. From 1971 until December 1997, Mr. Runstad
was President of Wright Runstad & Company. From 1987 through September 1998, Mr.
Runstad 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 has been a trustee of the Trust since March 1998. Mr.
Sidman served as Chairman of the Board and a director of Beacon Properties
Corporation from 1994 until the consummation of the merger of Beacon Properties
Corporation into Equity Office in December 1997. He is currently the managing
partner of The Beacon Companies, a private company in Boston, Massachusetts,
which is involved in real estate investment, development and management. Prior
to joining Beacon Properties Corporation in 1971, Mr. Sidman practiced law with
the predecessor to the firm of Rubin and Rudman in Boston, Massachusetts. Mr.
Sidman's past 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 of the Board of Directors and Executive
Committee for the United Way of Massachusetts Bay.
D.J. Andre de Bock was appointed a trustee effective May 15, 1998. He
currently is a member of the Board of Directors of OTIS B.V., Orange Global
Property Fund, and Stichting ROZ Index, a Dutch property index, and serves as an
advisor to Jones Lang Wootton Nederland. From 1995 through 1996, prior to his
retirement, Mr. de Bock was Chairman and Chief Executive Officer of ING Real
Estate, the real estate development and investment arm of ING Group. From 1991
until 1994, Mr. de Bock was Managing Director of Innovest Management, an
Amsterdam listed REIT organized under Dutch law.
- ---------------
(1) Member of Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation and Option Committee
(4) Member of the Special Conflicts Committee
MEETINGS AND COMMITTEES OF THE TRUST'S BOARD OF TRUSTEES
Meetings. The Board of Trustees held 16 meetings during 1998. All of the
trustees, except Mr. Sidman, attended over 75% of the meetings of the Board and
those committees on which he or she served during the year. Mr. Sidman attended
71% of the meetings of the Board during the year. The Board of Trustees has
standing executive, compensation and option, audit and special conflicts
committees, which are described below.
Executive Committee. The Trust's Board of Trustees' Executive Committee
consist of the trustees identified above. Mr. Zell is the Chairman of the
Executive Committee. Subject to the limitations which are specified in the
Trust's Bylaws, the Executive Committee has the general authority to acquire,
dispose of and finance investments and to approve the execution of contracts and
agreements, including those related to indebtedness. Although the Executive
Committee did not formally meet during the year, its members were in frequent
communication and approved numerous matters by unanimous written consent.
Compensation and Option Committee. The Trust's Board of Trustees'
Compensation and Option Committee consists of the independent trustees
identified above. Mr. Harper is the Chairman of the Compensation and Option
Committee. The Compensation and Option Committee determines compensation for the
executive officers 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. The
Compensation and Option Committee met ten times during the year.
100
<PAGE> 101
Audit Committee. The Trust's Board of Trustees' Audit Committee consists of
the independent trustees identified above. Mr. Goodyear is the Chairman of the
Audit Committee. The Audit Committee recommends 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 Trusts's and the Company's internal accounting controls. The
Audit Committee met three times during the year.
Special Conflicts Committee. The Trust's Board of Trustees' Special
Conflicts Committee consists of the independent trustees identified above. Mr.
Harper is the Chairman of the Special Conflicts Committee. The Trust's Bylaws
permit any trustee to require that the Special Conflicts Committee review and
approve, prior to a vote of the disinterested trustees of the full Board, any
transaction in which a trustee has a direct or indirect interest. The Special
Conflicts Committee met twice during the year.
The Trust does not have a nominating committee.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the trustees
and executive officers of the Trust to file reports of holdings and transactions
in the Trust's shares with the SEC and the New York Stock Exchange.
Management believes that, during 1998, all applicable filing requirements
of the officers and trustees of the Trust were complied with except that each of
Mr. Sidman and Mr. de Bock was late in filing their Form 3s. Each of Mr. Zell,
Mr. Callahan and Ms. Rosenberg was late in filing a Form 4 to report a
distribution of Units from the Company.
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<PAGE> 102
ITEM 11: EXECUTIVE COMPENSATION
COMPENSATION OF TRUST'S BOARD OF TRUSTEES; PAYMENT IN COMMON SHARES
Annual Fees: The trustees who are employees of the Trust receive no fees
for their services as trustees. Each of the independent trustees receives an
annual fee of $40,000 and an additional $1,000 per annum for each committee on
which he or she serves. Committee chairs receive an additional $500 per annum
for each committee chaired. Generally, these fees are paid in Common Shares. In
addition, independent trustees receive an annual grant of options to purchase
10,000 Common Shares at the fair market value on the date of each annual meeting
of shareholders. The annual trustee option grants vest as follows: options for
3,333 Common Shares vest six months after grant date; options for an additional
3,333 Common Shares vest on the first anniversary of the grant date; and options
for the remaining 3,334 Common Shares vest on the second anniversary of the
grant date.
Options: On February 17, 1998, The Board of Trustees' Compensation and
Option Committee granted fully vested options to purchase 500,000 Common Shares
to Mr. Zell, 94,500 Common Shares to each of Ms. Rosenberg and Mr. Harper and
47,250 Common Shares to each of Messrs. Dobrowski, Reinsdorf, Goodyear and
McKown at an exercise price of $29.50 per share. On February 16, 1999, the
Compensation and Option Committee granted Mr. Zell options to purchase an
additional 500,000 Common Shares at an above-market exercise price of $29.50 per
share. One third of such options granted to Mr. Zell will vest on each of the
first three anniversary dates of February 16, 1999.
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<PAGE> 103
EXECUTIVE COMPENSATION
The following tables show information with respect to the annual
compensation (including option grants) for services rendered to the Trust for
the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
The following table shows the annual compensation for Timothy H. Callahan,
the Chief Executive Officer of the Trust, and the other four most highly
compensated executive officers of the Trust.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
------------------------- -------
ANNUAL COMPENSATION RESTRICTED SECURITIES
--------------------- COMMON SHARE UNDERLYING LTIP ALL OTHER
SALARY BONUS AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) (#)(4) ($) ($)(5)
- --------------------------- ---- -------- ---------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Timothy H. Callahan......... 1997 $600,000 $1,050,000 $4,976,875 450,000 $0.00 $9,600
President and Chief 1998 $700,000 $1,050,000 $2,640,000 300,000 $0.00 $9,600
Executive Officer
Michael A. Steele........... 1997 $265,000 $ 525,000 $1,523,375 250,000 $0.00 $9,600
Executive Vice President-- 1998 $350,000 $ 525,000 $1,200,000 110,000 $0.00 $9,600
Real Estate Operations and
Chief Operating Officer
Richard D. Kincaid.......... 1997 $235,000 $ 465,000 $1,523,375 250,000 $0.00 $9,600
Executive Vice President 1998 $300,000 $ 465,000 $1,200,000 110,000 $0.00 $9,600
and Chief Financial
Officer
Stanley M. Stevens.......... 1997 $325,000 $ 375,000 $ 627,000 225,000 $0.00 $9,600
Executive Vice President 1998 $375,000 $ 375,000 $ 600,000 75,000 $0.00 $9,600
and Chief Legal Counsel
Sybil J. Ellis.............. 1997 $225,000 $ 275,000 $ 330,000 175,000 $0.00 $9,600
Senior Vice President-- 1998 $275,000 $ 300,500 $ 360,000 50,000 $0.00 $9,600
Acquisitions
</TABLE>
- ---------------
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of these
officers.
(2) Cash and non-cash bonuses payable in Common Shares including amounts earned
but deferred are reported in the year in which the compensation service was
performed, even if the bonuses were paid in a subsequent year.
(3) On September 22, 1997, December 16, 1997 and December 31, 1998, the
Compensation and Option Committee of the Board of Trustees granted
Restricted Share Awards to certain of the Trust's executive officers
pursuant to the Trust's Amended and Restated 1997 Share Option and Share
Award Plan. Mr. Callahan was granted Restricted Share Awards of 85,000,
70,000 and 110,000 Common Shares, respectively, and Mr. Steele and Mr.
Kincaid were each granted Restricted Share Awards of 17,000, 30,000 and
50,000 Common Shares, respectively. On December 16, 1997 and December 31,
1998, the Compensation and Option Committee granted Mr. Stevens Restricted
Share Awards of 19,000 and 25,000 Common Shares, respectively, and Ms. Ellis
Restricted Share Awards of 10,000 and 15,000 Common Shares, respectively.
These awards vest over a five-year period (50% on the third anniversary of
the grant date, 25% on the fourth anniversary of the grant date, and 25% on
the fifth anniversary of the grant date). The dollar value shown in the
table for the Restricted Share Awards is based on the closing prices as
listed on the New York Stock Exchange of the Common Shares on the respective
dates of grant. This valuation does not take into account the diminution in
value attributable to the restrictions applicable to the Common Shares. The
total number of Restricted Share Awards held by each executive
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<PAGE> 104
officer listed above and the value of such Restricted Share Awards at
December 31, 1998, the last trading day of the year, were as follows:
<TABLE>
<CAPTION>
NUMBER OF
RESTRICTED VALUE AT
NAME COMMON SHARE AWARDS DECEMBER 31, 1998
---- ------------------- -----------------
<S> <C> <C>
Timothy H. Callahan........................ 265,000 $6,360,000
Michael A. Steele.......................... 97,000 $2,328,000
Richard D. Kincaid......................... 97,000 $2,328,000
Stanley M. Stevens......................... 44,000 $1,056,000
Sybil J. Ellis............................. 25,000 $ 600,000
</TABLE>
Distributions are paid on all Restricted Share Awards at the same rate as
on unrestricted Common Shares.
(4) Securities underlying options are reported in the year granted.
(5) Includes employer matching and profit-sharing contributions to Equity
Office's 401(k) Retirement Savings Plan.
1998 OPTION GRANTS
The following table gives more information on share options granted during
the last fiscal year to Timothy H. Callahan, the Chief Executive Officer of the
Trust, and the other four most highly compensated executive officers of the
Trust .
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF COMMON SHARE
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE PER OPTION TERM(1)
OPTIONS IN FISCAL COMMON EXPIRATION --------------------------
NAME GRANTED(2) YEAR 1998 SHARE(3) DATE 5%(4) 10%(5)
---- ---------- ------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Timothy H. Callahan....... 300,000 3.02% $23.40 12/31/08 $11,727,000 $18,675,000
Michael A. Steele......... 110,000 1.11% $23.40 12/31/08 $ 4,299,900 $ 6,847,500
Richard D. Kincaid........ 110,000 1.11% $23.40 12/31/08 $ 4,299,900 $ 6,847,500
Stanley M. Stevens........ 75,000 .76% $23.40 12/31/08 $ 2,931,750 $ 4,668,750
Sybil J. Ellis............ 50,000 .50% $23.40 12/31/08 $ 1,954,500 $ 3,112,500
</TABLE>
- ---------------
(1) The 5% and 10% rates of appreciation are required to be disclosed by SEC
rules and are not intended to forecast possible future appreciation, if any,
in the Trust's share price.
(2) All options were granted at the fair market value of the Common Shares as of
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 annual installments over three
years.
(3) The exercise price for the grant of options on December 31, 1998 was the
average closing price of the Common Shares as listed on the New York Stock
Exchange for the five trading days immediately preceding the date of grant.
(4) An annual compound share price appreciation of 5% from the December 31, 1998
closing price as listed on the New York Stock Exchange of $24.00 per Common
Share yields a price of $39.09 per Common Share on the option expiration
date.
(5) An annual compound share price appreciation of 10% from the December 31,
1998 closing price as listed on the New York Stock Exchange of $24.00 per
Common Share yields a price of $62.25 per Common Share on the option
expiration date.
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<PAGE> 105
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table shows the number and value of share options
(exercisable and unexercisable) for Messrs. Callahan, Steele, Kincaid and
Stevens and Ms. Ellis during the last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
COMMON SHARES AT 12/31/98(#) AT 12/31/98(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy H. Callahan.... 0 $0.00 149,999 600,001 $199,998 $580,002
Michael A. Steele...... 0 $0.00 83,333 276,667 $150,000 $366,000
Richard D. Kincaid..... 0 $0.00 83,333 276,667 $150,000 $366,000
Stanley M. Stevens..... 0 $0.00 75,000 225,000 $150,000 $345,000
Sybil J. Ellis......... 0 $0.00 58,332 166,668 $124,998 $280,002
</TABLE>
- ---------------
(1) Represents the fair market value of a Common Share on December 31, 1998
($24.00) less the option exercise price. An option is "in-the-money" if the
fair market value of the Common Shares subject to the option exceeds the
option exercise price.
REPORT OF THE TRUST'S COMPENSATION AND OPTION COMMITTEE ON EXECUTIVE
COMPENSATION
The Compensation and Option Committee of the Board consists of the
independent trustees listed below. The Committee's functions include the review
and approval of Equity Office's executive compensation structure and overall
benefits program. The purpose of the executive compensation program is to
establish and maintain a performance and achievement oriented environment which
aligns the interests of our executives with the interests of our shareholders.
The program is performance-based with variable pay for executives constituting a
significant portion of total compensation to ensure that it remains competitive.
Based on Equity Office's excellent performance in 1998, the Compensation and
Option Committee believes that the compensation program properly rewards its
employees for achieving improvements in Equity Office's performance and serving
the interest of its shareholders.
Equity Office's overall compensation structure is reviewed annually with an
outside consultant and using outside executive compensation surveys of:
- other large for profit corporations outside the real estate area;
- the real estate industry in general; and
- REITs in particular with an emphasis on office REITS.
Types of Compensation:
The three major components of executive compensation include:
1. Base Salary. Positions are classified by salary on the basis of assigned
responsibilities and on an evaluation of the latest survey information
available, as to appropriate compensation levels. A range of earnings
opportunities has been established for each position. The mid-point of the
salary range will be dependent upon the market value of the position's
responsibilities and the value determined to be appropriate to reinforce the
achievement of Equity Office's goals and objectives. Each salary range has three
defined points of reference:
- minimum or the lowest salary to be paid to a qualified incumbent;
- mid-point or the middle position of the salary range established with
reference to the market value and objectives of Equity Office; and
- maximum or the highest amount to be paid to an incumbent in this
position.
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<PAGE> 106
Where salary information is unavailable for a particular position, the
salary range is based on other positions having similar responsibilities at
Equity Office and in companies with comparable revenues. Individual base
salaries are reviewed at least annually. Salary increases are granted based on
each executive's performance as well as such executive's position in the
applicable salary range.
2. Bonus. The objectives underlying our bonus program are to motivate all
employees by more closely linking bonus awards to value added for our
shareholders. Equity Office has created and intends to promote a culture of
performance and ownership among our managers. Executive officers' short-term
incentives are accomplished by tying the executive officers' performance to
Equity Office's continued performance. We accomplished this by awarding the
Chief Executive Officer and each other executive officer some of his or her
bonus in common shares. We believe that having our executive officers "invest" a
portion of their bonuses in Common Shares better aligns their compensation with
the performance of our common shares.
The bonus program recognizes three aspects of performance which are
corporate, team and individual:
- Corporate refers to the overall performance measures of Equity Office and
is used to determine executive and senior management incentive awards;
- Team refers to key functional or departmental performance measures. This
aspect of performance links individuals to the performance of their
collective work group or assigned geographic territory, and is intended
to foster cooperation within Equity Office; and
- Individual performance refers to specific performance measures developed
for each individual participant in the program. This aspect of
performance motivates individuals to achieve a high level of individual
success and personal contribution.
As a general rule, the more senior positions have their annual incentives
weighted more heavily toward the achievement of corporate and team performance
rather than individual performance. Performance levels for each performance
measure are identified that correspond to a threshold, target and maximum
performance level:
- Threshold performance signifies a solid achievement level but falls short
of meeting all objectives. This performance level must be achieved before
any bonus is earned;
- Target performance signifies an achievement level which meets the
business objectives set by Equity Office; and
- High performance signifies a significant achievement and would be
considered exceptional performance by industry standards.
3. Share Options and Restricted Share Awards. The Compensation and Option
Committee recognizes that while the bonus program provides rewards for positive
short-term and mid-term performance, the interests of shareholders are best
served by giving key employees the opportunity to participate in the
appreciation of our common shares through the granting of share options and
restricted share awards. We believe that share performance, over the long term,
will reflect executive performance and that such arrangements further reinforce
management goals and incentives to achieve shareholder objectives. All employee
share options granted to date vest over a period of three years at a rate of one
third of such grant each year, thereby encouraging the retention of key
employees who receive awards. We used the compensation surveys, an assessment of
the employee's achieved performance goals and objectives and the size of
previous grants made to the employee to determine the amount of share options
awarded each employee.
Chief Executive Officer's Compensation. Based on the executive compensation
surveys and our financial performance in 1998, the Compensation and Option
Committee believes that the salary, bonus, restricted share awards and option
grants of Mr. Callahan, our Chief Executive Officer and President, are fair and
competitive and that our overall executive compensation ranks in the upper
quartile among the general real estate industry and among REITs. Equity Office
accomplished its main goals in 1998 by increasing its net income and funds from
operations per common share, strengthening its balance sheet and diversifying
its portfolio across the United States. This provides stability in cash flows
and insulation against regional
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<PAGE> 107
economic downturns. During Mr. Callahan's tenure as Chief Executive Officer and
President, we have become the largest owner and operator of office buildings in
the United States. The key performance measure we used to determine Mr.
Callahan's 1998 compensation was that our financial performance in 1998 was in
the top quartile in almost every financial category, due in large part to Mr.
Callahan's leadership, foresight and experience. The Compensation and Option
Committee noted the following factors in support of its conclusion:
- Dividends per Common Share of $1.48 on an annualized basis; a 23%
increase as compared to the prior year's annualized rate per share;
- Strong financial performance, with a $386.3 million increase in funds
from operations over 1997 and a total market capitalization of $13.6
billion at December 31, 1998; and
- Continued growth in the square footage of owned office buildings from
65.3 million at December 31, 1997 to 75.1 million at December 31, 1998, a
15% increase.
Tax Policy. Section 162(m) of the Internal Revenue Code limits Equity
Office's tax deduction each year for compensation to each of our Chief Executive
Officer and the four other highest paid executive officers to $1 million.
Section 162(m), however, allows a deduction without regard to amount for
payments of performance based compensation which includes most share option and
other incentive arrangements, the material terms of which have been approved by
shareholders. Awards issued under our Amended and Restated 1997 Share Option and
Share Award Plan may, but need not, satisfy the requirements of Section 162(m).
Options under this plan that have an exercise price equal to grant date fair
market value and that vest based solely on continued employment qualify as
"performance-based compensation." However, options and other awards under the
plan that are conditioned on achievement of performance targets do not qualify
as performance-based compensation, because our shareholders have not been asked
to vote on those targets. We believe that because we qualify as a REIT under the
Code and are not subject to Federal income taxes, the payment of compensation
that does not satisfy the requirements of Section 162(m) would not have a
material adverse financial consequence to us provided we distribute 100% of our
taxable income.
Respectfully submitted,
James D. Harper, Jr., Chairman
David K. McKown
Sheli Z. Rosenberg
COMPENSATION AND OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Trust's Board of Trustees' Compensation and Option Committee members
are Messrs. Harper and McKown and Ms. Rosenberg.
Mr. Zell and Ms. Rosenberg serve as members of the Board of Equity Group
Investments, L.L.C. Ms. Rosenberg is the President and Chief Executive Officer
of Equity Group Investments, L.L.C. Mr. Zell and Ms. Rosenberg each serves as a
director of other non-public companies owned by Mr. Zell or his affiliates which
companies do not have Compensation and Option Committees.
See "Certain Relationships and Related Transactions."
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<PAGE> 108
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates how many Units in the Company the executive
officers and trustees beneficially owned as of March 1, 1999. In general,
"beneficial ownership" includes those Units a trustee or executive officer has
the power to vote, or the power to transfer. Except as otherwise noted, the
persons named in the table below have sole voting and investment power with
respect to all Units shown as beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF
UNITS PERCENTAGE
BENEFICIALLY OF ALL
NAME OWNED UNITS(1)
---- ------------ ----------
<S> <C> <C>
Samuel Zell(2)........................................... 6,413,078 2.22 %
Timothy H. Callahan...................................... 6,186 *
Michael A. Steele........................................ -- *
Richard D. Kincaid....................................... -- *
Stanley M. Stevens....................................... 735 *
Sybil J. Ellis........................................... -- *
Sheli Z. Rosenberg(3).................................... 44,741 *
Thomas E. Dobrowski...................................... -- *
James D. Harper, Jr...................................... -- *
Jerry M. Reinsdorf....................................... -- *
William M. Goodyear...................................... -- *
David K. McKown.......................................... -- *
H. Jon Runstad(4)........................................ 2,698,945 *
Edwin N. Sidman(5)....................................... 750,110 *
D.J. Andre de Bock....................................... -- *
All trustees and executive officers as a group (15
persons)............................................... 9,891,425 3.43 %
</TABLE>
- ---------------
* Less than 1%.
(1) Assumes a total of 288,557,168 Units outstanding as of March 1, 1999.
(2) Includes 1,614,500 Units attributable to ZML Partners Limited Partnership,
ZML Partners Limited Partnership II, ZML Partners Limited Partnership III
and/or ZML Partners Limited Partnership IV, which may be deemed to be
beneficially owned by Mr. Zell; however, Mr. Zell disclaims beneficial
ownership of 995,354 of such Units.
(3) Does not include 8,289,596 Units attributable to ZML Partners Limited
Partnership, ZML Partners Limited Partnership II, ZML Partners Limited
Partnership III and/or ZML Partners Limited Partnership IV, or held by 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 solely as a result of her position as
director, and/or executive officer of the ultimate general partner or
shareholder of such entities, or a director, and/or executive officer of
such entities; however, Ms. Rosenberg disclaims beneficial ownership of such
8,289,596 Units.
(4) Includes 2,615,700 Units 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
2,145,452 of these 2,615,700 Units.
(5) Includes 401,809 Units held by The Leventhal Family Limited Partnership.
Paula Sidman, Mr. Sidman's spouse, is a general partner of such partnership;
however, Mrs. Sidman disclaims beneficial ownership of the Units
beneficially owned by such partnership except for the Units in which she has
a pecuniary interest.
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<PAGE> 109
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
WRIGHT RUNSTAD AFFILIATED TRANSACTIONS
H. Jon Runstad, a trustee of the Trust, is the Chairman, Chief Executive
Officer and a director of Wright Runstad & Company, the general partner of
Wright Runstad Associates Limited Partnership ("WRALP"). A subsidiary of the
Trust and an affiliate of Equity Group Investments, L.L.C. together own a 30%
limited partnership interest in WRALP. During 1998, such subsidiary and limited
partner received distributions of $1.3 million from WRALP. In addition, various
subsidiaries of the Trust made payments to WRALP during 1998 totaling $4.4
million as development and management fees, leasing commissions and related
expense reimbursements with respect to some of our the Properties. An additional
$3.8 million was paid during 1998 to Wright Runstad & Company for the
reimbursement of salaries of personnel in connection with such management
services.
Wright Runstad & Company leases space in some of the Office Properties. The
terms of the leases are consistent with terms of unaffiliated tenants' leases.
Total rents and other amounts paid by Wright Runstad & Company under its lease
were approximately $.3 million for the year ending December 31, 1998. The
unaffiliated members of the Board of Trustees of the Trust annually review and
approve the rents paid under this lease.
In addition, Mr. Runstad had an interest in the following transactions
during 1998:
- WRALP serves as the co-property manager with the Company and leasing
agent for the portfolio of office buildings acquired in December 1997 by
the Company from an entity affiliated with WRALP. Those buildings are
located in Seattle and Bellevue, Washington; Portland, Oregon and
Anchorage, Alaska.
- In December 1997, the Company agreed to guarantee a line of credit
obtained by WRALP from a third-party lender in an amount of up to $19.5
million in principal plus $.5 million in costs. The current balance
outstanding on that line of credit is approximately $10 million. The
Company has not been required to make any payments under that guarantee.
- WRALP has subsequently become the property manager for two additional
office buildings which the Company acquired in 1998 which are located in
Seattle, Washington.
- WRALP owns a 20% interest and the Company owns an 80% interest in WRC
Sunset North LLC, a Washington limited liability company that is
developing a three-building office complex, Sunset North Corporate
Campus, in Bellevue, Washington. WRALP also serves as developer of that
project and, upon completion, will serve as its co-property manager with
the Company and leasing agent.
- WRALP owns a 20% interest and the Company owns an 80% interest in Three
Bellevue Center LLC, a Washington limited liability company that is
developing an office building, Three Bellevue Center, in Bellevue,
Washington. WRALP is serving as developer of that project and, upon
completion, will serve as co-property manager with the Company and
leasing agent.
- WRALP is currently developing an office building, The World Trade Center
in Seattle, Washington. Upon completion of the building, the Company will
serve as co-property manager and leasing agent with WRALP. The Company
has agreed to acquire that building after it has been completed and
occupied by a third party tenant.
EQUITY GROUP INVESTMENTS AFFILIATED TRANSACTIONS
The Company leases office space at Two North Riverside Plaza, Chicago,
Illinois owned by Two North Riverside Plaza Joint Venture, a partnership
comprised of trusts established for the benefit of the families of Samuel Zell
and Robert Lurie, a deceased former business partner of Mr. Zell. In addition,
Equity Group Investments, L.L.C., and its affiliates have provided the Company
and its subsidiaries with certain research and real estate tax services. The
Company paid approximately $2.5 million during 1998 to Equity Group Investments,
L.L.C. and its affiliates for such office space and services. Management
believes these amounts
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<PAGE> 110
equal a market rental rate for the office space and the actual cost of providing
these services. The unaffiliated members of the Board of Trustees of the Trust
annually review and approve the rates charged by Equity Group Investments,
L.L.C. for services rendered to the Company.
EGI Risk Services Inc., a wholly owned subsidiary of Equity Group
Investments, L.L.C. provides risk management services to the Company including
reviewing, obtaining and/or researching various insurance policies. In addition,
National Liberty, an affiliate of Equity Group Investments, L.L.C. provides
certain insurance coverage for the Company. Fees paid to EGI Risk Services Inc.
and insurance premiums paid to National Liberty during 1998 were approximately
$3.3 million.
An affiliate of Equity Group Investments, L.L.C. has an indirect minority
interest in Standard Parking Limited Partnership ("SPLP"). An affiliate of SPLP
manages the parking operations at certain properties that are owned by the
Company. Management believes amounts paid to SPLP's affiliate are equal to
market rates for such services.
The Company has entered into various lease agreements with SPLP's
affiliates whereby such affiliates lease certain stand-alone parking facilities.
Certain of these lease agreements provide such affiliates with annual successive
options to extend the term of the lease through various dates. The rent paid in
1998 under these lease agreements was approximately $13.1 million. 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 for future periods.
On July 28, 1998, the Company completed the purchase for $48.5 million of
50,000 8.25% Step Up Convertible Trust Preferred Securities, $1,000 liquidation
preference per share, issued by CT Convertible Trust I, a subsidiary of Capital
Trust in a private placement. The preferred securities are convertible at any
time by the holders into Class A common shares of Capital Trust, Inc. at a
conversion price of $11.70, reflecting a 30% conversion premium over Capital
Trust, Inc.'s common share price at the close of business on July 24, 1998. The
preferred securities are non-callable for five years, and have a 20-year
maturity. Mr. Zell is also Chairman of the Board of Capital Trust, and Ms.
Rosenberg and Mr. Dobrowski are directors of Capital Trust. The Company earned
approximately $1.7 million in dividends in 1998. The dividend is payable each
calendar quarter; commencing in year seven, the dividend will increase by 75
basis points per annum. In connection with the investment, Capital Trust has
granted the Company and other investors the right to participate in certain
strategic lending opportunities.
MISCELLANEOUS
Equity Office Properties Management Corp., a Delaware corporation, has
entered into third-party management contracts, on terms equivalent to
third-party transactions, with respect to properties which are owned or
controlled by affiliates of Mr. Zell. Income recognized for such services
rendered for 1998 was approximately $9.5 million.
Certain services for the Company's tenants that for tax reasons may not be
performed by a REIT are performed by a service corporation owned entirely by an
affiliate of Mr. Zell. The Company pays this service corporation a fee for its
services. The Company has no control over, or ownership interest in, this
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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<PAGE> 111
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) Financial Statements and Schedules:
FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets of EOP Operating Limited Partnership as of
December 31, 1998 and 1997
Consolidated Statements of Operations of EOP Operating Limited Partnership
for the year ended December 31, 1998 and the period from July 11, 1997 through
December 31, 1997, and the Combined Statements of Operations of Equity Office
Predecessors for the period from January 1, 1997 through July 10, 1997 and the
year ended December 31, 1996
Consolidated Statements of Changes in Partners' Capital of EOP Operating
Limited Partnership for the year ended December 31, 1998 and the period from
July 11, 1997 through December 31, 1997, and the Combined Statements of Changes
in Owners' Equity of Equity Office Predecessors for the period from January 1,
1997 through July 10, 1997 and the year ended December 31, 1996
Consolidated Statements of Cash Flows of EOP Operating Limited Partnership
for the year ended December 31, 1998 and the period from July 11, 1997 through
December 31, 1997, and the Combined Statements of Cash Flows of Equity Office
Predecessors for the period from January 1, 1997 through July 10, 1997 and the
year ended December 31, 1996
Notes to Consolidated and Combined Financial Statements
SCHEDULES
Schedule III -- Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(a)(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------- -----------
<S> <C>
4.1* Indenture, dated as of September 2, 1997, between the
Company and State Street Bank and Trust Company
4.2* First Supplemental Indenture, dated as of February 9, 1998,
between the Company and State Street Bank and Trust Company
4.3 Form of 6.375% Note due 2003 (incorporated herein by
reference to Exhibit 4.10 of the Company's Registration
Statement on Form S-4 (Reg. No. 333-61469))
4.4** Form of 6.625% Note due 2005
4.5 Form of 6.750% Note due 2008 (incorporated herein by
reference to Exhibit 4.11 of the Company's Registration
Statement on Form S-4 (Reg. No. 333-61469))
4.6** Form of 7.250% Note due 2018
4.7 Form of 6.376% MandatOry Par Put Remarketed Securities due
2012 (incorporated herein by reference to Exhibit 4.12 of
the Company's Registration Statement on Form S-4 (Reg. No.
333-61469))
4.8** $30,000,000 7.24% Senior Note due 2004
4.9** $50,000,000 7.36% Senior Note due 2005
</TABLE>
111
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------- -----------
<S> <C>
4.10** $50,000,000 7.44% Senior Note due 2006
4.11** $50,000,000 7.41% Senior Note due 2007
4.12 Form of 6.50% Notes due 2004 (incorporated herein by
reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-4 (Reg. No. 333-61469))
4.13 Form of 6.763% Notes due 2007 (incorporated herein by
reference to Exhibit 4.4 of the Company's Registration
Statement on Form S-4 (Reg. No. 333-61469))
4.14 Form of 7.25% Notes due 2028 (incorporated herein by
reference to Exhibit 4.5 of the Company's Registration
Statement on Form S-4 (Reg. No. 333-61469))
4.15 Debt Warrant Agreement, dated as of June 15, 1998 between
the Trust and the Warrant Agent (incorporated herein by
reference to Exhibit 4.8 of the Company's Registration
Statement on Form S-4 (Reg. No. 333-61469))
4.16 Form of Global Debt Warrant Certificate (incorporated herein
by reference to Exhibit 4.9 of the Company's Registration
Statement on Form S-4 (Reg. No. 333-61469))
4.17 Form of 6.375% Note due 2002 (incorporated herein by
reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K filed with the SEC on January 25, 1999)
4.18 Form of 6.5% Note due 2004 (incorporated herein by reference
to Exhibit 4.2 of the Company's Current Report on Form 8-K
filed with the SEC on January 25, 1999)
4.19 Form of 6.8% Note due 2009 (incorporated herein by reference
to Exhibit 4.3 of the Company's Current Report on Form 8-K
filed with the SEC on January 25, 1999)
4.20** Term Loan Agreement for $328,000,000 Term Credit Facility
dated as of August 14, 1998
4.21** Term Loan Agreement for $200,000,000 Term Credit Facility
dated as of September 22, 1998
4.22 Second Amended and Restated Revolving Credit Facility for $1
Billion Revolving Credit facility dated as of May 29, 1998
10.1* Agreement of Limited Partnership of the Operating
Partnership, dated as of July 3, 1997, as amended
10.2 Contribution Agreement, dated as of April 30, 1997, among
the Trust, the Company and the persons named therein
(incorporated herein by reference to Exhibit 10.4 to the
Trust's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended)
10.3 Agreement and Plan of Merger, dated September 15, 1997, as
amended, among the Trust, the Company, Beacon and Beacon
Partnership (incorporated herein by reference to Exhibit 2.1
to the Trust's Current Report on Form 8-K dated September
15, 1997)
12.1 Statement Regarding Computation of Ratios
21.1 List of Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included in signature page)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference to the same-numbered exhibit to the Trust's
Annual Report on Form 10-K for the year ended December 31, 1997, as amended
** Incorporated herein by reference to the same-numbered exhibit to the Trust's
Annual Report on Form 10-K for the year ended December 31, 1998.
112
<PAGE> 113
(b) Reports on Form 8-K:
None
(c) Exhibits
See Item 14(a)(3) above.
(c) Financial Statement Schedules:
None
113
<PAGE> 114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Chicago, Illinois, as of the 16th day of March, 1999.
EOP OPERATING LIMITED PARTNERSHIP
By: EQUITY OFFICE PROPERTIES TRUST
its general partner
/s/ TIMOTHY H. CALLAHAN
By:
--------------------------------------
Timothy H. Callahan
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated as of the 16th day of March, 1999.
Each person whose signature appears below hereby constitutes and appoints
Samuel Zell and Timothy H. Callahan, and each of them, 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 to this annual report on Form 10-K for
the fiscal year ended December 31, 1998, 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 or his substitutes may do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<C> <S>
/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 accounting officer)
Richard D. Kincaid
/s/ SAMUEL ZELL Chairman of the Board of Trustees
- ------------------------------------------------
Samuel Zell
/s/ D.J.A. DE BOCK Trustee
- ------------------------------------------------
D.J.A. de Bock
/s/ THOMAS E. DOBROWSKI Trustee
- ------------------------------------------------
Thomas E. Dobrowski
/s/ WILLIAM M. GOODYEAR Trustee
- ------------------------------------------------
William M. Goodyear
/s/ JAMES D. HARPER, JR. Trustee
- ------------------------------------------------
James D. Harper, Jr.
