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PROSPECTUS Filed Pursuant to Rule 424B
4,000,000 SHARES
BRANDYWINE REALTY TRUST
COMMON SHARES OF BENEFICIAL INTEREST
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Brandywine Realty Trust (the "Company") is a self-administered,
self-managed and fully integrated real estate investment trust ("REIT") that
owns a portfolio of 23 office buildings and one industrial facility (the
"Initial Properties") containing an aggregate of approximately 1.3 million net
rentable square feet located primarily in the Suburban Philadelphia Office and
Industrial Market (as defined in the "Glossary" and also referred to as the
"Market"). In addition, the Company acquired, on November 14, 1996, seven office
buildings and two industrial facilities and has entered into agreements to
purchase four additional office buildings (the "Acquisition Properties" and,
together with the Initial Properties, the "Properties"). The Acquisition
Properties contain an aggregate of approximately 700,000 net rentable square
feet located primarily in the Market. The Company also owns an interest in and
operates a commercial real estate management services company that as of
September 30, 1996 managed approximately 2.0 million net rentable square feet
(including 23 of the Initial Properties). As of September 30, 1996, the
Properties were approximately 94.3% leased.
All of the common shares of beneficial interest, par value $.01 per share,
of the Company (the "Common Shares") offered hereby are being sold by the
Company. The Company pays regular distributions to its shareholders and expects
to increase its quarterly distributions to shareholders following the closing of
the offering contemplated hereby (the "Offering") to $0.35 per share, beginning
with a pro rata distribution with respect to the quarter ending December 31,
1996. See "Distribution Policy."
Concurrent with the Offering and subject to certain conditions, the Company
is directly placing with: (i) a voting trust (the "SERS Voting Trust")
established for the benefit of the Commonwealth of Pennsylvania State Employees'
Retirement System ("SERS"), as advised by Radnor Advisors Inc. ("RAI"), $10.5
million of Common Shares at the price per Common Share sold in the Offering (the
"SERS Private Placement"); and (ii) two investment funds advised by Morgan
Stanley Asset Management Inc., $11.7 million of Common Shares at a price per
Common Share of $16.50 (the "Morgan Stanley Private Placement" and together with
the SERS Private Placement, the "Concurrent Investments"). The Underwriters will
not receive a discount or commission on the sale of Common Shares in the
Concurrent Investments. See "The Company -- The SERS Private Placement
and -- The Morgan Stanley Private Placement" and "Principal Shareholders." Nine
of the Acquisition Properties have been acquired from the SERS Voting Trust in
exchange for, among certain other consideration, $26.5 million of convertible
preferred shares which represents, assuming conversion of all such preferred
shares into Common Shares, an effective price per Common Share of $16.50. See
"The Company -- The SERS Transaction."
The Common Shares are traded on the American Stock Exchange (the "AMEX")
under the symbol "BDN." On November 25, 1996, the last reported sale price for
the Common Shares was $18.00 (adjusted to give effect to a one-for-three reverse
share split that will become effective prior to the closing of the Offering).
See "Price Range of Common Shares and Distribution History." The Company
qualified as a REIT for federal income tax purposes commencing with its taxable
year ended December 31, 1986. To assist the Company in complying with certain
qualification requirements applicable to REITs, the Company's Declaration of
Trust will provide that no shareholder or group of affiliated shareholders may
actually or constructively own more than 9.8% in value of the outstanding Common
Shares, subject to certain exceptions. See "Description of Shares of Beneficial
Interest -- Restrictions on Transfer."
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------
Per Share.................... $16.50 $1.03 $15.47
- ---------------------------------------------------------------------------------------------------------
Total(3)..................... $66,000,000 $4,120,000 $61,880,000
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,750,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional Common Shares solely to cover over-allotments, if any.
See "Underwriting." If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $75,900,000, $4,738,000 and $71,162,000, respectively.
------------------
The Common Shares are being offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to certain conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that certificates for the Common Shares offered hereby will be
available for delivery on or about December 2, 1996, at the offices of Smith
Barney Inc., 333 West 34th Street, New York, NY 10001.
------------------
SMITH BARNEY INC. LEGG MASON WOOD WALKER
INCORPORATED
November 25, 1996
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THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY..................... 1
The Company.......................... 1
Risk Factors......................... 3
Business and Growth Strategies....... 5
Recent Developments.................. 8
Business and Properties.............. 10
Structure of the Company............. 13
Benefits of the Offering to
Affiliates of the Company......... 13
The Offering and Concurrent
Investments....................... 14
Distribution Policy.................. 14
Tax Status of the Company............ 15
Summary Selected Financial Data...... 15
RISK FACTORS........................... 19
Limited Geographic Concentration..... 19
Redemption of Preferred Shares....... 19
Risks Associated with the Recent
Acquisition of Many of the
Company's Properties; Lack of
Operating History................. 19
Lack of Appraisals................... 20
Risks Relating to Distributions...... 20
Conflicts of Interests............... 20
Real Estate Investment
Considerations.................... 21
Risks Associated with Indebtedness... 23
Historical Losses.................... 24
Risk of Acquisition, Development and
Renovation Activities............. 24
Tax Risks............................ 24
ERISA................................ 26
Possible Environmental Liabilities... 27
Uninsured Losses..................... 27
Risk of Third-Party Management,
Leasing and Related Service
Business.......................... 28
Changes in Policies Without
Shareholder Approval.............. 28
Influence of Executive Officers,
Trustees and Principal
Shareholders...................... 28
Dependence on Key Personnel.......... 29
Limits on Changes in Control......... 29
Effect on Price of Shares Available
for Future Sale................... 30
Immediate Dilution................... 31
Effect on Holders of Common Shares
of an Issuance of Preferred
Shares............................ 31
Effect of Market Interest Rates on
Price of Common Shares............ 31
Offer and Sale of Unregistered
Securities........................ 31
THE COMPANY............................ 33
General.............................. 33
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The SSI/TNC Transaction.............. 35
The SERS Transaction................. 36
Other Pending Acquisitions........... 37
SERS Private Placement............... 37
Morgan Stanley Private Placement..... 37
The Management Company............... 37
BUSINESS AND GROWTH STRATEGIES......... 39
General.............................. 39
Management and Operating
Strategies........................ 39
Acquisition Strategies............... 40
Corporate Service Activities......... 41
Financing Policies................... 41
USE OF PROCEEDS........................ 42
DISTRIBUTION POLICY.................... 43
PRICE RANGE OF COMMON SHARES AND
DISTRIBUTION HISTORY................. 43
CAPITALIZATION......................... 44
DILUTION............................... 45
SELECTED FINANCIAL DATA................ 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 50
Overview............................. 50
Results of Operations................ 50
Liquidity and Capital Resources...... 53
Cash Flows........................... 55
Inflation............................ 55
Funds from Operations................ 55
SUBURBAN PHILADELPHIA ECONOMY AND
OFFICE MARKETS....................... 57
General.............................. 57
Suburban Philadelphia Office and
Industrial Market................. 59
BUSINESS AND PROPERTIES................ 63
General.............................. 63
Properties........................... 65
Tenants.............................. 67
Lease Expirations.................... 70
Historical Tenant Improvements and
Leasing Commissions............... 82
Historical Capital Expenditures...... 83
Potential Revenue Increase at
Replacement Cost Rents............ 83
Historical Occupancy................. 84
Submarkets and Property
Information....................... 89
Competition.......................... 99
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Environmental Matters................ 99
Ground Lease......................... 101
Insurance............................ 101
Certain Property Tax Information..... 101
Employees............................ 101
Legal Proceedings.................... 101
Mortgage Debt and Credit Facility.... 101
Credit Facility...................... 103
Option Properties.................... 104
C&W Mid-Year Report and C&W Market
Analyses.......................... 106
STRUCTURE OF THE COMPANY............... 106
Operating Partnership................ 106
BRP.................................. 107
Ownership............................ 107
Management Company................... 108
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES........................... 108
Investment Policies.................. 108
Dispositions......................... 109
Financing Policies................... 109
Working Capital Reserves............. 110
Conflict of Interests Policies....... 110
Policies with Respect to Other
Activities........................ 110
MANAGEMENT............................. 112
Trustees and Executive Officers...... 112
Trustees of the Company.............. 112
Executive Officers................... 113
Other Key Officers................... 114
Committees of the Board of
Trustees.......................... 114
Compensation Committee Interlocks and
Insider Participation............. 114
Compensation of Trustees............. 114
Executive Compensation............... 115
Employment Agreements................ 115
Stock Options Granted to Executive
Officers During Last Fiscal
Year.............................. 116
Stock Options held by Certain
Executive
Officer at December 31, 1995...... 116
401(k) Plan.......................... 117
Indemnification...................... 117
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................... 117
SSI/TNC Transaction.................. 117
Partnership Agreement; Redemption
Rights............................ 118
Repayment of Certain Advances to
SSI............................... 118
Indemnification of Certain Limited
Partners.......................... 118
PAGE
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Partnership Agreement; General
Indemnity......................... 118
Termination of Standstill
Agreements........................ 119
Option Properties.................... 119
Lease with SSI Affiliate............. 119
Environmental Indemnity.............. 119
Employment Agreements; Award of
Warrants.......................... 119
Prior Involvement of Legg Mason...... 119
Investment by RMO Fund............... 120
Prior Involvement of LCOR............ 120
PRINCIPAL SHAREHOLDERS................. 121
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST............................. 123
General.............................. 123
Transfer Agent and Registrar......... 123
Shares............................... 123
Preferred Shares..................... 124
Reverse Share Split; Treatment of
Fractional Shares................. 125
Restrictions on Transfer............. 126
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S DECLARATION OF TRUST
AND BYLAWS........................... 128
Duration............................. 128
Board of Trustees.................... 128
Meetings of Shareholders............. 128
Preferred Shares..................... 129
Business Combinations................ 129
Control Share Acquisitions........... 130
Amendment to the Declaration of
Trust............................. 130
Termination of the Company and REIT
Status............................ 131
Transactions Between the Company and
its Trustees or Officers.......... 131
Limitation of Liability and
Indemnification................... 131
Maryland Asset Requirements.......... 132
FEDERAL INCOME TAX CONSIDERATIONS...... 132
General.............................. 132
Taxation of the Company as a REIT.... 132
Qualification of the Company as a
REIT.............................. 133
Income Tests......................... 134
Asset Tests.......................... 135
Annual Distribution Requirements..... 136
Failure to Qualify................... 137
Income Taxation of the Operating
Partnership, the Title Holding
Partnerships and Their Partners... 137
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Classification of the Operating
Partnership and Title Holding
Partnerships as Partnerships...... 137
Partnership Allocations.............. 138
Tax Allocations With Respect to
Contributed Properties............ 139
Depreciation......................... 139
Basis in Operating Partnership
Interest.......................... 140
Sale of Partnership Property......... 140
Taxation of Taxable Domestic
Shareholders...................... 141
Backup Withholding................... 141
Taxation of Tax-Exempt
Shareholders...................... 141
Taxation of Foreign Shareholders..... 142
Statement of Stock Ownership......... 143
Other Tax Consequences............... 143
Possible Federal Tax Developments.... 143
Real Estate Transfer Taxes........... 143
OPERATING PARTNERSHIP AGREEMENT........ 144
Management........................... 144
Classes of Partnership Interests;
Distributions to Partners......... 144
Tax Allocation....................... 145
Capital Contributions................ 145
Number, Class and Owner of Units..... 145
Additional Issuances of Class A
Units............................. 146
Cancellation of Class A Units........ 146
Redemption Rights.................... 146
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Business Operations.................. 147
Registration Rights.................. 147
Amendments........................... 147
Tax Matters.......................... 147
Representations and Warranties....... 147
Term................................. 147
Indemnification...................... 148
BRP GENERAL PARTNERSHIP AGREEMENT...... 148
General.............................. 148
Management........................... 148
Amendments........................... 148
ERISA CONSIDERATIONS................... 148
Employee Benefit Plans, Tax-Qualified
Retirement Plans and IRAs......... 149
Status of the Company Under ERISA.... 149
SHARES AVAILABLE FOR FUTURE SALE....... 151
Registration Rights.................. 152
UNDERWRITING........................... 153
EXPERTS................................ 154
LEGAL MATTERS.......................... 154
TAX MATTERS............................ 154
AVAILABLE INFORMATION.................. 155
GLOSSARY............................... 156
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>
CAUTIONARY STATEMENT
WHEN USED IN THIS PROSPECTUS, THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS PROSPECTUS
PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING,
BUT NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS" AND IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS
OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus assumes
that: (i) the Underwriters' over-allotment option is not exercised; (ii) no
outstanding options or warrants are exercised; (iii) the Company has combined
its Common Shares by means of a one-for-three reverse share split prior to the
closing of the Offering (the "Reverse Split"); and (iv) the Company will acquire
all of the Acquisition Properties on or prior to the closing of the Offering.
Unless the context otherwise requires, all references in this Prospectus to the
"Company" shall mean Brandywine Realty Trust and its subsidiaries and affiliated
entities, including Brandywine Operating Partnership, L.P. (the "Operating
Partnership") and Brandywine Realty Services Corporation (the "Management
Company"), and, with respect to the period prior to the Company's acquisition of
the business of The Nichols Company ("TNC"), the term "Company" shall also
include the management and development operations of TNC. See "Glossary" for the
definitions of certain capitalized terms used in this Prospectus.
THE COMPANY
The Company is a self-administered, self-managed and fully integrated real
estate investment trust ("REIT") engaged in the ownership, management, leasing,
acquisition and development of primarily suburban office properties. The Initial
Properties consist of 23 suburban office buildings and one industrial facility
containing an aggregate of approximately 1.3 million net rentable square feet
located primarily in the Suburban Philadelphia Office and Industrial Market. In
addition, the Company has purchased nine of the Acquisition Properties and has
entered into agreements to purchase the four other Acquisition Properties. The
Acquisition Properties contain an aggregate of approximately 700,000 net
rentable square feet located primarily in the Market. Nine of the Acquisition
Properties (the "SERS Properties") were acquired for an aggregate purchase price
of approximately $30.3 million, payable as follows: (i) by issuing preferred
shares (the "Preferred Shares") that, subject to certain conditions, are
convertible into 1,606,060 Common Shares; (ii) by making deferred payments
aggregating $3.8 million in cash or Common Shares; and (iii) by issuing two-year
warrants to purchase 133,333 Common Shares at an exercise price of $25.50 per
share. See "The Company -- The SERS Transaction." The purchase prices for the
four remaining Acquisition Properties aggregate $22.8 million in cash. The
Company developed 19 of the Initial Properties and will manage 36 of the
Properties upon the closing of the Offering. In addition, the Company manages
approximately 575,000 net rentable square feet at office properties on behalf of
third parties and approximately 159,000 net rentable square feet at four other
properties that are subject to a purchase option held by the Company (the
"Option Properties"). As of September 30, 1996, the Properties were
approximately 94.3% leased to 222 tenants.
The Properties consist primarily of suburban office and industrial
buildings (36 of which are Class A properties). The Company considers Class A
suburban office and industrial properties to be those that have desirable
locations, are well maintained and professionally managed and have the potential
of achieving rental and occupancy rates that are typically at or above those
prevailing in their respective markets. The average age of the Properties is
approximately 10.8 years. The Company's 10 largest tenants (based on pro forma
annualized base rent at September 30, 1996) aggregate approximately 29.8% of the
Company's total base rent and approximately 27.5% of the Company's net rentable
square feet, and have a weighted average remaining lease term of approximately
7.8 years. As of September 30, 1996, no single tenant accounted for more than
8.7% of the Company's pro forma aggregate annualized base rent and only 30
tenants individually represented more than 1.0% of such aggregate annualized
base rent.
Leases representing approximately 58.5% of the net rentable square footage
at the Properties were signed during the period January 1, 1993 through December
31, 1995, a time when management believes market rental rates were at or below
current market rental rates. This belief is supported by the fact that for the
nine months ended September 30, 1996: (i) renewal leases at the Initial
Properties were signed covering approximately 154,000 net rentable square feet
of office space at a weighted average rental rate of $13.25 per square foot,
compared to leases that expired for that space during such period with a
weighted average rental
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<PAGE> 7
rate of $12.66 per square foot (representing a 4.7% increase); and (ii) new
leases at the Initial Properties were signed covering approximately 264,000 net
rentable square feet of office space at a weighted average rental rate of $15.96
per square foot, compared to leases that expired for that space during such
period with a weighted average rental rate of $14.52 per square foot
(representing a 9.9% increase). In all cases, weighted average rental rates
include expense recoveries, free rent and scheduled rent increases that would be
taken into account under generally accepted accounting principles. The Company
believes that the strength of its leasing department and tenant retention
capabilities should enable it to continue to capitalize on rental rate
differentials as the Company's leases expire.
The Company expects to focus its office and industrial building ownership
in submarkets located within the Suburban Philadelphia Office and Industrial
Market where it believes it can accumulate a critical mass of properties in
order to enhance operating efficiencies and, in turn, cash flow. The Company's
primary business objective is to realize and maximize growth in cash flow per
share and to increase shareholder value by:
- optimizing cash flow from the Properties through continued active
property management and prudent operating strategies;
- acquiring Class A suburban office and industrial properties and/or
portfolios of such properties located in the Market and surrounding areas
at prices that are below replacement cost and at yields which exceed the
Company's cost of capital;
- redeveloping and improving acquired properties and, to a lesser extent,
developing build-to-suit properties as opportunities arise;
- generating third party fee-related revenues; and
- operating within a conservative capital structure with financing policies
that allow for continued growth.
According to the Mid-Year 1996 Philadelphia Office Market Report and
Philadelphia Industrial Market Report (together, the "C&W Mid-Year Report")
prepared by Cushman & Wakefield of Pennsylvania, Inc. ("C&W"), the office and
industrial market located in the Philadelphia metropolitan area, which includes
the Suburban Philadelphia Office and Industrial Market, contains an aggregate of
approximately 383.3 million net rentable square feet. The Company believes that
the Suburban Philadelphia Office and Industrial Market has significant rental
growth potential due to declining vacancy rates, limited new construction, and
steady employment growth. Furthermore, the Company believes that the Market
contains opportunities to acquire Class A suburban office and industrial
properties at attractive yields and at prices which are significantly below
replacement costs. The Company's confidence in the Market is bolstered by the
fact that the Class A office direct vacancy rate in the six Pennsylvania
counties within the Market (Bucks, Chester, Delaware, Lehigh, Montgomery, and
Northampton) fell from approximately 16.4% at June 30, 1995 to approximately
9.1% at June 30, 1996, and the Class A office direct vacancy rate in the two New
Jersey counties within the Market (Burlington and Camden) fell from
approximately 18.4% at June 30, 1995 to approximately 11.3% at June 30, 1996,
according to the C&W Mid-Year Report. The overall vacancy rates within the
Market of 12.4% also compare favorably with the overall average national office
vacancy rate of 14.2% at June 30, 1996. In addition, the net absorption (i.e.,
the net change in occupied space for a given period of time, excluding sublet
space and preleasing) of office space for the Market was approximately 1.3
million net rentable square feet for the six-month period ended June 30, 1996
compared to negative net absorption of 80,000 net rentable square feet for the
six-month period ended June 30, 1995, according to the C&W Mid-Year Report.
The Company commenced its operations in 1986 as a finite life REIT that
owned eight properties. In October 1994, the Company's shareholders approved
amendments to the Company's Declaration of Trust that eliminated the Company's
finite life status and increased the Company's authorized capital. Since that
time, the Company has sought to enhance the value of its portfolio by: (i)
actively managing its Properties; (ii) exploring acquisitions of individual and
portfolio properties in its submarkets; and (iii) seeking financing transactions
that could be used to fund future growth. These efforts culminated in the August
1996 acquisition of substantially all of the real estate holdings of Safeguard
Scientifics, Inc. ("SSI") and SSI's real estate
2
<PAGE> 8
affiliate, The Nichols Company ("TNC"), a private real estate development and
management services company operating in the Market (the "SSI/TNC Transaction").
The SSI/TNC Transaction included the acquisition by the Company of 19
office and industrial properties containing approximately 958,000 net rentable
square feet with an occupancy rate of approximately 93.8% as of September 30,
1996 (the "SSI/TNC Properties") and an option to acquire the four Option
Properties, each of which is located within the Market. The SSI/TNC Transaction
also included the combination of the real estate management, marketing and
development functions of TNC with those of the Company. The Company believes
that the SSI/TNC Transaction has significantly enhanced its position as an owner
and operator of office and industrial properties in the Market.
Since 1982, TNC has operated exclusively in the Suburban Philadelphia
Office and Industrial Market and has been responsible for the development of
approximately 3.2 million net rentable square feet of office and industrial
properties in this Market, including the development of build-to-suit facilities
for GMAC (Mortgage Division former headquarters), Penn Mutual Life Insurance
Company (headquarters), Advanta Corp. (former headquarters), Sartomer Company,
Inc. (a U.S. subsidiary of TOTAL) (headquarters), General Accident Group,
General Electric, Ford Motor Company, and ARCO Chemical. In addition, TNC
acquired, developed, marketed, and managed nine corporate campuses.
The Company is led by an experienced management team, the senior members of
which include Anthony A. Nichols, Sr., Chairman of the Board and former
President of TNC, and Gerard H. Sweeney, President and Chief Executive Officer.
The Company's four senior executives have an average of approximately 22 years
of real estate experience. In aggregate, the Company's management team has been
responsible for the management of approximately 7.5 million net rentable square
feet and the development of approximately 3.2 million net rentable square feet
of office and industrial properties primarily within the Market.
RISK FACTORS
An investment in the Common Shares involves various risks, and investors
should carefully consider the matters discussed under "Risk Factors." Such risks
include, among others:
- the limited geographic concentration of the Properties, which increases
the risk of the Company being adversely affected by a downturn in the
Philadelphia economy;
- the possibility that the Preferred Shares issued in connection with the
acquisition of the SERS Properties (which are convertible, subject to
certain conditions, into an aggregate of 1,606,060 Common Shares) will
become (i) entitled to receive distributions after July 1, 1997 equal to
120% of the distributions payable in respect to the number of Common
Shares into which such Preferred Shares are convertible and (ii) subject
to redemption after July 1, 1998 at the greater of: (a) the fair market
value of the number of the Common Shares into which the Preferred Shares
may be converted and (b) an amount equal to $16.50 multiplied by the
number of Common Shares into which the Preferred Shares may be converted
plus an 8.0% return thereon, if prior to such respective dates the
shareholders do not approve the conversion of the Preferred Shares into
Common Shares, an event that would materially and adversely effect the
financial condition of the Company;
- risks associated with the acquisition of new properties, generally, and
with the Company's recent acquisition of many of the Properties
(including nine of the Acquisition Properties) and contemplated
acquisition of four of the Acquisition Properties, including risks of
acquiring properties over which the Company has had no control and which
may have characteristics or deficiencies unknown to the Company affecting
the value or revenue potential thereof; the risk that recently acquired
Properties or newly acquired properties will fail to perform as expected;
risks associated with integrating such acquisitions into the Company's
existing management structure; risks associated with the Company's lack
of operating history with regard to the most recently acquired Properties
and the Acquisition Properties; risks that certain types of losses could
exceed the Company's insurance coverage and the potential costs of
compliance with the Americans With Disabilities Act of 1990 (the "ADA");
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<PAGE> 9
- the lack of appraisals for the Properties, giving rise to the risk that
the combined value of the Common Shares, the Preferred Shares and Units
in the Operating Partnership that are redeemable for Common Shares may be
greater than the aggregate fair market value of the Company's equity in
the Properties;
- the risk that the actual amount of Cash Available for Distribution will
be substantially below the Company's expectations, including the risk
that the actual Cash Available for Distribution will be insufficient to
permit the Company to sustain its expected increased quarterly
distribution rate;
- conflicts of interest between the Company and certain of its executive
officers and members of the Board of Trustees, all of which could lead to
decisions that do not reflect solely the interests of shareholders,
including: (i) conflicts associated with sales of, or prepayment of debt
secured by, the Properties that may arise due to the more adverse tax
consequences of such sales or prepayment to certain members of management
and of the Board of Trustees as holders of Units; and (ii) the possible
failure by the Company to enforce the material terms of its acquisition
agreements with SSI and TNC, particularly the indemnification provisions
for breaches of representations and warranties, even when such
enforcement would be in the best interests of the Company;
- risks generally associated with real estate investment and property
management, such as: (i) the need to renew leases or relet space upon
lease expirations on equal or more favorable terms and, at times, to pay
renovation and reletting costs in connection therewith; (ii) the effect
of economic and other conditions on office property cash flows and
values; (iii) the ability of tenants to make lease payments; (iv) the
ability of a property to generate revenue sufficient to meet operating
expenses, including future debt service; and (v) the illiquidity of real
estate investments, all of which may adversely affect the Company's
ability to make expected distributions to shareholders and its ability to
qualify as a REIT;
- risks associated with borrowing, including the uncertainty associated
with the ability of the Company to refinance mortgage indebtedness at
maturity dates ranging from June 1997 to April 2001, that indebtedness
might be refinanced at higher interest rates or otherwise on terms less
favorable to the Company, that interest rates might increase on variable
rate indebtedness (which is expected to equal approximately $4.1 million
upon completion of the Offering) and on any borrowings under the
Company's expected two-year $80.0 million secured revolving credit
facility (the "Credit Facility") (none of which is expected to be
outstanding as of the closing of the Offering), all of which could
adversely affect the Company's ability to make expected distributions to
shareholders and its ability to qualify as a REIT;
- the absence of any provision in the organizational documents of the
Company limiting the amount of indebtedness the Company may incur;
- the possibility that the Company will incur net losses in the future;
- taxation of the Company as a corporation if it fails to qualify as a
REIT, treatment of the Operating Partnership as an association taxable as
a corporation if it fails to qualify as a partnership for federal income
tax purposes (and the resulting failure of the Company to qualify as a
REIT), the Company's liability for federal, state and local income taxes
in such event and the resulting decrease in the Cash Available for
Distribution;
- possible environmental liabilities in connection with the Company's
ownership and/or operation of the Properties;
- risks associated with the business and ownership of the Company's
property management business (the "Management Company"), including
potential tax liabilities, lack of control over the Management Company
and the risk that most property management contracts are cancelable by
the property owners with 30 days' notice or upon a sale of the property
under management;
- the possibility that the Board may in the future amend or revise the
investment, financing, borrowing and distribution policies of the Company
without a vote of shareholders;
- dependence on key personnel;
4
<PAGE> 10
- anti-takeover effect of limiting actual or constructive ownership of
Common Shares by a single person to 9.8% of the outstanding shares,
subject to certain specified exceptions, and of certain other provisions
contained in the organizational documents of the Company, including the
authority of the Board to designate and issue one or more series of
preferred shares, without shareholder approval, which may discourage a
change in control and limit the opportunity for shareholders to receive a
premium over the then-current market price for their Common Shares;
- the immediate dilution in the net book value of the Common Shares to be
experienced by the purchasers of Common Shares in the Offering;
- the preferential rights as to distributions, liquidation, and voting that
the Board has the authority to establish for the benefit of holders of
preferred shares including preferential liquidation, distribution and
redemption rights that the Board will establish for the benefit of the
holders of the Preferred Shares to be issued in connection with the SERS
Transaction;
- possible increase in market interest rates, which may lead prospective
purchasers of the Common Shares to expect a higher anticipated annual
yield from future distributions, and the possible issuance of additional
Common Shares, all of which may adversely affect the market price of
Common Shares; and
- the risks relating to the sale of unregistered securities.
BUSINESS AND GROWTH STRATEGIES
The Company's strategy is to focus its growth in the Suburban Philadelphia
Office and Industrial Market. The Company believes that certain economic
fundamentals in the Market provide an attractive environment for owning,
acquiring and operating Class A office and industrial properties. This belief is
supported by the following:
- The recent decline in vacancy rates within the Market: the Class A office
direct vacancy rate in the six Pennsylvania counties within the Market
fell from approximately 16.4% at June 30, 1995 to approximately 9.1% at
June 30, 1996, and the Class A office direct vacancy rate in the two New
Jersey counties within the Market fell from approximately 18.4% at June
30, 1995 to approximately 11.3% at June 30, 1996, according to the C&W
Mid-Year Report;
- The net absorption of office space within the Market during the six-month
period ended June 30, 1996 was approximately 1.3 million net rentable
square feet compared to a negative net absorption of 80,000 net rentable
square feet within the Market during the six-month period ended June 30,
1995, according to the C&W Mid-Year Report;
- The weighted average Class A office rental asking rate of $18.94 per
square foot within the Market as identified in the C&W Mid-Year Report,
compared to an average annualized rental rate of $15.15 per square foot
at the office Properties as of September 30, 1996; and
- The limited new construction of office buildings within the Market during
the 1990's, with construction primarily on a build-to-suit basis. As
reported by C&W, office development from January 1, 1995 through June 30,
1996 was limited to approximately 254,000 net rentable square feet in the
Market, which contained a total office inventory of approximately 43.7
million net rentable square feet as of June 30, 1996.
The Company further believes that, based on its evaluation of market
conditions, the growth rates attainable within the Suburban Philadelphia Office
and Industrial Market will improve overall occupancy levels and rental rates and
reduce owner leasing concessions.
The Company believes that the foundation of its growth will consist of: (i)
the quality and strategic location of the Properties; (ii) the strengthening
regional economy and real estate fundamentals of the Market; (iii) the knowledge
and experience of its senior management team; (iv) the limited new construction
of office space in the Market; (v) the presence of distressed sellers and
inadvertent owners (through
5
<PAGE> 11
foreclosure or otherwise); and (vi) the limited capital available to many of the
Company's competitors for acquisitions and capital improvements. The Company
expects to focus its office building ownership in submarkets located within the
Market where it believes it can accumulate a critical mass of properties in
order to enhance operating efficiencies and, in turn, cash flow.
The Company's primary business objective is to realize and maximize growth
in cash flow per share and to increase shareholder value by: (i) optimizing cash
flow from the Properties through continued active property management and
prudent operating strategies; (ii) acquiring quality suburban office and
industrial properties and/or portfolios of such properties located in the Market
and surrounding areas at prices that are below replacement cost and at yields
which exceed the Company's cost of capital; (iii) redeveloping and improving
acquired properties and, to a lesser extent, developing build-to-suit properties
as opportunities arise; (iv) generating third party fee-related revenues; and
(v) operating within a conservative capital structure with financing policies
that allow for continued growth.
MANAGEMENT AND OPERATING STRATEGIES
The Company expects to realize and maximize cash flow growth due to the
strength and experience of its management team through:
- Contractual Rental Rate Increases: As of September 30, 1996, 100 leases,
representing approximately 43.1% of the total leases at the Properties
and approximately 52.6% of the net rentable square feet at the
Properties, included built-in contractual rental rate increases. Between
September 30, 1996 and June 30, 2011, the contractual base rents received
by the Company under such leases are expected to increase by an aggregate
of approximately $11.8 million (not including increases attributable to
the transition from free or partial rent to full rent or rent increases
that are tied to indices such as the consumer price index (the "CPI"));
- Leasing Expiring/Vacant Space: The Company expects to experience cash
flow growth through the releasing of approximately 324,000 net rentable
square feet of space under 89 leases that expire at the Properties
between October 1, 1996 and December 31, 1997 and that have a weighted
average annual rental rate as of their expiration dates of $14.14 per
square foot. The Company believes that the majority of such leases are
currently at or below market rental rates. In addition, the Company
expects to realize additional cash flow through the potential leasing of
approximately 115,000 net rentable square feet of vacant space at the
Properties as of September 30, 1996 (approximately 5.7% of the Company's
total net rentable square feet). There can be no assurance, however, that
the Company will meet any of the foregoing expectations; and
- Tenant Services: The Company believes it has been able to provide tenants
with a high level of service as evidenced by the tenant retention rates
of the Initial Properties in 1993, 1994 and 1995 and the nine-month
period ended September 30, 1996 of 71.4%, 56.7%, 75.1% and 93.5%,
respectively, based on net rentable square footage renewed as a
percentage of the square footage of leases expiring during each period.
ACQUISITION STRATEGIES
The Company believes that it will be able to identify and capitalize on
acquisition opportunities through: (i) management's and the Board's significant
local market expertise; (ii) management's and the Board's relationships with
private and institutional real estate owners, potential sellers of individual
and portfolio properties, area real estate brokers and tenants; (iii) its
current market penetration in the Suburban Philadelphia Office and Industrial
Market; (iv) its access to capital as a public company, including, but not
limited to, proceeds available under the Company's $80 million Credit Facility
and the Operating Partnership's ability to exchange Units for interests in
properties, thereby permitting certain sellers to defer the tax gain associated
with the sale of such properties; and (v) its fully integrated real estate
operations, which allow the Company to respond quickly to acquisition
opportunities and enable it to provide real estate management services to third
parties as a means of identifying such opportunities. The Company's acquisition
program will focus on both portfolio and individual acquisitions. See "Business
and Properties -- Credit Facility."
6
<PAGE> 12
The Company will seek to acquire additional office and industrial
properties that meet one or more of the following investment criteria: (i) the
property is well designed, well constructed and well located within the Suburban
Philadelphia Office and Industrial Market; (ii) the property offers attractive
current yield and long-term growth potential based on its occupancy
characteristics, including lease structure, tenant credit and occupancy history;
(iii) the property can be acquired at a substantial discount to replacement
cost; and (iv) the property is located in a submarket that contains barriers to
entry and repositioning opportunities.
LibertyView Acquisition. As an example of these strategies, in July 1996,
the Company acquired the LibertyView Building, a 121,737 net rentable square
foot suburban office building built in 1990 and located in Cherry Hill, New
Jersey, for $10.6 million. This represents a purchase price of $87.07 per square
foot versus management's estimate of this Property's replacement cost of
approximately $150 per square foot. As of September 30, 1996, the LibertyView
Building was approximately 82.8% leased (up from 66.7% at the date of
acquisition). The LibertyView Building was acquired by the Company at a
capitalization rate of approximately 11.0% (calculated by dividing (a) the
expected net operating income (including the effect of straight line rents)
generated by the property based on annualized revenues from signed leases in
place and lease commitments at the date of acquisition by (b) the consideration
paid for the property after adjusting for the additional capital costs of new
leases). The Company estimates that the capitalization rate for this Property
would be approximately 12.9% upon the establishment of an occupancy level
greater than or equal to 95%, given current market rental rates, and after
adjusting for the anticipated additional capital costs required to achieve such
occupancy levels. There can be no assurance that the Company will achieve such
occupancy levels at prevailing market rates. In addition, there can be no
assurance that the Company will be successful in making acquisitions on
comparable terms in the future. The Company believes it could add, in addition
to the Acquisition Properties, a number of office properties to its existing
portfolio without requiring a material increase in management personnel due to
the Company's expertise, depth of current management, financial reporting
systems and the efficiencies created by its centralized management structure.
The Company also holds an option from an affiliate of TNC to purchase the
Option Properties containing approximately 159,000 net rentable square feet. The
Option Properties are located in the Market, are managed by the Company, and
were approximately 95.5% leased to 16 tenants as of September 30, 1996. There
can be no assurance that the Company will exercise its option to acquire any of
the Option Properties or, if it does, that it will be able to satisfy the
conditions relating to the exercise of such option. See "Business and
Properties -- Option Properties."
CORPORATE SERVICE ACTIVITIES
The Company, through the Management Company, managed, as of September 30,
1996, approximately 2.0 million net rentable square feet, including 575,000 net
rentable square feet of office properties on behalf of third parties and
approximately 159,000 net rentable square feet at the Option Properties. The
Company's services for such third parties include corporate tenant
representations, property management, leasing and brokerage and construction
management services. The Company typically provides a full range of real estate
services to companies that do not maintain in-house real estate departments. The
Company believes that these corporate service activities will help it to expand
its base of national tenants, further enhance property management economies of
scale and increase its market penetration. The Company also believes it will
benefit from the increasing tendency of institutional owners of real estate to
engage established real estate companies to handle their property and asset
management requirements. Third party clients of the Company include BetzDearborn
Inc., CompuCom Systems, Inc., Cambridge Technology Partners (Massachusetts),
Inc., Coherent Communications Systems Corporation, Integrated Systems Consulting
Group, Inc., Premier Solutions, Inc., and Sanchez Computer Associates, Inc.,
four of which are publicly-traded companies in which SSI maintains an ownership
interest. For the nine months ended September 30, 1996, the real estate
management services business had revenues of approximately $943,000. The
Company's management expects to continue its relationships with its corporate
clientele as well as to selectively market its services to corporate users of
commercial real estate and building owners.
7
<PAGE> 13
FINANCING POLICIES
As a general policy, following the closing of the Offering and the
Concurrent Investments, the Company intends, but is not obligated, to adhere to
a policy of maintaining a debt-to-total market capitalization ratio of no more
than 50%. This policy is intended to provide the Company with financial
flexibility to select the optimal source of capital (whether debt or equity)
with which to finance external growth. The Company's debt-to-total market
capitalization ratio immediately following the closing of the Offering and the
Concurrent Investments and the application of the net proceeds therefrom, will
be approximately 21.0% (approximately 19.8% if the Underwriters' over-allotment
option is exercised in full). Because such ratio is based upon the market values
of equity, it will fluctuate with changes in the price of Common Shares. See
"Policies with Respect to Certain Activities."
RECENT DEVELOPMENTS
RECENTLY COMPLETED ACQUISITIONS
- On August 22, 1996, the Company consummated the SSI/TNC Transaction in
which it acquired 19 of the Initial Properties in exchange for 258,333
Common Shares, warrants to purchase 258,333 Common Shares at an exercise
price of $19.50 per share and 540,159 Units (including Units which the
Operating Partnership is required to issue by no later than September
1999) that are convertible into 540,159 Common Shares. Such Units will be
subsequently reduced to approximately 509,856 in connection with the
repayment of debt upon the closing of the Offering. See "Use of
Proceeds." The 19 Initial Properties were acquired subject to mortgage
indebtedness aggregating approximately $64.0 million as of the date of
acquisition, a portion of which will be repaid from the net proceeds of
the Offering and the Concurrent Investments. See "Use of Proceeds" and
"The Company -- The SSI/TNC Transaction." The Company completed the
SSI/TNC Transaction for the following reasons: (i) to increase the size
and diversity of the Company's asset base, providing for a more stable
entity with which to generate cash flow; (ii) to increase the Company's
market capitalization, which the Company believes enhances its access to
the capital markets; and (iii) to combine the real estate expertise of
the Company and TNC, resulting in an increase in the Company's senior
management depth from three to seven executives and total employees from
six to 26.
- On July 19, 1996, the Company completed the acquisition of the
LibertyView Building, a 121,737 net rentable square foot suburban office
building located in Cherry Hill, New Jersey, for a purchase price of
approximately $10.6 million. See "-- Acquisition Strategies."
- On November 14, 1996, the Company completed the acquisition of the SERS
Properties. The SERS Properties aggregate approximately 418,000 net
rentable square feet, have an average age of approximately 12 years and
are located within the Market. As of September 30, 1996, the SERS
Properties were approximately 92.4% leased to 62 tenants. The SERS
Properties were acquired by the Company for an aggregate purchase price
of approximately $30.3 million, payable as follows: (i) by issuing
Preferred Shares that, subject to certain conditions, are convertible
into 1,606,060 Common Shares (which represents, assuming the conversion
of all such Preferred Shares into Common Shares, an effective price per
Common Share of $16.50); (ii) by agreeing to make deferred payments
aggregating $3.8 million; and (iii) by issuing two-year warrants to
purchase 133,333 Common Shares at an exercise price of $25.50 per share.
See "The Company -- The SERS Transaction."
PENDING ACQUISITIONS
- The Company has signed an agreement of sale to purchase the Delaware
Corporate Center I (One Righter Parkway), a 104,828 net rentable square
foot office building located in New Castle County, Delaware, for $12.7
million in cash. The building was built in 1989 and was 100% leased as of
September 30, 1996. See "The Company -- Other Pending Acquisitions."
- The Company has signed an agreement of sale to purchase two buildings in
Horsham, Pennsylvania for an aggregate purchase price of $7.1 million in
cash. The buildings include 700 Business Center Drive, a
8
<PAGE> 14
30,773 net rentable square foot office building built in 1986 and 800
Business Center Drive, a 51,236 net rentable square foot office building
built in 1986. 700 and 800 Business Center Drive were each 100% leased as
of September 30, 1996. See "The Company -- Other Pending Acquisitions."
- The Company has signed an agreement of sale to purchase 8000 Lincoln
Drive, a 54,923 net rentable square foot office building built in 1983
and located in Evesham, New Jersey, for $3.0 million in cash. The
building was 100% leased as of September 30, 1996.
These pending acquisitions are subject to completion of customary closing
conditions (other than the completion of due diligence which has occurred) and,
as a result, no assurance can be given that these, or any other, acquisitions
will be completed. However, it is expected that these acquisitions will close
concurrent with or shortly following the consummation of the Offering. If these
acquisitions are consummated, the Company's portfolio will consist of 37
properties aggregating approximately 2.0 million net rentable square feet.
CONCURRENT INVESTMENTS
- Concurrent with the closing of the Offering, the SERS Voting Trust has
agreed, subject to certain conditions, to purchase $10.5 million of
Common Shares directly from the Company in a private placement at the
price per Common Share sold in the Offering.
- Concurrent with the closing of the Offering, two investment funds (the
"Morgan Stanley Funds") advised by Morgan Stanley Asset Management Inc.
have agreed, subject to certain conditions, to purchase $11.7 million of
Common Shares directly from the Company in a private placement at a price
per Common Share of $16.50.
FINANCING TRANSACTION
Richard M. Osborne, an Ohio-based investor and Trustee of the Company, has
directly or through his affiliates made investments in the Company resulting in
his beneficial ownership of 260,039 Common Shares and warrants to purchase
80,439 Common Shares at an exercise price of $19.50 per share. Approximately
179,600 of Mr. Osborne's Common Shares were acquired in January 1996 from third
parties for a weighted average purchase price per share of approximately $15.03.
The balance of Mr. Osborne's Common Shares were acquired from the Company
pursuant to a June 1996 financing transaction that included (i) a $1.0 million
unsecured loan to the Company at the prime rate (the "Osborne Loan") and (ii)
the purchaser acquiring 19,983 paired units ("Paired Units") at a per unit price
of $16.89. Each Paired Unit included one Common Share and one six-year warrant
to purchase an additional Common Share at an exercise price of $19.50 per share.
The Osborne Loan was repaid on November 15, 1996, pursuant to its terms, through
the issuance by the Company of an aggregate of 60,456 Paired Units at a per unit
price of $16.89.
CREDIT FACILITY
The Company has received a commitment from a group of lenders to provide
the Company with a two-year, $80.0 million revolving Credit Facility. The Credit
Facility will be used, among other things, to finance the acquisition of
properties, provide funds for tenant improvements and capital expenditures and
provide for working capital and other general purposes. See "Business and
Properties -- Credit Facility."
REVERSE SHARE SPLIT
Prior to the closing of the Offering, the Company will combine the
outstanding Common Shares by means of a one-for-three reverse share split. As a
result, the number of Common Shares issuable upon exercise of outstanding
options and warrants, including the per share exercise prices, and the number of
Common Shares issuable upon conversion of Units will be proportionately
adjusted. The Reverse Split will result in certain shareholders owning
fractional shares of the Company. The Company will not issue fractional shares,
but will instead aggregate and sell any fractional shares and distribute the
cash proceeds to
9
<PAGE> 15
shareholders who would otherwise be entitled to receive fractional shares. See
"Description of Shares of Beneficial Interest -- Reverse Share Split; Treatment
of Fractional Shares."
BUSINESS AND PROPERTIES
PROPERTIES
The Initial Properties are comprised of 23 office properties (22 of which
are Class A properties) totalling approximately 1.2 million net rentable square
feet and one Class A industrial property (1510 Gehman Road) totalling
approximately 153,000 net rentable square feet. Twenty-two of the Initial
Properties are located in the Market. On November 14, 1996, the Company acquired
the nine SERS Properties. Concurrently with the closing of the Offering, the
Company will acquire the four additional Acquisition Properties. The Acquisition
Properties (all of which are Class A properties) are comprised of 11 office
properties totalling approximately 600,000 net rentable square feet and two
industrial facilities totalling approximately 100,000 net rentable square feet.