</TABLE>
114
<PAGE> 115
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<C> <S>
/s/ DAVID K. MCKOWN Trustee
- ------------------------------------------------
David K. McKown
/s/ JERRY M. REINSDORF Trustee
- ------------------------------------------------
Jerry M. Reinsdorf
/s/ SHELI Z. ROSENBERG Trustee
- ------------------------------------------------
Sheli Z. Rosenberg
Trustee
- ------------------------------------------------
H. Jon Runstad
/s/ EDWIN N. SIDMAN Trustee
- ------------------------------------------------
Edwin N. Sidman
</TABLE>
115
<PAGE> 116
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
ENCUMBRANCES
DESCRIPTION NOTES LOCATION AT 12/31/98 NOTES
----------- ------ -------- -------------- ------
<C> <S> <C> <C> <C> <C>
Office Properties:
1 60 Spear Street Building....................... (3) San Francisco, CA $ --
2 San Felipe Plaza............................... (3) Houston, TX 52,306,400
3 5100 Brookline................................. (3) Oklahoma City, OK --
4 Summit Office Park............................. (3) Ft. Worth, TX --
5 Intercontinental Center........................ (3) Houston, TX --
6 Four Forest.................................... (3) Dallas, TX --
7 Dominion Tower................................. (3) Norfolk, VA --
8 Northborough Tower............................. (3) Houston, TX --
9 500 Marquette Building......................... (3) Albuquerque, NM --
10 Atrium Towers.................................. (3) Oklahoma City, OK --
11 Community Corporate Center..................... (3) Columbus, OH 16,675,100
12 Sarasota City Center........................... (3) Sarasota, FL --
13 Denver Corporate Center II and III............. (3) Denver, CO --
14 University Tower............................... (3) Durham, NC --
15 Shelton Pointe................................. (3) Shelton, CT --
16 San Jacinto Center............................. (3) Austin, TX --
17 1111 19th Street............................... (3) Washington, D.C. --
18 Bank One Center / Tower........................ (3) Indianapolis, IN --
19 North Central Plaza Three...................... (3) Dallas, TX --
20 The Quadrant................................... (3) Englewood, CO --
21 Canterbury Green............................... (3)(4) Stamford, CT 19,070,700
22 Three Stamford Plaza........................... (3) Stamford, CT 16,594,500
23 Union Square................................... (3) San Antonio, TX --
24 One North Franklin............................. (3) Chicago, IL --
25 1620 L Street.................................. (3) Washington, DC --
26 300 Atlantic Street............................ (3) Stamford, CT --
27 One & Two Stamford Plaza....................... (3) Stamford, CT --
28 Sterling Plaza................................. (3) Dallas, TX --
29 1700 Higgins................................... (3) Des Plaines, IL 3,298,100 (5)
30 Franklin Plaza................................. (3) Austin, TX 33,265,100 (5)
31 Northwest Center............................... (3) San Antonio, TX 6,309,000 (5)
32 One Columbus Building.......................... (3) Columbus, OH 28,677,500 (5)
33 One Crosswoods Center.......................... (3) Columbus, OH 3,366,000 (5)
34 One Lakeway.................................... (3) Metairie, LA 9,463,500 (5)
35 Three Lakeway.................................. (3) Metairie, LA 16,608,000 (5)
36 Two Lakeway.................................... (3) Metairie, LA 14,338,100 (5)
37 NationsBank Plaza.............................. (3) Nashville, TN --
38 The Plaza at La Jolla Village.................. (3) San Diego, CA 57,575,400
39 Interco Corporate Tower........................ (3) Clayton, MO 21,809,200
40 9400 NCX....................................... (3) Dallas, TX --
41 Four Stamford Plaza............................ (3) Stamford, CT 15,855,600
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
-------------------------------- -------------------------
BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------------- --------------- ---------- ------------
<C> <C> <C> <C> <C>
Office Properties:
1 60 Spear Street Building....................... $ 2,125,200 $ 19,126,500 $ -- $ 228,100
2 San Felipe Plaza............................... 13,471,300 117,984,000 -- 3,185,600
3 5100 Brookline................................. 570,700 4,236,500 -- 317,700
4 Summit Office Park............................. 1,421,100 12,789,700 -- 770,300
5 Intercontinental Center........................ 1,752,200 14,420,200 -- 264,600
6 Four Forest.................................... 4,767,900 42,911,400 -- 882,300
7 Dominion Tower................................. 4,643,700 41,091,200 -- 733,900
8 Northborough Tower............................. 1,705,400 12,198,900 7,000 429,800
9 500 Marquette Building......................... 2,219,800 19,978,600 -- 771,600
10 Atrium Towers.................................. 749,100 6,741,600 -- 540,000
11 Community Corporate Center..................... 3,018,900 27,169,800 -- 693,200
12 Sarasota City Center........................... 2,239,600 20,156,700 -- 530,400
13 Denver Corporate Center II and III............. 6,059,400 36,534,300 -- 821,900
14 University Tower............................... 2,085,100 18,766,100 -- 650,800
15 Shelton Pointe................................. 1,513,900 13,625,200 -- 378,300
16 San Jacinto Center............................. 5,074,500 45,670,600 -- 1,545,500
17 1111 19th Street............................... 5,024,000 45,216,000 -- 410,000
18 Bank One Center / Tower........................ 14,608,200 131,473,600 -- 2,376,500
19 North Central Plaza Three...................... 3,632,100 32,689,300 -- 679,500
20 The Quadrant................................... 4,357,300 39,215,300 -- 1,306,100
21 Canterbury Green............................... -- 41,987,100 -- 1,319,800
22 Three Stamford Plaza........................... 3,956,600 35,609,800 -- 372,500
23 Union Square................................... 2,368,500 14,236,000 -- 624,300
24 One North Franklin............................. 9,830,500 88,474,400 -- 880,700
25 1620 L Street.................................. 2,708,200 24,374,000 -- 812,000
26 300 Atlantic Street............................ 4,632,300 41,690,900 -- 644,400
27 One & Two Stamford Plaza....................... 8,267,700 74,409,300 -- 2,020,400
28 Sterling Plaza................................. 3,810,600 34,295,500 -- 984,500
29 1700 Higgins................................... 1,323,100 11,907,900 -- 97,500
30 Franklin Plaza................................. 6,502,400 58,521,300 -- 2,153,000
31 Northwest Center............................... 1,948,000 17,531,900 -- 448,300
32 One Columbus Building.......................... 4,956,300 44,606,400 -- 782,900
33 One Crosswoods Center.......................... 1,058,900 9,529,800 -- 497,600
34 One Lakeway.................................... 2,803,900 25,235,500 -- 1,105,800
35 Three Lakeway.................................. 4,695,000 43,517,200 59,300 1,567,600
36 Two Lakeway.................................... 4,643,500 41,791,800 49,200 1,594,200
37 NationsBank Plaza.............................. 3,049,200 27,443,100 -- 318,600
38 The Plaza at La Jolla Village.................. 11,838,900 98,243,100 19,300 629,700
39 Interco Corporate Tower........................ 4,688,400 42,195,200 83,900 1,232,400
40 9400 NCX....................................... 3,570,000 32,129,700 -- 2,578,800
41 Four Stamford Plaza............................ 4,470,900 40,237,900 24,500 577,900
<CAPTION>
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD 12/31/98
--------------------------------
BUILDING AND ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION
----------- -------------- --------------- --------------- -------------
<C> <C> <C> <C> <C>
Office Properties:
1 60 Spear Street Building....................... $ 2,125,200 $ 19,354,600 $ 21,479,800 $ (700,500)
2 San Felipe Plaza............................... 13,471,300 121,169,600 134,640,900 (4,805,000)
3 5100 Brookline................................. 570,700 4,554,200 5,124,900 (193,300)
4 Summit Office Park............................. 1,421,100 13,560,000 14,981,100 (561,300)
5 Intercontinental Center........................ 1,752,200 14,684,800 16,437,000 (536,500)
6 Four Forest.................................... 4,767,900 43,793,700 48,561,600 (1,709,600)
7 Dominion Tower................................. 4,643,700 41,825,100 46,468,800 (1,577,000)
8 Northborough Tower............................. 1,712,400 12,628,700 14,341,100 (504,300)
9 500 Marquette Building......................... 2,219,800 20,750,200 22,970,000 (850,100)
10 Atrium Towers.................................. 749,100 7,281,600 8,030,700 (351,400)
11 Community Corporate Center..................... 3,018,900 27,863,000 30,881,900 (1,103,100)
12 Sarasota City Center........................... 2,239,600 20,687,100 22,926,700 (782,100)
13 Denver Corporate Center II and III............. 6,059,400 37,356,200 43,415,600 (1,383,000)
14 University Tower............................... 2,085,100 19,416,900 21,502,000 (748,900)
15 Shelton Pointe................................. 1,513,900 14,003,500 15,517,400 (531,800)
16 San Jacinto Center............................. 5,074,500 47,216,100 52,290,600 (1,871,300)
17 1111 19th Street............................... 5,024,000 45,626,000 50,650,000 (1,699,200)
18 Bank One Center / Tower........................ 14,608,200 133,850,100 148,458,300 (5,025,200)
19 North Central Plaza Three...................... 3,632,100 33,368,800 37,000,900 (1,387,400)
20 The Quadrant................................... 4,357,300 40,521,400 44,878,700 (1,567,900)
21 Canterbury Green............................... -- 43,306,900 43,306,900 (1,614,100)
22 Three Stamford Plaza........................... 3,956,600 35,982,300 39,938,900 (1,366,200)
23 Union Square................................... 2,368,500 14,860,300 17,228,800 (609,900)
24 One North Franklin............................. 9,830,500 89,355,100 99,185,600 (3,303,100)
25 1620 L Street.................................. 2,708,200 25,186,000 27,894,200 (1,087,100)
26 300 Atlantic Street............................ 4,632,300 42,335,300 46,967,600 (1,613,600)
27 One & Two Stamford Plaza....................... 8,267,700 76,429,700 84,697,400 (2,967,700)
28 Sterling Plaza................................. 3,810,600 35,280,000 39,090,600 (1,384,900)
29 1700 Higgins................................... 1,323,100 12,005,400 13,328,500 (449,100)
30 Franklin Plaza................................. 6,502,400 60,674,300 67,176,700 (2,495,000)
31 Northwest Center............................... 1,948,000 17,980,200 19,928,200 (672,900)
32 One Columbus Building.......................... 4,956,300 45,389,300 50,345,600 (1,699,900)
33 One Crosswoods Center.......................... 1,058,900 10,027,400 11,086,300 (422,400)
34 One Lakeway.................................... 2,803,900 26,341,300 29,145,200 (1,058,700)
35 Three Lakeway.................................. 4,754,300 45,084,800 49,839,100 (1,885,800)
36 Two Lakeway.................................... 4,692,700 43,386,000 48,078,700 (1,709,800)
37 NationsBank Plaza.............................. 3,049,200 27,761,700 30,810,900 (1,045,400)
38 The Plaza at La Jolla Village.................. 11,858,200 98,872,800 110,731,000 (3,638,500)
39 Interco Corporate Tower........................ 4,772,300 43,427,600 48,199,900 (1,652,700)
40 9400 NCX....................................... 3,570,000 34,708,500 38,278,500 (1,466,100)
41 Four Stamford Plaza............................ 4,495,400 40,815,800 45,311,200 (1,519,700)
<CAPTION>
DATE OF DATE DEPRECIABLE
DESCRIPTION CONSTRUCTION ACQUIRED LIVES(2)
----------- ------------ ------------------ -----------
<C> <C> <C> <C>
Office Properties:
1 60 Spear Street Building....................... 1967 09/29/87 40
2 San Felipe Plaza............................... 1984 09/29/87 40
3 5100 Brookline................................. 1974 03/01/89 40
4 Summit Office Park............................. 1974 03/01/89 40
5 Intercontinental Center........................ 1983 06/28/89 40
6 Four Forest.................................... 1985 06/29/89 40
7 Dominion Tower................................. 1987 07/25/89 40
8 Northborough Tower............................. 1983 08/03/89 40
9 500 Marquette Building......................... 1985 08/15/89 40
10 Atrium Towers.................................. 1980 12/15/89 40
11 Community Corporate Center..................... 1987 06/14/90 40
12 Sarasota City Center........................... 1989 09/28/90 40
13 Denver Corporate Center II and III............. 1981/93-97 12/20/90 40
14 University Tower............................... 1987 10/16/91 40
15 Shelton Pointe................................. 1985 11/26/91 40
16 San Jacinto Center............................. 1987 12/13/91 40
17 1111 19th Street............................... 1979 12/18/91 40
18 Bank One Center / Tower........................ 1990 03/24/92 40
19 North Central Plaza Three...................... 1986 04/21/92 40
20 The Quadrant................................... 1985 12/01/92 40
21 Canterbury Green............................... 1987 12/15/92 40
22 Three Stamford Plaza........................... 1980 12/15/92 40
23 Union Square................................... 1986 12/23/92 40
24 One North Franklin............................. 1991 12/31/92 40
25 1620 L Street.................................. 1989 02/05/93 40
26 300 Atlantic Street............................ 1987 03/30/93 40
27 One & Two Stamford Plaza....................... 1986 03/30/93 40
28 Sterling Plaza................................. 1984 06/25/93 40
29 1700 Higgins................................... 1986 11/12/93 40
30 Franklin Plaza................................. 1987 11/12/93 40
31 Northwest Center............................... 1984 11/12/93 40
32 One Columbus Building.......................... 1987 11/12/93 40
33 One Crosswoods Center.......................... 1984 11/12/93 40
34 One Lakeway.................................... 1981 11/12/93 40
35 Three Lakeway.................................. 1987 11/12/93 40
36 Two Lakeway.................................... 1984 11/12/93 40
37 NationsBank Plaza.............................. 1977 12/01/93 40
38 The Plaza at La Jolla Village.................. 1987-1990 03/10/94 40
39 Interco Corporate Tower........................ 1986 05/27/94 40
40 9400 NCX....................................... 1981 06/24/94 40
41 Four Stamford Plaza............................ 1979 08/31/94 40
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
ENCUMBRANCES
DESCRIPTION NOTES LOCATION AT 12/31/98 NOTES
----------- ------ -------- -------------- ------
<C> <S> <C> <C> <C> <C>
42 1920 Main Plaza................................ (3) Irvine, CA --
43 Paces West..................................... (3) Atlanta, GA --
44 One Market..................................... (3) San Francisco, CA 149,374,800
45 2010 Main Plaza................................ (3) Irvine, CA --
46 1100 Executive Tower........................... (3) Orange, CA --
47 28 State Street................................ (3) Boston, MA --
48 850 Third Avenue............................... (3) New York, NY --
49 161 North Clark................................ (3) Chicago, IL 124,843,200
50 Wachovia Center................................ (3) Charlotte, NC 26,026,800
51 Central Park................................... (3) Atlanta, GA 55,284,600
52 One American Center............................ (3) Austin, TX --
53 Pasadena Towers................................ (3) Pasadena, CA 47,056,900
54 580 California................................. (3) San Francisco, CA 29,518,400
55 1601 Market Street............................. (3) Philadelphia, PA --
56 Promenade II................................... (3) Atlanta, GA 94,479,400
57 Two California Plaza........................... (3) Los Angeles, CA --
58 BP Tower....................................... (3) Cleveland, OH 84,983,900
59 Sun Trust Center............................... (3) Orlando, FL --
60 Reston Town Center............................. (3) Reston, VA 90,568,000
61 Colonnade I.................................... (3) San Antonio, TX --
62 One Phoenix Plaza.............................. (3) Phoenix, AZ --
63 49 East Thomas Road............................ (3) Phoenix, AZ --
64 177 Broad Street............................... (3)(6) Stamford, CT --
65 Preston Commons................................ (3) Dallas, TX --
66 Oakbrook Terrace Tower......................... (3) Oakbrook Terrace, IL --
67 One Maritime Plaza............................. (3) San Francisco, CA --
68 Smith Barney Tower............................. (3) San Diego, CA --
69 201 Mission Street............................. (3) San Francisco, CA --
70 30 N. LaSalle Street........................... (3) Chicago, IL --
71 LL&E Tower..................................... New Orleans, LA 37,500,000 (7)
72 Texaco Center.................................. New Orleans, LA 42,500,000 (7)
73 Prudential Portfolio........................... (8) Various --
74 550 South Hope Street.......................... Los Angeles, CA --
75 10 & 30 South Wacker........................... Chicago, IL --
76 Four and Five Valley Square.................... Blue Bell, PA --
77 Four Falls Corporate Center.................... Conshohocken, PA --
78 Oak Hill Plaza................................. King of Prussia, PA --
79 One Devon Square............................... Wayne, PA --
80 Three Devon Square............................. Wayne, PA --
81 Two Devon Square............................... Wayne, PA --
82 Two Valley Square.............................. Blue Bell, PA --
83 Walnut Hill Plaza.............................. King of Prussia, PA 14,566,500
84 One Lafayette Centre........................... Washington, D.C. --
85 One Valley Square.............................. Blue Bell, PA --
86 Three Valley Square............................ Blue Bell, PA --
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
-------------------------------- -------------------------
BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------------- --------------- ---------- ------------
<C> <C> <C> <C> <C>
42 1920 Main Plaza................................ 5,480,600 47,525,800 -- 1,293,700
43 Paces West..................................... 12,833,700 75,024,500 -- 2,095,200
44 One Market..................................... 34,814,400 313,329,700 -- 22,827,000
45 2010 Main Plaza................................ 5,197,100 46,773,700 -- 606,000
46 1100 Executive Tower........................... 10,121,800 41,598,600 -- 586,100
47 28 State Street................................ 9,512,600 85,613,100 -- 40,315,400
48 850 Third Avenue............................... 9,605,900 86,453,200 -- 2,487,600
49 161 North Clark................................ 15,881,800 142,936,100 -- 18,625,600
50 Wachovia Center................................ 5,061,000 45,548,900 -- 678,200
51 Central Park................................... 9,162,600 82,463,000 -- 1,343,100
52 One American Center............................ -- 70,811,600 -- 2,118,400
53 Pasadena Towers................................ 7,087,500 63,787,500 -- 2,067,700
54 580 California................................. 7,491,200 67,420,900 -- 2,276,900
55 1601 Market Street............................. 5,780,800 52,027,500 -- 2,103,400
56 Promenade II................................... 14,850,000 133,650,200 -- 4,701,100
57 Two California Plaza........................... -- 156,197,000 -- 15,563,600
58 BP Tower....................................... 17,402,500 157,260,200 -- 2,187,600
59 Sun Trust Center............................... 11,023,600 99,212,300 -- 2,074,100
60 Reston Town Center............................. 21,482,600 154,576,300 18,500 766,500
61 Colonnade I.................................... 1,413,600 12,725,200 82,800 558,100
62 One Phoenix Plaza.............................. 6,191,900 55,726,900 -- --
63 49 East Thomas Road............................ 65,300 587,900 -- 10,400
64 177 Broad Street............................... 3,941,200 35,470,800 -- 514,600
65 Preston Commons................................ 5,723,400 51,510,300 5,100 1,986,800
66 Oakbrook Terrace Tower......................... 11,950,200 107,551,700 485,700 2,384,300
67 One Maritime Plaza............................. 11,530,700 103,776,000 -- 6,222,100
68 Smith Barney Tower............................. 2,657,700 23,919,400 -- 1,767,800
69 201 Mission Street............................. 8,870,700 79,836,500 -- 473,900
70 30 N. LaSalle Street........................... 12,489,000 112,400,700 -- 2,016,200
71 LL&E Tower..................................... 6,185,800 55,672,200 46,000 1,521,400
72 Texaco Center.................................. 6,686,300 60,177,000 9,500 1,430,600
73 Prudential Portfolio........................... 28,463,400 256,216,100 -- 12,142,500
74 550 South Hope Street.......................... 10,016,200 90,146,000 -- 262,500
75 10 & 30 South Wacker........................... 48,411,300 435,701,300 -- 1,984,600
76 Four and Five Valley Square.................... 865,700 7,793,200 -- 105,800
77 Four Falls Corporate Center.................... 4,938,900 44,458,300 55,000 302,900
78 Oak Hill Plaza................................. 2,208,200 19,878,500 -- 161,200
79 One Devon Square............................... 1,024,900 9,226,700 -- 111,200
80 Three Devon Square............................. 412,500 3,712,600 -- --
81 Two Devon Square............................... 659,200 5,935,000 -- 216,900
82 Two Valley Square.............................. 879,000 7,913,300 -- 264,700
83 Walnut Hill Plaza.............................. 2,045,000 18,409,900 -- 200,600
84 One Lafayette Centre........................... 8,262,400 74,362,000 -- 171,600
85 One Valley Square.............................. 717,200 6,456,900 -- 147,700
86 Three Valley Square............................ 1,012,100 9,111,300 -- 107,600
<CAPTION>
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD 12/31/98
--------------------------------
BUILDING AND ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION
----------- -------------- --------------- --------------- -------------
<C> <C> <C> <C> <C>
42 1920 Main Plaza................................ 5,480,600 48,819,500 54,300,100 (2,048,600)
43 Paces West..................................... 12,833,700 77,119,700 89,953,400 (3,153,400)
44 One Market..................................... 34,814,400 336,156,700 370,971,100 (14,258,400)
45 2010 Main Plaza................................ 5,197,100 47,379,700 52,576,800 (1,816,400)
46 1100 Executive Tower........................... 10,121,800 42,184,700 52,306,500 (1,639,500)
47 28 State Street................................ 9,512,600 125,928,500 135,441,100 (4,963,000)
48 850 Third Avenue............................... 9,605,900 88,940,800 98,546,700 (3,504,100)
49 161 North Clark................................ 15,881,800 161,561,700 177,443,500 (6,737,200)
50 Wachovia Center................................ 5,061,000 46,227,100 51,288,100 (1,695,700)
51 Central Park................................... 9,162,600 83,806,100 92,968,700 (3,210,400)
52 One American Center............................ -- 72,930,000 72,930,000 (2,742,400)
53 Pasadena Towers................................ 7,087,500 65,855,200 72,942,700 (2,645,700)
54 580 California................................. 7,491,200 69,697,800 77,189,000 (2,862,700)
55 1601 Market Street............................. 5,780,800 54,130,900 59,911,700 (2,059,900)
56 Promenade II................................... 14,850,000 138,351,300 153,201,300 (5,486,400)
57 Two California Plaza........................... -- 171,760,600 171,760,600 (9,509,000)
58 BP Tower....................................... 17,402,500 159,447,800 176,850,300 (5,716,300)
59 Sun Trust Center............................... 11,023,600 101,286,400 112,310,000 (3,802,800)
60 Reston Town Center............................. 21,501,100 155,342,800 176,843,900 (5,713,100)
61 Colonnade I.................................... 1,496,400 13,283,300 14,779,700 (565,900)
62 One Phoenix Plaza.............................. 6,191,900 55,726,900 61,918,800 (2,029,400)
63 49 East Thomas Road............................ 65,300 598,300 663,600 (21,500)
64 177 Broad Street............................... 3,941,200 35,985,400 39,926,600 (1,186,200)
65 Preston Commons................................ 5,728,500 53,497,100 59,225,600 (2,077,300)
66 Oakbrook Terrace Tower......................... 12,435,900 109,936,000 122,371,900 (4,076,900)
67 One Maritime Plaza............................. 11,530,700 109,998,100 121,528,800 (4,041,500)
68 Smith Barney Tower............................. 2,657,700 25,687,200 28,344,900 (1,246,800)
69 201 Mission Street............................. 8,870,700 80,310,400 89,181,100 (2,976,800)
70 30 N. LaSalle Street........................... 12,489,000 114,416,900 126,905,900 (4,271,500)
71 LL&E Tower..................................... 6,231,800 57,193,600 63,425,400 (1,860,400)
72 Texaco Center.................................. 6,695,800 61,607,600 68,303,400 (2,053,800)
73 Prudential Portfolio........................... 28,463,400 268,358,600 296,822,000 (8,663,800)
74 550 South Hope Street.......................... 10,016,200 90,408,500 100,424,700 (2,758,800)
75 10 & 30 South Wacker........................... 48,411,300 437,685,900 486,097,200 (13,267,300)
76 Four and Five Valley Square.................... 865,700 7,899,000 8,764,700 (238,800)
77 Four Falls Corporate Center.................... 4,993,900 44,761,200 49,755,100 (1,387,600)
78 Oak Hill Plaza................................. 2,208,200 20,039,700 22,247,900 (606,700)
79 One Devon Square............................... 1,024,900 9,337,900 10,362,800 (286,500)
80 Three Devon Square............................. 412,500 3,712,600 4,125,100 (111,900)
81 Two Devon Square............................... 659,200 6,151,900 6,811,100 (215,000)
82 Two Valley Square.............................. 879,000 8,178,000 9,057,000 (252,400)
83 Walnut Hill Plaza.............................. 2,045,000 18,610,500 20,655,500 (561,100)
84 One Lafayette Centre........................... 8,262,400 74,533,600 82,796,000 (2,257,000)
85 One Valley Square.............................. 717,200 6,604,600 7,321,800 (185,900)
86 Three Valley Square............................ 1,012,100 9,218,900 10,231,000 (256,600)
<CAPTION>
DATE OF DATE DEPRECIABLE
DESCRIPTION CONSTRUCTION ACQUIRED LIVES(2)
----------- ------------ ------------------ -----------
<C> <C> <C> <C>
42 1920 Main Plaza................................ 1988 09/29/94 40
43 Paces West..................................... 1988 10/31/94 40
44 One Market..................................... 1976 11/22/94 40
45 2010 Main Plaza................................ 1988 12/13/94 40
46 1100 Executive Tower........................... 1987 12/15/94 40
47 28 State Street................................ 1968/1997 01/23/95 40
48 850 Third Avenue............................... 1960 03/20/95 40
49 161 North Clark................................ 1992 07/26/95 40
50 Wachovia Center................................ 1972 09/01/95 40
51 Central Park................................... 1986 10/17/95 40
52 One American Center............................ 1984 11/01/95 40
53 Pasadena Towers................................ 1990-1991 12/14/95 40
54 580 California................................. 1984 12/21/95 40
55 1601 Market Street............................. 1970 01/18/96 40
56 Promenade II................................... 1990 06/14/96 40
57 Two California Plaza........................... 1992 08/23/96 40
58 BP Tower....................................... 1985/1989 09/04/96, 01/29/98 40
59 Sun Trust Center............................... 1988 09/18/96 40
60 Reston Town Center............................. 1990 10/22/96 40
61 Colonnade I.................................... 1983 12/04/96 40
62 One Phoenix Plaza.............................. 1989 12/04/96 40
63 49 East Thomas Road............................ 1974 12/11/96 40
64 177 Broad Street............................... 1989 01/29/97 40
65 Preston Commons................................ 1986 03/21/97 40
66 Oakbrook Terrace Tower......................... 1988 04/16/97 40
67 One Maritime Plaza............................. 1967 04/21/97 40
68 Smith Barney Tower............................. 1987 04/28/97 40
69 201 Mission Street............................. 1981 04/30/97 40
70 30 N. LaSalle Street........................... 1974 06/13/97 40
71 LL&E Tower..................................... 1987 09/03/97 40
72 Texaco Center.................................. 1984 09/03/97 40
73 Prudential Portfolio........................... Various 10/01/97 40
74 550 South Hope Street.......................... 1991 10/06/97 40
75 10 & 30 South Wacker........................... 1983-1987 10/07/97 40
76 Four and Five Valley Square.................... 1988 10/07/97 40
77 Four Falls Corporate Center.................... 1988 10/07/97 40
78 Oak Hill Plaza................................. 1982 10/07/97 40
79 One Devon Square............................... 1984 10/07/97 40
80 Three Devon Square............................. 1985 10/07/97 40
81 Two Devon Square............................... 1985 10/07/97 40
82 Two Valley Square.............................. 1990 10/07/97 40
83 Walnut Hill Plaza.............................. 1985 10/07/97 40
84 One Lafayette Centre........................... 1980 10/17/97 40
85 One Valley Square.............................. 1982 11/21/97 40
86 Three Valley Square............................ 1984 11/21/97 40
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
ENCUMBRANCES
DESCRIPTION NOTES LOCATION AT 12/31/98 NOTES
----------- ------ -------- -------------- ------
<C> <S> <C> <C> <C> <C>
87 1600 Duke Street............................... Alexandria, VA --
88 Fair Oaks Plaza................................ Fairfax, VA --
89 Lakeside Square................................ Dallas, TX --
90 LaSalle Plaza.................................. Minneapolis, MN --
91 1001 Fifth Avenue.............................. Portland, OR 20,515,000 (9)
92 1111 Third Avenue.............................. Seattle, WA 30,567,300 (9)
93 Calais Office Center........................... Anchorage, AK 8,513,700 (9)
94 First Interstate............................... Seattle, WA 83,085,700 (9)
95 Nordstrom Medical Tower........................ Seattle, WA 9,949,800 (9)
96 One Bellevue Center............................ Bellevue, WA 23,489,600 (9)
97 Rainer Plaza................................... Bellevue, WA 29,541,600 (9)
98 Second and Seneca.............................. Seattle, WA 40,517,100 (9)
99 101 N. Wacker.................................. Chicago, IL --
100 10880 Wilshire Boulevard....................... Los Angeles, CA --
101 10960 Wilshire Boulevard....................... Los Angeles, CA --
102 1300 N. 17th Street............................ Rosslyn, VA --
103 1333 H Street.................................. Washington, D.C. --
104 150 Federal Street............................. Boston, MA 56,080,000
105 1616 N. Fort Myer Drive........................ Rosslyn, VA --
106 175 Federal Street............................. Boston, MA --
107 2 Oliver Street - 147 Milk Street.............. Boston, MA --
108 200 West Adams................................. Chicago, IL --
109 225 Franklin Street............................ Boston, MA --
110 AT&T Plaza..................................... Oak Brook, IL --
111 Center Plaza................................... Boston, MA 59,917,700
112 Centerpointe I and II.......................... Fairfax, VA 30,099,900
113 Civic Opera House.............................. Chicago, IL 31,237,400
114 Crosby Corporate Center........................ Bedford, MA --
115 EJ Randolph.................................... McLean, VA 15,939,600 (10)
116 EJ Randolph II vacant land..................... McLean, VA --
117 John Marshall I and II......................... McLean, VA 20,637,100
118 Lake Marriott Business Park.................... Santa Clara, CA --
119 Lakeside Office Park........................... Atlanta, GA --
120 New England Executive Park..................... Burlington, MA --
121 Northridge I................................... Herndon, VA 14,452,600 (10)
122 One Canal Park................................. Cambridge, MA --
123 Perimeter Center............................... Atlanta, GA 215,715,100
124 Presidents Plaza............................... Chicago, IL --
125 Riverview I and II............................. Cambridge, MA --
126 Russia Wharf................................... Boston, MA --
127 Shoreline Technology Park...................... Mountain View, CA --
128 South Station.................................. Boston, MA --
129 Sunnyvale Business Center...................... Sunnyvale, CA --
130 Ten Canal Park................................. Cambridge, MA --
131 Tri-State International........................ Lincolnshire, IL --
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
-------------------------------- -------------------------
BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------------- --------------- ---------- ------------
<C> <C> <C> <C> <C>
87 1600 Duke Street............................... 1,105,600 9,950,000 -- 59,300
88 Fair Oaks Plaza................................ 2,412,000 21,707,600 29,000 122,100
89 Lakeside Square................................ 8,262,200 47,368,800 -- 1,274,700
90 LaSalle Plaza.................................. 9,680,600 87,125,100 -- 1,477,800
91 1001 Fifth Avenue.............................. 5,383,300 48,633,700 -- 576,800
92 1111 Third Avenue.............................. 9,899,900 89,570,700 -- 1,122,700
93 Calais Office Center........................... -- 16,630,800 -- 881,400
94 First Interstate............................... 21,360,700 193,528,600 -- 909,200
95 Nordstrom Medical Tower........................ 1,763,600 16,026,200 -- 4,400
96 One Bellevue Center............................ -- 56,223,100 -- 557,800
97 Rainer Plaza................................... -- 79,928,100 -- 428,000
98 Second and Seneca.............................. 10,922,500 98,927,300 -- 710,300
99 101 N. Wacker.................................. 10,067,600 90,608,800 -- 172,600
100 10880 Wilshire Boulevard....................... -- 149,841,200 -- 3,486,800
101 10960 Wilshire Boulevard....................... 16,841,300 151,573,900 -- 4,048,400
102 1300 N. 17th Street............................ 9,810,700 88,295,900 -- 73,800
103 1333 H Street.................................. 6,715,400 60,438,200 -- 253,400
104 150 Federal Street............................. 14,131,400 127,182,200 -- 8,439,500
105 1616 N. Fort Myer Drive........................ 6,960,700 62,646,300 -- 544,700
106 175 Federal Street............................. 4,893,900 44,045,200 -- 1,119,800
107 2 Oliver Street - 147 Milk Street.............. 5,017,400 45,157,000 -- 1,040,900
108 200 West Adams................................. 11,723,300 105,509,500 -- 594,400
109 225 Franklin Street............................ 34,607,800 311,470,600 -- 1,561,800
110 AT&T Plaza..................................... 4,834,200 43,507,900 36,000 437,400
111 Center Plaza................................... 18,942,300 170,480,400 -- 1,952,100
112 Centerpointe I and II.......................... 8,837,800 79,540,200 344,700 (204,900)
113 Civic Opera House.............................. 12,771,300 114,941,900 -- 1,597,700
114 Crosby Corporate Center........................ 5,957,800 53,620,400 49,800 507,900
115 EJ Randolph.................................... 3,936,600 35,429,100 7,000 164,100
116 EJ Randolph II vacant land..................... 5,770,000 -- -- 136,400
117 John Marshall I and II......................... 5,216,400 46,814,100 16,900 52,200
118 Lake Marriott Business Park.................... 9,090,800 84,967,100 -- 1,616,400
119 Lakeside Office Park........................... 4,792,500 43,132,300 -- 236,900
120 New England Executive Park..................... 15,636,600 140,729,200 102,400 4,002,100
121 Northridge I................................... 3,224,900 29,024,400 -- --
122 One Canal Park................................. 2,006,000 18,054,000 -- 44,600
123 Perimeter Center............................... 65,886,100 429,131,000 114,600 3,128,200
124 Presidents Plaza............................... 13,435,500 120,919,200 -- 1,241,200
125 Riverview I and II............................. 5,937,600 53,438,100 6,300 310,100
126 Russia Wharf................................... 3,891,500 35,022,800 -- 731,600
127 Shoreline Technology Park...................... 31,575,400 190,894,500 -- 180,400
128 South Station.................................. -- 31,073,800 -- 458,300
129 Sunnyvale Business Center...................... 4,890,000 44,010,000 -- 11,600
130 Ten Canal Park................................. 2,383,100 21,447,900 -- 18,700
131 Tri-State International........................ 10,925,300 98,327,300 141,200 1,557,400
<CAPTION>
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD 12/31/98
--------------------------------
BUILDING AND ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION
----------- -------------- --------------- --------------- -------------
<C> <C> <C> <C> <C>
87 1600 Duke Street............................... 1,105,600 10,009,300 11,114,900 (279,700)
88 Fair Oaks Plaza................................ 2,441,000 21,829,700 24,270,700 (615,100)
89 Lakeside Square................................ 8,262,200 48,643,500 56,905,700 (1,423,000)
90 LaSalle Plaza.................................. 9,680,600 88,602,900 98,283,500 (2,559,100)
91 1001 Fifth Avenue.............................. 5,383,300 49,210,500 54,593,800 (1,324,800)
92 1111 Third Avenue.............................. 9,899,900 90,693,400 100,593,300 (2,469,700)
93 Calais Office Center........................... -- 17,512,200 17,512,200 (539,400)
94 First Interstate............................... 21,360,700 194,437,800 215,798,500 (5,068,200)
95 Nordstrom Medical Tower........................ 1,763,600 16,030,600 17,794,200 (418,300)
96 One Bellevue Center............................ -- 56,780,900 56,780,900 (1,562,500)
97 Rainer Plaza................................... -- 80,356,100 80,356,100 (2,124,800)
98 Second and Seneca.............................. 10,922,500 99,637,600 110,560,100 (2,711,600)
99 101 N. Wacker.................................. 10,067,600 90,781,400 100,849,000 (2,361,300)
100 10880 Wilshire Boulevard....................... -- 153,328,000 153,328,000 (3,954,700)
101 10960 Wilshire Boulevard....................... 16,841,300 155,622,300 172,463,600 (4,034,200)
102 1300 N. 17th Street............................ 9,810,700 88,369,700 98,180,400 (2,310,800)
103 1333 H Street.................................. 6,715,400 60,691,600 67,407,000 (1,581,800)
104 150 Federal Street............................. 14,131,400 135,621,700 149,753,100 (3,672,700)
105 1616 N. Fort Myer Drive........................ 6,960,700 63,191,000 70,151,700 (1,633,200)
106 175 Federal Street............................. 4,893,900 45,165,000 50,058,900 (1,180,200)
107 2 Oliver Street - 147 Milk Street.............. 5,017,400 46,197,900 51,215,300 (1,248,100)
108 200 West Adams................................. 11,723,300 106,103,900 117,827,200 (2,841,300)
109 225 Franklin Street............................ 34,607,800 313,032,400 347,640,200 (8,300,000)
110 AT&T Plaza..................................... 4,870,200 43,945,300 48,815,500 (1,196,600)
111 Center Plaza................................... 18,942,300 172,432,500 191,374,800 (4,525,300)
112 Centerpointe I and II.......................... 9,182,500 79,335,300 88,517,800 (2,077,900)
113 Civic Opera House.............................. 12,771,300 116,539,600 129,310,900 (3,166,200)
114 Crosby Corporate Center........................ 6,007,600 54,128,300 60,135,900 (1,403,100)
115 EJ Randolph.................................... 3,943,600 35,593,200 39,536,800 (927,100)
116 EJ Randolph II vacant land..................... 5,770,000 136,400 5,906,400 --
117 John Marshall I and II......................... 5,233,300 46,866,300 52,099,600 (1,225,200)
118 Lake Marriott Business Park.................... 9,090,800 86,583,500 95,674,300 (1,641,500)
119 Lakeside Office Park........................... 4,792,500 43,369,200 48,161,700 (1,148,200)
120 New England Executive Park..................... 15,739,000 144,731,300 160,470,300 (3,397,200)
121 Northridge I................................... 3,224,900 29,024,400 32,249,300 (755,800)
122 One Canal Park................................. 2,006,000 18,098,600 20,104,600 (485,500)
123 Perimeter Center............................... 66,000,700 432,259,200 498,259,900 (11,847,400)
124 Presidents Plaza............................... 13,435,500 122,160,400 135,595,900 (3,269,400)
125 Riverview I and II............................. 5,943,900 53,748,200 59,692,100 (1,394,500)
126 Russia Wharf................................... 3,891,500 35,754,400 39,645,900 (1,419,100)
127 Shoreline Technology Park...................... 31,575,400 191,074,900 222,650,300 (4,648,000)
128 South Station.................................. -- 31,532,100 31,532,100 (809,800)
129 Sunnyvale Business Center...................... 4,890,000 44,021,600 48,911,600 (1,146,100)
130 Ten Canal Park................................. 2,383,100 21,466,600 23,849,700 (558,600)
131 Tri-State International........................ 11,066,500 99,884,700 110,951,200 (2,762,600)
<CAPTION>
DATE OF DATE DEPRECIABLE
DESCRIPTION CONSTRUCTION ACQUIRED LIVES(2)
----------- ------------ ------------------ -----------
<C> <C> <C> <C>
87 1600 Duke Street............................... 1985 11/24/97 40
88 Fair Oaks Plaza................................ 1986 11/24/97 40
89 Lakeside Square................................ 1987 11/24/97 40
90 LaSalle Plaza.................................. 1991 11/25/97 40
91 1001 Fifth Avenue.............................. 1980 12/17/97 40
92 1111 Third Avenue.............................. 1980 12/17/97 40
93 Calais Office Center........................... 1975 12/17/97 40
94 First Interstate............................... 1983 12/17/97 40
95 Nordstrom Medical Tower........................ 1986 12/17/97 40
96 One Bellevue Center............................ 1983 12/17/97 40
97 Rainer Plaza................................... 1986 12/17/97 40
98 Second and Seneca.............................. 1991 12/17/97 40
99 101 N. Wacker.................................. 1980 12/19/97 40
100 10880 Wilshire Boulevard....................... 1970 12/19/97 40
101 10960 Wilshire Boulevard....................... 1971 12/19/97 40
102 1300 N. 17th Street............................ 1980 12/19/97 40
103 1333 H Street.................................. 1982 12/19/97 40
104 150 Federal Street............................. 1988 12/19/97 40
105 1616 N. Fort Myer Drive........................ 1974 12/19/97 40
106 175 Federal Street............................. 1977 12/19/97 40
107 2 Oliver Street - 147 Milk Street.............. 1988 12/19/97 40
108 200 West Adams................................. 1985 12/19/97 40
109 225 Franklin Street............................ 1966 12/19/97 40
110 AT&T Plaza..................................... 1984 12/19/97 40
111 Center Plaza................................... 1969 12/19/97 40
112 Centerpointe I and II.......................... 1998/1990 12/19/97 40
113 Civic Opera House.............................. 1929 12/19/97 40
114 Crosby Corporate Center........................ 1996 12/19/97 40
115 EJ Randolph.................................... 1983 12/19/97 40
116 EJ Randolph II vacant land..................... N/A 12/19/97 40
117 John Marshall I and II......................... 1981 12/19/97 40
118 Lake Marriott Business Park.................... 1981 12/19/97 40
119 Lakeside Office Park........................... 1972-1978 12/19/97 40
120 New England Executive Park..................... 1970-1985 12/19/97 40
121 Northridge I................................... 1988 12/19/97 40
122 One Canal Park................................. 1987 12/19/97 40
123 Perimeter Center............................... 1970-1989 12/19/97 40
124 Presidents Plaza............................... 1980-1982 12/19/97 40
125 Riverview I and II............................. 1985-1986 12/19/97 40
126 Russia Wharf................................... 1978-1982 12/19/97 40
127 Shoreline Technology Park...................... 1985-1991 12/19/97 40
128 South Station.................................. 1988 12/19/97 40
129 Sunnyvale Business Center...................... 1990 12/19/97 40
130 Ten Canal Park................................. 1987 12/19/97 40
131 Tri-State International........................ 1986 12/19/97 40
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
ENCUMBRANCES
DESCRIPTION NOTES LOCATION AT 12/31/98 NOTES
----------- ------ -------- -------------- ------
<C> <S> <C> <C> <C> <C>
132 Wellesley Office Park.......................... Wellesley, MA 55,193,300
133 Westbrook Corporate Center..................... Westchester, IL 109,619,300
134 Westwood Business Center....................... Wellesley, MA --
135 100 Summer Street.............................. Boston, MA --
136 Westbrook Corporate Center vacant land......... Westchester, IL --
137 Denver Post Tower.............................. Denver, CO --
138 301 Howard Street.............................. San Francisco, CA --
139 410 17th Street................................ Denver, CO --
140 Tabor Center................................... Denver, CO 47,810,600
141 Trinity Place.................................. Denver, CO --
142 Dominion Plaza................................. Denver, CO --
143 Millennium Plaza............................... Englewood, CO --
144 Polk and Taylor Buildings...................... Arlington, VA --
145 Columbia SeaFirst Center....................... Seattle, WA --
146 Northland Plaza................................ Bloomington, MN --
147 4949 S. Syracuse............................... Denver, CO --
148 Metropoint I................................... Denver, CO --
149 Metropoint III vacant land..................... Denver, CO --
150 One Park Square................................ Albuquerque, NM --
151 Park Avenue Tower.............................. New York, NY --
152 Terrace Building............................... Englewood, CO --
153 The Solarium................................... Englewood, CO --
154 Second and Spring.............................. Seattle, WA --
155 Colonnade I and II............................. Dallas, TX --
156 Worldwide Plaza................................ New York, NY 263,620,300
157 Central Park vacant land....................... Atlanta, GA --
--------------
Subtotal Office Properties..................... $2,278,417,400
--------------
Development Properties:
158 Reston Town Center Garage...................... (11) Reston, VA $ --
159 150 California................................. (11) San Francisco, CA --
160 175 Wyman Street............................... (11) Walthan, MA --
161 Crosby Corporate Center II..................... (11) Bedford, MA --
162 John Marshall III.............................. (11) McLean, VA --
163 Media Center................................... (11) Burbank, CA --
164 Riverside Center............................... (11) Newton, MA --
165 Tower at New England Executive Park............ (11) Burlington, MA --
166 215 Fremont Street............................. (11) San Francisco, CA --
167 Colonnade III.................................. (11) Dallas, TX --
168 Prominence..................................... (12) Atlanta, GA --
169 World Trade Center............................. (12) Seattle, WA --
170 Rand Tower Garage.............................. (12) Minneapolis, MN --
--------------
Subtotal Development Properties................ $ --
--------------
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
-------------------------------- -------------------------
BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------------- --------------- ---------- ------------
<C> <C> <C> <C> <C>
132 Wellesley Office Park.......................... 16,492,700 148,434,200 20,400 1,155,900
133 Westbrook Corporate Center..................... 24,896,800 224,071,100 30,100 2,780,200
134 Westwood Business Center....................... 2,719,600 24,476,300 -- 250,800
135 100 Summer Street.............................. 22,271,000 200,439,300 -- 1,787,900
136 Westbrook Corporate Center vacant land......... 3,972,800 -- -- --
137 Denver Post Tower.............................. -- 52,937,200 -- 1,393,600
138 301 Howard Street.............................. 7,050,800 58,920,400 -- 1,005,600
139 410 17th Street................................ 4,473,700 40,263,700 -- 673,000
140 Tabor Center................................... 27,948,500 116,536,200 -- 832,600
141 Trinity Place.................................. 1,903,400 17,130,400 -- 419,700
142 Dominion Plaza................................. 5,990,100 53,911,200 -- 1,881,700
143 Millennium Plaza............................... 7,757,100 38,313,800 -- 18,700
144 Polk and Taylor Buildings...................... 16,942,500 152,482,800 -- 2,803,900
145 Columbia SeaFirst Center....................... 40,175,000 361,574,800 -- 2,176,400
146 Northland Plaza................................ 4,705,100 42,346,000 -- 219,900
147 4949 S. Syracuse............................... 822,300 7,400,800 -- 12,600
148 Metropoint I................................... 4,374,900 39,374,500 -- 174,500
149 Metropoint III vacant land..................... 2,000,000 -- -- --
150 One Park Square................................ 3,634,300 32,708,700 -- 174,800
151 Park Avenue Tower.............................. 48,976,000 195,903,900 -- 635,000
152 Terrace Building............................... 1,546,400 13,917,900 -- 142,000
153 The Solarium................................... 1,951,100 17,560,100 -- 196,400
154 Second and Spring.............................. 1,968,400 17,715,700 -- 14,100
155 Colonnade I and II............................. 9,043,800 81,394,100 -- 143,600
156 Worldwide Plaza................................ 124,919,000 499,676,100 -- --
157 Central Park vacant land....................... 3,975,400 -- -- --
-------------- --------------- ---------- ------------
Subtotal Office Properties..................... $1,384,586,100 $11,485,232,700 $1,844,200 $265,076,100
-------------- --------------- ---------- ------------
Development Properties:
158 Reston Town Center Garage...................... $ 1,942,500 $ -- $ -- $ 994,700
159 150 California................................. 12,566,800 -- -- 4,370,900
160 175 Wyman Street............................... 16,871,000 -- -- 3,129,400
161 Crosby Corporate Center II..................... 9,384,600 -- -- 25,501,300
162 John Marshall III.............................. 9,950,000 -- -- 8,131,200
163 Media Center................................... 15,000,000 -- -- 4,899,500
164 Riverside Center............................... 24,000,000 -- -- 9,635,000
165 Tower at New England Executive Park............ 2,792,900 25,136,500 -- 3,172,700
166 215 Fremont Street............................. 2,404,400 21,639,200 -- 2,183,300
167 Colonnade III.................................. 6,152,000 55,367,700 -- 2,524,500
168 Prominence..................................... -- 534,700 -- --
169 World Trade Center............................. -- 17,400 -- --
170 Rand Tower Garage.............................. -- 70,700 -- --
-------------- --------------- ---------- ------------
Subtotal Development Properties................ $ 101,064,200 $ 102,766,200 $ -- $64,542,500
-------------- --------------- ---------- ------------
<CAPTION>
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD 12/31/98
--------------------------------
BUILDING AND ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION
----------- -------------- --------------- --------------- -------------
<C> <C> <C> <C> <C>
132 Wellesley Office Park.......................... 16,513,100 149,590,100 166,103,200 (3,917,900)
133 Westbrook Corporate Center..................... 24,926,900 226,851,300 251,778,200 (6,026,700)
134 Westwood Business Center....................... 2,719,600 24,727,100 27,446,700 (653,900)
135 100 Summer Street.............................. 22,271,000 202,227,200 224,498,200 (4,000,400)
136 Westbrook Corporate Center vacant land......... 3,972,800 -- 3,972,800 --
137 Denver Post Tower.............................. -- 54,330,800 54,330,800 (993,300)
138 301 Howard Street.............................. 7,050,800 59,926,000 66,976,800 (1,066,100)
139 410 17th Street................................ 4,473,700 40,936,700 45,410,400 (731,800)
140 Tabor Center................................... 27,948,500 117,368,800 145,317,300 (2,082,300)
141 Trinity Place.................................. 1,903,400 17,550,100 19,453,500 (323,400)
142 Dominion Plaza................................. 5,990,100 55,792,900 61,783,000 (874,900)
143 Millennium Plaza............................... 7,757,100 38,332,500 46,089,600 (600,400)
144 Polk and Taylor Buildings...................... 16,942,500 155,286,700 172,229,200 (2,673,600)
145 Columbia SeaFirst Center....................... 40,175,000 363,751,200 403,926,200 (4,910,200)
146 Northland Plaza................................ 4,705,100 42,565,900 47,271,000 (486,400)
147 4949 S. Syracuse............................... 822,300 7,413,400 8,235,700 (85,300)
148 Metropoint I................................... 4,374,900 39,549,000 43,923,900 (454,900)
149 Metropoint III vacant land..................... 2,000,000 -- 2,000,000 --
150 One Park Square................................ 3,634,300 32,883,500 36,517,800 (378,200)
151 Park Avenue Tower.............................. 48,976,000 196,538,900 245,514,900 (2,273,400)
152 Terrace Building............................... 1,546,400 14,059,900 15,606,300 (159,800)
153 The Solarium................................... 1,951,100 17,756,500 19,707,600 (207,600)
154 Second and Spring.............................. 1,968,400 17,729,800 19,698,200 (203,100)
155 Colonnade I and II............................. 9,043,800 81,537,700 90,581,500 (595,900)
156 Worldwide Plaza................................ 124,919,000 499,676,100 624,595,100 (2,602,500)
157 Central Park vacant land....................... 3,975,400 -- 3,975,400 --
-------------- --------------- --------------- -------------
Subtotal Office Properties..................... $1,386,430,300 $11,750,308,800 $13,136,739,100 $(342,895,500)
-------------- --------------- --------------- -------------
Development Properties:
158 Reston Town Center Garage...................... $ 1,942,500 $ 994,700 $ 2,937,200 $ --
159 150 California................................. 12,566,800 4,370,900 16,937,700 --
160 175 Wyman Street............................... 16,871,000 3,129,400 20,000,400 --
161 Crosby Corporate Center II..................... 9,384,600 25,501,300 34,885,900 --
162 John Marshall III.............................. 9,950,000 8,131,200 18,081,200 --
163 Media Center................................... 15,000,000 4,899,500 19,899,500 --
164 Riverside Center............................... 24,000,000 9,635,000 33,625,000 --
165 Tower at New England Executive Park............ 2,792,900 28,309,200 31,102,100 (266,500)
166 215 Fremont Street............................. 2,404,400 23,822,500 26,226,900 --
167 Colonnade III.................................. 6,152,000 57,892,200 64,044,200 (611,800)
168 Prominence..................................... -- 534,700 534,700 --
169 World Trade Center............................. -- 17,400 17,400 --
170 Rand Tower Garage.............................. -- 70,700 70,700 --
-------------- --------------- --------------- -------------
Subtotal Development Properties................ $ 101,064,200 $ 167,308,700 $ 268,372,900 $ (878,300)
-------------- --------------- --------------- -------------
<CAPTION>
DATE OF DATE DEPRECIABLE
DESCRIPTION CONSTRUCTION ACQUIRED LIVES(2)
----------- ------------ ------------------ -----------
<C> <C> <C> <C>
132 Wellesley Office Park.......................... 1963-1984 12/19/97 40
133 Westbrook Corporate Center..................... 1985-1996 12/19/97 40
134 Westwood Business Center....................... 1985 12/19/97 40
135 100 Summer Street.............................. 1974/1990 03/18/98 40
136 Westbrook Corporate Center vacant land......... N/A 04/02/98 40
137 Denver Post Tower.............................. 1984 04/21/98 40
138 301 Howard Street.............................. 1988 04/29/98 40
139 410 17th Street................................ 1978 04/30/98 40
140 Tabor Center................................... 1985 04/30/98 40
141 Trinity Place.................................. 1983 04/30/98 40
142 Dominion Plaza................................. 1983 05/14/98 40
143 Millennium Plaza............................... 1982 05/19/98 40
144 Polk and Taylor Buildings...................... 1970 05/22/98 40
145 Columbia SeaFirst Center....................... 1985 06/26/98 40
146 Northland Plaza................................ 1985 07/02/98 40
147 4949 S. Syracuse............................... 1982 07/15/98 40
148 Metropoint I................................... 1987 07/15/98 40
149 Metropoint III vacant land..................... N/A 07/15/98 40
150 One Park Square................................ 1985 07/15/98 40
151 Park Avenue Tower.............................. 1986 07/15/98 40
152 Terrace Building............................... 1982 07/15/98 40
153 The Solarium................................... 1982 07/15/98 40
154 Second and Spring.............................. 1906/1989 07/29/98 40
155 Colonnade I and II............................. 1983-1985 09/30/98 40
156 Worldwide Plaza................................ 1989 10/01/98 40
157 Central Park vacant land....................... N/A 11/03/98 40
Subtotal Office Properties.....................