The Company generally considers Class A suburban office and industrial
properties to be those that have desirable locations, are well maintained and
professionally managed and have the potential of achieving rental and occupancy
rates that are typically at or above those prevailing in their respective
markets. As of September 30, 1996, the 34 office Properties and the three
industrial Properties were approximately 93.5% and 100% leased, respectively, by
222 tenants. The 34 office Properties are primarily one to three story suburban
office buildings containing an average of 51,000 net rentable square feet. All
of the Properties are in business parks or commercial business districts, and 19
of the Properties were developed by the Company.
10
<PAGE> 16
The following table sets forth certain information with respect to the
Properties:
<TABLE>
<CAPTION>
AVERAGE TOTAL BASE
TOTAL BASE RENT RENT PLUS EXPENSE
FOR THE RECOVERIES PER
NET PERCENTAGE TWELVE MONTHS NET RENTABLE SQUARE
RENTABLE LEASED AS OF ENDED FOOT LEASED
INITIAL PROPERTIES: YEAR SQUARE SEPTEMBER 30, SEPTEMBER 30, 1996(2) SEPTEMBER 30,
SUBMARKET/PROPERTY BUILT FEET 1996(1) (000'S) 1996(3)
- --------------------------------------------- ----- --------- ------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road............................ 1984 30,138 100.0% $ 329 $ 15.67
1155 Business Center Drive.................. 1990 51,388 99.4% 591 16.31
500 Enterprise Road......................... 1990 67,800 98.5% 674 13.74
One Progress Avenue......................... 1986 79,204 100.0% 563 9.54
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way............................ 1987 47,604 100.0% 336 7.15
486 Thomas Jones Way........................ 1990 51,500 50.9% 416 23.26
468 Creamery Way............................ 1990 28,934 100.0% 293 14.54
110 Summit Drive............................ 1985 43,660 67.6% 262 13.51
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON,
PA
2240/50 Butler Pike......................... 1984 52,183 99.4% 560 15.82
120 West Germantown Pike.................... 1984 30,546 100.0% 421 19.16
140 West Germantown Pike.................... 1984 25,953 98.7% 297 16.56
2260 Butler Pike............................ 1984 31,892 100.0% 377 16.84
MAIN LINE, PA
16 Campus Boulevard......................... 1990 65,463 100.0% 430 9.94
18 Campus Boulevard......................... 1990 37,700 100.0% 410 15.01
LEHIGH VALLEY, PA
7310 Tilghman Street........................ 1985 40,000 99.0% 329 11.44
7248 Tilghman Street........................ 1987 42,863 93.8% 399 15.06
6575 Snowdrift Road......................... 1988 46,250 100.0% 300 9.06
LANSDALE, PA
1510 Gehman Road............................ 1990 152,625 100.0% 773 7.70
BURLINGTON COUNTY, NJ
One Greentree Centre........................ 1982 55,838 100.0% 869 16.97
Two Greentree Centre........................ 1983 56,075 100.0% 816 14.53
Three Greentree Centre...................... 1984 69,101 96.2% 1,049 16.51
CAMDEN COUNTY, NJ
457 Haddonfield Road (LibertyView).......... 1990 121,737 82.8% 1,160 16.34
OTHER MARKETS
168 Franklin Corner Road.................... 1976 32,000 54.5% 186 13.43
Lawrenceville, NJ
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks......................... 1982 73,339 100.0% 1,008 13.83
--------- ----- ------- ------
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
INITIAL PROPERTIES.......................... 1,333,793 93.8% $12,848 $ 14.04(10)
========= ===== ======= ======
<CAPTION>
AVERAGE C&W RENTAL RATE TENANTS LEASING 10% OR
ANNUALIZED WEIGHTED INCREASE MORE OF RENTABLE
RENTAL AVERAGE POTENTIAL SQUARE FOOTAGE PER
RATE AS OF CLASS A UNTIL MARKET PROPERTY AS OF
INITIAL PROPERTIES: SEPTEMBER 30, RENTAL RATE IS SEPTEMBER 30, 1996
SUBMARKET/PROPERTY 1996(4) RATES(5) ACHIEVED(6) AND LEASE EXPIRATION DATE
- --------------------------------------------- ------------------ -------- ------------ -------------------------
<S> <<C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road............................ $16.50 $18.02 9.2% GMAC (100%) - 5/03
1155 Business Center Drive.................. 17.22 18.02 4.6% IMS (79%) - 3/06;
Motorola (14%) - 2/99
500 Enterprise Road......................... 15.03 14.50 (3.5)% Conti Mortgage
(80%) - 4/01;
Pioneer (19%) - 10/00
One Progress Avenue......................... 11.75 18.02 53.4% Reed Technologies
(100%) - 6/11
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way............................ 7.25(7) 7.89(8) 8.8% Neutronics (100%) - 1/03
486 Thomas Jones Way........................ 15.46 15.55 0.5% First American Real
Estate (20%) - 4/00
468 Creamery Way............................ 13.88 13.61 (1.9)% Franciscan Health
(82%) - 6/99;
American Day Treatment
(18%) - 6/00
110 Summit Drive............................ 7.20(8) 7.89(8) 9.6% Maris Equipment
(49%) - 4/99
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON,
PA
2240/50 Butler Pike......................... 17.55 18.70 6.6% CoreStates (59%) - 4/06;
TWA Marketing
(33%) - 10/99
120 West Germantown Pike.................... 17.52 18.70 6.7% Clair O'Dell
(82%) - 7/01;
Kleinerts (13%) - 10/98
140 West Germantown Pike.................... 17.38 18.70 7.6% Healthcare, Inc.
(46%) - 9/99; Henkel
(29%) - 6/98; National
Health Equity
(20%) - 5/99
2260 Butler Pike............................ 17.82 18.70 4.9% Information Resources
(66%) - 12/00; Med
Resorts (26%) - 1/01
MAIN LINE, PA
16 Campus Boulevard......................... 13.58 20.27 49.3% New England Mutual
(52%) - 5/06; Atlantic
Employees C.U.
(35%) - 1/06
18 Campus Boulevard......................... 18.62 20.27 8.9% Prudential (25%) - 6/01;
Devco Mutual
(35%) - 1/01;
Scott Paper
(17%) - 11/97;
Marshall Dennehey
(18%) - 10/01
LEHIGH VALLEY, PA
7310 Tilghman Street........................ 8.89(8) 10.50(8) 18.1% AT&T (83%) - 12/96-8/98
7248 Tilghman Street........................ 14.76 15.34 3.9% IDS Financial
(29%) - 7/01;
Ohio Casualty
(46%) - 7/01;
Meridian Mortgage
(12%) - 6/99
6575 Snowdrift Road......................... 7.15(8) 10.50(8) 46.9% Corning Packaging
(100%) - 2/99
LANSDALE, PA
1510 Gehman Road............................ 4.72(8) 5.95(8) 26.1% Ford Electronics
(35%) - 6/98;
Nibco (65%) - 8/99
BURLINGTON COUNTY, NJ
One Greentree Centre........................ 16.07 19.30 20.0% American Executive
Centers (30%) - 1/06;
West Jersey (15%) - 4/01;
Temple Sports Med.
(18%) - 12/97
Two Greentree Centre........................ 16.02 19.30 20.5% Merrill Lynch
(23%) - 11/05;
ReMax Suburban
(12%) - 11/05
Three Greentree Centre...................... 16.41 19.30 17.6% Parker, McCay & Criscuolo
(39%) - 5/01;
Marshall Dennehey
(20%) - 5/97;
Olde Discounts
(12%) - 3/00;
Surety Title
(13%) - 11/03
CAMDEN COUNTY, NJ
457 Haddonfield Road (LibertyView).......... 18.63 21.81 17.1% HIP Health Plan
(31%) - 12/07
OTHER MARKETS
168 Franklin Corner Road.................... 15.55 18.00(9) 15.8% Dr. Belden (12%) - 5/01;
Lawrenceville, NJ Crawford & Co.
(14%) - 11/99
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks......................... 14.25 15.50(9) 8.8% N/A
----- ----- -----
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
INITIAL PROPERTIES.......................... $14.63(10) $16.83(10)(11) 15.0%
===== ===== =====
</TABLE>
11
<PAGE> 17
<TABLE>
<CAPTION>
AVERAGE TOTAL BASE
TOTAL BASE RENT RENT PLUS EXPENSE
FOR THE RECOVERIES PER
NET PERCENTAGE TWELVE MONTHS NET RENTABLE SQUARE
RENTABLE LEASED AS OF ENDED FOOT LEASED
ACQUISITION PROPERTIES: YEAR SQUARE SEPTEMBER 30, SEPTEMBER 30, 1996(2) SEPTEMBER 30,
SUBMARKET/PROPERTY BUILT FEET 1996(1) (000'S) 1996(3)
- ----------------------------------------------- ----- --------- ------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
700 Business Center Drive(12)................. 1986
82,009 100.0% $ 793 $11.59
800 Business Center Drive(12)................. 1986
KING OF PRUSSIA, PA
500 North Gulph Road.......................... 1979 92,851 86.1% 1,387 15.02
BUCKS COUNTY, PA
2200 Cabot Boulevard.......................... 1979 55,081 100.0% 259 5.75
2250 Cabot Boulevard.......................... 1982 40,000 100.0% 170 5.22
2260 Cabot Boulevard(12)...................... 1984
29,638 100.0% 246 10.17
2270 Cabot Boulevard(12)...................... 1984
3000 Cabot Boulevard.......................... 1986 34,640 83.9% 364 12.85
3329 Street Road -- Greenwood Sq.(12)......... 1985
3331 Street Road -- Greenwood Sq.(12)......... 1986 165,929 92.1% 2,234 14.56
3333 Street Road -- Greenwood Sq.(12)......... 1988
BURLINGTON COUNTY, NJ
8000 Lincoln Drive............................ 1983 54,923 100.0% 445 8.25
NORTHERN SUBURBAN WILMINGTON
One Righter Parkway........................... 1989 104,828 100.0% 2,044 19.50
--------- ----- ------- ------
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
ACQUISITION PROPERTIES........................ 659,899 95.2% $ 7,942 $ 12.93
========= ===== ======= ======
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR ALL
PROPERTIES.................................... 1,993,692 94.3% $20,790 $ 13.67
========= ===== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AVERAGE C&W RENTAL RATE TENANTS LEASING 10% OR
ANNUALIZED WEIGHTED INCREASE MORE OF RENTABLE
RENTAL AVERAGE POTENTIAL SQUARE FOOTAGE PER
RATE AS OF CLASS A UNTIL MARKET PROPERTY AS OF
ACQUISITION PROPERTIES: SEPTEMBER 30, RENTAL RATE IS SEPTEMBER 30, 1996
SUBMARKET/PROPERTY 1996(4) RATES(5) ACHIEVED(6) AND LEASE EXPIRATION DATE
- ----------------------------------------------- --------------- -------- ------------ -------------------------
<S> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
700 Business Center Drive(12)................. Metpath (35%) - 1/12; Sprint
$13.11 $18.02 37.5% (19%) - 3/01; Macro (19%) -
800 Business Center Drive(12)................. 4/01; Advanta (10%) - 6/99
KING OF PRUSSIA, PA
500 North Gulph Road.......................... 16.51 21.39 29.6% Transition Software
(16%) - 8/00, Strohl
Syst (12%) - 10/99
BUCKS COUNTY, PA
2200 Cabot Boulevard.......................... 4.40 4.50 2.3% Hussman Corp (38%), Nobel
Printing (38%) - 6/97;
McCaffrey Mgt
(24%) - 8/00
2250 Cabot Boulevard.......................... 3.50 4.50 28.6% Bucks County Nut (100%) -
7/99
2260 Cabot Boulevard(12)...................... 8.78 9.00 2.5% Sager Electrical (14%) -
10/98; Terminix Intrntnl
2270 Cabot Boulevard(12)...................... (13%) - 11/96
3000 Cabot Boulevard.......................... 17.03 18.95 11.3% Geraghty & Miller (31%) -
11/97; Prudential Insur.
(21%) - 7/98;
Luigi Bormioli Co.
(11%) - 6/98
3329 Street Road -- Greenwood Sq.(12).........
3331 Street Road -- Greenwood Sq.(12)......... 16.54 18.95 14.6% Waste Management (27%) -
3333 Street Road -- Greenwood Sq.(12)......... 3/97
BURLINGTON COUNTY, NJ
8000 Lincoln Drive............................ 17.13 19.30 $ 12.7% CSC (67%) - 11/01; Blue
Cross (33%) - 2/07
NORTHERN SUBURBAN WILMINGTON
One Righter Parkway........................... 19.30 20.50 6.2% Kimberly Clark (89%) -
12/05
------ ------ ----
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
ACQUISITION PROPERTIES........................ $16.23(13) $19.01(11)(13) 17.2%
====== ====== ====
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR ALL
PROPERTIES.................................... $15.15(14) $17.54(11)(14) 15.8%
====== ====== ====
</TABLE>
- ---------------
(1) Calculated by dividing net rentable square feet included in leases dated on
or before September 30, 1996 by the aggregate net rentable square feet
included in the Property.
(2) "Total Base Rent" for the twelve months ended September 30, 1996 represents
base rents received during such period, excluding tenant reimbursements,
calculated in accordance with generally accepted accounting principles
determined on a straight-line basis. Tenant reimbursements generally
include payment of real estate taxes, operating expenses, and escalations
and common area maintenance and utility charges.
(3) Represents the Total Base Rent for the twelve months ended September 30,
1996, plus tenant reimbursements for the twelve months ended September 30,
1996, divided by the net rentable square feet leased.
(4) "Average Annualized Rental Rate" is calculated as follows: (i) for office
leases written on a triple net basis, the sum of the annualized contracted
base rental rates payable for all space leased as of September 30, 1996
(without giving effect to free rent or scheduled rent increases that would
be taken into account under generally accepted accounting principles) plus
the 1996 budgeted operating expenses excluding tenant electricity; and (ii)
for office leases written on a full service basis, the annualized
contracted base rate payable for all space leased as of September 30, 1996.
In both cases, the annualized rental rate is divided by the total square
footage leased as of September 30, 1996 without giving effect to free rent
or scheduled rent increases that would be taken into account under
generally accepted accounting principles.
(5) Represents the weighted average asking rates, as of June 30, 1996, of
directly competitive properties in the relevant submarket within the
Market, as identified by C&W.
(6) Represents the percentage by which the June 30, 1996 C&W weighted average
asking rate exceeds the September 30, 1996 average annualized rental rate
of the applicable Property.
(7) Property occupied by a single tenant under a triple net lease agreement,
pursuant to which the tenant subcontracts directly with third party
contractors for all building services.
(8) These rates represent triple net lease rates (leases under which tenants
are required to pay all real property taxes, insurance and expenses of
maintaining the leased space).
(9) Rental rates represent management's estimate of asking rental rates in
these markets for comparable properties.
(10) Excludes 1510 Gehman Road, which is an industrial Property.
(11) Represents the Class A weighted average rental rate for the submarkets in
which the Properties are located (weighted by Property net rentable square
footage) as compared to the Class A office weighted average asking rate of
$18.94 per square foot for the Market (weighted by Market net rentable
square footage)as identified in the C&W Mid-Year Report.
(12) The data reflected for these properties are presented on a consolidated
basis.
(13) Excludes 2200 Cabot Boulevard and 2250 Cabot Boulevard, which are
industrial properties.
(14) Excludes 1510 Gehman Road, 2200 Cabot Boulevard and 2250 Cabot Boulevard,
which are industrial properties.
<PAGE> 18
STRUCTURE OF THE COMPANY
As set forth under "Structure of the Company -- Ownership," the following
diagram depicts the ownership of the Company and the Operating Partnership upon
closing of the Offering:
GRAPH
- ---------------
(1) The Operating Partnership holds controlling interests in each of the
property partnerships.
(2) The Operating Partnership owns all of the non-voting preferred stock and 5%
of the common stock of the Management Company and is entitled to receive 95%
of the dividends payable by the Management Company on its capital stock.
Four executive officers of the Company, Messrs. Nichols, Sweeney, Belcher
and Gallagher, are the partners in a general partnership that owns the
remaining 95% of the common stock of the Management Company. Ownership of
the Management Company was structured in a manner intended to comply with
REIT qualification requirements.
BENEFITS OF THE OFFERING TO AFFILIATES OF THE COMPANY
Certain affiliates of the Company will realize material benefits in
connection with the Offering, including the following:
- The Units that the Operating Partnership issued and committed to issue in
the SSI/TNC Transaction will, as a result of the Offering and pursuant to
their terms, be convertible into an equal number of Common Shares and,
accordingly, such Units will be more liquid as a result of the Offering;
- SSI and TNC, as holders of Units, will realize an immediate accretion in
the net tangible book value of their investment in the Company of
approximately $5.72 per Common Share;
13
<PAGE> 19
- Pursuant to the SSI/TNC Transaction, the Company will become obligated to
indemnify TNC and SSI against liability under approximately $10.4 million
of recourse indebtedness secured by four of the Properties;
- Approximately $764,000 of the proceeds of the Offering will be used to
repay in full loans made by SSI to the Operating Partnership; and
- Agreements imposing restrictions on the ability of each of SSI, Anthony
A. Nichols, Sr. and Richard M. Osborne and their respective affiliates to
transfer their Common Shares, and restricting the manner in which they
may vote such Common Shares, will terminate.
THE OFFERING AND CONCURRENT INVESTMENTS
All of the Common Shares offered hereby are being sold by the Company. None
of the Company's shareholders are selling any Common Shares in the Offering.
<TABLE>
<S> <C>
Common Shares offered hereby............................. 4,000,000
Common Shares offered in the Concurrent Investments...... 1,345,453
Common Shares outstanding after the Offering and the
Concurrent Investments................................. 8,418,875(1)
Use of Proceeds from the Offering and the Concurrent
Investments............................................ Repayment of certain indebtedness
related to the Properties, payment
of the cash portion of the purchase
prices of the Acquisition
Properties, funding of initial
Credit Facility fees and expenses
and for working capital purposes.
See "Use of Proceeds."
AMEX Symbol.............................................. "BDN"
</TABLE>
- ---------------
(1) Includes: (i) 509,856 Common Shares reserved for issuance upon the
conversion of Units into Common Shares; (ii) 1,606,060 Common Shares
reserved for issuance upon the conversion of the Preferred Shares into
Common Shares; and (iii) 709,090 Common Shares issued to the Morgan Stanley
Funds in the Morgan Stanley Private Placement. Excludes: (i) 582,105 Common
Shares reserved for issuance, at an exercise price of $19.50 per share, upon
the exercise of warrants; (ii) 133,333 Common Shares reserved for issuance,
at an exercise price of $25.50 per share, upon the exercise of warrants; and
(iii) 46,666 Common Shares reserved for issuance, at exercise prices of
$14.31 and $6.21 per share, upon the exercise of options in respect of
33,333 and 13,333 Common Shares, respectively.
DISTRIBUTION POLICY
The Company has paid dividends on a regular basis since the beginning of
1994. See "Price Range of Common Shares and Distribution History." Following the
Offering, the Company intends to increase its quarterly distributions to $0.35
per share beginning with a pro rata distribution with respect to the period
commencing on the closing of the Offering and ending on December 31, 1996. On an
annualized basis, this would be $1.40 per share. Although the Company intends to
maintain the stated distribution rate, future distributions by the Company to
holders of Common Shares will be made at the discretion of the Board of
Trustees. The Company currently expects that the principal factors the Board
will consider in setting distributions will be the annual REIT distribution
requirements (described below) and the Board's determination of the relative
benefits of distribution versus reinvestment in the Company. The Board will also
consider the actual cash flow of the Company, the Company's financial condition
and capital requirements, and such other factors as the Board deems relevant.
See "Risk Factors -- Risks Relating to Distributions."
14
<PAGE> 20
TAX STATUS OF THE COMPANY
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), and so long
as it remains qualified as a REIT, the Company generally will not be subject to
Federal income tax on that portion of its ordinary income or capital gains that
is currently distributed to shareholders so long as it distributes at least 95%
of its REIT taxable income each year. Based on the Company's pro forma results
from operations for the twelve months ended September 30, 1996, the Company
would have been required to distribute approximately $4.9 million or $0.64 per
share, in order to maintain its status as a REIT. REITs are subject to a number
of organizational and operational requirements. If the Company fails to qualify
as a REIT in any taxable year, the Company will be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. See "Federal Income Tax Considerations -- Failure to
Qualify" for a more detailed discussion of the consequences of a failure of the
Company to remain qualified as a REIT. Even if the Company remains qualified as
a REIT, the Company may be subject to certain state and local taxes on its
income and property and to Federal income and excise taxes on its undistributed
income and certain other categories of income. The Management Company is subject
to Federal and state income tax on its taxable income at regular corporate
rates. See "Federal Income Tax Considerations."
SUMMARY SELECTED FINANCIAL DATA
The following tables set forth certain summary selected historical
financial and operating information and on a combined basis for the Company and
the SSI/TNC Properties and on a pro forma basis for the Company. The following
tables also set forth certain historical selected financial data for the Company
for each of the five years during the period ended December 31, 1995, and as of
and for the nine months ended September 30, 1995 and 1996. Such information
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The unaudited pro forma financial and operating information for the nine
months ended September 30, 1996 and for the year ended December 31, 1995 is
presented as if the following transactions had been consummated on September 30,
1996 for balance sheet purposes and at the beginning of the period presented for
purposes of the statements of operations: (i) the Company acquired the
Acquisition Properties and contributed them to the Operating Partnership; (ii)
the Company consummated the Concurrent Investments and contributed the net
proceeds therefrom to the Operating Partnership; and (iii) the Company
consummated the Offering and applied the net proceeds therefrom as set forth
under the caption "Use of Proceeds." The pro forma financial information is not
necessarily indicative of what the actual financial position or results of the
Company would have been as of and for the periods indicated, nor does it purport
to represent the Company's future financial position or results of operations.
15
<PAGE> 21
BRANDYWINE REALTY TRUST
COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ ------------------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
----------------- PRO FORMA ------------------- PRO FORMA
1994 1995 1995 1995 1996 1996
------- ------- ---------- ------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Base rents........................................ $12,209 $11,346 $ 18,813 $ 8,469 $ 9,122 $ 15,605
Tenant reimbursements............................. 3,130 2,961 3,946 2,207 2,717 3,255
Management fees................................... 946 617 -- 492 778 --
Other............................................. 79 86 86 54 169 169
------- ------- ------- ------- ------- ------
Total revenue............................... 16,364 15,010 22,845 11,222 12,786 19,029
------- ------- ------- ------- ------- ------
Expenses --
Interest.......................................... 7,877 6,648 3,396 5,015 4,664 2,573
Depreciation and amortization..................... 4,988 5,738 7,598 4,139 3,890 5,571
Property expenses................................. 5,897 5,032 10,129 3,618 4,698 8,027
General and administrative........................ 2,054 1,588 790 1,177 1,039 587
Provision for loss on real estate investments..... 5,400 202 -- -- -- --
------- ------- ------- ------- ------- ------
Total expenses.............................. 26,216 19,208 21,913 13,949 14,291 16,758
------- ------- ------- ------- ------- ------
Income (loss) before gains on sales of real estate
investments, minority interest and extraordinary
items............................................. (9,852) (4,198) 932 (2,727) (1,505) 2,271
Gains on sales of real estate investments........... 1,410 -- -- -- -- --
Equity income of management company................. -- -- 72 -- 54 244
Income (loss) before extraordinary items............ (2,807) (4,203) 874 (2,727) (1,451) 2,331
Income (loss) allocated to Common Shares............ (1,374) 645
Weighted average number of shares outstanding....... 6,309,016 6,308,053
Earnings per share:
Income (loss) before extraordinary items.......... $ 0.14 $ 0.37
Income (loss) allocated to Common Shares.......... $ (0.22) $ 0.10
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
HISTORICAL PRO FORMA
-------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Real estate investments, net of accumulated
depreciation.................................... $98,818 $151,671
Total assets...................................... 106,183 167,265
Mortgages and notes payable....................... 83,020 36,839
Total liabilities................................. 86,116 39,190
Minority interest................................. 8,758 525
Convertible preferred shares...................... -- 26,444
Beneficiaries' equity............................. 11,309 101,106
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
-------------------- PRO FORMA -------------------- PRO FORMA
1994 1995 1995 1995 1996 1996
-------- ------- --------- ------- -------- ---------
(IN THOUSANDS, EXCEPT FOR PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)........................ $ 645 $ 1,382 $ 7,131 $ 1,307 $ 2,661 $ 7,103
Cash flows provided by (used in):
Operating activities.......................... 1,534 1,886 (b) 1,575 1,710 (b)
Investing activities.......................... 7,844 (3,490) (b) (1,704) (11,409) (b)
Financing activities.......................... (10,171) 1,013 (b) (557) 11,126 (b)
Total cash distributions declared............... 3,680 1,021 -- 835 226 --
PROPERTY DATA:
Number of properties owned at period end........ 22 23 37 22 24 37
Gross net rentable square feet owned at period
end........................................... 1,180 1,212 1,994 1,181 1,334 1,994
</TABLE>
16
<PAGE> 22
BRANDYWINE REALTY TRUST
HISTORICAL SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total operating revenue(c)................. $ -- $ -- $ -- $ 4,192 $ 3,666 $ 2,691 $ 4,599
Income from acquisition of limited partner
interests in Brandywine Specified
Property Investors Limited Partnership... -- -- 2,469 -- -- -- --
Provision for loss on real estate
investments.............................. (6,700) -- -- (5,400) -- -- --
Gain on sales of real estate investments... -- -- -- 1,410 -- -- --
Extraordinary item-gain on extinguishment
of debt.................................. -- -- -- 7,998 -- -- --
Net income (loss).......................... (6,705) (1) 2,468 7,567(b) (824) (592) (128)
Net income (loss) per share................ (10.83) -- 3.99 11.22 (1.32) (0.95) (0.19)
Cash distributions declared................ -- -- -- 2,914 1,021 835 226
Cash distributions per share(c)............ -- -- -- 4.71 1.65 1.35 0.36(d)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments, net of accumulated
depreciation.............................. $ -- $ -- $ -- $13,948 $13,709 $13,570 $ 98,818
Total assets................................ 2,128 2,123 4,604 17,873 17,105 17,225 106,183
Mortgages and notes payable(e).............. -- -- -- 6,899 8,931 8,957 83,020
Total liabilities........................... 58 55 68 8,684 9,761 9,463 86,116
Minority interest........................... -- -- -- -- -- -- 8,758
Beneficiaries' equity....................... 2,070 2,068 4,536 9,189 7,344 7,762 11,309
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)..................... $ (5) $ (1) $ (1) $ (533) $ 537 $ 453 $ 837
Cash flows provided by (used in):
Operating activities....................... -- -- -- (628) 497 363 887
Investing activities....................... -- -- 2,469 9,559 (701) (943) (9,914)
Financing activities....................... -- -- -- (9,635) (722) (326) 10,046
PROPERTY DATA:
Number of properties owned at period end..... 7 7 7 4 4 4 24
Gross net rentable square feet owned at
period end................................. 546 546 546 255 255 255 1,334
</TABLE>
- ---------------
(a) Management generally considers Funds from Operations to be a useful measure
of the operating performance of an equity REIT because, together with net
income and cash flows, Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt
and to fund acquisitions and other capital expenditures. Funds from
Operations does not represent net income or cash flows from operations as
defined by generally accepted accounting principles ("GAAP") and does not
necessarily indicate that cash flows will be sufficient to fund cash needs.
It should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity. Funds from Operations does not measure whether cash flow is
sufficient to fund all of the Company's cash needs, including principal
amortization, capital improvements and distributions to shareholders. Funds
from Operations also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Further, Funds from
Operations as disclosed by other REITs may not be comparable to the
Company's calculation of Funds from Operations. The Company adopted the
NAREIT definition of Funds from Operations in 1996 and has used it for all
periods presented. Funds from Operations is calculated as net income (loss)
adjusted for depreciation expense attributable to real property,
amortization expense attributable to
17
<PAGE> 23
capitalized leasing costs, tenant allowances and improvements, gains on
sales of real estate investments and extraordinary and nonrecurring items.
(b) Pro forma information relating to cash flows from operating, investing and
financing activities has not been included because management believes that
the information would not be meaningful due to the number of assumptions
required in order to calculate this information.
(c) Prior to 1994, the Company accounted for its investment in Brandywine Realty
Partners ("BRP") using the equity method of accounting and, accordingly,
received no rents and tenant reimbursements from its investment in BRP and
received allocated income from BRP totalling $148,000, $290,000, and
$568,000 for the years ended December 31, 1991, 1992, and 1993,
respectively. Subsequent to 1993, the Company acquired control of BRP and
consolidated this investment.
(d) Excludes a $0.21 per share distribution declared by the Company on November
1, 1996 relating to third quarter operations that was paid to shareholders
of record as of November 11, 1996.
(e) The Company paid $1,114,000 from escrowed cash reserves to its then mortgage
lender on December 28, 1994 in exchange for termination of its obligation to
make future participating interest payments to the lender.
18
<PAGE> 24
RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in the Prospectus before making a decision
to purchase Common Shares in the Offering.
LIMITED GEOGRAPHIC CONCENTRATION
Thirty-four of the 37 Properties are located in the Suburban Philadelphia
Office and Industrial Market. In addition, a fundamental element of the
Company's growth strategy is to acquire additional properties in the Market.
Consequently, the Company is dependent upon the demand for office and other
commercial space in the Market. The Company's revenue and the value of the
Properties may be affected by a number of factors in the Market, including the
local economic climate (which may be adversely impacted by business layoffs or
downsizing, industry slowdowns, changing demographics, and other factors) and
local real estate conditions (such as oversupply of, or reduced demand for,
office and other competing commercial properties). Therefore, the Company's
performance and its ability to make distributions to shareholders will likely be
dependent, to a large extent, on the economic conditions in the Market.
REDEMPTION OF PREFERRED SHARES
Prior to the occurrence of a Conversion Approval (as defined below), the
Preferred Shares are convertible into up to 181,325 Common Shares, and following
the occurrence of a Conversion Approval, the Preferred Shares will be
convertible into an additional 1,424,735 Common Shares. A "Conversion Approval"
means approval of the unlimited conversion of the Preferred Shares into Common
Shares by a majority of the votes cast by holders of Common Shares at a meeting
of shareholders in which holders of the Preferred Shares have no right to vote.
In the event that a Conversion Approval has not occurred by July 1, 1997,
holders of the Preferred Shares will become entitled to receive distributions
equal to 120% of the distributions payable in respect of the number of Common
Shares into which such Preferred Shares are convertible (i.e., an aggregate of
1,606,060) (the "Conversion Number"). In the event that a Conversion Approval
has not occurred by July 1, 1998, holders of the Preferred Shares will have the
right to require the Company to redeem their Preferred Shares at a price (the
"Redemption Price") equal to the greater of: (i) the product of (a) $16.50 plus
an amount (the "Return Amount") equal to 8.0% of $16.50 per annum from the date
of issuance of the Preferred Shares through the redemption date less an amount
(not to exceed the Return Amount) equal to distributions actually received by
the holder on account of such Preferred Shares and (b) the Conversion Number;
and (ii) the product of the market price of a Common Share and the Conversion
Number. If the Company is required to redeem the Preferred Shares, it is
expected that the Company would be required to significantly increase the
leverage on its portfolio or sell a significant number of Properties in order to
finance such redemption, either of which events would likely materially and
adversely affect the Cash Available for Distribution and the market price for
the Common Shares. In addition, a mandatory redemption by the Company of the
Preferred Shares could require the Company, on its own behalf or through the
Operating Partnership, to borrow funds on a short-term basis to meet the
distribution requirements applicable to REITs. In such instances, the Company,
in order to avoid the adverse tax consequences associated with loss of REIT
status, might need to: (i) borrow funds even if management believed that then
prevailing market conditions generally were not favorable for such borrowings or
that such borrowings would not be advisable in the absence of such tax
considerations; and/or (ii) liquidate certain of its investments on adverse
terms. See "The Company -- The SERS Transaction" and "Description of Shares of
Beneficial Interest -- Preferred Shares."
RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF MANY OF THE COMPANY'S
PROPERTIES; LACK OF OPERATING HISTORY
Twenty of the Company's 24 Initial Properties have been acquired within the
past six months, including 19 Properties acquired in the SSI/TNC Transaction.
These recently acquired Properties, as well as the 13 Acquisition Properties,
may have characteristics or deficiencies unknown to the Company affecting their
valuation or revenue potential, and it is also possible that the operating
performance of such Properties may decline under the Company's management.
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The Company is currently experiencing a period of rapid growth. Following
the SSI/TNC Transaction and after giving effect to the purchase of the
Acquisition Properties, the Company's property portfolio will have increased
from five properties, consisting of approximately 375,000 net rentable square
feet, to 37 properties, consisting of approximately 2.0 million net rentable
square feet. The Company's ability to manage its growth effectively will require
it to successfully integrate its new acquisitions into its existing management
structure. As the Company acquires additional properties, the Company will be
subject to risks associated with managing new properties, including lease-up and
tenant retention. No assurances can be given that the Company will be able to
succeed with such integration or effectively manage additional properties or
that newly acquired properties will perform as expected. In addition, the
Company's ability to manage its growth effectively will depend on whether the
integration of the TNC management team into its existing management structure
will, over time, prove to be successful. In connection with the SSI/TNC
Transaction, the Company added approximately 20 administrative, property
management, leasing, marketing, and related personnel previously employed by
TNC. There can be no assurance that the integration of these additional
employees into the Company's organization will be successful or that the Company
will manage the combined operations with TNC effectively.
LACK OF APPRAISALS
The Company did not obtain independent appraisals of the SSI/TNC
Properties, the SERS Properties, or the other Acquisition Properties recently
acquired or to be acquired by it, and has not obtained appraisals of any of the
Properties in connection with the Offering. There can be no assurance that the
consideration paid or payable by the Company for the Properties accurately
reflects their value and, specifically, that the combined value of the Common
Shares, Preferred Shares and Units may be greater than the aggregate fair market
value of the Company's equity in the Properties.
RISKS RELATING TO DISTRIBUTIONS
The Company pays regular distributions to its shareholders and expects to
increase its quarterly distribution rate following closing of the Offering to
$0.35 per share, beginning with a pro rata distribution with respect to the
quarter ending December 31, 1996. See "Distribution Policy." In addition, the
Common Shares issued in connection with the Offering, as well as any Common
Shares and Preferred Shares that were or will be issued in connection with the
SERS Transactions and the Concurrent Investments or may in the future be issued
to finance acquisitions, upon the conversion of Units or upon the exercise of
options or warrants or otherwise will further increase required Cash Available
for Distribution to make anticipated distributions to shareholders. In addition,
if the distribution preference payable on the Preferred Shares increases as a
result of the failure of a Conversion Approval to occur by July 1, 1997, such
event will also increase required Cash Available for Distribution needed for the
Company to maintain its proposed new distribution rate. The Company's
determination to increase distributions as described above was based on the
Company's expectations with respect to pro forma Cash Available for Distribution
following the Offering. No assurance can be given, however, that actual Cash
Available for Distribution following the Offering will not be substantially
below the Company's expectations. In addition, the Company's ability to make
distributions will depend, in large part, on the performance of its Properties
and any other properties it may acquire in the future, including occupancy
levels, the Company's ability to enter into new leases upon expiration of
current leases and costs associated with the renewal or reletting of space,
expenditures with respect to existing and newly acquired properties, the amount
of the Company's debt and the interest rates thereon, default or bankruptcy by
tenants and other costs relating to the Properties, as well as the absence of
significant expenditures relating to environmental or other regulatory matters.
Most of these matters are beyond the control of the Company and any significant
difference between the Company's expectations with respect to these matters and
actual results could have a material adverse effect on the Company and its
ability to make or sustain distributions.
CONFLICTS OF INTERESTS
Tax Consequences Upon Sale or Refinancing of SSI/TNC Properties. Direct or
indirect holders of Units may suffer different and more adverse tax consequences
than the Company upon the sale or refinancing of any of the SSI/TNC Properties
and, therefore, such holders (including Mr. Nichols, the Company's Chairman of
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the Board, and Warren V. Musser, a Trustee of the Company and Chairman of the
Board of SSI) and the Company may have different objectives regarding the
appropriate pricing and timing of any sale or refinancing of such Properties.
While the Company, as the sole general partner of the Operating Partnership, has
the exclusive authority as to whether and on what terms to sell or refinance an
individual Property, those members of the Company's management and Board of
Trustees who directly or indirectly hold Units may influence the Company not to
sell or refinance the SSI/TNC Properties even though such sale might otherwise
be financially advantageous to the Company, or may influence the Company to
refinance such Properties with a high level of debt.
Failure to Enforce Terms of Acquisition Agreements. As shareholders and
members of TNC and its affiliates and recipients of Common Shares, Units and
warrants in the SSI/TNC Transaction, certain members of the Company's
management, including Messrs. Nichols, Belcher and Gallagher, will have a
conflict of interest with respect to their obligations as Trustees or executive
officers of the Company in enforcing the terms (including customary
representations and warranties as to ownership and operation) of the agreements
relating to the transfer to the Company of SSI/TNC Properties. The failure to
enforce the material terms of those agreements, particularly the indemnification
provisions for breaches of representations and warranties, could result in a
monetary loss to the Company, which loss could have a material adverse effect on
the Company's financial condition or results of operations. In addition, the
aggregate liability of SSI, TNC and certain of their affiliates under those
agreements is limited to the 497,895 Units issued to them (less the
approximately 30,303 Units that will be forfeited in connection with the
repayment of debt upon closing of the Offering). The Company will therefore have
no right of recovery as to any damages in excess of the value of the Units that
may result from breaches of such representations and warranties.
REAL ESTATE INVESTMENT CONSIDERATIONS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend in large part
on the amount of income generated and expenses incurred. If the Properties do
not generate revenue sufficient to meet operating expenses, including debt
service, tenant improvements, leasing commissions, and other capital
expenditures, the Company may have to borrow additional amounts to cover fixed
costs and the Company's Cash Available for Distribution and ability to make
expected distributions to its shareholders will be adversely affected.
The Company's revenue and the value of its Properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; the perceptions of
prospective tenants of the attractiveness of the property; the ability of the
Company to manage and maintain the Properties and secure adequate insurance and
increased operating costs (including real estate taxes and utilities). In
addition, real estate values and income from properties are also affected by
such factors as applicable laws, including tax laws, interest rate levels and
the availability of financing.
Significant Lease Expirations. The Company is subject to the risk that,
upon expiration, leases may not be renewed, the space may not be relet, or the
terms of renewal or reletting (including the cost of required renovations) may
be less favorable than the current lease terms. Leases accounting for
approximately 18% of the aggregate annualized base rents from the Properties as
of September 30, 1996 (representing approximately 16.2% of the net rentable
square feet at the Properties) expire without penalty or premium through the end
of 1997, and leases accounting for approximately 6.5% of aggregate annualized
base rent from the Properties as of September 30, 1996 (representing
approximately 7.2% of the net rentable square feet at the Properties) are
scheduled to expire in 1998. Other leases grant their tenants early termination
rights upon payment of a termination penalty. See "Business and
Properties -- General." The Company has estimated the expenditures for new and
renewal leases for 1997 and 1998 but no assurances can be given that the Company
has correctly estimated such expenses. Lease expirations will require the
Company to locate new tenants and negotiate replacement leases with such
tenants. Replacement leases typically require the Company to incur tenant
improvements, other tenant inducements and leasing commissions, in each case,
which may be higher than the costs relating to renewal leases. If the Company is
unable to promptly relet or renew leases for all or a substantial portion of
this space, if the rental rates upon such renewal or reletting are significantly
lower than expected or if the Company's reserves for these purposes prove
inadequate, the Company's Cash Available for Distribution and ability to make
expected distributions to shareholders could be adversely affected.
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Dependence on Key Tenants. The Company's 10 largest tenants (based on pro
forma base rent as of September 30, 1996) aggregate approximately 29.8% of the
Company's total base rent and approximately 27.5% of the Company's net rental
square feet and have a weighted average remaining lease term of approximately
7.8 years. As of September 30, 1996, the Company's largest tenant, Kimberly
Clark, represents approximately 8.7% of the pro forma aggregate annualized base
rent as of September 30, 1996 and 5.0% of the pro forma net rentable square feet
at the Properties. Although the Company believes that it has a good relationship
with each of its principal tenants, the Company's revenues and Cash Available
for Distribution to shareholders would be disproportionately and adversely
affected if any of these tenants did not renew their lease or leases with the
Company upon expiration or renewed their leases on terms less favorable to the
Company.
Financially Distressed Tenants. In the event of any default by a tenant,
the Company may experience delays in enforcing its rights as a landlord and may
incur substantial costs in protecting its investment. In addition, at any time a
tenant of the Properties may seek the protection of bankruptcy laws, which could
result in the rejection and termination of such tenant's lease and thereby cause
a reduction in Cash Available for Distribution to shareholders. Four of the
Company's tenants are currently in bankruptcy proceedings. Such tenants are
parties to leases providing for payments representing approximately $199,000 of
aggregate annualized base rent as of September 30, 1996. There can be no
assurance that these or other tenants will not reject their leases in a
bankruptcy proceeding or that the Company will not experience significant tenant
defaults in the future, each of which could have an adverse effect on the
Company's revenues and Cash Available for Distribution to shareholders.
Competition. The Company competes with a number of real estate developers,
operators, and institutions for tenants and acquisition opportunities. Many of
these competitors have significantly greater resources than the Company. No
assurances can be given that such competition will not adversely affect the
Company's revenues and Cash Available for Distribution to shareholders.
Illiquidity of Real Estate. Equity real estate investments are relatively
illiquid and therefore tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, the Code limits the Company's ability to sell properties held for
fewer than four years, which may affect the Company's ability to sell properties
without adversely affecting returns to shareholders.
Changes in Laws. Because increases in income and service taxes are
generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make expected
distributions to shareholders. The Properties are also subject to various
federal, state, and local regulatory requirements, such as requirements of the
ADA and state and local fire and safety requirements. Failure to comply with
these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. The Company believes that
the Properties are currently in material compliance with all such requirements.
However, there can be no assurance that these requirements will not change or
that new requirements will not be imposed which would require significant
unanticipated expenditures by the Company and could have an adverse effect on
the Company's cash flow and ability to make distributions.
Compliance with Americans with Disabilities Act. Under the ADA, all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers and noncompliance could result in imposition of fines
by the U.S. government or an award of damages to private litigants. Although the
Company believes that the Properties are in material compliance with these
requirements, the Company may incur additional costs to comply with the ADA.
Although the Company believes that such costs will not have a material adverse
effect on the Company, if required changes involved a greater expenditure than
the Company currently anticipates, the Company's ability to make expected
distributions could be adversely affected.
Risks Associated with Partnership and Joint Venture Property Ownership
Structures. The Company owns its interests in 23 of the Initial Properties and
the nine SERS Properties through the Operating Partnership and it expects that
the four additional Acquisition Properties will be held by the Operating
Partnership. In addition, the Company may also participate with other entities
in property ownership through
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joint ventures or partnerships in the future. Partnership or joint venture
investments may, under certain circumstances, involve risks not otherwise
present, including the possibility that the Company's partners or co-venturers
might become bankrupt, that such partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company and that such partners or
co-venturers may be in a position to take action contrary to the Company's
instructions or requests or contrary to the Company's policies or objectives,
including the Company's policy with respect to maintaining its qualification as
a REIT. The Company will, however, seek to maintain sufficient control of such
partnerships or joint ventures to permit the Company's business objectives to be
achieved. There is no limitation under the Company's organizational documents as
to the amount of funds that may be invested in partnerships or joint ventures.