Development Properties:
158 Reston Town Center Garage...................... N/A 10/22/96 N/A
159 150 California................................. N/A 12/19/97 N/A
160 175 Wyman Street............................... N/A 12/19/97 N/A
161 Crosby Corporate Center II..................... 1998 12/19/97 40
162 John Marshall III.............................. N/A 12/19/97 N/A
163 Media Center................................... N/A 12/19/97 N/A
164 Riverside Center............................... N/A 12/19/97 N/A
165 Tower at New England Executive Park............ 1971/1998 03/31/98 40
166 215 Fremont Street............................. N/A 04/29/98 N/A
167 Colonnade III.................................. 1998 09/30/98 40
168 Prominence..................................... N/A N/A N/A
169 World Trade Center............................. N/A N/A N/A
170 Rand Tower Garage.............................. N/A N/A N/A
Subtotal Development Properties................
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
ENCUMBRANCES
DESCRIPTION NOTES LOCATION AT 12/31/98 NOTES
----------- ------ -------- -------------- ------
<C> <S> <C> <C> <C> <C>
Parking Facilities:
1 203 North LaSalle Garage....................... (3) Chicago, IL $ 32,661,500 (13)
2 Theatre District Garage........................ (3) Chicago, IL --
3 Capitol Commons Garage......................... (3) Indianapolis, IN 4,368,800
4 Boston Harbor Garage........................... (3) Boston, MA 34,640,100
5 Milwaukee Center............................... (3) Milwaukee, WI --
6 1111 Sansom Street Garage...................... (3) Philadelphia, PA --
7 15th & Sansom Streets Garage................... (3) Philadelphia, PA --
8 1602-34 Chancellor Garage...................... (3) Philadelphia, PA --
9 1616 Sansom Street Garage...................... (3) Philadelphia, PA --
10 Juniper/Locust Streets Garage.................. (3) Philadelphia, PA --
11 Adams-Wabash Garage............................ Chicago, IL --
12 601 Tchoupitoulas Garage....................... New Orleans, LA -- (7)
13 Stanwix Garage................................. Pittsburgh, PA --
14 Forbes and Allies Garages...................... Pittsburgh, PA --
--------------
Subtotal Parking Facilities.................... $ 71,670,400
--------------
Management Business -- Furniture, fixtures and
equipment...................................... $ --
--------------
Investment in Real Estate...................... $2,350,087,800
==============
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
-------------------------------- -------------------------
BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------------- --------------- ---------- ------------
<C> <C> <C> <C> <C>
Parking Facilities:
1 203 North LaSalle Garage....................... $ 3,784,600 $ 34,061,500 $ -- $ 652,500
2 Theatre District Garage........................ 3,372,300 30,326,400 -- 102,600
3 Capitol Commons Garage......................... -- 14,428,500 -- 1,200
4 Boston Harbor Garage........................... 6,087,300 54,785,300 -- 1,446,200
5 Milwaukee Center............................... -- 7,798,800 -- 289,600
6 1111 Sansom Street Garage...................... 1,476,500 -- 6,800 --
7 15th & Sansom Streets Garage................... 726,400 6,537,600 -- 11,300
8 1602-34 Chancellor Garage...................... 735,900 6,622,700 -- 441,300
9 1616 Sansom Street Garage...................... 432,900 3,896,200 -- (3,000)
10 Juniper/Locust Streets Garage.................. 574,400 5,169,900 -- 242,600
11 Adams-Wabash Garage............................ 2,525,000 22,725,300 -- 215,500
12 601 Tchoupitoulas Garage....................... 1,180,000 10,619,800 -- 1,300
13 Stanwix Garage................................. 1,794,500 16,160,000 -- 650,300
14 Forbes and Allies Garages...................... -- 31,250,900 -- --
-------------- --------------- ---------- ------------
Subtotal Parking Facilities.................... $ 22,689,800 $ 244,382,900 $ 6,800 $ 4,051,400
-------------- --------------- ---------- ------------
Management Business -- Furniture, fixtures and
equipment...................................... $ -- $ -- $ -- $ 7,576,400
-------------- --------------- ---------- ------------
Investment in Real Estate...................... $1,508,340,100 $11,832,381,800 $1,851,000 $341,246,400
============== =============== ========== ============
<CAPTION>
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD 12/31/98
--------------------------------
BUILDING AND ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS TOTAL(1) DEPRECIATION
----------- -------------- --------------- --------------- -------------
<C> <C> <C> <C> <C>
Parking Facilities:
1 203 North LaSalle Garage....................... $ 3,784,600 $ 34,714,000 $ 38,498,600 $ (1,295,500)
2 Theatre District Garage........................ 3,372,300 30,429,000 33,801,300 (1,112,300)
3 Capitol Commons Garage......................... -- 14,429,700 14,429,700 (526,500)
4 Boston Harbor Garage........................... 6,087,300 56,231,500 62,318,800 (2,251,100)
5 Milwaukee Center............................... -- 8,088,400 8,088,400 (312,000)
6 1111 Sansom Street Garage...................... 1,483,300 -- 1,483,300 (700)
7 15th & Sansom Streets Garage................... 726,400 6,548,900 7,275,300 (237,300)
8 1602-34 Chancellor Garage...................... 735,900 7,064,000 7,799,900 (240,100)
9 1616 Sansom Street Garage...................... 432,900 3,893,200 4,326,100 (91,900)
10 Juniper/Locust Streets Garage.................. 574,400 5,412,500 5,986,900 (188,800)
11 Adams-Wabash Garage............................ 2,525,000 22,940,800 25,465,800 (784,500)
12 601 Tchoupitoulas Garage....................... 1,180,000 10,621,100 11,801,100 (342,700)
13 Stanwix Garage................................. 1,794,500 16,810,300 18,604,800 (462,000)
14 Forbes and Allies Garages...................... -- 31,250,900 31,250,900 --
-------------- --------------- --------------- -------------
Subtotal Parking Facilities.................... $ 22,696,600 $ 248,434,300 $ 271,130,900 $ (7,845,400)
-------------- --------------- --------------- -------------
Management Business -- Furniture, fixtures and
equipment...................................... $ -- $ 7,576,400 $ 7,576,400 $ (639,600)
-------------- --------------- --------------- -------------
Investment in Real Estate...................... $1,510,191,100 $12,173,628,200 $13,683,819,300 $(352,258,800)
============== =============== =============== =============
<CAPTION>
DATE OF DATE DEPRECIABLE
DESCRIPTION CONSTRUCTION ACQUIRED LIVES(2)
----------- ------------ ------------------ -----------
<C> <C> <C> <C>
Parking Facilities:
1 203 North LaSalle Garage....................... 1985 06/09/95 40
2 Theatre District Garage........................ 1987 06/09/95 40
3 Capitol Commons Garage......................... 1987 06/29/95 40
4 Boston Harbor Garage........................... 1972 12/10/96 40
5 Milwaukee Center............................... 1988 12/18/96 40
6 1111 Sansom Street Garage...................... N/A 12/27/96 40
7 15th & Sansom Streets Garage................... 1950/1954 12/27/96 40
8 1602-34 Chancellor Garage...................... 1945/1955 12/27/96 40
9 1616 Sansom Street Garage...................... 1950 12/27/96 40
10 Juniper/Locust Streets Garage.................. 1949/1952 12/27/96 40
11 Adams-Wabash Garage............................ 1990 08/11/97 40
12 601 Tchoupitoulas Garage....................... 1982 09/03/97 40
13 Stanwix Garage................................. 1989 11/25/97 40
14 Forbes and Allies Garages...................... 1954 12/17/98 40
Subtotal Parking Facilities....................
Management Business -- Furniture, fixtures and
equipment......................................
Investment in Real Estate......................
</TABLE>
<PAGE> 121
- ---------------
The initial costs to the Company for certain properties acquired in connection
with the Beacon Merger on 12/19/97 have been reallocated as a result of
finalizing purchase price allocation based on relative fair value and include
adjustments for additional acquisitions costs incurred in 1998.
(1) The aggregate cost for Federal Income Tax purposes as of December 31, 1998
was approximately $9.7 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) The date acquired represents the date these Properties were acquired by
Equity Office Predecessors. The acquisition of the Properties, or interest
therein, by the Company from Equity Office Predecessors in connection with
the Consolidation on July 11, 1997, was accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion
No. 16. Accordingly, the assets were recorded by the Company at their fair
values.
(4) This Property contains 106 residential units in addition to 224,405 square
feet of office space.
(5) These loans are subject to cross default and collateralization provisions.
(6) This Property contains 161 residential units in addition to 187,573 square
feet of office space.
(7) These loans are subject to cross default and collateralization provisions.
(8) The Prudential Portfolio consists of six Office Buildings located in
Philadelphia, PA, Dallas, TX, and Houston, TX. These Office Buildings were
constructed between 1969 and 1984.
(9) These loans are subject to cross default and collateralization provisions.
(10) These loans are subject to cross default and collateralization provisions.
(11) These properties are in various development stages. During the development
period certain operating costs, including real estate taxes together with
interest incurred during the development stages will be capitalized.
(12) During 1998, the Company committed to acquire these properties upon their
completion. The costs reflected above include legal and other professional
fees incurred in connection with the Company's potential acquisition of
these projects. These transactions are contingent upon certain terms and
conditions as set forth in their respective purchase agreements. There can
be no assurance that these transactions will be consummated.
(13) The encumbrance on the 203 North LaSalle Garage is also secured by a first
lien on the Theatre District Garage.
<PAGE> 122
A SUMMARY OF ACTIVITY OF INVESTMENT IN REAL ESTATE AND ACCUMULATED DEPRECIATION
IS AS FOLLOWS:
The changes in investment in real estate for the year ended December 31,
1998, the period from July 11, 1997 through December 31, 1997, the period from
January 1, 1997 through July 10, 1997 and for the year ended December 31, 1996
are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
JULY 11, 1997 JANUARY 1, 1997
THROUGH THROUGH
DECEMBER 31, DECEMBER 31, JULY 10, DECEMBER 31,
1998 1997 1997 1996
------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of the
period........................ $11,041,014,100 $ 0 $3,549,707,600 $2,571,851,300
Additions during period:
Acquisitions............... 2,556,978,300 10,941,428,100 531,968,000 860,995,000
Improvements............... 207,093,000 99,586,000 59,511,000 129,485,300
Deductions during period:
Properties disposed of..... (121,266,100) (67,193,400) (9,633,600)
Write-off of fully
depreciated assets which
are not longer in
service.................. 0 (2,990,400)
--------------- --------------- -------------- --------------
Balance, end of period.......... $13,683,819,300 $11,041,014,100 $4,073,993,200 $3,549,707,600
=============== =============== ============== ==============
</TABLE>
The changes in accumulated depreciation for the year ended December 31,
1998, the period from July 11, 1997 through December 31, 1997, the period from
January 1, 1997 through July 10, 1997 and for the year ended December 31, 1996
are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
JULY 11, 1997 JANUARY 1, 1997
THROUGH THROUGH
DECEMBER 31, DECEMBER 31, JULY 10, DECEMBER 31,
1998 1997 1997 1996
------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of the
period........................ $ (64,695,100) $ -- $ (257,893,300) $ (178,448,600)
Additions during period:
Depreciation............... (291,213,400) (64,695,100) (57,379,300) (82,905,300)
Deductions during period:
Properties disposed of..... 3,649,700 -- 8,517,200 470,200
Write-off of fully
depreciated assets which
are not longer in
service.................. -- -- 2,990,400
--------------- --------------- -------------- --------------
Balance, end of period.......... $ (352,258,800) $ (64,695,100) $ (306,755,400) $ (257,893,300)
=============== =============== ============== ==============
</TABLE>
<PAGE> 1
EXHIBIT 4.22
SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
for $1,000,000,000 Revolving Credit Facility
dated as of May 29, 1998
among
EOP OPERATING LIMITED PARTNERSHIP,
THE BANKS LISTED HEREIN,
NATIONSBANK, N.A.,
as Administrative Agent,
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
as Documentation Agent,
J.P. MORGAN SECURITIES INC.,
as Syndication Agent,
THE BANK OF NOVA SCOTIA,
THE CHASE MANHATTAN BANK,
COMMERZBANK AKTIENGESELLSCHAFT,
DRESDNER BANK AG, NEW YORK AND CAYMAN BRANCHES,
PNC BANK, NATIONAL ASSOCIATION,
and
UNION BANK OF SWITZERLAND, NEW YORK BRANCH,
as Managing Agents
AND
CREDIT LYONNAIS, NEW YORK BRANCH,
FLEET NATIONAL BANK,
and
U.S. BANK NATIONAL ASSOCIATION,
as Co-Agents.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINITIONS........................................................ 2
SECTION 1.1. Definitions 2
SECTION 1.2. Accounting Terms and Determinations 27
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1.3. Types of Borrowings 27
SECTION 1.4. Interrelationship with the Existing Credit
Agreement 28
ARTICLE II THE CREDITS 28
SECTION 2.1. Commitments to Lend 28
SECTION 2.2. Notice of Borrowing 28
SECTION 2.3. Swingline Loan Subfacility 29
(a)Swingline Commitment 29
(b)Swingline Borrowings 29
(c)Interest Rate 31
SECTION 2.4. Money Market Borrowings 31
(a)The Money Market Option 31
(b)Money Market Quote Request 31
(c)Invitation for Money Market Quotes 32
(d)Submission and Contents of Money Market
Quotes 32
(e)Notice to Borrower 33
(f)Acceptance and Notice by Borrower 34
(g)Allocation by Agent 34
SECTION 2.5. Notice to Banks; Funding of Loans 35
SECTION 2.6. Notes 36
SECTION 2.7. Method of Electing Interest Rates 37
SECTION 2.8. Interest Rates 38
SECTION 2.9. Fees 39
(a)Facility Fee 39
(b)Agency Fees 39
(c)Fees Non-Refundable 39
SECTION 2.10. Maturity Date 39
SECTION 2.11. Optional Prepayments 40
SECTION 2.12. General Provisions as to Payments 41
SECTION 2.13. Funding Losses 42
SECTION 2.14. Computation of Interest and Fees 42
SECTION 2.15. Use of Proceeds 42
ARTICLE III CONDITIONS 42
SECTION 3.1. Closing 42
SECTION 3.2. Borrowings 44
ARTICLE IV REPRESENTATIONS AND WARRANTIES 45
SECTION 4.1. Existence and Power 45
SECTION 4.2. Power and Authority 45
SECTION 4.3. No Violation 46
SECTION 4.4. Financial Information 47
SECTION 4.5. Litigation 47
SECTION 4.6. Compliance with ERISA 47
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 4.7. Environmental 48
SECTION 4.8. Taxes 48
SECTION 4.9. Full Disclosure 48
SECTION 4.10. Solvency 49
SECTION 4.11. Use of Proceeds 49
SECTION 4.12. Governmental Approvals 49
SECTION 4.13. Investment Company Act; Public Utility
Holding Company Act 49
SECTION 4.14. Principal Offices 49
SECTION 4.15. REIT Status 49
SECTION 4.16. Patents, Trademarks, etc. 49
SECTION 4.17. Judgments 49
SECTION 4.18. No Default 50
SECTION 4.19. Licenses, etc. 50
SECTION 4.20. Compliance With Law 50
SECTION 4.21. No Burdensome Restrictions 50
SECTION 4.22. Brokers' Fees 50
SECTION 4.23. Labor Matters 50
SECTION 4.24. Insurance 51
SECTION 4.25. Organizational Documents 51
SECTION 4.26. Qualifying Unencumbered Properties 51
SECTION 4.27. "Year 2000" Compliance. 51
ARTICLE V AFFIRMATIVE AND NEGATIVE COVENANTS 52
SECTION 5.1. Information 52
SECTION 5.2. Payment of Obligations 54
SECTION 5.3. Maintenance of Property; Insurance; Leases 55
SECTION 5.4. Maintenance of Existence 55
SECTION 5.5. Compliance with Laws 55
SECTION 5.6. Inspection of Property, Books and Records 55
SECTION 5.7. Existence 56
SECTION 5.8. Financial Covenants 56
(a)Total Liabilities to Total Asset Value 56
(b)EBITDA to Interest Expense Ratio 56
(c)[Intentionally Omitted.] 56
(d)Cash Flow to Fixed Charges Ratio 56
(e)Secured Debt to Total Asset Value 56
(f)Unencumbered Pool 56
(g)Unencumbered Net Operating Income to Unsecured
Debt Service 56
(h)Minimum Tangible Net Worth 56
(i)Dividends 57
(j)Permitted Holdings 57
(k)No Liens 57
(l)Calculation 57
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 5.9. Restriction on Fundamental Changes 57
SECTION 5.10. Changes in Business 58
SECTION 5.11. EOPT Status 58
(a)Status 58
(b)Indebtedness 58
(c)Restriction on Fundamental Changes 59
(d)Environmental Liabilities 59
(e)Disposal of Partnership Interests 59
SECTION 5.12. Other Indebtedness 60
SECTION 5.13. Forward Equity Contracts. 60
ARTICLE VI DEFAULTS 60
SECTION 6.1. Events of Default 60
SECTION 6.2. Rights and Remedies 63
SECTION 6.3. Notice of Default 64
SECTION 6.4. Distribution of Proceeds after Default 64
ARTICLE VII THE AGENTS 64
SECTION 7.1. Appointment and Authorization 64
SECTION 7.2. Agency and Affiliates 65
SECTION 7.3. Action by Administrative Agent and
Documentation Agent 65
SECTION 7.4. Consultation with Experts 65
SECTION 7.5. Liability of Administrative Agent and
Documentation Agent 65
SECTION 7.6. Indemnification 66
SECTION 7.7. Credit Decision 66
SECTION 7.8. Successor Administrative Agent, Documentation
Agent or Syndication Agent 66
SECTION 7.9. Consents and Approvals 67
ARTICLE VIII CHANGE IN CIRCUMSTANCES 68
SECTION 8.1. Basis for Determining Interest Rate Inadequate
or Unfair 68
SECTION 8.2. Illegality 68
SECTION 8.3. Increased Cost and Reduced Return 69
SECTION 8.4. Taxes 71
SECTION 8.5. Base Rate Loans Substituted for Affected
Euro-Dollar Loans 73
ARTICLE IX MISCELLANEOUS 73
SECTION 9.1. Notices 73
SECTION 9.2. No Waivers 74
SECTION 9.3. Expenses; Indemnification 74
SECTION 9.4. Sharing of Set-Offs 76
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 9.5. Amendments and Waivers 76
SECTION 9.6. Successors and Assigns 77
SECTION 9.7. Collateral 80
SECTION 9.8. Governing Law; Submission to Jurisdiction 80
SECTION 9.9. Counterparts; Integration;. Effectiveness 81
SECTION 9.10. WAIVER OF JURY TRIAL 81
SECTION 9.11. Survival 81
SECTION 9.12. Domicile of Loans 81
SECTION 9.13. Limitation of Liability 81
SECTION 9.14. Recourse Obligation 82
SECTION 9.15. Confidentiality 82
SECTION 9.16. Bank's Failure to Fund 82
SECTION 9.17. Banks' ERISA Covenant 87
SECTION 9.18. Managing Agents and Co-Agents 87
SECTION 9.19. No Bankruptcy Proceedings 88
SCHEDULE 1.1
SCHEDULE 4.4 (b)
SCHEDULE 4.6
SCHEDULE 5.11(c)(1)
SCHEDULE 5.11(c)(2)
</TABLE>
SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THIS SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this
"Agreement") dated as of May 29, 1998 among EOP OPERATING LIMITED PARTNERSHIP
(the "Borrower"), the BANKS listed on the signature pages hereof, NATIONSBANK,
N.A., as Administrative Agent, BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Documentation Agent, J.P. MORGAN SECURITIES INC., as Syndication
Agent, THE BANK OF NOVA SCOTIA, THE CHASE MANHATTAN BANK, COMMERZBANK
AKTIENGESELLSCHAFT, DRESDNER BANK AG, NEW YORK AND CAYMAN BRANCHES, PNC BANK,
NATIONAL ASSOCIATION, and UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as
Managing Agents, CREDIT LYONNAIS, NEW YORK BRANCH, FLEET NATIONAL BANK, and U.S.
BANK NATIONAL ASSOCIATION, as Co-Agents
W I T N E S S E T H
WHEREAS, the Borrower has executed and delivered to the Agents, the Managing
Agents, the Co-Agents and certain of the Banks that certain Amended and Restated
Revolving Credit Agreement dated as of November 20, 1997, by and among the
Borrower, certain of the Banks, the Managing Agents, the Co-Agents and the
Agents (the "Existing Credit Agreement");
<PAGE> 6
WHEREAS, the Borrower, the Agents, the Managing Agents, the Co-Agents and
the Banks party to the Existing Credit Agreement desire to amend and restate the
Existing Credit Agreement in its entirety to add additional entities as Banks
and to set forth the terms and conditions under which the Banks may hereafter
extend loans to the Borrower; and
WHEREAS, it is the intent of the Borrower, the Agents, the Managing Agents,
the Co-Agents and the Banks that this Agreement replace in its entirety the
Existing Credit Agreement and that, from and after the Closing Date (as defined
below), the Existing Credit Agreement shall be of no force and effect, except to
evidence the terms and conditions under which the Borrower heretofore incurred
obligations and liabilities to the Banks, the Agents, the Managing Agents and
the Co-Agents, as evidenced by the Existing Credit Agreement and the Banks', the
Agents', the Managing Agents's and the Co-Agents' books and records;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used herein, have the
following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes setting
forth Money Market Absolute Rates pursuant to Section 2.4.
"Adjusted Interbank Offered Rate" as applicable to any Interest Period means
a rate per annum equal to the quotient obtained (rounded upward, if necessary,
to the next higher 1/100 of 1%) by dividing (i) the Interbank Offered Rate
applicable during such Interest Period by (ii) 1.00 minus the Euro-Dollar
Reserve Percentage.
"Administrative Agent" shall mean NationsBank, N.A. in its capacity as
Administrative Agent hereunder, and its permitted successors in such capacity in
accordance with the terms of this Agreement.
"Administrative Questionnaire" means with respect to each Bank, an
administrative questionnaire in the form prepared by the Administrative Agent
and submitted to the Administrative Agent (with a copy to the Borrower and the
Documentation Agent) duly completed by such Bank.
"Agents" shall mean the Administrative Agent, the Documentation Agent and
the Syndication Agent, collectively.
<PAGE> 7
"Agreement" shall mean this Second Amended and Restated Revolving Credit
Agreement as the same may from time to time hereafter be modified, supplemented
or amended.
"Applicable Fee Percentage" means the respective percentages per annum
determined, at any time, based on the range into which Borrower's Credit Rating
then falls, in accordance with the table set forth below. Any change in
Borrower's Credit Rating causing it to move to a different range on the table
shall effect an immediate change in the Applicable Fee Percentage. In the event
that Borrower receives only two (2) Credit Ratings, and such Credit Ratings are
not equivalent, the Applicable Fee Percentage shall be determined by the lower
of such two (2) Credit Ratings. In the event that Borrower receives more than
two (2) Credit Ratings, and such Credit Ratings are not all equivalent, the
Applicable Fee Percentage shall be determined by the higher of the ratings from
S&P and Moody's, provided that the rating from one of the other Rating Agencies
shall be at least equivalent to such higher rating; provided, further, that if
the rating from one of the other Rating Agencies is not at least equivalent to
the higher of the ratings from S&P and Moody's, then the Applicable Fee
Percentage shall be determined by the second (2nd) highest Credit Rating. In the
event that only one of the Rating Agencies shall have set Borrower's Credit
Rating, then the Applicable Fee Percentage shall be based on such rating only.
<TABLE>
<CAPTION>
Range of
Borrower's
Credit Rating Applicable
(S&P/Moody's Fee Percentage
Ratings) (% per annum)
-------------------- --------------
<S> <C>
Non-Invest-
ment Grade 0.20
BBB-/Baa3 0.20
BBB/Baa2 0.20
BBB+/Baa1 0.20
A-/A3 or better 0.15
</TABLE>
"Applicable Interest Rate" means (i) with respect to any Fixed Rate
Indebtedness, the fixed interest rate applicable to such Fixed Rate Indebtedness
at the time in question, and (ii) with respect to any Floating Rate
Indebtedness, either (x) the rate at which the interest rate applicable to such
Floating Rate Indebtedness is actually capped (or fixed pursuant to an interest
rate hedging device), at the time of calculation, if Borrower has entered into
an interest rate cap agreement or other interest rate hedging device with
respect thereto or (y) if Borrower has not entered into an interest rate cap
agreement or other interest rate hedging device with respect to such Floating
Rate Indebtedness, the
<PAGE> 8
greater of (A) the rate at which the interest rate applicable to such Floating
Rate Indebtedness could be fixed for the remaining term of such Floating Rate
Indebtedness, at the time of calculation, by Borrower's entering into any
unsecured interest rate hedging device either not requiring an upfront payment
or if requiring an upfront payment, such upfront payment shall be amortized over
the term of such device and included in the calculation of the interest rate
(or, if such rate is incapable of being fixed by entering into an unsecured
interest rate hedging device at the time of calculation, a fixed rate equivalent
reasonably determined by Administrative Agent) or (B) the floating rate
applicable to such Floating Rate Indebtedness at the time in question.
"Applicable Lending Office" means with respect to any Bank, (i) in the case
of its Base Rate Loans and Swingline Loans, its Domestic Lending Office, (ii) in
the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office, and (iii) in
the case of its Money Market Loans, its Money Market Lending Office.
"Applicable Margin" means with respect to each Loan, the respective
percentages per annum determined, at any time, based on the range into which
Borrower's Credit Rating then falls, in accordance with the table set forth
below. Any change in Borrower's Credit Rating causing it to move to a different
range on the table shall effect an immediate change in the Applicable Margin. In
the event that Borrower receives only two (2) Credit Ratings, and such Credit
Ratings are not equivalent, the Applicable Margin shall be determined by the
lower of such two (2) Credit Ratings. In the event that Borrower receives more
than two (2) Credit Ratings, and such Credit Ratings are not all equivalent, the
Applicable Margin shall be determined by the higher of the ratings from S&P and
Moody's, provided that the rating from one of the other Rating Agencies shall be
at least equivalent to such higher rating; provided, further, that if the rating
from one of the other Rating Agencies is not at least equivalent to the higher
of the ratings from S&P and Moody's, then the Applicable Margin shall be
determined by the second (2nd) highest Credit Rating. In the event that only one
of the Rating Agencies shall have set Borrower's Credit Rating, then the
Applicable Margin shall be based on such rating only.
<TABLE>
<CAPTION>
Range of Applicable
Borrower's Margin for Applicable
Credit Rating Base Rate Margin for Euro
(S&P/Moody's Loans Dollar Loans
Ratings) (% per annum) (% per annum)
- ------------- ------------- -------------
<S> <C> <C>
Non-Invest-
ment Grade 0.0 1.175
BBB-/Baa3 0.0 0.80
BBB/Baa2 0.0 0.70
BBB+/Baa1 0.0 0.60
</TABLE>
<PAGE> 9
<TABLE>
<S> <C> <C>
A-/A3 or better 0.0 0.55
</TABLE>
"Assignee" has the meaning set forth in Section 9.6(c).
"Balance Sheet Indebtedness" means with respect to any Person and assuming
such Person is required to prepare financial statements in accordance with GAAP,
without duplication, the Indebtedness of such Person which would be required to
be included on the liabilities side of the balance sheet of such Person in
accordance with GAAP. Notwithstanding the foregoing, Balance Sheet Indebtedness
shall include current liabilities and all guarantees of Indebtedness of any
Person.
"Balloon Payments" shall mean with respect to any loan constituting Balance
Sheet Indebtedness, any required principal payment of such loan which is either
(i) payable at the maturity of such Indebtedness or (ii) in an amount which
exceeds fifteen percent (15%) of the original principal amount of such loan;
provided, however, that the final payment of a fully amortizing loan shall not
constitute a Balloon Payment.
"Bank" means each entity (other than Borrower) listed on the signature pages
hereof, each Assignee which becomes a Bank pursuant to Section 9.6(c), and their
respective successors and each Designated Lender; provided, however, that the
term "Bank" shall exclude each Designated Lender when used in reference to a
Committed Loan, the Commitments or terms relating to the Committed Loans and the
Commitments and shall further exclude each Designated Lender for all other
purposes hereunder except that any Designated Lender which funds a Money Market
Loan shall, subject to Section 9.6(d), have the rights (including the rights
given to a Bank contained in Section 9.3 and otherwise in Article 9) and
obligations of a Bank associated with holding such Money Market Loan. For
purposes of this Agreement, J.P. Morgan Securities, Inc. shall not constitute a
"Bank."
"Bankruptcy Code" shall mean Title 11 of the United States Code, entitled
"Bankruptcy", as amended from time to time, and any successor statute or
statutes.
"Base Rate" means, for any day, a rate per annum equal to the higher of (i)
the Prime Rate for such day and (ii) the sum of 0.5% plus the Federal Funds Rate
for such day. Each change in the Base Rate shall become effective automatically
as of the opening of business on the date of such change in the Base Rate,
without prior written notice to Borrower or Banks.
"Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate
Loan in accordance with the provisions of this Agreement.
"Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by any member of the ERISA
Group.
<PAGE> 10
"Borrower" means EOP Operating Limited Partnership, a Delaware limited
partnership.
"Borrower's Share" means Borrower's and EOPT's direct or indirect share of
an Investment Affiliate based upon Borrower's and EOPT's percentage ownership
(whether direct or indirect) of such Investment Affiliate.
"Borrowing" has the meaning set forth in Section 1.3.
"Business Day" means any day except a Saturday, Sunday or other day on which
commercial banks in Dallas, Texas are authorized by law to close.
"Capital Leases" as applied to any Person, means any lease of any property
(whether real, personal or mixed) by that Person as lessee which, in conformity
with GAAP, is or should be accounted for as a capital lease on the balance sheet
of that Person.
"Cash or Cash Equivalents" shall mean (a) cash; (b) marketable direct
obligations issued or unconditionally guaranteed by the United States Government
or issued by an agency thereof and backed by the full faith and credit of the
United States, in each case maturing within one (1) year after the date of
acquisition thereof; (c) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within ninety (90) days after the
date of acquisition thereof and, at the time of acquisition, having one of the
two highest ratings obtainable from any two of S & P, Moody's, Duff or Fitch
(or, if at any time no two of the foregoing shall be rating such obligations,
then from such other nationally recognized rating services acceptable to
Administrative Agent ); (d) domestic corporate bonds, other than domestic
corporate bonds issued by Borrower or any of its Affiliates, maturing no more
than two (2) years after the date of acquisition thereof and, at the time of
acquisition, having a rating of at least A or the equivalent from any two (2) of
S & P, Moody's, Duff or Fitch (or, if at any time no two of the foregoing shall
be rating such obligations, then from such other nationally recognized rating
services acceptable to Administrative Agent); (e) variable-rate domestic
corporate notes or medium term corporate notes, other than notes issued by
Borrower or any of its Affiliates, maturing or resetting no more than one (1)
year after the date of acquisition thereof and having a rating of at least AA or
the equivalent from two of S & P, Moody's, Duff or Fitch (or, if at any time no
two of the foregoing shall be rating such obligations, then from such other
nationally recognized rating services acceptable to Administrative Agent); (f)
commercial paper (foreign and domestic) or master notes, other than commercial
paper or master notes issued by Borrower or any of its Affiliates, and, at the
time of acquisition, having a long-term rating of at least A or the equivalent
from S & P, Moody's, Duff or Fitch and having a short-term rating of at least
A-1 and P-1 from S & P and Moody's, respectively (or, if at any time neither S &
P nor Moody's shall be rating such obligations, then the highest rating from
such other nationally recognized rating services acceptable to Administrative
Agent); (g) domestic and Eurodollar certificates of deposit or domestic time
deposits or Eurodollar deposits or bankers' acceptances (foreign or domestic)
that are issued by a bank (I) which has, at the time of acquisition, a
<PAGE> 11
long-term rating of at least A or the equivalent from S & P, Moody's, Duff or
Fitch and (II) if a domestic bank, which is a member of the Federal Deposit
Insurance Corporation; and (h) overnight securities repurchase agreements, or
reverse repurchase agreements secured by any of the foregoing types of
securities or debt instruments, provided that the collateral supporting such
repurchase agreements shall have a value not less than 101% of the principal
amount of the repurchase agreement plus accrued interest.
"Cash Flow" means, for any period, EBITDA for such period, as adjusted for a
normalized recurring level of capital expenditures by Borrower for such period,
which adjustment shall be at the rate of One Dollar and Fifty cents ($1.50) per
square foot per annum of office space leased as of the applicable date of
determination for (i) all Office Properties of Borrower and Consolidated
Subsidiaries, and (ii) Borrower's Share of each Office Property of an Investment
Affiliate (provided that, as to any Office Property acquired during such period
such $1.50 per square foot adjustment shall be pro-rated for the period of
ownership).
"Closing Date" means the date on or after the Effective Date on which the
conditions set forth in Section 3.1 shall have been satisfied to the
satisfaction of the Administrative Agent and the Documentation Agent.
"Co-Agents" means Credit Lyonnais, New York Branch, Fleet National Bank, and
U.S. Bank National Association, in their capacity as Co-Agents hereunder.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and as it
may be further amended from time to time, any successor statutes thereto, and
applicable U.S. Department of Treasury regulations issued pursuant thereto in
temporary or final form.
"Committed Borrowing" has the meaning set forth in Section 1.3.
"Committed Loan" means a loan made by a Bank pursuant to Section 2.1;
provided that, if any such loan or loans (or portions thereof) are combined or
subdivided pursuant to a Notice of Interest Rate Election, the term "Committed
Loan" shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"Commitment" means with respect to each Bank, the amount set forth under the
name of such Bank on the signature pages hereof (and, for each Bank which is an
Assignee, the amount set forth in the Transfer Supplement entered into pursuant
to Section 9.6(c) as the Assignee's Commitment), as such amount may be reduced
from time to time pursuant to Section 2.11(c) or in connection with an
assignment to an Assignee, and as such amount may be increased pursuant to
Section 2.16.
"Consolidated Subsidiary" means at any date any Subsidiary or other entity
which is consolidated with Borrower or EOPT in accordance with GAAP.
<PAGE> 12
"Consolidated Tangible Net Worth" means, at any time, the tangible net worth
of Borrower, on a consolidated basis, determined in accordance with GAAP, plus
all accumulated depreciation and amortization of Borrower plus Borrower's Share
of accumulated depreciation and amortization of Investment Affiliates, deducted,
in either case, from earnings in calculating Net Income.
"Contingent Obligation" as to any Person means, without duplication, (i) any
contingent obligation of such Person required to be shown on such Person's
balance sheet in accordance with GAAP, and (ii) any obligation required to be
disclosed in the footnotes to such Person's financial statements, guaranteeing
partially or in whole any Non-Recourse Indebtedness, lease, dividend or other
obligation, exclusive of contractual indemnities (including, without limitation,
any indemnity or price-adjustment provision relating to the purchase or sale of
securities or other assets) and guarantees of non-monetary obligations (other
than guarantees of completion) which have not yet been called on or quantified,
of such Person or of any other Person. The amount of any Contingent Obligation
described in clause (ii) shall be deemed to be (a) with respect to a guaranty of
interest or interest and principal, or operating income guaranty, the Net
Present Value of the sum of all payments required to be made thereunder (which
in the case of an operating income guaranty shall be deemed to be equal to the
debt service for the note secured thereby), calculated at the Applicable
Interest Rate, through (i) in the case of an interest or interest and principal
guaranty, the stated date of maturity of the obligation (and commencing on the
date interest could first be payable thereunder), or (ii) in the case of an
operating income guaranty, the date through which such guaranty will remain in
effect, and (b) with respect to all guarantees not covered by the preceding
clause (a), an amount equal to the stated or determinable amount of the primary
obligation in respect of which such guaranty is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as recorded on the
balance sheet and on the footnotes to the most recent financial statements of
Borrower required to be delivered pursuant to Section 5.1 hereof.
Notwithstanding anything contained herein to the contrary, guarantees of
completion shall not be deemed to be Contingent Obligations unless and until a
claim for payment or performance has been made thereunder, at which time any
such guaranty of completion shall be deemed to be a Contingent Obligation in an
amount equal to any such claim. Subject to the preceding sentence, (i) in the
case of a joint and several guaranty given by such Person and another Person
(but only to the extent such guaranty is recourse, directly or indirectly to
Borrower), the amount of the guaranty shall be deemed to be 100% thereof unless
and only to the extent that such other Person has delivered Cash or Cash
Equivalents to secure all or any part of such Person's guaranteed obligations
and (ii) in the case of a guaranty (whether or not joint and several) of an
obligation otherwise constituting Indebtedness of such Person, the amount of
such guaranty shall be deemed to be only that amount in excess of the amount of
the obligation constituting Indebtedness of such Person. Notwithstanding
anything contained herein to the contrary, "Contingent Obligations" shall be
deemed not to include guarantees of Unused Commitments or of construction loans
to the extent the same have not been drawn. All matters constituting "Contingent
Obligations" shall be calculated without duplication.
<PAGE> 13
"Convertible Securities" means evidences of shares of stock, limited or
general partnership interests or other ownership interests, warrants, options,
or other rights or securities which are convertible into or exchangeable for,
with or without payment of additional consideration, common shares of beneficial
interest of EOPT or partnership interests of Borrower, as the case may be,
either immediately or upon the arrival of a specified date or the happening of a
specified event.
"Credit Rating" means the rating assigned by the Rating Agencies to
Borrower's senior unsecured long term indebtedness.
"Debt Restructuring" means a restatement of, or material change in, the
amortization or other financial terms of any Indebtedness of EOPT, the Borrower
or any Subsidiary or Investment Affiliate.
"Debt Service" means, for any period and without duplication, Interest
Expense for such period plus scheduled principal amortization (excluding Balloon
Payments) for such period on all Balance Sheet Indebtedness of Borrower on a
consolidated basis, plus Borrower's Share of scheduled principal amortization
(excluding Balloon Payments) for such period on all Balance Sheet Indebtedness
of Investment Affiliates.
"Default" means any condition or event which with the giving of notice or
lapse of time or both would, unless cured or waived, become an Event of Default.
"Default Rate" has the meaning set forth in Section 2.8(d).