RISKS ASSOCIATED WITH INDEBTEDNESS
Debt Financing and Existing Debt Maturities. The Company will be subject
to risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of principal
and interest and, the risk that existing indebtedness on the Properties (which
in all cases will not have been fully amortized at maturity) will not be able to
be refinanced or that the terms of such refinancing will not be as favorable as
the terms of existing indebtedness. Upon the closing of the Offering and the
Concurrent Investments and the application of the net proceeds therefrom, the
Company expects to have outstanding indebtedness of approximately $36.8 million,
which will have principal repayments of $3.0 million, $13.6 million, $9.5
million, $2.7 million, and $8.0 million in 1997, 1998, 1999, 2000 and 2001,
respectively. In addition, upon the closing of the Offering, it is expected that
the Company will enter into the $80 million Credit Facility that will have a
term of two years. If principal payments due at maturity cannot be refinanced,
extended, or paid with the proceeds of other capital transactions, such as new
equity capital, the Company may not be able to pay distributions at expected
levels and to repay all such maturing debt. Furthermore, if prevailing interest
rates or other factors at the time of refinancing (such as the reluctance of
lenders to make commercial real estate loans) result in higher interest rates,
the interest expense relating to such refinanced indebtedness would increase,
which could adversely affect the Company's cash flow and its ability to make
expected distributions to its shareholders. In addition, if the Company is
unable to meet its obligations under any of its mortgage financings (including
the Credit Facility), the Properties securing such indebtedness could be
foreclosed on, which would have a material adverse effect on the Company and its
ability to make expected distributions and, depending on the number of
Properties foreclosed on, could threaten the continued viability of the Company.
See "Policies With Respect to Certain Activities -- Financing Policies."
Risk of Rising Interest Rates and Variable Rate Debt. Upon the closing of
the Offering and the Concurrent Investment and the application of the use of
proceeds therefrom, the Company will have outstanding approximately $4.1 million
of variable rate indebtedness. In addition, the Credit Facility will bear
interest at a variable rate. See "Business and Properties -- Credit Facility."
In addition, the Company may incur other variable rate indebtedness in the
future. Increases in interest rates on such indebtedness would increase the
Company's interest expense, which could adversely affect the Company's cash flow
and its ability to pay expected distributions to shareholders. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
No Limitation on Debt. Upon the closing of the Offering and the Concurrent
Investments and the application of the net proceeds therefrom, on a pro forma
basis the debt-to-total market capitalization ratio of the Company will be
approximately 21.0%. Although the Company has adopted a policy that limits the
debt-to-total market capitalization ratio of the Company to 50%, the
organizational documents of the Company do not contain any limitation on the
amount of indebtedness the Company may incur. Accordingly, the Board of Trustees
could alter or eliminate this policy. If this policy were changed, the Company
could become more highly leveraged, resulting in an increase in debt service
that could adversely affect the Company's cash flow and, consequently, Cash
Available for Distribution and could increase the risk of default on the
Company's indebtedness.
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HISTORICAL LOSSES
The Company had net losses of approximately $824,000 for the year ended
December 31, 1995 and approximately $128,000 for the nine-month period ended
September 30, 1996. The SSI/TNC Properties also experienced net losses of
approximately $2.2 million, $1.8 million, and $1.3 million for the years ended
December 31, 1993 and 1994, and the six months ended June 30, 1996,
respectively. These net losses reflect certain noncash charges such as
depreciation and amortization as well as the substantial interest expense
associated with the acquisition and development financing of the Initial
Properties. These historical results may not be indicative of future results.
Nonetheless, there can be no assurance that the Company will not incur net
losses in the future.
RISK OF ACQUISITION, DEVELOPMENT AND RENOVATION ACTIVITIES
The Company intends to continue acquiring office and industrial properties.
See "Business and Growth Strategies." Acquisitions of office and industrial
properties entail risks that investments will fail to perform in accordance with
expectations. Estimates of renovation costs and costs of improvements to bring
an acquired property up to standards established for the market position
intended for that property may prove inaccurate. In addition, there are general
investment risks associated with any new real estate investment.
The Company anticipates that future acquisitions and renovations may be
financed through a combination of advances under the Credit Facility, other
lines of credit and other forms of secured or unsecured financing. If new
developments are financed through construction loans, there is a risk that, upon
completion of construction, permanent financing for newly developed properties
may not be available or may be available only on disadvantageous terms.
While the Company has generally limited its acquisition, development,
renovation, management, and leasing business primarily to the Market, it is
possible that the Company will in the future expand its business to new
geographic markets. The Company will not initially possess the same level of
familiarity with new markets outside of the Suburban Philadelphia Office and
Industrial Market, which could adversely affect its ability to acquire, develop,
manage, or lease properties in any new localities. Changing market conditions,
including competition from other purchasers of Class A suburban office and
industrial properties, may diminish the Company's opportunities for attractive
additional acquisitions.
The Company also intends to review from time to time the possibility of
developing and constructing office buildings and other commercial properties.
Risks associated with the Company's development and construction activities may
include: (i) abandonment of development opportunities; (ii) construction costs
of a property exceeding original estimates, possibly making the property
uneconomical; (iii) occupancy rates and rents at a newly completed property may
not be sufficient to make the property profitable; (iv) financing may not be
available on favorable terms for development of a property; and (v) construction
and lease-up may not be completed on schedule, resulting in increased debt
service expense and construction costs. In addition, new development activities,
regardless of whether they would ultimately be successful, typically require a
substantial portion of management's time and attention. Development activities
would also be subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations.
TAX RISKS
Consequences of Failure to Qualify as a REIT. Since 1986, the Company has
operated, and continues to operate, in such a manner as to qualify as a REIT
under the Code. Although the Company believes that it is currently organized and
will continue to operate so as to qualify as a REIT, no assurance can be given
that the Company will qualify or remain qualified as a REIT in the future.
Qualification as a REIT involves the application of highly technical and complex
Code provisions, many of which have only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely within the Company's control may affect its ability to qualify as a
REIT. For example, in order to qualify as a REIT, at least 95% of the Company's
gross income in any year must be derived from qualifying sources and the Company
must pay distributions to its shareholders aggregating at least 95% of its REIT
taxable income (excluding net capital gains). The complexity of these provisions
and of the applicable income tax regulations
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that have been promulgated under the Code is even greater in the case of a REIT
that holds its assets in partnership form. In addition, no assurance can be
given that future legislation, new regulations, administrative interpretations,
or court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the Federal income tax consequences of such
qualification. The Company is relying on the opinion of Arthur Andersen LLP, tax
advisor to the Company, regarding various issues affecting the Company's ability
to qualify, and retain qualification, as a REIT. Such tax opinion is based on
various assumptions and factual representations by the Company regarding the
Company's ability to meet the various requirements for qualification as a REIT,
and no assurance can be given that actual operating results will meet these
requirements. Such tax opinion is not binding on the IRS or any court. See
"Federal Income Tax Considerations."
One of the requirements for maintaining REIT status is that a REIT not own
more than 10% of the voting stock of a corporation other than the stock of a
qualified REIT subsidiary (of which the REIT is required to own all of such
stock) and stock in another REIT. The Operating Partnership owns 5% of the
voting common stock and all of the non-voting preferred stock of the Management
Company and, therefore, the Company believes it will comply with this rule.
However, the IRS could contend that the Operating Partnership's ownership of all
of the non-voting preferred stock of the Management Company should be viewed as
voting stock because of its substantial economic position in the Management
Company. If the IRS were to be successful in such a contention, the Company's
status as a REIT would be lost and the Company would become subject to Federal
corporate income tax on its net income, which would have a material adverse
affect on the Company's Cash Available for Distribution. See "Federal Income Tax
Considerations."
If in any taxable year the Company were to fail to qualify as a REIT, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at the
applicable corporate rate. In addition, unless it were entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. This disqualification would reduce the funds of the
Company available for investment or distribution to shareholders because of the
additional tax liability of the Company for the year or years involved. If the
Company were to fail to qualify as a REIT, it no longer would be subject to the
distribution requirements of the Code. To the extent that distributions to
shareholders would have been made in anticipation of the Company's qualifying as
a REIT, the Company might be required to borrow funds or to liquidate certain of
its investments to pay the applicable tax. Although the Company currently
intends to operate in a manner designed to allow it to qualify as a REIT, it is
possible that future economic, market, legal, tax, or other considerations may
cause the Board of Trustees to revoke the REIT election. See "Federal Income Tax
Considerations."
Required Distributions; Potential Requirement to Borrow. To obtain the
favorable tax treatment associated with qualification as a REIT, the Company
generally will be required each year to distribute to its shareholders at least
95% of its REIT taxable income (excluding net capital gain). In addition, the
Company will be subject to tax on its undistributed net taxable income and net
capital gain, and a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income plus 95% of its capital gain net income
for the calendar year, plus certain undistributed amounts from prior years.
The Company intends to make distributions to its shareholders to comply
with the distribution provisions of the Code and to avoid income and other
taxes. The Company's income will consist primarily of the Company's share of the
income of the Operating Partnership and the Properties it owns directly, and the
Company's cash flow will consist primarily of its share of distributions from
the Operating Partnership and cash flow from the Properties it owns directly.
Differences in timing between the receipt of income and the payment of expenses
in arriving at taxable income (of the Company or the Operating Partnership), the
effect of required debt amortization payments and the possible redemption by the
Company of the Preferred Shares could require the Company, on its own behalf or
through the Operating Partnership, to borrow funds on a short-term basis to meet
the distribution requirements in order to remain qualified as a REIT. In such
instances, the Company, in order to avoid adverse tax consequences, might need
to: (i) borrow funds even if
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management believed that then prevailing market conditions generally were not
favorable for such borrowings or that such borrowings would not be advisable in
the absence of such tax considerations; and/or (ii) liquidate investments on
adverse terms. For Federal income tax purposes, distributions paid to
shareholders may consist of ordinary income, capital gains, nontaxable return of
capital or a combination thereof. The Company will provide its shareholders with
an annual statement indicating the tax character of the distributions. See
"Federal Income Tax Considerations."
Distributions by the Company will be determined by the Board of Trustees
and will be dependent on a number of factors, including Cash Available for
Distribution, the Company's financial condition, any decision by the Board of
Trustees to reinvest funds rather than to distribute such funds, the Company's
capital expenditures, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Trustees deems
relevant. Accordingly, there is no assurance that the Company will maintain its
distribution rate or continue to satisfy the annual distribution requirements so
as to qualify as a REIT.
Consequences of Failure of the Operating Partnership (or a Subsidiary
Partnership) to be Treated as a Partnership. The Company will receive an
opinion of Arthur Andersen LLP, tax advisor to the Company, stating that,
assuming that the Operating Partnership and each subsidiary partnership is being
operated in accordance with its respective organization documents, the Operating
Partnership and each of the subsidiary partnerships will be treated as a
partnership and not as an association taxable as a corporation, for federal
income tax purposes. Such opinion is not binding on the IRS. If the IRS were to
successfully challenge the tax status of the Operating Partnership or any of its
subsidiary partnerships for federal income tax purposes, the Operating
Partnership or the affected subsidiary partnership would be taxable as a
corporation. In such event, the Company would cease to qualify as a REIT for
federal income tax purposes. The imposition of a corporate tax on the Operating
Partnership or any of the subsidiary partnerships would also reduce the amount
of Cash Available for Distribution to the Company and its shareholders. See
"Federal Income Tax Considerations -- Income Taxation of the Operating
Partnership, the Title Holding Partnerships and Their Partners."
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be
subject to certain federal, state and local taxes on its income and property. In
addition, the Management Company generally is subject to federal and state
income tax at regular corporate rates on its net taxable income, which will
include the Management Company's management, leasing and related service
business. If the Company has net income from a prohibited transaction, such
income will be subject to a 100% tax. See "Federal Income Tax Considerations."
Real Estate Transfer Taxes. The transfers of 10 Properties to the
Operating Partnership or a subsidiary partnership have been structured as
transfers of 89% of the capital interests and 99% of the cash flow and profits
interests in the limited partnerships owning such Properties with the Residual
Interests to be acquired by the Operating Partnership not later than September
1999. This transaction structure is intended to comply with the provisions of
informal advice from the Pennsylvania Department of Revenue to the effect that
such transfers are not subject to Pennsylvania real estate transfer taxes.
However, the Company has not obtained a formal ruling from the Pennsylvania
Department of Revenue on this issue. If the Company desired or were required,
for financing purposes or otherwise, to acquire such Residual Interests within
such period, the Company could be required to pay real estate transfer taxes in
an amount aggregating approximately $640,000. Transfer of an eleventh Property
(16 Campus Boulevard) to the Operating Partnership was structured in a similar
manner in order to avoid certain transfer taxes, although a tenant in such
Property holds a 35% profits interest in the applicable partnership.
ERISA
Depending upon the particular circumstances of the plan, an investment in
Common Shares may be an appropriate investment for an ERISA Plan, a Qualified
Plan, or an IRA. In deciding whether to purchase Common Shares, a fiduciary of
an ERISA Plan, in consultation with its advisors, should carefully consider its
fiduciary responsibilities under ERISA, the prohibited transaction rules of
ERISA and the Code, and the effect of the "plan asset" regulations issued by the
U.S. Department of Labor. See "ERISA Considerations."
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POSSIBLE ENVIRONMENTAL LIABILITIES
General. Under various Federal, state and local laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or releases
at such property and may be held liable to a governmental entity or to third
parties for property damage and for investigation and clean-up costs incurred by
such parties in connection with contamination. The cost of investigation,
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure to properly remediate such substances, may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral. In connection with the ownership (direct or
indirect), operation, management and development of real properties, the Company
may be considered an owner or operator of such properties or as having arranged
for the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental fines and injuries to persons and
property. All of the Properties have been subject to a Phase I or similar
environmental site assessment (which involves general inspections without soil
sampling or groundwater analysis) completed by independent environmental
consultants. Except as indicated below with respect to the Whitelands Business
Park in Exton, Pennsylvania (the "Whitelands Property"), these environmental
site assessments have not revealed any significant environmental liability, nor
is the Company aware of any environmental liability with respect to the
Properties that the Company's management believes would have a material adverse
effect on the Company. An environmental assessment has identified environmental
contamination of potential concern with respect to the Whitelands Property.
Petroleum products, solvents and heavy metals were detected in the groundwater.
These contaminants are believed to be associated with debris deposited by third
parties in a quarry formerly located on the Whitelands Property. The Whitelands
Property previously appeared on the Comprehensive Environmental Response
Compensation and Liability Information System List, a list maintained by the
United States Environmental Protection Agency (the "EPA") of abandoned, inactive
or uncontrolled hazardous waste sites which may require cleanup. The EPA
conducted a preliminary assessment of the Property in 1984, and subsequently the
Whitelands Property was removed from the list. While the Company believes it is
unlikely that it will be required to undertake remedial action with respect to
such contamination, there can be no assurance in this regard. If the Company
were required to undertake remedial action on the Whitelands Property, it has
been indemnified through August 2001 against the cost of such remediation by
SSI, subject to a limitation of approximately $2.0 million. In the event SSI is
unable to fulfill its obligations under its indemnity agreement or the Company
is required to undertake remedial action after the expiration of the indemnity,
the costs associated with any remediation could materially and adversely impact
Cash Available for Distribution. Because the Company does not believe that any
remediation at the Whitelands Property is probable, no amounts have been accrued
for any such potential liability.
No assurance can be given that existing environmental studies with respect
to the Properties reveal all environmental liabilities or that any prior owner
of any such property did not create any material environmental condition not
known to the Company. Moreover, no assurance can be given that: (i) future laws,
ordinances or regulations will not impose any material environmental liability;
or (ii) the current environmental condition of the Properties will not be
affected by tenants and occupants of the Properties, by the condition of
properties in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood (where
appropriate), extended coverage, and rental loss insurance for the Initial
Properties and the SERS Properties (and will carry such coverage for the other
Acquisition Properties upon their acquisition), with policy specification and
insured limits which the Company believes are adequate and appropriate under the
circumstances. There are certain types of losses (such as from nuclear
accidents, wars, civil disturbances, and environmental matters) that generally
are not insured against because they are either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of the insured limits
occur, the Company could lose both its investment in, and anticipated future
revenues and cash flow from, the affected Property and would continue to be
obligated in respect of any recourse mortgage indebtedness or other financial
obligations on such Property. Any such loss would adversely
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affect the Company. Moreover, as the general partner of the Operating
Partnership, the Company will be liable for any of the Operating Partnership's
unsatisfied obligations other than the non-recourse obligations.
RISK OF THIRD-PARTY MANAGEMENT, LEASING AND RELATED SERVICE BUSINESS
Possible Termination of Management Contracts. The Company intends to
selectively pursue the management of properties owned by third parties. Risks
associated with the management of properties owned by third parties include the
risk that the management contracts (which are generally cancelable upon 30 days'
notice or upon certain events, including sale of the property) will be
terminated by the property owner or will be lost in connection with a sale of
such property, that contracts may not be renewed upon expiration or may not be
renewed on terms consistent with current terms and that the rental revenues upon
which management fees are based will decline as a result of general real estate
market conditions or specific market factors affecting properties managed by the
Company, resulting in decreased management fee income.
Possible Adverse Consequences of Lack of Control Over the Business of the
Management Company. In order to satisfy certain technical requirements
applicable to REITs, certain of the executive officers, as partners of a general
partnership that holds 95% of the voting common stock of the Management Company,
and not the Company, have the ability to elect the board of directors of the
Management Company. The Company is not able to elect directors of the Management
Company and, consequently, the Company has no ability to influence the decisions
of such entity. As a result, the board of directors and management of the
Management Company may implement business policies or decisions that would not
have been implemented by persons controlled by the Company and that are adverse
to the interests of the Company or that lead to adverse financial results, which
would adversely affect the Company's ability to pay distributions to
shareholders.
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL
The investment, financing, borrowing, and distribution policies of the
Company, and its policies with respect to all other activities, including its
growth, debt, capitalization, distributions, REIT status, and operating
policies, is determined by the Board of Trustees. Although the Board of Trustees
has no present intention to amend or revise any of these policies, these
policies may be amended or revised from time to time at the discretion of the
Board of Trustees without notice to or a vote of the shareholders of the
Company. See "Policies with Respect to Certain Activities." Accordingly,
shareholders may not have control over changes in policies of the Company and
changes in the Company's policies may not fully serve the interests of all
shareholders. A change in these policies could adversely affect the Company's
distributions, financial condition, results of operations or the market price of
Common Shares.
INFLUENCE OF EXECUTIVE OFFICERS, TRUSTEES AND PRINCIPAL SHAREHOLDERS
None of the Trustees, officers or other shareholders of the Company are
selling Common Shares in the Offering. Upon the closing of the Offering and the
Concurrent Investments, all Trustees and executive officers as a group will own
approximately 7.0% of the total issued and outstanding Common Shares (assuming
the conversion of all Preferred Shares issued in the SERS Transaction into
Common Shares and the conversion of all Units held by Trustees and executive
officers into Common Shares). Such ownership would increase to 10.4% if all
options and warrants held by them were exercised. Upon the closing of the
Offering and the Concurrent Investments, SERS will own 481,818 Preferred Shares
(convertible under certain circumstances into 1,606,060 Common Shares), 636,363
Common Shares, and warrants to purchase an additional 133,333 Common Shares
(representing 25.9% of the outstanding Common Shares assuming conversion of such
Preferred Shares and exercise of such warrants). Accordingly, such persons will
have substantial influence on the Company, which influence might not be
consistent with the interests of other shareholders, and may in the future have
a substantial influence on the outcome of any matters submitted to the
shareholders for approval. See "Principal Shareholders." In addition, the
Company's Declaration of Trust, subject to certain exceptions, authorizes the
Trustees to take such actions as are necessary and desirable to preserve its
qualification as a REIT and pursuant to such authority the Board of Trustees has
agreed to limit any person to direct or indirect ownership of no more than 9.8%
in value of the Company's outstanding shares of beneficial interest (the
"Ownership Limit"). Excepted from the Ownership Limit is SSI who will,
immediately following completion
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of the Offering (and assuming the conversion of all Preferred Shares to be
issued in the SERS Transaction into Common Shares), beneficially own 8.0% of the
Common Shares assuming the conversion of all Units held by SSI into Common
Shares. However, SSI is subject to a separate contractual ownership limitation
of 14.75%. The ownership restrictions could have the effect of further
solidifying the control SSI has over the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Anthony A. Nichols, Sr. and Gerard H. Sweeney. While the Company
believes that it could find replacements for these key personnel, the loss of
their services could have an adverse effect on the operations of the Company.
Messrs. Nichols and Sweeney have entered into employment agreements with the
Company. However, these agreements do not restrict the ability of either Mr.
Nichols or Mr. Sweeney to become employed by a competitor of the Company
following termination of his employment with the Company. See
"Management -- Employment Agreements."
LIMITS ON CHANGES IN CONTROL
Certain provisions of the Declaration of Trust and bylaws (the "Bylaws")
may have the effect of delaying, deferring, or preventing a third party from
making an acquisition proposal for the Company and may thereby inhibit a change
in control of the Company. For example, such provisions may: (i) deter tender
offers for the Common Shares, which offers may be attractive to the
shareholders; or (ii) deter purchases of large blocks of Common Shares, thereby
limiting the opportunity for shareholders to receive a premium for their Common
Shares over then-prevailing market prices. See "Description of Shares of
Beneficial Interest" and "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws." These provisions include the
following:
Ownership Limit Necessary to Maintain REIT Qualification. In order for the
Company to maintain its qualification as a REIT, not more than 50% in value of
the Company's outstanding Shares may be owned, actually or constructively, under
the applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds) at any time during the last half of
any taxable year (other than the first taxable year for which the election to be
taxed as a REIT has been made). In order to protect the Company against the risk
of losing REIT status due to the concentration of ownership among its
shareholders, the Ownership Limit adopted by the Board of Trustees pursuant to
the Declaration of Trust limits direct or indirect ownership to 9.8% in value of
the outstanding Shares, subject to certain exceptions. See "Description of
Shares of Beneficial Interest -- Restrictions on Transfer." The Board of
Trustees could waive this restriction with respect to a particular shareholder
if it were satisfied, based upon the advice of tax counsel, that ownership by
such shareholder in excess of the Ownership Limits would not jeopardize the
Company's status as a REIT and the Board of Trustees otherwise decided such
action would be in the best interests of the Company. Actual or constructive
ownership of Common Shares in excess of the Ownership Limits will cause the
violative transfer or ownership to be void with respect to the transferee or
owner as to that number of shares in excess of the Ownership Limits and such
shares will be automatically transferred to a trust for the benefit of a person
to whom an interest in the Common Shares may be permissably transferred. Such
transferee shall have no right to vote such shares or be entitled to
distributions with respect to such shares.
Preferred Shares. The Company's Declaration of Trust authorizes the Board
of Trustees to issue up to 5,000,000 preferred shares and to establish the
preferences, rights, and other terms (including the right to vote and the right
to convert into Common Shares) of any shares so issued. See "Description of
Shares of Beneficial Interest -- Shares -- Preferred Shares of Beneficial
Interest." In addition to the Preferred Shares issued in the SERS Transaction,
the Board of Trustees could establish a series of preferred shares that could
have the effect of delaying, deferring, or preventing a tender offer or a change
in control of the Company that might involve a premium price of the Common
Shares or otherwise be in the best interests of the shareholders.
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Exemptions from the Maryland Business Combination Law. Under the Maryland
General Corporation Law, as amended ("MGCL"), as applicable to real estate
investment trusts, certain "business combinations" (including certain issuances
of equity securities) between a Maryland real estate investment trust and any
person who beneficially owns 10% or more of the voting power of the trust's
shares (an "Interested Shareholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Shareholder
becomes an Interested Shareholder. Thereafter, any such business combination
must be recommended by the board of trustees and approved by two super-majority
shareholder votes unless, among other conditions, the trust's common
shareholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Shareholder for its shares. These provisions of the MGCL do
not apply, however, to business combinations that are approved or exempted by
the board of trustees prior to the time that the Interested Shareholder becomes
an Interested Shareholder. Pursuant to the statute, the Company has exempted any
business combination involving SSI, TNC, Gerard H. Sweeney and any affiliate or
associate of theirs from the business combination statute and, consequently, the
five-year prohibition and the super-majority vote requirements described above
will not apply to business combinations between any of them and the Company. As
a result, SSI, TNC, Mr. Sweeney, and affiliates and associates thereof
(including Mr. Nichols) may be able to enter into business combinations with the
Company, which may not be in the best interest of the shareholders, without
compliance by the Company with the super-majority vote requirements and other
provisions of the statute. In addition, the Company has exempted any business
combination involving SERS or the SERS Voting Trust and any of their respective
affiliates or associates, and Morgan Stanley Asset Management Inc. and the
Morgan Stanley Funds and any of the respective affiliates or associates from the
business combination statute. See "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws -- Business Combinations."
Maryland Control Share Acquisition Statute. The MGCL, as applicable to
real estate investment trusts, provides that "control shares" of a Maryland real
estate investment trust acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiror, by
officers or by trustees who are employees of the trust. If voting rights are not
approved at a meeting of shareholders, then, subject to certain conditions and
limitations, the issuer may redeem any or all of the control shares (except
those for which voting rights have previously been approved) for fair value. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. Pursuant to the statute, the
Company has exempted any and all acquisitions by SSI, TNC, and any current or
future affiliate or associate of theirs from the control shares statute. As a
result, SSI or TNC will be able to possess voting power not generally available
to other persons and the effect may be to further solidify their control of the
Company. In addition, pursuant to the statute, the Company has exempted any and
all acquisitions by SERS and the SERS Voting Trust and any of their respective
current or future affiliates or associates and Morgan Stanley Asset Management
Inc. and the Morgan Stanley Funds and any of their respective current or future
affiliates or associates from the control shares statute. Common Shares
beneficially owned by Richard M. Osborne have not been exempted from the
statute. See "Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws -- Control Share Acquisitions."
EFFECT ON PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of Common Shares, or the perception that such
sales could occur, could adversely affect prevailing prices for the Common
Shares. The Company has reserved: (i) 509,856 Common Shares for issuance upon
conversion of Units; (ii) 762,104 Common Shares for issuance upon exercise of
outstanding options and warrants; and (iii) 1,606,060 Common Shares issuable
upon conversion of the Preferred Shares. Each of the Trustees and executive
officers of the Company, and certain shareholders of the Company (including SSI,
TNC, the RMO Trust, the RMO Fund and the SERS Voting Trust) have agreed, subject
to certain limited exceptions, not to sell, offer to sell, solicit an offer to
buy, contract to sell, grant any option to purchase, or otherwise transfer or
dispose of, any Common Shares, or any securities convertible into or exercisable
or exchangeable for Common Shares, during the 180-day period after the effective
date of this
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Prospectus (the "Lock-Up Period") without the prior written consent of Smith
Barney Inc. The Company and the Operating Partnership have also agreed with the
Underwriters not to sell, offer to sell, solicit an offer to buy, contract to
sell or otherwise transfer or dispose of any Common Shares or any securities
convertible into or exercisable or exchangeable for Common Shares (whether
through the issuance or granting of any options, warrants, commitments,
subscriptions, rights to purchase or otherwise) during the Lock-up Period
without the prior written consent of Smith Barney Inc., except for the issuance
of such securities in connection with the acquisition of any office or
industrial property; upon the redemption of any Units issued in connection with
the SSI/TNC Transaction; upon the exercise of any options or warrants of the
Company; in connection with the Concurrent Investments; or upon conversion of
any Preferred Shares issued in connection with the SERS Transaction. See "Shares
Available for Future Sale." At the conclusion of such periods, the Common Shares
issuable upon the exchange of Units or Preferred Shares or the exercise of
outstanding options or warrants may be sold in the public market pursuant to the
registration statement the Company is obligated to file prior to March 31, 1997
or pursuant to any available exemptions from registration. No prediction can be
made regarding the effect that future sales of Company securities will have on
the market price of Common Shares.
IMMEDIATE DILUTION
As more fully set forth under "Dilution," the pro forma net tangible book
value per share of the assets of the Company after the Offering will be less
than the public offering price per share in the Offering. Accordingly,
shareholders acquiring Common Shares in the Offering will experience an
immediate dilution of $0.88 per share in the net tangible book value of the
Common Shares.
EFFECT ON HOLDERS OF COMMON SHARES OF AN ISSUANCE OF PREFERRED SHARES
The Board of Trustees is empowered by the Company's Declaration of Trust to
designate and issue from time to time one or more classes or series of preferred
shares without shareholder approval. The Board of Trustees may determine the
relative rights, preferences, and privileges of each class or series of
preferred shares so issued. See "Description of Shares of Beneficial
Interest -- Shares -- Preferred Shares of Beneficial Interest." Because the
Board of Trustees has the power to establish the preferences and rights of each
class or series of Preferred Shares, it may afford the holders in any series or
class of preferred shares preferences, distributions, powers and rights, voting
or otherwise, senior to the rights of holders of Common Shares. The Company has
agreed to issue Preferred Shares to the SERS Voting Trust in the SERS
Transaction. See "The Company -- The SERS Transaction."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that influences the market price of the Common Shares in
the public market is the annual distribution rate on the shares. Increasing
market interest rates may lead prospective purchasers of the Common Shares to
demand a higher annual distribution rate from future distributions. Such an
increase in the required distribution may adversely affect the market price of
the Common Shares.
OFFER AND SALE OF UNREGISTERED SECURITIES
The Company has offered and expects to issue concurrent with the Offering
(i) $10.5 million of Common Shares pursuant to the SERS Private Placement and
(ii) $11.7 million of Common Shares pursuant to the Morgan Stanley Private
Placement. The offer and sale of such Common Shares have not been registered
under the Securities Act of 1933, as amended (the "Securities Act") in reliance
upon the exemption from registration under Section 4(2) of the Securities Act.
Because the offer and sale of such Common Shares was not completed prior to the
filing of the Registration Statement and is occurring at the same time as the
sale of Common Shares pursuant to the Offering, an issue may arise whether the
offer and sale of such Common Shares pursuant to these private placements would
be integrated with the Offering and, therefore, required to be registered under
the Securities Act. If it were to be determined that the offer and sale of the
Common Shares sold pursuant to the SERS and Morgan Stanley Private Placements
should have been registered under the Securities Act, the holders of such Common
Shares could be given the right under federal securities laws
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to rescind their investment, or to pursue other claims against the Company which
could adversely affect the financial condition of the Company or its ability to
make expected distributions to its shareholders. Although the Company's counsel
has provided an opinion that, subject to certain assumptions and qualifications,
the offer and sale of the Common Shares in the SERS and Morgan Stanley Private
Placements should be exempt from registration under Section 4(2) of the
Securities Act relating to "transactions not involving any public offering,"
such opinion is not binding on the Securities and Exchange Commission or the
purchasers of the Common Shares in such private placements. Furthermore, each of
the purchasers in the SERS and Morgan Stanley Private Placements have waived, to
the extent permitted by applicable law, any right of rescission that would
result from the integration of such private placements with the Offering.
Although the Company does not believe it will have any material liability for
failure to register the Common Shares to be issued in connection with the SERS
and Morgan Stanley Private Placements, there can be no assurance in this regard.
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THE COMPANY
GENERAL
The Company is a self-administered, self-managed and fully integrated REIT
engaged in the ownership, management, leasing, acquisition and development of
primarily suburban office properties. The Initial Properties consist of 23
suburban office buildings and one industrial facility containing an aggregate of
approximately 1.3 million net rentable square feet located primarily in the
Suburban Philadelphia Office and Industrial Market. In addition to owning the
Initial Properties, the Company, on November 14, 1996, acquired the SERS
Properties, which consist of seven office buildings and two industrial
facilities, and has entered into agreements to purchase the four other
Acquisition Properties. The Acquisition Properties contain an aggregate of
approximately 700,000 net rentable square feet located primarily in the Market.
The SERS Properties (which account for nine of the 13 Acquisition Properties)
were acquired for an aggregate purchase price of approximately $30.3 million,
payable as follows: (i) by issuing the Preferred Shares that, subject to certain
conditions, are convertible into 1,606,060 Common Shares; (ii) by agreeing to
make deferred payments aggregating $3.8 million in cash or Common Shares; and
(iii) by issuing to SERS two-year warrants to purchase 133,333 Common Shares at
an exercise price of $25.50 per share. See "-- The SERS Transaction." The
purchase prices for the four remaining Acquisition Properties aggregate $22.8
million in cash. The Company developed 19 of the Initial Properties and will
manage 36 of the Properties upon the closing of the Offering. In addition, the
Company manages approximately 575,000 net rentable square feet at office
properties on behalf of third parties and approximately 159,000 net rentable
square feet at the Option Properties. As of September 30, 1996, the Properties
were approximately 94.3% leased to 222 tenants.
The Properties consist primarily of suburban office and industrial
buildings (36 of which are Class A properties). The Company considers Class A
suburban office and industrial properties to be those that have desirable
locations, are well maintained and professionally managed and have the potential
of achieving rental and occupancy rates that are typically at or above those
prevailing in their respective markets. The average age of the Properties is
approximately 10.8 years. The Company's 10 largest tenants (based on pro forma
annualized base rents at September 30, 1996) aggregate approximately 29.8% of
the Company's total base rent and approximately 27.5% of the Company's net
rentable square feet and have a weighted average remaining lease term of
approximately 7.8 years. As of September 30, 1996, no single tenant accounted
for more than 8.7% of the Company's pro forma aggregate annualized base rent and
only 30 tenants individually represented more than 1.0% of such aggregate
annualized base rent.
Leases representing approximately 58.5% of the net rentable square footage
at the Properties were signed during the period January 1, 1993 through December
31, 1995, a time when management believes market rental rates were at or below
current market rental rates. This belief is supported by the fact that for the
nine months ended September 30, 1996: (i) renewal leases at the Initial
Properties were signed covering approximately 154,000 net rentable square feet
of office space at a weighted average rental rate of $13.25 per square foot,
compared to leases that expired for that space during such period with a
weighted average rental rate of $12.66 per square foot (representing a 4.7%
increase); and (ii) new leases at the Initial Properties were signed covering
approximately 264,000 net rentable square feet of office space at a weighted
average rental rate of $15.96 per square foot, compared to leases that expired
for that space during such period with a weighted average rental rate of $14.52
per square foot (representing a 9.9% increase). In all cases, weighted average
rental rates include expense recoveries, free rent and scheduled rent increases
that would be taken into account under generally accepted accounting principles.
The Company believes that the strength of its leasing department and tenant
retention capabilities should enable it to continue to capitalize on rental rate
differentials as the Company's leases expire.
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The Company expects to focus its office and industrial building ownership
in submarkets located within the Suburban Philadelphia Office and Industrial
Market where it believes it can accumulate a critical mass of properties in
order to enhance operating efficiencies and, in turn, cash flow. The Company's
primary business objective is to realize and maximize growth in cash flow per
share and to increase shareholder value by:
- optimizing cash flow from the Properties through continued active
property management and prudent operating strategies;
- acquiring Class A suburban office and industrial properties and/or
portfolios of such properties located in the Market and surrounding areas
at prices that are below replacement cost and at yields which exceed the
Company's cost of capital;
- redeveloping and improving acquired properties and, to a lesser extent,
developing build-to-suit properties as opportunities arise;
- generating third party fee-related revenues; and
- operating within a conservative capital structure with financing policies
that allow for continued growth.
According to the C&W Mid-Year Report, the office and industrial market
located in the Philadelphia metropolitan area, which includes the Suburban
Philadelphia Office and Industrial Market, contains an aggregate of
approximately 383.3 million net rentable square feet. In addition, the Company
believes that the Suburban Philadelphia Office and Industrial Market has
significant rental growth potential due to declining vacancy rates, limited new
construction and steady employment growth. Furthermore, the Company believes
that the Market contains opportunities to acquire Class A suburban office and
industrial properties at attractive yields and at prices which are significantly
below replacement costs. The Company's confidence in the Market is bolstered by
the fact that the Class A office direct vacancy rate in the six Pennsylvania
counties within the Market (Bucks, Chester, Delaware, Lehigh, Montgomery and
Northampton) fell from approximately 16.4% at June 30, 1995 to approximately
9.1% at June 30, 1996, and the Class A office direct vacancy rate in the two New
Jersey counties within the Market (Burlington and Camden) fell from
approximately 18.4% at June 30, 1995 to approximately 11.3% at June 30, 1996,
according to the C&W Mid-Year Report. The overall vacancy rates within the
Market of 12.4% also compare favorably with the overall average national office
vacancy rate of 14.2% at June 30, 1996. In addition, the net absorption of
office space for the Market was approximately 1.3 million net rentable square
feet for the six-month period ended June 30, 1996 compared to a negative net
absorption of 80,000 net rentable square feet for the six-month period ended
June 30, 1995, according to the C&W Mid-Year Report.
The Company commenced its operations in 1986 as a finite life REIT that
owned eight properties. In October 1994, the Company's shareholders approved
amendments to the Company's Declaration of Trust that eliminated the Company's
finite life status and increased the Company's authorized capital. Since that
time, the Company has sought to enhance the value of its portfolio by: (i)
actively managing its Properties; (ii) exploring acquisitions of individual and
portfolio properties in its submarkets; and (iii) seeking financing transactions
that could be used to fund future growth. These efforts culminated in the
SSI/TNC Transaction in which the Company acquired substantially all of the real
estate holdings of SSI, and SSI's real estate affiliate, TNC, a private real
estate development and management services company operating in the Market. SSI
is a publicly-traded company that invests in and actively supports
technology-driven growth companies. As of September 30, 1996, SSI owned
significant investments in more than 20 companies, including the following
publicly-traded companies: Novell, Inc., CompuCom Systems, Inc., Cambridge
Technology Partners (Massachusetts), Inc., Coherent Communications Systems
Corporation, USDATA Corporation and Integrated Systems Consulting Group, Inc.
The SSI/TNC Transaction included the acquisition by the Company of 19
office and industrial properties (containing approximately 958,000 net rentable
square feet with an occupancy rate of approximately 93.8% as of September 30,
1996) and an option to acquire the four Option Properties, each of which is
located in the Market. The SSI/TNC Transaction also included the combination of
the real estate
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management, marketing and development functions of TNC with those of the
Company. The Company believes that the SSI/TNC Transaction has significantly
enhanced its position as an owner and operator of office and industrial
properties in the Market.
Since 1982, TNC has operated exclusively in the Suburban Philadelphia
Office and Industrial Market and has been responsible for the development of
approximately 3.2 million square feet of office and industrial properties in the
Market, including the development of build-to-suit facilities for GMAC (former
Mortgage Division headquarters), Penn Mutual Life Insurance Company
(headquarters), Advanta Corp. (former headquarters), Sartomer Company, Inc. (a
U.S. subsidiary of TOTAL)(headquarters), General Accident Group, General
Electric, Ford Motor Company and ARCO Chemical. In addition, TNC acquired,
developed, marketed and managed nine corporate campuses.
The Company is led by an experienced management team, senior members of
which include Anthony A. Nichols, Sr., Chairman of the Board and former
President of TNC, and Gerard H. Sweeney, President and Chief Executive Officer.
The Company's four senior executives have an average of approximately 22 years
of real estate experience. In aggregate, the Company's management team has been
responsible for the management of approximately 7.5 million square feet and the
development of approximately 3.2 million square feet of office and industrial
properties primarily within the Market.
THE SSI/TNC TRANSACTION
On August 22, 1996, the Company completed the SSI/TNC Transaction pursuant
to which the Operating Partnership acquired: (i) directly, title to six suburban
office properties located in the Suburban Philadelphia Office and Industrial
Market; (ii) indirectly, through subsidiary limited partnerships (collectively,
the "Title Holding Partnerships"), controlling interests in 13 additional
suburban office properties located in the Market; and (iii) all of the
non-voting preferred stock and 5% of the voting common stock (which collectively
are entitled to receive 95% of the dividends) of the Management Company. The
Operating Partnership, together with a subsidiary of the Company, acquired two
Title Holding Partnerships that own two of the Initial Properties. The Operating
Partnership, together with a subsidiary of the Company, acquired an 89% capital
interest and a 99% cash flow and profits interest in 10 of the 13 Title Holding
Partnerships, and an 89% capital interest and a 64% cash flow and profits
interest in an eleventh Title Holding Partnership. Except as indicated below,
ownership of the Residual Interests in these Title Holding Partnerships was
retained by TNC and SSI in order to avoid the incurrence of transfer taxes in
connection with the Company's acquisition of the Properties owned by the Title
Holding Partnerships. A tenant in one of the Properties owned by a Title Holding
Partnership (16 Campus Boulevard, Newtown Square) holds a subordinated 35% cash
flow interest in such partnership. See "Structure of the Company -- Ownership."
The Company acquired its interests in the SSI/TNC Properties, together with
approximately $426,000 in cash, in exchange for: (i) 258,333 Common Shares; (ii)
a six-year warrant to purchase 258,333 Common Shares at an exercise price of
$19.50 per share; (iii) 495,837 Units, which are convertible into 495,837 Common
Shares and (iv) the obligation of the Operating Partnership to acquire by
September 1999 the Residual Interests in exchange for 44,322 Units, which are
convertible into 44,322 Common Shares, plus an amount equal to all distributions
that would have been payable in respect of such Units had they been issued as of
the closing of the SSI/TNC Transaction. The Units are redeemable for cash or, at
the option of the Company, for Common Shares. The SSI/TNC Properties were
conveyed to the Operating Partnership subject to approximately $63.6 million in
mortgage indebtedness as of the date of acquisition, a portion of which will be
repaid from the net proceeds of the Offering and the Concurrent Investments. See
"Use of Proceeds."
Pursuant to the terms of the SSI/TNC Transaction, if certain mortgage
indebtedness encumbering the Properties (as described below) is repaid at a
discount, 75% of the resulting increase in equity created would be allocated to
the original owners of such properties and 25% of such equity would be allocated
to the Company through the issuance of additional interests in the Operating
Partnership at the rate of one Unit for each $16.50 of additional equity so
created. Following the closing of the Offering and the Concurrent
35
<PAGE> 41
Investments and the application of the net proceeds therefrom, the mortgage
indebtedness that is subject to this provision will have an outstanding
principal balance of approximately $15.4 million and will encumber six of the
SSI/TNC Properties. See "Business and Properties -- Mortgage Debt and Line of
Credit."
In addition, in connection with the SSI/TNC Transaction, SSI made loans to
the Operating Partnership and a subsidiary in order to enable the Operating
Partnership to pay certain expenses in connection with such transaction, provide
working capital, make certain preferred distributions to the Company and finance
tenant improvements (collectively, the "SSI Loan"). As of September 30, 1996,
the outstanding balance of the SSI Loan, including accrued interest, was
approximately $774,000. Upon the closing of the Offering, the SSI Loan and
accrued interest thereon, will be repaid in full. See "Certain Relationships and
Related Transactions -- Repayment of Certain Advances to SSI."
Pursuant to the terms of the SSI/TNC Transaction, an affiliate of TNC
granted the Operating Partnership the right to acquire, during the two-year
period following the closing of the transaction (subject to two additional
one-year extensions), the four Option Properties. Exercise of the option is
subject to a right of first refusal in favor of, and the consent of, the holder
of the mortgage encumbering the Option Properties. There can be no assurance
that the Company will exercise its option or that the holder of such mortgage
will consent to the exercise of the option. See "Business and
Properties -- Option Properties."
In connection with the SSI/TNC Transaction, the Company entered into
two-year employment agreements with the Company's four executive officers and
the Company issued to these four executive officers six-year warrants to
purchase, in the aggregate, 220,000 Common Shares at an exercise price of $19.50
per share. See "Management -- Employment Agreements."
THE SERS TRANSACTION
On November 14, 1996, the Company acquired the SERS Properties. The SERS
Properties aggregate approximately 418,000 net rentable square feet, have an
average age of approximately 12 years and are located in the Market. As of
September 30, 1996, the SERS Properties were approximately 92.4% leased to 62
tenants. The SERS Properties were acquired by the Company for an aggregate
purchase price of $30.3 million, payable as follows: (i) by issuing 481,818
Preferred Shares that, subject to certain conditions, are convertible into
1,606,060 Common Shares; (ii) by agreeing to make deferred payments aggregating
$3.8 million (as described below); and (iii) by issuing two-year warrants to
purchase 133,333 Common Shares at an exercise price of $25.50 per share. In
addition, at the closing of the SERS Transaction, SERS deposited approximately
$1.4 million into an escrow account to be used for tenant improvements, leasing
commissions and capital expenditures for the SERS Properties.
Each Preferred Share will entitle the holder to: (i) receive distributions
equal to the distributions payable in respect of a number of Common Shares equal
to the Conversion Number; (ii) vote, together with holders of Common Shares, as
a class, and to cast the number of votes equal to the Conversion Number; and
(iii) a liquidation preference equal to the greater of (a) the amount that would
have been payable with respect to the Common Shares into which such Preferred
Shares would have been convertible immediately prior to the liquidation had the
condition to convertibility been satisfied and (b) the product of $16.50
multiplied by the Conversion Number plus all declared but unpaid dividends. The
Company will be required to pay $2.5 million of the deferred purchase price on
June 30, 1998 and $1.3 million on December 31, 1999 in cash or, at the Company's
option, through the issuance of a number of Common Shares equal to the
applicable amount of the deferred purchase price divided by the greater of the
Market Value Per Share or the Book Value Per Share (as such terms are defined in
the Glossary).
Prior to a Conversion Approval, Preferred Shares will be convertible into
up to 181,325 Common Shares. In the event that a Conversion Approval has not
occurred by July 1, 1997, holders of Preferred Shares will become entitled to
receive distributions equal to 120% of the distributions payable in respect of a
number of Common Shares equal to the Conversion Number. In the event that a
Conversion Approval has not occurred by July 1, 1998, holders of Preferred
Shares will have the right to require the Company to redeem all or a
36
<PAGE> 42
portion of their Preferred Shares at the Redemption Price. SSI, TNC, Anthony A.
Nichols, Sr. and Richard M. Osborne have agreed to vote the Common Shares
beneficially owned by them in favor of the unlimited conversion. See "Risk
Factors -- Redemption of Preferred Shares."
Concurrent with the closing of the Offering, the Company will issue to the
SERS Voting Trust $10.5 million of Common Shares. See "-- SERS Private
Placement" below.
OTHER PENDING ACQUISITIONS
- The Company has signed an agreement of sale to purchase the Delaware
Corporate Center (One Righter Parkway), a 104,828 net rentable square
foot office building located in New Castle County, Delaware for $12.7
million in cash. The building was built in 1989 and was 100% leased as of
September 30, 1996.
- The Company has signed an agreement of sale to purchase two buildings in
Horsham, Pennsylvania for an aggregate purchase price of $7.1 million in
cash. The buildings include: 700 Business Center Drive, a 30,773 net
rentable square foot office building built in 1986 and 800 Business
Center Drive, a 51,236 net rentable square foot office building built in
1986. 700 and 800 Business Center Drive were each 100% leased, as of
September 30, 1996.
- The Company has signed an agreement of sale to purchase 8000 Lincoln
Drive, a 54,923 net rentable square foot office building built in 1983
and located in Evesham, New Jersey, for $3.0 million in cash. The
building was 100% leased as of September 30, 1996.
These pending acquisitions are subject to completion of customary closing
conditions (other than the completion of due diligence, which has occurred) and,
as a result, no assurance can be given that these, or any other, acquisitions
will be completed. However, it is expected that these acquisitions will close
concurrent with, or shortly following, the closing of the Offering. If these
acquisitions are consummated, the Company's portfolio will consist of 37
properties aggregating approximately 2.0 million net rentable square feet.
SERS PRIVATE PLACEMENT
- Concurrent with the closing of the Offering the SERS Voting Trust has
agreed, subject to certain conditions, to purchase $10.5 million of
Common Shares directly from the Company in a private placement at the
price per Common Shares sold in the Offering.
MORGAN STANLEY PRIVATE PLACEMENT
- Concurrent with the closing of the Offering, the Morgan Stanley Funds, as
advised by Morgan Stanley Asset Management Inc., have agreed, subject to
certain conditions, to purchase $11.7 million in Common Shares directly
from the Company in a private placement at a price per Common Share of
$16.50.
THE MANAGEMENT COMPANY
The Company conducts its real estate management services business through
the Management Company. The Company manages all but one of the Initial
Properties through the Management Company; the Twin Forks Building, located in
North Carolina, is managed for the Company by an unaffiliated third party. The
Company manages, through the Management Company, additional properties on behalf
of unaffiliated third parties. As of September 30, 1996, the Management Company
was managing properties containing an aggregate of approximately 2.0 million net
rentable square feet, of which approximately 1.3 million net rentable square
feet related to Initial Properties owned by the Company, 159,000 net rentable
square feet related to the Option Properties, and approximately 575,000 net
rentable square feet related to properties owned by unaffiliated third parties.
The Company will manage each Acquisition Property following its acquisition
through the Management Company. Through its ownership of 100% of the preferred
stock and 5%
37
<PAGE> 43
of the common stock of the Management Company, the Operating Partnership is
entitled to receive 95% of amounts paid as dividends by the Management Company.
See "Structure of the Company -- Management Company."
The Company was organized as a Maryland real estate investment trust in
1986. The Company's principal executive offices are located at 16 Campus
Boulevard, Newtown Square, Pennsylvania 19073 and its telephone number is
610-325-5600.
38
<PAGE> 44
BUSINESS AND GROWTH STRATEGIES
GENERAL
The Company's strategy is to focus its growth in the Suburban Philadelphia
Office and Industrial Market. The Company believes that certain economic
fundamentals in the Market provide an attractive environment for owning,
acquiring and operating Class A office and industrial properties. This belief is
supported by the following:
- The recent decline in vacancy rates within the Market: the Class A office
direct vacancy rate in the six Pennsylvania counties within the Market
fell from approximately 16.4% at June 30, 1995 to approximately 9.1% at
June 30, 1996, and the Class A office direct vacancy rate in the two New
Jersey counties within the Market fell from approximately 18.4% at June
30, 1995 to approximately 11.3% at June 30, 1996, according to the C&W
Mid-Year Report;
- The net absorption of office space within the Market during the six-month
period ended June 30, 1996 was approximately 1.3 million net rentable
square feet compared to a negative net absorption of 80,000 net rentable
square feet during the six-month period ended June 30, 1995, according to
the C&W Mid-Year Report;
- The weighted average Class A office rental asking rate of $18.94 per
square foot within the Market, as identified in the C&W Mid-Year Report,
compared to an average annualized rental rate of $15.15 per square foot
at the Properties as of September 30, 1996; and
- The limited new construction of office buildings within the Market during
the 1990's, with construction being primarily on a build-to-suit basis.
As reported by C&W, office development from January 1, 1995 through June
30, 1996 was limited to approximately 254,000 net rentable square feet in
the Market, which contained a total office inventory of approximately
43.7 million net rentable square feet as of June 30, 1996.
The Company further believes that, based on its evaluation of market
conditions, the growth rates attainable within the Suburban Philadelphia Office
and Industrial Market will improve overall occupancy levels and rental rates and
reduce owner leasing concessions.
The Company believes that the foundation of its growth will consist of: (i)
the quality and strategic location of the Properties; (ii) the strengthening
economy and real estate fundamentals of the Market; (iii) the knowledge and
experience of its senior management team; (iv) the limited new construction of
office space in the Market; (v) the presence of distressed sellers and
inadvertent owners (through foreclosure or otherwise); and (vi) the limited
capital available to many of the Company's competitors for acquisitions and
capital improvements. The Company expects to focus its office building ownership
in submarkets located within the Market where it believes it can accumulate a
critical mass of Properties in order to enhance operating efficiencies and, in
turn, cash flow.
The Company's primary business objective is to realize and maximize growth
in cash flow per share and to increase shareholder value by: (i) optimizing cash
flow from the Properties through continued active property management and
prudent operating strategies; (ii) acquiring quality suburban office and
industrial properties and/or portfolios of such properties located in the Market
and surrounding areas at prices that are below replacement cost and at yields
which exceed the Company's cost of capital; (iii) redeveloping and improving
acquired properties and, to a lesser extent, developing build-to-suit properties
as opportunities arise; (iv) generating third party fee-related revenues; and
(v) operating within a conservative capital structure with financing policies
that allow for continued growth.
MANAGEMENT AND OPERATING STRATEGIES
The Company expects to realize and maximize cash flow growth due to the
strength and experience of its management team through:
- Contractual Rental Rate Increases: As of September 30, 1996, 100 leases,
representing approximately 43.1% of the total leases at the Properties
and approximately 52.6% of the net rentable square feet at
39
<PAGE> 45
the Properties, include built-in contractual rental rate increases.
Between September 30, 1996 and June 30, 2011, the contractual base rents
under such leases are expected to increase by an aggregate of
approximately $11.8 million (not including increases attributable to the
transition from free or partial rent to full rent or rent increases that
are tied to indices such as the CPI);
- Leasing Expiring/Vacant Space: The Company expects to experience cash
flow growth through the releasing of approximately 324,000 net rentable
square feet of space under 89 leases that expire at the Properties
between October 1, 1996 and December 31, 1997 and that have a weighted
average annual rental rate as of their expiration dates of $14.14 per
square foot. The Company believes that the majority of such leases are
currently at or below market rental rates. In addition, the Company
expects to realize additional cash flow through the potential leasing of
approximately 115,000 net rentable square feet of vacant space at the
Properties as of September 30, 1996 (approximately 5.7% of the Company's
total net rentable square feet). There can be no assurance, however, that
the Company will meet any of the foregoing expectations; and
- Tenant Services: The Company believes it has been able to provide tenants
with a high level of service as evidenced by the tenant retention rates
of the Initial Properties in 1993, 1994 and 1995 and the nine-month
period ended September 30, 1996 of 71.4%, 56.7%, 75.1% and 93.5%,
respectively, based on net rentable square footage renewed as a
percentage of the square footage of leases expiring during each period.
ACQUISITION STRATEGIES
The Company believes that it will be able to identify and capitalize on
acquisition opportunities through: (i) management's and the Board's significant
local market expertise; (ii) management's and the Board's relationships with
private and institutional real estate owners, potential sellers of individual
and portfolio properties, area real estate brokers and tenants; (iii) its
current market penetration in the Suburban Philadelphia Office and Industrial
Market; (iv) its access to capital as a public company, including but not
limited to proceeds available under the Company's expected two-year, $80.0
million secured revolving Credit Facility and the ability to exchange Units for
interests in properties, thereby permitting certain sellers to defer the tax
gain associated with sale of such properties; and (v) its fully integrated real
estate operations which allow the Company to respond quickly to acquisition
opportunities and enable it to provide real estate management services to third
parties as a means of identifying such opportunities. The Company's acquisition
program will focus on both portfolio and individual acquisitions. See "Business
and Properties -- Credit Facility."
The Company will seek to acquire additional office and industrial
properties that meet one or more of the following investment criteria: (i) the
property is well designed and well constructed and well located within the
Suburban Philadelphia Office and Industrial Market; (ii) the property offers
attractive current yield and long-term growth potential based on its occupancy
characteristics, including lease structure, tenant credit and occupancy history;
(iii) the property can be acquired at a substantial discount to replacement
cost; and (iv) the property is located in a submarket that contains barriers to
entry and repositioning opportunities.
LibertyView Acquisition. As an example of these strategies, in July 1996
the Company acquired the LibertyView Building, a 121,737 square foot net
rentable suburban office building built in 1990 and located in Cherry Hill, New
Jersey, for $10.6 million. This represents a purchase price of $87.07 per square
foot versus management's estimate of this Property's replacement cost of
approximately $150 per square foot. As of September 30, 1996, the LibertyView
Building was approximately 82.8% leased (up from 66.7% at the date of
acquisition). The LibertyView Building was acquired by the Company at a
capitalization rate of approximately 11.0% (calculated by dividing (a) the
expected net operating income (including the effect of straight line rents)
generated by the property based on annualized revenues from signed leases in
place and lease commitments at the date of acquisition by (b) the consideration
paid for the property). The Company estimates that the capitalization rate for
this Property would be approximately 12.9% upon the establishment of an
occupancy level greater than or equal to 95%, given current market rental rates,
and after adjusting for the anticipated additional capital costs required to
achieve such occupancy levels. There can be no assurances that the Company will
achieve such occupancy levels at prevailing market rates. In addition, there can
be no
40
<PAGE> 46
assurance that the Company will be successful in making acquisitions on
comparable terms in the future. The Company believes it could add a number of
office properties to its existing portfolio without requiring a material
increase in management personnel due to the Company's expertise, depth of
current management, financial reporting systems and the efficiencies created by
its centralized management structure.
The Company also holds an option from an affiliate of TNC to purchase the
Option Properties which contain approximately 159,000 net rentable square feet.
The Option Properties are located in the Market, are managed by the Company and
were approximately 95.5% leased to 16 tenants as of September 30, 1996. There
can be no assurance that the Company will exercise its option to acquire any of
the Option Properties or, if it does, that it will be able to satisfy the
conditions relating to the exercise of such option. See "Business and
Properties -- Option Properties."
The Company has obtained a commitment for an $80 million Credit Facility
from Smith Barney Mortgage Capital Group, Inc., and NationsBank, N.A. It is
expected that the Credit Facility will close concurrent with the Offering. It is
expected that the Credit Facility will have a two-year term and will be secured
by mortgages on 25 of the Properties. The Credit Facility will assist the
Company in executing targeted acquisition opportunities and expanding its market
presence.
CORPORATE SERVICE ACTIVITIES
The Company, through the Management Company, managed, as of September 30,
1996, approximately 2.0 million net rentable square feet, including 575,000 net
rentable square feet of office properties on behalf of third parties and
approximately 159,000 net rentable square feet at the Option Properties. The
Company's services for such third parties include corporate tenant
representations, property management, leasing and brokerage and construction
management services. The Company typically provides a full range of real estate
services to companies that do not maintain in-house real estate departments. The
Company believes that these corporate service activities will help it to expand
its base of national tenants, further enhance property management economies of
scale and increase its market penetration. The Company also believes it will
benefit from the increasing tendency of institutional owners of real estate to
engage established real estate companies for their property and asset management
requirements. Third party clients of the Company include BetzDearborn Inc.,
CompuCom Systems, Inc., Cambridge Technology Partners (Massachusetts), Inc.,
Coherent Communications Systems Corporation, Integrated Systems Consulting
Group, Inc., Premier Solutions, Inc. and Sanchez Computer Associates, Inc., four
of which are publicly-traded companies in which SSI maintains an ownership
interest. For the nine months ended September 30, 1996, the real estate
management services business had revenues of approximately $943,000. The
Company's management expects to continue its relationships with its corporate
clientele as well as to selectively market its services to corporate users of
commercial real estate and building owners.
FINANCING POLICIES
As a general policy, following the closing of the Offering and the
Concurrent Investments, the Company intends, but is not obligated, to adhere to
a policy of maintaining a debt-to-total market capitalization ratio (i.e., the
total consolidated debt of the Company as a percentage of the market value of
issued and outstanding Shares plus total consolidated debt) of no more than 50%.
This policy is intended to provide the Company with financial flexibility to
select the optimal source of capital (whether debt or equity) with which to
finance external growth. The Company's debt-to-total market capitalization ratio
immediately following the Offering and the Concurrent Investments and the
application of the net proceeds therefrom, will be approximately 21.0%
(approximately 19.8% if the Underwriters' over-allotment option is exercised in
full). Because such ratio is based upon the market values of equity, it will
fluctuate with changes in the price of Common Shares. See "Policies with Respect
to Certain Activities."
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<PAGE> 47
USE OF PROCEEDS
The net proceeds to the Company from the Offering and the Concurrent
Investments, after estimated underwriting discounts and commissions and
estimated expenses of the Offering, are expected to be approximately $81.3
million (approximately $90.4 million if the Underwriters' over-allotment option
is exercised in full). The Company will contribute all of the net proceeds to
the Operating Partnership, which will use such contribution as follows: (i) to
repay approximately $48.5 million of mortgage debt secured by the Properties
(including prepayment penalties and accrued interest); (ii) to repay
approximately $764,000 of debt owed to SSI; (iii) to fund $24.3 million of the
cash portion of the purchase price and related expenses in connection with the
purchase of the Acquisition Properties; (iv) to pay approximately $875,000 in
fees and expenses relating to the Credit Facility; and (v) approximately $6.9
million for working capital purposes.
If the Underwriters' over-allotment option is exercised in full, the
Company expects to use the additional net proceeds to repay additional mortgage
debt, to make additional acquisitions of office or industrial properties or for
working capital or to make additional acquisitions.
Pending the application of the net proceeds from the Offering and from the
Concurrent Investments, the Company will invest such portion of the net proceeds
in interest-bearing accounts and short-term, interest-bearing securities, which
are consistent with the Company's intention to qualify for taxation as a REIT.
The following table sets forth certain information regarding the debt to be
repaid upon completion of the Offering, which consists of mortgage debt
encumbering certain of the Properties. The mortgages to be repaid upon
completion of the Offering had a weighted average interest rate of approximately
7.8% (before additional interest relating to cash flow participations) and a
weighted average remaining term to maturity of approximately 4.5 years as of
September 30, 1996.
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
OUTSTANDING PREPAYMENT PREMIUMS INTEREST
SEPTEMBER 30, 1996 OR PENALTIES RATE MATURITY
PROPERTY (000'S)(1) (000'S) AT SEPTEMBER 30, 1996 DATE
- ------------------------------ ------------------ ------------------- --------------------- -------
<S> <C> <C> <C> <C>
1155 Business Center Drive.... $ 31,224(2) None 8.23%(3) 11/2000
500 Enterprise Road........... (2)
One Progress Avenue........... (2)
456 Creamery Way.............. (2)
16 Campus Boulevard........... (2)
18 Campus Boulevard........... (2)
1510 Gehman Road.............. (2)
168 Franklin Corner Road...... (2)
2240/50 Butler Pike........... 13,426(4) $ 500 7.125%(5) 7/2000
120 West Germantown Pike...... (4)
140 West Germantown Pike...... (4)
2260 Butler Pike.............. (4)
7248 Tilghman Street.......... 3,218 None(7) 7.0%(6) 6/2004
---------- ------
Total............... $ 47,868 $ 500
============== ================
</TABLE>
- ---------------
(1) Exact repayment amounts may differ due to amortization and exclusion of
accrued interest estimated to be approximately $300,000. The table excludes
$364,000 of mortgage debt owed to SSI that bears interest at the prime rate.
(2) All of these Properties secure a single loan.
(3) Interest rate is variable and equal to lender's composite commercial paper
rate plus 2.75% per annum.
(4) All of these Properties secure a single loan.
(5) Additional interest in an amount equal to 50% of cash flow (as defined in
the applicable loan documents) is also payable on such loan.
(6) Additional interest in an amount equal to 80% of cash flow (as defined in
the applicable loan documents) is also payable on such loan.
(7) Subject to a yield maintenance penalty if paid after December 2, 1996.
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<PAGE> 48
DISTRIBUTION POLICY
The Company has paid dividends on a regular basis since the beginning of
1994. See "Price Range of Common Shares and Distribution History." Following the
Offering, the Company intends to increase its regular quarterly distributions to
$0.35 per share beginning with a pro rata distribution with respect to the
period commencing on the closing of the Offering and ending on December 31,
1996. On an annualized basis, this would be $1.40 per share. The Company's
determination to increase distributions as described above was based on the
Company's expectations with respect to pro forma Cash Available for Distribution
following the Offering. Although the Company intends to maintain the stated
distribution rate, future distributions by the Company to holders of Common
Shares will be made at the discretion of the Board of Trustees. The Company
currently expects that the principal factors the Board will consider in setting
distributions will be the annual REIT distribution requirements (described
below) and the Board's determination of the relative benefits of distribution
versus reinvestment in the Company. The Board will also consider the actual cash
flow of the Company, the Company's financial condition and capital requirements
and such other factors as the Board deems relevant. See "Risk Factors -- Risks
Relating to Distributions."
Cash Available for Distribution may exceed the Company's earnings and
profits due to non-cash expenses, consisting primarily of depreciation.
Distributions by the Company to the extent of its current or accumulated
earnings and profits for federal income tax purposes will be taxable to
shareholders as ordinary dividend income. Distributions in excess of earnings
and profits generally will be treated as a non-taxable reduction of a
shareholder's basis in its Common Shares, to the extent of its basis, and
thereafter as taxable gain. Distributions treated as a non-taxable reduction of
basis will have the effect of deferring taxation until the shareholder's
disposition of the Common Shares. For additional discussion of the tax treatment
of distributions to the holders of Common Shares, see "Federal Income Tax
Consideration -- Taxation of Taxable Domestic Shareholders" and "Federal Income
Tax Considerations -- Taxation of Tax-Exempt Shareholders."
PRICE RANGE OF COMMON SHARES AND DISTRIBUTION HISTORY
The Common Shares are traded on the AMEX under the symbol "BDN." On
November 1, 1996, there were approximately 335 holders of record of the Common
Shares. On November 25, 1996, the last reported sale price of the Common Shares
on the AMEX was $18.00 (adjusted to give effect to the Reverse Split). The
following table sets forth the quarterly high and low closing sale price per
share reported on the AMEX commencing with the quarter beginning January 1, 1994
and the distributions paid by the Company with respect to each such period after
giving effect to the Reverse Split.
<TABLE>
<CAPTION>
SHARE PRICE SHARE PRICE DISTRIBUTIONS
HIGH LOW DECLARED FOR QUARTER
----------- ----------- --------------------
<S> <C> <C> <C>
First Quarter 1994.................. $11 1/4 $ 5 1/16 $ 0.12
Second Quarter 1994................. $11 13/16 $ 9 3/8 $ 0.15
Third Quarter 1994.................. $18 $12 $ 2.19(1)
Fourth Quarter 1994................. $13 1/2 $10 7/8 $ 2.25(1)
----------- ----------- ------
First Quarter 1995.................. $14 1/4 $10 1/2 $ 1.20(1)
Second Quarter 1995................. $12 3/8 $10 11/16 $ 0.15
Third Quarter 1995.................. $11 13/16 $10 11/16 $ 0.15
Fourth Quarter 1995................. $11 1/4 $10 1/8 $ 0.15
----------- ----------- ------
First Quarter 1996.................. $16 5/16 $10 1/2 $ 0.18(2)
Second Quarter 1996................. $22 1/8 $15 15/16 $ 0.18(3)
Third Quarter 1996.................. $18 3/8 $17 1/16 $ 0.21(4)
----------- ----------- ------
</TABLE>
- ---------------
(1) Includes a regular dividend of $0.15 plus extraordinary dividends related to
the sale of Properties, in the case of 1994, and the refinancing of
Properties, in the case of 1995.
(2) On May 1, 1996, the Company declared a distribution of $0.18 per share
relating to first quarter operations that was paid to shareholders of record
as of May 10, 1996.
(3) On July 11, 1996, the Company declared a distribution of $0.18 per share
relating to second quarter operations that was paid to shareholders of
record as of July 26, 1996.
(4) On November 1, 1996, the Company declared a distribution of $0.21 per share
relating to third quarter operations that was paid to shareholders of record
as of November 11, 1996.
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<PAGE> 49
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and on a pro forma basis as of that same date assuming the
closing of the SERS Transaction and the closing of the Offering and the
Concurrent Investments and the application of the net proceeds therefrom as
described under "Use of Proceeds." The information set forth in the table should
be read in conjunction with the financial statements of the Company and notes
thereto, the pro forma consolidating financial information and notes thereto and
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------
HISTORICAL PRO FORMA
------------- ------------
<S> <C> <C>
Debt:
Mortgages and notes payable.......................... $ 83,020,000 $ 36,839,000(1)
Credit Facility...................................... -- --
Minority Interest in the Operating Partnership......... 8,758,000 525,000
Convertible Preferred Shares........................... -- 26,444,000(1)
Beneficiaries' Equity:
Preferred Shares of beneficial interest, $.01 par
value per share; 5,000,000 shares authorized; 0
historical and 481,818 pro forma Series A
Convertible Preferred Shares issued and
outstanding....................................... -- --
Common Shares of beneficial interest, $.01 par value
per share; 25,000,000 shares authorized; 911,184
historical and 6,302,959 pro forma shares issued
and outstanding................................... 9,000 63,000(2)
Additional paid-in capital........................... 20,443,000 109,882,000
Share warrants....................................... 658,000(3) 962,000(4)
Accumulated deficit.................................. (9,801,000) (9,801,000)
----------- ------------
Total beneficiaries' equity....................... 11,309,000 101,106,000
----------- ------------
Total capitalization......................... $103,087,000 $164,914,000
=========== ============
</TABLE>
- ---------------
(1) Assumes the payment in cash by the Company of deferred payments aggregating
$3.8 million in connection with the SERS Transaction. The preferred shares
are convertible, subject to satisfaction of certain conditions, into
1,606,060 of Common Shares. See "The Company -- The SERS Transaction."
(2) Excludes: (i) 509,856 Common Shares reserved for issuance upon the
conversion of Units into Common Shares; (ii) 1,606,060 Common Shares
reserved for issuance upon the conversion of the Preferred Shares into
Common Shares; (iii) 582,105 Common Shares reserved for issuance, at an
exercise price of $19.50 per share, upon the exercise of warrants; (iv)
133,333 Common Shares reserved for issuance, at an exercise price of $25.50
per share, upon the exercise of warrants; and (v) 46,666 Common Shares
reserved for issuance, at exercise prices of $14.31 and $6.21 per share,
upon the exercise of options, in respect of 33,333 and 13,333 Common Shares,
respectively.
(3) Represents 19,983 warrants issued to the RMO Fund at a price of $2.10 per
warrant, 258,333 warrants issued to SSI at a price of $2.10 per warrant, and
14,135 warrants issued to the RMO Fund at a price of $5.19 per warrant.
(4) Represents an additional 46,321 warrants issued to the RMO Fund at a price
of $5.40 per warrant and, together with the other warrants issued to the RMO
Fund, represents a total value of $248,000. In addition, the Company issued
133,333 warrants to SERS for Common Shares at a price of $0.42 per warrant
in connection with the Preferred Shares.
44
<PAGE> 50
DILUTION
At September 30, 1996, the Company had a net tangible book value of $9.0
million, or $9.90 per outstanding Common Share. Without taking into account any
other changes in such net tangible book value after September 30, 1996, other
than to give effect to the sale by the Company of 4,000,000 Common Shares in
this Offering and 1,345,453 Common Shares in the Concurrent Investments and the
application of the net proceeds therefrom, the net tangible book value of the
Company at September 30, 1996 would have been $98.5 million, or $15.62 per
share. This amount represents an immediate increase in net tangible book value
per share of $5.72 to current shareholders and an immediate dilution in net
tangible book value per share to purchasers of Common Shares in the Offering of
approximately $0.88 per share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Public offering price per Common Share........................... $ 16.50
Net tangible book value per Common Share before the
Offering(1)................................................. $ 9.90
Increase in net tangible book value per Common Share
attributable to the Offering(2)............................. 5.72
Net tangible book value per Common Share after the Offering(2)... $ 15.62
Dilution in net tangible book value per Common Share to new
investors(3)(4)................................................ $ 0.88
</TABLE>
- ---------------
(1) Net tangible book value per share before the Offering and the Concurrent
Investments is determined by dividing net tangible book value of the Company
(total assets of $106,183 less prepaid financing costs of $2,290, less total
liabilities of $86,116 and minority interests of $8,758 to holders of Units)
by the number of Common Shares outstanding.
(2) Based on the public offering price of $16.50 per Common Share (adjusted to
give effect to the Reverse Split) and after deducting Underwriters'
discounts and commissions and estimated Offering expenses. Excludes: (i)
509,856 Common Shares reserved for issuance upon the conversion of Units
into Common Shares; (ii) 1,606,060 Common Shares reserved for issuance upon
the conversion of Preferred Shares into Common Shares; (iii) 582,105 Common
Shares reserved for issuance, at an exercise price of $19.50 per share, upon
the exercise of warrants; (iv) 133,333 Common Shares reserved for issuance,
at an exercise price of $25.50 per share, upon the exercise of warrants; and
(v) 46,666 Common Shares reserved for issuance, at exercise prices of $14.31
and $6.21 per share, upon the exercise of options in respect of 33,333 and
13,333 Common Shares, respectively.
(3) Dilution is determined by subtracting net tangible book value per Common
Share after the Offering and the Concurrent Investments from the per share
public offering price of $16.50.
(4) Dilution in net tangible book value per Common Share to purchasers of Common
Shares would be $4.81 if the 509,856 Units were converted into Common Shares
and the Preferred Shares were converted into 1,606,060 Common Shares,
resulting in 8,418,875 total Common Shares outstanding.
The following table summarizes, on a pro forma basis giving effect to the
Offering, the number of Common Shares to be sold by the Company in the Offering
and the number of Units to be issued and convertible subsequent to the Offering,
the net tangible book value as of September 30, 1996 and the net tangible book
value per share based on total Common Shares and Units after the Offering.
<TABLE>
<CAPTION>
COMMON SHARES/ NET TANGIBLE NET TANGIBLE
UNITS BOOK VALUE BOOK VALUE
------------------ ------------------- --------------
NUMBER PERCENT $ PERCENT PER SHARE/UNIT
------ ------- ------- ------- --------------
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
New investors in the Offering.......... 4,000 58.7% $59,130 60.1% $ 16.50 (1)
Concurrent Investments................. 1,345 19.7% $22,200 22.5% $ 16.50
Common Shares and Units of Continuing
Investors............................ 1,467 21.6% $17,131(2) 17.4% $ 11.68
----- ------ ------- ------
Total........................ 6,812 (3) 100.0% $98,461(3) 100.0%
===== ====== ======= ======
</TABLE>
- ---------------
(1) Before deducting underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Based on the September 30, 1996 net book value of the assets of $98,461
(excluding financing costs of $2,645 and net of liabilities to be assumed of
$65,634 on a pro forma basis), and after minority interest of $525 assuming
all Units issued or issuable are converted into Common Shares.
(3) Excludes 1,606,060 Common Shares reserved for issuance upon the conversion
of 481,818 Preferred Shares at a pro-forma value of $26,444.
45
<PAGE> 51
SELECTED FINANCIAL DATA
The following tables set forth certain selected historical financial and
operating information on a combined basis for the Company and the SSI/TNC
Properties and on a pro forma basis for the Company. The selected combined
financial and operating information for the nine months ended September 30, 1996
and September 30, 1995 has been derived from the unaudited historical financial
statements of the Company and of the SSI/TNC Properties included elsewhere in
this Prospectus. The following tables also set forth certain selected historical
financial data for the Company for each of the five years during the period
ended December 31, 1995, and as of and for the nine months ended September 30,
1995 and 1996. Such information should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The unaudited pro forma financial and operating information for the nine
months ended September 30, 1996 and for the year ended December 31, 1995 is
presented as if the following transactions had been consummated on September 30,
1996, for balance sheet purposes and at the beginning of the period presented
for purposes of the statements of operations: (i) the Company acquired the
Acquisition Properties and contributed them to the Operating Partnership; (ii)
the Company consummated the Concurrent Investments and contributed the net
proceeds therefrom to the Operating Partnership; and (iii) the completion of
this Offering and the application of the net proceeds therefrom as set forth
under the caption "Use of Proceeds." The pro forma financial information is not
necessarily indicative of what the actual financial position or results of the
Company would have been as of and for the periods indicated, nor does it purport
to represent the Company's future financial position or results of operations.
46
<PAGE> 52
BRANDYWINE REALTY TRUST
COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
----------------- PRO FORMA ----------------- PRO FORMA
1994 1995 1995 1995 1996 1996
------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Base rents.............................................. $12,209 $11,346 $18,813 $ 8,469 $ 9,122 $15,605
Tenant reimbursements................................... 3,130 2,961 3,946 2,207 2,717 3,255
Management fees......................................... 946 617 -- 492 778 --
Other................................................... 79 86 86 54 169 169
------- ------- ------- ------- ------- ------
Total revenue..................................... 16,364 15,010 22,845 11,222 12,786 19,029
------- ------- ------- ------- ------- ------
Expenses --
Interest................................................ 7,877 6,648 3,396 5,015 4,664 2,573
Depreciation and amortization........................... 4,988 5,738 7,598 4,139 3,890 5,571
Property expenses....................................... 5,897 5,032 10,129 3,618 4,698 8,027
General and administrative.............................. 2,054 1,588 790 1,177 1,039 587
Provision for loss on real estate investments........... 5,400 202 -- -- -- --
------- ------- ------- ------- ------- ------
Total expenses.................................... 26,216 19,208 21,913 13,949 14,291 16,758
------- ------- ------- ------- ------- ------
Income (loss) before gains on sales of real estate
investments, minority interest and extraordinary
items................................................... (9,852) (4,198) 932 (2,727) (1,505) 2,271
Gains on sales of real estate investments................. 1,410 -- -- -- -- --
Equity income of management company....................... -- -- 72 -- 54 244
Income (loss) before extraordinary items.................. (2,807) (4,203) 874 (2,727) (1,451) 2,331
Income (loss) allocated to Common Shares.................. (1,374) 645
Weighted average number of shares outstanding............. 6,309,016 6,308,053
Earnings per share:
Income (loss) before extraordinary items................ $ 0.14 $ 0.37
Income (loss) Allocated to Common Shares................ $ (0.22) $ 0.10
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------
PRO
HISTORICAL FORMA
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Real estate investments, net of accumulated
depreciation............................................ $98,818 $151,671
Total assets.............................................. 106,183 167,265
Mortgages and notes payable............................... 83,020 36,839
Total liabilities......................................... 86,116 39,190
Minority interest......................................... 8,758 525
Convertible preferred shares.............................. -- 26,444
Beneficiaries' equity..................................... 11,309 101,106
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
-------------------- PRO FORMA ------------------- PRO FORMA
1994 1995 1995 1995 1996 1996
-------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)............................. $ 645 $ 1,382 $ 7,131 $ 1,307 $ 2,661 $ 7,103
Cash flows provided by (used in):
Operating activities............................... 1,534 1,886 (b) 1,575 1,710 (b)
Investing activities............................... 7,844 (3,490) (b) (1,704) (11,409) (b)
Financing activities............................... (10,171) 1,013 (b) (557) 11,126 (b)
Total cash distributions declared.................... 3,680 1,021 -- 835 226 --
PROPERTY DATA:
Number of properties owned at period end............. 22 23 37 22 24 37
Gross net rentable square feet owned at period end... 1,180 1,212 1,994 1,181 1,334 1,994
</TABLE>
47
<PAGE> 53
BRANDYWINE REALTY TRUST
HISTORICAL SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total operating revenue(c)................... $ -- $ -- $ -- $ 4,192 $ 3,666 $ 2,691 $ 4,599
Income from acquisition of limited partner
interests in Brandywine Specified Property
Investors Limited Partnership.............. -- -- 2,469 -- -- -- --
Provision for loss on real estate
investments................................ (6,700) -- -- (5,400) -- -- --
Gain on sales of real estate investments..... -- -- -- 1,410 -- -- --
Extraordinary item-gain on extinguishment
of debt.................................... -- -- -- 7,998 -- -- --
Net income (loss)............................ (6,705) (1) 2,468 7,567(b) (824) (592) (128)
Net income (loss) per share.................. (10.83) -- 3.99 11.22 (1.32) (0.95) (0.19)
Cash distributions declared.................. -- -- -- 2,914 1,021 835 226
Cash distributions per share................. -- -- -- 4.71 1.65 1.35 0.36(d)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments, net of accumulated
depreciation............................... $ -- $ -- $ -- $13,948 $13,709 $13,570 $98,818
Total assets................................. 2,128 2,123 4,604 17,873 17,105 17,225 106,183
Mortgages and notes payable(e)............... -- -- -- 6,899 8,931 8,957 83,020
Total liabilities............................ 58 55 68 8,684 9,761 9,463 86,116
Minority interest............................ -- -- -- -- -- -- 8,758
Beneficiaries', equity....................... 2,070 2,068 4,536 9,189 7,344 7,762 11,309
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)..................... $ (5) $ (1) $ (1) $ (533) $ 537 $ 453 $ 837
Cash flows provided by (used in):
Operating activities....................... -- -- -- (628) 497 363 887
Investing activities....................... -- -- 2,469 9,559 (701) (943) (9,914)
Financing activities....................... -- -- -- (9,635) (722) (326) 10,046
PROPERTY DATA:
Number of properties owned at period end..... 7 7 7 4 4 4 24
Gross net rentable square feet owned at
period end................................. 546 546 546 255 255 255 1,334
</TABLE>
- ---------------
(a) Management generally considers Funds from Operations to be a useful measure
of the operating performance of an equity REIT because, together with net
income and cash flows, Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt
and to fund acquisitions and other capital expenditures. Funds from
Operations does not represent net income or cash flows from operations as
defined by generally accepted accounting principles
48
<PAGE> 54
("GAAP") and does not necessarily indicate that cash flows will be
sufficient to fund cash needs. It should not be considered as an alternative
to net income as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity. Funds from Operations does not measure
whether cash flow is sufficient to fund all of the Company's cash needs,
including principal amortization, capital improvements and distributions to
shareholders. Funds from Operations also does not represent cash flows
generated from operating, investing or financing activities as defined by
GAAP. Further, Funds from Operations as disclosed by other REITs may not be
comparable to the Company's calculation of Funds from Operations. The
Company adopted the NAREIT definition of Funds from Operations in 1996 and
has used it for all periods presented. Funds from Operations is calculated
as net income (loss) adjusted for depreciation expense attributable to real
property, amortization expense attributable to capitalized leasing costs,
tenant allowances and improvements, gains on sales of real estate
investments and extraordinary and nonrecurring items.
(b) Pro forma information relating to cash flows from operating, investing and
financing activities has not been included because management believes that
the information would not be meaningful due to the number of assumptions
required in order to calculate this information.
(c) Prior to 1994, the Company accounted for its investment in BRP using the
equity method of accounting and, accordingly, received no rents and tenant
reimbursements from its investment in BRP and received allocated income from
BRP totalling $148,000, $290,000 and $568,000 for the years ended December
31, 1991, 1992 and 1993, respectively. Subsequent to 1993, the Company
acquired control of BRP and consolidated this investment.
(d) Excludes a $0.21 per share distribution declared by the Company on November
1, 1996 relating to third quarter operations that was paid to shareholders
of record as of November 11, 1996.
(e) The Company paid $1,114,000 from escrowed cash reserves to its then mortgage
lender on December 28, 1994 in exchange for termination of its obligation to
make future participating interest payments to the lender.
49
<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with Selected
Financial Data and the financial statements appearing elsewhere in this
Prospectus. The results of operations, liquidity and capital resources and cash
flows of the Company include the historical results of operations of the four
Properties held by the Company prior to August 22, 1996. The combined historical
presentation includes the historical results of the Company and the SSI/TNC
Properties as if they were combined for the earliest period presented. The pro
forma presentation includes the historical results of the Company, the SSI/TNC
Properties, the acquisitions of the LibertyView Building, the Acquisition
Properties and the effects of the Offering. These effects are reflected in the
pro forma condensed consolidated financial statements located elsewhere in this
Prospectus.
The Company receives income primarily from rental revenue (including tenant
reimbursements) from the Properties and, to a lesser extent, from the management
of certain properties owned by third parties. In August 1996, the Company
consummated the SSI/TNC Transaction whereby the Company acquired the SSI/TNC
Properties which constitute 19 of the Company's 24 Initial Properties and 38.7%
of the Company's pro forma rental revenue (including tenant reimbursements) for
the nine months ended September 30, 1996. The SSI/TNC Transaction also included
the combination of real estate management, marketing and development functions
of TNC with those of the Company. The Company will continue to provide
management, leasing and other related services for the Properties and, in
addition, will selectively pursue providing such services to third parties, as
well as exploring acquisitions of individual and portfolios of properties in the
Market. In connection with the Company's pursuit of potential acquisitions of
additional real estate and third party debt investments, the Company has
purchased nine of the Acquisition Properties and has entered into agreements to
purchase the four other Acquisition Properties. The Acquisition Properties
contain an aggregate of approximately 700,000 net rentable square feet located
primarily in the Market. Nine of the 13 Acquisition Properties represent the
"SERS Properties" which will be acquired for an aggregate purchase price of
approximately $30.3 million, payable as follows: (i) by issuing Preferred Shares
that, subject to certain conditions, are convertible into an aggregate of
1,606,060 Common Shares; (ii) by making deferred payments aggregating $3.8
million in cash or Common Shares; and (iii) by issuing two-year warrants to
purchase 133,333 Common Shares at an exercise price of $25.50 per share. The
purchase prices for the four remaining Acquisition Properties aggregate $22.8
million and will be paid in cash. The Company expects that revenue growth in the
next two years will result primarily from additional acquisitions, as well as
from rent increases in its current portfolio. The Company believes that if the
commercial rental market within the Market continues to improve, then rental
rate increases will become a more substantial part of its revenue growth over
time.
RESULTS OF OPERATIONS
HISTORICAL OPERATING RESULTS OF THE COMPANY
Comparison of the Nine Months Ended September 30, 1996 to the Nine Months
Ended September 30, 1995. Rental revenue increased by approximately $1.9
million or 70.9% for the nine months ended September 30, 1996 compared to the
nine months ended September 30, 1995. This increase was primarily due to
increased revenue attributable to the Company's acquisitions of the LibertyView
Building and the SSI/TNC Properties during the third quarter of 1996.
Interest expense increased by $770,000 or 134.6% for the nine months ended
September 30, 1996 compared to the nine months ended September 30, 1995. This
increase was primarily due to interest on increased debt attributable to the
Company's acquisitions of the LibertyView Building and the SSI/TNC Properties
during the third quarter of 1996. Depreciation and amortization expense
increased by $89,000 or 8.2% for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995. This increase was
primarily due to increased depreciation and amortization attributable to the
Company's acquisitions of the LibertyView Building and the SSI/TNC Properties
during the third quarter of 1996, offset by the non-recurring write-off of
approximately $254,000 in 1995 of deferred loan costs associated with
refinancing of mortgage debt in April 1995. For the nine months ended September
30, 1996 compared to the
50
<PAGE> 56
nine months ended September 30, 1995, utilities expense increased by $94,000 or
23.7%, real estate taxes increased by $135,000 or 45.5%, maintenance expense
increased by $369,000 or 90.7%, management fees increased by $64,000 or 145.5%,
and other operating expenses increased by $17,000 or 39.5%. Each of these
increases was primarily due to increased expenses attributable to the Company's
acquisitions of the LibertyView Building and the SSI/TNC Properties during the
third quarter of 1996.
Equity in net income of the Management Company totalled $54,000 for the
nine months ended September 30, 1996 compared to zero for the nine months ended
September 30, 1995. This variance is a result of the Company's formation of the
Management Company in connection with the SSI/TNC Transaction during the third
quarter of 1996.
As a result of the foregoing, the Company's consolidated net loss for the
period January 1, 1996 to September 30, 1996 was $128,000 or $0.19 per share as
compared to a consolidated net loss of $592,000 or $0.95 per share for the
period January 1, 1995 to September 30, 1995.
Comparison of the Year Ended December 31, 1995 to the Year Ended December
31, 1994. Primarily as a result of the sales of three of the Company's
properties during 1994 as part of the Company's strategic decision to refocus
its efforts in the Market, rental revenues decreased by approximately $576,000
or 13.8% and property operating expenses decreased by approximately $494,000 or
23.5% for the year ended December 31, 1995 compared to the year ended December
31, 1994.
Depreciation and amortization expense remained relatively constant for the
year ended December 31, 1995 compared to the year ended December 31, 1994. This
was primarily due to the nonrecurring write-off of deferred loan fees in 1995
totaling approximately $354,000 resulting from: (i) the refinancing of mortgage
debt in April 1995; and (ii) the termination of a loan commitment, which was
offset by a comparable reduction in depreciation and amortization for the three
properties sold in 1994. Interest expense decreased by approximately $1.2
million or 59.6% for the year ended December 31, 1995 compared to the year ended
December 31, 1994 due to the overall reduced interest expense associated with
mortgage loans obtained from the Principal Financial Group in April 1995.