"Designated Lender" means a special purpose corporation that (i) shall have
become a party to this Agreement pursuant to Section 9.6(d), and (ii) is not
otherwise a Bank.
"Designated Lender Notes" means promissory notes of the Borrower,
substantially in the form of Exhibit A-1 hereto, evidencing the obligation of
the Borrower to repay Money Market Loans made by Designated Lenders, and
"Designated Lender Note" means any one of such promissory notes issued under
Section 9.6(d) hereof.
"Designating Lender" shall have the meaning set forth in Section 9.6(d)
hereof.
"Designation Agreement" means a designation agreement in substantially the
form of Exhibit G attached hereto, entered into by a Bank and a Designated
Lender and accepted by the Lead Agent.
"Development Activity" means (a) the development and construction of office
buildings and parking facilities by the Borrower or any of its Financing
Partnerships or Joint Venture Subsidiaries excluding Unimproved Assets, (b) the
financing by the Borrower or any of its Financing Partnerships or Joint Venture
Subsidiaries of any such development or construction and (c) the incurrence by
the Borrower or any of its
<PAGE> 14
Financing Partnerships or Joint Venture Subsidiaries of any Contingent
Obligations in connection with such development or construction (other than
purchase contracts for Real Property Assets which are not payable until after
completion of development or construction). For purposes of Section 5.8(j)
hereof, the "value" of Development Activity shall mean (i) in the case of the
development and construction by the Borrower or any of its Financing
Partnerships described in clause (a) of this definition, the full cost budget to
complete such development and construction, (ii) in the case of the development
and construction by a Joint Venture Subsidiary of the Borrower described in
clause (a) of this definition, an amount equal to the product of (AA) the full
cost budget to complete such development and construction, multiplied by (BB)
Borrower's Share of such Joint Venture Subsidiary, (iii) in the case of the
financing of any development and construction by the Borrower or any of its
Financing Partnerships described in clause (b) of this definition, the amount
the Borrower or any Financing Partnership has committed to fund to pay the cost
to complete such development and construction, (iv) in the case of the financing
of any development and construction by a Joint Venture Subsidiary of the
Borrower described in clause (b) of this definition, an amount equal to the
product of (AA) the amount such Joint Venture Subsidiary has committed to fund
to pay the cost to complete such development and construction, multiplied by (B)
Borrower's Share of such Joint Venture Subsidiary, (v) in the case of the
incurrence of any Contingent Obligations in connection with any development and
construction by the Borrower or any of its Financing Partnerships described in
clause (c) of this definition, the amount of such Contingent Obligation of the
Borrower or such Financing Partnership, (vi) in the case of the incurrence of
any Contingent Obligations in connection with any development and construction
by a Joint Venture Subsidiary of the Borrower described in clause (c) of this
definition, an amount equal to the product of (AA) the amount of such Contingent
Obligation of such Joint Venture Subsidiary, multiplied by (BB) Borrower's Share
of such Joint Venture Subsidiary..
"Documentation Agent" means Bank of America, National Trust and Savings
Association, in its capacity as Documentation Agent hereunder, and its permitted
successors in such capacity in accordance with the terms of this Agreement.
"Domestic Lending Office" means, as to each Bank, its office located at its
address in the United States set forth in its Administrative Questionnaire (or
identified in its Administrative Questionnaire as its Domestic Lending Office)
or such other office as such Bank may hereafter designate as its Domestic
Lending Office by notice to the Borrower and the Administrative Agent.
"Duff" means Duff & Phelps Credit Rating Company, or any successor thereto.
"EBITDA" means, for any period (i) Net Income for such period, plus (ii)
depreciation and amortization expense and other non-cash items deducted in the
calculation of Net Income for such period, plus (iii) Interest Expense deducted
in the calculation of Net Income for such period, plus (iv) Taxes (net of any
Taxes actually paid to, or withheld by, any foreign jurisdiction with respect to
any Real Property Asset located outside of the United States) deducted in the
calculation of Net Income for such
<PAGE> 15
period, plus (v) Borrower's Share of the Investment Affiliate EBITDA for each
Investment Affiliate, minus (vi) the gains (and plus the losses) from
extraordinary items or asset sales or write-ups or forgiveness of indebtedness
included (or deducted) in the calculation of Net Income for such period, all of
the foregoing without duplication.
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 9.9.
"Environmental Affiliate" means any partnership, joint venture, trust or
corporation in which an equity interest is owned directly or indirectly by the
Borrower and, as a result of the ownership of such equity interest, Borrower may
have recourse liability for Environmental Claims against such partnership, joint
venture, trust or corporation (or the property thereof).
"Environmental Claim" means, with respect to any Person, any notice, claim,
demand or similar communication (written or oral) by any other Person alleging
potential liability of such Person for investigatory costs, cleanup costs,
governmental response costs, natural resources damage, property damages,
personal injuries, fines or penalties arising out of, based on or resulting from
(i) the presence, or release into the environment, of any Materials of
Environmental Concern at any location, whether or not owned by such Person or
(ii) circumstances forming the basis of any violation, or alleged violation, of
any Environmental Law, in each case (with respect to both (i) and (ii) above) as
to which there is a reasonable possibility of an adverse determination with
respect thereto and which, if adversely determined, would have a Material
Adverse Effect on the Borrower.
"Environmental Laws" means any and all federal, state, and local statutes,
laws, judicial decisions, regulations, ordinances, rules, judgments, orders,
decrees, plans, injunctions, permits, concessions, grants, licenses, agreements
and other governmental restrictions relating to the environment, the effect of
the environment on human health or to emissions, discharges or releases of
Materials of Environmental Concern into the environment including, without
limitation, ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Materials of Environmental Concern or the
clean up or other remediation thereof.
"EOPT" means Equity Office Properties Trust, a Maryland real estate
investment trust, the sole managing general partner of the Borrower.
"EOPT Guaranty" means (i) the Amended and Restated Guaranty of Payment --
No. 1, dated as of even date herewith, executed by and between EOPT and
Administrative Agent for the benefit of the Banks, and (ii) the Amended and
Restated Guaranty of Payment -- No. 2, dated as of even date herewith, executed
by and between EOPT and Administrative Agent for the benefit of the Banks. All
uses herein of the term "EOPT Guaranty" shall be deemed to refer to each of the
guarantees listed in clauses (i) and (ii) above individually and to both such
guarantees collectively.
<PAGE> 16
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary, EOPT and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control and all members of an "affiliated service
group" which, together with the Borrower, any Subsidiary or EOPT, are treated as
a single employer under Section 414 of the Code or Section 4001(b)(1) of ERISA.
"Euro-Dollar Borrowing" has the meaning set forth in Section 1.3.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its Euro-Dollar Lending
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Administrative Agent.
"Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a
Euro-Dollar Loan in accordance with the applicable Notice of Borrowing.
"Euro-Dollar Reference Bank"" means the principal Dallas offices of the
Administrative Agent.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) under
Regulation D, as Regulation D may be amended, modified or supplemented, for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The Adjusted Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the Euro-Dollar
Reserve Percentage.
"Event of Default" has the meaning set forth in Section 6.1.
"Existing Credit Agreement" has the meaning set forth in the Recitals
hereto.
"Federal Funds Rate" means, for any day, the rate per annum (rounded upward,
if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day, provided that (i) if
<PAGE> 17
such day is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if no such rate is so
published on such next succeeding Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to the Administrative Agent on such day on
such transactions as determined by the Administrative Agent.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System as constituted from time to time.
"FFO" means "funds from operations," defined to mean, without duplication
for any period, Net Income, plus (i) Borrower's Share of the Net Income of any
Investment Affiliate (plus Borrower's Share of real estate depreciation and
amortization expenses of Investment Affiliates), plus (ii) real estate
depreciation and amortization expense for such period, plus (iii) any
amortization of loan discount deducted from the calculation of Net Income for
such period, plus (iv) Taxes deducted from the calculation of Net Income for
such period, minus (v) gains (and plus the losses) from Debt Restructurings and
sales or other dispositions of Property of the Borrower or any Subsidiary or
Investment Affiliate included (or deducted) in the calculation of Net Income for
such period.
"Financing Partnerships" means any Subsidiary which is wholly-owned,
directly or indirectly, by Borrower or by Borrower and EOPT, with EOPT holding,
directly or indirectly other than through its interest in Borrower, no more than
a 2% economic interest in such Subsidiary.
"Fiscal Quarter" means a fiscal quarter of a Fiscal Year.
"Fiscal Year" means the fiscal year of Borrower and EOPT.
"Fitch" means Fitch Investors Services, Inc., or any successor thereto.
"Fixed Charges" for any Fiscal Quarter period means the sum of (i) Debt
Service for such period, (ii) dividends on preferred units payable by Borrower
for such period, and (iii) distributions made by Borrower in such period to EOPT
for the purpose of paying dividends on preferred shares in EOPT.
"Fixed Rate Borrowing" has the meaning set forth in Section 1.3.
"Fixed Rate Indebtedness" means all Indebtedness which accrues interest at a
fixed rate.
"Floating Rate Indebtedness" means all Indebtedness which is not Fixed Rate
Indebtedness and which is not a Contingent Obligation or an Unused Commitment.
"Form S-11" means the Form S-11 Registration Statement filed by EOPT with
the Securities and Exchange Commission on May 7, 1997, as amended.
<PAGE> 18
"GAAP" means generally accepted accounting principles recognized as such in
the opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
"Group of Loans" means, at any time, a group of Loans consisting of (i) all
Committed Loans which are Base Rate Loans at such time, or (ii) all Euro-Dollar
Loans having the same Interest Period at such time; provided that, if a
Committed Loan of any particular Bank is converted to or made as a Base Rate
Loan pursuant to Section 8.2 or 8.5, such Loan shall be included in the same
Group or Groups of Loans from time to time as it would have been in if it had
not been so converted or made.
"IBOR Auction" means a solicitation of Money Market Quotes setting forth
Money Market Margins based on the Interbank Offered Rate pursuant to Section
2.4.
"Interbank Offered Rate" applicable to any Interest Period means the average
(rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective
rates per annum at which deposits in dollars are offered to the Euro-Dollar
Reference Bank in the interbank market at approximately 11:00 a.m. (Dallas time)
two Business Days before the first day of such Interest Period in an amount
approximately equal to the principal amount of the Euro-Dollar Borrowing or
Group of Loans or portion thereof to be converted into or continued as
Euro-Dollar Loans to which such Interest Period is to apply and for a period of
time comparable to such Interest Period.
"Indebtedness" as applied to any Person (and without duplication), means (a)
all indebtedness, obligations or other liabilities of such Person for borrowed
money, (b) all indebtedness, obligations or other liabilities of such Person
evidenced by Securities or other similar instruments, (c) all Contingent
Obligations of such Person, (d) all reimbursement obligations and other
liabilities of such Person with respect to letters of credit or banker's
acceptances issued for such Person's account or other similar instruments for
which a contingent liability exists, (e) all obligations of such Person to pay
the deferred purchase price of Property or services, (f) all obligations in
respect of Capital Leases (including, without limitation, ground leases to the
extent such ground leases constitute Capital Leases) of such Person, (g) all
indebtedness obligations or other liabilities of such Person or others secured
by a Lien on any asset of such Person, whether or not such indebtedness,
obligations or liabilities are assumed by, or are a personal liability of such
Person, (h) all indebtedness, obligations or other liabilities (other than
interest expense liability) in respect of Interest Rate Contracts and foreign
currency exchange agreements (other than Interest Rate Contracts purchased to
hedge Indebtedness), to the extent such liabilities are material and are
reported or are required under GAAP to be reported by such Person in its
financial statements, (i) ERISA obligations currently due and payable and (j)
all other items which, in accordance with
<PAGE> 19
GAAP, would be included as liabilities on the liability side of the balance
sheet of such Person.
"Indemnitee" has the meaning set forth in Section 9.3(b).
"Interest Expense" means, for any period and without duplication, total
interest expense, whether paid, accrued or capitalized of Borrower, on a
consolidated basis determined in accordance with GAAP, plus Borrower's Share of
accrued, paid or capitalized interest with respect to any Balance Sheet
Indebtedness of Investment Affiliates (in each case, including, without
limitation, the interest component of Capital Leases but excluding interest
expense covered by an interest reserve established under a loan facility such as
capitalized construction interest provided for in a construction loan).
"Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the
period commencing on the date of such Borrowing specified in the Notice of
Borrowing or on the date specified in the applicable Notice of Interest Rate
Election and ending 30, 60, 90, or 180 days thereafter (or a period less than 30
days with the reasonable approval of Administrative Agent, unless any Bank has
previously advised Administrative Agent and Borrower that it is unable to enter
into Interbank Offered Rate Contracts for an Interest Period of the same
duration) as the Borrower may elect in the applicable Notice of Borrowing or
Notice of Interest Rate Election; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding
Business Day unless such Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding Business
Day;
(b) any Interest Period which begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Business Day of a calendar month; and
(c) no Interest Period may end later than the Maturity Date.
(2) with respect to each Base Rate Borrowing and solely for determining when
interest is payable on any Base Rate Borrowing, the period commencing on the
date of such Borrowing specified in the Notice of Borrowing or on the date
specified (or deemed specified) in the applicable Notice of Interest Rate
Election and ending 30 days thereafter; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding
Business Day; and
(b) no Interest Period may end later than the Maturity Date.
<PAGE> 20
(3) with respect to each Money Market IBOR Loan, the period commencing on the
date of borrowing specified in the applicable Money Market Quote Request and
ending such number of months thereafter as the Borrower may elect in accordance
with Section 2.4; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding
Business Day unless such Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding Business
Day;
(b) any Interest Period which begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (c) below, end on the last Business Day of a
calendar month; and
(c) no Interest Period may end later than the Maturity.
(4) with respect to each Money Market Absolute Rate Loan, the period commencing
on the date of borrowing specified in the applicable Money Market Quote Request
and ending such number of days thereafter (but not less than 14 days or more
than 180 days) as the Borrower may elect in accordance with Section 2.4;
provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding
Business Day; and
(b) no Interest Period may end later than the Maturity Date.
"Interest Rate Contracts" means, collectively, interest rate swap, collar,
cap or similar agreements providing interest rate protection.
"Investment Affiliate" means any Person in whom EOPT or Borrower holds an
equity interest, directly or indirectly, whose financial results are not
consolidated under GAAP with the financial results of EOPT or Borrower on the
consolidated financial statements of EOPT and Borrower.
"Investment Affiliate EBITDA" means, for any period (i) the net earnings (or
loss) of an Investment Affiliate for such period calculated in conformity with
GAAP, plus (ii) depreciation and amortization expense and other non-cash items
of such Investment Affiliate deducted in the calculation of such net earnings
(or loss) for such period, plus (iii) total interest expense, whether paid,
accrued or capitalized, of such Investment Affiliate deducted in the calculation
of such net earnings (or loss) for such period, plus (iv) Taxes of such
Investment Affiliate deducted in the calculation of such net earnings (or loss)
for such period.
"Investment Grade Rating" means a rating for a Person's senior long-term
unsecured debt of BBB- or better from S&P or a rating of Baa3 or better from
Moody's. In the event that Borrower receives Credit Ratings only from S&P and
Moody's, and such
<PAGE> 21
Credit Ratings are not equivalent, the lower of such two (2) Credit Ratings
shall be used to determine whether an Investment Grade Rating was achieved. In
the event that Borrower receives more than two (2) Credit Ratings, and such
Credit Ratings are not all equivalent, the higher of the ratings from S&P and
Moody's shall be used to determine whether an Investment Grade Rating was
achieved, provided that the rating from one of the other Rating Agencies shall
be at least equivalent to such higher rating; provided, further, that if the
rating from one of the other Rating Agencies is not at least equivalent to the
higher of the ratings from S&P and Moody's, then the second (2nd) highest Credit
Rating shall be used to determine whether an Investment Grade Rating was
achieved.
"Investment Mortgages" means mortgages securing indebtedness with respect to
Office Properties and Parking Properties directly or indirectly owed to Borrower
or any of its Subsidiaries, including, without limitation, certificates of
interest in real estate mortgage investment conduits.
"Invitation for Money Market Quotes" has the meaning set forth in Section
2.4(c).
"Joint Venture Interests" means partnership or joint venture interests
issued by any Person which is an Investment Affiliate that is not a Subsidiary.
"Joint Venture Parent" means Borrower or one or more Financing Partnerships
of Borrower which directly owns any interest in a Joint Venture Subsidiary.
"Joint Venture Subsidiary" means any entity (other than a Financing
Partnership) in which (i) a Joint Venture Parent owns at least 50% of the
economic interests and (ii) the sale or financing of any Property owned by such
Joint Venture Subsidiary is controlled by a Joint Venture Parent. For purposes
of this definition, the Borrower shall be deemed to "control" Civic Parking,
L.L.C., a Missouri limited liability company ("Civic") so long as (i) a Joint
Venture Parent owns at least 50% of economic interest therein and (ii) such
Joint Venture Parent's consent shall be required to authorize and approve the
sale or financing of the Property owned by Civic.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind, or any other type of preferential
arrangement, in each case that has the effect of creating a security interest,
in respect of such asset. For the purposes of this Agreement, the Borrower or
any Consolidated Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"Loan" means a Base Rate Loan, a Euro-Dollar Loan, a Money Market Loan or a
Swingline Loan and "Loans" means Base Rate Loans, Euro-Dollar Loans, Money
Market Loans or Swingline Loans or any combination of the foregoing.
"Loan Documents" means this Agreement, the Notes, the EOPT Guaranty, and the
Acorn Guaranty (as defined in the EOPT Guaranty).
<PAGE> 22
"Majority Banks" means at any time Banks having at least 51% of the
aggregate amount of Commitments, or if the Commitments shall have been
terminated, holding Notes evidencing at least 51% of the aggregate unpaid
principal amount of the Loans, (provided, that in the case of Swingline Loans,
the amount of each Bank's funded participation interest in such Swingline Loans
shall be considered for purposes hereof as if it were a direct loan and not a
participation interest, and the aggregate amount of Swingline Loans owing to the
Swingline Lender shall be considered for purposes hereof as reduced by the
amount of such funded participation interests).
"Managing Agents" means The Bank of Nova Scotia, The Chase Manhattan Bank,
Commerzbank Aktiengesellschaft, Dresdner Bank AG, New York and Cayman Branches,
PNC Bank, National Association, and Union Bank of Switzerland, New York Branch,
in their capacity as Managing Agents hereunder.
"Mandatory Borrowing" has the meaning set forth in Section 2.3(b)(iii).
"Material Adverse Effect" means an effect resulting from any circumstance or
event or series of circumstances or events, of whatever nature (but excluding
general economic conditions), which does or could reasonably be expected to,
materially and adversely (i) impair the ability of the Borrower and its
Consolidated Subsidiaries, taken as a whole, to perform their respective
obligations under the Loan Documents, or (ii) the ability of Administrative
Agent, Documentation Agent or the Banks to enforce the Loan Documents.
"Material Plan" means at any time a Plan or Plans having aggregate unfunded
liabilities in excess of $5,000,000.
"Materials of Environmental Concern" means and includes pollutants,
contaminants, hazardous wastes, toxic and hazardous substances, asbestos, lead,
petroleum and petroleum by-products.
"Maturity Date" shall mean the date when all of the Obligations hereunder
shall be due and payable which shall be May 29, 2001, unless accelerated
pursuant to the terms hereof.
"Money Market Absolute Rate" has the meaning set forth in Section 2.4(d)(2).
"Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant
to an Absolute Rate Auction.
"Money Market Borrowing" has the meaning set forth in Section 1.3.
"Money Market Lending Office" means, as to each Bank, its Domestic Lending
Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Agent; provided
<PAGE> 23
that any Bank may from time to time by notice to the Borrower and the
Administrative Agent designate separate Money Market Lending Offices for its
Money Market IBOR Loans, on the one hand, and its Money Market Absolute Rate
Loans, on the other hand, in which case all references herein to the Money
Market Lending Office of such Bank shall be deemed to refer to either or both of
such offices, as the context may require.
"Money Market IBOR Loan" means a loan to be made by a Bank pursuant to a
IBOR Auction (including, without limitation, such a loan bearing interest at the
Base Rate pursuant to Article VIII).
"Money Market Loan" means a Money Market IBOR Loan or a Money Market
Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section
2.4(d)(2).
"Money Market Quote" means an offer by a Bank to make a Money Market Loan in
accordance with Section 2.4.
"Money Market Quote Request" has the meaning set forth in Section 2.4(b).
"Moody's" means Moody's Investors Services, Inc. or any successor thereto.
"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has at any time after September 25, 1980 made contributions or has been required
to make contributions (for these purposes any Person which ceased to be a member
of the ERISA Group after September 25, 1980 will be treated as a member of the
ERISA Group).
"Negative Pledge" means, with respect to any Property, any covenant,
condition, or other restriction which prohibits or limits the creation or
assumption of any Lien upon such Property to secure any or all of the
Obligations.
"Net Income" means, for any period, the net earnings (or loss) after Taxes
of the Borrower, on a consolidated basis, before the deduction of minority
interests and before the deduction of payment of any preferred dividends, for
such period calculated in conformity with GAAP.
"Net Offering Proceeds" means all cash or other assets received by EOPT or
Borrower as a result of the sale of common shares of beneficial interest,
preferred shares of beneficial interest, partnership interests, limited
liability company interests, Convertible Securities or other ownership or equity
interests in EOPT or Borrower less customary costs and discounts of issuance
paid by EOPT or Borrower, as the case may be.
"Net Price" means, with respect to the purchase of any Property, without
duplication, (i) the aggregate purchase price paid as cash consideration for
such purchase
<PAGE> 24
(without adjustment for prorations), including, without limitation, the
principal amount of any note received or other deferred payment to be made in
connection with such purchase (except as described in clause (ii) below) and the
value of any non-cash consideration delivered in connection with such purchase
(including, without limitation, shares or preferred shares of beneficial
interest in EOPT and OP Units or Preferred OP Units (as defined in Borrower's
partnership agreement)) plus (ii) reasonable costs of sale and non-recurring
taxes paid or payable in connection with such purchase or sale.
"Net Present Value" shall mean, as to a specified or ascertainable dollar
amount, the present value, as of the date of calculation of any such amount
using a discount rate equal to the Base Rate in effect as of the date of such
calculation.
"Non-Recourse Indebtedness" means Indebtedness with respect to which
recourse for payment is limited to (i) specific assets related to a particular
Property or group of Properties encumbered by a Lien securing such Indebtedness
or (ii) any Subsidiary (provided that if a Subsidiary is a partnership, there is
no recourse to Borrower or EOPT as a general partner of such partnership);
provided, however, that personal recourse of Borrower or EOPT for any such
Indebtedness for fraud, misrepresentation, misapplication of cash, waste,
environmental claims and liabilities and other circumstances customarily
excluded by institutional lenders from exculpation provisions and/or included in
separate indemnification agreements in non-recourse financing of real estate
shall not, by itself, prevent such Indebtedness from being characterized as
Non-Recourse Indebtedness.
"Notes" means the amended and restated promissory notes of the Borrower,
substantially in the form of Exhibit A and Exhibit A-1 hereto, evidencing the
obligation of the Borrower to repay the Loans, and "Note" means any one of such
promissory notes issued hereunder. The Notes shall be issued in substitution for
the "Notes" issued pursuant to the Existing Credit Agreement.
"Notice of Borrowing" means a notice from Borrower in accordance with
Section 2.2 or Section 2.3(b)(i).
"Notice of Interest Rate Election" has the meaning set forth in Section 2.7.
"Obligations" means all obligations, liabilities, indemnity obligations and
Indebtedness of every nature of the Borrower, from time to time owing to
Administrative Agent, Documentation Agent or any Bank under or in connection
with this Agreement or any other Loan Document.
"Office Property" means any Property which constitutes primarily commercial
office space other than a Parking Property.
"Original Closing Date" means the "Closing Date" as defined in the Existing
Credit Agreement.
"Parking Property" means any Property which is primarily used for parking.
<PAGE> 25
"Parent" means, with respect to any Bank, any Person controlling such Bank.
"Participant" has the meaning set forth in Section 9.6(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Holdings" means Unimproved Assets, Development Activity, Joint
Venture Interests, Investment Mortgages and Securities, but only to the extent
permitted in Section 5.8.
"Permitted Liens" means:
a. Liens for Taxes, assessments or other governmental charges not
yet due and payable or which are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted in
accordance with the terms hereof;
b. statutory liens of carriers, warehousemen, mechanics, materialmen
and other similar liens imposed by law, which are incurred in the ordinary
course of business for sums not more than sixty (60) days delinquent or
which are being contested in good faith in accordance with the terms hereof;
c. deposits made in the ordinary course of business to secure
liabilities to insurance carriers;
d. Liens for purchase money obligations for equipment; provided that
(i) the Indebtedness secured by any such Lien does not exceed the purchase
price of such equipment, (ii) any such Lien encumbers only the asset so
purchased and the proceeds upon sale, disposition, loss or destruction
thereof, and (iii) such Lien, after giving effect to the Indebtedness
secured thereby, does not give rise to an Event of Default;
e. easements, rights-of-way, zoning restrictions, other similar
charges or encumbrances and all other items listed on Schedule B to
Borrower's owner's title insurance policies, except in connection with any
Indebtedness, for any of Borrower's Real Property Assets, so long as the
foregoing do not interfere in any material respect with the use or ordinary
conduct of the business of Borrower and do not diminish in any material
respect the value of the Property to which it is attached or for which it is
listed;
f. Liens and judgments which have been or will be bonded or released
of record within thirty (30) days after the date such Lien or judgment is
entered or filed against EOPT, Borrower, or any Subsidiary;
<PAGE> 26
g. Liens on Property of the Borrower or its Subsidiaries (other than
Qualifying Unencumbered Property) securing Indebtedness which may be
incurred or remain outstanding without resulting in an Event of Default
hereunder; and
h. Liens in favor of Borrower against any asset of any Financing
Partnership or Joint Venture Subsidiaries.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including, without limitation, a
government or political subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Code and either (i) is
maintained, or contributed to, by any member of the ERISA Group for employees of
any member of the ERISA Group or (ii) has at any time within the preceding five
years been maintained, or contributed to, by any Person which was at such time a
member of the ERISA Group for employees of any Person which was at such time a
member of the ERISA Group.
"Prime Rate" means the rate of interest publicly announced by the
Administrative Agent from time to time as its Prime Rate (it being understood
that the same shall not necessarily be the best rate offerred by the
Administrative Agent to customers).
"Pro Rata Share" means, with respect to any Bank, a fraction (expressed as a
percentage), the numerator of which shall be the amount of such Bank's
Commitment and the denominator of which shall be the aggregate amount of all of
the Banks' Commitments, as adjusted from time to time in accordance with the
provisions of this Agreement.
"Property" means, with respect to any Person, any real or personal property,
building, facility, structure, equipment or unit, or other asset owned by such
Person.
"Qualified Institution" means a Bank, or one or more banks, finance
companies, insurance or other financial institutions which (A) has (or, in the
case of a bank which is a subsidiary, such bank's parent has) a rating of its
senior debt obligations of not less than Baa-1 by Moody's or a comparable rating
by a rating agency acceptable to Syndication Agent and (B) has total assets in
excess of Ten Billion Dollars ($10,000,000,000).
"Qualifying Unencumbered Property" means any Property (excluding Unimproved
Assets) from time to time which (i) is an operating Office Property or Parking
Property wholly-owned (directly or beneficially) by Borrower, a Financing
Partnership or a Joint Venture Subsidiary, (ii) is not subject (nor are any
equity interests in such Property that are owned directly or indirectly by
Borrower, EOPT or any Joint Venture Parent subject) to a Lien which secures
Indebtedness of any Person other than Permitted Liens, (iii) is not subject (nor
are any equity interests in such Property that are owned
<PAGE> 27
directly or indirectly by Borrower, EOPT or any Joint Venture Parent subject) to
any Negative Pledge (provided that a financial covenant given for the benefit of
any Person that may be violated by the granting of any Lien on any Property to
secure any or all of the Obligations shall not be deemed a Negative Pledge).
"Rating Agencies" means, collectively, S&P, Moody's, Duff and Fitch.
"Real Property Assets" means as to any Person as of any time, the real
property assets (including, without limitation, interests in participating
mortgages in which such Person's interest therein is characterized as equity
according to GAAP) owned directly or indirectly by such Person at such time.
"Recourse Debt" shall mean Indebtedness that is not Non-Recourse
Indebtedness.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least 66 2/3% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid
principal amount of the Loans (provided, that in the case of Swingline Loans,
the amount of each Bank's funded participation interest in such Swingline Loans
shall be considered for purposes hereof as if it were a direct loan and not a
participation interest, and the aggregate amount of Swingline Loans owing to the
Swingline Lender shall be considered for purposes hereof as reduced by the
amount of such funded participation interests).
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or any successor thereto.
"Secured Debt" means Indebtedness, the payment of which is secured by a Lien
(other than a Permitted Lien, except for those Permitted Liens described in
clauses (d) and (g) of the definition thereof) on any Property owned or leased
by EOPT, Borrower, or any Consolidated Subsidiary plus Borrower's Share of
Indebtedness, the payment of which is secured by a Lien (other than a Permitted
Lien, except for those Permitted Liens described in clauses (d) and (g) of the
definition thereof) on any Property owned or leased by any Investment Affiliate.
"Securities" means any stock, partnership interests, shares, shares of
beneficial interest, voting trust certificates, bonds, debentures, notes or
other evidences of indebtedness, secured or unsecured, convertible, subordinated
or otherwise, or in general any instruments commonly known as "securities," or
any certificates of interest, shares, or participations in temporary or interim
certificates for the purchase or acquisition of, or any right to subscribe to,
purchase or acquire any of the foregoing, but shall not include Joint Venture
Interests or any evidence of the Obligations.
<PAGE> 28
"Solvent" means, with respect to any Person, that the fair saleable value of
such Person's assets exceeds the Indebtedness of such Person.
"Subsidiary" means any corporation or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Borrower or EOPT.
"Syndication Agent" means J.P. Morgan Securities Inc., in its capacity as
syndication agent hereunder and its permitted successors in such capacity in
accordance with the terms of this Agreement.
"Swingline Borrowing" has the meaning set forth in Section 1.3.
"Swingline Commitment" has the meaning set forth in Section 2.3(a).
"Swingline Lender" means NationsBank, N.A., in its capacity as Swingline
Lender hereunder, and its permitted successors in such capacity in accordance
with the terms of this Agreement..
"Swingline Loan" means a loan made by the Swingline Lender pursuant to
Section 2.3.
"Taxes" means all federal, state, local and foreign income and gross
receipts taxes.
"Term" has the meaning set forth in Section 2.10.
"Term Loan Agreement" shall mean that certain Credit Agreement, dated as of
October 2, 1997, among the Borrower and the banks and agents listed therein,
providing for a term loan facility in the amount of $1,500,000,000.
"Termination Event" shall mean (i) a "reportable event", as such term is
described in Section 4043 of ERISA (other than a "reportable event" not subject
to the provision for 30-day notice to the PBGC), or an event described in
Section 4062(e) of ERISA, (ii) the withdrawal by any member of the ERISA Group
from a Multiemployer Plan during a plan year in which it is a "substantial
employer" (as defined in Section 4001(a)(2) of ERISA), or the incurrence of
liability by any member of the ERISA Group under Section 4064 of ERISA upon the
termination of a Multiemployer Plan, (iii) the filing of a notice of intent to
terminate any Plan under Section 4041 of ERISA, other than in a standard
termination within the meaning of Section 4041 of ERISA, or the treatment of a
Plan amendment as a distress termination under Section 4041 of ERISA, (iv) the
institution by the PBGC of proceedings to terminate, impose liability (other
than for premiums under Section 4007 of ERISA) in respect of, or cause a trustee
to be appointed to administer, any Plan or (v) any other event or condition that
might reasonably constitute grounds for the termination of, or the appointment
of a trustee to administer, any Plan or the
<PAGE> 29
imposition of any liability or encumbrance or Lien on the Real Property Assets
or any member of the ERISA Group under ERISA or the Code.
"Total Asset Value" means, with respect to Borrower and without duplication,
(i) for any Properties owned by Borrower, any Consolidated Subsidiary or
Investment Affiliate which was neither acquired nor disposed of by Borrower, a
Consolidated Subsidiary or an Investment Affiliate in the Fiscal Quarter most
recently ended, the quotient obtained by dividing (a) (x) EBITDA attributable to
such Properties for the Fiscal Quarter most recently ended multiplied by four
(4) less (y) $0.20 per square foot of leased office space within such Properties
which are Office Properties, by (b) 0.0875, plus (ii) for any Property which was
acquired by Borrower or a Consolidated Subsidiary in the Fiscal Quarter most
recently ended, the Net Price of the Property paid by Borrower or the
Consolidated Subsidiary for such Property, plus (iii) for any Property which was
acquired by an Investment Affiliate in the Fiscal Quarter most recently ended,
Borrower's Share of the Net Price of the Property paid by such Investment
Affiliate for such Property, plus (iv) the value of any Cash or Cash Equivalent
owned by Borrower, plus (v) the value of any Unimproved Assets and any other
tangible assets of Borrower or its Consolidated Subsidiaries (including foreign
currency exchange agreements, to the extent such agreements are material and are
reported or are required under GAAP to be reported by the Borrower or its
Consolidated Subsidiaries in their financial statements), as measured on a GAAP
basis, plus (vi) Borrower's Share of the value of any Unimproved Assets and any
other tangible assets of any Investment Affiliate as measured on a GAAP basis.
"Total Liabilities" means, as of the date of determination and without
duplication, all Balance Sheet Indebtedness of Borrower, on a consolidated
basis, plus Borrower's Share of all Balance Sheet Indebtedness of Investment
Affiliates.
"Treasury Rate" means, as of any date, a rate equal to the annual yield to
maturity on the U.S. Treasury Constant Maturity Series with a ten year maturity,
as such yield is reported in Federal Reserve Statistical Release H.15 --
Selected Interest Rates, published most recently prior to the date the
applicable Treasury Rate is being determined. Such yield shall be determined by
straight line linear interpolation between the yields reported in Release H.15,
if necessary. In the event Release H.15 is no longer published, the
Administrative Agent shall select, in its reasonable discretion, an alternate
basis for the determination of Treasury yield for U.S. Treasury Constant
Maturity Series with ten year maturities.
"Unencumbered Asset Value" means (i) for any Qualifying Unencumbered
Properties which were neither acquired or disposed of by Borrower, a Financing
Partnership or a Joint Venture Subsidiary in the Fiscal Quarter most recently
ended, the quotient of (a) (x) the aggregate EBITDA for such Fiscal Quarter
attributable to such Qualifying Unencumbered Properties for the Fiscal Quarter
most recently ended multiplied by four (4) less (y) $1.50 per square foot of
leased office space within such Qualifying Unencumbered Properties which are
Office Properties, and less (z) in the case of any Qualifying Unencumbered
Property located outside of the United States, an
<PAGE> 30
amount equal to the applicable withholding taxes imposed by any foreign
jurisdiction applicable to the EBITDA attributable to any such Qualifying
Unencumbered Property for the applicable period, divided by (b) 0.0875, plus
(ii) for all Qualifying Unencumbered Properties owned (directly or beneficially)
by Borrower, any Financing Partnership or any Joint Venture Subsidiary which
were acquired (directly or indirectly) by the Borrower, any Financing
Partnership or any Joint Venture Subsidiary during the Fiscal Quarter most
recently ended, the aggregate Net Price of such Qualifying Unencumbered
Properties paid by Borrower or its Affiliates for such Qualifying Unencumbered
Properties; provided, however, that, unless otherwise approved by the Majority
Banks, (aa) in the event any such Qualifying Unencumbered Property is owned by a
Joint Venture Subsidiary, the amount of the EBITDA attributable to such
Qualifying Unencumbered Property for purposes of clause (i) above and the Net
Price of such Qualifying Unencumbered Property for the purposes of clause (ii)
above shall be reduced to a percentage equal to the Borrower's percentage
ownership interest (whether direct or indirect) in such Joint Venture
Subsidiary, (bb) the portion of the amount of the Unencumbered Asset Value
attributable to any single Qualifying Unencumbered Property which would cause
such amount to exceed twenty-five percent (25%) of the total Unencumbered Asset
Value at such time (after making all adjustments required by this proviso) will
be disregarded in determining Unencumbered Asset Value, (cc) the portion of the
aggregate amount of the Unencumbered Asset Value attributable to Qualifying
Unencumbered Properties that are Parking Properties which would cause such
aggregate amount to exceed twenty-five percent (25%) of the total Unencumbered
Asset Value at such time (after making all adjustments required by this proviso)
will be disregarded in determining Unencumbered Asset Value, (dd) the portion of
the aggregate amount of the Unencumbered Asset Value attributable to Qualifying
Unencumbered Properties that are Qualifying Unencumbered Properties owned by
Joint Venture Subsidiaries (after first taking into account the adjustment
provided in clause (aa) of this proviso) which would cause such aggregate amount
to exceed thirty-five percent (35%) of the total Unencumbered Asset Value at
such time (after making all adjustments required by this proviso) will be
disregarded in determining Unencumbered Asset Value, and (ee) the portion of the
amount of the Unencumbered Asset Value attributable to all Qualifying
Unencumbered Property located outside of the United States (after first taking
into account the adjustment provided in clause (aa) of this proviso) which would
cause such amount to exceed ten percent (10%) of the total Unencumbered Asset
Value at such time (after making all adjustments required by this proviso) will
be disregarded in determining Unencumbered Asset Value.
"Unencumbered Net Operating Income" means, for any period, for all
Qualifying Unencumbered Properties, the aggregate EBITDA attributable to each
such Qualifying Unencumbered Property for such period (provided that as to any
Qualifying Unencumbered Property acquired during such period, only EBITDA
attributable to such period occurring after such acquisition shall be included),
as adjusted for a normalized recurring level of capital expenditures by Borrower
for such period, which adjustment shall be at the rate of One Dollar and Fifty
Cents ($1.50) per square foot per annum of office space leased as of the
applicable date of determination for all Qualifying Unencumbered Properties that
are Office Properties (provided that, as to any Office
<PAGE> 31
Property acquired during such period, such amount per square foot shall be
pro-rated for the period of ownership).
"Unimproved Assets" means Real Property Assets containing no material
improvements.
"United States" means the United States of America, including the fifty
states and the District of Columbia.
"Unsecured Debt" means the amount of Indebtedness for borrowed money of EOPT
Borrower and any Financing Partnership which is not Secured Debt, including,
without limitation, the amount of all then outstanding Loans, plus, for the
purpose of calculating the ratio of outstanding Unsecured Debt to Unencumbered
Asset Value, an amount equal to the Borrower's percentage ownership interest
(whether direct or indirect) in each Joint Venture Subsidiary times any
Indebtedness for borrowed money of such Joint Venture Subsidiary which is not
Secured Debt.
"Unsecured Debt Service" means Debt Service payable in respect of Unsecured
Debt.
"Unused Commitments" shall mean an amount equal to all unadvanced funds
(other than unadvanced funds in connection with any construction loan) which any
third party is obligated to advance to Borrower or another Person or otherwise
pursuant to any loan document, written instrument or otherwise.
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified
herein, all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements required to
be delivered hereunder shall be prepared in accordance with GAAP applied on a
basis consistent (except for changes concurred in by the Borrower's independent
public accountants) with the most recent audited consolidated financial
statements of the Borrower and its Consolidated Subsidiaries delivered to the
Administrative Agent; provided that for purposes of references to the financial
results and information of "EOPT, on a consolidated basis," EOPT shall be deemed
to own one hundred percent (100%) of the partnership interests in Borrower; and
provided further that, if the Borrower notifies the Administrative Agent that
the Borrower wishes to amend any covenant in Article V to eliminate the effect
of any change in GAAP on the operation of such covenant (or if the
Administrative Agent notifies the Borrower that the Required Banks wish to amend
Article V for such purpose), then the Borrower's compliance with such covenant
shall be determined on the basis of GAAP in effect immediately before the
relevant change in GAAP became effective, until either such notice is withdrawn
or such covenant is amended in a manner reasonably satisfactory to the Borrower
and the Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
<PAGE> 32
Article 2 on the same date, all of which Loans are of the same type (subject to
Article 8) and, except in the case of Base Rate Loans and Swingline Loans, have
the same initial Interest Period. Borrowings are classified for purposes of this
Agreement either by reference to the pricing of Loans comprising such Borrowing
(e.g., a "Fixed Rate Borrowing" is a Euro-Dollar Borrowing or a Money Market
Borrowing (excluding any such Borrowing consisting of Money Market IBOR Loans
bearing interest at the Base Rate pursuant to Article VIII), and a "Euro-Dollar
Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the
provisions of Article 2 under which participation therein is determined (i.e., a
"Committed Borrowing" is a Borrowing under Section 2.1 in which all Banks
participate in proportion to their Commitments, while a "Money Market Borrowing"
is a Borrowing under Section 2.4 in which a Bank's share is determined on the
basis of its bid in accordance therewith, and a "Swingline Borrowing" is a
Borrowing under Section 2.3 in which only the Swingline Lender participates
(subject to the provisions of said Section 2.3)).
SECTION 1.4. Interrelationship with the Existing Credit Agreement. As stated
in the recitals to this Agreement, this Agreement is intended to amend and
restate the provisions of the Existing Credit Agreement and, notwithstanding the
issuance of the Notes on the Closing Date, (a) all of the terms and provisions
of the Existing Credit Agreement shall continue to apply for the period prior to
the Closing Date, including any determination of the interest periods, payment
dates, interest rates, Events of Default or any amount that may be payable to
the Banks or the Agents, and (b) the "Obligations" under the Existing Credit
Agreement shall continue to be paid or repaid on or prior to the Closing Date in
accordance with the terms thereof, and shall from and after the Closing Date be
paid or repaid in accordance with the terms of this Agreement. All references in
the Loan Documents to the Existing Credit Agreement, as it may be amended from
time to time, shall be deemed to include references to this Agreement. All
"Loans" under the Existing Credit Agreement shall constitute comparable "Loans"
under this Agreement. Borrower hereby acknowledges that no Bank is currently in
default of its obligations under the Existing Credit Agreement.
ARTICLE II
THE CREDITS
SECTION 2.1. Commitments to Lend. Each Bank severally agrees, on the terms
and conditions set forth in this Agreement, to make Loans to the Borrower
pursuant to this Article from time to time during the term hereof in amounts
such that the aggregate principal amount of Committed Loans by such Bank at any
one time outstanding plus such Bank's Pro Rata Share of Swingline Loans
outstanding at such time shall not exceed the amount of its Commitment. Each
Borrowing outstanding under this Section 2.1 shall be in an aggregate principal
amount of $5,000,000, or an integral multiple of $100,000 in excess thereof
(except that any such Borrowing may be in the aggregate amount available in
accordance with Section 3.2(b)) and, other than with respect to Money Market
Loans and Swingline Loans, shall be made from the several Banks ratably in
proportion to their
<PAGE> 33
respective Commitments. Subject to the limitations set forth herein, any amounts
repaid may be reborrowed.
SECTION 2.2. Notice of Borrowing. With respect to any Committed Borrowing,
the Borrower shall give Administrative Agent notice not later than 11:00 a.m.
(Dallas, Texas time) (x) one Business Day before each Base Rate Borrowing, or
(y) three Business Days before each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Business Day in the
case of a Base Rate Borrowing or a Business Day in the case of a Euro-Dollar
Borrowing,
(ii) the aggregate amount of such Borrowing,
(iii) whether the Loans comprising such Borrowing are to be Base Rate
Loans or Euro-Dollar Loans, and
(iv) in the case of a Euro-Dollar Borrowing, the duration of the
Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period.
SECTION 2.3. Swingline Loan Subfacility.
(a) Swingline Commitment. Subject to the terms and conditions of this
Section 2.3, the Swingline Lender, in its individual capacity, agrees to make
certain revolving credit loans to the Borrower (each a "Swingline Loan" and,
collectively, the "Swingline Loans") from time to time during the term hereof;
provided, however, that the aggregate amount of Swingline Loans outstanding at
any time shall not exceed the lesser of (i) SEVENTY-FIVE MILLION DOLLARS
($75,000,000), and (ii) the aggregate Commitments less all Loans then
outstanding (the "Swingline Commitment"). Subject to the limitations set forth
herein, any amounts repaid in respect of Swingline Loans may be reborrowed.
(b) Swingline Borrowings.
(i) Notice of Borrowing. With respect to any Swingline Borrowing,
the Borrower shall give the Swingline Lender and the Administrative Agent notice
in writing which is received by the Swingline Lender and Administrative Agent
not later than 1:00 p.m. (Dallas, Texas time) on the proposed date of such
Swingline Borrowing (and confirmed by telephone by such time), specifying (A)
that a Swingline Borrowing is being requested, (B) the amount of such Swingline
Borrowing, (C) the proposed date of such Swingline Borrowing, which shall be a
Business Day and (D) stating that no Default or Event of Default has occurred
and is continuing both before and after giving effect to such Swingline
Borrowing. Such notice shall be irrevocable.
<PAGE> 34
(ii) Minimum Amounts. Each Swingline Borrowing shall be in a minimum
principal amount of $1,000,000, or an integral multiple of $100,000 in excess
thereof.
(iii) Repayment of Swingline Loans. Each Swingline Loan shall be due
and payable on the earliest of (A) 5 days from the date of the applicable
Swingline Borrowing, (B) the date of the next Committed Borrowing or (C) the
Maturity Date. If, and to the extent, any Swingline Loans shall be outstanding
on the date of any Committed Borrowing, such Swingline Loans shall first be
repaid from the proceeds of such Committed Borrowing prior to the disbursement
of the same to the Borrower. If, and to the extent, a Committed Borrowing is not
requested prior to the Maturity Date or the end of the 5-day period after a
Swingline Borrowing, the Borrower shall be deemed to have requested a Committed
Borrowing comprised entirely of Base Rate Loans in the amount of the applicable
Swingline Loan then outstanding, the proceeds of which shall be used to repay
such Swingline Loan to the Swingline Lender. In addition, the Swingline Lender
may, at any time, in its sole discretion, by written notice to the Borrower and
the Administrative Agent, demand repayment of its Swingline Loans by way of a
Committed Borrowing, in which case the Borrower shall be deemed to have
requested a Committed Borrowing comprised entirely of Base Rate Loans in the
amount of such Swingline Loans then outstanding, the proceeds of which shall be
used to repay such Swingline Loans to the Swingline Lender. Any Committed
Borrowing which is deemed requested by the Borrower in accordance with this
Section 2.3(b)(iii) is hereinafter referred to as a "Mandatory Borrowing". Each
Bank hereby irrevocably agrees to make Committed Loans promptly upon receipt of
notice from the Swingline Lender of any such deemed request for a Mandatory
Borrowing in the amount and in the manner specified in the preceding sentences
and on the date such notice is received by such Bank (or the next Business Day
if such notice is received after 12:00 P.M. (Dallas, Texas time))
notwithstanding (I) the amount of the Mandatory Borrowing may not comply with
the minimum amount of Committed Borrowings otherwise required hereunder, (II)
whether any conditions specified in Section 3.2 are then satisfied, (III)
whether a Default or an Event of Default then exists, (IV) failure of any such
deemed request for a Committed Borrowing to be made by the time otherwise
required in Section 2.1, (V) the date of such Mandatory Borrowing (provided that
such date must be a Business Day), or (VI) any termination of the Commitments
immediately prior to such Mandatory Borrowing or contemporaneously therewith;
provided, however, that no Bank shall be obligated to make Committed Loans in
respect of a Mandatory Borrowing if a Default or an Event of Default then exists
and the applicable Swingline Loan was made by the Swingline Lender without
receipt of a written Notice of Borrowing in the form specified in subclause (i)
above or after Administrative Agent has delivered a notice of Default or Event
of Default which has not been rescinded.
(iv) Purchase of Participations. In the event that any Mandatory
Borrowing cannot for any reason be made on the date otherwise required above
(including, without limitation , as a result of the commencement of a proceeding
under the Bankruptcy Code with respect to the Borrower), then each Bank hereby
agrees that it shall forthwith purchase (as of the date the Mandatory Borrowing
would otherwise have
<PAGE> 35
occurred, but adjusted for any payment received from the Borrower on or after
such date and prior to such purchase) from the Swingline Lender such
participations in the outstanding Swingline Loans as shall be necessary to cause
each such Bank to share in such Swingline Loans ratably based upon its Pro Rata
Share (determined before giving effect to any termination of the Commitments
pursuant to Section 6.2), provided that (A) all interest payable on the
Swingline Loans with respect to any participation shall be for the account of
the Swingline Lender until but excluding the day upon which the Mandatory
Borrowing would otherwise have occurred, and (B) in the event of a delay between
the day upon which the Mandatory Borrowing would otherwise have occurred and the
time any purchase of a participation pursuant to this sentence is actually made,
the purchasing Bank shall be required to pay to the Swingline Lender interest on
the principal amount of such participation for each day from and including the
day upon which the Mandatory Borrowing would otherwise have occurred to but
excluding the date of payment for such participation, at the rate equal to the
Federal Funds Rate, for the two (2) Business Days after the date the Mandatory
Borrowing would otherwise have occurred, and thereafter at a rate equal to the
Base Rate. Notwithstanding the foregoing, no Bank shall be obligated to purchase
a participation in any Swingline Loan if a Default or an Event of Default then
exists and such Swingline Loan was made by the Swingline Lender without receipt
of a written Notice of Borrowing in the form specified in subclause (i) above or
after Administrative Agent has delivered a notice of Default or Event of Default
which has not been rescinded.
(c) Interest Rate. Each Swingline Loan shall bear interest on the
outstanding principal amount thereof, for each day from the date such Swingline
Loan is made until the date it is repaid, at a rate per annum equal to the
Federal Funds Rate plus the Applicable Margin for Euro-Dollar Loans for such
day.
SECTION 2.4. Money Market Borrowings.
(a) The Money Market Option. From time to time during the Term, and
provided that at such time the Borrower maintains a Credit Rating of at least
BBB- or Baa3 (or their equivalent) from two (2) Rating Agencies at least one (1)
of which is S&P or Moody's, the Borrower may, as set forth in this Section 2.4,
request the Banks during the Term to make offers to make Money Market Loans to
the Borrower, not to exceed, at such time, the lesser of (i) $350,000,000
(adjusted pro rata for changes in the aggregate Commitments), and (ii) the
aggregate Commitments less all Loans then outstanding (excluding any Loans or
any portion thereof to be repaid from the proceeds of such Money Market Loans).
Subject to the provisions of this Agreement, the Borrower may repay any
outstanding Money Market Loan on any day which is both a Business Day and a
Business Day and any amounts so repaid may be reborrowed, up to the amount
available under this Section 2.4 at the time of such Borrowing, until the
Business Day next preceding the Maturity Date. The Banks may, but shall have no
obligation to, make such offers and the Borrower may, but shall have no
obligation to, accept any such offers in the manner set forth in this Section
2.4.
<PAGE> 36
(b) Money Market Quote Request. When the Borrower wishes to request offers
to make Money Market Loans under this Section, it shall transmit to the
Administrative Agent by telex or facsimile transmission a Money Market Quote
Request substantially in the form of Exhibit B hereto (a "Money Market Quote
Request") so as to be received not later than 11:00 A.M. (Dallas, Texas time) on
(x) the fifth Business Day prior to the date of Borrowing proposed therein, in
the case of a IBOR Auction or (y) the Business Day immediately preceding the
date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or,
in either case, such other time or date as the Borrower and the Administrative
Agent shall have mutually agreed and shall have notified the Banks not later
than the date of the Money Market Quote Request for the first IBOR Auction or
Absolute Rate Auction for which such change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a Business Day in
the case of a IBOR Auction or a Business Day in the case of an Absolute Rate
Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$5,000,000 or a larger multiple of $100,000,
(iii) the duration of the Interest Period applicable thereto (which
shall not be less than 14 days or more than 180 days), subject to the
provisions of the definition of Interest Period,
(iv) whether the Money Market Quotes requested are to set forth a
Money Market Margin or a Money Market Absolute Rate, and
(v) the aggregate amount of all Money Market Loans then outstanding.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. In no event may Borrower
give a Money Market Quote Request within ten (10) days of the giving of any
other Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a Money
Market Quote Request, the Administrative Agent shall send to the Banks by telex
or facsimile transmission an "Invitation for Money Market Quotes" substantially
in the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the Money
Market Loans to which such Money Market Quote Request relates in accordance with
this Section.
(d) Submission and Contents of Money Market Quotes. 1. Each Bank may submit
a Money Market Quote containing an offer or offers to make Money Market Loans in
response to any Invitation for Money Market Quotes. Each Money Market Quote must
comply with the requirements of this subsection (d) and must be submitted to the
Administrative Agent by telex or facsimile transmission at its offices specified
in or pursuant to Section 9.1 not later than (x) 2:00 P.M. (Dallas, Texas time)
on the fourth
<PAGE> 37
Business Day prior to the proposed date of Borrowing, in the case of a IBOR
Auction or (y) 9:30 A.M. (Dallas, Texas time) on the proposed date of Borrowing,
in the case of an Absolute Rate Auction (or, in either case, such other time or
date as the Borrower and the Administrative Agent shall have mutually agreed and
shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first IBOR Auction or Absolute Rate Auction for which such
change is to be effective); provided that Money Market Quotes submitted by the
Administrative Agent (or any affiliate of the Administrative Agent) in the
capacity of a Bank may be submitted, and may only be submitted, if the
Administrative Agent or such affiliate notifies the Borrower of the terms of the
offer or offers contained therein not later than (x) one hour prior to the
deadline for the other Banks, in the case of an IBOR Auction or (y) one hour
prior to the deadline for the other Banks, in the case of an Absolute Rate
Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall be
irrevocable except with the written consent of the Administrative Agent given on
the instructions of the Borrower.
2. Each Money Market Quote shall be in substantially the form of Exhibit D
hereto and shall in any case specify:
(i) the proposed date of Borrowing,
(ii) the principal amount of the Money Market Loan for which each
such offer is being made, which principal amount (w) may be greater
than or less than the Commitment of the quoting Bank, (x) must be $5,000,000
or a larger multiple of $100,000, (y) may not exceed the principal amount of
Money Market Loans for which offers were requested and (z) may be subject to
an aggregate limitation as to the principal amount of Money Market Loans for
which offers being made by such quoting Bank may be accepted,
(iii) the Interest Period(s) with respect to which each such offer is
being made,
(iv) in the case of an IBOR Auction, the margin above or below the
applicable Interbank Offered Rate (the "Money Market Margin") offered for
each such Money Market Loan, expressed as a percentage (specified to the
nearest 1/10,000th of 1%) to be added to or subtracted from such base rate,
(v) in the case of an Absolute Rate Auction, the rate of interest
per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market
Absolute Rate") offered for each such Money Market Loan, and
(vi) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
<PAGE> 38
3. Any Money Market Quote shall be disregarded if it:
(i) is not substantially in conformity with Exhibit D hereto or does
not specify all of the information required by subsection (d)(2) above;
(ii) contains qualifying, conditional or similar language (except for
an aggregate limitation as provided in subsection (d)(2)(ii) above);
(iii) proposes terms other than or in addition to those set forth in
the applicable Invitation for Money Market Quotes; or
(iv) arrives after the time set forth in subsection (d)(1).
(e) Notice to Borrower. The Administrative Agent shall promptly (and in any
event within one (1) Business Day after receipt thereof) notify the Borrower in
writing of the terms (x) of any Money Market Quote submitted by a Bank that is
in accordance with subsection (d) and (y) of any Money Market Quote that amends,
modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the Administrative
Agent unless such subsequent Money Market Quote is submitted solely to correct a
manifest error in such former Money Market Quote or modifies the terms of such
previous Money Market Quote to provide terms more favorable to Borrower. The
Administrative Agent's notice to the Borrower shall specify (A) the aggregate
principal amount of Money Market Loans for which offers have been received for
each Interest Period specified in the related Money Market Quote Request, (B)
the respective principal amounts and Money Market Margins or Money Market
Absolute Rates, as the case may be, so offered and (C) if applicable,
limitations on the aggregate principal amount of Money Market Loans for which
offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:00 A.M. (Dallas,
Texas time) on (x) the third Business Day prior to the proposed date of
Borrowing, in the case of an IBOR Auction or (y) the proposed date of Borrowing,
in the case of an Absolute Rate Auction (or, in either case, such other time or
date as the Borrower and the Administrative Agent shall have mutually agreed and
shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first IBOR Auction or Absolute Rate Auction for which such
change is to be effective), the Borrower shall notify the Administrative Agent
of its acceptance or non-acceptance of the offers so notified to it pursuant to
subsection (e). In the case of acceptance, such notice (a "Notice of Money
Market Borrowing") shall specify the aggregate principal amount of offers for
each Interest Period that are accepted. The Borrower may accept any Money Market
Quote in whole or in part; provided that:
1. the aggregate principal amount of each Money Market Borrowing may
not exceed the applicable amount set forth in the related Money Market Quote
Request;
<PAGE> 39
2. the principal amount of each Money Market Borrowing must be
$5,000,000 or a larger multiple of $100,000;
3. acceptance of offers may only be made on the basis of ascending
Money Market Margins or Money Market Absolute Rates, as the case may be; and
4. the Borrower may not accept any offer that is described in
subsection (d)(3) or that otherwise fails to comply with the requirements of
this Agreement.
(g) Allocation by Agent. If offers are made by two or more Banks with the
same Money Market Margins or Money Market Absolute Rates, as the case may be,
for a greater aggregate principal amount than the amount in respect of which
such offers are accepted for the related Interest Period, the principal amount
of Money Market Loans in respect of which such offers are accepted shall be
allocated by the Administrative Agent among such Banks as nearly as possible (in
multiples of $100,000, as the Administrative Agent may deem appropriate) in
proportion to the aggregate principal amounts of such offers. The Administrative
Agent shall promptly (and in any event within one (1) Business Day after such
offers are accepted) notify the Borrower and each such Bank in writing of any
such allocation of Money Market Loans. Determinations by the Administrative
Agent of the allocation of Money Market Loans shall be conclusive in the absence
of manifest error.
(h) Notwithstanding anything to the contrary contained herein, each Bank
shall be required to fund its Pro Rata Share of Committed Loans in accordance
with Section 2.1 hereof despite the fact that any Bank's Commitment may have
been or may be exceeded as a result of such Bank's making of Money Market Loans.
SECTION 2.5. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing from Borrower in accordance with
Section 2.2 hereof, the Administrative Agent shall, on the date such Notice of
Borrowing is received by the Administrative Agent, notify Documentation Agent
and each Bank of the contents thereof and of such Bank's share of such
Borrowing, of the interest rate determined pursuant thereto and the Interest
Period(s) (if different from those requested by the Borrower) and such Notice of
Borrowing shall not thereafter be revocable by the Borrower, unless Borrower
shall pay any applicable expenses pursuant to Section 2.13.
(b) Not later than 1:00 p.m. (Dallas, Texas time) on the date of each
Committed Borrowing (including without limitation each Mandatory Borrowing) as
indicated in the applicable Notice of Borrowing, each Bank shall (except as
provided in subsection (d) of this Section) make available its share of such
Committed Borrowing in Federal funds immediately available in Dallas, Texas, to
the Administrative Agent at its address referred to in Section 9.1.
<PAGE> 40
(c) Not later than 3:00 p.m. (Dallas, Texas time) on the date of each
Swingline Borrowing as indicated in the applicable Notice of Borrowing, the
Swingline Lender shall make available such Swingline Borrowing in Federal funds
immediately available in Dallas, Texas, to the Administrative Agent at its
address referred to in Section 9.1.
(d) Unless the Administrative Agent shall have received notice from a Bank
prior to the date of any Borrowing that such Bank will not make available to the
Administrative Agent such Bank's share of such Borrowing, the Administrative
Agent may assume that such Bank has made such share available to the
Administrative Agent on the date of such Borrowing in accordance with of this
Section 2.5 and the Administrative Agent may, in reliance upon such assumption,
but shall not be obligated to, make available to the Borrower on such date a
corresponding amount on behalf of such Bank. If and to the extent that such Bank
shall not have so made such share available to the Administrative Agent, such
Bank agrees to repay to the Administrative Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Administrative Agent, at the rate of interest applicable to such
Borrowing hereunder. If such Bank shall repay to the Administrative Agent such
corresponding amount, such amount so repaid shall constitute such Bank's Loan
included in such Borrowing for purposes of this Agreement. If such Bank shall
not pay to Administrative Agent such corresponding amount after reasonable
attempts are made by Administrative Agent to collect such amounts from such
Bank, Borrower agrees to repay to Administrative Agent forthwith on demand such
corresponding amounts together with interest thereto, for each day from the date
such amount is made available to Borrower until the date such amount is repaid
to Administrative Agent, at the interest rate applicable thereto one (1)
Business Day after demand. Nothing contained in this Section 2.5(d) shall be
deemed to reduce the Commitment of any Bank or in any way affect the rights of
Borrower with respect to any defaulting Bank or Administrative Agent. The
failure of any Bank to make available to the Administrative Agent such Bank's
share of any Borrowing in accordance with Section 2.5(b) hereof shall not
relieve any other Bank of its obligations to fund its Commitment, in accordance
with the provisions hereof.
(e) Subject to the provisions hereof, the Administrative Agent shall make
available each Borrowing to Borrower in Federal funds immediately available in
accordance with, and on the date set forth in, the applicable Notice of
Borrowing.
SECTION 2.6. Notes.
(a) The Loans of each Bank shall be evidenced by a single Note payable to
the order of such Bank for the account of its Applicable Lending Office.
(b) Each Bank may, by notice to the Borrower, the Administrative Agent and
the Documentation Agent, request that its Loans of a particular type (including,
without
<PAGE> 41
limitation, Swingline Loans and Money Market Loans) be evidenced by a separate
Note in an amount equal to the aggregate unpaid principal amount of such Loans.
Any additional costs incurred by the Administrative Agent, the Borrower or the
Banks in connection with preparing such a Note shall be at the sole cost and
expense of the Bank requesting such Note. In the event any Loans evidenced by
such a Note are paid in full prior to the Maturity Date, any such Bank shall
return such Note to Borrower. Each such Note shall be in substantially the form
of Exhibit A hereto with appropriate modifications to reflect the fact that it
evidences solely Loans of the relevant type. Upon the execution and delivery of
any such Note, any existing Note payable to such Bank shall be replaced or
modified accordingly. Each reference in this Agreement to the "Note" of such
Bank shall be deemed to refer to and include any or all of such Notes, as the
context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.1(a), the
Documentation Agent shall forward such Note to such Bank. Each Bank shall record
the date, amount, type and maturity of each Loan made by it and the date and
amount of each payment of principal made by the Borrower with respect thereto,
and may, if such Bank so elects in connection with any transfer or enforcement
of its Note, endorse on the appropriate schedule appropriate notations to
evidence the foregoing information with respect to each such Loan then
outstanding; provided that the failure of any Bank to make any such recordation
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so
to endorse its Note and to attach to and make a part of its Note a continuation
of any such schedule as and when required.
(d) The Committed Loans shall mature, and the principal amount thereof
shall be due and payable, on the Maturity Date. The Swingline Loans shall
mature, and the principal amount thereof shall be due and payable, in accordance
with Section 2.3(b)(iii).
(e) Each Money Market Loan included in any Money Market Borrowing shall
mature, and the principal amount thereof shall be due and payable, together with
accrued interest thereon, on the earlier to occur of (i) last day of the
Interest Period applicable to such Borrowing or (ii) the Maturity Date.
(f) There shall be no more than ten (10) Euro-Dollar Groups of Loans and no
more than ten (10) Money Market Loans outstanding at any one time.
SECTION 2.7. Method of Electing Interest Rates. (a) The Loans included in
each Committed Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Borrowing or as otherwise
provided in Section 2.3 with respect to Mandatory Borrowings. Thereafter, the
Borrower may from time to time elect to change or continue the type of interest
rate borne by each Group of Loans (subject in each case to the provisions of
Article VIII), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert all or any portion of such Loans to Euro-Dollar Loans as of any
Business Day;
<PAGE> 42
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to
convert all or any portion of such Loans to Base Rate Loans and/or elect to
continue all or any portion of such Loans as Euro-Dollar Loans for an
additional Interest Period or additional Interest Periods, in each case
effective on the last day of the then current Interest Period applicable to
such Loans, or on such other date designated by Borrower in the Notice of
Interest Rate Election provided Borrower shall pay any losses pursuant to
Section 2.13.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Administrative Agent at least three (3) Business Days
before the conversion or continuation selected in such notice is to be
effective. A Notice of Interest Rate Election may, if it so specifies, apply to
only a portion of the aggregate principal amount of the relevant Group of Loans;
provided that (i) such portion is allocated ratably among the Loans comprising
such Group, (ii) the portion to which such Notice applies, and the remaining
portion to which it does not apply, are each $500,000 or any larger multiple of
$100,000, (iii) there shall be no more than ten (10) Euro-Dollar Groups of Loans
outstanding at any time, (iv) no Committed Loan may be continued as, or
converted into, a Euro-Dollar Loan when any Event of Default has occurred and is
continuing, and (v) no Interest Period shall extend beyond the Maturity Date.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such notice
applies;
(ii) the date on which the conversion or continuation selected in
such notice is to be effective, which shall comply with the applicable clause
of subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the new
type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the
initial Interest Period applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans for an
additional Interest Period, the duration of such additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the Borrower
pursuant to subsection (a) above, the Administrative Agent shall notify the
Documentation Agent and each Bank the same day as it receives such Notice of
Interest Rate Election of the contents thereof, the interest rates determined
pursuant thereto and the Interest Periods (if different from those requested by
the Borrower) and such notice shall not thereafter be revocable by the Borrower.
If the Borrower fails to deliver a timely Notice of Interest Rate Election to
the Administrative Agent for any Group of
<PAGE> 43
Euro-Dollar Loans, such Loans shall be converted into Base Rate Loans on the
last day of the then current Interest Period applicable thereto.
SECTION 2.8. Interest Rates.
(a) Each Base Rate Loan shall bear interest on the outstanding principal
amount thereof, for each day from the date such Loan is made until the date it
is repaid or converted into a Euro-Dollar Loan pursuant to Section 2.7, at a
rate per annum equal to the Base Rate plus the Applicable Margin for Base Rate
Loans for such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding principal
amount thereof, for each day during the Interest Period applicable thereto, at a
rate per annum equal to the sum of the Applicable Margin for Euro-Dollar Loans
for such day plus the Adjusted Interbank Offered Rate applicable to such
Interest Period.
(c) Subject to Section 8.1, each Money Market IBOR Loan shall bear interest
on the outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the sum of the Interbank Offered Rate for
such Interest Period (determined in accordance with Section 2.8(b) as if the
related Money Market IBOR Borrowing were a Euro-Dollar Borrowing) plus (or
minus) the Money Market Margin quoted by the Bank making such Loan in accordance
with Section 2.4. Each Money Market Absolute Rate Loan shall bear interest on
the outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by
the Bank making such Loan in accordance with Section 2.4. Any overdue principal
of or interest on any Money Market Loan shall bear interest, payable on demand,
for each day until paid at a rate per annum equal to the Base Rate until such
failure shall become an Event of Default and thereafter at a rate per annum
equal to the sum of 4% plus the Base Rate for such day.
(d) In the event that, and for so long as, any Event of Default shall have
occurred and be continuing, the outstanding principal amount of the Loans, and,
to the extent permitted by applicable law, overdue interest in respect of all
Loans, shall bear interest at the annual rate equal to the sum of the Base Rate
and four percent (4%) (the "Default Rate").
(e) The Administrative Agent shall determine each interest rate applicable
to the Loans hereunder. The Administrative Agent shall give prompt notice to the
Borrower and the Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of demonstrable error.
(f) Intentionally Omitted.
(g) Interest on all Loans shall be payable on the first Business Day of
each calendar month.
SECTION 2.9. Fees.
<PAGE> 44
(a) Facility Fee. For the period beginning on the date hereof and ending on
the date the Obligations are paid in full and this Agreement is terminated (the
"Facility Fee Period"), the Borrower shall pay to the Administrative Agent for
the account of the Banks ratably in proportion to their respective Commitments a
facility fee on the aggregate Commitments at the Applicable Fee Percentage. The
facility fee shall be payable in arrears on each January 1, April 1, July 1 and
October 1 during the Facility Fee Period.
(b) Agency Fees. Borrower shall pay Administrative Agent, Documentation
Agent and Syndication Agent such fees as are provided for in the agency fee
agreement by and between Administrative Agent and Borrower, as in existence from
time to time.
(c) Fees Non-Refundable. All fees set forth in this Section 2.9 shall be
deemed to have been earned on the date payment is due in accordance with the
provisions hereof and shall be non-refundable. The obligation of the Borrower to
pay such fees in accordance with the provisions hereof shall be binding upon the
Borrower and shall inure to the benefit of the Administrative Agent, the
Documentation Agent, the Syndication Agent and the Banks regardless of whether
any Loans are actually made.
SECTION 2.10. Maturity Date.
The term (the "Term") of the Commitments (and each Bank's obligations to
make Loans hereunder) shall terminate and expire on the Maturity Date. Upon the
date of the termination of the Term, any Loans then outstanding (together with
accrued interest thereon and all other Obligations) shall be due and payable on
such date.
SECTION 2.11. Optional Prepayments.
(a) The Borrower may, upon at least one (1) Business Day's notice to the
Administrative Agent, prepay any Group of Base Rate Loans or any Money Market
Borrowing bearing interest at the Base Rate pursuant to Section 8.1, in whole at
any time, or from time to time in part in amounts aggregating One Million
Dollars ($1,000,000) or any larger multiple of One Hundred Thousand Dollars
($100,000), by paying the principal amount to be prepaid together with accrued
interest thereon to the date of prepayment. The Borrower may, from time to time
on any Business Day so long as prior notice is given to the Administrative Agent
and Swingline Lender no later than 1:00 p.m. (Dallas, Texas time) on the day on
which Borrower intends to make such prepayment, prepay any Swingline Loans in
whole or in part in amounts aggregating $100,000 or a higher integral multiple
of $100,000 (or, if less, the aggregate outstanding principal amount of all
Swingline Loans then outstanding) by paying the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment no later than
2:00 p.m. (Dallas, Texas time) on such day. Each such optional prepayment shall
be applied to prepay ratably the Loans of the several Banks (or the Swingline
Lender in the case of Swingline Loans) included in such Group or Borrowing.
<PAGE> 45
(b) The Borrower may, upon at least one (1) Business Days' notice to the
Administrative Agent, prepay any Euro-Dollar Loan as of the last day of the
Interest Period applicable thereto. Except as provided in Article 8 and except
with respect to any Euro-Dollar Loan which has been converted to a Base Rate
Loan pursuant to Section 8.2, 8.3 or 8.4 hereof, the Borrower may not prepay all
or any portion of the principal amount of any Euro-Dollar Loan prior to the end
of the Interest Period applicable thereto unless the Borrower shall also pay any
applicable expenses pursuant to Section 2.13. In addition, the Borrower may not
prepay all or any portion of the principal amount of any Money Market Loan prior
to the end of the Interest Period applicable thereto without the consent of all
applicable Designated Lenders and Banks. Any such prepayment shall be upon at
least three (3) Business Days notice to the Administrative Agent. Each such
optional prepayment shall be in the amounts set forth in Section 2.11(a) above
and shall be applied to prepay ratably the Loans of the Banks included in any
Group of Euro-Dollar Loans, except that any Euro-Dollar Loan which has been
converted to a Base Rate Loan pursuant to Section 8.2, 8.3 or 8.4 hereof may be
prepaid without ratable payment of the other Loans in such Group of Loans which
have not been so converted.
(c) The Borrower may at any time and from time to time cancel all or any
part of the Commitments by the delivery to the Administrative Agent of a notice
of cancellation within the applicable time periods set forth in Sections 2.11(a)
and (b) if there are Loans then outstanding or, if there are no Loans
outstanding at such time as to which the Commitments with respect thereto are
being canceled, upon at least one (1) Business Day's notice to the
Administrative Agent, whereupon, in either event, all or such portion of the
Commitments, as applicable, shall terminate as to the Banks, pro rata on the
date set forth in such notice of cancellation, and, if there are any Loans then
outstanding, Borrower shall prepay, as applicable, all or such portion of Loans
outstanding on such date in accordance with the requirements of Section 2.11(a)
and (b), Borrower shall be permitted to designate in its notice of cancellation
which Loans, if any, are to be prepaid. A reduction of the Commitments pursuant
to this Section 2.11(c) shall not effect a reduction in the Swingline Commitment
(unless so elected by the Borrower) until the aggregate Commitments have been
reduced to an amount equal to the Swingline Commitment.
(d) Any amounts so prepaid pursuant to Section 2.11 (a) or (b) may be
reborrowed. In the event Borrower elects to cancel all or any portion of the
Commitments and the Swingline Commitment pursuant to Section 2.11(c) hereof,
such amounts may not be reborrowed.
SECTION 2.12. General Provisions as to Payments.
(a) The Borrower shall make each payment of principal of and interest on
the Loans and of fees hereunder, not later than 11:00 a.m. (Dallas, Texas time)
on the date when due, in Federal or other funds immediately available in Dallas,
Texas, to the Administrative Agent at its address referred to in Section 9.1.
The Administrative Agent will promptly (and in any event within one (1) Business
Day after receipt thereof) distribute to each Bank its ratable share (or
applicable share with respect to Money
<PAGE> 46
Market Loans) of each such payment received by the Administrative Agent for the
account of the Banks. If and to the extent that the Administrative Agent shall
receive any such payment for the account of the Banks on or before 12:00 Noon
(Dallas, Texas time) on any Business Day, and Administrative Agent shall not
have distributed to any Bank its applicable share of such payment on such
Business Day, Administrative Agent shall distribute such amount to such Bank
together with interest thereon, for each day from the date such amount should
have been distributed to such Bank until the date Administrative Agent
distributes such amount to such Bank, at the Federal Funds Rate. Whenever any
payment of principal of, or interest on the Base Rate Loans or Swingline Loans
or of fees shall be due on a day which is not a Business Day, the date for
payment thereof shall be extended to the next succeeding Business Day. Whenever
any payment of principal of, or interest on, the Euro-Dollar Loans shall be due
on a day which is not a Business Day, the date for payment thereof shall be
extended to the next succeeding Business Day unless such Business Day falls in
another calendar month, in which case the date for payment thereof shall be the
next preceding Business Day. Whenever any payment of principal of, or interest
on, the Money Market Loans shall be due on a day which is not a Business Day,
the date for payment thereof shall be extended to the next succeeding Business
Day. If the date for any payment of principal is extended by operation of law or
otherwise, interest thereon shall be payable for such extended time.
(b) Unless the Administrative Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Banks hereunder
that the Borrower will not make such payment in full, the Administrative Agent
may assume that the Borrower has made such payment in full to the Administrative
Agent on such date and the Administrative Agent may, in reliance upon such
assumption, cause to be distributed to each Bank on such due date an amount
equal to the amount then due such Bank. If and to the extent that the Borrower
shall not have so made such payment, each Bank shall repay to the Administrative
Agent forthwith on demand such amount distributed to such Bank together with
interest thereon, for each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the Administrative Agent, at
the Federal Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower makes any payment of principal
with respect to any Euro-Dollar Loan or Money Market IBOR Loan (pursuant to
Article II, VI or VIII or otherwise) on any day other than the last day of the
Interest Period applicable thereto, or if the Borrower fails to borrow any
Euro-Dollar Loans or Money Market IBOR Loans after notice has been given to any
Bank in accordance with Section 2.5(a) or 2.4(f), as applicable, or if Borrower
shall deliver a Notice of Interest Rate Election specifying that a Euro-Dollar
Loan shall be converted on a date other than the first (1st) day of the then
current Interest Period applicable thereto, the Borrower shall reimburse each
Bank within 15 days after certification of such Bank of such loss or expense
(which shall be delivered by each such Bank to Administrative Agent for delivery
to Borrower) for any resulting loss or expense incurred by it (or by an existing
Participant in the related Loan), including, without limitation, any loss
incurred in obtaining, liquidating or employing deposits from third parties, but
excluding loss of margin for the period after any such payment or failure to
borrow, provided that such
<PAGE> 47
Bank shall have delivered to Administrative Agent and Administrative Agent shall
have delivered to the Borrower a certification as to the amount of such loss or
expense, which certification shall set forth in reasonable detail the basis for
and calculation of such loss or expense and shall be conclusive in the absence
of demonstrable error.
SECTION 2.14. Computation of Interest and Fees. All interest and fees shall
be computed on the basis of a year of 360 days and paid for the actual number of
days elapsed (including the first day but excluding the last day).
SECTION 2.15. Use of Proceeds. The Borrower shall use the proceeds of the
Loans for general corporate purposes, including, without limitation, the
acquisition of real property to be used in the Borrower's existing business and
for general working capital needs of the Borrower; provided, however, that no
Swingline Loan shall be used more than once for the purpose of refinancing
another Swingline Loan, in whole or part.
ARTICLE III
CONDITIONS
SECTION 3.1. Closing. The closing hereunder shall occur on the date when
each of the following conditions is satisfied (or waived in writing by the
Administrative Agent and the Banks), each document to be dated the Closing Date
unless otherwise indicated:
(a) the Borrower shall have executed and delivered to the Documentation
Agent a Note for the account of each Bank dated on or before the Closing Date
complying with the provisions of Section 2.6;
(b) the Borrower, the Administrative Agent and Documentation Agent and each
of the Banks shall have executed and delivered to the Borrower, the
Administrative Agent and Documentation Agent a duly executed original of this
Agreement;
(c) EOPT shall have executed and delivered to the Administrative Agent and
Documentation Agent a duly executed original of the EOPT Guaranty;
(d) the Documentation Agent shall have received an opinion of Rosenberg &
Liebentritt, P.C., counsel for the Borrower and EOPT, acceptable to the
Documentation Agent, the Banks and their counsel;
(e) the Documentation Agent shall have received all documents the
Documentation Agent may reasonably request relating to the existence of the
Borrower and EOPT, the authority for and the validity of this Agreement and the
other Loan Documents, the incumbency of officers executing this Agreement and
the other Loan Documents and any other matters relevant hereto, all in form and
substance satisfactory to the Administrative Agent. Such documentation shall
include, without limitation, the
<PAGE> 48
agreement of limited partnership of the Borrower, as well as the certificate of
limited partnership of the Borrower, both as amended, modified or supplemented
to the Closing Date, certified to be true, correct and complete by a senior
officer of the Borrower as of a date not more than ten (10) days prior to the
Closing Date, together with a certificate of existence as to the Borrower from
the Secretary of State (or the equivalent thereof) of Delaware, to be dated not
more than thirty (30) days prior to the Closing Date, as well as the declaration
of trust of EOPT, as amended, modified or supplemented to the Closing Date,
certified to be true, correct and complete by a senior officer of EOPT as of a
date not more than ten (10) days prior to the Closing Date, together with a good
standing certificate as to EOPT from the Secretary of State (or the equivalent
thereof) of Maryland, to be dated not more than thirty (30) days prior to the
Closing Date;
(f) the Borrower and EOPT each shall have executed a solvency certificate
acceptable to the Documentation Agent;
(g) the Documentation Agent shall have received all certificates,
agreements and other documents and papers referred to in this Section 3.1 and
the Notice of Borrowing referred to in Section 3.2, if applicable, unless
otherwise specified, in sufficient counterparts, satisfactory in form and
substance to the Documentation Agent in their sole discretion;
(h) the Borrower shall have taken all actions required to authorize the
execution and delivery of this Agreement and the other Loan Documents and the
performance thereof by the Borrower, and EOPT shall have taken all actions
required to authorize the execution and delivery of the reaffirmation of the
EOPT Guaranty and the other Loan Documents and the performance thereof by EOPT;
(i) the Banks shall be satisfied that neither the Borrower, EOPT nor any
Consolidated Subsidiary is subject to any present or contingent environmental
liability which could have a Material Adverse Effect and the Borrower shall have
delivered a certificate so stating;
(j) the Administrative Agent shall have received, for its and any other
Bank's account, all fees due and payable pursuant to Section 2.9 hereof on or
before the Closing Date, and the reasonable fees and expenses accrued through
the Closing Date of Skadden, Arps, Slate, Meagher & Flom LLP shall have been
paid to Skadden, Arps, Slate, Meagher & Flom LLP;
(k) the Borrower shall have delivered copies of all consents, licenses and
approvals, if any, required in connection with the execution, delivery and
performance by the Borrower and EOPT, and the validity and enforceability, of
the Loan Documents, or in connection with any of the transactions contemplated
thereby, and such consents, licenses and approvals shall be in full force and
effect;
(l) no Default or Event of Default shall have occurred;
<PAGE> 49
(m) the Borrower shall have delivered a certificate in form acceptable to
Documentation Agent showing compliance with the requirements of Section 5.8 as
of the Closing Date; and
(n) the Borrower shall have repaid in full all amounts outstanding under
the Term Loan Agreement, and terminated the same.
SECTION 3.2. Borrowings. The obligation of any Bank to make a Loan is
subject to the satisfaction of the following conditions:
(a) receipt by the Administrative Agent of a Notice of Borrowing as
required by Section 2.2 or Section 2.3(b)(i) or a Notice of Money Market
Borrowing as required by Section 2.4;
(b) immediately after such Borrowing, the aggregate outstanding principal
amount of the Loans will not exceed the aggregate amount of the Commitments;
(c) immediately before and after such Borrowing, no Default or Event of
Default shall have occurred and be continuing both before and after giving
effect to the making of such Loans;
(d) the representations and warranties of the Borrower contained in this
Agreement (other than representations and warranties which expressly speak as of
a different date) shall be true and correct in all material respects on and as
of the date of such Borrowing both before and after giving effect to the making
of such Loans;
(e) no law or regulation shall have been adopted, no order, judgment or
decree of any governmental authority shall have been issued, and no litigation
shall be pending, which does or seeks to enjoin, prohibit or restrain, the
making or repayment of the Loans or the consummation of the transactions
contemplated by this Agreement; and
(f) no event, act or condition shall have occurred after the Closing Date
which, in the reasonable judgment of the Administrative Agent, Documentation
Agent or the Required Banks, as the case may be, has had or is likely to have a
Material Adverse Effect.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(b), (c), (d), (e) and (f) (to the extent that Borrower is or should have been
aware of any Material Adverse Effect) of this Section, except as otherwise
disclosed in writing by Borrower to the Banks. Notwithstanding anything to the
contrary, no Borrowing shall be permitted if such Borrowing would cause Borrower
to fail to be in compliance with any of the covenants contained in this
Agreement or in any of the other Loan Documents.
ARTICLE IV
<PAGE> 50
REPRESENTATIONS AND WARRANTIES
In order to induce the Administrative Agent, Documentation Agent and each of
the other Banks which is or may become a party to this Agreement to make the
Loans, the Borrower makes the following representations and warranties as of the
Closing Date. Such representations and warranties shall survive the
effectiveness of this Agreement, the execution and delivery of the other Loan
Documents and the making of the Loans.
SECTION 4.1. Existence and Power. The Borrower is a limited partnership,
duly formed and validly existing as a limited partnership under the laws of the
State of Delaware and has all powers and all material governmental licenses,
authorizations, consents and approvals required to own its property and assets
and carry on its business as now conducted or as it presently proposes to
conduct and has been duly qualified and is in good standing in every
jurisdiction in which the failure to be so qualified and/or in good standing is
likely to have a Material Adverse Effect. EOPT is a real estate investment
trust, duly formed, validly existing and in good standing as a real estate
investment trust under the laws of the State of Maryland and has all powers and
all material governmental licenses, authorizations, consents and approvals
required to own its property and assets and carry on its business as now
conducted or as it presently proposes to conduct and has been duly qualified and
is in good standing in every jurisdiction in which the failure to be so
qualified and/or in good standing is likely to have a Material Adverse Effect.
SECTION 4.2. Power and Authority. The Borrower has the partnership power and
authority to execute, deliver and carry out the terms and provisions of each of
the Loan Documents to which it is a party and has taken all necessary
partnership action, if any, to authorize the execution and delivery on behalf of
the Borrower and the performance by the Borrower of such Loan Documents. The
Borrower and EOPT each have duly executed and delivered each Loan Document to
which it is a party in accordance with the terms of this Agreement, and each
such Loan Document constitutes the legal, valid and binding obligation of the
Borrower and EOPT, enforceable in accordance with its terms, except as
enforceability may be limited by applicable insolvency, bankruptcy or other laws
affecting creditors rights generally, or general principles of equity, whether
such enforceability is considered in a proceeding in equity or at law. EOPT has
the power and authority to execute, deliver and carry out the terms and
provisions of each of the Loan Documents to which it is a party and has taken
all necessary action to authorize the execution, delivery and performance of
such Loan Documents. EOPT has the power and authority to execute, deliver and
carry out the terms and provisions of each of the Loan Documents on behalf of
the Borrower to which the Borrower is a party and has taken all necessary action
to authorize the execution and delivery on behalf of the Borrower and the
performance by the Borrower of such Loan Documents.