Administrative expense decreased by approximately $152,000 or 18.2% primarily
due to nonrecurring 1994 costs related to mortgage restructuring efforts. In the
first quarter of 1994, a writedown of $5.4 million was recorded to adjust the
carrying value of the then seven properties of the Company to the then estimated
net realizable value. Such writedown was recorded as a provision for loss on
real estate investments in the Company's 1994 financial statements. For the year
ended December 31, 1995, no such writedown was required to be recorded.
As a result of the foregoing, the Company's consolidated net loss was
approximately $824,000 or $1.32 per share for the year ended December 31, 1995
compared to consolidated net income of approximately $7.6 million or $11.22 per
share for the year ended December 31, 1994.
Comparison of the Year Ended December 31, 1994 to the Year Ended December
31, 1993. The Company's net income for 1994 was attributable to an
extraordinary gain of approximately $8.0 million upon extinguishment of debt
resulting from the January 1994 refinancing of the Company's four properties
owned at that time coupled with an approximately $1.4 million gain resulting
from the sales of three properties during 1994, offset primarily by the
approximately $1.1 million payment of all future additional interest (a 25%
participation right) to the then mortgage lender in December 1994. The Company's
1993 income was primarily attributable to the settlements which the Company
obtained with two of the limited partners of Brandywine Specified Property
Investors Limited Partnership, a partner in BRP, whereby the Company received
approximately $2.5 million in cash.
As a result of the foregoing, the Company's consolidated net income was
approximately $7.6 million or $11.22 per share for the year ended December 31,
1994 compared to net income of approximately $2.5 million or $3.99 per share for
the year ended December 31, 1993.
COMBINED HISTORICAL OPERATING RESULTS OF THE COMPANY
Comparison of the Nine Months Ended September 30, 1996 to the Nine Months
Ended September 30, 1995. Total revenue, on a combined historical basis,
increased by approximately $1,564,000 or 13.9% for the
51
<PAGE> 57
nine months ended September 30, 1996 compared to the nine months ended September
30, 1995. Base rental revenue accounted for approximately $653,000 of the
increase and was primarily due to the acquisition of the LibertyView Building
coupled with improved occupancy levels of certain of the Properties. Tenant
reimbursements accounted for approximately $510,000 of the increase and was
primarily due to the acquisition of the LibertyView Building coupled with
increased tenant recoveries resulting from increased operating expenses.
Interest expense, on a combined historical basis, decreased by
approximately $351,000 or 7.0% for the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995. Such decrease was
primarily a result of a debt reduction in connection with an approximately $30.5
million debt refinancing in the fourth quarter of 1995 on certain of the SSI/TNC
Properties. Depreciation and amortization decreased by approximately $249,000 or
6.0% for the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995 primarily as a result of the non-recurring write-off of
approximately $254,000 in deferred loan costs associated with the April 1995
refinancing of mortgage debt. Property expenses increased by approximately
$1,080,000 or 29.9% for the nine months ended September 30, 1996 compared to the
nine months ended September 30, 1995 primarily due to increased maintenance
costs resulting from snow removal costs incurred during the winter of 1996 on
all of the Properties. General and administrative expenses decreased by
approximately $138,000 or 11.7% primarily due to reduced payroll costs.
As a result of the foregoing, on a combined historical basis, the net loss
before gains on sales of real estate, minority interest and extraordinary items
for the Company and the SSI/TNC Properties was approximately $1.5 million for
the nine months ended September 30, 1996 compared to approximately $2.7 million
for the nine months ended September 30, 1995.
Comparison of the Year Ended December 31, 1995 to the Year Ended December
31, 1994. Total revenue, on a combined historical basis, decreased by
approximately $1.4 million or 8.3% for the year ended December 31, 1995 compared
to the year ended December 31, 1994. Base rental revenue and tenant
reimbursements accounted for approximately $1.0 million of the decrease, which
was primarily due to the sale of three of the Company's properties during 1994,
interim vacancy from lease rollovers in certain of the SSI/TNC Properties and a
decrease in tenant reimbursements due, in part, to decreases in property
expenses in certain of the SSI/TNC Properties. Management fee revenue decreased
by approximately $329,000 or 34.8% for the year ended December 31, 1995 compared
to the year ended December 31, 1994 primarily as a result of discontinued
contracts on certain managed properties sold and fewer brokerage transactions.
Interest expense, on a combined historical basis, decreased by
approximately $1.2 million or 15.6% for the year ended December 31, 1995
compared to the year ended December 31, 1994. Such decrease was primarily a
result of significantly reduced interest expense in connection with the
Principal Financial Group mortgage loans obtained in April 1995 on the four
Properties owned by the Company at that time. Depreciation and amortization
increased by approximately $750,000 or 15.0% for the year ended December 31,
1995 compared to the year ended December 31, 1994. This increase was
attributable to additional tenant improvements completed in 1995 in certain of
the SSI/TNC Properties and the write-off of unamortized tenant improvements
associated with leases which terminated at certain of the SSI/TNC Properties.
Property expenses decreased by approximately $865,000 or 14.7% primarily due to
the sale of three of the Company's properties during 1994, as well as reductions
in property expenses of the SSI/TNC Properties, including reductions in real
estate taxes resulting from tax assessment appeals and reductions in building
operating expenses associated with occupancy levels. General and administrative
expenses decreased by $466,000 or 22.7% primarily due to staff reductions and
the elimination of certain non-recurring expenses. In the first quarter of 1994,
the Company recorded a writedown of $5.4 million to adjust the carrying value of
the seven properties owned by the Company to the then estimated net realizable
value. Such writedown was recorded as a provision for loss on real estate
investments in the Company's 1994 financial statements. For the year ended
December 31, 1995, a writedown of $202,000 was recorded in the fourth quarter to
adjust the carrying value of one of the SSI/TNC Properties to its then estimated
net realizable value.
As a result of the foregoing, on a combined historical basis, the net loss
before gains on sales of real estate, minority interest and extraordinary items
for the Company and the SSI/TNC Properties was
52
<PAGE> 58
approximately $4.2 million for the year ended December 31, 1995 compared to
approximately $9.9 million for the year ended December 31, 1994.
PRO FORMA OPERATING RESULTS OF THE COMPANY
Comparison of the Nine Months Ended September 30, 1996 on a Pro Forma Basis
to the Nine Months Ended September 30, 1996 on a Historical Basis. Pro forma
total revenue was approximately $19.0 million for the nine months ended
September 30, 1996, representing an approximately $14.4 million or 313.8%
increase over historical results for this period, resulting primarily from an
increase in rental revenue associated with the Company's completed acquisitions
of the LibertyView Building and the SSI/TNC Properties and the pro forma
acquisitions of the Acquisition Properties in 1996.
The historical 1996 interest expense of approximately $1.3 million
increased to $2.6 million on a pro forma basis. Interest expense as a percentage
of total revenue decreased from 29.2% of total revenue in historical 1996 to
13.5% of total revenue on a pro forma basis. The net reduction of 15.7% was
attributable to the Company's acquisition of the SSI/TNC Properties which
reflected interest expense of 42.1% as a percentage of total revenue on a
historical basis for the nine months ended September 30, 1996, offset by a
reduction in interest expense based on the effects of the Offering.
On a pro forma basis, combined net income of the Company (before the impact
of the minority interest in the Operating Partnership) would have been
approximately $2.4 million for the nine months ended September 30, 1996
comparing positively to the historical net loss of approximately $128,000 for
the nine months ended September 30, 1996. This positive comparison results
primarily from a substantial increase in total revenue, due to the benefit of a
pro forma full nine months of revenue from the LibertyView Building and the
SSI/TNC Properties acquired and the Acquisition Properties to be acquired in
1996.
Comparison of the Year Ended December 31, 1995 on a Pro Forma Basis to the
Year Ended December 31, 1995 on a Historical Basis. Pro forma total revenue was
approximately $22.8 million for the year ended December 31, 1995, representing
an approximately $19.2 million or 523.2% increase over historical results for
this period, resulting primarily from an increase in rental revenue associated
with the completed acquisitions of the LibertyView Building and the SSI/TNC
Properties and the pro forma acquisition of the Acquisition Properties in 1996.
The historical 1995 interest expense of approximately $793,000 increased to
$3.4 million on a pro forma basis. Interest expense as a percentage of total
revenue decreased from 21.6% of total revenue for the historical year ended
December 31, 1995 to 14.9% of total revenue on a pro forma basis. The net
reduction of 6.7% was attributable to the Company's acquisition of the SSI/TNC
Properties which reflected interest expense of 51.6% as a percentage of total
revenue on a historical basis for the year ended December 31, 1995 offset by a
reduction in interest expense based on the effects of the Offering.
On a pro forma basis, combined net income of the Company (before the impact
of the minority interest in the Operating Partnership) would have been
approximately $1.1 million for the year ended December 31, 1995 comparing
positively to the historical net loss of approximately $824,000 for the year
ended December 31, 1995. This positive impact results primarily from a
substantial increase in total revenue, due to the benefit of a pro forma full
year of revenue from the LibertyView Building and the SSI/TNC Properties
acquired and the Acquisition Properties to be acquired in 1996.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Offering and the Concurrent Investments, the Company
expects to sell an additional 5,345,453 Common Shares and realize net proceeds
of approximately $81.3 million. The net proceeds to the Company from the
Offering and the Concurrent Investments after estimated underwriting discounts
and commissions and estimated expenses of the Offering, are expected to be
approximately $81.3 million (approximately $90.4 million if the Underwriter's
over-allotment option is exercised in full). The Company will contribute the net
proceeds to the Operating Partnership, which will use such contribution as
follows: (i) to repay approximately $48.5 million of mortgage debt secured by
the Properties (including
53
<PAGE> 59
prepayment penalties and accrued interest); (ii) to repay approximately $764,000
of debt owed to SSI; (iii) to fund $24.3 million of the cash portion of the
purchase price and related expenses in connection with the purchase of the
Acquisition Properties; (iv) to pay $875,000 in fees and expenses relating to
the Credit Facility; and (v) and the balance for working capital purposes. The
remaining $6.9 million of net proceeds will be retained by the Company and will
be used for working capital purposes.
As of September 30, 1996, and following the closing of the Offering, the
Company will have approximately $36.8 million of pro forma debt outstanding
consisting of nine mortgage notes totalling $33.6 million (which have a weighted
average interest rate of 8.4% and will mature between June 1997 and April 2001)
and $3.8 million in deferred payments owed to the seller of SERS Properties,
which amount has been discounted to $3.2 million based on its terms. The
mortgage note on 110 Summit Drive matures in June 1997, and totalled
approximately $1.6 million at September 30, 1996. The Company is currently
pursuing extending the maturity date or refinancing the mortgage. If the Company
does not extend or refinance this mortgage note, the Company could either repay
the debt using cash reserves or borrow on the Credit Facility. Based upon the
Company's pro forma total market capitalization at September 30, 1996 of
approximately $175.8 million, the Company's consolidated debt represents 21.0%
of its total market capitalization.
The Company and Operating Partnership have obtained a commitment from Smith
Barney Mortgage Capital Group, Inc. and NationsBank, N.A. for a two-year, $80
million secured revolving Credit Facility. The Credit Facility will be used to
refinance existing indebtedness, fund acquisitions and new development projects,
and for general working capital purposes, including capital expenditures and
tenant improvements. The amount available to be borrowed under the Credit
Facility will be reduced by the amount of the letters of credit issued by the
lenders for as long as such letters of credit are outstanding. The Credit
Facility will be recourse to the Company and the Operating Partnership and will
be secured by, among other items, cross-collateralized and cross-defaulted first
mortgage liens on approximately 25 Properties, owned directly or indirectly by
the Company, the Operating Partnership or the Subsidiaries.
The Credit Facility will bear interest at a per annum floating rate equal
to the 30, 60, or 90-day LIBOR, plus 175 basis points. The Credit Facility will
require monthly payments of interest only, with all outstanding advances and all
accrued but unpaid interest due two (2) years from the closing of the Credit
Facility. A fee equal to 0.75% of the maximum amount available under the Credit
Facility will be paid to the lenders in respect of the Credit Facility at
closing. In addition, a fee of 0.25% per annum (0.125% per annum until 4/1/97)
on the unused amount of the Credit Facility will be payable quarterly in
arrears. An annual fee in the amount of $35,000 will be payable annually in
advance to NationsBank, N.A. as compensation for administration of the Credit
Facility. The Credit Facility will carry minimum debt service coverage, fixed
charge, debt-to-tangible net worth ratios and other financial covenants and
tests, and will require payment of prepayment premiums in certain instances.
Closing of the Credit Facility is subject to satisfactory completion of
this offering, the negotiation and execution of a definitive Credit Facility
agreement and related documentation, and other customary closing conditions.
The Company's operating properties require periodic investments of capital
for tenant related capital expenditures and for general capital improvements.
For the years ended December 31, 1993, 1994 and 1995 and for the nine months
ended September 30, 1996, tenant related capital expenditures including related
leasing commissions totalled $1,259,000, $2,115,000, $2,836,000 and $1,536,000
respectively, for 23 of the 24 Initial Properties (including the 23 office
buildings and excluding the one industrial property). See "Business and
Properties -- Historical Tenant Improvements and Leasing Commissions." The
Company has estimated its next annual tenant related capital expenditures and
leasing commissions relating to the 37 properties including the Initial
Properties and the Acquisition Properties to be approximately $4.4 million.
Sources available to cover these costs include approximately $700,000 in
available lender financing pursuant to an existing commitment from the lender on
the LibertyView Building, approximately $800,000 in cash reserves in connection
with the Greentree Office and Twin Forks Properties and approximately $1.4
million in funds that was set aside for this purpose by the seller for the SERS
Properties. The Company intends to fund the balance of these costs through its
rental revenues and operating expense reimbursements from tenants and borrowings
under the Credit Facility.
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<PAGE> 60
The Company's primary sources of Cash Available for Distribution will be
from rental revenues and operating expense reimbursements from tenants and the
management services income (and dividends) from providing services to the
Properties and for third parties. The Company intends to use these funds to pay
operating expenses, repay borrowings under the Credit Facility, pay debt
service, fund recurring capital expenditures, make acquisitions, fund tenant
allowances and pay regular quarterly distributions to shareholders.
Cash and cash equivalents were $840,000 and $3.3 million at December 31,
1995 and on a pro forma basis at September 30, 1996, respectively. The increase
in cash and cash equivalents primarily resulted from cash flows provided by
operating and financing activities in excess of cash used in investing
activities, including the impact of the Offering.
The Company expects to meet its short-term liquidity requirements generally
through its working capital and net cash provided by operations. The Company
believes that its net cash provided by operations will be sufficient to allow
the Company to make distributions necessary to enable the Company to continue to
remain qualified as a REIT. The Company also believes that the foregoing sources
of liquidity will be sufficient to fund its short-term liquidity needs for the
foreseeable future.
The Company expects to meet its long-term liquidity requirements such as
property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through long-term secured and unsecured
indebtedness and the issuance of additional equity securities. The Company also
expects to use funds available under the Credit Facility to finance acquisitions
and capital improvements on an interim basis.
CASH FLOWS
Cash and cash equivalents were $840,000 and $3.3 million at December 31,
1995 and on a pro forma basis at September 30, 1996, respectively. The increase
in cash and cash equivalents primarily resulted from cash flows provided by
operating and financing activities in excess of cash used in investing
activities, including the impact of the Offering.
Net cash provided by operating activities increased in 1995 by $1.1 million
in comparison to 1994. The increase was primarily attributed to a decrease in
interest expense of approximately $1.2 million due to the overall reduced
interest expense associated with mortgage loans obtained from the Principal
Financial Group in April 1995, which refinanced 100% of the debt encumbering the
Company's properties.
Net cash used in investing activities decreased in 1995 by approximately
$10.3 million in comparison to 1994. The decrease was primarily attributable to
the net proceeds on sales of three properties in 1994 of $9.2 million.
Net cash used in financing activities decreased by $8.9 million in 1995 in
comparison to 1994. The decrease was primarily attributable to repayment of
mortgage indebtedness and distributions to shareholders arising from sales of
three properties in 1994.
INFLATION
Substantially all of the office leases provide for separate escalations of
real estate taxes and operating expenses either on a triple net basis or over a
base amount. In addition, many of the office leases provide for fixed base rent
increases or indexed escalations (based on the CPI or other measure). The
Company believes that inflationary increases in expenses will be offset by the
expense reimbursement and contractual rent increases.
FUNDS FROM OPERATIONS
Management generally considers Funds from Operations as one measure of REIT
performance. The Company adopted the NAREIT definition of Funds from Operations
in 1996 and has used this definition for all periods presented in this
Prospectus. Funds from Operations is calculated as net income (loss) adjusted
for
55
<PAGE> 61
depreciation expense attributable to real property, amortization expense
attributable to capitalized leasing costs, tenant allowances and improvements,
gains on sales of real estate investments and extraordinary and nonrecurring
items. Funds from Operations should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity.
Funds from Operations on a pro forma basis for the year ended December 31,
1995 and the nine months ended September 30, 1996 is summarized in the following
table (in thousands, except share data).
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------
YEAR ENDED NINE MONTHS
DECEMBER 31, 1995 ENDED SEPTEMBER 30, 1996
----------------- ------------------------
<S> <C> <C>
Income before extraordinary items..................... $ 874 $ 2,331
Add:
Depreciation attributable to real property, net
of minority interest........................... 5,686 4,410
Amortization attributable to leasing costs,
tenant allowances and improvements, net of
minority interest.............................. 552 338
--------- ---------
Funds from Operations............................ $ 7,112 $ 7,079
========= =========
Weighted average Common Shares outstanding(1).... 7,915,076 7,914,113
========= =========
</TABLE>
- ---------------
(1) Includes 1,606,060 Common Shares issuable upon the conversion of Preferred
Shares. Excludes 509,856 Common Shares issuable upon the conversion of
509,856 Units and 762,104 Common Shares reserved for issuance upon the
exercise of outstanding warrants and options. See "Capitalization" and
"Operating Partnership Agreement -- Redemption Rights."
During 1995, the Company declared distributions totaling $1.65 per share.
On May 1, 1996, July 11, 1996, and November 1, 1996, the Company declared
distributions of $0.18, $0.18 and $0.21 per share, respectively.
56
<PAGE> 62
SUBURBAN PHILADELPHIA ECONOMY AND OFFICE MARKETS
GENERAL
The Company believes that current and projected economic trends in the
Market present a favorable economic climate for commercial real estate.
According to the C&W Mid-Year Report, there has been a marked decrease in the
Class A office direct vacancy rate in the six suburban Pennsylvania counties
(9.1% at June 30, 1996 compared to 16.4% at June 30, 1995) and in the two New
Jersey counties (11.3% at June 30, 1996 compared to 18.4% at June 30, 1995) in
the Market. In addition, according to the C&W Mid-Year Report, the net
absorption of office space (i.e., net change in occupied space for a given
period of time, excluding sublet space and preleasing) for the Market was
approximately 1.3 million net rentable square feet for the six-month period
ended June 30, 1996 compared to a negative net absorption of 80,000 net rentable
square feet for the six-month period ended June 30, 1995. In addition, leasing
activity for the six-month period ended June 30, 1996 of approximately 1.6
million net rentable square feet represented a 21.5% increase over the leasing
activity during the six-month period ended June 30, 1995. The Company believes
that the momentum in leasing and absorption that the Market is experiencing has
had a positive effect on rental rates within the Market. The Company believes
that the rollover of currently below market leases in its portfolio presents the
opportunity for internal growth and that increased leasing activity, coupled
with minimal new construction, creates an opportunity for future external growth
through the strategic acquisition of office and industrial properties in the
Market. As of June 30, 1996, the weighted average asking rental rate for Class A
office space in the Market was $18.94 per square foot, compared to the average
annualized rental rate of $15.15 in the Company's office portfolio as of
September 30, 1996.
Philadelphia is the nation's fourth largest metropolitan area and is
located at the center of the Northeast Corridor. In addition, according to the
Philadelphia Chamber of Commerce, the Philadelphia primary metropolitan
statistical area (including Bucks, Chester, Delaware and Montgomery counties in
Pennsylvania and Burlington, Camden, Gloucester, Mercer and Salem Counties in
New Jersey) (the "Philadelphia PMSA") is the fifth largest retail market in the
nation with total 1994 sales of approximately $43.0 billion. Philadelphia has a
diverse economic base, as evidenced by the presence of over 90.0% of all
standard industrial classifications. An important dynamic in the Philadelphia
regional economy has been the increasingly significant role played by small
business. According to the United States Department of Commerce, businesses with
fewer than 100 employees account for approximately 97.0% of the businesses in
the Philadelphia area. Furthermore, according to the United States Department of
Commerce, from 1973 to 1993, the number of small businesses grew by 62.0% within
the Philadelphia area. The Company believes that, due to the fact that small
business operators locate their business operations in those areas readily
accessible to and situated near residential areas, the growth of small
businesses can be expected to increase the demands for suburban office space.
According to C&W, the job growth that has recently occurred within the Market
comes from small to midsize technology-driven firms that tend to seek suburban
locations that are closer to their employees.
The Philadelphia metropolitan area is served by an excellent transportation
system. The combination of Interstate 95, Interstate 476 (referred to locally as
the "Blue Route") and the Pennsylvania Turnpike form an integrated roadway
system that loops the entire Philadelphia area and provides ready access, via
car, to all points in the Northeast Corridor, Midwest, and New England.
Philadelphia's Amtrak station is the second busiest station in the U.S., with
hourly trains reaching Washington, D.C. in less than two hours and New York City
in approximately one hour. In addition, the Philadelphia International Airport
is served by 24 national and international carriers flying to over 100 domestic
and 15 foreign destinations.
The Company's strategy is to operate in those submarkets located within the
Market that are experiencing, or are expected by the Company to experience,
economic growth in excess of that experienced and anticipated for the regional
economy as a whole and competitive with or better than the U.S. economy as a
whole. The Company believes that employment growth is a reliable indicator of
projected demand for both suburban office and industrial space. As indicated by
the table below, the suburban office markets in which the Company operates have
significantly outpaced, and are expected to continue to outpace, the population
growth rates experienced by the Philadelphia PMSA.
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<PAGE> 63
POPULATION GROWTH (000'S)(1)
<TABLE>
<CAPTION>
1980 1990 % CHG 2000 % CHG 2010 % CHG
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Suburban
Philadelphia(2)........... 3,336 3,597 7.8% 3,875 7.7% 4,090 5.5%
Philadelphia Region(3).... 5,025 5,183 3.1% 5,437 4.9% 5,621 3.3%
</TABLE>
CUMULATIVE CHANGE 1980-1990
<TABLE>
<S> <C>
Suburban Philadelphia(2)............................................ 7.8%
Philadelphia Region(3).............................................. 3.1%
U.S. National Average............................................... 9.5%
</TABLE>
- ---------------
(1) 1980 and 1990 data were obtained from U.S. Census and population forecasts
were obtained from the Delaware Valley Regional Planning Commission.
(2) Defined as Bucks, Chester, Delaware and Montgomery Counties in Pennsylvania
and Burlington, Gloucester, Camden and Mercer Counties in New Jersey.
(3) Includes Philadelphia County.
As evidenced by the historic trend between 1980 and 1990, the population
growth rate in suburban Philadelphia was approximately 252% of the Philadelphia
regional average and approximately 82.1% of the national average. The following
table compares historic and projected employment growth in suburban Philadelphia
with the Philadelphia region.
EMPLOYMENT GROWTH (000'S)(1)
<TABLE>
<CAPTION>
1980 1990 % CHG 2000 % CHG 2010 % CHG
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Suburban
Philadelphia(2)........... 1,446 1,857 28.4% 2,001 7.7% 2,172 8.5%
Philadelphia Region(3).... 2,282 2,694 18.1% 2,849 5.7% 3,065 7.6%
</TABLE>
CUMULATIVE CHANGE 1980-1990
<TABLE>
<S> <C>
Suburban Philadelphia(2)............................................ 28.4%
Philadelphia Region(3).............................................. 18.1%
U.S. National Average............................................... 24.9%
</TABLE>
- ---------------
(1) 1980 and 1990 data were obtained from the U.S. Census and the employment
forecasts were obtained from the Delaware Valley Regional Planning
Commission.
(2) Defined as Bucks, Chester, Delaware and Montgomery Counties in Pennsylvania
and Burlington, Gloucester, Camden and Mercer Counties in New Jersey.
(3) Includes Philadelphia County.
The data set forth above indicate that employment growth has accompanied
population growth and that the suburban Philadelphia area has outpaced the
Philadelphia region as a whole and surpassed the national average for the
10-year period from 1980 to 1990 with respect to employment growth.
The Company's belief in the strong relationship between population and
employment growth is further supported by the following unemployment statistics
as of June 30, 1996.
58
<PAGE> 64
HISTORICAL ANNUAL UNEMPLOYMENT RATES
<TABLE>
<CAPTION>
MEASUREMENT PERIOD MARKET AVER- PHILADELPHIA U.S. NATIONAL
(FISCAL YEAR COVERED) AGE COUNTY AVERAGE
<S> <C> <C> <C>
1993 6.1 8.1 7.0
1994 5.5 7.6 6.5
1995 5.1 7.0 5.5
1996 4.6 6.8 5.6
</TABLE>
The Company further believes that growth in the service sector will
increase the demand for office space in its submarkets. According to the
Delaware Valley Planning Commission, in 1990, the service sector (including the
financial, insurance and real estate segments) employed approximately 1.1
million employees within the Philadelphia PMSA which represented approximately
40.5% of regional employment. This sector is projected to create approximately
89,000 and 179,000 new jobs from 1990 to 2000 and 2010, respectively.
Other sectors that have contributed to office sector growth within the
Philadelphia PMSA include the biotechnology, pharmaceutical, healthcare and
education industries. During 1995, the approximately 120 biotechnology and
pharmaceutical companies that reside in the Philadelphia area generated over
$5.3 billion in revenue, representing an approximately 23.8% increase from 1994.
Drawing from a labor force of approximately 275,000 high-tech workers, 360,000
professional and 230,000 precision production workers, this industry works
closely with surrounding educational institutions and financial/venture capital
organizations. The Philadelphia area has the second largest concentration of
healthcare resources in the nation. More than 11.0% of the area's workforce is
employed in healthcare and the percentage of physicians engaged in research is
the highest of all metropolitan areas in the U.S. Philadelphia is home to 89
degree granting institutions which include six medical schools, 24 teaching
hospitals and five local law schools. The area annually graduates over 50,000
students including over 1,000 Ph.D.'s and 3,000 MBA's and more than 40.0% of the
region's graduates are in the field of science. The Company believes that growth
in these sectors will add to the demand for office space in the future.
A strong, regional financial services and venture capital industry has
financially supported the emergence of high-growth technology companies in the
suburban Philadelphia area. According to the 1995 annual report published by the
National Venture Capital Association, New Jersey ranked second in the nation and
Pennsylvania ranked eleventh for the amount of money venture capital investors
placed with companies within the two states. In terms of number of venture
capital transactions completed, Pennsylvania and New Jersey were respectively
ranked fourth and fifth in the nation.
SUBURBAN PHILADELPHIA OFFICE AND INDUSTRIAL MARKET
According to C&W, the total Philadelphia PMSA consists of approximately
383.3 million net rentable square feet of office and industrial space. This
space is comprised of approximately 83.3 million net rentable square feet of
office space and 300 million net rentable square feet of industrial space.
Office Market
According to C&W, the Pennsylvania counties within the Market contain
approximately 34.3 million net rentable square feet of office space which, as of
June 30, 1996, had a direct vacancy rate of approximately 9.5%, which is down
significantly from the direct vacancy rate of 15.7% as of June 30, 1995. The
June 30, 1996 direct vacancy rate for Class A buildings within the Pennsylvania
counties within the Market was 9.2%, which
59
<PAGE> 65
compares favorably with the total direct vacancy rate in the Market of 11.2% as
of such date. The Market in Pennsylvania consists of the four counties that
immediately surround Philadelphia: Bucks, Chester, Delaware, and Montgomery and
also includes Lehigh and Northampton Counties in the Lehigh Valley area. The
Market in Pennsylvania is further divided into nine smaller submarkets. Vacancy
rates within these nine submarkets as of June 30, 1996 range from a high of
12.6% in the Southern Route 202 Corridor submarket to a low of 5.0% for the Blue
Bell/Plymouth Meeting/Fort Washington submarket. Vacancy rates for all nine
submarkets are lower than they were at June 30, 1995. During the six-month
period ended June 30, 1996, absorption for the Pennsylvania counties within the
Market was approximately 1.2 million square feet compared to a negative net
absorption of approximately 117,100 square feet at June 30, 1995. During the
six-month period ended June 30, 1996, leasing activity in the Pennsylvania
counties within the Market was approximately 1.6 million square feet, an
increase of 21.5% over leasing activity during the six-month period ended June
30, 1995.
The Company's target office market also includes Southern New Jersey. The
primary counties comprising this market are Burlington and Camden, which as of
June 30, 1996, consisted of approximately 173 buildings aggregating
approximately 9.4 million net rentable square feet. The direct vacancy rate for
Southern New Jersey as of June 30, 1996 was 17.5% as compared to 18.8% as of
June 30, 1995. Absorption of approximately 41,000 square feet for the six-month
period ended June 30, 1996 reflects a slight improvement over the absorption of
approximately 36,800 square feet for the six-month period ended June 30, 1995.
According to C&W, Southern New Jersey's high vacancy rate is the result of poor
Class B and Class C markets. Both Burlington and Camden Counties are
experiencing a lack of available Class A office space. The direct vacancy rate
for Class A space in Southern New Jersey was 11.3% as of June 30, 1996, as
compared to 18.4% as of June 30, 1995.
Four of the Company's Initial Properties are combination office/flex
facilities (500 Enterprise Road; 456 Creamery Way; 7310 Tilghman Street; and
6575 Snowdrift Road). The term "flex" signifies that the overall design of the
building is flexible in accommodating users with needs of between 10% and 100%
of the leased area finished as office area or laboratories or display use. Flex
buildings typically have lower ceiling heights than typically found in
traditional industrial properties and generally higher quality construction.
Throughout the four suburban counties that are adjacent to the City of
Philadelphia (Bucks, Montgomery, Chester and Delaware) and in which all of the
Company's flex buildings are located, there is an estimated 13.5 million net
rentable square feet of flex space. According to C&W, the vacancy rate for flex
space in those four counties was 10.6% as of June 30, 1996. This vacancy rate
represents a decline from the 12.0% vacancy rate as of June 30, 1995. One of the
Initial Properties, 1510 Gehman Road, is a combination office and industrial
facility.
HISTORICAL OVERALL OFFICE VACANCY
PENNSYLVANIA SUBURBS
[GRAPH]
60
<PAGE> 66
The following table indicates the inventories and availabilities of office
properties in the Suburban Philadelphia Office and Industrial Market as of June
30, 1996.
SUBURBAN PHILADELPHIA
OFFICE MARKET STATISTICS
(EXCLUDES PHILADELPHIA COUNTY)
<TABLE>
<CAPTION>
LEASING
ACTIVITY C&W
OVERALL ABSORPTION (JANUARY 1, 1996 WEIGHTED
AVAILABLE DIRECT CLASS A (JANUARY 1, 1996 TO JUNE 30, AVERAGE
INVENTORY SPACE VACANCY VACANCY TO JUNE 30, 1996) 1996) RENTAL
SUBMARKET NAME (SQUARE FEET) (SQUARE FEET) RATE(1) RATE(2) (SQUARE FEET) (SQUARE FEET)(3) RATES(4)
- ---------------------------- ------------- ------------- -------- -------- ----------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Horsham/Willow Grove
/Jenkintown............... 3,275,323 394,888 11.4% 10.4% 140,801 187,550 $ 17.60
Southern Route 202
Corridor.................. 3,487,383 484,085 12.6% 13.8% 166,465 209,594 18.45
Blue Bell/Plymouth Mtg./
Ft. Washington ........... 4,911,211 340,587 5.0% 5.0% 136,984 158,412 18.14
Main Line................. 2,481,194 210,049 7.3% 8.3% 49,043 61,537 20.27
Lehigh & Northampton........ 4,370,024 505,529 11.6% 11.3% (2,799) 54,609 14.41
Bala Cynwyd................. 2,812,907 241,189 5.8% 4.5% 25,457 114,071 23.91
Conshohocken................ 1,094,018 70,777 5.9% 5.3% 90,994 154,953 22.36
King of Prussia/
Valley Forge.............. 9,303,771 1,001,867 10.4% 8.3% 439,237 586,438 21.39
Southern Bucks County....... 2,601,676 331,894 12.4% 12.8% 167,397 114,713 18.59
---------- --------- ---- ---- --------- --------- ------
TOTAL/WEIGHTED AVERAGE
PENNSYLVANIA SUBURBS...... 34,337,507 3,580,865 9.5% 9.1% 1,213,579 1,641,877 $ 18.77
========== ========= ==== ==== ========= ========= ======
Burlington County........... 4,581,772 883,008 17.2% 12.6% (87,589) 146,349 $ 20.23
Camden County............... 4,789,329 939,615 17.7% 9.0% 129,012 119,690 21.81
---------- --------- ---- ---- --------- --------- ------
TOTAL/WEIGHTED AVERAGE
SOUTHERN NEW JERSEY....... 9,371,101 1,822,623 17.5% 11.3% 41,423 266,039 $ 20.70
========== ========= ==== ==== ========= ========= ======
TOTAL/WEIGHTED AVERAGE
SUBURBAN PHILADELPHIA..... 43,708,608 5,403,488 11.2% 9.2% 1,255,002 1,907,916 $ 18.94
========== ========= ==== ==== ========= ========= ======
</TABLE>
Source: C&W.
- ---------------
(1) C&W defines "Direct Vacancy Rate" as the space available directly under
prime leases and relets divided by the inventory. Space in buildings under
construction or renovation is not included.
(2) C&W defines "Class A" as buildings that are well-leased, professionally
managed, attract high quality tenants and command upper tier rental rates.
(3) C&W defines "Leasing Activity" as the sum of all finished/closed
transactions for a given period of time including subleasing activity.
(4) C&W defines "Weighted Average Rental Rates" as the gross annual asking rates
of existing buildings.
Industrial Market
According to C&W, the Philadelphia industrial market consists of a total
estimated inventory of approximately 300 million net rentable square feet with
an overall vacancy rate of 13.1% as of June 30, 1996. Vacancy rates as of June
30, 1996 range from a high of 22.3% in Montgomery County to a low of 6.2% in
Camden County. The industrial market within the four Pennsylvania counties
adjacent to Philadelphia County (Bucks, Delaware, Chester and Montgomery)
aggregates approximately 130 million net rentable square feet. Sales and leasing
activity for the quarter ended June 30, 1996 totaled 2.1 million square feet, an
increase of 1.5 million square feet over the quarter ended March 31, 1996. The
overall available inventory in these counties was approximately 20.4 million net
rentable square feet as of June 30, 1996 and was characterized as 49%
warehouse/distribution space, 30% manufacturing space, 2% office service space
and 19% flex/other space. This represents an overall vacancy rate of 15.7%
within these counties.
61
<PAGE> 67
According to C&W, the industrial markets in Burlington and Camden Counties
include approximately 70.0 million net rentable square feet. Available inventory
decreased over 1.0 million square feet during the three-month period ended June
30, 1996, reducing the vacancy rate from 11.0% to 9.5% as of June 30, 1996.
According to C&W, as of June 30, 1996, the industrial market within the
Philadelphia PMSA had an overall vacancy rate of 13.1%. Within this market,
leasing activity was approximately 2.7 million net rentable square feet and
sales activity was approximately 1.8 million net rentable square feet for the
six-month period ended June 30, 1996.
The following table indicates availability of industrial space within the
Philadelphia PMSA as of June 30, 1996:
<TABLE>
<CAPTION>
ESTIMATED OVERALL ESTIMATED
INVENTORY AVAILABLE SPACE OVERALL
COUNTY NAME (SQUARE FEET) (SQUARE FEET) VACANCY RATE
------------------------------------------- ------------- --------------- ------------
<S> <C> <C> <C>
Philadelphia County........................ 100,000,000 12,330,129 12.3%
Montgomery County.......................... 40,000,000 8,905,479 22.3%
Bucks County............................... 37,000,000 6,228,141 16.8%
Chester County............................. 25,000,000 2,459,075 9.8%
Delaware County............................ 28,000,000 2,856,238 10.2%
Burlington County.......................... 15,000,000 3,227,307 21.5%
Camden County.............................. 35,000,000 2.158,308 6.2%
Gloucester County.......................... 20,000,000 1,279,992 6.4%
----------- ---------- ----
Total/Weighted Average........... 300,000,000 39,444,669 13.1%
=========== ========== ====
</TABLE>
HISTORICAL OVERALL INDUSTRIAL VACANCY
PHILADELPHIA PMSA
[GRAPH]
62
<PAGE> 68
BUSINESS AND PROPERTIES
GENERAL
The Initial Properties include 23 suburban office buildings (22 of which
are Class A properties) totalling approximately 12 million net rentable square
feet and one Class A industrial facility (1510 Gehman Road) totalling
approximately 152,000 net rentable square feet. The Company developed 19 of the
Initial Properties and currently manages 23 of the Initial Properties, in
addition to managing approximately 575,000 net rentable square feet on behalf of
third parties and approximately 159,000 net rentable square feet at the four
Option Properties. In addition to owning the Initial Properties, the Company, on
November 14, 1996, acquired the SERS Properties, which consist of seven office
buildings and two industrial facilities, and has entered into agreements to
purchase the four other Acquisition Properties. The Properties are located in
the Market, with the exception of: (i) the Twin Forks Office Park located in
Raleigh, North Carolina, which was acquired by the Company in 1986 in connection
with the Company's formation; (ii) 168 Franklin Corner Road located in
Lawrenceville, New Jersey; and (iii) Delaware Corporate Center (an Acquisition
Property) located in New Castle County, Delaware. The Properties are easily
accessible from major thoroughfares and are in close proximity to numerous
amenities, including restaurants, retail shopping malls, hotels and banks. The
Properties contain an aggregate of approximately 2.0 million net rentable square
feet and, as of September 30, 1996, were approximately 94.3% leased to 222
tenants. The Company's tenants include many service sector employers, as well as
a large number of professional firms and local, national and foreign businesses.
The Company believes, based in part on recent engineering reports, that all of
its Properties are well maintained and do not require significant capital
improvements.
The Properties consist primarily of suburban and industrial buildings (36
of which are Class A properties). The Company considers Class A suburban office
and industrial properties to be those that have desirable locations, are well
maintained and professionally managed and have the potential of achieving rental
and occupancy rates that are typically at or above those prevailing in their
respective markets. The average age of the Properties is approximately 10.8
years. The Company's 10 largest tenants (based on pro forma annualized base rent
at September 30, 1996) aggregate approximately 29.8% of the Company's total base
rent and approximately 27.5% of the Company's net rentable square feet and have
a weighted average remaining lease term of approximately 7.8 years. As of
September 30, 1996, no single tenant accounted for more than approximately 8.7%
of the Company's pro forma aggregate annualized base rent and only 30 tenants
individually represented more than 1.0% of such aggregate annualized base rent.
Leases representing approximately 58.5% of the net rentable square footage
at the Properties were signed during the period January 1, 1993 through December
31, 1995, a time when management believes market rental rates were at or below
current market rental rates. This belief is supported by the fact that for the
nine months ended September 30, 1996: (i) renewal leases at the Initial
Properties were signed covering approximately 154,000 net rentable square feet
of office space at a weighted average rental rate of $13.25 per square foot,
compared to leases that expired for that space during such period with a
weighted average rental rate of $12.66 per square foot (representing a 4.7%
increase); and (ii) new leases at the Initial Properties were signed covering
approximately 264,000 net rentable square feet of office space at a weighted
average rental rate of $15.96 per square foot, compared to leases that expired
for that space during such period with a weighted average rental rate of $14.52
per square foot (representing a 9.9% increase). In all cases, weighted average
rental rates include expense recoveries, free rent and scheduled rent increases
that would be taken into account under generally accepted accounting principles.
The Company believes that the strength of its leasing department and tenant
retention capabilities should enable it to continue to capitalize on rental rate
differentials as the Company's leases expire.
The Company's leases are typically structured for terms of three, five,
seven or ten years. Due to conditions within the Market, the Company utilizes
two primary lease structures: (i) triple net leases (which represented
approximately 75.0% of the aggregate net rentable leased square footage at the
Initial Properties as of September 30, 1996 and under which tenants are required
to pay all real property taxes, insurance and expenses of maintaining the leased
space); and (ii) full service gross leases (which represented approximately
25.0% of the aggregate leased net rentable square footage as of September 30,
1996 and under which the tenants typically pay for all real estate taxes and
operating expenses above those for an established base year).
63
<PAGE> 69
Under the Company's leases at the Initial Properties, the landlord is
generally responsible for structural repairs. Most leases do not permit early
termination; however, approximately 12 leases at the Initial Properties
(covering an aggregate of approximately 184,000 net rentable square feet and
having a weighted average base rental rate of approximately $11.53) permit the
tenant to terminate the lease prior to its initial term (excluding rights
pursuant to casualty, condemnation, eminent domain and changes in zoning
classifications) (generally upon six to twelve months' notice and generally
after the end of the third year of a five year lease or the fifth year of a 10
year lease, subject to the tenant's obligation to pay a fixed termination
penalty, typically consisting of unamortized tenant improvements, leasing
commissions plus an additional negotiated payment). Approximately eight leases
at the Acquisition Properties (covering an aggregate of approximately 94,000 net
rentable square feet and having a weighted average base rental rate of
approximately $14.10) similarly permit the tenant to terminate the lease prior
to its initial term.
The Company's asset management strategy is designed to efficiently balance
the sound business and reporting fundamentals necessary for a public company
with the operating efficiency of a responsive market-oriented real estate
organization.
The Properties will be financially and operationally managed under active
central control. All financial reporting, administration (including the
formation and implementation of policies and procedures), marketing, leasing,
capital expenditure and construction decisions are administered at the Company's
corporate office. The Company employs asset managers to oversee and direct the
ongoing property operations, as well as the on-site personnel which may include
a property manager, leasing agent and other necessary staff. The asset managers
actively participate with the executive officers in the formation of the
Company's policies and procedures. In addition, the Company's financial and
property management reporting systems are designed to ensure operational
compliance with the Company's policies and procedures. On-site staffing for each
Property is determined by the Property's size, tenant profile and location
relative to other Properties. The Company has an active tenant relations program
and a maintenance staff to ensure that all of the Properties are maintained in
accordance with the Company's standard of excellence. The Company also contracts
with third parties for cleaning services, day porters, landscaping, engineering
and other service personnel necessary to operate each Property.