SECTION 4.3. No Violation. (a) Neither the execution, delivery or
performance by or on behalf of the Borrower of the Loan Documents to which it is
a party, nor
<PAGE> 51
compliance by the Borrower with the terms and provisions thereof nor the
consummation of the transactions contemplated by the Loan Documents, (i) will
materially contravene any applicable provision of any law, statute, rule,
regulation, order, writ, injunction or decree of any court or governmental
instrumentality, (ii) will materially conflict with or result in any breach of,
any of the terms, covenants, conditions or provisions of, or constitute a
default under, or result in the creation or imposition of (or the obligation to
create or impose) any Lien upon any of the property or assets of the Borrower or
any of its Consolidated Subsidiaries pursuant to the terms of any indenture,
mortgage, deed of trust, or other agreement or other instrument to which the
Borrower (or of any partnership of which the Borrower is a partner) or any of
its Consolidated Subsidiaries is a party or by which it or any of its property
or assets is bound or to which it is subject (except for such breaches and
defaults under loan agreements which the lenders thereunder have agreed to
forbear pursuant to valid forbearance agreements), or (iii) will cause a
material default by the Borrower under any organizational document of any Person
in which the Borrower has an interest, or cause a material default under the
Borrower's agreement or certificate of limited partnership, the consequences of
which conflict, breach or default would have a Material Adverse Effect, or
result in or require the creation or imposition of any Lien whatsoever upon any
Property (except as contemplated herein).
(b) Neither the execution, delivery or performance by EOPT of the Loan
Documents to which it is a party, nor compliance by EOPT with the terms and
provisions thereof nor the consummation of the transactions contemplated by the
Loan Documents, (i) will materially contravene any applicable provision of any
law, statute, rule, regulation, order, writ, injunction or decree of any court
or governmental instrumentality, (ii) will materially conflict with or result in
any breach of, any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of (or the
obligation to create or impose) any Lien upon any of the property or assets of
EOPT or any of its Consolidated Subsidiaries pursuant to the terms of any
indenture, mortgage, deed of trust, or other agreement or other instrument to
which EOPT (or of any partnership of which EOPT is a partner) or any of its
Consolidated Subsidiaries is a party or by which it or any of its property or
assets is bound or to which it is subject (except for such breaches and defaults
under loan agreements which the lenders thereunder have agreed to forbear
pursuant to valid forbearance agreements), or (iii) will cause a material
default by EOPT under any organizational document of any Person in which EOPT
has an interest, the consequences of which conflict, breach or default would
have a Material Adverse Effect, or result in or require the creation or
imposition of any Lien whatsoever upon any Property (except as contemplated
herein).
SECTION 4.4. Financial Information. (a) The consolidated balance sheet of
EOPT as of December 31, 1997, and the related statements of operations and cash
flows of EOPT for the period from July 11, 1997 to December 31, 1997, reported
on by Ernst & Young LLP, fairly present, in conformity with GAAP, the
consolidated financial position of EOPT as of such date and the consolidated
results of operations and cash flows for the period from July 11, 1997 to
December 31, 1997.
<PAGE> 52
(b) Since March 31, 1998, (i) except as may have been disclosed in writing
to the Banks, nothing has occurred having a Material Adverse Effect, and (ii)
except as set forth on Schedule 4.4(b), neither the Borrower nor EOPT has
incurred any material indebtedness or guaranty on or before the Closing Date.
SECTION 4.5. Litigation. Except as previously disclosed by the Borrower in
writing to the Banks, there is no action, suit or proceeding pending against, or
to the knowledge of the Borrower threatened against or affecting, (i) the
Borrower, EOPT or any of their Consolidated Subsidiaries, (ii) the Loan
Documents or any of the transactions contemplated by the Loan Documents or (iii)
any of their assets, before any court or arbitrator or any governmental body,
agency or official in which there is a reasonable possibility of an adverse
decision which could, individually, or in the aggregate have a Material Adverse
Effect or which in any manner draws into question the validity of this Agreement
or the other Loan Documents. As of the Closing Date, no such action, suit or
proceeding exists.
SECTION 4.6. Compliance with ERISA. (a) Except as set forth on Schedule 4.6
attached hereto, neither Borrower nor EOPT is a member of or has entered into,
maintained, contributed to, or been required to contribute to, or may incur any
liability with respect to any Plan or Multiemployer Plan or any other Benefit
Arrangement.
(b) Except for a "prohibited transaction" arising solely because of a
Bank's breach of the covenant set forth in Section 9.17 hereof, the transactions
contemplated by the Loan Documents will not constitute a nonexempt prohibited
transaction (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) that could subject the Administrative Agent, Documentation Agent or
any of the Banks to any tax or penalty on prohibited transactions imposed under
Section 4975 of the Code or Section 502(i) of ERISA and such transactions will
not otherwise result in the Administrative Agent, the Documentation Agent or any
of the Banks being deemed in violation of Sections 404 or 406 of ERISA or
Section 4975 of the Code or in the Administrative Agent, the Documentation Agent
or any of the Banks being a fiduciary or party in interest under ERISA or a
"disqualified person" as defined in Section 4975(e)(2) of the Code with respect
to an "employee benefit plan" within the meaning of Section 3(3) of ERISA or a
"plan" within the meaning of Section 4975(e)(1) of the Code. No assets of
Borrower constitute "assets" (within the meaning of ERISA or Section 4975 of the
Code, including, but not limited to, 29 C.F.R. Section 2510.3-101 or any
successor regulation thereto) of an "employee benefit plan" within the meaning
of Section 3(3) of ERISA or a "plan" within the meaning of Section 4975(e)(1) of
the Code. In addition to the prohibitions set forth in this Agreement and the
other Loan Documents, and not in limitation thereof, Borrower covenants and
agrees that Borrower shall not use any "assets" (within the meaning of ERISA or
Section 4975 of the Code, including but not limited to 29 C.F.R. Section
2510.3-101) of an "employee benefit plan" within the meaning of Section 3(3) of
ERISA or a "plan" within the meaning of Section 4975(e)(1) of the Code to repay
or secure the Note, the Loan, or the Obligations.
<PAGE> 53
SECTION 4.7. Environmental. The Borrower conducts reviews of the effect of
Environmental Laws on the business, operations and properties of the Borrower
and its Consolidated Subsidiaries when necessary in the course of which it
identifies and evaluates associated liabilities and costs (including, without
limitation, any capital or operating expenditures required for clean-up or
closure of properties presently owned, any capital or operating expenditures
required to achieve or maintain compliance with environmental protection
standards imposed by law or as a condition of any license, permit or contract,
any related constraints on operating activities, and any actual or potential
liabilities to third parties, including, without limitation, employees, and any
related costs and expenses). On the basis of this review, the Borrower has
reasonably concluded that such associated liabilities and costs, including,
without limitation, the costs of compliance with Environmental Laws, are
unlikely to have a Material Adverse Effect.
SECTION 4.8. Taxes. The Borrower, EOPT and their Consolidated Subsidiaries
have filed all United States Federal income tax returns and all other material
tax returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by the Borrower,
EOPT or any Consolidated Subsidiary, except such taxes, if any, as are reserved
against in accordance with GAAP, such taxes as are being contested in good faith
by appropriate proceedings or such taxes, the failure to make payment of which
when due and payable will not have, in the aggregate, a Material Adverse Effect.
The charges, accruals and reserves on the books of the Borrower, EOPT and their
Consolidated Subsidiaries in respect of taxes or other governmental charges are,
in the opinion of the Borrower, adequate.
SECTION 4.9. Full Disclosure. All information heretofore furnished by the
Borrower to the Administrative Agent, Documentation Agent or any Bank for
purposes of or in connection with this Agreement or any transaction contemplated
hereby or thereby is true and accurate in all material respects on the date as
of which such information is stated or certified. The Borrower has disclosed to
the Documentation Agent, in writing any and all facts which have or may have (to
the extent the Borrower can now reasonably foresee) a Material Adverse Effect.
SECTION 4.10. Solvency. On the Closing Date and after giving effect to the
transactions contemplated by the Loan Documents occurring on the Closing Date,
the Borrower and EOPT will be Solvent.
SECTION 4.11. Use of Proceeds. All proceeds of the Loans will be used by the
Borrower only in accordance with the provisions hereof. Neither the making of
any Loan nor the use of the proceeds thereof will violate or be inconsistent
with the provisions of regulations T, U, or X of the Federal Reserve Board.
SECTION 4.12. Governmental Approvals. No order, consent, approval, license,
authorization, or validation of, or filing, recording or registration with, or
exemption by, any governmental or public body or authority, or any subdivision
thereof, is required to authorize, or is required in connection with the
execution, delivery and performance of
<PAGE> 54
any Loan Document or the consummation of any of the transactions contemplated
thereby other than those that have already been duly made or obtained and remain
in full force and effect or those which, if not made or obtained, would not have
a Material Adverse Effect;
SECTION 4.13. Investment Company Act; Public Utility Holding Company Act.
Neither the Borrower, EOPT nor any Consolidated Subsidiary is (x) an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended, (y) a "holding
company" or a "subsidiary company" of a "holding company" or an "affiliate" of
either a "holding company" or a "subsidiary company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended, or (z) subject to any
other federal or state law or regulation which purports to restrict or regulate
its ability to borrow money.
SECTION 4.14. Principal Offices. As of the Closing Date, the principal
office, chief executive office and principal place of business of the Borrower
is Two North Riverside Plaza, Suite 2200, Chicago, Illinois 60606.
SECTION 4.15. REIT Status. EOPT is qualified and EOPT intends to continue to
qualify as a real estate investment trust under the Code.
SECTION 4.16. Patents, Trademarks, etc. The Borrower has obtained and holds
in full force and effect all patents, trademarks, servicemarks, trade names,
copyrights and other such rights, free from burdensome restrictions, which are
necessary for the operation of its business as presently conducted, the
impairment of which is likely to have a Material Adverse Effect.
SECTION 4.17. Judgments. As of the Closing Date, there are no final,
non-appealable judgments or decrees in an aggregate amount of Five Million
Dollars ($5,000,000) or more entered by a court or courts of competent
jurisdiction against EOPT or the Borrower or, to the extent such judgment would
be recourse to EOPT or Borrower, any of its Consolidated Subsidiaries (other
than judgments as to which, and only to the extent, a reputable insurance
company has acknowledged coverage of such claim in writing).
SECTION 4.18. No Default. No Event of Default or, to the best of the
Borrower's knowledge, Default exists under or with respect to any Loan Document
and the Borrower is not in default in any material respect beyond any applicable
grace period under or with respect to any other material agreement, instrument
or undertaking to which it is a party or by which it or any of its property is
bound in any respect, the existence of which default is likely to result in a
Material Adverse Effect.
SECTION 4.19. Licenses, etc. The Borrower has obtained and does hold in full
force and effect, all franchises, licenses, permits, certificates,
authorizations, qualifications, accreditation, easements, rights of way and
other consents and approvals
<PAGE> 55
which are necessary for the operation of its businesses as presently conducted,
the absence of which is likely to have a Material Adverse Effect.
SECTION 4.20. Compliance With Law. To the Borrower's knowledge, the Borrower
and each of its Real Property Assets are in compliance with all laws, rules,
regulations, orders, judgments, writs and decrees, including, without
limitation, all building and zoning ordinances and codes, the failure to comply
with which is likely to have a Material Adverse Effect.
SECTION 4.21. No Burdensome Restrictions. Except as may have been disclosed
by the Borrower in writing to the Banks, Borrower is not a party to any
agreement or instrument or subject to any other obligation or any charter or
corporate or partnership restriction, as the case may be, which, individually or
in the aggregate, is likely to have a Material Adverse Effect.
SECTION 4.22. Brokers' Fees. The Borrower has not dealt with any broker or
finder with respect to the transactions contemplated by this Agreement or
otherwise in connection with this Agreement, and the Borrower has not done any
act, had any negotiations or conversation, or made any agreements or promises
which will in any way create or give rise to any obligation or liability for the
payment by the Borrower of any brokerage fee, charge, commission or other
compensation to any party with respect to the transactions contemplated by the
Loan Documents, other than the fees payable to the Administrative Agent, the
Documentation Agent, the Syndication Agent and the Banks, and certain other
Persons as previously disclosed in writing to the Administrative Agent.
SECTION 4.23. Labor Matters. Except as disclosed on Schedule 4.6, there are
no collective bargaining agreements or Multiemployer Plans covering the
employees of the Borrower or any member of the ERISA Group and neither the
Borrower nor any member of the ERISA Group has suffered any strikes, walkouts,
work stoppages or other material labor difficulty within the last five years.
SECTION 4.24. Insurance. The Borrower currently maintains insurance at 100%
replacement cost insurance coverage (subject to customary deductibles) in
respect of each of its Real Property Assets, as well as commercial general
liability insurance (including, without limitation, "builders' risk" where
applicable) against claims for personal, and bodily injury and/or death, to one
or more persons, or property damage, as well as workers' compensation insurance,
in each case with respect to liability and casualty insurance with insurers
having an A.M. Best policyholders' rating of not less than A-VII in amounts that
prudent owners of assets such as Borrower's directly or indirectly owned Real
Property Assets would maintain.
SECTION 4.25. Organizational Documents. The documents delivered pursuant to
Section 3.1(e) constitute, as of the Closing Date, all of the organizational
documents (together with all amendments and modifications thereof) of the
Borrower and EOPT. The Borrower represents that it has delivered to the
Documentation Agent true, correct and complete copies of each such documents.
Schedule 4.25 attached hereto is a true and
<PAGE> 56
correct summary of the partners of the Borrower as of the date hereof and the
interest in the Borrower held by each such partner as of the date hereof. EOPT
is the managing general partner of the Borrower and each of 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 Partnership IV as of the date hereof. EOPT
holds (directly or indirectly) a 89.70% ownership interest in the Borrower as of
the date hereof.
SECTION 4.26. Qualifying Unencumbered Properties. As of the date hereof,
each Property listed on Schedule 1.1 as a Qualifying Unencumbered Property (i)
is an operating Office Building or Parking Property wholly-owned (directly or
beneficially) by Borrower, a Financing Partnership or a Joint Venture
Subsidiary, (ii) is not subject (nor are any equity interests in such Property
that are owned directly or indirectly by Borrower, EOPT or any Joint Venture
Parent subject) to a Lien which secures Indebtedness of any Person, other than
Permitted Liens, and (iii) is not subject (nor are any equity interests in such
Property that are owned directly or indirectly by Borrower, EOPT or Joint
Venture Parent subject) to any covenant, condition, or other restriction which
prohibits or limits the creation or assumption of any Lien upon such Property.
All of the information set forth on Schedule 1.1 is true and correct in all
material respects.
SECTION 4.27. "Year 2000" Compliance. The Borrower and EOPT have conducted a
review and assessment of the Borrower's and EOPT's computer applications with
respect to the "year 2000 problem" (that is, the risk that computer applications
may not be able to properly perform date-sensitive functions after December 31,
1999) and, based on that review and inquiry, the Borrower does not believe that
year 2000 problem will result in a Material Adverse Effect to the Borrower's or
EOPT's financial condition or results of operations, or on its ability to repay
the Loan.
ARTICLE V
AFFIRMATIVE AND NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as any Bank has any
Commitment hereunder or any Obligations remain unpaid:
SECTION 5.1. Information. The Borrower will deliver to each of the Banks:
(a) as soon as available and in any event within five (5) Business Days
after the same is required to be filed with the Securities and Exchange
Commission (but in no event later than 125 days after the end of each Fiscal
Year of the Borrower) a consolidated balance sheet of the Borrower, EOPT and
their Consolidated Subsidiaries as of the end of such Fiscal Year and the
related consolidated statements of Borrower's and EOPT's operations and
consolidated statements of Borrower's and EOPT's cash flow for such Fiscal Year,
setting forth in each case in comparative form the figures for the
<PAGE> 57
previous Fiscal Year (if available), all reported in a manner acceptable to the
Securities and Exchange Commission on Borrower's and EOPT's Form 10K and
reported on by Ernst & Young LLP or other independent public accountants of
nationally recognized standing;
(b) as soon as available and in any event within five (5) Business Days
after the same is required to be filed with the Securities and Exchange
Commission (but in no event later than 80 days after the end of each of the
first three quarters of each Fiscal Year of the Borrower and EOPT), (i) a
consolidated balance sheet of the Borrower, EOPT and their Consolidated
Subsidiaries as of the end of such quarter and the related consolidated
statements of Borrower's and EOPT's operations and consolidated statements of
Borrower's and EOPT's cash flow for such quarter and for the portion of the
Borrower's or EOPT's Fiscal Year ended at the end of such quarter, all reported
in the form provided to the Securities and Exchange Commission on Borrower's and
EOPT's Form 10Q, and (ii) and such other information reasonably requested by the
Administrative Agent and Documentation Agent or any Bank;
(c) simultaneously with the delivery of each set of financial statements
referred to in clauses (a) and (b) above, a certificate of the chief financial
officer of the Borrower (i) setting forth in reasonable detail the calculations
required to establish whether the Borrower was in compliance with the
requirements of Section 5.8 on the date of such financial statements; (ii)
certifying (x) that such financial statements fairly present the financial
condition and the results of operations of the Borrower on the dates and for the
periods indicated, on the basis of GAAP, with respect to the Borrower subject,
in the case of interim financial statements, to normally recurring year-end
adjustments, and (y) that such officer has reviewed the terms of the Loan
Documents and has made, or caused to be made under his or her supervision, a
review in reasonable detail of the business and condition of the Borrower during
the period beginning on the date through which the last such review was made
pursuant to this Section 5.1(c) (or, in the case of the first certification
pursuant to this Section 5.1(c), the Closing Date) and ending on a date not more
than ten (10) Business Days prior to the date of such delivery and that (1) on
the basis of such financial statements and such review of the Loan Documents, no
Event of Default existed under Section 6.1(b) with respect to Sections 5.8 and
5.9 at or as of the date of said financial statements, and (2) on the basis of
such review of the Loan Documents and the business and condition of the
Borrower, to the best knowledge of such officer, as of the last day of the
period covered by such certificate no Default or Event of Default under any
other provision of Section 6.1 occurred and is continuing or, if any such
Default or Event of Default has occurred and is continuing, specifying the
nature and extent thereof and, the action the Borrower proposes to take in
respect thereof. Such certificate shall set forth the calculations required to
establish the matters described in clauses (1) and (2) above;
(d) (i) within five (5) Business Days after any officer of the Borrower
obtains knowledge of any Default, if such Default is then continuing, a
certificate of the chief financial officer, or other executive officer of the
Borrower setting forth the details thereof and the action which the Borrower is
taking or proposes to take with respect
<PAGE> 58
thereto; and (ii) promptly and in any event within five (5) Business Days after
the Borrower obtains knowledge thereof, notice of (x) any litigation or
governmental proceeding pending or threatened against the Borrower or its
directly or indirectly Real Property Assets as to which there is a reasonable
possibility of an adverse determination and which, if adversely determined, is
likely to individually or in the aggregate, result in a Material Adverse Effect,
and (y) any other event, act or condition which is likely to result in a
Material Adverse Effect;
(e) promptly upon the mailing thereof to the shareholders of EOPT
generally, copies of all financial statements, reports and proxy statements so
mailed;
(f) promptly upon the filing thereof, copies of all registration statements
(other than the exhibits thereto and any registration statements on Form S-8 or
its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents)
(other than the exhibits thereto, which exhibits will be provided upon request
therefor by any Bank) which EOPT shall have filed with the Securities and
Exchange Commission;
(g) promptly and in any event within thirty (30) days, if and when any
member of the ERISA Group (i) gives or is required to give notice to the PBGC of
any "reportable event" (as defined in Section 4043 of ERISA) with respect to any
Plan which might constitute grounds for a termination of such Plan under Title
IV of ERISA, or knows that the plan administrator of any Plan has given or is
required to give notice of any such reportable event, a copy of the notice of
such reportable event given or required to be given to the PBGC; (ii) receives
notice of complete or partial withdrawal liability under Title IV of ERISA or
notice that any Multiemployer Plan is in reorganization, is insolvent or has
been terminated, a copy of such notice; (iii) receives notice from the PBGC
under Title IV of ERISA of an intent to terminate, impose liability (other than
for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to
administer any Plan, a copy of such notice; (iv) applies for a waiver of the
minimum funding standard under Section 412 of the Code, a copy of such
application; (v) gives notice of intent to terminate any Plan under Section
4041(c) of ERISA, a copy of such notice and other information filed with the
PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of
ERISA, a copy of such notice; or (vii) fails to make any payment or contribution
to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or
makes any amendment to any Plan or Benefit Arrangement which has resulted or
could result in the imposition of a Lien or the posting of a bond or other
security, and in the case of clauses (i) through (vii) above, which event could
result in a Material Adverse Effect, a certificate of the chief financial
officer or the chief accounting officer of the Borrower setting forth details as
to such occurrence and action, if any, which the Borrower or applicable member
of the ERISA Group is required or proposes to take;
(h) promptly and in any event within ten (10) days after the Borrower
obtains actual knowledge of any of the following events, a certificate of the
Borrower, executed by an officer of the Borrower, specifying the nature of such
condition, and the Borrower's or, if the Borrower has actual knowledge thereof,
the Environmental Affiliate's proposed
<PAGE> 59
initial response thereto: (i) the receipt by the Borrower, or any of the
Environmental Affiliates of any communication (written or oral), whether from a
governmental authority, citizens group, employee or otherwise, that alleges that
the Borrower, or any of the Environmental Affiliates, is not in compliance with
applicable Environmental Laws, and such noncompliance is likely to have a
Material Adverse Effect, (ii) the existence of any Environmental Claim pending
against the Borrower or any Environmental Affiliate and such Environmental Claim
is likely to have a Material Adverse Effect or (iii) any release, emission,
discharge or disposal of any Material of Environmental Concern that is likely to
form the basis of any Environmental Claim against the Borrower or any
Environmental Affiliate which in any such event is likely to have a Material
Adverse Effect;
(i) promptly and in any event within five (5) Business Days after receipt
of any notices or correspondence from any company or agent for any company
providing insurance coverage to the Borrower relating to any loss which is
likely to result in a Material Adverse Effect, copies of such notices and
correspondence; and
(j) from time to time such additional information regarding the financial
position or business of the Borrower, EOPT and their Subsidiaries as the
Administrative Agent, at the request of any Bank, may reasonably request in
writing, so long as disclosure of such information could not result in a
violation of, or expose the Borrower, EOPT or their Subsidiaries to any material
liability under, any applicable law, ordinance or regulation or any agreements
with unaffiliated third parties that are binding on the Borrower, EOPT or any of
their Subsidiaries or on any Property of any of them.
SECTION 5.2. Payment of Obligations. The Borrower, EOPT and their
Consolidated Subsidiaries will pay and discharge, at or before maturity, all
their respective material obligations and liabilities including, without
limitation, any obligation pursuant to any agreement by which it or any of its
properties is bound, in each case where the failure to so pay or discharge such
obligations or liabilities is likely to result in a Material Adverse Effect, and
will maintain in accordance with GAAP, appropriate reserves for the accrual of
any of the same.
SECTION 5.3. Maintenance of Property; Insurance; Leases.
(a) The Borrower will keep, and will cause each Consolidated Subsidiary to
keep, all property useful and necessary in its business, including without
limitation its Real Property Assets (for so long as it constitutes Real Property
Assets), in good repair, working order and condition, ordinary wear and tear
excepted, in each case where the failure to so maintain and repair will have a
Material Adverse Effect.
(b) The Borrower shall maintain, or cause to be maintained, insurance
comparable to that described in Section 4.24 hereof with insurers meeting the
qualifications described therein, which insurance shall in any event not provide
for less coverage than insurance customarily carried by owners of properties
similar to, and in the same locations as, Borrower's Real Property Assets. The
Borrower will deliver to the
<PAGE> 60
Administrative Agent upon the reasonable request of the Administrative Agent
from time to time (i) full information as to the insurance carried, (ii) within
five (5) days of receipt of notice from any insurer a copy of any notice of
cancellation or material change in coverage from that existing on the date of
this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of
coverage by the Borrower.
SECTION 5.4. Maintenance of Existence. The Borrower and EOPT each will
preserve, renew and keep in full force and effect, its partnership and trust
existence and its respective rights, privileges and franchises necessary for the
normal conduct of business unless the failure to maintain such rights and
franchises does not have a Material Adverse Effect.
SECTION 5.5. Compliance with Laws. The Borrower and EOPT will, and will
cause their Subsidiaries to, comply in all material respects with all applicable
laws, ordinances, rules, regulations, and requirements of governmental
authorities (including, without limitation, Environmental Laws, and all zoning
and building codes with respect to its Real Property Assets and ERISA and the
rules and regulations thereunder and all federal securities laws) except where
the necessity of compliance therewith is contested in good faith by appropriate
proceedings or where the failure to do so will not have a Material Adverse
Effect or expose Administrative Agent, Documentation Agent or Banks to any
material liability therefor.
SECTION 5.6. Inspection of Property, Books and Records. The Borrower will
keep proper books of record and account in which full, true and correct entries
shall be made of all dealings and transactions in relation to its business and
activities in conformity with GAAP, modified as required by this Agreement and
applicable law; and will permit representatives of any Bank at such Bank's
expense to visit and inspect any of its properties, including without limitation
its Real Property Assets, and so long as disclosure of such information could
not result in a violation of, or expose the Borrower, EOPT or their Subsidiaries
to any material liability under, any applicable law, ordinance or regulation or
any agreements with unaffiliated third parties that are binding on the Borrower,
EOPT or any of their Subsidiaries or on any Property of any of them, to examine
and make abstracts from any of its books and records and to discuss its affairs,
finances and accounts with its officers and independent public accountants, all
at such reasonable times during normal business hours, upon reasonable prior
notice and as often as may reasonably be desired. Administrative Agent shall
coordinate any such visit or inspection to arrange for review by any Bank
requesting any such visit or inspection.
SECTION 5.7. Existence. The Borrower shall do or cause to be done, all
things necessary to preserve and keep in full force and effect its, EOPT's and
their Consolidated Subsidiaries' existence and its patents, trademarks,
servicemarks, tradenames, copyrights, franchises, licenses, permits,
certificates, authorizations, qualifications, accreditation, easements, rights
of way and other rights, consents and approvals the nonexistence of which is
likely to have a Material Adverse Effect.
SECTION 5.8. Financial Covenants.
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(a) Total Liabilities to Total Asset Value. Prior to June 30, 1998,
Borrower shall not permit the ratio of Total Liabilities to Total Asset Value of
Borrower to exceed 0.55:1 at any time. From and after July 1, 1998, Borrower
shall not permit the ratio of Total Liabilities to Total Asset Value of Borrower
to exceed 0.50:1 at any time.
(b) EBITDA to Interest Expense Ratio. Borrower shall not permit the ratio
of EBITDA for the then most recently completed Fiscal Quarter to Interest
Expense for the then most recently completed Fiscal Quarter to be less than
2.00:1.
(c) [Intentionally Omitted.]
(d) Cash Flow to Fixed Charges Ratio. Borrower shall not permit the ratio
of Cash Flow for the then most recently completed Fiscal Quarter to Fixed
Charges for the then most recently completed Fiscal Quarter to be less than
1.5:1.
(e) Secured Debt to Total Asset Value. Borrower shall not permit the
ratio of Secured Debt to Total Asset Value of Borrower to exceed 0.40:1 at any
time.
(f) Unencumbered Pool. Borrower shall not permit the ratio of the
outstanding Unsecured Debt to Unencumbered Asset Value to exceed 0.55:1 at any
time.
(g) Unencumbered Net Operating Income to Unsecured Debt Service. Borrower
shall not permit the ratio of Unencumbered Net Operating Income for the then
most recently completed Fiscal Quarter to Unsecured Debt Service for the then
most recently completed Fiscal Quarter to be less than 2.0:1.
(h) Minimum Tangible Net Worth. The Consolidated Tangible Net Worth of the
Borrower determined in conformity with GAAP will at no time be less than the sum
of (i) $5,500,000,000, and (ii) seventy percent (70%) of all Net Offering
Proceeds received by EOPT or Borrower after December 31, 1997.
(i) Dividends. The Borrower will not, as determined on an aggregate annual
basis, pay any partnership distributions in excess of 90% of the Borrower's FFO
for such year. During the continuance of a monetary Event of Default, Borrower
shall only pay partnership distributions that are necessary to enable EOPT to
make those dividends necessary to maintain EOPT's status as a real estate
investment trust.
(j) Permitted Holdings. Borrower's primary business will be the ownership,
operation and development of Office Properties and Parking Properties and any
other business activities of Borrower and its Subsidiaries will remain
incidental thereto. Notwithstanding the foregoing, Borrower and its Subsidiaries
may acquire or maintain Permitted Holdings if and so long as the aggregate value
of Permitted Holdings, whether held directly or indirectly by Borrower does not
exceed, at any time, fifteen percent (15%) of Total Asset Value of Borrower
unless a greater percentage is approved by the Majority Banks (which approval
shall not be unreasonably withheld, conditioned or
<PAGE> 62
delayed), provided, however, Borrower and its Subsidiaries may not acquire or
maintain Unimproved Assets if and to the extent that the aggregate value of
Unimproved Assets, whether held directly or indirectly by Borrower exceeds, at
any time, ten percent (10%) of Total Asset Value of Borrower unless a greater
percentage is approved by the Majority Banks (which approval shall not be
unreasonably withheld, conditioned or delayed). For purposes of calculating the
foregoing percentage the value of Unimproved Assets shall be calculated in the
manner that Total Asset Value is determined.
(k) No Liens. Borrower and EOPT shall not, and shall not allow any of their
Subsidiaries, Financing Partnerships or Joint Venture Subsidiaries to, allow any
Qualifying Unencumbered Property (or any equity interests in such Property that
are owned directly or indirectly by Borrower, EOPT or any Joint Venture Parent),
that is necessary to comply with the provisions of Sections 5.8(f) and (g)
hereof, to become subject to a Lien that secures the Indebtedness of any Person,
other than Permitted Liens.
(l) Calculation. Each of the foregoing ratios and financial requirements
shall be calculated as of the last day of each Fiscal Quarter.
SECTION 5.9. Restriction on Fundamental Changes. (a) Neither the Borrower
nor EOPT shall enter into any merger or consolidation without obtaining the
prior written consent thereto in writing of the Majority Banks, which consent
shall not be unreasonably withheld, conditioned or delayed, unless (i) the
Borrower or EOPT is the surviving entity, (ii) the entity which is merged into
Borrower or EOPT is predominantly in the commercial real estate business, (iii)
the creditworthiness of the surviving entity's long term unsecured debt or
implied senior debt, as applicable, is not lower than Borrower's or EOPT's
creditworthiness two months immediately preceding such merger, and (iv) the then
fair market value of the assets of the entity which is merged into the Borrower
or EOPT is less than twenty-five percent (25%) of the Borrower's or EOPT's then
Total Asset Value following such merger. Neither the Borrower nor EOPT shall
liquidate, wind-up or dissolve (or suffer any liquidation or dissolution),
discontinue its business or convey, lease, sell, transfer or otherwise dispose
of, in one transaction or series of transactions, all or substantially all of
its business or property, whether now or hereafter acquired. Nothing in this
Section shall be deemed to prohibit the sale or leasing of portions of the Real
Property Assets in the ordinary course of business.
(b) The Borrower shall not amend its agreement of limited partnership or
other organizational documents in any manner that would have a Material Adverse
Effect without the Majority Banks' consent, which shall not be unreasonably
withheld. Without limitation of the foregoing, no Person shall be admitted as a
general partner of the Borrower other than EOPT and Zell/Merrill Lynch Real
Estate Opportunity Partners Limited Partnership II. EOPT shall not amend its
declaration of trust, by-laws, or other organizational documents in any manner
that would have a Material Adverse Effect without the Majority Banks' consent,
which shall not be unreasonably withheld. The Borrower shall not make any
"in-kind" transfer of any of its property or assets to any of its constituent
partners.
<PAGE> 63
(c) Subject to the provisions of clause (b) above, the Borrower shall
deliver to Administrative Agent copies of all amendments to its agreement of
limited partnership or to EOPT's declaration of trust, by-laws, or other
organizational documents no less than ten (10) days after the effective date of
any such amendment.
SECTION 5.10. Changes in Business. (a) Except for Permitted Holdings,
neither the Borrower nor EOPT shall enter into any business which is
substantially different from that conducted by the Borrower or EOPT on the
Closing Date after giving effect to the transactions contemplated by the Loan
Documents. The Borrower shall carry on its business operations through the
Borrower, its Consolidated Subsidiaries and its Investment Affiliates.
(b) Except for Permitted Holdings, Borrower shall not engage in any line of
business other than ownership, operation and development of Office Properties
and Parking Properties and the provision of services incidental thereto, whether
directly or through its Consolidated Subsidiaries and Investment Affiliates.
SECTION 5.11. EOPT Status.
(a) Status. EOPT shall at all times (i) remain a publicly traded company
listed for trading on the New York Stock Exchange, and (ii) maintain its status
as a self-directed and self-administered real estate investment trust under the
Code.
(b) Indebtedness. EOPT shall not, directly or indirectly, create, incur,
assume or otherwise become or remain directly or indirectly liable with respect
to, any Indebtedness, except:
(1) the Obligations; and
(2) Indebtedness of Borrower for which there is recourse to EOPT
which, after giving effect thereto, may be incurred or may remain
outstanding without giving rise to an Event of Default or Default under any
provision of this Article V.
(c) Restriction on Fundamental Changes.
(1) EOPT shall not have an investment in any Person other than
(i) Borrower, (ii) directly or indirectly in Financing Partnerships, and
(iii) the interests identified on Schedule 5.11(c)(1) as being owned by
EOPT.
(2) EOPT shall not acquire an interest in any Property other than
securities issued by Borrower and Financing Partnerships and the interests
identified on Schedule 5.11(c)(2) attached hereto.
(3) None of 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
<PAGE> 64
Limited Partnership III or Zell/Merrill Lynch Real Estate Opportunity
Partners Limited Partnership IV shall have any investments or own any assets
other than in their respective partnership interests in Borrower.
(4) Neither of EOP-QRS Trust nor EOP-QRS LaJolla Trust shall
have any investments or own any assets other than their permitted ownership
interests Financing Subsidiaries.
(d) Environmental Liabilities. Neither EOPT nor any of its Subsidiaries
shall become subject to any Environmental Claim which has a Material Adverse
Effect, including, without limitation, any arising out of or related to (i) the
release or threatened release of any Material of Environmental Concern into the
environment, or any remedial action in response thereto, or (ii) any violation
of any Environmental Laws. Notwithstanding the foregoing provision, EOPT shall
have the right to contest in good faith any claim of violation of an
Environmental Law by appropriate legal proceedings and shall be entitled to
postpone compliance with the obligation being contested as long as (i) no Event
of Default shall have occurred and be continuing, (ii) EOPT shall have given
Administrative Agent prior written notice of the commencement of such contest,
(iii) noncompliance with such Environmental Law shall not subject EOPT or such
Subsidiary to any criminal penalty or subject Administrative Agent,
Documentation Agent or any Bank to pay any civil penalty or to prosecution for a
crime, and (iv) no portion of any Property material to Borrower or its condition
or prospects shall be in substantial danger of being sold, forfeited or lost, by
reason of such contest or the continued existence of the matter being contested.
(e) Disposal of Partnership Interests. EOPT will not directly or indirectly
convey, sell, transfer, assign, pledge or otherwise encumber or dispose of any
of its partnership interests in Borrower or any of its equity interest in any of
the partners of the Borrower as of the date hereof (except in connection with
the dissolution or liquidation of such partners of the Borrower), except for the
reduction of EOPT's interest in the Borrower arising from Borrower's issuance of
partnership interests in the Borrower or the retirement of preference units by
Borrower. EOPT will continue to be the managing general partner of Borrower and
of each 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 Partnership IV, and
will not permit such Persons to sell, transfer, assign, pledge or otherwise
encumber or dispose of any of their respective partnership interests in the
Borrower, except for the reduction of such partners' interest in the Borrower
arising from the Borrower's issuance of partnership interests in the Borrower or
the retirement of preference units by the Borrower and except in connection with
the dissolution or liquidation of such partners.
SECTION 5.12. Other Indebtedness. Borrower and EOPT shall not allow any of
their Subsidiaries, Financing Partnerships or Joint Venture Subsidiaries that
own, directly or indirectly, any Qualifying Unencumbered Property to directly or
indirectly
<PAGE> 65
create, incur, assume or otherwise become or remain liable with
respect to any Indebtedness other than trade debt incurred in the ordinary
course of business and Indebtedness owing to Borrower, if the resulting failure
of such Property to qualify as a Qualifying Unencumbered Property would result
in an Event of Default under Section 5.8.
SECTION 5.13. Forward Equity Contracts. If Borrower shall enter into any
forward equity contracts, Borrower may only settle the same by delivery of
stock, it being agreed that if Borrower shall settle the same with cash, the
same shall constitute an Event of Default hereunder.
ARTICLE VI
DEFAULTS
SECTION 6.1. Events of Default. An "Event of Default" shall have occurred
if one or more of the following events shall have occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of any Loan, or
the Borrower shall fail to pay when due interest on any Loan or any fees or any
other amount payable to Administrative Agent, Documentation Agent, Syndication
Agent or the Banks hereunder and the same shall continue for a period of five
(5) days after the same becomes due;
(b) the Borrower shall fail to observe or perform any covenant contained in
Section 5.8, Section 5.9(a) or (b), Section 5.10, Section 5.11(a), (b) or (c),
Section 5.12 or Section 5.13;
(c) the Borrower shall fail to observe or perform any covenant or agreement
contained in this Agreement (other than those covered by clause (a), (b), (e),
(f), (g), (h), (j), (n) or (o) of this Section 6.1) for 30 days after written
notice thereof has been given to the Borrower by the Administrative Agent, or if
such default is of such a nature that it cannot with reasonable effort be
completely remedied within said period of thirty (30) days such additional
period of time as may be reasonably necessary to cure same, provided Borrower
commences such cure within said thirty (30) day period and diligently prosecutes
same, until completion, but in no event shall such extended period exceed ninety
(90) days;
(d) any representation, warranty, certification or statement made by the
Borrower in this Agreement or in any certificate, financial statement or other
document delivered pursuant to this Agreement shall prove to have been incorrect
in any material respect when made (or deemed made) and, with respect to such
representations, warranties, certifications or statements not known by the
Borrower at the time made or deemed made to be incorrect, the defect causing
such representation or warranty to be
<PAGE> 66
incorrect when made (or deemed made) is not removed within thirty (30) days
after written notice thereof from Administrative Agent to Borrower;
(e) the Borrower, EOPT, any Subsidiary or any Investment Affiliate shall
default in the payment when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) of any amount owing in respect of
any Recourse Debt (other than the Obligations) for which the aggregate
outstanding principal amount exceeds $10,000,000 and such default shall continue
beyond the giving of any required notice and the expiration of any applicable
grace period and such default has not been waived, in writing, by the holder of
any such Debt; or the Borrower, EOPT, any Subsidiary or any Investment Affiliate
shall default in the performance or observance of any obligation or condition
with respect to any such Recourse Debt or any other event shall occur or
condition exist beyond the giving of any required notice and the expiration of
any applicable grace period, if the effect of such default, event or condition
is to accelerate the maturity of any such indebtedness or to permit (without any
further requirement of notice or lapse of time) the holder or holders thereof,
or any trustee or agent for such holders, to accelerate the maturity of any such
indebtedness;
(f) the Borrower or EOPT shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidate, custodian or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any action to authorize any of the foregoing;
(g) an involuntary case or other proceeding shall be commenced against the
Borrower or EOPT seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 90 days; or an order for relief shall
be entered against the Borrower or EOPT under the federal bankruptcy laws as now
or hereafter in effect;
(h) one or more final, non-appealable judgments or decrees in an aggregate
amount of Twenty Million Dollars ($20,000,000) or more shall be entered by a
court or courts of competent jurisdiction against EOPT, the Borrower or, to the
extent of any recourse to EOPT or the Borrower, any of its Consolidated
Subsidiaries (other than any judgment as to which, and only to the extent, a
reputable insurance company has acknowledged coverage of such claim in writing)
and (i) any such judgments or decrees shall not be stayed, discharged, paid,
bonded or vacated within thirty (30) days or (ii) enforcement proceedings shall
be commenced by any creditor on any such judgments or decrees;
<PAGE> 67
(i) there shall be a change in the majority of the Board of Trustees of
EOPT during any twelve (12) month period, excluding any change in directors
resulting from (x) the death or disability of any director, or (y) satisfaction
of any requirement for the majority of the members of the board of directors or
trustees of EOPT to qualify under applicable law as independent trustees or (z)
the replacement of any trustee who is an officer or employee of EOPT or an
affiliate of EOPT with any other officer or employee of EOPT or an affiliate of
EOPT;
(j) any Person (including affiliates of such Person) or "group" (as such
term is defined in applicable federal securities laws and regulations) shall
acquire more than thirty percent (30%) of the common shares of EOPT;
(k) EOPT shall cease at any time to qualify as a real estate investment
trust under the Code;
(l) if any Termination Event with respect to a Plan, Multiemployer Plan or
Benefit Arrangement shall occur as a result of which Termination Event or Events
any member of the ERISA Group has incurred or may incur any liability to the
PBGC or any other Person and the sum (determined as of the date of occurrence of
such Termination Event) of the insufficiency of such Plan, Multiemployer Plan or
Benefit Arrangement and the insufficiency of any and all other Plans,
Multiemployer Plans and Benefit Arrangements with respect to which such a
Termination Event shall occur and be continuing (or, in the case of a Multiple
Employer Plan with respect to which a Termination Event described in clause (ii)
of the definition of Termination Event shall occur and be continuing and in the
case of a liability with respect to a Termination Event which is or could be a
liability of the Borrower or EOPT rather than a liability of the Plan, the
liability of the Borrower or EOPT) is equal to or greater than $10,000,000 and
which the Administrative Agent reasonably determines will have a Material
Adverse Effect;
(m) if, any member of the ERISA Group shall commit a failure described in
Section 302(f)(1) of ERISA or Section 412(n)(1) of the Code and the amount of
the lien determined under Section 302(f)(3) of ERISA or Section 412(n)(3) of the
Code that could reasonably be expected to be imposed on any member of the ERISA
Group or their assets in respect of such failure shall be equal to or greater
than $10,000,000 and which the Administrative Agent reasonably determines will
have a Material Adverse Effect;
(n) at any time, for any reason the Borrower seeks to repudiate its
obligations under any Loan Document or EOPT seeks to repudiate its obligations
under the EOPT Guaranty.
(o) a default beyond any applicable notice or grace period under any of the
other Loan Documents;
<PAGE> 68
(p) any assets of Borrower shall constitute "assets" (within the meaning of
ERISA or Section 4975 of the Code, including but not limited to 29 C.F.R.
Section 2510.3-101 or any successor regulation thereto) of an "employee benefit
plan" within the meaning of Section 3(3) of ERISA or a "plan" within the meaning
of Section 4975(e)(1) of the Code; or
(q) the Note, the Loan, the Obligations, the EOPT Guaranty or any of the
Loan Documents or the exercise of any of the Administrative Agent's, the
Documentation Agent's or any of the Bank's rights in connection therewith shall
constitute a prohibited transaction under ERISA and/or the Code.
SECTION 6.2. Rights and Remedies. (a) Upon the occurrence of any Event of
Default described in Sections 6.1(f), (g), (p) or (q), the Commitments and the
Swingline Commitment shall immediately terminate and the unpaid principal amount
of, and any and all accrued interest on, the Loans and any and all accrued fees
and other Obligations hereunder shall automatically become immediately due and
payable, with all additional interest from time to time accrued thereon and
without presentation, demand, or protest or other requirements of any kind
(including, without limitation, valuation and appraisement, diligence,
presentment, notice of intent to demand or accelerate and notice of
acceleration), all of which are hereby expressly waived by the Borrower; and
upon the occurrence and during the continuance of any other Event of Default,
the Administrative Agent may (and upon the demand of the Required Banks shall),
by written notice to the Borrower, in addition to the exercise of all of the
rights and remedies permitted the Administrative Agent and the Banks at law or
equity or under any of the other Loan Documents, declare that the commitments
are terminated and declare the unpaid principal amount of and any and all
accrued and unpaid interest on the Loans and any and all accrued fees and other
Obligations hereunder to be, and the same shall thereupon be, immediately due
and payable with all additional interest from time to time accrued thereon and
(except as otherwise provided in the Loan Documents) without presentation,
demand, or protest or other requirements of any kind (including, without
limitation, valuation and appraisement, diligence, presentment, notice of intent
to demand or accelerate and notice of acceleration), all of which are hereby
expressly waived by the Borrower.
(b) Notwithstanding anything to the contrary contained in this Agreement or
in any other Loan Document, the Documentation Agent, the Administrative Agent,
and the Banks each agree that any exercise or enforcement of the rights and
remedies granted to the Documentation Agent, the Administrative Agent or the
Banks under this Agreement or at law or in equity with respect to this Agreement
or any other Loan Documents shall be commenced and maintained by the
Documentation Agent or the Administrative Agent on behalf of the Documentation
Agent, the Administrative Agent and/or the Banks. The Administrative Agent shall
act at the direction of the Required Banks in connection with the exercise of
any and all remedies at law, in equity or under any of the Loan Documents or, if
the Required Banks are unable to reach agreement, then, from and after an Event
of Default, the Administrative Agent may pursue such rights and remedies as it
may determine.
<PAGE> 69
SECTION 6.3. Notice of Default. The Administrative Agent shall give notice
to the Borrower under Section 6.1(c) and 6.1(d) promptly upon being requested to
do so by the Required Banks and shall thereupon notify all the Banks thereof.
Neither Administrative Agent nor Documentation Agent shall be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default (other
than nonpayment of principal of or interest on the Loans) unless Administrative
Agent or Documentation Agent has received notice in writing from a Bank or
Borrower referring to this Agreement or the other Loan Documents, describing
such event or condition. Should Administrative Agent or Documentation Agent
receive notice of the occurrence of an Default or Event of Default expressly
stating that such notice is a notice of an Default or Event of Default, or
should Administrative Agent or Documentation Agent send Borrower a notice of
Default or Event of Default, Administrative Agent or Documentation Agent, as
applicable, shall promptly give notice thereof to each Bank.
SECTION 6.4. Distribution of Proceeds after Default. Notwithstanding
anything contained herein to the contrary but subject to the provisions of
Section 9.16 hereof , from and after an Event of Default, to the extent proceeds
are received by Administrative Agent, such proceeds will be distributed to the
Banks pro rata in accordance with the unpaid principal amount of the Loans
(giving effect to any participations granted therein pursuant to Section 2.3 and
Section 9.4).
ARTICLE VII
THE AGENTS
SECTION 7.1. Appointment and Authorization. Each Bank irrevocably appoints
and authorizes the Administrative Agent, Documentation Agent and the Syndication
Agent to take such action as agent on its behalf and to exercise such powers
under this Agreement and the other Loan Documents as are delegated to the
Administrative Agent, Documentation Agent and the Syndication Agent by the terms
hereof or thereof, together with all such powers as are reasonably incidental
thereto. Except as set forth in Sections 7.8 and 7.9 hereof, the provisions of
this Article VII are solely for the benefit of Administrative Agent,
Documentation Agent, the Syndication Agent and the Banks, and Borrower shall not
have any rights to rely on or enforce any of the provisions hereof. In
performing its functions and duties under this Agreement, Administrative Agent,
Documentation Agent and the Syndication Agent shall each act solely as an agent
of the Banks and do not assume and shall not be deemed to have assumed any
obligation toward or relationship of agency or trust with or for the Borrower.
SECTION 7.2. Agency and Affiliates. NationsBank, N.A. and Bank of America,
National Trust and Savings Association shall have the same rights and powers
under this Agreement as any other Bank and may exercise or refrain from
exercising the same as though it were not the Administrative Agent or
Documentation Agent
<PAGE> 70
respectively, and NationsBank, N.A., Bank of America National Trust and Savings
Association, and their affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with the Borrower, EOPT or any
Subsidiary or affiliate of the Borrower as if they were not the Administrative
Agent and Documentation Agent, respectively, hereunder, and the term "Bank" and
"Banks" shall include NationsBank, N.A. and Bank of America National Trust and
Savings Association, in their individual capacities.
SECTION 7.3. Action by Administrative Agent and Documentation Agent. The
obligations of the Administrative Agent and Documentation Agent hereunder are
only those expressly set forth herein. Without limiting the generality of the
foregoing, the Administrative Agent and Documentation Agent shall not be
required to take any action with respect to any Default or Event of Default,
except as expressly provided in Article VI. The duties of Administrative Agent
and Documentation Agent shall be administrative in nature. Subject to the
provisions of Sections 7.1, 7.5 and 7.6, Administrative Agent and Documentation
Agent shall administer the Loans in the same manner as each administers its own
loans.
SECTION 7.4. Consultation with Experts. As between Administrative Agent and
Documentation Agent on the one hand and the Banks on the other hand, the
Administrative Agent and Documentation Agent may consult with legal counsel (who
may be counsel for the Borrower), independent public accountants and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken by it in good faith in accordance with the advice of such counsel,
accountants or experts.
SECTION 7.5. Liability of Administrative Agent and Documentation Agent. As
between Administrative Agent and Documentation Agent on the one hand and the
Banks on the other hand, none of the Administrative Agent, the Documentation
Agent nor any of their affiliates nor any of their respective directors,
officers, agents or employees shall be liable for any action taken or not taken
by it in connection herewith (i) with the consent or at the request of the
Required Banks or (ii) in the absence of its own gross negligence or willful
misconduct. As between Administrative Agent and Documentation Agent on the one
hand and the Banks on the other hand, none of the Administrative Agent, the
Documentation Agent nor any of its directors, officers, agents or employees
shall be responsible for or have any duty to ascertain, inquire into or verify
(i) any statement, warranty or representation made in connection with this
Agreement or any borrowing hereunder; (ii) the performance or observance of any
of the covenants or agreements of the Borrower; (iii) the satisfaction of any
condition specified in Article III, except receipt of items required to be
delivered to the Administrative Agent or the Documentation Agent; or (iv) the
validity, effectiveness or genuineness of this Agreement, the other Loan
Documents or any other instrument or writing furnished in connection herewith.
As between Administrative Agent and Documentation Agent on the one hand and the
Banks on the other hand, neither the Administrative Agent nor the Documentation
Agent shall incur any liability by acting in reliance upon any notice, consent,
certificate, statement, or other writing (which may be a bank wire, telex or
similar writing) believed by it to be genuine or to be signed by the proper
party or parties.
<PAGE> 71
SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance with
its Commitment, indemnify the Administrative Agent and the Documentation Agent
and their affiliates and their respective directors, officers, agents and
employees (to the extent not reimbursed by the Borrower) against any cost,
expense (including, without limitation, counsel fees and disbursements), claim,
demand, action, loss or liability (except such as result from such indemnitee's
gross negligence or willful misconduct) that such indemnitee may suffer or incur
in connection with its duties as Administrative Agent and/or Documentation Agent
under this Agreement, the other Loan Documents or any action taken or omitted by
such indemnitee hereunder. In the event that the Documentation Agent or the
Administrative Agent shall, subsequent to its receipt of indemnification
payment(s) from Banks in accordance with this section, recoup any amount from
the Borrower, or any other party liable therefor in connection with such
indemnification, the Documentation Agent or the Administrative Agent, as the
case may be, shall reimburse the Banks which previously made the payment(s) pro
rata, based upon the actual amounts which were theretofore paid by each Bank.
The Documentation Agent or the Administrative Agent, as the case may be, shall
reimburse such Banks so entitled to reimbursement within two (2) Business Days
of its receipt of such funds from the Borrower or such other party liable
therefor.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Administrative Agent, the
Documentation Agent, the Syndication Agent or any other Bank, and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Bank also acknowledges
that it will, independently and without reliance upon the Administrative Agent,
Documentation Agent, the Syndication Agent or any other Bank, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking any action under this
Agreement.
SECTION 7.8. Successor Administrative Agent, Documentation Agent or
Syndication Agent. The Administrative Agent, the Documentation Agent or the
Syndication Agent may resign at any time by giving notice thereof to the Banks,
the Borrower and each other and the Administrative Agent, the Documentation
Agent or the Syndication Agent, as applicable, shall resign in the event its
Commitment (or, so long as J.P. Morgan Securities, Inc. is the Syndication
Agent, Morgan Guaranty Trust Company of New York's Commitment) is reduced to
less than Thirty Million Dollars ($30,000,000) unless as a result of a
cancellation or reduction in the aggregate Commitments. Upon any such
resignation, the Majority Banks shall have the right to appoint a successor
Administrative Agent, Documentation Agent or Syndication Agent, as applicable,
which successor Administrative Agent, successor Documentation Agent or successor
Syndication Agent (as applicable) shall, provided no Event of Default has
occurred and is then continuing, be subject to Borrower's approval, which
approval shall not be unreasonably withheld or delayed (except that Borrower
shall, in all events, be deemed to have approved Bank of America, National Trust
and Savings Association, as a successor Administrative Agent and NationsBank,
N.A., as a successor Documentation Agent). If
<PAGE> 72
no successor Administrative Agent, Documentation Agent or Syndication Agent (as
applicable) shall have been so appointed by the Majority Banks and approved by
the Borrower, and shall have accepted such appointment, within 30 days after the
retiring Administrative Agent, Documentation Agent or Syndication Agent (as
applicable) gives notice of resignation, then the retiring Administrative Agent,
retiring Documentation Agent, or retiring Syndication Agent (as applicable) may,
on behalf of the Banks, appoint a successor Administrative Agent, Documentation
Agent or Syndication Agent (as applicable), which shall be the Administrative
Agent, the Documentation Agent or the Syndication Agent as the case may be, who
shall act until the Majority Banks shall appoint an Administrative Agent,
Documentation Agent or Syndication Agent. Any appointment of a successor
Administrative Agent, Documentation Agent or Syndication Agent by Majority Banks
or the retiring Administrative Agent, the Documentation Agent or the Syndication
Agent pursuant to the preceding sentence shall, provided no Event of Default has
occurred and is then continuing, be subject to the Borrower's approval, which
approval shall not be unreasonably withheld or delayed. Upon the acceptance of
its appointment as the Administrative Agent, Documentation Agent or Syndication
Agent hereunder by a successor Administrative Agent or successor Documentation
Agent or successor Syndication Agent, as applicable, such successor
Administrative Agent, successor Documentation Agent or successor Syndication
Agent, as applicable, shall thereupon succeed to and become vested with all the
rights and duties of the retiring Administrative Agent, retiring Documentation
Agent or retiring Syndication Agent, as applicable, and the retiring
Administrative Agent, the retiring Documentation Agent or the retiring
Syndication Agent, as applicable, shall be discharged from its duties and
obligations hereunder. The rights and duties of the Administrative Agent to be
vested in any successor Administrative Agent shall include, without limitation,
the rights and duties as Swingline Lender. After any retiring Administrative
Agent's, retiring Documentation Agent's or retiring Syndication Agent's
resignation hereunder, the provisions of this Article shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was the
Administrative Agent, the Documentation Agent or the Syndication Agent, as
applicable. For gross negligence or willful misconduct, as determined by all the
Banks (excluding for such determination Administrative Agent or Documentation
Agent in its capacity as a Bank, as applicable), Administrative Agent,
Documentation Agent or Syndication Agent may be removed at any time by giving at
least thirty (30) Business Days prior written notice to Administrative Agent,
Documentation Agent, Syndication Agent and Borrower. Such resignation or removal
shall take effect upon the acceptance of appointment by a successor
Administrative Agent, Documentation Agent or Syndication Agent, as applicable,
in accordance with the provisions of this Section 7.8.
SECTION 7.9. Consents and Approvals. All communications from
Administrative Agent to the Banks requesting the Banks' determination, consent,
approval or disapproval (i) shall be given in the form of a written notice to
each Bank, (ii) shall be accompanied by a description of the matter or item as
to which such determination, approval, consent or disapproval is requested, or
shall advise each Bank where such matter or item may be inspected, or shall
otherwise describe the matter or issue to be resolved, (iii) shall include, if
reasonably requested by a Bank and to the extent not
<PAGE> 73
previously provided to such Bank, written materials and a summary of all oral
information provided to Administrative Agent by Borrower in respect of the
matter or issue to be resolved, and (iv) shall include Administrative Agent's
recommended course of action or determination in respect thereof. Each Bank
shall reply promptly, but in any event within ten (10) Business Days after
receipt of the request therefor from Administrative Agent (the "Bank Reply
Period"). Unless a Bank shall give written notice to Administrative Agent that
it objects to the recommendation or determination of Administrative Agent
(together with a written explanation of the reasons behind such objection)
within the Bank Reply Period, such Bank shall be deemed to have approved of or
consented to such recommendation or determination. With respect to decisions
requiring the approval of the Required Banks, Majority Banks or all the Banks,
Administrative Agent shall submit its recommendation or determination for
approval of or consent to such recommendation or determination to all Banks and
upon receiving the required approval or consent shall follow the course of
action or determination of the Required Banks, Majority Banks or all the Banks
(and each non-responding Bank shall be deemed to have concurred with such
recommended course of action), as the case may be.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If
on or prior to the first day of any Interest Period for any Euro-Dollar
Borrowing or Money Market IBOR Loan the Administrative Agent determines in good
faith that deposits in dollars (in the applicable amounts) are not being offered
in the relevant market for such Interest Period, the Administrative Agent shall
forthwith give notice thereof to the Borrower and the Banks, whereupon until the
Administrative Agent notifies the Borrower that the circumstances giving rise to
such suspension no longer exist, the obligations of the Banks to make
Euro-Dollar Loans shall be suspended. Unless the Borrower notifies the
Administrative Agent at least two Business Days before the date of (i) any
Euro-Dollar Borrowing for which a Notice of Borrowing has previously been given
that it elects not to borrow on such date, such Borrowing shall instead be made
as a Base Rate Borrowing, or (ii) any Money Market IBOR Borrowing for which a
Notice of Money Market Borrowing has previously been given, the Money Market
IBOR Loans comprising such Borrowing shall bear interest for each day from and
including the first day to but excluding the last day of the Interest Period
applicable thereto at the Base Rate for such day.
SECTION 8.2. Illegality. If, on or after the date of this Agreement, the
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Euro-Dollar Lending Office) with any request or directive
(whether or not having the force of law)
<PAGE> 74
made after the Closing Date of any such authority, central bank or comparable
agency shall make it unlawful for any Bank (or its Euro-Dollar Lending Office)
to make, maintain or fund its Euro-Dollar Loans, the Administrative Agent shall
forthwith give notice thereof to the other Banks and the Borrower, whereupon
until such Bank notifies the Borrower and the Administrative Agent that the
circumstances giving rise to such suspension no longer exist, the obligation of
such Bank to make Euro-Dollar Loans shall be suspended. With respect to
Euro-Dollar Loans, before giving any notice to the Administrative Agent pursuant
to this Section, such Bank shall designate a different Euro-Dollar Lending
Office if such designation will avoid the need for giving such notice and will
not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If
such Bank shall determine that it may not lawfully continue to maintain and fund
any of its outstanding Euro-Dollar Loans to maturity and shall so specify in
such notice, the Borrower shall be deemed to have delivered a Notice of Interest
Rate Election and such Euro-Dollar Loan shall be converted as of such date to a
Base Rate Loan (without payment of any amounts that Borrower would otherwise be
obligated to pay pursuant to Section 2.13 hereof with respect to Loans converted
pursuant to this Section 8.2) in an equal principal amount from such Bank (on
which interest and principal shall be payable contemporaneously with the related
Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate
Loan.
If at any time, it shall be unlawful for any Bank to make, maintain or fund
its Euro-Dollar Loans, the Borrower shall have the right, upon five (5) Business
Day's notice to the Administrative Agent, to either (x) cause a bank, reasonably
acceptable to the Administrative Agent, to offer to purchase the Commitments of
such Bank for an amount equal to such Bank's outstanding Loans, and to become a
Bank hereunder, or obtain the agreement of one or more existing Banks to offer
to purchase the Commitments of such Bank for such amount, which offer such Bank
is hereby required to accept, or (y) to repay in full all Loans then outstanding
of such Bank, together with interest and all other amounts due thereon, upon
which event, such Bank's Commitments shall be deemed to be canceled pursuant to
Section 2.11(c).
SECTION 8.3. Increased Cost and Reduced Return.
(a) If, on or after (x) the date hereof in the case of Committed Loans made
pursuant to Section 2.1, or (y) the date of the related Money Market Quote (in
each case, the "Loan Effective Date"), in the case of any Money Market Loan, the
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Applicable Lending Office) with any request or directive
(whether or not having the force of law) made at the Closing Date of any such
authority, central bank or comparable agency shall impose, modify or deem
applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System (but excluding
with respect to any Euro-Dollar Loan any such requirement reflected in an
applicable Euro-Dollar Reserve Percentage)), special deposit, insurance
assessment or similar
<PAGE> 75
requirement against assets of, deposits with or for the account of, or credit
extended by, any Bank (or its Applicable Lending Office) or shall impose on any
Bank (or its Applicable Lending Office) or on the interbank market any other
condition materially more burdensome in nature, extent or consequence than those
in existence as of the Loan Effective Date affecting such Bank's Euro-Dollar
Loans, its Note, or its obligation to make Euro-Dollar Loans, and the result of
any of the foregoing is to increase the cost to such Bank (or its Applicable
Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the
amount of any sum received or receivable by such Bank (or its Applicable Lending
Office) under this Agreement or under its Note with respect to such Euro-Dollar
Loans, by an amount deemed by such Bank to be material, then, within 15 days
after demand by such Bank (with a copy to the Administrative Agent and
Documentation Agent), the Borrower shall pay to such Bank such additional amount
or amounts (based upon a reasonable allocation thereof by such Bank to the
Euro-Dollar Loans made by such Bank hereunder) as will compensate such Bank for
such increased cost or reduction to the extent such Bank generally imposes such
additional amounts on other borrowers of such Bank in similar circumstances.
(b) If any Bank shall have reasonably determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) made after the Closing Date of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of such Bank (or its Parent) as a
consequence of such Bank's obligations hereunder to a level below that which
such Bank (or its Parent) could have achieved but for such adoption, change,
request or directive (taking into consideration its policies with respect to
capital adequacy) by an amount reasonably deemed by such Bank to be material,
then from time to time, within 15 days after demand by such Bank (with a copy to
the Administrative Agent and Documentation Agent), the Borrower shall pay to
such Bank such additional amount or amounts as will compensate such Bank (or its
Parent) for such reduction to the extent such Bank generally imposes such
additional amounts on other borrowers of such Bank in similar circumstances.
(c) Each Bank will promptly notify the Borrower and the Administrative
Agent of any event of which it has knowledge, occurring after the date hereof,
which will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
reasonable judgment of such Bank, be otherwise disadvantageous to such Bank. If
such Bank shall fail to notify Borrower of any such event within 90 days
following the end of the month during which such event occurred, then Borrower's
liability for any amounts described in this Section incurred by such Bank as a
result of such event shall be limited to those attributable to the period
occurring subsequent to the ninetieth (90th) day prior to the date upon which
such Bank actually notified Borrower of the occurrence of such event. A
certificate of any Bank
<PAGE> 76
claiming compensation under this Section and setting forth a reasonably detailed
calculation of the additional amount or amounts to be paid to it hereunder shall
be conclusive in the absence of demonstrable error. In determining such amount,
such Bank may use any reasonable averaging and attribution methods.
(d) If at any time, any Bank shall be owed amounts pursuant to this Section
8.3, the Borrower shall have the right, upon five (5) Business Day's notice to
the Administrative Agent to either (x) cause a bank, reasonably acceptable to
the Administrative Agent, to offer to purchase the Commitments of such Bank for
an amount equal to such Bank's outstanding Loans, and to become a Bank
hereunder, or to obtain the agreement of one or more existing Banks to offer to
purchase the Commitments of such Bank for such amount, which offer such Bank is
hereby required to accept, or (y) to repay in full all Loans then outstanding of
such Bank, together with interest and all other amounts due thereon, upon which
event, such Bank's Commitment shall be deemed to be canceled pursuant to Section
2.11(c).
SECTION 8.4. Taxes.
(a) Any and all payments by the Borrower to or for the account of any Bank,
the Documentation Agent or the Administrative Agent hereunder or under any other
Loan Document shall be made free and clear of and without deduction for any and
all present or future taxes, duties, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the case
of each Bank, the Documentation Agent and the Administrative Agent, taxes
imposed on its income, and franchise taxes imposed on it, by the jurisdiction
under the laws of which such Bank, the Documentation Agent or the Administrative
Agent (as the case may be) is organized or any political subdivision thereof
and, in the case of each Bank, taxes imposed on its income, and franchise or
similar taxes imposed on it, by the jurisdiction of such Bank's Applicable
Lending Office or any political subdivision thereof or by any other jurisdiction
(or any political subdivision thereof) as a result of a present or former
connection between such Bank, Documentation Agent or Administrative Agent and
such other jurisdiction or by the United States (all such non-excluded taxes,
duties, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Non-Excluded Taxes"). If the Borrower shall be
required by law to deduct any Non-Excluded Taxes from or in respect of any sum
payable hereunder or under any Note, (i) the sum payable shall be increased as
necessary so that after making all required deductions (including, without
limitation, deductions applicable to additional sums payable under this Section
8.4) such Bank, the Documentation Agent or the Administrative Agent (as the case
may be) receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law and (iv) the Borrower shall
furnish to the Administrative Agent, at its address referred to in Section 9.1,
the original or a certified copy of a receipt evidencing payment thereof.
<PAGE> 77
(b) In addition, the Borrower agrees to pay any present or future stamp or
documentary taxes and any other excise or property taxes, or charges or similar
levies which arise from any payment made hereunder or under any Note or from the
execution or delivery of, or otherwise with respect to, this Agreement or any
Note (hereinafter referred to as "Other Taxes").
(c) The Borrower agrees to indemnify each Bank, the Documentation Agent and
the Administrative Agent for the full amount of Non-Excluded Taxes or Other
Taxes (including, without limitation, any Non-Excluded Taxes or Other Taxes
imposed or asserted by any jurisdiction on amounts payable under this Section
8.4) paid by such Bank, the Documentation Agent or the Administrative Agent (as
the case may be) and, so long as such Bank, Documentation Agent or
Administrative Agent has promptly paid any such Non-Excluded Taxes or Other
Taxes, any liability for penalties and interest arising therefrom or with
respect thereto. This indemnification shall be made within 15 days from the date
such Bank, the Documentation Agent or the Administrative Agent (as the case may
be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the United
States, on or prior to the date of its execution and delivery of this Agreement
in the case of each Bank listed on the signature pages hereof and on or prior to
the date on which it becomes a Bank in the case of each other Bank, shall
provide the Borrower with (A) two duly completed copies of Internal Revenue
Service form 1001 or 4224, as appropriate, or any successor form prescribed by
the Internal Revenue Service, and (B) an Internal Revenue Service Form W-8 or
W-9, or any successor form prescribed by the Internal Revenue Service, and shall
provide Borrower with two further copies of any such form or certification on or
before the date that any such form or certification expires or becomes obsolete
and after the occurrence of any event requiring a change in the most recent form
previously delivered by it to Borrower, certifying (i) in the case of a Form
1001 or 4224, that such Bank is entitled to benefits under an income tax treaty
to which the United States is a party which reduces the rate of withholding tax
on payments of interest or certifying that the income receivable pursuant to
this Agreement is effectively connected with the conduct of a trade or business
in the United States, and (ii) in the case of a Form W-8 or W-9, that it is
entitled to an exemption from United States backup withholding tax. If the form
provided by a Bank at the time such Bank first becomes a party to this Agreement
indicates a United States interest withholding tax rate in excess of zero,
withholding tax at such rate shall be considered excluded from "Non-Excluded
Taxes" as defined in Section 8.4(a).
(e) For any period with respect to which a Bank has failed to provide the
Borrower with the appropriate form pursuant to Section 8.4(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which a form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 8.4(c) with respect to
Non-Excluded Taxes imposed by the United States; provided, however, that should
a Bank, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Non-Excluded Taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such
<PAGE> 78
steps as such Bank shall reasonably request to assist such Bank to recover such
Taxes so long as Borrower shall incur no cost or liability as a result thereof.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Bank pursuant to this Section 8.4, then such Bank will change the
jurisdiction of its Applicable Lending Office so as to eliminate or reduce any
such additional payment which may thereafter accrue if such change, in the
judgment of such Bank, is not otherwise disadvantageous to such Bank.
(g) If at any time, any Bank shall be owed amounts pursuant to this Section
8.4, the Borrower shall have the right, upon five (5) Business Day's notice to
the Administrative Agent to either (x) cause a bank, reasonably acceptable to
the Administrative Agent, to offer to purchase the Commitments of such Bank for
an amount equal to such Bank's outstanding Loans, and to become a Bank
hereunder, or to obtain the agreement of one or more existing Banks to offer to
purchase the Commitments of such Bank for such amount, which offer such Bank is
hereby required to accept, or (y) to repay in full all Loans then outstanding of
such Bank, together with interest and all other amounts due thereon, upon which
event, such Bank's Commitment shall be deemed to be canceled pursuant to Section
2.11(c).
SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar Loans.
If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended
pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section
8.3 or 8.4 with respect to its Euro-Dollar Loans and the Borrower shall, by at
least five Business Days' prior notice to such Bank through the Administrative
Agent, have elected that the provisions of this Section shall apply to such
Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer exist:
(a) Borrower shall be deemed to have delivered a Notice of Interest Rate
Election with respect to such affected Euro-Dollar Loans and thereafter all
Loans which would otherwise be made by such Bank as Euro-Dollar Loans shall be
made instead as Base Rate Loans (on which interest and principal shall be
payable contemporaneously with the related Euro-Dollar Loans of the other
Banks), and
(b) after each of its Euro-Dollar Loans has been repaid, all payments of
principal which would otherwise be applied to repay such Euro-Dollar Loans shall
be applied to repay its Base Rate Loans instead, and
(c) Borrower will not be required to make any payment which would otherwise
be required by Section 2.13 with respect to such Euro-Dollar Loans converted to
Base Rate Loans pursuant to clause (a) above.
ARTICLE IX
<PAGE> 79
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including bank wire, telex, facsimile
transmission followed by telephonic confirmation or similar writing) and shall
be given to such party: (x) in the case of the Borrower, the Documentation
Agent, the Syndication Agent or the Administrative Agent, at its address, telex
number or facsimile number set forth on Exhibit F attached hereto with a
duplicate copy thereof, in the case of the Borrower, to the Borrower, at Equity
Office Properties Trust, Two North Riverside Plaza, Suite 2200, Chicago,
Illinois 60606, Attn: Chief Legal Counsel, and to Rosenberg & Liebentritt, P.C.,
Two North Riverside Plaza, Suite 1600, Chicago, Illinois 60606, Attn: James M.
Phipps, Esq., (y) in the case of any Bank, at its address, telex number or
facsimile number set forth in its Administrative Questionnaire or (z) in the
case of any party, such other address, telex number or facsimile number as such
party may hereafter specify for the purpose by notice to the Administrative
Agent and the Borrower. Each such notice, request or other communication shall
be effective (i) if given by telex or facsimile transmission, when such telex or
facsimile is transmitted to the telex number or facsimile number specified in
this Section and the appropriate answerback or facsimile confirmation is
received, (ii) if given by certified registered mail, return receipt requested,
with first class postage prepaid, addressed as aforesaid, upon receipt or
refusal to accept delivery, (iii) if given by a nationally recognized overnight
carrier, 24 hours after such communication is deposited with such carrier with
postage prepaid for next day delivery, or (iv) if given by any other means, when
delivered at the address specified in this Section; provided that notices to the
Administrative Agent and the Documentation Agent under Article II or Article
VIII shall not be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Administrative Agent,
the Documentation Agent or any Bank in exercising any right, power or privilege
hereunder or under any Note shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 9.3. Expenses; Indemnification.
(a) The Borrower shall pay within thirty (30) days after written notice
from the Administrative Agent or Documentation Agent, as applicable, (i) all
reasonable out-of-pocket costs and expenses of the Administrative Agent and the
Documentation Agent (including, without limitation, reasonable fees and
disbursements of special counsel Skadden, Arps, Slate, Meagher & Flom LLP ), in
connection with the preparation of this Agreement, the Loan Documents and the
documents and instruments referred to therein, and any waiver or consent
hereunder or any amendment hereof or any Default or alleged Default hereunder,
(ii) all reasonable fees and disbursements of special counsel in connection with
the syndication of the Loans, and (iii) if an Event of Default occurs, all
reasonable out-of-pocket expenses incurred by the Administrative Agent,
Documentation Agent and each Bank, including, without limitation, fees and
disbursements of counsel
<PAGE> 80
for the Administrative Agent, the Documentation Agent and each of the Banks, in
connection with the enforcement of the Loan Documents and the instruments
referred to therein and such Event of Default and collection, bankruptcy,
insolvency and other enforcement proceedings resulting therefrom; provided,
however, that the attorneys' fees and disbursements for which Borrower is
obligated under this subsection (a)(iii) shall be limited to the reasonable
non-duplicative fees and disbursements of (A) counsel for Administrative Agent,
(B) counsel for Documentation Agent and (C) counsel for all of the Banks as a
group; and provided, further, that all other costs and expenses for which
Borrower is obligated under this subsection (a)(iii) shall be limited to the
reasonable non-duplicative costs and expenses of Administrative Agent and
Documentation Agent. For purposes of this Section 9.3(a)(iii), (1) counsel for
Administrative Agent shall mean a single outside law firm representing
Administrative Agent, (2) counsel for Documentation Agent shall mean a single
outside law firm representing Documentation Agent (which may or may not be the
same law firm representing Administrative Agent) and (3) counsel for all of the
Banks as a group shall mean a single outside law firm representing such Banks as
a group (which law firm may or may not be the same law firm representing either
or both of Administrative Agent or Documentation Agent).
(b) The Borrower agrees to indemnify the Documentation Agent, the
Administrative Agent and each Bank, their respective affiliates and the
respective directors, officers, agents and employees of the foregoing (each an
"Indemnitee") and hold each Indemnitee harmless from and against any and all
liabilities, losses, damages, costs and expenses of any kind, including, without
limitation, the reasonable fees and disbursements of counsel, which may be
incurred by such Indemnitee in connection with any investigative, administrative
or judicial proceeding that may at any time (including, without limitation, at
any time following the payment of the Obligations) be asserted against any
Indemnitee, as a result of, or arising out of, or in any way related to or by
reason of, (i) any of the transactions contemplated by the Loan Documents or the
execution, delivery or performance of any Loan Document, (ii) any violation by
the Borrower or the Environmental Affiliates of any applicable Environmental
Law, (iii) any Environmental Claim arising out of the management, use, control,
ownership or operation of property or assets by the Borrower or any of the
Environmental Affiliates, including, without limitation, all on-site and
off-site activities of Borrower or any Environmental Affiliate involving
Materials of Environmental Concern, (iv) the breach of any environmental
representation or warranty set forth herein, but excluding those liabilities,
losses, damages, costs and expenses (a) for which such Indemnitee has been
compensated pursuant to the terms of this Agreement, (b) incurred solely by
reason of the gross negligence, willful misconduct bad faith or fraud of any
Indemnitee as finally determined by a court of competent jurisdiction, (c)
arising from violations of Environmental Laws relating to a Property which are
caused by the act or omission of such Indemnitee after such Indemnitee takes
possession of such Property or (d) owing by such Indemnitee to any third party
based upon contractual obligations of such Indemnitee owing to such third party
which are not expressly set forth in the Loan Documents. In addition, the
indemnification set forth in this Section 9.3(b) in favor of any director,
officer, agent or employee of Administrative Agent, Documentation Agent or any
Bank shall be solely in their respective capacities as such director, officer,
agent or employee. The Borrower's
<PAGE> 81
obligations under this Section shall survive the termination of this Agreement
and the payment of the Obligations. Without limitation of the other provisions
of this Section 9.3, Borrower shall indemnify and hold each of the
Administrative Agent, the Documentation Agent and the Banks free and harmless
from and against all loss, costs (including reasonable attorneys' fees and
expenses), expenses, taxes, and damages (including consequential damages) that
the Administrative Agent, the Documentation Agent and the Banks may suffer or
incur by reason of the investigation, defense and settlement of claims and in
obtaining any prohibited transaction exemption under ERISA or the Code necessary
in the Administrative Agent's or the Documentation Agent's reasonable judgment
by reason of the inaccuracy of the representations and warranties, or a breach
of the provisions, set forth in Section 4.6(b).
SECTION 9.4. Sharing of Set-Offs. In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance of
any Event of Default, each Bank is hereby authorized at any time or from time to
time, without presentment, demand, protest or other notice of any kind to the
Borrower or to any other Person, any such notice being hereby expressly waived,
but subject to the prior consent of the Administrative Agent and the
Documentation Agent, to set off and to appropriate and apply any and all
deposits (general or special, time or demand, provisional or final) and any
other indebtedness at any time held or owing by such Bank (including, without
limitation, by branches and agencies of such Bank wherever located) to or for
the credit or the account of the Borrower against and on account of the
Obligations of the Borrower then due and payable to such Bank under this
Agreement or under any of the other Loan Documents, including, without
limitation, all interests in Obligations purchased by such Bank. Each Bank
agrees that if it shall by exercising any right of set-off or counterclaim or
otherwise, receive payment of a proportion of the aggregate amount of principal
and interest due with respect to any Note held by it which is greater than the
proportion received by any other Bank, the Bank receiving such proportionately
greater payment shall purchase such participations in the Notes held by the
other Banks, and such other adjustments shall be made, as may be required so
that all such payments of principal and interest with respect to the Notes held
by the Banks shall be shared by the Banks pro rata; provided that nothing in
this Section shall impair the right of any Bank to exercise any right of set-off
or counterclaim it may have to any deposits not received in connection with the
Loans and to apply the amount subject to such exercise to the payment of
indebtedness of the Borrower other than its indebtedness under the Notes. The
Borrower agrees, to the fullest extent it may effectively do so under applicable
law, that any holder of a participation in a Note, whether or not acquired
pursuant to the foregoing arrangements, may exercise rights of set-off or
counterclaim and other rights with respect to such participation as fully as if
such holder of a participation were a direct creditor of the Borrower in the
amount of such participation. Notwithstanding anything to the contrary contained
herein, any Bank may, by separate agreement with the Borrower, waive its right
to set off contained herein or granted by law and any such written waiver shall
be effective against such Bank under this Section 9.4.
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SECTION 9.5. Amendments and Waivers. Any provision of this Agreement or
the Notes or other Loan Documents may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by the Borrower and the Majority
Banks (and, if the rights or duties of the Administrative Agent , the
Documentation Agent or the Swingline Lender in their capacity as Administrative
Agent, Documentation Agent or the Swingline Lender, as applicable, are affected
thereby, by the Administrative Agent, the Documentation Agent or the Swingline
Lender, as applicable); provided that (A) no amendment or waiver of the
provisions of Article V (including, without limitation, any of the definitions
of the defined terms used in Section 5.8 hereof) shall be effective unless
signed by the Borrower and the Required Banks and (B) no such amendment or
waiver with respect to this Agreement, the Notes or any other Loan Documents
shall, unless signed by all the Banks, (i) increase or decrease the Commitment
of any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of or
rate of interest on any Loan or any fees hereunder, (iii) postpone the date
fixed for any payment of principal of or interest on any Loan or any fees
hereunder or for any reduction or termination of any Commitment, (iv) change the
percentage of the Commitments or of the aggregate unpaid principal amount of the
Notes, or the number of Banks, which shall be required for the Banks or any of
them to take any action under this Section or any other provision of this
Agreement, (v) release the EOPT Guaranty or (vi) modify the provisions of this
Section 9.5.
SECTION 9.6. Successors and Assigns.
(a) The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
except that the Borrower may not assign or otherwise transfer any of its rights
under this Agreement or the other Loan Documents without the prior written
consent of all Banks and the Administrative Agent and a Bank may not assign or
otherwise transfer any of its interest under this Agreement except as permitted
in subsection (b) and (c) of this Section 9.6.
(b) Prior to the occurrence of an Event of Default, any Bank may at any
time, with (and subject to) the consent of Borrower (which consent shall not be
unreasonably withheld or delayed) and the Administrative Agent, grant to an
existing Bank, one or more banks, finance companies, insurance companies or
other financial institutions (a "Participant") in minimum amounts of not less
than $10,000,000 (or any lesser amount in the case of participations to an
existing Bank) participating interests in its Commitment or any or all of its
Loans. After the occurrence and during the continuance of an Event of Default,
any Bank may at any time grant to any Person in any amount (also a
"Participant"), participating interests in its Commitment or any or all of its
Loans. Notwithstanding anything to the contrary in this subsection (b), with
respect to a Bank's granting of participations in its outstanding Money Market
Loans prior to the occurrence of an Event of Default, the minimum amount of such
participations shall be $5,000,000 and no consent of the Administrative Agent or
the Borrower shall be required. Any participation made during the continuation
of an Event of Default shall not be affected by the subsequent cure of such
Event of Default. In the event of any such grant by a Bank of
<PAGE> 83
a participating interest to a Participant, whether or not upon notice to the
Borrower and the Administrative Agent, such Bank shall remain responsible for
the performance of its obligations hereunder, and the Borrower, the
Documentation Agent and the Administrative Agent shall continue to deal solely
and directly with such Bank in connection with such Bank's rights and
obligations under this Agreement. Any agreement pursuant to which any Bank may
grant such a participating interest shall provide that such Bank shall retain
the sole right and responsibility to enforce the obligations of the Borrower
hereunder including, without limitation, the right to approve any amendment,
modification or waiver of any provision of this Agreement; provided that such
participation agreement may provide that such Bank will not agree to any
modification, amendment or waiver of this Agreement described in clause (i),
(ii), (iii), (iv) or (v) of Section 9.5 without the consent of the Participant.
The Borrower agrees that each Participant shall, to the extent provided in its
participation agreement, be entitled to the benefits of Article VIII with
respect to its participating interest.
(c) Any Bank may at any time assign to a Qualified Institution (in each
case, an "Assignee") (i) prior to the occurrence of an Event of Default, in
minimum amounts of not less than Ten Million Dollars ($10,000,000) and integral
multiple of One Million Dollars ($1,000,000) thereafter (or any lesser amount in
the case of assignments to an existing Bank) and (ii) after the occurrence and
during the continuance of an Event of Default, in any amount, all or a
proportionate part of all, of its rights and obligations under this Agreement,
the Notes and the other Loan Documents, and, in either case, such Assignee shall
assume such rights and obligations, pursuant to a Transfer Supplement in
substantially the form of Exhibit "E" hereto executed by such Assignee and such
transferor Bank; provided, that if no Event of Default shall have occurred and
be continuing, such assignment shall be subject to the Administrative Agent's
and the Borrower's consent, which consent shall not be unreasonably withheld or
delayed; and provided further that if an Assignee is an affiliate of such
transferor Bank or was a Bank immediately prior to such assignment, no such
consent shall be required; and provided further that such assignment may, but
need not, include rights of the transferor Bank in respect of outstanding Money
Market Loans. Upon execution and delivery of such instrument and payment by such
Assignee to such transferor Bank of an amount equal to the purchase price agreed
between such transferor Bank and such Assignee, such Assignee shall be a Bank
party to this Agreement and shall have all the rights and obligations of a Bank
with a Commitment as set forth in such instrument of assumption, and no further
consent or action by any party shall be required and the transferor Bank shall
be released from its obligations hereunder to a corresponding extent. Upon the
consummation of any assignment pursuant to this subsection (c), the transferor
Bank, the Administrative Agent and the Borrower shall make appropriate
arrangements so that, if required, a new Note is issued to the Assignee. In
connection with any such assignment, the transferor Bank shall pay to the
Administrative Agent an administrative fee for processing such assignment in the
amount of $2,500. If the Assignee is not incorporated under the laws of the
United States of America or a state thereof, it shall deliver to the Borrower
and the Administrative Agent certification as to exemption from deduction or
withholding of any United States federal income taxes in accordance with Section
8.4.