64
<PAGE> 70
PROPERTIES
The following table sets forth certain information with respect to the
Properties:
<TABLE>
<CAPTION>
AVERAGE TOTAL BASE
TOTAL BASE RENT RENT PLUS EXPENSE
FOR THE RECOVERIES PER
NET PERCENTAGE TWELVE MONTHS NET RENTABLE SQUARE
RENTABLE LEASED AS OF ENDED FOOT LEASED
INITIAL PROPERTIES: YEAR SQUARE SEPTEMBER 30, SEPTEMBER 30, 1996(2) SEPTEMBER 30,
SUBMARKET/PROPERTY BUILT FEET 1996(1) (000'S) 1996(3)
- --------------------------------------------- ----- --------- ------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road............................ 1984 30,138 100.0% $ 329 $ 15.67
1155 Business Center Drive.................. 1990 51,388 99.4% 591 16.31
500 Enterprise Road......................... 1990 67,800 98.5% 674 13.74
One Progress Avenue......................... 1986 79,204 100.0% 563 9.54
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way............................ 1987 47,604 100.0% 336 7.15
486 Thomas Jones Way........................ 1990 51,500 50.9% 416 23.26
468 Creamery Way............................ 1990 28,934 100.0% 293 14.54
110 Summit Drive............................ 1985 43,660 67.6% 262 13.51
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON,
PA
2240/50 Butler Pike......................... 1984 52,183 99.4% 560 15.82
120 West Germantown Pike.................... 1984 30,546 100.0% 421 19.16
140 West Germantown Pike.................... 1984 25,953 98.7% 297 16.56
2260 Butler Pike............................ 1984 31,892 100.0% 377 16.84
MAIN LINE, PA
16 Campus Boulevard......................... 1990 65,463 100.0% 430 9.94
18 Campus Boulevard......................... 1990 37,700 100.0% 410 15.01
LEHIGH VALLEY, PA
7310 Tilghman Street........................ 1985 40,000 99.0% 329 11.44
7248 Tilghman Street........................ 1987 42,863 93.8% 399 15.06
6575 Snowdrift Road......................... 1988 46,250 100.0% 300 9.06
LANSDALE, PA
1510 Gehman Road............................ 1990 152,625 100.0% 773 7.70
BURLINGTON COUNTY, NJ
One Greentree Centre........................ 1982 55,838 100.0% 869 16.97
Two Greentree Centre........................ 1983 56,075 100.0% 816 14.53
Three Greentree Centre...................... 1984 69,101 96.2% 1,049 16.51
CAMDEN COUNTY, NJ
457 Haddonfield Road (LibertyView).......... 1990 121,737 82.8% 1,160 16.34
OTHER MARKETS
168 Franklin Corner Road.................... 1976 32,000 54.5% 186 13.43
Lawrenceville, NJ
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks......................... 1982 73,339 100.0% 1,008 13.83
--------- ----- ------- ------
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
INITIAL PROPERTIES.......................... 1,333,793 93.8% 12,848 14.04(10)
========= ===== ======= ======
<CAPTION>
AVERAGE C&W RENTAL RATE TENANTS LEASING 10% OR
ANNUALIZED WEIGHTED INCREASE MORE OF RENTABLE
RENTAL AVERAGE POTENTIAL SQUARE FOOTAGE PER
RATE AS OF CLASS A UNTIL MARKET PROPERTY AS OF
INITIAL PROPERTIES: SEPTEMBER 30, RENTAL RATE IS SEPTEMBER 30, 1996
SUBMARKET/PROPERTY 1996(4) RATES(5) ACHIEVED(6) AND LEASE EXPIRATION DATE
- --------------------------------------------- ------------------ -------- ------------ -------------------------
<S> <<C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road............................ $16.50 $18.02 9.2% GMAC (100%) - 5/03
1155 Business Center Drive.................. 17.22 18.02 4.6% IMS (79%) - 3/06;
Motorola (14%) - 2/99
500 Enterprise Road......................... 15.03 14.50 (3.5)% Conti Mortgage
(80%) - 4/01;
Pioneer (19%) - 10/00
One Progress Avenue......................... 11.75 18.02 53.4% Reed Technologies
(100%) - 6/11
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way............................ 7.25(7) 7.89(8) 8.8% Neutronics (100%) - 1/03
486 Thomas Jones Way........................ 15.46 15.55 0.5% First American Real
Estate (20%) - 4/00
468 Creamery Way............................ 13.88 13.61 (1.9)% Franciscan Health
(82%) - 6/99;
American Day Treatment
(18%) - 6/00
110 Summit Drive............................ 7.20(8) 7.89(8) 9.6% Maris Equipment
(49%) - 4/99
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON,
PA
2240/50 Butler Pike......................... 17.55 18.70 6.6% CoreStates (59%) - 4/06;
TWA Marketing
(33%) - 10/99
120 West Germantown Pike.................... 17.52 18.70 6.7% Clair O'Dell
(82%) - 7/01;
Kleinerts (13%) - 10/98
140 West Germantown Pike.................... 17.38 18.70 7.6% Healthcare, Inc.
(46%) - 9/99; Henkel
(29%) - 6/98; National
Health Equity
(20%) - 5/99
2260 Butler Pike............................ 17.82 18.70 4.9% Information Resources
(66%) - 12/00; Med
Resorts (26%) - 1/01
MAIN LINE, PA
16 Campus Boulevard......................... 13.58 20.27 49.3% New England Mutual
(52%) - 5/06; Atlantic
Employees C.U.
(35%) - 1/06
18 Campus Boulevard......................... 18.62 20.27 8.9% Prudential (25%) - 6/01;
Devco Mutual
(35%) - 1/01;
Scott Paper
(17%) - 11/97;
Marshall Dennehey
(18%) - 10/01
LEHIGH VALLEY, PA
7310 Tilghman Street........................ 8.89(8) 10.50(8) 18.1% AT&T (83%) - 12/96-8/98
7248 Tilghman Street........................ 14.76 15.34 3.9% IDS Financial
(29%) - 7/01;
Ohio Casualty
(46%) - 7/01;
Meridian Mortgage
(12%) - 6/99
6575 Snowdrift Road......................... 7.15(8) 10.50(8) 46.9% Corning Packaging
(100%) - 2/99
LANSDALE, PA
1510 Gehman Road............................ 4.72(8) 5.95(8) 26.1% Ford Electronics
(35%) - 6/98;
Nibco (65%) - 8/99
BURLINGTON COUNTY, NJ
One Greentree Centre........................ 16.07 19.30 20.0% American Executive
Centers (30%) - 1/06;
West Jersey (15%) - 4/01;
Temple Sports Med.
(18%) - 12/97
Two Greentree Centre........................ 16.02 19.30 20.5% Merrill Lynch
(23%) - 11/05;
ReMax Suburban
(12%) - 11/05
Three Greentree Centre...................... 16.41 19.30 17.6% Parker, McCay & Criscuolo
(39%) - 5/01;
Marshall Dennehey
(20%) - 5/97;
Olde Discounts
(12%) - 3/00;
Surety Title
(13%) - 11/03
CAMDEN COUNTY, NJ
457 Haddonfield Road (LibertyView).......... 18.63 21.81 17.1% HIP Health Plan
(31%) - 12/07
OTHER MARKETS
168 Franklin Corner Road.................... 15.55 18.00(9) 15.8% Dr. Belden (12%) - 5/01;
Lawrenceville, NJ Crawford & Co.
(14%) - 11/99
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks......................... 14.25 15.50(9) 8.8% N/A
----- ----- -----
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
INITIAL PROPERTIES.......................... $14.63(10) $16.83(10)(11) 15.0%
===== ===== =====
</TABLE>
65
<PAGE> 71
<TABLE>
<CAPTION>
AVERAGE TOTAL BASE
TOTAL BASE RENT RENT PLUS EXPENSE
FOR THE RECOVERIES PER
NET PERCENTAGE TWELVE MONTHS NET RENTABLE SQUARE
RENTABLE LEASED AS OF ENDED FOOT LEASED
ACQUISITION PROPERTIES: YEAR SQUARE SEPTEMBER 30, SEPTEMBER 30, 1996(2) SEPTEMBER 30,
SUBMARKET/PROPERTY BUILT FEET 1996(1) (000'S) 1996(3)
- ----------------------------------------------- ----- --------- ------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
700 Business Center Drive(12)................. 1986
82,009 100.0% $ 793 $11.59
800 Business Center Drive(12)................. 1986
KING OF PRUSSIA, PA
500 North Gulph Road.......................... 1979 92,851 86.1% 1,387 15.02
BUCKS COUNTY, PA
2200 Cabot Boulevard.......................... 1979 55,081 100.0% 259 5.75
2250 Cabot Boulevard.......................... 1982 40,000 100.0% 170 5.22
2260 Cabot Boulevard(12)...................... 1984
29,638 100.0% 246 10.17
2270 Cabot Boulevard(12)...................... 1984
3000 Cabot Boulevard.......................... 1986 34,640 83.9% 364 12.85
3329 Street Road -- Greenwood Sq.(12)......... 1985
3331 Street Road -- Greenwood Sq.(12)......... 1986 165,929 92.1% 2,234 14.56
3333 Street Road -- Greenwood Sq.(12)......... 1988
BURLINGTON COUNTY, NJ
8000 Lincoln Drive............................ 1983 54,923 100.0% 445 8.25
NORTHERN SUBURBAN WILMINGTON
One Righter Parkway........................... 1989 104,828 100.0% 2,044 19.50
--------- ----- ------- ------
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
ACQUISITION PROPERTIES........................ 659,899 95.2% $ 7,942 $ 12.93
========= ===== ======= ======
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR ALL
PROPERTIES.................................... 1,993,692 94.3% $20,790 $ 13.67
========= ===== ======= ======
<CAPTION>
AVERAGE C&W RENTAL RATE TENANTS LEASING 10% OR
ANNUALIZED WEIGHTED INCREASE MORE OF RENTABLE
RENTAL AVERAGE POTENTIAL SQUARE FOOTAGE PER
RATE AS OF CLASS A UNTIL MARKET PROPERTY AS OF
ACQUISITION PROPERTIES: SEPTEMBER 30, RENTAL RATE IS SEPTEMBER 30, 1996
SUBMARKET/PROPERTY 1996(4) RATES(5) ACHIEVED(6) AND LEASE EXPIRATION DATE
- ----------------------------------------------- --------------- -------- ------------ -------------------------
<S> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
700 Business Center Drive(12)................. Metpath (35%) - 1/12;
Sprint (19%) - 3/01;
Macro (19%) - 4/01%;
800 Business Center Drive(12)................. Advanta (10%) - 6/99
KING OF PRUSSIA, PA
500 North Gulph Road.......................... 16.51 21.39 29.6% Transition Software
(16%) - 8/00, Strohl
Syst (12%) - 10/99
BUCKS COUNTY, PA
2200 Cabot Boulevard.......................... 4.40 4.50 2.3% Hussman Corp (38%), Nobel
Printing (38%) - 6/97;
McCaffrey Mgt
(24%) - 8/00
2250 Cabot Boulevard.......................... 3.50 4.50 28.6% Bucks County Nut (100%) -
7/99
2260 Cabot Boulevard(12)...................... Sager Electrical (14%) -
8.78 9.00 2.5% 10/98; Terminix Intrntnl
2270 Cabot Boulevard(12)...................... (13%) - 11/96
3000 Cabot Boulevard.......................... 17.03 18.95 11.3% Geraghty & Miller (31%) -
11/97; Prudential Insur.
(21%) - 7/98;
Luigi Bormioli Co.
(11%) - 6/98
3329 Street Road -- Greenwood Sq.(12).........
3331 Street Road -- Greenwood Sq.(12)......... 16.54 18.95 14.6% Waste Management (27%) -
3333 Street Road -- Greenwood Sq.(12)......... 3/97
BURLINGTON COUNTY, NJ
8000 Lincoln Drive............................ 17.13 19.30 $ 12.7% CSC (67%) - 11/01; Blue
Cross (33%) - 2/07
NORTHERN SUBURBAN WILMINGTON
One Righter Parkway........................... $ 19.30 20.50 6.2% Kimberly Clark (89%) -
12/05
----- ----- -----
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR THE
ACQUISITION PROPERTIES........................ $ 16.23(13) $19.01(11)(13) 17.2%
===== ===== =====
CONSOLIDATED TOTAL/WEIGHTED AVERAGE FOR ALL
PROPERTIES.................................... $ 15.15(14) $17.54(11)(14) 15.8%
===== ===== =====
</TABLE>
- ---------------
(1) Calculated by dividing net rentable square feet included in leases dated on
or before September 30, 1996 by the aggregate net rentable square feet
included in the Property.
(2) "Total Base Rent" for the twelve months ended September 30, 1996 represents
base rents received during such period, excluding tenant reimbursements,
calculated in accordance with generally accepted accounting principles
determined on a straight-line basis. Tenant reimbursements generally
include payment of real estate taxes, operating expenses, and escalations
and common area maintenance and utility charges.
(3) Represents the Total Base Rent for the twelve months ended September 30,
1996, plus tenant reimbursements for the twelve months ended September 30,
1996, divided by the net rentable square feet leased.
(4) "Average Annualized Rental Rate" is calculated as follows: (i) for office
leases written on a triple net basis, the sum of the annualized contracted
base rental rates payable for all space leased as of September 30, 1996
(without giving effect to free rent or scheduled rent increases that would
be taken into account under generally accepted accounting principles) plus
the 1996 budgeted operating expenses excluding tenant electricity; and (ii)
for office leases written on a full service basis, the annualized
contracted base rate payable for all space leased as of September 30, 1996.
In both cases, the annualized rental rate is divided by the total square
footage leased as of September 30, 1996 without giving effect to free rent
or scheduled rent increases that would be taken into account under
generally accepted accounting principles.
(5) Represents the weighted average asking rates, as of June 30, 1996, of
directly competitive properties in the relevant submarket within the
Market, as identified by C&W.
(6) Represents the percentage by which the June 30, 1996 C&W weighted average
asking rate exceeds the September 30, 1996 average annualized rental rate
of the applicable Property.
(7) Property occupied by a single tenant under a triple net lease agreement,
pursuant to which the tenant subcontracts directly with third party
contractors for all building services.
(8) These rates represent triple net lease rates (leases under which tenants
are required to pay all real property taxes, insurance and expenses of
maintaining the leased space).
(9) Rental rates represent management's estimate of asking rental rates in
these markets for comparable properties.
(10) Excludes 1510 Gehman Road, which is an industrial Property.
(11) Represents the Class A weighted average rental rate for the submarkets in
which the Properties are located (weighted by Property net rentable square
footage) as compared to the Class A office weighted average asking rate of
$18.94 per square foot for the Market (weighted by Market net rentable
square footage)as identified in the C&W Mid-Year Report.
(12) The data reflected for these properties are presented on a consolidated
basis.
(13) Excludes 2200 Cabot Boulevard and 2250 Cabot Boulevard, which are
industrial properties.
(14) Excludes 1510 Gehman Road, 2200 Cabot Boulevard and 2250 Cabot Boulevard,
which are industrial properties.
66
<PAGE> 72
TENANTS
Initial Properties. The Initial Properties are leased to approximately 146
tenants that are engaged in a variety of businesses. The following table sets
forth information regarding the Company's leases with its 20 largest tenants
based upon annualized base rent for the Initial Properties as of September 30,
1996:
<TABLE>
<CAPTION>
PERCENTAGE OF
REMAINING AGGREGATE NET PERCENTAGE OF ANNUALIZED AGGREGATE
NUMBER OF LEASE TERM RENTABLE SQUARE AGGREGATE LEASED BASE RENT ANNUALIZED
TENANT NAME LEASES IN MONTHS FEET LEASED SQUARE FEET (000'S) BASE RENT
- ---------------------- --------- ------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Reed Technology....... 1 178 79,204 5.9% $ 733 5.1%
Conti Mortgage........ 1 56 53,906 4.0% 596 4.2%
IMS................... 1 115 40,774 3.1% 494 3.5%
HIP Health Plan of
NJ.................. 1 136 37,515 2.8% 463 3.2%
Clair O'Dell Agency... 1 59 25,177 1.9% 441 3.1%
CoreStates............ 1 116 30,359 2.2% 410 2.9%
Nibco, Inc............ 1 36 98,725 7.4% 395 2.8%
Parker, McKay &
Criscuolo........... 1 57 25,905 1.9% 388 2.7%
GMAC.................. 1 81 30,138 2.3% 354 2.5%
Neutronics............ 1 77 47,604 3.6% 346 2.4%
Corning Packaging..... 1 30 46,250 3.5% 331 2.3%
Ford Motor Co......... 1 22 53,900 4.0% 327 2.3%
Marshall, Dennehey.... 2 (a) 19,633 1.5% 321 2.2%
New England Mutual.... 1 117 31,907 2.4% 320 2.2%
AT&T Communications... 3 (b) 32,774 2.5% 288 2.0%
Information
Resources........... 1 52 21,008 1.6% 284 2.0%
American Executive
Centers............. 1 114 16,853 1.3% 279 2.0%
Devco Mutual.......... 1 54 13,332 1.0% 230 1.6%
Ohio Casualty......... 1 59 19,877 1.5% 229 1.6%
Franciscan Health
Systems............. 1 34 23,588 1.8% 225 1.6%
--
---- ------- ---- ----- ----
Consolidated
Total/
Weighted
Average..... 23 75 748,429 56.1% $ 7,454 52.3%
== ==== ======= ==== ===== ====
</TABLE>
- ---------------
(a) Consists of two leases: a lease representing 12,971 square feet that expires
in May 1997 and a lease representing 6,662 square feet that expires in
October 2001.
(b) Consists of three leases: a lease representing 11,000 square feet that
expires in August 1998; a lease representing 13,107 square feet that expires
in December 1996 and a lease representing 8,667 square feet that expires in
November 1997.
67
<PAGE> 73
Acquisition Properties. The Acquisition Properties are leased to
approximately 76 tenants that are engaged in a variety of businesses. The
following table sets forth information regarding leases with the 20 largest
tenants at the Acquisition Properties based upon annualized base rent for the
Acquisition Properties as of September 30, 1996:
<TABLE>
<CAPTION>
PERCENTAGE OF
REMAINING AGGREGATE NET PERCENTAGE OF ANNUALIZED AGGREGATE
NUMBER OF LEASE TERM RENTABLE SQUARE AGGREGATE LEASED BASE RENT ANNUALIZED
TENANT NAME LEASES IN MONTHS FEET LEASED SQUARE FEET (000'S) BASE RENT
- ---------------------- --------- ------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kimberly Clark........ 1 112 93,014 14.1% $ 1,814 20.1%
Waste Management...... 1 6 45,764 6.9% 715 8.0%
CSC................... 1 63 36,830 5.6% 626 6.9%
Blue Cross............ 1 126 18,093 2.7% 315 3.5%
FPA Corporation....... 1 6 16,453 2.5% 280 3.1%
Prudential............ 2 (a) 13,945 2.1% 271 3.0%
Sprint................ 1 55 15,348 2.3% 253 2.8%
Metpath............... 1 185 28,475 4.3% 249 2.8%
Macro................. 1 56 15,425 2.3% 231 2.6%
Transition Software... 1 48 15,101 2.3% 227 2.5%
KWS&P................. 1 31 22,706 3.4% 212 2.4%
Nason Cullen Inc...... 1 59 12,566 1.9% 201 2.2%
Strohl Systems........ 1 38 11,277 1.7% 186 2.1%
Nextel
Communication....... 1 56 11,004 1.7% 182 2.0%
Geraghty & Miller..... 1 15 10,840 1.6% 173 1.9%
Outdoor World Corp.... 1 20 9,579 1.5% 153 1.7%
Bucks County Nut...... 1 35 40,000 6.1% 140 1.6%
Advanta............... 1 34 8,339 1.3% 129 1.4%
Orbital Engineer...... 1 53 7,468 1.1% 117 1.3%
First American........ 1 39 6,258 0.9% 114 1.3%
--
---- ------- ---- ----- ----
Consolidated
Total/Weighted
Average..... 21 65 438,435 65.5% $ 6,588 72.2%
== ==== ======= ==== ===== ====
</TABLE>
- ---------------
(a) Consists of two leases: a lease representing 7,445 square feet that expires
in July 1998, and a lease representing 6,500 square feet that expires in
November 1996.
68
<PAGE> 74
Properties. On a combined basis, the Properties are leased to 222 tenants
that are engaged in a variety of businesses. The following table sets forth
information, on a combined basis, regarding leases at the Properties with the 20
largest tenants based upon annualized base rent from the Properties as of
September 30, 1996:
<TABLE>
<CAPTION>
PERCENTAGE OF
REMAINING AGGREGATE NET PERCENTAGE OF ANNUALIZED AGGREGATE
NUMBER OF LEASE TERM RENTABLE SQUARE AGGREGATE LEASED BASE RENT ANNUALIZED
TENANT NAME LEASES IN MONTHS FEET LEASED SQUARE FEET $ (000'S) BASE RENT
- ---------------------- --------- ------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kimberly Clark........ 2 (a) 99,238 5.0% $ 2,013 8.7%
Waste Management...... 1 6 45,764 2.3% 752 3.2%
Reed Technology....... 1 178 79,204 4.0% 733 3.1%
CSC................... 1 63 36,830 1.9% 626 2.7%
Conti Mortgage........ 1 56 53,906 2.7% 596 2.6%
IMS................... 1 115 40,774 2.0% 495 2.1%
HIP Health Plan NJ.... 1 136 37,515 1.9% 463 2.0%
Clair O'Dell Agency... 1 59 25,177 1.3% 441 1.9%
CoreStates............ 1 116 30,359 1.5% 410 1.8%
Nibco, Inc............ 1 36 98,725 5.0% 395 1.7%
Parker, McKay &
Criscuolo........... 1 57 25,905 1.3% 389 1.7%
GMAC.................. 1 81 30,138 1.5% 355 1.5%
Neutronics............ 1 77 47,604 2.4% 346 1.5%
Corning Packaging..... 1 30 46,250 2.3% 331 1.4%
Ford Electronics...... 1 22 53,900 2.7% 327 1.4%
Marshall, Dennehey.... 2 (b) 19,633 1.0% 321 1.4%
New England Mutual.... 1 117 31,907 1.6% 320 1.4%
Blue Cross............ 1 126 18,093 0.9% 315 1.4%
AT&T
Communications...... 3 (c) 32,774 1.6% 288 1.2%
Information
Resources........... 1 52 21,008 1.1% 284 1.2%
--
---- ------- ---- ---------- ----
Consolidated
Total
Weighted
Average..... 24 76 874,704 43.9% $10,200 43.8%
== ======= ==== ========== ====
</TABLE>
- ---------------
(a) Consists of two leases: a lease representing 93,014 square feet that expires
in December 2005, and a lease representing 6,224 square feet that expires in
November 1997.
(b) Consists of two leases: a lease representing 12,971 square feet that expires
in May 1997 and a lease representing 6,662 square feet that expires in
October 2001.
(c) Consists of three leases: a lease representing 11,000 square feet that
expires in August 1998; a lease representing 13,107 square feet that expires
in December 1996 and a lease representing 8,667 square feet that expires in
November 1997.
69
<PAGE> 75
LEASE EXPIRATIONS
Initial Properties. The following table sets forth detailed lease
expiration information for the Initial Properties for leases in place as of
September 30, 1996, assuming that none of the tenants exercise renewal options
or termination rights, if any, at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE
OF
TOTAL
RENTABLE FINAL
NUMBER OF SQUARE FINAL ANNUALIZED ANNUALIZED
LEASES FOOTAGE FINAL BASE RENT PER BASE
EXPIRING SUBJECT TO ANNUALIZED SQUARE FOOT RENT UNDER
YEAR OF LEASE EXPIRATION WITHIN THE EXPIRING BASE RENT UNDER UNDER EXPIRING CUMULATIVE
DECEMBER 31 YEAR(1) LEASES EXPIRING LEASES EXPIRING LEASES(1) LEASES TOTAL
- ----------------------------------- ---------- ---------- --------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996(2)............................ 15 54,004 $ 676,134 $12.52 4.4% 4.4%
1997............................... 42 115,886 1,701,924 14.69 11.1% 15.5%
1998............................... 20 100,621(3) 977,905(3) 9.72 6.4% 21.9%
1999............................... 28 296,212(3) 2,495,062(3) 8.42 16.3% 38.2%
2000............................... 10 62,670 874,483 13.95 5.7% 45.5%
2001............................... 20 212,726 2,970,875 13.97 19.4% 63.3%
2002............................... 1 8,912 169,328 19.00 1.1% 64.4%
2003............................... 7 109,336 1,361,239 12.45 8.9% 73.3%
2004............................... 1 9,262 185,240 20.00 1.2% 74.5%
2005............................... 2 19,387 365,564 18.86 2.4% 76.9%
2006............................... 6 145,449 1,942,732 13.36 12.7% 89.6%
2007 and thereafter................ 2 116,719 1,580,118 13.54 10.4% 100.0%
--- --------- ----------- ------ ------ ----
Consolidated Total/Weighted
Average.......................... 154 1,251,184 $15,300,604 $12.23 100.0% 100.0%
=== ========= =========== ====== ====== ====
</TABLE>
- ---------------
(1) "Final Annualized Base Rent" for each lease scheduled to expire represents
the cash rental rate of base rents, excluding tenant reimbursements, in the
final month prior to expiration multiplied by 12. Tenant reimbursements
generally include payments on account of real estate taxes, operating
expense escalations and common area utility charges.
(2) Represents lease expirations from September 30, 1996 through December 31,
1996.
(3) Includes 152,625 net rentable square feet and $780,711 of final annualized
base rent ($5.12 per net rentable square foot) associated with 1998 and 1999
lease expirations on the Company's sole industrial property included in the
Initial Properties.
70
<PAGE> 76
Acquisition Properties. The following table sets forth detailed lease
expiration information for the Acquisition Properties for leases in place as of
September 30, 1996, assuming none of the tenants exercise renewal options or
termination rights, if any, at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE
OF
TOTAL
RENTABLE FINAL
NUMBER OF SQUARE FINAL ANNUALIZED ANNUALIZED
LEASES FOOTAGE FINAL BASE RENT PER BASE
EXPIRING SUBJECT TO ANNUALIZED SQUARE FOOT RENT UNDER
YEAR OF LEASE EXPIRATION WITHIN THE EXPIRING BASE RENT UNDER UNDER EXPIRING CUMULATIVE
DECEMBER 31 YEAR(1) LEASES EXPIRING LEASES EXPIRING LEASES(1) LEASES TOTAL
- ----------------------------------- ---------- ---------- --------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996(2)............................ 7 23,245 $ 334,950 $14.41 3.4% 3.4%
1997............................... 18 130,449 1,866,640 14.31 19.0% 22.4%
1998............................... 14 42,303 659,835 15.60 6.7% 29.1%
1999............................... 20 143,085 1,605,792 11.22 16.3% 45.4%
2000............................... 4 35,008 445,238 12.72 4.5% 49.9%
2001............................... 10 108,623 1,849,219 17.02 18.8% 68.7%
2002............................... 1 4,433 82,764 18.67 0.8% 69.5%
2003............................... -- -- -- -- -- 69.5%
2004............................... -- -- -- -- -- 69.5%
2005............................... 1 93,014 2,252,799 24.22 22.9% 92.4%
2006............................... -- -- -- -- -- 92.4%
2007 and thereafter................ 3 48.069 742,447 15.45 7.6% 100.0%
--- -------- - ----------- ------ ------
Consolidated Total/Weighted
Average.......................... 78 628,229 $ 9,839,684 $15.66 100.0% 100.0%
=== ========= =========== ====== ======
</TABLE>
- ---------------
(1) "Final Annualized Base Rent" for each lease scheduled to expire represents
the cash rental rate of base rents, excluding tenant reimbursements, in the
final month prior to expiration multiplied by 12. Tenant reimbursements
generally include payments on account of real estate taxes, operating
expense escalations and common area utility charges.
(2) Represents lease expirations from September 30, 1996 through December 31,
1996.
71
<PAGE> 77
Properties. The following table sets forth detailed lease expiration
information for the Properties on a combined basis for leases in place as of
September 30, 1996, assuming that none of the tenants exercise renewal options
or termination rights, if any, at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE
OF
TOTAL
RENTABLE FINAL
NUMBER OF SQUARE FINAL ANNUALIZED ANNUALIZED
LEASES FOOTAGE FINAL BASE RENT PER BASE
EXPIRING SUBJECT TO ANNUALIZED SQUARE FOOT RENT UNDER
YEAR OF LEASE EXPIRATION WITHIN THE EXPIRING BASE RENT UNDER UNDER EXPIRING CUMULATIVE
DECEMBER 31 YEAR(1) LEASES EXPIRING LEASES EXPIRING LEASES(1) LEASES TOTAL
- ----------------------------------- ---------- ---------- --------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996(2)............................ 22 77,249 $ 1,011,084 $13.09 4.0% 4.0%
1997............................... 60 246,335 3,568,563 14.49 14.2% 18.2%
1998............................... 34 142,924(3) 1,637,739(3) 11.46 6.5% 24.7%
1999............................... 48 439,297(3) 4,100,854(3) 9.34 16.3% 41.0%
2000............................... 14 97,678 1,319,720 13.51 5.3% 46.3%
2001............................... 30 321,349 4,820,094 15.00 19.2% 65.5%
2002............................... 2 13,345 252,092 18.89 1.0% 66.5%
2003............................... 7 109,336 1,361,239 12.45 5.4% 71.9%
2004............................... 1 9,262 185,240 20.00 0.7% 72.6%
2005............................... 3 112,401 2,618,363 23.29 10.4% 83.0%
2006............................... 6 145,449 1,942,732 13.36 7.7% 90.7%
2007 and thereafter................ 5 164,788 2,322,565 9.24 9.3% 100.0%
--- --------- ----------- ------ ------
Consolidated Total/
Weighted Average................. 232 1,879,413 $25,140,285 $13.38 100.0% 100.0%
=== ========= =========== ====== ======
</TABLE>
- ---------------
(1) "Final Annualized Base Rent" for each lease scheduled to expire represents
the cash rental rate of base rents, excluding tenant reimbursements, in the
final month prior to expiration multiplied by 12. Tenant reimbursements
generally include payments on account of real estate taxes, operating
expense escalations and common area utility charges.
(2) Represents lease expirations from September 30, 1996 through December 31,
1996.
(3) Includes 152,625 net rentable square feet and $780,711 of final annualized
base rent ($5.12 per net rentable square foot) associated with 1998 and 1999
lease expirations on the Company's sole industrial property included in the
Initial Properties.
72
<PAGE> 78
LEASING EXPIRATIONS -- PROPERTY BY PROPERTY
The following table sets forth detailed lease expiration information for
each of the Properties for leases in place as of September 30, 1996, assuming
that none of the tenants exercise renewal options or termination rights, if any,
at or prior to the scheduled expirations.
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES:
HORSHAM/WILLOW GROVE/
JENKINTOWN, PA
650 Dresher Road
Square Footage of Expiring Leases..... -- -- -- -- -- -- --
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- -- --
Number of Leases Expiring............. -- -- -- -- -- -- --
1155 Business Center Drive
Square Footage of Expiring Leases..... -- -- 1,023 6,988 2,298 -- --
Percentage of Total Leased Square
Feet................................. -- -- 2.0% 13.7% 4.5% -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- $11,253 $97,622 $29,070 -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- $11.00 $13.97 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- 1.7% 14.4% 4.3% -- --
Number of Leases Expiring............. -- -- 1 1 1 -- --
500 Enterprise Road
Square Footage of Expiring Leases..... -- -- -- -- 12,845 53,906 --
Percentage of Total Leased Square
Feet................................. -- -- -- -- 19.2% 80.8% --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- $122,028 $595,661 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- $9.50 $11.05 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- 17.0% 83.0% --
Number of Leases Expiring............. -- -- -- -- 1 1 --
One Progress Avenue
Square Footage of Expiring Leases..... -- -- -- -- -- -- --
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- -- --
Number of Leases Expiring............. -- -- -- -- -- -- --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES:
HORSHAM/WILLOW GROVE/
JENKINTOWN, PA
650 Dresher Road
Square Footage of Expiring Leases..... 30,138 -- -- -- -- 30,138
Percentage of Total Leased Square
Feet................................. 100.0% -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... $403,849 -- -- -- -- $403,849
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $13.40 -- -- -- -- $13.40
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 100.0% -- -- -- -- 100.0%
Number of Leases Expiring............. 1 -- -- -- -- 1
1155 Business Center Drive
Square Footage of Expiring Leases..... -- -- -- 40,774 -- 51,083
Percentage of Total Leased Square
Feet................................. -- -- -- 79.8% -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- $538,217 -- $676,162
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- $13.20 -- $13.24
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 79.6% -- 100.0%
Number of Leases Expiring............. -- -- -- 1 -- 4
500 Enterprise Road
Square Footage of Expiring Leases..... -- -- -- -- -- 66,751
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $717,689
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $10.75
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 2
One Progress Avenue
Square Footage of Expiring Leases..... -- -- -- -- 79,204 79,204
Percentage of Total Leased Square
Feet................................. -- -- -- -- 100.0 % 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- $967,873 $967,873
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- $12.22 $12.22
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- 100.0 % 100.0%
Number of Leases Expiring............. -- -- -- -- 1 1
</TABLE>
- ---------------
Footnotes appear on page 81.
73
<PAGE> 79
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
SOUTHERN ROUTE
202 CORRIDOR, PA
456 Creamery Way
Square Footage of Expiring Leases..... -- -- -- -- -- -- --
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- -- --
Number of Leases Expiring............. -- -- -- -- -- -- --
486 Thomas Jones Way
Square Footage of Expiring Leases..... 2,676 3,895 8,612 10,086 961 -- --
Percentage of Total Leased Square
Feet................................. 10.2 % 14.9% 32.8% 38.5% 3.7%
Final Annual Base Rent Under
Expiring Leases(2)................... $30,774 $46,935 $99,944 $113,468 $11,532 -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $11.50 $12.05 $11.61 $11.25 $12.00 -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 0 0 33.0% 37.5% 3.8%
Number of Leases Expiring............. 1 1 3 1 1 -- --
468 Creamery Way
Square Footage of Expiring Leases..... -- -- -- 23,588 5,346 -- --
Percentage of Total Leased Square
Feet................................. -- -- -- 81.5% 18.5% -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- $224,086 $67,627 -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- $9.50 $12.65 -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 76.8% 23.2% -- --
Number of Leases Expiring............. -- -- -- 1 1 -- --
110 Summit Drive
Square Footage of Expiring Leases..... 2,600 -- -- 26,920 -- -- --
Percentage of Total Leased Square
Feet................................. 8.8 % 91.2%
Final Annual Base Rent Under
Expiring Leases(2)................... $22,646 -- -- $191,110 -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $8.71 -- -- $7.10 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 10.6 % 89.4%
Number of Leases Expiring............. 1 -- -- 2 -- -- --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
SOUTHERN ROUTE
202 CORRIDOR, PA
456 Creamery Way
Square Footage of Expiring Leases..... 47,604 -- -- -- -- 47,604
Percentage of Total Leased Square
Feet................................. 100.0% -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... $357,030 -- -- -- -- $357,030
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $7.50 -- -- -- -- $7.50
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 100.0% -- -- -- -- 100.0%
Number of Leases Expiring............. 1 -- -- -- -- 1
486 Thomas Jones Way
Square Footage of Expiring Leases..... -- -- -- -- -- 26,230
Percentage of Total Leased Square
Feet................................. 100.00%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $302,653
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $11.54
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 100.00%
Number of Leases Expiring............. -- -- -- -- -- 7
468 Creamery Way
Square Footage of Expiring Leases..... -- -- -- -- -- 28,934
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $291,713
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $10.08
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 2
110 Summit Drive
Square Footage of Expiring Leases..... -- -- -- -- -- 29,520
Percentage of Total Leased Square
Feet................................. 100.00%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $213,756
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $7.24
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 100.00%
Number of Leases Expiring............. -- -- -- -- -- 3
</TABLE>
- ---------------
Footnotes appear on page 81.
74
<PAGE> 80
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
BLUE BELL/PLYMOUTH MEETING/ FORT WASHINGTON, PA
2240/50 Butler Pike
Square Footage of Expiring Leases..... -- -- 4,430 17,080 -- -- --
Percentage of Total Leased Square
Feet................................. -- -- 8.5% 33.0% -- -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- $56,483 $187,880 -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- $12.75 $11.00 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- 8.1% 27.0% -- -- --
Number of Leases Expiring............. -- -- 1 1 -- -- --
120 West Germantown Pike
Square Footage of Expiring Leases..... -- -- 1,450 -- -- 29,096 --
Percentage of Total Leased Square
Feet................................. 4.8% 95.2%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- $17,400 -- -- $510,427 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- $12.00 -- -- $17.54 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- 3.3% 96.7%
Number of Leases Expiring............. -- -- 1 -- -- 2 --
140 West Germantown Pike
Square Footage of Expiring Leases..... -- -- 7,460 16,900 1,264 -- --
Percentage of Total Leased Square
Feet................................. -- -- 29.1% 66.0% 4.9% -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- $125,701 $215,059 $16,432 -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- $16.85 $12.73 $13.00 -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- 35.2% 60.2% 4.6% -- --
Number of Leases Expiring............. -- -- 1 2 1 -- --
2260 Butler Pike
Square Footage of Expiring Leases..... -- -- -- 3,041 21,008 7,843 --
Percentage of Total Leased Square
Feet................................. 9.5% 65.9% 24.6%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- $41,662 $283,608 $98,038 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- $13.70 $13.50 $12.50 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 9.8% 67.0% 23.2% --
Number of Leases Expiring............. -- -- -- 1 1 1 --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
BLUE BELL/PLYMOUTH MEETING/ FORT WASHI
2240/50 Butler Pike
Square Footage of Expiring Leases..... -- -- -- 30,359 -- 51,869
Percentage of Total Leased Square
Feet................................. -- -- -- 58.5% -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- $450,831 -- $695,194
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- $14.85 -- $13.40
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 64.9% -- 100.0%
Number of Leases Expiring............. -- -- -- 1 -- 3
120 West Germantown Pike
Square Footage of Expiring Leases..... -- -- -- -- -- 30,546
Percentage of Total Leased Square
Feet................................. 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $527,827
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $17.28
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 100.0%
Number of Leases Expiring............. -- -- -- -- -- 3
140 West Germantown Pike
Square Footage of Expiring Leases..... -- -- -- -- -- 25,624
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $357,192
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $13.94
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 4
2260 Butler Pike
Square Footage of Expiring Leases..... -- -- -- -- -- 31,892
Percentage of Total Leased Square
Feet................................. 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $423,308
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $13.27
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 3
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
MAIN LINE, PA
16 Campus Boulevard
Square Footage of Expiring Leases..... -- -- -- -- -- 8,000 --
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 12.2% --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $96,000 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $12.00 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 13.4% --
Number of Leases Expiring............. -- -- -- -- -- 1 --
18 Campus Boulevard
Square Footage of Expiring Leases..... -- 6,224 -- 2,042 -- 29,434 --
Percentage of Total Leased Square
Feet................................. -- 16.5% -- 5.4% -- 78.1% --
Final Annual Base Rent Under
Expiring Leases(2)................... -- $78,360 -- $26,546 -- $447,354 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- $12.59 -- $13.00 -- $15.20 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- 14.2% -- 4.8% -- 81.0% --
Number of Leases Expiring............. -- 1 -- 1 -- 3 --
LEHIGH VALLEY, PA
7310 Tilghman Street
Square Footage of Expiring Leases..... 13,107 8,667 11,000 3,829 -- 2,980 --
Percentage of Total Leased Square
Feet................................. 33.1 % 21.9% 27.8% 9.7% -- 7.5% --
Final Annual Base Rent Under
Expiring Leases(2)................... $108,788 $86,670 $92,950 $34,461 -- $29,055 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $8.30 $10.00 $8.45 $9.00 -- $9.75 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 30.9 % 24.6% 26.4% 9.8% -- 8.3% --
Number of Leases Expiring............. 1 1 1 1 -- 1 --
7248 Tilghman Street
Square Footage of Expiring Leases..... -- 5,327 -- 2,695 -- 32,180 --
Percentage of Total Leased Square
Feet................................. -- 13.2% -- 6.7% -- 80.1% --
Final Annual Base Rent Under
Expiring Leases(2)................... -- $59,929 -- $30,993 -- $348,540 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- $11.25 -- $11.50 -- $10.83 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- 13.6% -- 7.1% -- 79.3% --
Number of Leases Expiring............. -- 1 -- 1 -- 2 --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
MAIN LINE, PA
16 Campus Boulevard
Square Footage of Expiring Leases..... -- -- -- 57,463 -- 65,463
Percentage of Total Leased Square
Feet................................. -- -- -- 87.8% -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- $620,837 -- $716,837
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- $10.80 -- $10.95
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 86.6% -- 100.0%
Number of Leases Expiring............. -- -- -- 3 -- 4
18 Campus Boulevard
Square Footage of Expiring Leases..... -- -- -- -- -- 37,700
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $552,260
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $14.65
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 5
LEHIGH VALLEY, PA
7310 Tilghman Street
Square Footage of Expiring Leases..... -- -- -- -- -- 39,583
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $351,924
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $8.89
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 5
7248 Tilghman Street
Square Footage of Expiring Leases..... -- -- -- -- -- 40,202
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $439,462
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $10.93
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 4
</TABLE>
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<PAGE> 82
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
6575 Snowdrift Road
Square Footage of Expiring Leases..... -- -- -- 46,250 -- -- --
Percentage of Total Leased Square
Feet................................. -- -- -- 100.0% -- -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- $330,688 -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- $7.15 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 100.0% -- -- --
Number of Leases Expiring............. -- -- -- 1 -- -- --
LANSDALE, PA
1510 Gehman Road
Square Footage of Expiring Leases..... -- -- 53,900 98,725 -- -- --
Percentage of Total Leased Square
Feet................................. -- -- 35.3% 64.7% -- -- --
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- $361,130 $419,581 -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- $6.70 $4.25 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- 46.3% 53.7% -- -- --
Number of Leases Expiring............. -- -- 1 1 -- -- --
BURLINGTON COUNTY, NJ
One Greentree Centre
Square Footage of Expiring Leases..... 3,701 15,394 5,172 4,415 -- 10,303 --
Percentage of Total Leased Square
Feet................................. 6.6% 27.6% 9.3% 7.9% -- 18.5% --
Final Annual Base Rent Under
Expiring Leases(2)................... $60,813 $247,192 $84,954 $78,366 -- $182,038 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $16.43 $16.06 $16.43 $17.75 -- $17.67 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 6.2% 25.1% 8.6% 8.0% -- 18.5% --
Number of Leases Expiring............. 2 6 3 1 -- 2 --
Two Greentree Centre
Square Footage of Expiring Leases..... 5,680 18,838 3,732 3,183 -- -- --
Percentage of Total Leased Square
Feet................................. 10.1% 33.6% 6.7% 5.7% -- -- --
Final Annual Base Rent Under
Expiring Leases(2)................... $99,400 $283,350 $69,917 $50,928 -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $17.50 $15.04 $11.75 $16.00 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 10.3% 29.2% 7.2% 5.3% -- -- --
Number of Leases Expiring............. 1 5 2 1 1 -- --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
6575 Snowdrift Road
Square Footage of Expiring Leases..... -- -- -- -- -- 46,250
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $330,688
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $7.15
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 1
LANSDALE, PA
1510 Gehman Road
Square Footage of Expiring Leases..... -- -- -- -- -- 152,625
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $780,711
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $5.12
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 2
BURLINGTON COUNTY, NJ
One Greentree Centre
Square Footage of Expiring Leases..... -- -- -- 16,853 -- 55,838
Percentage of Total Leased Square
Feet................................. -- -- -- 30.2% -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- $332,847 -- $986,210
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- $19.75 -- $17.66
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 33.8% -- 100.0%
Number of Leases Expiring............. -- -- -- 1 -- 15
Two Greentree Centre
Square Footage of Expiring Leases..... 5,255 -- 19,387 -- -- 56,075
Percentage of Total Leased Square
Feet................................. 9.4% -- 34.5% -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... $99,845 -- $365,564 -- -- $969,004
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $19.00 -- $18.86 -- -- $16.82
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 10.3% -- 37.7% -- -- 100.0%
Number of Leases Expiring............. 1 -- 2 -- -- 12
</TABLE>
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<PAGE> 83
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
Three Greentree Centre
Square Footage of Expiring Leases..... -- 17,676 -- -- 13,150 26,430 --
Percentage of Total Leased Square
Feet................................. -- 26.6% -- -- 19.8% 39.8% --
Final Annual Base Rent Under
Expiring Leases(2)................... -- $317,173 -- -- $242,155 $450,885 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- $17.94 -- -- $18.41 $17.06 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- 26.9% -- -- 20.5% 38.2% --
Number of Leases Expiring............. -- 3 -- -- 2 2 --
CAMDEN COUNTY, NJ
457 Haddonfield Road
Square Footage of Expiring Leases..... 11,521 -- 7,233 5,798 6,978 8,912
Percentage of Total Leased Square
Feet................................. 11.4% -- 7.2% 5.6% 6.9% 8.8%
Final Annual Base Rent Under
Expiring Leases(2)................... $184,682 -- $105,819 $102,032 $144,134 $169,328
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $16.03 -- $14.63 $17.60 $20.66 $19.00
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 10.4% -- 6.0% 5.8% 8.1% 9.6%
Number of Leases Expiring............. 1 -- 1 2 3 1
OTHER MARKETS
168 Franklin Corner Road,
Lawrenceville, NJ
Square Footage of Expiring Leases..... 8,467 550 -- 4,504 -- 3,902 --
Percentage of Total Leased Square
Feet................................. 48.6% 3.2% -- 25.8% -- 22.4% --
Final Annual Base Rent Under
Expiring Leases(2)................... $106,041 $7,150 -- $62,200 -- $39,020 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $12.52 $13.00 -- $13.81 -- $10.00 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 49.5% 3.3% -- 29.0% -- 18.2% --
Number of Leases Expiring............. 3 1 -- 1 -- 1 --
5910-6090 Six Forks, Raleigh, NC
Square Footage of Expiring Leases..... 17,773 27,794 3,842 18,733 -- 1,674 --
Percentage of Total Leased Square
Feet................................. 24.2% 37.9% 5.2% 25.6% -- 2.3% --
Final Annual Base Rent Under
Expiring Leases(2)................... $247,672 $390,483 $58,175 $286,723 -- $26,784 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. 13.94 14.05 15.14 15.31 -- 16.00 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 23.2% 36.5% 5.4% 26.8% -- 2.5% --
Number of Leases Expiring............. 6 22 5 10 -- 1 --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES (CONTINUED):
Three Greentree Centre
Square Footage of Expiring Leases..... 9,226 -- -- -- -- 66,482
Percentage of Total Leased Square
Feet................................. 13.9% -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... $170,681 -- -- -- -- $1,180,894
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $18.50 -- -- -- -- $17.76
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 14.5% -- -- -- -- 100.0%
Number of Leases Expiring............. 1 -- -- -- -- 8
CAMDEN COUNTY, NJ
457 Haddonfield Road
Square Footage of Expiring Leases..... 13,589 9,262 -- -- 37,515 100,808
Percentage of Total Leased Square
Feet................................. 13.5% 9.2% -- -- 37.2% 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... $269,926 $185,240 -- -- $612,245 $1,773,406
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. $19.86 20.00 -- -- $16.32 $17.59
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 15.2% 10.5% -- -- 34.5% 100.0%
Number of Leases Expiring............. 2 1 -- -- 1 12
OTHER MARKETS
168 Franklin Corner Road,
Lawrenceville, NJ
Square Footage of Expiring Leases..... -- -- -- -- -- 17,423
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... -- -- -- -- -- $214,411
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. -- -- -- -- -- $12.31
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 6
5910-6090 Six Forks, Raleigh, NC
Square Footage of Expiring Leases..... 3,524 -- -- -- -- 73,340
Percentage of Total Leased Square
Feet................................. 4.8% -- -- -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)................... $59,908 -- -- -- -- $1,069,745
Final Annual Base Rent per Square Foot
Under Expiring Leases(3)............. 17.00 -- -- -- -- 14.59
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 5.6% -- -- -- -- 100.0%
Number of Leases Expiring............. 1 -- -- -- -- 45
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED TOTALS FOR INITIAL
PROPERTIES
Square Footage of Expiring Leases.... 54,004 115,886 100,621 296,212 62,670 212,726 8,912
Percentage of Total Leased Square
Feet............................... 4.6 % 9.2% 8.0% 23.6% 5.0% 17.0% .7%
Total Annual Base Rent Under Expiring
Leases(2).......................... $676,134 $1,701,924 $977,905 $2,495,062 $874,483 $2,970,875 $169,328
Total Annual Base Rent per Square
Feet Under Expiring Leases(3)...... $12.86 $14.69 $9.72 $8.42 $13.95 $13.97 $19.00
Percentage of Total Final Annual Base
Rate Represented by Expiring
Leases............................. 4.8 % 11.0% 6.4% 16.2% 5.7% 19.3% 1.1%
Number of Leases Expiring............ 15 42 20 28 10 20 1
CONSOLIDATED TOTALS FOR INITIAL
PROPERTIES
Square Footage of Expiring Leases.... 109,336 9,262 19,387 145,449 116,719 1,251,184
Percentage of Total Leased Square
Feet............................... 8.7% 0.8% 1.5% 11.6% 9.3 % 100.0%
Total Annual Base Rent Under Expiring
Leases(2).......................... $1,361,239 $185,240 $365,564 $1,942,732 $1,580,118 $15,300,604
Total Annual Base Rent per Square
Feet Under Expiring Leases(3)...... $12.45 $20.00 $18.86 $13.36 $13.54 $12.23
Percentage of Total Final Annual Base
Rate Represented by Expiring
Leases............................. 8.9% 1.2% 2.4% 12.7% 10.3 % 100.0%
Number of Leases Expiring............ 7 1 2 6 2 154
</TABLE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ACQUISITION PROPERTIES:
HORSHAM/WILLOW GROVE/JENKINTOWN PA
700/800 Business Center Drive
Square Footage of Expiring Leases..... -- -- -- 22,761 -- 30,773 --
Percentage of Total Leased Square
Feet................................. -- -- -- 27.8% -- 37.5% --
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- $348,223 -- $499,965 --
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- $15.30 -- $16.25 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 27.5% -- 39.5% --
Number of Leases Expiring............. -- -- -- 3 -- 2 --
KING OF PRUSSIA, PA
500 North Gulph Road
Square Footage of Expiring Leases..... 2,362 8,214 6,617 35,085 15,101 12,566 --
Percentage of Total Leased Square
Feet................................. 3.0 % 10.3% 8.3% 43.9% 18.9% 15.7% --
Final Annual Base Rent Under Expiring
Leases(2)............................ $43,697 $133,067 $123,521 $608,010 $286,919 $226,188 --
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. $18.50 $16.20 $18.67 $17.33 $19.00 $18.00 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 3.1 % 9.4% 8.7% 42.8% 20.2% 15.9% --
Number of Leases Expiring............. 1 1 3 5 1 1 --
Bucks County, PA
2200 Cabot Boulevard
Square Footage of Expiring Leases..... -- 20,700 -- 21,000 13,381 -- --
Percentage of Total Leased Square
Feet................................. -- 37.6% -- 38.1% 24.3% -- --
Final Annual Base Rent Under Expiring
Leases(2)............................ -- $108,054 -- $80,850 $53,524 -- --
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- $5.22 -- $3.85 $4.00 -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- 44.6% -- 33.3% 22.1% -- --
Number of Leases Expiring............. -- 1 -- 1 1 -- --
2250 Cabot Boulevard
Square Footage of Expiring Leases..... -- -- -- 40,000 -- -- --
Percentage of Total Leased Square
Feet................................. -- -- -- 100.0% -- -- --
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- $140,000 -- -- --
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- $3.50 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- 100.0% -- -- --
Number of Leases Expiring............. -- -- -- 1 -- -- --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ACQUISITION PROPERTIES:
HORSHAM/WILLOW GROVE/JENKINTOWN PA
700/800 Business Center Drive
Square Footage of Expiring Leases..... -- -- -- -- 28,475 82,009
Percentage of Total Leased Square
Feet................................. -- -- -- -- 34.7 % 100.0%
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- $418,583 $1,266,771
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- $14.70 $15.45
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- 33.0 % 100.0%
Number of Leases Expiring............. -- -- -- -- 1 6
KING OF PRUSSIA, PA
500 North Gulph Road
Square Footage of Expiring Leases..... -- -- -- -- -- 79.945
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- -- $1,421,402
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- -- $17.78
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 12
Bucks County, PA
2200 Cabot Boulevard
Square Footage of Expiring Leases..... -- -- -- -- -- 55,081
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- -- $242,428
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- -- $4.40
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 3
2250 Cabot Boulevard
Square Footage of Expiring Leases..... -- -- -- -- -- 40,000
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- -- $140,000
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- -- $3.50
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 1
</TABLE>
- ---------------
Footnotes appear on page 81.
79
<PAGE> 85
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ACQUISITION PROPERTIES (CONTINUED):
2260/2270 Cabot Boulevard
Square Footage of Expiring Leases..... 11,283 7,356 8,203 -- 2,796 -- --
Percentage of Total Leased Square
Feet................................. 38.1 % 24.8% 27.7% -- 9.4% -- --
Final Annual Base Rent Under Expiring
Leases(2)............................ $94,613 $72,021 $70,782 -- $34,111 -- --
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. $8.39 $9.79 $8.63 -- $12.20 -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 34.9 % 26.5% 26.1% -- 12.6% -- --
Number of Leases Expiring............. 3 4 3 -- 1 -- --
3000 Cabot Boulevard
Square Footage of Expiring Leases..... 1,900 10,840 11,378 4,933 -- -- --
Percentage of Total Leased Square
Feet................................. 6.5 % 37.3% 39.2% 17.0% -- -- --
Final Annual Base Rent Under Expiring
Leases(2)............................ $34,200 $173,440 $203,048 $84,101 -- -- --
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. $18.00 $16.00 $17.85 $17.05 -- -- --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 6.9 % 35.1% 41.1% 17.0% -- -- --
Number of Leases Expiring............. 1 1 2 2 -- -- --
GREENWOOD SQUARE
Square Footage of Expiring Leases..... 6,500 80,658 16,105 11,373 3,730 28,454 4,433
Percentage of Total Leased Square
Feet................................. 4.3 % 52.8% 10.6% 7.5% 2.4% 18.6% 2.9%
Final Annual Based Rent Under Expiring
Leases(2)............................ $141,440 $1,334,481 $262,484 $193,957 $70,684 $460,126 $82,764
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. $21.76 $16.54 $16.30 $17.05 $18.95 $16.17 $18.67
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... 5.6 % 52.4% 10.3% 7.6% 2.8% 18.1% 3.2%
Number of Leases Expiring............. 1 10 6 5 1 6 1
Burlington County, NJ
8000 Lincoln Drive
Square Footage of Expiring Leases..... -- -- -- -- -- 36,830 --
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 67.1% --
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- -- $662,940 --
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- -- $18.00 --
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 67.2% --
Number of Leases Expiring............. -- -- -- -- -- 1 --
ACQUISITION PROPERTIES (CONTINUED):
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
2260/2270 Cabot Boulevard
Square Footage of Expiring Leases..... -- -- -- -- -- 29,638
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- -- $271,527
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- -- $9.16
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 11
3000 Cabot Boulevard
Square Footage of Expiring Leases..... -- -- -- -- -- 29,051
Percentage of Total Leased Square
Feet................................. -- -- -- -- -- 100.0%
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- -- $494,789
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- -- $17.03
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- -- 6
GREENWOOD SQUARE
Square Footage of Expiring Leases..... -- -- -- -- 1,501 152,754
Percentage of Total Leased Square
Feet................................. -- -- -- -- 1.0 % 100.0%
Final Annual Based Rent Under Expiring
Leases(2)............................ -- -- -- -- -- $2,545,336
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- -- $16.67
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- -- 100.0%
Number of Leases Expiring............. -- -- -- -- 1 31
Burlington County, NJ
8000 Lincoln Drive
Square Footage of Expiring Leases..... -- -- -- -- 18,093 54,923
Percentage of Total Leased Square
Feet................................. -- -- -- -- 32.9 % 100.0%
Final Annual Base Rent Under Expiring
Leases(2)............................ -- -- -- -- $323,865 $986,805
Final Annual Base Rent per Square Foot
under Expiring Leases(3)............. -- -- -- -- $17.90 $17.97
Percentage of Total Final Annual Base
Rent Represented by Expiring
Leases............................... -- -- -- -- 32.8 % 100.0%
Number of Leases Expiring............. -- -- -- -- 1 2
</TABLE>
- ---------------
Footnotes appear on page 81.
80
<PAGE> 86
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Northern Suburban Wilmington
One Righter Parkway
Square Footage of Expiring
Leases......................... 1,200 2,681 -- 7,933 -- -- --
Percentage of Total Leased
Square Feet.................... 1.1% 2.6% -- 7.6% -- -- --
Final Annual Base Rent Under
Expiring Leases(2)............. $21,000 $45,577 -- $150,651 -- -- --
Final Annual Base Rent per
Square Foot under Expiring
Leases(3)...................... $17.50 $17.00 -- $18.99 -- -- --
Percentage of Total Final Annual
Base Rent Represented by
Expiring Leases................ 0.9% 1.9% -- 6.1% -- -- --
Number of Leases Expiring....... 1 1 -- 3 -- -- --
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Northern Suburban Wilmington
One Righter Parkway
Square Footage of Expiring
Leases......................... -- -- 93,014 -- -- 104,828
Percentage of Total Leased
Square Feet.................... -- -- 88.7% -- -- 100.0%
Final Annual Base Rent Under
Expiring Leases(2)............. -- -- $2,252,799 -- -- $2,470,027
Final Annual Base Rent per
Square Foot under Expiring
Leases(3)...................... -- -- $24.22 -- -- $23.56
Percentage of Total Final Annual
Base Rent Represented by
Expiring Leases................ -- -- 91.2% -- -- 100.0%
Number of Leases Expiring....... -- -- 1 -- -- 6
</TABLE>
- ---------------
(1) Represents lease expirations from September 30, 1996 to December 31, 1996.
(2) Represents annual base rent for the final annual period in accordance with
lease terms.
(3) Calculated by dividing the annual base rent for the final annual period by
the net rentable square feet subject to such leases.
CONSOLIDATED TOTALS FOR ACQUISITION PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Square Footage of Expiring
Leases......................... 23,245 130,449 42,303 143,085 35,008 108,623 4,433
Percentage of Total Leased
Square Feet.................... 3.7% 20.8% 6.7% 22.8% 5.6% 17.2% 0.7%
Final Annual Base Rent Under
Expiring Leases(2)............. $334,950 $1,866,640 $659,835 $1,605,792 $445,238 $1,849,219 $82,764
Final Annual Base Rent per
Square Foot under Expiring
Leases(3)...................... $14.41 $14.31 $15.60 $11.22 $12.72 $17.02 $18.67
Percentage of Total Final Annual
Base Rent Represented by
Expiring Leases................ 3.4% 19.0% 6.7% 16.3% 4.5% 8.8% 0.8%
Number of Leases Expiring....... 7 18 14 20 4 10 1
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Square Footage of Expiring
Leases......................... -- -- 93,014 -- 48,069 628,229
Percentage of Total Leased
Square Feet.................... -- -- 14.8% -- 7.7 % 100.0%
Final Annual Base Rent Under
Expiring Leases(2)............. -- -- $2,252,799 -- $742,447 $9,839,684
Final Annual Base Rent per
Square Foot under Expiring
Leases(3)...................... -- -- $24.22 -- $15.45 $15.66
Percentage of Total Final Annual
Base Rent Represented by
Expiring Leases................ -- -- 22.9% -- 7.6 % 100.0%
Number of Leases Expiring....... -- -- 1 -- 3 78
</TABLE>
- ---------------
(1) Represents lease expirations from September 30, 1996 to December 31, 1996.
(2) Represents annual base rent for the final annual period in accordance with
lease terms.
(3) Calculated by dividing the annual base rent for the final annual period by
the net rentable square feet subject to such leases.
CONSOLIDATED TOTALS FOR ALL PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Square Footage of Expiring
Leases......................... 77,249 246,335 142,924 439,297 97,678 321,349 13,345
Percentage of Total Leased
Square Feet.................... 4.1% 13.1% 7.6% 22.8% 5.2% 17.1% 0.7%
Final Annual Base Rent Under
Expiring Leases(2)............. $1,011,084 $3,568,563 $1,637,739 $4,100,854 $1,319,720 $4,820,094 $252,092
Final Annual Base Rent per
Square Foot under Expiring
Leases(3)...................... $13.09 $14.49 $11.46 $9.34 $13.51 $15.00 $18.89
Percentage of Total Final Annual
Base Rent Represented by
Expiring Leases................ 4.0% 14.2% 6.5% 16.3% 5.3% 19.2% 1.0%
Number of Leases Expiring....... 22 60 34 48 14 30 2
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- -------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Square Footage of Expiring
Leases......................... 109,336 9,262 112,401 145,449 164,788 1,879,413
Percentage of Total Leased
Square Feet.................... 5.8% 0.5% 6.0% 7.7% 8.8 % 100.0%
Final Annual Base Rent Under
Expiring Leases(2)............. $1,361,239 $185,240 $2,618,363 $1,942,732 $2,322,565 $25,140,285
Final Annual Base Rent per
Square Foot under Expiring
Leases(3)...................... $12.45 $20.00 $23.29 $13.36 $9.24 $13.38
Percentage of Total Final Annual
Base Rent Represented by
Expiring Leases................ 5.4% 0.7% 10.4% 7.7% 9.3 % 100.0%
Number of Leases Expiring....... 7 1 3 6 5 232
</TABLE>
- ---------------
(1) Represents lease expirations from September 30, 1996 to December 31, 1996.
(2) Represents annual base rent for the final annual period in accordance with
lease terms.
(3) Calculated by dividing the annual base rent for the final annual period by
the net rentable square feet subject to such leases.
81
<PAGE> 87
HISTORICAL TENANT IMPROVEMENTS AND LEASING COMMISSIONS
The following table sets forth certain historical information regarding
tenant improvements ("TI") and leasing commission ("LC") costs attributable to
leases that commenced (i.e., the date the renewal or replacement tenant began to
pay rent) for the Initial Properties during each of the periods presented. TI
and LC costs for commenced leases during a particular period do not equal the
cash paid during such period due to the timing of payments. The following
results for the nine-month period ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the full fiscal year.
Historical TI and LC data relating to the Acquisition Properties was not made
available to the Company.
<TABLE>
<CAPTION>
JANUARY 1 TO TOTAL/WEIGHTED
1993 1994 1995 SEPTEMBER 30, 1996 AVERAGE
-------- -------- -------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
NEW TENANTS(1)(2)
Number of Leases........... 21 8 31 17 77
Square feet of re-tenanted
space.................... 91,590 52,312(2) 168,618 160,863 473,383
TI per square foot......... $ 7.01 $ 22.72(2) $ 4.26 $ 3.88 $ 6.70
LC per square foot......... $ 2.87 $ 2.67 $ 2.19 $ 1.42 $ 2.11
-------- -------- -------- -------- ----------
Total TI and LC per
square foot........... $ 9.88 $ 25.39(2) $ 6.45 $ 5.30 $ 8.81
======== ======== ======== ======== ==========
RENEWAL/EXPANSION LEASES(1)
Number of Leases........... 24 29 32 20 105
Square feet of
Renewals/Expansions...... 72,961 122,178 308,331 148,309 651,779
TI per square foot......... $ 4.21 $ 4.31 $ 4.88 $ 3.46 $ 4.38
LC per square foot......... $ .64 $ 2.13 $ 0.79 $ 1.14 $ 1.10
-------- -------- -------- -------- ----------
Total TI and LC per
square foot........... $ 4.85 $ 6.44 $ 5.67 $ 4.60 $ 5.48
======== ======== ======== ======== ==========
TOTAL NEW TENANTS AND
RENEWAL/EXPANSION
LEASES(1)(2)
Number of Leases........... 45 37 63 37 182
Square feet................ 164,551 174,490 476,949 309,172 1,125,162
TI per square foot......... $ 5.77 $ 9.83 $ 4.66 $ 3.68 $ 5.36
LC per square foot......... $ 1.88 $ 2.29 $ 1.28 $ 1.29 $ 1.52
-------- -------- -------- -------- ----------
Total TI and LC per
square foot........... $ 7.65 $ 12.12 $ 5.94 $ 4.97 $ 6.88
======== ======== ======== ======== ==========
</TABLE>
- ---------------
(1) Includes TI and LC costs relating to the 23 Initial Properties that are
office buildings and excludes the one industrial property.
(2) Represents costs associated with conversion of approximately 44,000 net
rentable square feet of warehouse/laboratory space to office space.
82
<PAGE> 88
HISTORICAL CAPITAL EXPENDITURES
The following table sets forth information relating to the combined
historical capital expenditures (excluding those expenditures which are
recoverable from tenants) of the 23 Initial Properties that are office
buildings. Historical capital expenditure data relating to the Acquisition
Properties was not made available to the Company.
<TABLE>
<CAPTION>
JANUARY 1 TO
SEPTEMBER 30,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Number of Net Rentable Square Feet(1).... 1,027,431 1,027,431 1,032,764 1,082,257
Capital Expenditures Incurred............ $ -- $ 46,060 $ 78,601 $ 126,738
Capital Expenditures per net rentable
square foot............................ $ -- $ 0.04 $ 0.08 $ 0.12
Annual Weighted Average per square foot
(January 1, 1993 to September 30, 1996)............................................ $ 0.06
</TABLE>
- ---------------
(1) Net rentable square feet are weighted to reflect the acquisitions of 168
Franklin Corner Road in November 1995 and the LibertyView Building (457
Haddonfield Road) in July 1996. In all instances the one industrial property
(1510 Gehman Road) included in the Initial Properties and the Acquisition
Properties are excluded from the calculations.
POTENTIAL REVENUE INCREASE AT REPLACEMENT COST RENTS
The Company believes that the SSI/TNC Properties, the Acquisition
Properties and LibertyView have been purchased at substantial discounts to
replacement cost and have the potential for significant internal revenue growth
as rental rates for office properties in their respective submarkets recover to
levels that would provide a reasonable return on investment to a developer of a
new Class A multi-tenant office building ("Replacement Cost Rents").
ESTIMATED REPLACEMENT COST RENT ANALYSIS
MULTI-TENANT OFFICE BUILDINGS
(PER NET RENTABLE SQUARE FOOT)
<TABLE>
<CAPTION>
SUBURBAN MARKET(1)
-------------------
LOW HIGH
------- -------
<S> <C> <C>
Total Construction (Replacement) Costs(1)................ $135.00 $145.00
Estimated Replacement Cost Rents(1)...................... $ 22.00 $ 24.00
Weighted Average Class A Rental Rates(2)................. $ 18.94 $ 18.94
------- -------
Increase in Class A Rental Rates Necessary to Reach
Replacement Cost Rents................................. $ 3.06 $ 5.06
Percentage Increase in Class A Rental Rates Necessary to
Reach Replacement Cost Rents........................... 16.2 % 26.7 %
</TABLE>
- ---------------
(1) Replacement cost data obtained from C&W Market Analyses. C&W consulted the
Marshall Valuation Service, a nationally recognized construction cost
manual, which indicated that the total cost of development ranges from
approximately $135 to $145 per square foot. This cost includes land, both
direct and indirect costs of construction, a contingency for initial leasing
expenses and an allowance for overhead. This Replacement Cost Rents data
excludes any provision for developers' profit.
(2) Market estimate, provided by C&W.
The Company believes that large corporate users of Class A office space are
beginning to face a shortage of large contiguous blocks of Class A space. This
is illustrated by the fact that, according to C&W, there has been extremely
limited office development for the period from January 1, 1995 to June 30, 1996
(approxi-
83
<PAGE> 89
mately 255,000 net rentable square feet of new office development out of a total
inventory of approximately 43.7 million square feet of office space in the
submarkets where the Properties are located).
HISTORICAL SQUARE FEET UNDER CONSTRUCTION
PHILADELPHIA MSA
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 JUNE 30, 1996
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
1,359,500 332,000 157,290 52,390 227,390 26,600
</TABLE>
HISTORICAL OCCUPANCY
The table below sets forth the average occupancy rates, based on square
feet leased, of the Initial Properties at the indicated dates. Historical
occupancy data relating to the Acquisition Properties was not made available to
the Company.
<TABLE>
<CAPTION>
AGGREGATE RENTABLE PERCENTAGE LEASED
DATE SQUARE FEET(1) AT PERIOD END(2)
-------------------------------------------- ------------------ -----------------
<S> <C> <C>
September 30, 1996.......................... 1,333,794 93.8%
December 31, 1995........................... 1,212,056 89.7%
December 31, 1994........................... 1,180,056 94.0%
December 31, 1993........................... 1,180,056 92.1%
December 31, 1992........................... 1,180,056 91.4%
December 31, 1991........................... 1,180,056 83.8%
</TABLE>
- ---------------
(1) The Properties at 168 Franklin Corner Road and 457 Haddonfield Road
(LibertyView) are excluded from the data for these years because the Company
acquired such Properties subsequent to the applicable period. 168 Franklin
Corner Road was acquired in November 1995 and, at that time, was 54% leased.
457 Haddonfield Road was acquired in July 1996, and at that time was 67%
leased.
(2) Percentage leased for four of the Initial Properties (One, Two and Three
Greentree Centre and Twin Forks Office Park) is as of January 31. The
Company does not believe that percentages at December 31 for such Properties
are materially different than the percentages at January 31.
84
<PAGE> 90
OCCUPANCY AND RENTAL RATES -- PROPERTY BY PROPERTY
The following table sets forth the occupancy rates, average annual
effective rental rate per leased square foot and total annual rental revenue for
each of the Initial Properties during the periods specified. Historical
occupancy data and average annual effective rental rates relating to the
Acquisition Properties were not made available to the Company.
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/
JENKINTOWN, PA
650 DRESHER ROAD
Percentage Leased at Period
End.......................... 100% 100% 100% 100% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 17.39 $ 17.39 $ 17.09 $ 16.89 $ 15.23 $ 16.50
Total Annual Rental Revenue
(2).......................... $ 524,000 $ 524,000 $ 515,000 $ 509,000 $ 306,000 --
1155 BUSINESS CENTER DRIVE
Percentage Leased at Period
End.......................... 99% 100% 96% 97% 100% 99%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 16.43 $ 16.68 $ 17.14 $ 16.51 $ 16.50 $ 17.22
Total Annual Rental Revenue
(2).......................... $ 751,000 $ 854,000 $ 863,000 $ 813,000 $ 827,000 --
500 ENTERPRISE ROAD
Percentage Leased at Period
End.......................... 74% 74% 74% 93% 84% 98%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 11.92 $ 12.80 $ 13.70 $ 11.55 $ 13.13 $ 15.03
Total Annual Rental Revenue
(2).......................... $ 471,000 $ 638,000 $ 683,000 $ 626,000 $ 813,000 --
ONE PROGRESS AVENUE
Percentage Leased at Period
End.......................... 100% 100% 100% 100% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 12.64 $ 12.06 $ 11.88 $ 12.56 $ 11.45 $ 11.75
Total Annual Rental Revenue
(2).......................... $1,001,000 $ 955,000 $ 941,000 $ 995,000 $ 907,000 --
SOUTHERN ROUTE 202
CORRIDOR, PA
456 CREAMERY WAY
Percentage Leased at Period
End.......................... 100% 100% 100% 100% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 8.82 $ 5.13 $ 7.71 $ 7.18 $ 7.12 $ 7.25
Total Annual Rental Revenue
(2).......................... $ 420,000 $ 244,000 $ 367,000 $ 342,000 $ 339,000 --
486 THOMAS JONES WAY
Percentage Leased at Period
End.......................... 66% 66% 88% 88% 86% 50.9%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 14.91 $ 15.18 $ 14.75 $ 14.74 $ 14.58 $ 15.46
Total Annual Rental Revenue
(2).......................... $ 416,000 $ 517,000 $ 646,000 $ 669,000 $ 649,000 --
</TABLE>
85
<PAGE> 91
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
468 CREAMERY WAY
Percentage Leased at Period
End.......................... 100% 100% 100% 100% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 12.44 $ 12.96 $ 13.00 $ 13.31 $ 12.89 $ 13.88
Total Annual Rental Revenue
(2).......................... $ 360,000 $ 375,000 $ 376,000 $ 385,000 $ 373,000 --
110 SUMMIT DRIVE
Percentage Leased at Period
End.......................... 79% 90% 100% 100% 87% 68%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 8.30 $ 10.13 $ 9.42 $ 9.60 $ 8.46 $ 7.20
Total Annual Rental Revenue
(2).......................... $ 314,000 $ 356,000 $ 377,000 $ 419,000 $ 360,000 --
BLUE BELL/PLYMOUTH MEETING/FORT
WASHINGTON, PA
2240/50 BUTLER PIKE
Percentage Leased at Period
End.......................... 79% 100% 100% 100% 100% 99%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 17.66 $ 17.66 $ 16.69 $ 16.50 $ 16.27 $ 17.55
Total Annual Rental Revenue
(2).......................... $ 819,000 $ 842,000 $ 871,000 $ 861,000 $ 849,000 --
120 WEST GERMANTOWN PIKE
Percentage Leased at Period
End.......................... 100% 100% 100% 100% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 19.28 $ 20.26 $ 20.66 $ 20.43 $ 18.73 $ 17.52
Total Annual Rental Revenue
(2).......................... $ 589,000 $ 619,000 $ 631,000 $ 624,000 $ 563,000 --
140 WEST GERMANTOWN PIKE
Percentage Leased at Period
End.......................... 100% 72% 96% 100% 100% 99%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 16.65 $ 16.86 $ 16.19 $ 15.34 $ 15.61 $ 17.38
Total Annual Rental Revenue
(2).......................... $ 432,000 $ 367,000 $ 365,000 $ 394,000 $ 405,000 --
2260 BUTLER PIKE
Percentage Leased at Period
End.......................... 100% 100% 75% 75% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 16.23 $ 16.62 $ 18.42 $ 17.30 $ 16.76 $ 17.82
Total Annual Rental Revenue
(2).......................... $ 497,000 $ 530,000 $ 455,000 $ 416,000 $ 436,000 --
MAIN LINE, PA
16 CAMPUS BOULEVARD
Percentage Leased at Period
End.......................... 100% 100% 100% 100% 0% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 16.57 $ 17.53 $ 18.68 $ 18.15 $ 17.22 $ 13.58
Total Annual Rental Revenue
(2).......................... $1,122,000 $1,187,000 $1,265,000 $1,229,000 $1,069,000 --
18 CAMPUS BOULEVARD
Percentage Leased at Period
End.......................... 35% 77% 77% 82% 82% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 18.33 $ 16.94 $ 17.69 $ 17.56 $ 17.14 $ 18.62
Total Annual Rental Revenue
(2).......................... $ 224,000 $ 350,000 $ 513,000 $ 524,000 $ 532,000 --
</TABLE>
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<PAGE> 92
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
LEHIGH VALLEY, PA
7310 TILGHMAN STREET
Percentage Leased at Period
End.......................... 78% 90% 82% 82% 93% 99%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 10.26 $ 10.91 $ 11.85 $ 11.99 $ 11.23 $ 8.89
Total Annual Rental Revenue
(2).......................... $ 366,000 $ 350,000 $ 402,000 $ 395,000 $ 393,000 --
7248 TILGHMAN STREET
Percentage Leased at Period
End.......................... 96% 96% 83% 92% 92% 94%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 12.68 $ 12.66 $ 13.82 $ 14.22 $ 13.81 $ 14.76
Total Annual Rental Revenue
(2).......................... $ 439,000 $ 522,000 $ 537,000 $ 549,000 $ 557,000 --
6575 SNOWDRIFT ROAD
Percentage Leased at Period
End.......................... 100% 100% 100% 100% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 7.82 $ 7.98 $ 8.09 $ 8.52 $ 7.35 $ 7.15
Total Annual Rental Revenue
(2).......................... $ 315,000 $ 369,000 $ 374,000 $ 394,000 $ 340,000 --
1510 GEHMAN ROAD
Percentage Leased at Period
End.......................... 50% 85% 85% 100% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 5.53 $ 5.82 $ 7.47 $ 7.27 $ 7.21 $ 4.72
Total Annual Rental Revenue
(2).......................... $ 419,000 $ 676,000 $ 969,000 $1,082,000 $1,101,000 --
BURLINGTON COUNTY, NJ
ONE GREENTREE CENTRE
Percentage Leased at Period End
(3).......................... 81% 97% 100% 93% 91% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 16.82 $ 14.96 $ 15.53 $ 15.80 $ 18.42 $ 16.07
Total Annual Rental Revenue
(2).......................... $ 815,000 $ 744,000 $ 855,000 $ 854,000 $ 949,000 --
TWO GREENTREE CENTRE
Percentage Leased at Period End
(3).......................... 83% 84% 79% 75% 100% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 16.74 $ 17.78 $ 18.49 $ 16.18 $ 13.60 $ 16.02
Total Annual Rental Revenue
(2).......................... $ 794,000 $ 832,000 $ 845,000 $ 698,000 $ 666,000 --
THREE GREENTREE CENTRE
Percentage Leased at Period End
(3).......................... 100% 95% 100% 74% 99% 96%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 17.77 $ 17.77 $ 18.35 $ 15.94 $ 15.78 $ 16.41
Total Annual Rental Revenue
(2).......................... $1,226,000 $1,194,000 $1,234,000 $ 957,000 $ 942,000 --
</TABLE>
87
<PAGE> 93
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
CAMDEN COUNTY, NJ
457 HADDONFIELD ROAD
(LIBERTYVIEW)
Percentage Leased at Period End
(4).......................... -- -- -- -- 63% 83%
Average Annual Effective Rental
Rate Per Leased Square Foot
(4).......................... -- -- -- -- -- $ 18.63
Total Annual Rental Revenue
(4).......................... -- -- -- -- -- --
OTHER MARKETS
168 FRANKLIN CORNER ROAD,
LAWRENCEVILLE, NJ
Percentage Leased at Period End
(5).......................... -- -- -- -- 55% 55%
Average Annual Effective Rental
Rate Per Leased Square Foot
(5).......................... -- -- -- -- $ 15.95 $ 15.55
Total Annual Rental Revenue
(5).......................... -- -- -- -- $ 23,000 --
5910-6090 SIX FORKS, RALEIGH, NC
Percentage Leased at Period End
(3).......................... 92% 93% 97% 100% 97% 100%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1).......................... $ 11.16 $ 12.37 $ 11.22 $ 13.13 $ 14.27 $ 14.25
Total Annual Rental Revenue
(2).......................... $ 630,000 $ 833,000 $ 779,000 $ 944,000 $1,026,000 --
</TABLE>
- ---------------
(1) For the years ended December 31, 1991 through 1995, represents annual rental
revenue divided by the average occupancy level. For the nine-month period
ended September 30, 1996, represents: (i) for office leases written on a
triple net lease basis, the sum of the annualized contracted base rental
rates payable for all space leased as of September 30, 1996 without giving
effect to free rent or scheduled rent increases that would be taken into
account under generally accepted accounting principles plus the 1996
budgeted operating expense excluding tenant electricity; and (ii) for office
leases written on a full service basis, the annualized contracted base
rental rate payable for all space leased as of September 30, 1996 without
giving effect to free rent or scheduled rent increases that would be taken
into account under generally accepted accounting principles. In both cases,
the annualized rental is divided by the total square footage leased as of
September 30, 1996.
(2) Represents rental revenue including tenant reimbursements, determined on a
straight-line basis in accordance with generally accepted accounting
principles. Tenant reimbursements generally include payment of real estate
taxes, operating expenses and escalations and common area maintenance and
utility charges.
(3) Percentage leased for four of the Properties (One, Two and Three Greentree
Centre and Twin Forks Office Park) is as of January 31. The Company does not
believe that percentages at December 31 for such Properties are materially
different than the percentages at January 31.
(4) Property acquired in July 1996.
(5) Property acquired in November 1995.
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<PAGE> 94
SUBMARKETS AND PROPERTY INFORMATION
The Properties owned and operated by the Company contain an aggregate of
approximately 2.0 million net rentable square feet. Thirty-five of the
Properties are located in the Market. The C&W Mid-Year Report divides the six
Pennsylvania counties included within the Market into nine submarkets. While the
Company considers all nine of these Pennsylvania submarkets and the two southern
New Jersey counties within the Market as its primary market, its currently owned
Properties are concentrated in several key submarket areas. These submarkets are
discussed below. Unless otherwise indicated, the market data contained in the
following discussion have been derived from the C&W Mid-Year Report and from
nine additional market analyses prepared by C&W at the request of the Company
(the "C&W Market Analyses").
HORSHAM/WILLOW GROVE/JENKINTOWN
The Company owns four Initial Properties and will acquire two Properties in
the Horsham/Willow Grove/Jenkintown submarket. This submarket contains, as of
June 30, 1996, approximately 3.3 million net rentable square feet of commercial
office space. As of June 30, 1996, total vacancy was approximately 12.1%, down
from 15.6% as of June 30, 1995. Demand for office space in this submarket has
historically come from the movement of users outward from Philadelphia and from
the formation of new high-tech/service oriented businesses.
HORSHAM BUSINESS CENTER
Horsham Business Center is a business park developed by the Company and
consists of 16 Class A suburban office buildings aggregating approximately
600,000 net rentable square feet. Horsham Business Center is located on the
northwestern side of the Philadelphia metropolitan area in Montgomery County,
Pennsylvania.
As of June 30, 1996, the direct competition to the Company's Properties
within this submarket consisted of approximately 1.1 million net rentable square
feet of existing Class A office space (in 22 buildings), with an overall vacancy
rate of 8.9%, as compared to 17.2% as of June 30, 1995. The weighted average
asking rental rate in directly competitive properties is $18.02 per square foot
compared to the average existing rental rates of $16.50 and $17.22 in the
Company's two buildings as of September 30, 1996.
650 Dresher Road
650 Dresher Road is a one story office building completed in 1984.
This Property contains 30,138 net rentable square feet and is situated on
4.2 acres. This Property is constructed of structural steel framing with a
brick exterior. As of September 30, 1996, this Property was 100% leased to
GMAC Mortgage Corporation at an average annualized existing base rent of
$11.75 per leased square foot. After factoring in 1996 projected operating
expense recoveries, the annualized existing rental rate at the building as
of August 31, 1996 excluding tenant utilities was $16.50 per leased square
foot. The lease is scheduled to expire in May 2003 and is structured on a
triple net basis which allows for a complete pass through of all property
operating expenses.
1155 Business Center Drive
1155 Business Center Drive is a two story office building completed in
1990. This Property contains 51,388 net rentable square feet and is
situated on 5 acres. This Property is constructed of structural steel
framing with a brick exterior. As of September 30, 1996, this Property was
99.4% leased to four tenants with an average annualized existing base rent
of $12.37 per leased square foot. After factoring in 1996 projected
operating expense recoveries, the average annualized existing rental rate
at the building as of September 30, 1996 excluding tenant utilities was
$17.22 per leased square foot. The largest tenant in this property is IMS
(International Mill Service) occupying 40,774 square feet or 79.4% of the
total net rentable square feet, with a lease scheduled to expire in March
2006. There are no existing leases at this property that are scheduled to
expire in 1996 or 1997.
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<PAGE> 95
700/800 Horsham Business Center Drive (Acquisition Properties)
700/800 Business Center Drive is a two building, one and two story
office complex completed in 1986. These buildings aggregate 82,009 net
rentable square feet and are situated on 13.2 acres. The buildings are
constructed of structural steel framing with a brick exterior. As of
September 30, 1996, the buildings were 100% leased to five tenants. After
factoring in 1996 projected operating expense recoveries, the average
annualized existing rental rate at the buildings as of September 30, 1996
excluding tenant utilities was $14.60 per leased square foot. The primary
tenant, is Metpath, which occupies 28,475 net rentable square feet,
expanding to 51,236 net rentable square feet in July 1999, under a lease
scheduled to expire in January 2012.
KEITH VALLEY BUSINESS CENTER
Keith Valley Business Center contains two office buildings, and is located
in Horsham, Montgomery County, Pennsylvania. Keith Valley Business Center is
located several miles from, and is within the same submarket as, Horsham
Business Center.
500 Enterprise Road
500 Enterprise Road is a one story office/flex building completed in
1990. This Property contains 67,800 net rentable square feet and is
situated on 7.4 acres. This Property is constructed of structural steel
framing with a brick exterior. As of September 30, 1996, this Property was
98.5% leased to two tenants, with an average annualized existing base rent
per leased square foot of $10.75. After factoring in 1996 projected
operating expense recoveries, the average annualized existing rental rate
at this Property as of September 30, 1996 excluding tenant utilities was
$15.03 per leased square foot. Conti Trade Services Corporation, a wholly
owned subsidiary of Continental Grain, leases 53,906 square feet
(representing 79.6% of the net rentable square feet) under a lease
scheduled to expire in April 2001, provided that Conti Trade Services
Corporation may terminate the lease in April 2000 with a penalty payment.
The other lessee (constituting 12,845 net rentable square feet) at this
Property is Pioneer Technologies, under a lease scheduled to expire in
October 2000. This property competes for tenants in the same office
submarket as the Properties in the Horsham Business Center.
One Progress Drive
One Progress Drive is a two story office building completed in 1986.
This Property contains 79,204 net rentable square feet and is constructed
of structural steel framing with a brick exterior. As of September 30,
1996, this Property was 100% leased to Reed Technology at an average
existing base rent per leased square foot of $9.25. After factoring in 1996
projected operating expense recoveries, the annualized existing rental rate
at the building as of September 30, 1996, excluding tenant utilities, is
$11.75 per leased square foot. Reed Technology is a wholly-owned subsidiary
of Reed Elsevier, and the lease is scheduled to expire in June 2011. In
connection with this tenancy, the interior of the building was
substantially renovated at the tenant's expense. The lease contains the
following two early termination provisions: in July 2001 the tenant may
terminate the lease upon one year's prior written notice to the Company and
by making a termination payment of $3.2 million; in July 2006 the tenant
may terminate the lease upon one year's written notice and by making a
termination payment of $840,000. According to C&W, One Progress Drive
competes for tenants in the same office submarket as the Horsham Business
Center properties. The tenant has a right of first offer to purchase this
Property during the term of its lease.
SOUTHERN ROUTE 202 CORRIDOR
The Company owns four Properties in the Southern Route 202 Corridor
submarket. This submarket contains, as of June 30, 1996, approximately 3.5
million net rentable square feet of commercial office space and an additional
approximately 2.6 million net rentable square feet of flex space. As of June 30,
1996, total vacancy for commercial office space in this submarket was
approximately 13.9%, down from 22.9% as of
90
<PAGE> 96
June 30, 1995. Over the 18-month period ended June 30, 1996, net absorption of
office space in this submarket averaged 39,800 square feet per quarter or
approximately 160,000 square feet per annum. Leasing activity during this period
averaged approximately 100,000 square feet per quarter or 400,000 square feet
per annum. As of June 30, 1996, total vacancy for flex space in this submarket
was approximately 2.8%, down from 8.5% at the end of the first quarter of 1995.
The Company's Properties in this submarket are located in two separate
business complexes: Whitelands Business Park and Oaklands Corporate Center, in
which the Company developed a total of seven buildings. Of these seven
buildings, four were build-to-suit and were sold to the occupant. The buildings
were constructed between 1987 and 1990, contain an aggregate of 171,698 net
rentable square feet and are situated on 17.6 acres.
OAKLANDS BUSINESS CENTER
456 Creamery Way
456 Creamery Way is a single story office/flex building completed in
1987. This Property contains 47,604 net rentable square feet and is
situated on 5.2 acres and is currently 100% leased to Neutronics, Inc.
under a lease scheduled to expire in January 2003 at an existing rental
rate of $7.25 per square foot. This lease is written on a triple net basis
and, pursuant to its terms, the tenant contracts directly with third
parties that provide building services, including landscaping, janitorial
service and snow removal.
486 Thomas Jones Way
486 Thomas Jones Way is a two story office building completed in 1990.
This Property contains 51,500 net rentable square feet and is situated on
4.6 acres. This Property is constructed of steel framing with a brick
exterior. As of September 30, 1996, this Property was 50.93% leased to
seven tenants at an average annualized existing rental rate of $11.54 per
square foot. After factoring in 1996 projected operating expense
recoveries, the average annualized existing rental rate at this Property as
of September 30, 1996 excluding tenant utilities was $15.46 per leased
square foot. The primary tenant at this Property is First American Real
Estate, which occupies 10,086 square feet under a lease scheduled to expire
in December 1999.
468 Creamery Way
468 Creamery Way is a single story office building completed in 1990.
This Property contains 28,934 net rentable square feet and is situated on
2.6 acres. As of September 30, 1996, this Property was 100% leased to two
tenants at an average annualized existing rental rate of $10.08 per square
foot. After factoring in 1996 projected operating expense recoveries, the
average annualized existing rental rate at this Property as of September
30, 1996 excluding tenant utilities was $13.88 per leased square foot. The
primary tenant at this Property is Franciscan Health System, which occupies
23,588 square feet under a lease scheduled to expire in June 1999.
WHITELANDS BUSINESS CENTER
110 Summit Drive
110 Summit Drive is a single story office building completed in 1985.
This Property contains 43,660 net rentable square feet and is situated on
5.2 acres. As of September 30, 1996, this Property was 67.6% leased to
three tenants at an average existing base rent of $7.20 per square foot.