<PAGE> 84
Any assignment made during the continuation of an Event of Default shall not be
affected by any subsequent cure of such Event of Default.
(d) Any Bank (each, a "Designating Lender") may at any time designate one
Designated Lender to fund Money Market Loans on behalf of such Designating
Lender subject to the terms of this Section 9.6(d) and the provisions in Section
9.6(b) and (c) shall not apply to such designation. No Bank may designate more
than one (1) Designated Lender at any one time. The parties to each such
designation shall execute and deliver to the Lead Agent for its acceptance a
Designation Agreement. Upon such receipt of an appropriately completed
Designation Agreement executed by a Designating Lender and a designee
representing that it is a Designated Lender, the Lead Agent will accept such
Designation Agreement and will give prompt notice thereof to the Borrower,
whereupon, (i) the Borrower shall execute and deliver to the Designating Lender
a Designated Lender Note payable to the order of the Designated Lender, (ii)
from and after the effective date specified in the Designation Agreement, the
Designated Lender shall become a party to this Agreement with a right (subject
to the provisions of Section 2.4(b)) to make Money Market Loans on behalf of its
Designating Lender pursuant to Section 2.4 after the Borrower has accepted a
Money Market Loan (or portion thereof) of the Designating Lender, and (iii) the
Designated Lender shall not be required to make payments with respect to any
obligations in this Agreement except to the extent of excess cash flow of such
Designated Lender which is not otherwise required to repay obligations of such
Designated Lender which are then due and payable; provided, however, that
regardless of such designation and assumption by the Designated Lender, the
Designating Lender shall be and remain obligated to the Borrower, the
Administrative Agent, the Managing Agents, the Co-Agents and the Banks for each
and every of the obligations of the Designating Lender and its related
Designated Lender with respect to this Agreement, including, without limitation,
any indemnification obligations under Section 7.6 hereof and any sums otherwise
payable to the Borrower by the Designated Lender. Each Designating Lender shall
serve as the administrative agent of the Designated Lender and shall on behalf
of, and to the exclusion of, the Designated Lender: (i) receive any and all
payments made for the benefit of the Designated Lender and (ii) give and receive
all communications and notices and take all actions hereunder, including,
without limitation, votes, approvals, waivers, consents and amendments under or
relating to this Agreement and the other Loan Documents. Any such notice,
communication, vote, approval, waiver, consent or amendment shall be signed by
the Designating Lender as administrative agent for the Designated Lender and
shall not be signed by the Designated Lender on its own behalf and shall be
binding upon the Designated Lender to the same extent as if signed by the
Designated Lender on its own behalf. The Borrower, the Administrative Agent, the
Managing Agents, the Co-Agents and the Banks may rely thereon without any
requirement that the Designated Lender sign or acknowledge the same. No
Designated Lender may assign or transfer all or any portion of its interest
hereunder or under any other Loan Document, other than assignments to the
Designating Lender which originally designated such Designated Lender or
otherwise in accordance with the provisions of Section 9.6 (b) and (c).
<PAGE> 85
(e) Any Bank may at any time assign all or any portion of its rights under
this Agreement and its Note to a Federal Reserve Bank. No such assignment shall
release the transferor Bank from its obligations hereunder.
(f) No Assignee, Participant or other transferee of any Bank's rights shall
be entitled to receive any greater payment under Section 8.3 or 8.4 than such
Bank would have been entitled to receive with respect to the rights transferred,
unless such transfer is made with the Borrower's prior written consent or by
reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to
designate a different Applicable Lending Office under certain circumstances or
at a time when the circumstances giving rise to such greater payment did not
exist.
(g) No Assignee of any rights and obligations under this Agreement shall be
permitted to further assign less than all of such rights and obligations. No
participant in any rights and obligations under this Agreement shall be
permitted to sell subparticipations of such rights and obligations.
(h) Anything in this Agreement to the contrary notwithstanding, so long as
no Event of Default shall have occurred and be continuing, no Bank shall be
permitted to enter into an assignment of, or sell a participation interest in,
its rights and obligations hereunder which would result in such Bank holding a
Commitment without participants of less than Ten Million Dollars ($10,000,000)
(or in the case of the Administrative Agent, Documentation Agent or Morgan
Guaranty Trust Company of New York or the Managing Agents, Thirty Million
Dollars ($30,000,000), or in the case of any Co-Agent, Twenty Million Dollars
($20,000,000)) unless as a result of a cancellation or reduction of the
aggregate Commitments; provided, however, that no Bank shall be prohibited from
assigning its entire Commitment so long as such assignment is otherwise
permitted under this Section 9.6.
(i) By its execution of this Agreement, each of the Banks which were
parties to the Existing Credit Agreement (each an "Existing Bank") hereby
assigns and sells to the Banks accepting the same as set forth below, without
recourse, representation or warranty (except as expressly provided herein), that
portion of its "Commitment" under the Existing Loan Agreement which is in excess
of its Commitment hereunder. By its execution of this Agreement, each of the
Banks which were not parties to the Existing Credit Agreement (each a "New
Bank") and each Existing Bank whose Commitment hereunder exceeds its
"Commitment" under the Existing Credit Agreement hereby accepts the portion of
the above-referenced excess "Commitments" which is equal to the (i) in the case
of a New Bank, the amount of its Commitment hereunder, and (ii) in the case of
an Existing Bank whose Commitment hereunder exceeds its "Commitment" under the
Existing Credit Agreement, the amount of such increase. Each Bank hereby
acknowledges and agrees that, as of the date hereof, its Commitment hereunder is
in the amount shown on the signature page of such Bank attached to this
Agreement. Each Existing Bank hereby represents and warrants that it is the
legal and beneficial owner of the interests being assigned by it in accordance
with this Section 9.6(f) and that such interests are free and clear of any
adverse claim.
<PAGE> 86
SECTION 9.7. Collateral. Each of the Banks represents to the
Administrative Agent and each of the other Banks that it in good faith is not
relying upon any "margin stock" (as defined in Regulation U) as collateral in
the extension or maintenance of the credit provided for in this Agreement.
SECTION 9.8. Governing Law; Submission to Jurisdiction. (a) THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED
BY THE LAWS OF THE STATE OF ILLINOIS (WITHOUT GIVING EFFECT TO THE PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW).
(b) Any legal action or proceeding with respect to this Agreement or any
other Loan Document and any action for enforcement of any judgment in respect
thereof may be brought in the courts of the State of Illinois or of the United
States of America for the Northern District of Illinois, and, by execution and
delivery of this Agreement, the Borrower hereby accepts for itself and in
respect of its property, generally and unconditionally, the non-exclusive
jurisdiction of the aforesaid courts and appellate courts from any thereof. The
Borrower irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the hand delivery, or
mailing of copies thereof by registered or certified mail, postage prepaid, to
the Borrower at its address set forth below. The Borrower hereby irrevocably
waives any objection which it may now or hereafter have to the laying of venue
of any of the aforesaid actions or proceedings arising out of or in connection
with this Agreement or any other Loan Document brought in the courts referred to
above and hereby further irrevocably waives and agrees not to plead or claim in
any such court that any such action or proceeding brought in any such court has
been brought in an inconvenient forum. Nothing herein shall affect the right of
the Administrative Agent or the Documentation Agent to serve process in any
other manner permitted by law or to commence legal proceedings or otherwise
proceed against the Borrower in any other jurisdiction.
SECTION 9.9. Counterparts; Integration;. Effectiveness. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement constitutes the entire agreement and understanding
among the parties hereto and supersedes any and all prior agreements and
understandings, oral or written, relating to the subject matter hereof. This
Agreement shall become effective upon receipt by the Documentation Agent and the
Borrower of counterparts hereof signed by each of the parties hereto (or, in the
case of any party as to which an executed counterpart shall not have been
received, receipt by the Administrative Agent in form satisfactory to it of
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party).
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE
ADMINISTRATIVE AGENT, THE DOCUMENTATION AGENT, THE
<PAGE> 87
SYNDICATION AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Survival. All indemnities set forth herein shall survive the
execution and delivery of this Agreement and the other Loan Documents and the
making and repayment of the Loans hereunder.
SECTION 9.12. Domicile of Loans. Each Bank may transfer and carry its Loans
at, to or for the account of any domestic or foreign branch office, subsidiary
or affiliate of such Bank.
SECTION 9.13. Limitation of Liability. No claim may be made by the Borrower
or any other Person acting by or through Borrower against the Administrative
Agent, the Documentation Agent, the Syndication Agent or any Bank or the
affiliates, directors, officers, employees, attorneys or agent of any of them
for any punitive damages in respect of any claim for breach of contract or any
other theory of liability arising out of or related to the transactions
contemplated by this Agreement or by the other Loan Documents, or any act,
omission or event occurring in connection therewith; and the Borrower hereby
waives, releases and agrees not to sue upon any claim for any such damages,
whether or not accrued and whether or not known or suspected to exist in its
favor.
SECTION 9.14. Recourse Obligation. This Agreement and the Obligations
hereunder are fully recourse to the Borrower. Notwithstanding the foregoing, no
recourse under or upon any obligation, covenant, or agreement contained in this
Agreement shall be had against (i) any officer, director, shareholder or
employee of the Borrower or EOPT (other than pursuant to the Acorn Guaranty (as
defined in the EOPT Guaranty)) or (ii) any general partner of Borrower other
than EOPT, in each case except in the event of fraud or misappropriation of
funds on the part of such officer, director, shareholder or employee or such
general partner.
SECTION 9.15. Confidentiality. The Administrative Agent, the Documentation
Agent and each Bank shall use reasonable efforts to assure that information
about Borrower, EOPT and its Subsidiaries and Investments Affiliates, and the
Properties thereof and their operations, affairs and financial condition, not
generally disclosed to the public, which is furnished to Administrative Agent,
the Documentation Agent or any Bank pursuant to the provisions hereof or any
other Loan Document is used only for the purposes of this Agreement and shall
not be divulged to any Person other than the Administrative Agent, the
Documentation Agent, the Banks, and their affiliates and respective officers,
directors, employees and agents who are actively and directly participating in
the evaluation, administration or enforcement of the Loan and other transactions
between such Bank and the Borrower, except: (a) to their attorneys and
accountants, (b) in connection with the enforcement of the rights and exercise
of any remedies of the Administrative Agent, the Documentation Agent and the
Banks
<PAGE> 88
hereunder and under the other Loan Documents, (c) in connection with assignments
and participations and the solicitation of prospective assignees and
participants referred to in Section 9.6 hereof, who have agreed in writing to be
bound by a confidentiality agreement substantially equivalent to the terms of
this Section 9.15, and (d) as may otherwise be required or requested by any
regulatory authority having jurisdiction over the Administrative Agent, the
Documentation Agent or any Bank or by any applicable law, rule, regulation or
judicial process.
SECTION 9.16. Bank's Failure to Fund.
(a) If a Bank does not advance to Administrative Agent such Bank's Pro Rata
Share of a Loan in accordance herewith, then neither Administrative Agent,
Documentation Agent nor the other Banks shall be required or obligated to fund
such Bank's Pro Rata Share of such Loan.
(b) As used herein, the following terms shall have the meanings set forth
below:
(i) "Defaulting Bank" shall mean any Bank which (x) does not advance
to the Administrative Agent such Bank's Pro Rata Share of a Loan in accordance
herewith for a period of five (5) Business Days after notice of such failure
from Administrative Agent, (y) shall otherwise fail to perform such Bank's
obligations under the Loan Documents (including, without limitation, the
obligation to purchase participations pursuant to Section 2.3) for a period of
five (5) Business Days after notice of such failure from Administrative Agent,
or (z) shall fail to pay the Administrative Agent, Documentation Agent or any
other Bank, as the case may be, upon demand, such Bank's Pro Rata Share of any
costs, expenses or disbursements incurred or made by the Administrative Agent
pursuant to the terms of the Loan Documents for a period of five (5) Business
Days after notice of such failure from Administrative Agent, and in all cases,
such failure is not as a result of a good faith dispute as to whether such
advance is properly required to be made pursuant to the provisions of this
Agreement, or as to whether such other performance or payment is properly
required pursuant to the provisions of this Agreement.
(ii) "Junior Creditor" means any Defaulting Bank which has not (x)
fully cured each and every default on its part under the Loan Documents and (y)
unconditionally tendered to the Administrative Agent such Defaulting Bank's Pro
Rata Share of all costs, expenses and disbursements required to be paid or
reimbursed pursuant to the terms of the Loan Documents.
(iii) "Payment in Full" means, as of any date, the receipt by the
Banks who are not Junior Creditors of an amount of cash, in lawful currency of
the United States, sufficient to indefeasibly pay in full all Senior Debt.
(iv) "Senior Debt" means (x) collectively, any and all indebtedness,
obligations and liabilities of the Borrower to the Banks who are not Junior
Creditors from
<PAGE> 89
time to time, whether fixed or contingent, direct or indirect, joint or several,
due or not due, liquidated or unliquidated, determined or undetermined, arising
by contract, operation of law or otherwise, whether on open account or evidenced
by one or more instruments, and whether for principal, premium, interest
(including, without limitation, interest accruing after the filing of a petition
initiating any proceeding referred to in Section 6.1(f) or (g)), reimbursement
for fees, indemnities, costs, expenses or otherwise, which arise under, in
connection with or in respect of the Loans or the Loan Documents, and (y) any
and all deferrals, renewals, extensions and refundings of, or amendments,
restatements, rearrangements, modifications or supplements to, any such
indebtedness, obligation or liability.
(v) "Subordinated Debt" means (x) any and all indebtedness,
obligations and liabilities of Borrower to one or more Junior Creditors from
time to time, whether fixed or contingent, direct or indirect, joint or several,
due or not due, liquidated or unliquidated, determined or undetermined, arising
by contract, operation of law or otherwise, whether on open account or evidenced
by one or more instruments, and whether for principal, premium, interest
(including, without limitation, interest accruing after the filing of a petition
initiating any proceeding referred to in Section 6.1(f) or (g)), reimbursement
for fees, indemnities, costs, expenses or otherwise, which arise under, in
connection with or in respect of the Loans or the Loan Documents, and (y) any
and all deferrals, renewals, extensions and refundings of, or amendments,
restatements, rearrangements, modifications or supplements to, any such
indebtedness, obligation or liability.
(c) Immediately upon a Bank's becoming a Junior Creditor and until such
time as such Bank shall have cured all applicable defaults, no Junior Creditor
shall, prior to Payment in Full of all Senior Debt:
(i) accelerate, demand payment of, sue upon, collect, or receive any
payment upon, in any manner, or satisfy or otherwise discharge, any Subordinated
Debt, whether for principal, interest and otherwise;
(ii) take or enforce any Liens to secure Subordinated Debt or attach
or levy upon any assets of Borrower, to enforce any Subordinated Debt;
(iii) enforce or apply any security for any Subordinated Debt; or
(iv) incur any debt or liability, or the like, to, or receive any
loan, return of capital, advance, gift or any other property, from, the
Borrower.
(d) In the event of:
(i) any insolvency, bankruptcy, receivership, liquidation,
dissolution, reorganization, readjustment, composition or other similar
proceeding relating to Borrower;
<PAGE> 90
(ii) any liquidation, dissolution or other winding-up of the
Borrower, voluntary or involuntary, whether or not involving insolvency,
reorganization or bankruptcy proceedings;
(iii) any assignment by the Borrower for the benefit of creditors;
(iv) any sale or other transfer of all or substantially all assets of
the Borrower; or
(v) any other marshaling of the assets of the Borrower;
each of the Banks shall first have received Payment in Full of all Senior Debt
before any payment or distribution, whether in cash, securities or other
property, shall be made in respect of or upon any Subordinated Debt. Any payment
or distribution, whether in cash, securities or other property that would
otherwise be payable or deliverable in respect of Subordinated Debt to any
Junior Creditor but for this Agreement shall be paid or delivered directly to
the Administrative Agent for distribution to the Banks in accordance with this
Agreement until Payment in Full of all Senior Debt. If any Junior Creditor
receives any such payment or distribution, it shall promptly pay over or deliver
the same to the Administrative Agent for application in accordance with the
preceding sentence.
(e) Each Junior Creditor shall file in any bankruptcy or other proceeding
of Borrower in which the filing of claims is required by law, all claims
relating to Subordinated Debt that such Junior Creditor may have against
Borrower and assign to the Banks who are not Junior Creditors all rights of such
Junior Creditor thereunder. If such Junior Creditor does not file any such claim
prior to forty-five (45) days before the expiration of the time to file such
claim, Administrative Agent, as attorney-in-fact for such Junior Creditor, is
hereby irrevocably authorized to do so in the name of such Junior Creditor or,
in Administrative Agent's sole discretion, to assign the claim to a nominee and
to cause proof of claim to be filed in the name of such nominee. The foregoing
power of attorney is coupled with an interest and cannot be revoked. The
Administrative Agent shall, to the exclusion of each Junior Creditor, have the
sole right, subject to Section 9.5 hereof, to accept or reject any plan proposed
in any such proceeding and to take any other action that a party filing a claim
is entitled to take. In all such cases, whether in administration, bankruptcy or
otherwise, the Person or Persons authorized to pay such claim shall pay to
Administrative Agent the amount payable on such claim and, to the full extent
necessary for that purpose, each Junior Creditor hereby transfers and assigns to
the Administrative Agent all of the Junior Creditor's rights to any such
payments or distributions to which Junior Creditor would otherwise be entitled.
(f) (i) If any payment or distribution of any character or any security,
whether in cash, securities or other property, shall be received by any Junior
Creditor in contravention of any of the terms hereof, such payment or
distribution or security shall be received in trust for the benefit of, and
shall promptly be paid over or delivered and transferred to, Administrative
Agent for application to the payment of all Senior Debt, to the extent necessary
to achieve Payment in Full. In the event of the failure of any Junior
<PAGE> 91
Creditor to endorse or assign any such payment, distribution or security,
Administrative Agent is hereby irrevocably authorized to endorse or assign the
same as attorney-in-fact for such Junior Creditor.
(ii) Each Junior Creditor shall take such action (including, without
limitation, the execution and filing of a financing statement with respect to
this Agreement and the execution, verification, delivery and filing of proofs of
claim, consents, assignments or other instructions that Administrative Agent may
require from time to time in order to prove or realize upon any rights or claims
pertaining to Subordinated Debt or to effectuate the full benefit of the
subordination contained herein) as may, in Administrative Agent's sole and
absolute discretion, be necessary or desirable to assure the effectiveness of
the subordination effected by this Agreement.
(g) (i) Each Bank that becomes a Junior Creditor understands and
acknowledges by its execution hereof that each other Bank is entering into this
Agreement and the Loan Documents in reliance upon the absolute subordination in
right of payment and in time of payment of Subordinated Debt to Senior Debt as
set forth herein.
(ii) Only upon the Payment in Full of all Senior Debt shall any Junior
Creditor be subrogated to any remaining rights of the Banks which are not
Defaulting Banks to receive payments or distributions of assets of the Borrower
made on or applicable to any Senior Debt.
(iii) Each Junior Creditor agrees that it will deliver all instruments
or other writings evidencing any Subordinated Debt held by it to Administrative
Agent, promptly after request therefor by the Administrative Agent.
(iv) No Junior Creditor may at any time sell, assign or otherwise
transfer any Subordinated Debt, or any portion thereof, including, without
limitation, the granting of any Lien thereon, unless and until satisfaction of
the requirements of Section 9.6 above and the proposed transferee shall have
assumed in writing the obligation of the Junior Creditor to the Banks under this
Agreement, in a form acceptable to the Administrative Agent.
(v) If any of the Senior Debt, should be invalidated, avoided or set
aside, the subordination provided for herein nevertheless shall continue in full
force and effect and, as between the Banks which are not Defaulting Banks and
all Junior Creditors, shall be and be deemed to remain in full force and effect.
(vi) Each Junior Creditor hereby irrevocably waives, in respect of
Subordinated Debt, all rights (x) under Sections 361 through 365, 502(e) and 509
of the Bankruptcy Code (or any similar sections hereafter in effect under any
other Federal or state laws or legal or equitable principles relating to
bankruptcy, insolvency, reorganizations, liquidations or otherwise for the
relief of debtors or protection of creditors), and (y) to seek or obtain
conversion to a different type of proceeding or to
<PAGE> 92
seek or obtain dismissal of a proceeding, in each case in relation to a
bankruptcy, reorganization, insolvency or other proceeding under similar laws
with respect to the Borrower. Without limiting the generality of the foregoing,
each Junior Creditor hereby specifically waives (A) the right to seek to give
credit (secured or otherwise) to the Borrower in any way under Section 364 of
the Bankruptcy Code unless the same is subordinated in all respects to Senior
Debt in a manner acceptable to Administrative Agent in its sole and absolute
discretion and (B) the right to receive any collateral security (including,
without limitation, any "super priority" or equal or "priming" or replacement
Lien) for any Subordinated Debt unless the Banks which are not Defaulting Banks
have received a senior position acceptable to the Banks in their sole and
absolute discretion to secure all Senior Debt (in the same collateral to the
extent collateral is involved).
(h) (i) In addition to and not in limitation of the subordination
effected by this Section 9.16, the Administrative Agent and each of the Banks
which are not Defaulting Banks may in their respective sole and absolute
discretion, also exercise any and all other rights and remedies available at
law or in equity in respect of a Defaulting Bank; and
(ii) The Administrative Agent shall give each of the Banks notice of
the occurrence of a default under this Section 9.16 by a Defaulting Bank and if
the Administrative Agent and/or one or more of the other Banks shall, at their
option, fund any amounts required to be paid or advanced by a Defaulting Bank,
the other Banks who have elected not to fund any portion of such amounts shall
not be liable for any reimbursements to the Administrative Agent and/or to such
other funding Banks.
(i) Notwithstanding anything to the contrary contained or implied herein, a
Defaulting Bank shall not be entitled to vote on any matter as to which a vote
by the Banks is required hereunder, including, without limitation, any actions
or consents on the part of the Administrative Agent as to which the approval or
consent of all the Banks or the Required Banks or Majority Banks is required
under Article VIII, Section 9.5 or elsewhere, so long as such Bank is a
Defaulting Bank; provided, however, that in the case of any vote requiring the
unanimous consent of the Banks, if all the Banks other than the Defaulting Bank
shall have voted in accordance with each other, then the Defaulting Bank shall
be deemed to have voted in accordance with such Banks.
(j) Each of the Administrative Agent and any one or more of the Banks which
are not Defaulting Banks may, at their respective option, (i) advance to the
Borrower such Bank's Pro Rata Share of the Loans not advanced by a Defaulting
Bank in accordance with the Loan Documents, or (ii) pay to the Administrative
Agent such Bank's Pro Rata Share of any costs, expenses or disbursements
incurred or made by the Administrative Agent pursuant to the terms of this
Agreement not theretofore paid by a Defaulting Bank. Immediately upon the making
of any such advance by the Administrative Agent or any one of the Banks, such
Bank's Pro Rata Share and the Pro Rata Share of the Defaulting Bank shall be
recalculated to reflect such advance. All payments, repayments and other
disbursements of funds by the Administrative Agent to
<PAGE> 93
Banks shall thereupon and, at all times thereafter be made in accordance with
such Bank's recalculated Pro Rata Share unless and until a Defaulting Bank shall
fully cure all defaults on the part of such Defaulting Bank under the Loan
Documents or otherwise existing in respect of the Loans or this Agreement, at
which time the Pro Rata Share of the Bank(s) which advanced sums on behalf of
the Defaulting Bank and of the Defaulting Bank shall be restored to their
original percentages.
SECTION 9.17. Banks' ERISA Covenant. Each Bank, by its signature hereto or
on the applicable Transfer Supplement, hereby agrees (a) that on the date any
Loan is disbursed hereunder no portion of such Bank's Pro Rata Share of such
Loan will constitute "assets" within the meaning of 29 C.F.R. Section 2510.3-101
of an "employee benefit plan" within the meaning of Section 3(3) of ERISA or a
"plan" within the meaning of Section 4975(e)(1) of the Code, and (b) that
following such date such Bank shall not allocate such Bank's Pro Rata Share of
any Loan to an account of such Bank if such allocation (i) by itself would cause
such Pro Rata Share of such Loan to then constitute "assets" (within the meaning
of 29 C.F.R. Section 2510.3-101) of an "employee benefit plan" within the
meaning of Section 3(3) of ERISA or a "plan" within the meaning of Section
4975(e)(1) of the Code and (ii) by itself would cause such Loan to constitute a
prohibited transaction under ERISA or the Code (which is not exempt from the
restrictions of Section 406 of ERISA and Section 4975 of the Code and the taxes
and penalties imposed by Section 4975 of the Code and Section 502(i) of ERISA)
or any Agent or Bank being deemed in violation of Section 404 of ERISA.
SECTION 9.18. Managing Agents and Co-Agents. Borrower, the Agents and each
Bank acknowledges and agrees that the obligations of the Managing Agents and the
Co-Agents hereunder shall be limited to those obligations that are expressly set
forth herein, if any, and the Managing Agents and the Co-Agents shall not be
required to take any action or assume any liability except as may be required in
each of their capacity as a Bank hereunder. Borrower, the Agents and each Bank
agrees that the indemnifications set forth herein for the benefit of the Agents
shall also run to the benefit of the Managing Agents and the Co-Agents to the
extent the Managing Agents and/or any Agent incurs any loss, cost or damage
arising from its capacity as the Managing Agents or as a Co-Agent.
SECTION 9.19. No Bankruptcy Proceedings. Each of the Borrower, the Banks,
the Administrative Agent, the Managing Agents, and the Co-Agents hereby agrees
that it will not institute against any Designated Lender or join any other
Person in instituting against any Designated Lender any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceeding under any
federal or state bankruptcy or similar law, until the later to occur of (i) one
year and one day after the payment in full of the latest maturing commercial
paper note issued by such Designated Lender and (ii) the Maturity Date.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
<PAGE> 94
EOP OPERATING LIMITED PARTNERSHIP,
a Delaware limited partnership
By: Equity Office Properties Trust, a Maryland real
estate investment trust, its managing general
partner
By:
Name:
Title:
Facsimile number: (312) 559-5009
Address: Two North Riverside Plaza
Suite 2200
Chicago, Illinois 60606
Attn: Chief Financial Officer
TOTAL COMMITMENTS: $1,000,000,000
NATIONSBANK, N.A., as Administrative Agent,
as Swingline Lender and as a Bank
By:_________________________________________
Name:
Title:
Commitment: $69,000,000
BANK OF AMERICA, NATIONAL TRUST &
SAVINGS ASSOCIATION, as Documentation
Agent and as a Bank
By:_________________________________________
Name:
Title:
Commitment: $69,000,000
J.P. MORGAN SECURITIES, INC., as Syndication
Agent
By:_________________________________________
<PAGE> 95
Name:
Title:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as a Bank
By:_________________________________________
Name:
Title:
Commitment: $69,000,000
THE BANK OF NOVA SCOTIA, as a Managing
Agent and as a Bank
By:_________________________________________
Name:
Title:
Commitment: $65,000,000
THE CHASE MANHATTAN BANK, as a
Managing Agent and as a Bank
By:_________________________________________
Name:
Title:
Commitment: $65,000,000
COMMERZBANK AKTIENGESELLSCHAFT, as a
By:_________________________________________
Name:
Title:
By:_________________________________________
Name:
Title:
Commitment: $65,000,000
<PAGE> 96
DRESDNER BANK AG, NEW YORK AND
CAYMAN BRANCHES, as a Managing Agent and
as Bank
By:_________________________________________
Name:
Title:
By:_________________________________________
Name:
Title:
Commitment: $65,000,000
PNC BANK, NATIONAL ASSOCIATION, as a
Managing Agent and as a Bank
By:_________________________________________
Name:
Title:
Commitment: $65,000,000
UNION BANK OF SWITZERLAND, NEW
YORK BRANCH, as a Managing Agent and as a
Bank
By:_________________________________________
Name:
Title:
By:_________________________________________
Name:
Title:
Commitment: $65,000,000
CREDIT LYONNAIS, NEW YORK BRANCH, as
a Co-Agent and as a Bank
<PAGE> 97
By:_________________________________________
Name:
Title:
Commitment: $54,000,000
FLEET NATIONAL BANK, as a Co-Agent and as
a Bank
By:_________________________________________
Name:
Title:
Commitment: $54,000,000
U.S. BANK NATIONAL ASSOCIATION, as a
Co-Agent and as a Bank
By:_________________________________________
Name:
Title:
Commitment: $54,000,000
BANK ONE, ILLINOIS, N.A., as a Bank
By:_________________________________________
Name:
Title:
Commitment: $50,000,000
BAYERISCHE HYPOTHEKEN-UND
WECHSEL-BANK AKTIENGESELLSCHAFT, as a
Bank
By:_________________________________________
Name:
Title:
By:_________________________________________
Name:
Title:
<PAGE> 98
Commitment: $50,000,000
BANKBOSTON, N.A., as a Bank
By:_________________________________________
Name:
Title:
Commitment: $31,000,000
LASALLE NATIONAL BANK, as a Bank
By:_________________________________________
Name:
Title:
Commitment: $30,000,000
MELLON BANK, as a Bank
By:_________________________________________
Name:
Title:
Commitment: $30,000,000
UNION BANK OF CALIFORNIA, N.A., as a Bank
By:_________________________________________
Name:
Title:
Commitment: $30,000,000
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, as a Bank
By:_________________________________________
Name:
Title:
Commitment: $20,000,000
<PAGE> 99
Schedule 1.1
Initial Qualifying Unencumbered Properties
<TABLE>
<CAPTION>
- ---------------------------------------------------------- --------------------------------------------------------
Property Name Location
- ---------------------------------------------------------- --------------------------------------------------------
<S> <C>
1,2,3 Devon Square Wayne, PA
- ---------------------------------------------------------- --------------------------------------------------------
1-5 Valley Square Plymouth Meeting, PA
- ---------------------------------------------------------- --------------------------------------------------------
10/30 S. Wacker Chicago, IL
- ---------------------------------------------------------- --------------------------------------------------------
1100 Executive Tower Orange County, CA
- ---------------------------------------------------------- --------------------------------------------------------
1111 19th Street Washington, D.C.
- ---------------------------------------------------------- --------------------------------------------------------
1601 Market Street Philadelphia, PA
- ---------------------------------------------------------- --------------------------------------------------------
1620 L Street Washington, D.C.
- ---------------------------------------------------------- --------------------------------------------------------
1700 Market Philadelphia, PA
- ---------------------------------------------------------- --------------------------------------------------------
177 Broad Stamford, CT
- ---------------------------------------------------------- --------------------------------------------------------
1920 Main Plaza Orange County, CA
- ---------------------------------------------------------- --------------------------------------------------------
201 Mission San Francisco, CA
- ---------------------------------------------------------- --------------------------------------------------------
2010 Main Plaza Orange County, CA
- ---------------------------------------------------------- --------------------------------------------------------
28 State Street Boston, MA
- ---------------------------------------------------------- --------------------------------------------------------
30 North LaSalle Chicago,IL
- ---------------------------------------------------------- --------------------------------------------------------
300 Atlantic Street Stamford, CT
- ---------------------------------------------------------- --------------------------------------------------------
49 East Thomas Phoenix, AZ
- ---------------------------------------------------------- --------------------------------------------------------
500 Marquette Building Albuquerque, NM
- ---------------------------------------------------------- --------------------------------------------------------
500 Orange Tower Orange County, CA
- ---------------------------------------------------------- --------------------------------------------------------
5100 Brookline Oklahoma City, OK
- ---------------------------------------------------------- --------------------------------------------------------
550 South Hope Los Angeles, CA
- ---------------------------------------------------------- --------------------------------------------------------
60 Spear Street Building San Francisco, CA
- ---------------------------------------------------------- --------------------------------------------------------
601 Tehoupitoulas New Orleans, LA
- ---------------------------------------------------------- --------------------------------------------------------
8080 Central Dallas, TX
- ---------------------------------------------------------- --------------------------------------------------------
850 Third Avenue New York, NY
- ---------------------------------------------------------- --------------------------------------------------------
9400 NCX Dallas, TX
- ---------------------------------------------------------- --------------------------------------------------------
Adams/Wabash Garage Chicago, IL
- ---------------------------------------------------------- --------------------------------------------------------
Atrium Towers Oklahoma City, OK
- ---------------------------------------------------------- --------------------------------------------------------
Bank One Center/Tower Indianapolis, IN
- ---------------------------------------------------------- --------------------------------------------------------
Brookhollow I, II, III Houston, TX
- ---------------------------------------------------------- --------------------------------------------------------
Civic Parking St. Louis, MO
- ---------------------------------------------------------- --------------------------------------------------------
Colonnade I San Antonio, TX
- ---------------------------------------------------------- --------------------------------------------------------
Denver Corporate Center II & III Denver, CO
- ---------------------------------------------------------- --------------------------------------------------------
Destec Tower Houston, TX
- ---------------------------------------------------------- --------------------------------------------------------
Dominion Tower Norfolk, VA
- ---------------------------------------------------------- --------------------------------------------------------
First Union Center Ft. Lauderdale, FL
- ---------------------------------------------------------- --------------------------------------------------------
Four Falls West Conshohocken, PA
- ---------------------------------------------------------- --------------------------------------------------------
Four Forest Dallas, TX
- ---------------------------------------------------------- --------------------------------------------------------
Intercontinental Center Houston, TX
- ---------------------------------------------------------- --------------------------------------------------------
LL & E Tower New Orleans, LA
</TABLE>
<PAGE> 100
<TABLE>
<S> <C>
- ---------------------------------------------------------- --------------------------------------------------------
Nations Bank Plaza Nashville, TN
- ---------------------------------------------------------- --------------------------------------------------------
North Central Plaza Three Dallas, TX
- ---------------------------------------------------------- --------------------------------------------------------
Northborough Tower Houston, TX
- ---------------------------------------------------------- --------------------------------------------------------
Oak Hill Plaza King of Prussia, PA
- ---------------------------------------------------------- --------------------------------------------------------
Oakbrook Terrace Oak Brook Terrace, IL
- ---------------------------------------------------------- --------------------------------------------------------
One American Center Austin, TX
- ---------------------------------------------------------- --------------------------------------------------------
One Clearlake Centre West Palm Beach, FL
- ---------------------------------------------------------- --------------------------------------------------------
One Layfayette Washington, D.C.
- ---------------------------------------------------------- --------------------------------------------------------
One Maritime Plaza San Francisco, CA
- ---------------------------------------------------------- --------------------------------------------------------
One North Franklin Chicago, IL
- ---------------------------------------------------------- --------------------------------------------------------
One Phoenix Phoenix, AZ
- ---------------------------------------------------------- --------------------------------------------------------
One & Two Stamford Plaza Stamford, CT
- ---------------------------------------------------------- --------------------------------------------------------
Paces West Atlanta, GA
- ---------------------------------------------------------- --------------------------------------------------------
Philadelphia Garages Philadelphia, PA
- ---------------------------------------------------------- --------------------------------------------------------
Preston Commons Dallas, TX
- ---------------------------------------------------------- --------------------------------------------------------
San Jacinto Center Austin, TX
- ---------------------------------------------------------- --------------------------------------------------------
Sarasota City Center Sarasota, FL
- ---------------------------------------------------------- --------------------------------------------------------
Shelton Point Shelton, CT
- ---------------------------------------------------------- --------------------------------------------------------
Smith Barney San Diego, CA
- ---------------------------------------------------------- --------------------------------------------------------
Sterling Plaza Dallas, TX
- ---------------------------------------------------------- --------------------------------------------------------
Summitt Office Park Ft. Worth, TX
- ---------------------------------------------------------- --------------------------------------------------------
Sun Trust Building Orlando, FL
- ---------------------------------------------------------- --------------------------------------------------------
Tampa Commons Tampa, FL
- ---------------------------------------------------------- --------------------------------------------------------
Texaco Center New Orleans, LA
- ---------------------------------------------------------- --------------------------------------------------------
The Quadrant Denver, CO
- ---------------------------------------------------------- --------------------------------------------------------
Two California Plaza Los Angeles, CA
- ---------------------------------------------------------- --------------------------------------------------------
Union Square San Antonio, TX
- ---------------------------------------------------------- --------------------------------------------------------
University Tower Durham, NC
- ---------------------------------------------------------- --------------------------------------------------------
</TABLE>
SCHEDULE 4.4 (b)
Disclosure of
Additional Material Indebtedness
1. Drawings under this Agreement.
2. On April 30, 1998, EOP-Tabor, L.L.C. assumed a $48,108,587 loan obligation
to Prudential Insurance Company of America in connection with the
acquisition of One Tabor Center, Denver Colorado.
3. On May 14, 1998, EOP-Dominion Plaza, L.L.C. issued a Promissory Note in
the amount of $37,943,846.23 to Dom Plaza Associates, L.P., in payment of
a portion of the purchase price in connection with the acquisition of
Dominion
<PAGE> 101
Plaza, Denver, Colorado. The Promissory Note is secured by a $37,943,846,23
Letter of Credit issued by NationsBank of Texas, N.A., for the account of,
and reimbursement of any draws thereunder are the obligation of EOP
Operating Limited Partnership and EOP-Dominion Plaza, L.L.C.
SCHEDULE 4.6
Borrower and EOPT ERISA Plans
The employees of EOPT and the Borrower (other than union employees) may
currently participate in a 401(k) Plan.
Other benefits for non-union employees include:
Health care plan, dental care,
vision care, life insurance and
accidental death and dismemberment
plan, travel/accident insurance,
short-term disability, long-term
disability, sick time, vacation
time, personal days, holidays and
direct paycheck deposit.
Union employee benefits include:
Sick time, vacation time, personal
days, holidays, direct paycheck
deposit, monthly employer
contributions into the health and
welfare trust and pension fund
(which health and welfare trusts and
pension funds are generally Plans,
Multiemployer Plans or Benefit
Arrangements).
SCHEDULE 5.11(c)(1)
EOP-QRS Trust
EOP-QRS LaJolla Trust
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership II
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership III
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership IV
<PAGE> 102
SCHEDULE 5.11(c)(2)
EOP-QRS Trust
EOP-QRS LaJolla Trust
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership II
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership III
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership IV
<PAGE> 1
EXHIBIT 12.1
EOP OPERATING LIMITED PARTNERSHIP AND
EQUITY OFFICE PREDECESSORS
STATEMENTS REGARDING COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
EOP Operating EOP Operating Equity Office
Limited Partnership Limited Partnership for Predecessors for
for the the period from the period from
year ended July 11, 1997 through January 1, 1997
(DOLLARS IN THOUSANDS) December 31, 1998 December 31, 1997 through July 10, 1997
-------------------- -------------------------------------------
<S> <C> <C> <C>
Net Income before preferred $ 380,328 $ 94,962 $ 49,173
distributions, gains from sales of
property, provision for value
impairment and extraordinary items
Plus Fixed Charges:
Interest expense 338,611 76,675 80,481
Interest expense from unconsolidated subsidiaries 8,580
Loan amortization cost 6,404 4,179 2,771
Taxes 1,664 0 0
----------------- -------------------------------------------
Earnings $ 735,587 $ 175,816 $ 132,425
================= ===========================================
Fixed Charges:
Interest expense $ 338,611 $ 76,675 $ 80,481
Interest expense from unconsolidated subsidiaries 8,580 0 0
Capitalized interest 15,077 1,890 3,669
Loan amortization cost 6,404 4,179 2,771
Preferred distributions 32,202 649 0
----------------- -------------------------------------------
Total Fixed Charges $ 400,874 $ 83,393 $ 86,921
================= ===========================================
Ratio of earnings to combined fixed charges
and preferred unit distributions 1.8 2.1 1.5
================= ===========================================
<CAPTION>
Equity Office Predecessors
Combined Historical for the
years ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C>
Net Income before preferred
distributions, gains from sales of
property, provision for value
impairment and extraordinary items $ 68,087 $ 23,436 $ 14,857
Plus Fixed Charges:
Interest expense 119,595 100,566 59,316
Interest expense from unconsolidated subsidiaries
Loan amortization cost 4,275 2,025 1,568
Taxes 0 0 0
------------------------------------------------------------
Earnings $ 191,957 $ 126,027 $ 75,741
============================================================
Fixed Charges:
Interest expense $ 119,595 $ 100,566 $ 59,316
Interest expense from unconsolidated subsidiaries 0 0 0
Capitalized interest 4,640 1,682 0
Loan amortization cost 4,275 2,025 1,568
Preferred distributions 0 0 0
------------------------------------------------------------
Total Fixed Charges $ 128,510 $ 104,273 $ 60,884
============================================================
Ratio of earnings to combined fixed charges
and preferred unit distributions 1.5 1.2 1.2
============================================================
</TABLE>
<PAGE> 1
Exhibit 21.1
Equity Office Properties Management Corp., a Delaware corporation
In addition, the Company has interests in 237 entities which are not
deemed to be significant subsidiaries.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement
(Form S-3) and related Prospectus of EOP Operating Limited Partnership for
the registration of $2.0 billion debt securities and warrants (registration
statement no. 333-58689), of our report dated February 9, 1999, except for Note
23, as to which the date is February 16, 1999, with respect to the consolidated
financial statements and schedule of EOP Operating Limited Partnership and
Equity Office Predecessors included in the 1998 Annual Report (Form 10-K) of EOP
Operating Limited Partnership.
ERNST & YOUNG LLP
Chicago, Illinois
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 226,656
<SECURITIES> 0
<RECEIVABLES> 123,308
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 579,767
<PP&E> 13,683,819
<DEPRECIATION> (352,259)
<TOTAL-ASSETS> 14,261,291
<CURRENT-LIABILITIES> 447,208
<BONDS> 6,025,405
<COMMON> 0
0
615,000
<OTHER-SE> 7,173,678
<TOTAL-LIABILITY-AND-EQUITY> 14,261,291
<SALES> 0
<TOTAL-REVENUES> 1,679,699
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 980,529
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 338,611
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 360,559
<DISCONTINUED> 0
<EXTRAORDINARY> (7,506)
<CHANGES> 0
<NET-INCOME> 353,053
<EPS-PRIMARY> $1.25
<EPS-DILUTED> $1.24
</TABLE>