The primary tenant is Maris Equipment, which occupies 21,580 square feet
under a lease scheduled to expire in April 1999.
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BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON
The Company owns four Properties in the Blue Bell/Plymouth Meeting/Fort
Washington submarket. As of June 30, 1996, this submarket contains approximately
4.9 million square feet of commercial office space. As of June 30, 1996, total
vacancy for commercial office space was approximately 6.9%, down from 11.8% as
of June 30, 1995. As of September 30, 1996, there were no projects under
construction. Absorption of office space in this submarket has averaged 55,000
square feet per quarter or 218,000 square feet annually during the 18-month
period ended June 30, 1996. Leasing activity has averaged approximately 95,000
square feet per quarter or 380,000 square feet per annum during the 18-month
period ended June 30, 1996.
MEETINGHOUSE BUSINESS CENTER
Meetinghouse Business Center was developed by the Company and consists of
five office buildings aggregating approximately 140,000 net rentable square
feet. This complex is located on the northeastern side of the Philadelphia
metropolitan area in Montgomery County, Pennsylvania. The buildings were
completed in 1984 and are situated on 20.5 acres. The buildings are one and two
story, with structural steel framing and stone and stucco exteriors. This
complex was developed consistent with the requirements of the Meetinghouse
historical district. The complex is at the interchange of the Pennsylvania
Turnpike (both East-West and Northeast Extension) and Interstate 476, which is
the largest interchange on the Pennsylvania Turnpike.
Meetinghouse Business Center competes for tenants in the Blue Bell/Plymouth
Meeting/Fort Washington submarket which consists of approximately 4.9 million
square feet. As of June 30, 1996, total vacancy in this marketplace was 6.9%,
which represents a significant decline from 11.8% as of June 30, 1995. C&W
identified five other buildings which directly compete with Meetinghouse
Business Center. These buildings aggregate 443,000 net rentable square feet, and
as of June 30, 1996 were less than 1.9% vacant. Average annual asking rental
rates for this direct competition range from $18.00 to $19.00 per square foot
while existing tenants at this Property were paying $15.45 to $18.60 per square
foot as of September 30, 1996.
2240/50 Butler Pike
2240/50 Butler Pike is a one story office building completed in 1984.
This Property contains 52,183 net rentable square feet and is situated on
7.5 acres. As of September 30, 1996, this Property was 99.4% leased to
three tenants. The primary tenant is CoreStates Bank, which occupies 30,359
net rentable square feet (representing 58% of the aggregate net rentable
square feet at the Property) at an existing annualized rental rate of
$13.50 per square foot under a lease scheduled to expire in April 2006. The
other major tenant in this Property is Worldwide Marketing, which occupies
17,080 net rentable square feet (representing 33% of the net rentable
square feet at the Property) at an existing annualized rental rate of
$11.00 per square foot under a lease scheduled to expire in October 1999.
After factoring in 1996 projected operating expense recoveries, the annual
average existing rental rate for this Property as of September 30, 1996
(excluding tenant utilities) was $17.55 per leased square foot.
120 W. Germantown Pike
120 W. Germantown Pike is a two story office building completed in
1984. This Property contains 30,546 net rentable square feet and is
situated on 3.2 acres. As of September 30, 1996, this Property was 100%
leased to three tenants. The primary tenant is Clair O'Dell, a regional
insurance agency, which occupies 25,177 net rentable square feet
(representing 82% of the net rentable square feet at the Property) under a
lease scheduled to expire in July 2001 at an existing annualized rental
rate of $17.50 per square foot. After factoring in 1996 projected operating
expense recoveries, the average annual existing rental rate for this
Property as of September 30, 1996 excluding tenant utilities was $17.52 per
leased square foot.
140 W. Germantown Pike
140 W. Germantown Pike is a two story office building completed in
1984. This Property contains 25,953 net rentable square feet and is
situated on 3.6 acres. As of September 30, 1996, this Property was
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<PAGE> 98
98.7% leased to four tenants. The primary tenant is Healthcare, Inc., which
occupies 11,822 net rentable square feet (representing 46% of the net
rentable square feet at the Property) under a lease scheduled to expire in
September 1999 at an average annualized existing rental rate of $12.50
square foot. After factoring in 1996 projected operating expense
recoveries, the annual existing rental rate for all tenants at this
Property as of September 30, 1996 (excluding tenant utilities) was $17.38
per leased square foot.
2260 Butler Pike
2260 Butler Pike is a one story office building completed in 1984.
This Property contains 31,892 net rentable square feet and is situated on
6.2 acres. As of September 30, 1996, this Property was 100% leased to three
tenants. The primary tenant is Information Resources, which occupies 21,008
net rentable square feet (representing 66% of the net rentable square feet
at the Property) under a lease scheduled to expire in December 2000 at an
existing annualized rental rate of $13.50 per square foot. After factoring
in 1996 projected operating expense recoveries, the annual existing rental
rate for all tenants at this Property as of September 30, 1996 (excluding
tenant utilities) was $17.82 per leased square foot.
MAIN LINE
The Company owns two Properties in the Main Line submarket. This submarket
contains, as of June 30, 1996, approximately 2.5 million square feet of
commercial office space. As of June 30, 1996, the total vacancy rate was
approximately 8.5%, down from 14.5% at June 30, 1995. Over the 18-month period
ended June 30, 1996, net absorption of office space in this submarket totalled
approximately 150,000 square feet, while leasing activity exceeded 315,000
square feet. The Company's Properties in this submarket are located in the
Newtown Square Corporate Campus.
NEWTOWN SQUARE CORPORATE CAMPUS
According to C&W, as of June 30, 1996, there were 21 buildings aggregating
approximately 2.3 million net rentable square feet that are in direct
competition to the Company's Newtown Square Properties. The vacancy rate in
these directly competitive properties was 7.2% as of June 30, 1996. As a result,
vacancy rates in these directly competitive properties compare favorably to the
8.5% vacancy rate in the overall Main Line office submarket area as of June 30,
1996. Rental rates in the directly comparable properties range from $18.00 per
square foot full service (which includes a pro rata share of all costs of
operating the property) to $24.00 per square foot plus tenant electricity. On a
gross rental rate basis, excluding tenant utilities, existing tenants in 16 and
18 Campus Boulevard were paying from $11.49 to $17.60 and from $16.50 to $17.95,
respectively, per leased square foot plus electricity as of September 30, 1996.
16 Campus Boulevard
16 Campus Boulevard is a three story office building completed in
1990. This Property contains 65,463 net rentable square feet and is
situated on 14.6 acres. This Property is constructed of structural steel
framing with a brick exterior. As of September 30, 1996, this Property was
100% leased to four tenants at an average annualized base rent per leased
per square foot of $9.43. The largest tenant at this Property, New England
Mutual Life, occupies 31,907 net rentable square feet under a lease
scheduled to expire in 2006. 16 Campus Boulevard also is the headquarters
building of the Company. After factoring in 1996 projected operating
expense recoveries, the average annual existing rental rate for the
building as of September 30, 1996 (excluding tenant utilities) was $13.58
per square foot. A tenant at this Property has a right of first offer to
purchase this Property during the term of its lease, which is scheduled to
expire in June 2006.
18 Campus Boulevard
18 Campus Boulevard is a two story office building completed in 1990.
This Property contains 37,700 net rentable square feet and is situated on
6.4 acres. This Property is constructed of structural steel framing with a
brick exterior. This Property is currently 100% leased to tenants at an
average existing annualized base rent per square foot of $14.62. The major
tenant at the Property, Devco Mutual, occupies 13,332 net rentable square
feet under a lease expiring in January 2001, provided, that, Devco may
terminate the lease at January 1998 with a penalty payment. There are no
existing leases that are scheduled to expire in 1996. The aggregate net
rentable square footage of leases expiring in 1997
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<PAGE> 99
represent 14.2% of this Property's total net rentable square feet. After
factoring in 1996 projected operating expense recoveries, the annual
existing rental rate for this Property as of September 30, 1996 (excluding
tenant utilities) was $18.62 per leased square foot.
LEHIGH VALLEY
The Company owns three Properties in the Lehigh Valley submarket. This
submarket contains approximately 4.4 million square feet of commercial office
space. As of June 30, 1996, total vacancy in this submarket was approximately
11.6% down from 15.4% at June 30, 1995. Over the 18-month period ended June 30,
1996, absorption of office space in this submarket was approximately 37,000
square feet per quarter or 148,000 square feet per year.
In addition to competing in the office market within this submarket,
certain of the Properties compete in the industrial/flex market sector.
According to C&W, as of June 30, 1996 there was an estimated 19.1 million net
rentable square feet of industrial space located in 12 business parks throughout
this market sector. As of June 30, 1996, the vacancy rate in this market sector
was 9.9%. Included in this market sector was an estimated 1.7 million square
feet of flex space as of June 30, 1996. As of that date, the vacancy rate for
flex space was only 14.2%. C&W identified seven flex complexes aggregating
629,000 net rentable square feet that are in direct competition with the
Properties located within this submarket. Such competing properties had an
overall vacancy rate of 5.2% as of June 30, 1996, compared to 36.7% as of June
30, 1995. Average asking rents in these competing properties ranged from $3.75
to $10.50 per square foot.
IRON RUN CORPORATE CENTER
The Company owns three Properties in the Iron Run Corporate Center, a 725
acre business park located in Allentown, Pennsylvania. The park contains 37
buildings containing over 3 million net rentable square feet. The Company
developed five buildings in the park totalling over 326,000 net rentable square
feet. Two buildings, aggregating 200,000 net rentable square feet, were
build-to-suit for an end user and a life insurance company. The Company's three
Iron Run Corporate Center buildings aggregate 129,113 net rentable square feet
and are both office and office/flex buildings.
7310 Tilghman Street
7310 Tilghman Street is a one story office building completed in 1985.
This Property contains 40,000 net rentable square feet and is situated on
5.2 acres. The structural steel framed building has a brick exterior and an
interior ceiling height capability of 18 feet. As of September 30, 1996,
this Property was 99% leased to three tenants at an average annualized
existing base rent of $8.89 per square foot. The primary tenant is AT&T,
which occupies 32,774 net rentable square feet under three leases scheduled
to expire as follows: December 1996 (13,107 net rentable square feet);
November 1997 (8,667 net rentable square feet); and August 1998 (11,000 net
rentable square feet).
7248 Tilghman Street
7248 Tilghman Street is a one story office/flex building completed in
1987. This Property contains 42,863 net rentable square feet and is
situated on 4.2 acres. As of September 30, 1996, this Property was 94%
leased to four tenants. The primary tenant is Ohio Casualty, which occupies
19,877 net rentable square feet under a lease scheduled to expire in July
2001. After factoring in 1996 projected operating expense recoveries, the
annual existing rental rate for this Property as of September 30, 1996
excluding tenant utilities was 14.76 per leased square foot.
According to C&W, these properties compete for office tenants in the Lehigh
Valley area which contains of 4.3 million net rentable square feet and, as of
June 30, 1996, had a total vacancy of 11.6%, down from 15.4% at June 30, 1995.
The average asking rental rate for properties directly competing with the
Properties in this submarket ranges between $8.75 to $13.50 per square foot on a
triple net basis.
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6575 Snowdrift Road
6575 Snowdrift Road is a one story office/flex building completed in
1989. This Property contains 46,250 net rentable square feet and is
situated on 6.3 acres. As of September 30, 1996, this Property was 100%
leased to Corning Packaging under a lease scheduled to expire in February
1999 at an average annual rental rate of $7.15 per leased square foot.
LANSDALE
The Company has a warehouse/distribution facility located in Lansdale,
Pennsylvania, which is located along the Northeast Extension of the Pennsylvania
Turnpike between Plymouth Meeting and Allentown, Pennsylvania. C&W indicated
that, in the four suburban Pennsylvania counties that are adjacent to the City
of Philadelphia, there were an estimated 67.5 million net rentable square feet
of warehouse/distribution space with a vacancy rate of 13.5% as of June 30,
1996. C&W has indicated that the Company's Property in this submarket competes
within the Western Montgomery County area submarket. Within this submarket,
there are approximately 4.5 million net rentable square feet of
warehouse/distribution space with a vacancy rate as of June 30, 1996 of 15.0%.
During the 18-month period ended June 30, 1996, the vacancy rate for warehouse
space in the Western Montgomery County market area was highly variable, with a
rate as low as 11.4% and as high as 16.3%. During such period, leasing activity
amounted to over 700,000 square feet which equated to 120,000 square feet per
quarter.
1510 Gehman Road
1510 Gehman Road is a warehouse/flex building located in northern
Montgomery County completed in 1990 and situated in a park that contains
three buildings that were developed by the Company. Two of the buildings
were build-to-suit for a user and the other facility was sold to an
institutional investor in 1992. This Property contains 152,625 net rentable
square feet and is situated on 14.8 acres. This Property is constructed of
structural steel framing, insulated metal panels and exterior masonry units
with an interior ceiling height of 24 feet. This Property consists of 65%
warehouse space and 35% finished space. As of September 30, 1996, this
Property was 100% leased to two tenants with an average annualized existing
base rent per leased square foot of $4.72. Nibco, Inc. occupies 98,725 net
rentable square feet as warehouse space under a lease scheduled to expire
in August 1999 at an existing rate of $4.00 per net rentable square foot.
Ford Electronics occupies 53,900 net rentable square feet utilized as
design space under a lease scheduled to expire in June 1998 at an existing
rental rate of $6.05 per net rentable square foot. Ford has contractual
right to acquire the 1510 Gehman Road property provided Ford occupies
greater than 50% of the building. As of November 7, 1996, Ford occupied 35%
of the building and the balance was occupied by Nibco, Inc.
BUCKS COUNTY OFFICE AND INDUSTRIAL MARKET
Eight of the Acquisition Properties are located in the Bucks County Office
and Industrial market. This submarket contains, as of June 30, 1996
approximately 37 million net rentable square feet of industrial space and 2.6
million net rentable square feet of office space. As of June 30, 1996, the
vacancy rate in this submarket was approximately 16.8% for industrial properties
and 12.8% for office properties, down from 18.4% at January 1, 1996.
As of June 30, 1996, the average rental rate for Class A office space was
$18.95 (full service), per net rentable square foot. Office leasing activity
during the past few years has averaged approximately 150,000 to 200,000 net
rentable square feet per year while net absorption of office space has averaged
approximately 75,000 to 200,000 net rentable square feet per year.
The average rental rate for industrial space in this submarket was $3.37
per square foot for the six-month period ended June 30, 1996, but varies between
$3.00 to $5.00 per net rentable square foot depending on tenant size, percentage
of office and special finishes. The average rental rate for office/flex space
was $6.45 per net rentable square foot for the six month period ended June 30,
1996 but was between $6.00 and $10.00 per net rentable square foot depending on
tenant size, percentage of office and special finishes. Leasing activity
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in this submarket during the six month period ended June 30, 1996 was
approximately 353,000 net rentable square feet.
2200 Cabot Boulevard (an Acquisition Property)
2200 Cabot Boulevard is a one story industrial building completed in
1979. This Property contains 55,081 net rentable square feet and is
situated on 3.98 acres. This Property is constructed of structural steel
framing with a brick and glass exterior. As of September 30, 1996, this
Property was 100% leased to three tenants with an average annualized
existing base rent of $4.40 per square foot. The largest tenants in this
Property are Hussman and Noble Printing, occupying 21,000 and 20,700 square
feet, respectively, with leases scheduled to expire in March 1999 and May
1997, respectively, provided, that, Hussman may terminate the lease at
September 1997 with a penalty payment.
2250 Cabot Boulevard (an Acquisition Property)
2250 Cabot Boulevard is a one story industrial building completed in
1982. This Property contains 40,000 net rentable square feet and is
situated on 3.3 acres. This Property is constructed of structural steel
framing with a brick and glass exterior. As of September 30, 1996, this
Property was 100% leased to one tenant with an average annualized existing
base rent of $3.50 per square foot. This tenant, Bucks County Nut, occupies
40,000 square feet under a lease scheduled to expire in July 1999.
2260/2270 Cabot Boulevard (Acquisition Properties)
2260/2270 Cabot Boulevard consists of two one story office/flex
buildings completed in 1984. This Property contains an aggregate of 29,638
net rentable square feet and is situated on 2.1 acres. This Property is
constructed of structural steel framing with a brick and glass exterior. As
of September 30, 1996, this Property was 100% leased to 12 tenants with an
average annualized existing base rent of $8.54 per square foot. The largest
tenant in this Property, Sager Electrical, occupies 4,238 square feet under
a lease scheduled to expire in October 1998.
3000 Cabot Boulevard (an Acquisition Property)
3000 Cabot Boulevard is a one story office building completed in 1986.
This Property contains 34,640 net rentable square feet and is situated on
4.9 acres. This Property is constructed of structural steel framing with a
brick and glass exterior. As of September 30, 1996, this Property was 83.8%
leased to six tenants with an average annualized existing base rent of
$17.03 per square foot. The largest tenant in this Property, Geraghty
Miller, occupies 10,840 square feet under a lease scheduled to expire in
November 1997.
3333, 3331, 3329 Street Road -- Greenwood Square (Acquisition Properties)
The Greenwood Square Property consists of three multi-story office
buildings completed from 1985 through 1988. 3333 Street Road is a three
story office building, containing 60,408 net rentable square feet situated
on 3.4 acres; 3331 Street Road is a four story office building, containing
80,521 net rentable square feet situated on 4.5 acres; and 3329 Street Road
is a two story office building, containing 25,000 net rentable square feet
situated on 1.5 acres. All three buildings are constructed of structural
steel with brick and glass exteriors. As of September 30, 1996 this
Property was 92.1% leased to 30 tenants with an average annualized existing
gross rent of $16.54 per square foot. The largest tenant in this Property,
Waste Management, occupies 45,764 net rentable square feet under a lease
scheduled to expire in March 1997.
KING OF PRUSSIA/VALLEY FORGE MARKET
The Company is acquiring one building in the King of Prussia/Valley Forge
market. As of June 30, 1996, this submarket contained approximately 9.3 million
square feet of office space. As of June 30, 1996, vacancy in this submarket was
approximately 10.8%, down from 17.6% at June 30, 1995. Leasing activity in this
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submarket for the six months ended June 30, 1996 was 586,438 net rentable square
feet. Absorption in this submarket for the six months ended June 30, 1996 was
939,237 net rentable square feet compared to 167,504 net rentable square feet
for the comparable period during 1995.
500 North Gulph Road (an Acquisition Property)
500 North Gulph Road is a five story office building completed in
1979. This Property contains 92,851 net rentable square feet and is
situated on 5.3 acres. This Property is constructed of structural steel
framing with a pre-cast concrete exterior. As of September 30, 1996, this
Property was 86.1% leased to 13 tenants with an average annualized existing
gross rent of $16.51 per square foot. The largest tenants in this Property
are Strohl Systems and Transition Software, which are related companies and
occupy 26,378 net rentable square feet under two separate leases scheduled
to expire in October 1999 and September 2000.
SOUTHERN NEW JERSEY
The Southern New Jersey market is divided into two principal submarket
areas: Burlington County and Camden County.
BURLINGTON COUNTY SUBMARKET
The Company owns three Initial Properties and will acquire one Property in
Burlington County. This submarket contains approximately 4.6 million net
rentable square feet of commercial office space. As of June 30, 1996, total
office vacancy was 19.3% down from 21.2% as of June 30, 1995 in this submarket.
However, the vacancy rate of Class A space as of June 30, 1996 was 12.6%
compared to the market average of 19.3%. Leasing activity within the Burlington
County market was approximately 93,000 square feet per quarter or 371,000 square
feet per annum during the 18-month period ended June 30, 1996.
One Greentree Centre
One Greentree Centre is a three story midrise office building
completed in 1982. This Property contains 55,838 net rentable square feet
and is situated on 4.2 acres. This Property is constructed of structural
steel framing with a brick exterior. The lobby in this Property was
renovated in 1996. As of September 30, 1996, this Property was 100% leased
to fourteen tenants at an average annualized base rent per leased square
foot of $16.07 full service. The largest tenant in this Property is
American Executive Centers, which occupies 16,853 square feet under a lease
scheduled to expire in January, 2006. Aggregate square footage of leases
scheduled to expire in 1996, 1997 and 1998 represent 7%, 28% and 9% of this
Property's total net rentable square footage.
Two Greentree Centre
Two Greentree Centre is a three story midrise office building
completed in 1983. This Property contains 56,075 net rentable square feet
and is situated on 4.2 acres. This Property is a sister building to One
Greentree Center and is constructed of structural steel framing with a
brick exterior. The lobby was renovated in 1996. As of September 30, 1996,
this Property was 100% leased to eleven tenants at an average annualized
base rent per lease square foot of $16.02 full service. The largest tenant
in this Property is Merrill, Lynch, Pierce, Fenner and Smith, which
occupies 12,672 net rentable square feet under a lease scheduled to expire
in November 2005. Aggregate square footage of leases scheduled to expire in
1996, 1997 and 1998 represent 0%, 30%, and 5%, respectively, of this
Property's total net rentable square feet.
Three Greentree Centre
Three Greentree Centre is a four story midrise office building
completed in 1984. This Property contains 69,101 net rentable square feet
and is situated on 5.4 acres. This Property is constructed of structural
steel framing with a brick and dryvit exterior. The two story lobby was
renovated in 1996. As of
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September 30, 1996, this Property was 96% leased to eight tenants at an
average annualized base rent per lease square foot of $16.41 full service.
The largest tenant at the Property is Parker, McKay, Criscuolo &
Associates, a regional law firm, which occupies 25,905 net rentable square
feet under a lease scheduled to expire in May 2001. Aggregate square
footage of leases scheduled to expire in 1996, 1997 and 1998 represent 0%,
25% and 0%, respectively, of this Property's total net rentable square
feet.
8000 Lincoln Drive (an Acquisition Property)
8000 Lincoln Drive is a five story office building completed in 1983.
This Property contains 54,923 net rentable square feet and is situated on
7.5 acres. This Property is constructed of structural steel framing with a
pre-cast concrete exterior. As of September 30, 1996, this Property was
100% leased for occupancy by January 1997 to two tenants with an average
annualized existing base rent of $17.13 per square foot. The largest tenant
in this Property will be Computer Science Corp. occupying 36,830 net
rentable square feet under a lease scheduled to expire in November 2001,
provided that, Computer Science may terminate the lease at November 1999
with a penalty payment.
C&W identified 15 office buildings aggregating approximately 1.3 million
net rentable square feet that, as of June 30, 1996, compete directly with the
Greentree Centre Properties. As of June 30, 1996, these competing properties
were approximately 22% vacant, with rental rates ranging from $19.50 to $22.00,
per square foot for leases with full operating expenses included.
CAMDEN COUNTY SUBMARKET
The Company owns one Property in Camden County. This submarket contains
approximately 4.8 million net rentable square feet of commercial office space.
At June 30, 1996, the vacancy rate was approximately 20%. This high vacancy rate
is primarily attributable to vacancy rates of 18.4% and 21% on Class B and Class
C space, respectively. At June 30, 1996, the vacancy rate for Class A office
space was 9.0%. While there has been negative absorption in this submarket in
the 18-month period ended June 30, 1996, C&W has reported that during the
three-month period ended June 30, 1996, absorption has been a positive 112,572
square feet. In addition, during the 18-month period ended June 30, 1996,
leasing activity in this submarket has approximated 70,000 square feet per
quarter or 280,000 square feet annually.
457 Haddonfield Road
457 Haddonfield Road (known as the LibertyView Building) is a seven
story midrise office building completed in 1990. This Property contains
121,737 net rentable square feet and is situated on approximately 7 acres.
This Property features a structural steel framing, reinforced concrete
footings with an exterior of precast panels with reflective glass. Key
features in this Property include a two story marble lobby, working
balconies on the upper floors, permanent neon lighting and dramatic views
of Center City Philadelphia. As of September 30, 1996, this Property was
83% leased to twelve tenants at an average annualized existing rental rate
of $18.63 per square foot. The largest tenant of this Property is HIP
Health of N.J., which occupies 37,515 net rentable square feet under a
lease scheduled to expire in December 2007.
NORTHERN SUBURBAN WILMINGTON
New Castle County Delaware
The Company is acquiring one building in the Northern Suburban
Wilmington submarket. As of June 30, 1996 the subtotal market contained
approximately 3.0 net rentable million square feet of commercial office
space, with a vacancy rate of 12.6% which is down from 15.7% at June 30,
1995. C&W has identified eleven Class A Buildings aggregating approximately
1.2 million net rentable square feet which are directly competitive with
the Company's Property in this submarket. As of June 30, 1996, vacancy in
the competitive submarket product was approximately 3.7%. The average
rental rate for comparable properties in the submarket for Class A space is
$20.50 per net rentable square foot. Leasing
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activity in the submarket during the eighteen months period ended June 30,
1996 has averaged 544,000 net rentable square feet on an annualized basis,
while annual net absorption of office space has averaged approximately
350,000 net rentable square feet.
One Righter Parkway -- Delaware Corporate Center I (an Acquisition
Property)
Delaware Corporate Center I is a three story office building completed
in 1989. This Property contains 104,828 net rentable square feet and is
situated on 3 acres. This Property is constructed of structural steel
framing and precast concrete exterior. As of September 30, 1996, this
Property was 100% leased to six tenants with an average annualized existing
base rent of $19.30 per square foot. The largest tenant in this Property,
Kimberly Clark, occupies 93,014 net rentable square feet under a lease
scheduled to expire in December 2005. Delaware Corporate Center I is a
ground leased property. See "-- Ground Lease." Fee ownership is held by
Woodlawn Trustees, Incorporated, and the ground lessee's interest will be
acquired by the Operating Partnership from the seller. Fifty-one years
remain on the original term of the ground lease and the ground lessee has
the option to extend the term for two consecutive ten-year terms. The
ground lessee holds a right of first refusal to acquire the fee interest in
the property. The property is ground leased on a triple-net basis, with the
ground lessee assuming all carrying charges respecting the property, in
addition to payment of base rent.
OTHER MARKETS
168 Franklin Corner Road
168 Franklin Corner Road is located in Lawrenceville, Mercer County,
New Jersey and was completed in 1976. This Property contains 32,000 net
rentable square feet. As of September 30, 1996, this Property was 55%
leased to six tenants at an average annualized existing rental rate of
$12.31 per leased square foot.
Twin Forks Office Park
Twin Forks Office Park is located in Raleigh, North Carolina. This
Property was completed in 1982 and contains 73,339 net rentable square
feet. As of September 30, 1996 this Property was 100% leased to 46 tenants
at an average annualized existing rental rate of $14.25 per leased square
foot. The primary tenant in this Property is GE Mortgage, occupying 19,373
square feet (26% of the total net rentable square feet at the Property)
under a lease that expired in October 1996. GE Mortgage has announced its
intention to vacate and to relocate its Raleigh operations to Cherry Hill,
NJ. Since this announcement the Company has actively been marketing this
space and, as of September 30, 1996, has re-leased 8,801 of the total
19,373 square feet to three tenants at an annualized existing rental rate
of $15.25 per square foot.
COMPETITION
The Company competes with other owners and developers that have greater
resources and more experience than the Company. Within the Suburban Philadelphia
Office and Industrial Market, the Company's office and industrial Properties
compete generally with properties owned by other real estate developers and
institutions principally on the basis of price, property quality and location,
especially proximity to major area highways, suburban residential areas, and
access to the central Philadelphia business district and the northeast corridor
business communities of New York, Baltimore and Washington. The Company's
industrial Properties compete principally with buildings owned by other local
developers largely on the basis of services provided and access to
transportation, both highway and rail, and access to Northeast corridor and
national markets.
ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of certain hazardous or toxic
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substances on, in or under such property. Such laws often impose such liability
without regard to whether the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's or operator's ability to sell or rent such property or to
borrow using such property as collateral. Persons who arrange for the disposal
or treatment of hazardous or toxic wastes may be liable for the costs of removal
or remediation of such wastes at the disposal or treatment facility, regardless
of whether such facility is owned or operated by such person. Certain other
federal, state and local laws, ordinances and regulations may impose liability
on an owner of real property where on-site contamination discharges into waters
of the state, including groundwater, or otherwise affects the beneficial use of
such waters. Other federal, state and local laws, ordinances and regulations
require abatement or removal of certain asbestos-containing materials in the
event of demolition or certain renovations or remodeling and also govern
emissions of asbestos fibers in the air. The operation and subsequent removal of
certain underground storage tanks are also regulated by federal, state and local
laws, ordinances and regulations. In connection with its ownership and operation
of the Properties, the Company could be held liable for the costs of remedial
action with respect to contamination, asbestos-containing materials or tanks or
related claims.
All of the Properties have been subjected to either Phase I environmental
site assessments, or updates of earlier assessments, performed by independent
third parties. Phase I environmental site assessments are intended to evaluate
the environmental condition of, and potential environmental liabilities
associated with, the Property and include a site visit and review of public and
historical records, but involve no soil or groundwater sampling or subsurface
investigation. Such assessments generally consist of an investigation of
environmental conditions of the Properties, including a preliminary
investigation of the Properties and identification of publicly known conditions
concerning properties in the vicinity of the Properties, an investigation as to
the presence of polychlorinated biphenyls and aboveground and underground
storage tanks at the Properties and the preparation and issuance of written
reports. The primary focus of the recent Phase I environmental site assessments
and updates of earlier assessments conducted on the Properties was to identify
any "recognized environmental conditions." These are conditions arising from the
presence or likely presence of hazardous substances or petroleum products that
would present a risk of harm to the public health or environment or that would
be the subject of an enforcement action if brought to the attention of
appropriate governmental agencies, or of third party actions.
Except as discussed below with respect to the Whitelands Property, the
environmental site assessments have not revealed any significant environmental
liability, nor is the Company aware of any environmental liability with respect
to the Properties that the Company's management believes would have a material
adverse effect on the Company. An environmental assessment has identified
environmental contamination of potential concern with respect to the Whitelands
Property (110 Summit Drive). Petroleum products, solvents and heavy metals were
detected in the groundwater. These contaminants are believed to be associated
with debris deposited by others in a quarry formerly located on the Whitelands
Property. The quarry previously appeared on the Comprehensive Environmental
Response Compensation and Liability Information System List, a list maintained
by the United States Environmental Protection Agency (the "EPA") of abandoned,
inactive or uncontrolled hazardous waste sites which may require cleanup. The
EPA conducted a preliminary assessment in 1984 with the result that no further
action was taken. Subsequently, the quarry was removed from the list. While the
Company believes it is unlikely that the Operating Partnership will be required
to undertake remedial action with respect to such contamination, there can be no
assurance in this regard. If the Operating Partnership were required to
undertake remedial action on the Whitelands Property, it has been indemnified
against the cost of such remediation by the seller, SSI, subject to a maximum of
$2,018,000. The term of SSI's indemnity agreement expires on August 22, 2001. If
SSI is unable to fulfill its obligations under its indemnity agreement or if the
Operating Partnership is required to undertake remedial action after the
expiration of the five-year term of the agreement, the costs of such remediation
could be substantial. Because the Company does not believe that any remediation
at the Whitelands Property is probable, no amounts have been accrued for any
such potential liability.
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No assurance can be given that existing environmental studies with respect
to the Properties reveal all environmental liabilities or that any prior owner
of any such property did not create any material environmental condition not
know to the Company. Moreover, no assurance can be given that: (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Properties will not be
affected by tenants and occupants of the Properties, by the condition of
properties in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
GROUND LEASE
Delaware Corporate Center I (an Acquisition Property) is a ground leased
property. Fee ownership is held by Woodlawn Trustees, Incorporated, and the
ground lessee's interest will be acquired by the Operating Partnership from the
seller. Fifty-one years remain on the original term of the ground lease and the
ground lessee has the option to extend the term for two consecutive ten-year
terms. The ground lessee holds a right of first refusal to acquire the fee
interest in the property. The property is ground leased on a triple-net basis,
with the ground lessee assuming all carrying charges respecting the property, in
addition to payment of base rent which is approximately $109,000 per annum,
subject to certain periodic adjustments.
INSURANCE
The Operating Partnership carries comprehensive liability, fire, extended
coverage and rental loss insurance covering all of the Properties, with policy
specifications and insured limits which the Company believes are adequate and
appropriate under the circumstances. There are, however, certain types of losses
that are not generally insured because they are either uninsurable or not
economically feasible to insure. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in the
Property, as well as the anticipated future revenues from the Property and, in
the case of debt which is with recourse to the Company, would remain obligated
for any mortgage debt or other financial obligations related to the Property.
Any such loss would adversely affect the Company. Moreover, the Company will
generally be liable for any unsatisfied obligations other than non-recourse
obligations. Company management believes that the Properties are adequately
insured. No assurance can be given that material losses in excess of insurance
proceeds will not occur in the future.
CERTAIN PROPERTY TAX INFORMATION
The aggregate real estate property tax obligations paid by the Company
(with or without tenant reimbursement) for calendar 1995 were approximately
$391,000. The aggregate real estate property tax obligations paid by SSI and TNC
(with or without tenant reimbursement) for calendar 1995 with respect to the
SSI/TNC Properties were approximately $968,000. These amounts do not include
real estate property taxes paid directly by tenants. On a pro forma basis, more
than 95.3% of the aggregate annualized base rent at the Properties as of
September 30, 1996 is generated by leases which contain provisions requiring
tenants to pay as additional rent their proportionate share of any real estate
taxes or increases in real estate taxes over base amounts.
EMPLOYEES
As of September 30, 1996, the Company employed 26 persons, including four
executive officers.
LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation nor, to
the Company's knowledge, is any material litigation currently threatened against
the Company, other than routine litigation arising in the ordinary course of
business, substantially all of which is expected to be covered by liability
insurance.
MORTGAGE DEBT AND CREDIT FACILITY
Mortgage Indebtedness
The following table sets forth the Company's mortgage indebtedness that
will remain outstanding after the closing of the Offering and the Concurrent
Investments and the application of the use of proceeds therefrom. In addition to
mortgage indebtedness listed below, the Credit Facility is expected to be
secured by
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cross-collateralized mortgages and assignments and rents on all Properties,
except for those set forth in the table below.
<TABLE>
<CAPTION>
PROPERTIES -- INDEBTEDNESS
(DOLLARS IN THOUSANDS)
PRINCIPAL BALANCE INTEREST
AS OF RATE AT ANNUAL DEBT MATURITY PREPAYMENT
PROPERTY/LOCATION SEPTEMBER 30, 1996 SEPTEMBER 30, 1996 SERVICE(1) DATE PREMIUMS
- --------------------------- ------------------ ------------------ ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Horsham Business Center
Horsham, PA
650 Dresher Road(2)...... $ 2,500 8.00% $ 237 8/1998 None
After
2/1/97
Oaklands Corporate Center
Exton, PA
486 Thomas Jones Way(3)..
468 Creamery Way(3)...... 6,427 8.00% 638 2/1998 None
Whitelands Business Park
Exton, PA
110 Summit Drive(4)...... 1,583 9.25% 220 4/1997 None
Iron Run Industrial Park
Allentown, PA
7310 Tilghman Street..... 2,533 9.25% 274 3/2000 (9)
6575 Snowdrift Road...... 2,348 8.00% 230 2/1998 None
Greentree Centre
Marlton, New Jersey
One Greentree
Centre(5)(6)
Two Greentree
Centre(5)(6)
Three Greentree
Centre(5)(6) 6,147 9.00% 628 4/2001 (10)
LibertyView
Cherry Hill, NJ
457 Haddonfield
Road(7)(8)............ 8,461 8.00% 339 1/1999 (11)
910 8.00% 0 12/1997
None
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks(6)... $ 2,704 9.00% $ 276 4/2001 (12)
--------- -------
TOTAL MORTGAGE
INDEBTEDNESS............. $ 33,613 $ 2,842
========= =======
</TABLE>
- ---------------
(1) "Annual Debt Service" is calculated for the twelve-month period ending
December 31, 1996. For loans that bear interest at a variable rate, the
rates in effect at September 30, 1996 have been assumed to remain constant
for the balance of 1996.
(2) On July 31, 1996, this loan was refinanced by paying the former mortgage
lender $2.4 million in full satisfaction thereof with the partial proceeds
of a new loan from GMAC in the principal amount of $2.5 million. The new
mortgage loan matures on August 1, 1998, bears interest at a variable rate
equal to LIBOR plus 250 basis points and provides for principal
amortization of $4,000 per month during the period September 1, 1997
through July 1, 1998.
(3) Both of these properties secure a single loan.
(4) Interest rate is variable and equal to the prime rate plus 1.0%.
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(5) These properties secure two loans payable to a single lender. The interest
rate was fixed at 9.0% through October 15, 1996 and is currently fixed at
9.31% through April 15, 1998. After April 15, 1998, the interest rate is
reset based upon the mortgage lender's evaluation of such factors as
financial performance and projected risk of the Properties securing such
loan. The mortgage loans are due on April 15, 2001, and the lender has the
right to call the loans at par on April 15, 1998.
(6) The Company has made an application to the lender that, if accepted, would
result in (i) an increase in the principal amount of the Greentree Centre
loan to $7.3 million and the Twin Forks loan to $2.7 million, (ii) a fixed
interest rate of 7.6%, (iii) a maturity date of 5 years from closing, and
(iv) a 20-year amortization of principal.
(7) The $8,461,000 debt was incurred as a result of the acquisition of the
Property on July 19, 1996 and the amount of debt service reflects debt
service from July 19, 1996 through December 31, 1996. Pursuant to the terms
of this loan, the Company has the right to borrow up to approximately $1.4
million to fund tenant improvements and leasing commissions.
(8) The $910,000 of debt was incurred as a result of the acquisition of the
Property on July 19, 1996. The mortgage note payable is in the principal
amount of $1.0 million, is due in December 1997 and does not bear interest.
The Company recorded a $104,000 adjustment to the purchase price and a
corresponding reduction in debt to reflect the fair value of the note
payable to the seller and will accrue interest expense to the date of
maturity.
(9) Four percent through December 31, 1996, which prepayment penalty is reduced
by 1% for each subsequent year through 1999.
(10) This loan may not be prepaid unless the Twin Forks loan is also prepaid.
The prepayment penalty equals greater of 1% of principal amount prepaid or
a yield maintenance premium.
(11) One percent of any portion of the original acquisition portion of the loan
being prepaid.
(12) This loan may be prepaid without prepayment of the loan secured by One
Greentree Centre, Two Greentree Centre and Three Greentree Centre, provided
certain loan-to-value ratios and coverage tests with regard to the
Greentree Centre loan are satisfied and upon payment of a premium equal to
the greater of 1% of the principal amount prepaid or a yield maintenance
premium.
CREDIT FACILITY
The Company and Operating Partnership have obtained a commitment from Smith
Barney Mortgage Capital Group, Inc. and NationsBank, N.A. for a two year, $80
million secured revolving Credit Facility. The Credit Facility will be used to
refinance existing indebtedness, fund acquisitions and new development projects,
and for general working capital purposes, including capital expenditures and
tenant improvements. The amount available to be borrowed under the Credit
Facility will be reduced by the amount of the letters of credit issued by the
lenders for as long as such letters of credit are outstanding. The Credit
Facility will be recourse to the Company and the Operating Partnership and will
be secured by, among other items, cross-collateralized and cross-defaulted first
mortgage liens on approximately 25 Properties, owned directly or indirectly by
the Company, the Operating Partnership or their representative subsidiaries.
The Credit Facility will bear interest at a per annum floating rate equal
to the 30, 60, or 90-day LIBOR, plus 175 basis points. The Credit Facility will
require monthly payments of interest only, with all outstanding advances and all
accrued but unpaid interest due 2 years from the closing of the Credit Facility.
A fee equal to 0.75% of the maximum amount available under the Credit Facility
will be paid to the lenders in respect of the Credit Facility at closing. In
addition, a fee of 0.25% per annum (0.125% per annum until 4/1/97) on the unused
amount of the Credit Facility will be payable quarterly in arrears. An annual
fee in the amount of $35,000 will be payable annually in advance to NationsBank,
N.A. as compensation for administration of the Credit Facility. The Credit
Facility will carry minimum debt service coverage, fixed charge,
debt-to-tangible net worth ratios and other financial covenants and tests, and
will require payment of prepayment premiums in certain instances.
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<PAGE> 109
Closing of the Credit Facility is subject to satisfactory completion of
this Offering, the negotiation and execution of a definitive Credit Facility
agreement and related documentation, and other customary closing conditions.
OPTION PROPERTIES
At the closing of the SSI/TNC Transaction, the Operating Partnership
acquired an option from an affiliate of TNC (C/N Horsham Towne Limited
Partnership) entitling the Company to acquire, at its discretion, the four
Option Properties at any time during the two-year period ending August 22, 1998
(subject to two extensions of one year each). The Operating Partnership may not
exercise its option for less than all of the Option Properties. The parties have
agreed that the purchase price payable by the Operating Partnership upon
exercise of its option will consist of $10.00 in excess of the mortgage debt
encumbering the Option Properties at the time of exercise (which, as of
September 30, 1996, aggregated $21.0 million, including approximately $4.2
million of accrued debt and unpaid interest). The right of the Operating
Partnership to exercise its option to acquire the Option Properties is
conditioned on receipt of consent of the mortgage lender for the Option
Properties. As of the date hereof, no lender consent has been requested, and no
determination to seek any such consent has been made. There can be no assurance
that any of the Option Properties will be acquired.
The following table summarizes certain information with respect to the
Option Properties:
<TABLE>
<CAPTION>
AVERAGE TOTAL
TOTAL BASE RENT
PERCENTAGE BASE RENT PLUS EXPENSE
LEASED AS OF FOR THE TWELVE RECOVERIES PER
NET SEPTEMBER MONTHS ENDED RENTABLE SQUARE
YEAR RENTABLE 30, SEPTEMBER 30, 1996 FOOT LEASED AT
PROPERTY/LOCATION BUILT SQUARE FEET 1996(1) (000'S)(2) SEPTEMBER 30, 1996(3)
- ---------------------------------------- ----- ----------- ------------ --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
HORSHAM BUSINESS CENTER HORSHAM, PA
255 Business Center Drive............. 1987 50,616 100% $ 524 $ 14.60
355 Business Center Drive............. 1987 26,637 88% 139 8.48
455 Business Center Drive............. 1988 51,505 94% 420 11.97
555 Business Center Drive............. 1988 30,122 99% 340 16.26
------- -------
158,880 $ 1,423
======= =======
<CAPTION>
TENANTS LEASING 10% OR MORE
OF RENTABLE SQUARE FOOTAGE PER
PROPERTY AS OF SEPTEMBER 30,
PROPERTY/LOCATION 1996 AND LEASE EXPIRATION DATE
- ---------------------------------------- ------------------------------
<S> <<C>
HORSHAM BUSINESS CENTER HORSHAM, PA
255 Business Center Drive............. Stroehmann (38%) - 6/99;
Great Expectations
(23%) - 3/97;
GMAC (13%) - 9/97-9/01;
Buckman Van Buren (21%) - 2/97
355 Business Center Drive............. Anthem Electronic
(34%) - 9/01;
Seimens Printing Sys.
(22%) - 8/98;
GE Capital (16%) - 9/01
455 Business Center Drive............. Astea (65%) - 10/02;
Letven/Diccicco (29%) - 7/00
555 Business Center Drive............. GMAC (77%) - 9/99;
First American Home Care
(13%) - 4/00
</TABLE>
- ---------------
(1) Based on all leases dated on or before September 30, 1996.
(2) "Total Base Rent" for the twelve months ended June 30, 1996 represents base
rents excluding tenant reimbursements calculated in accordance with
generally accepted accounting principles determined on a straight-line
basis. Tenant reimbursements generally include payment of real estate taxes,
operating expenses and escalations and common area maintenance and utility
charges.
(3) Represents Total Base Rent for the twelve months ended September 30, 1996,
plus tenant reimbursements for the twelve months ended September 30, 1996,
divided by net rentable square feet leased.
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<PAGE> 110
AGGREGATE TAX BASIS -- INITIAL PROPERTIES
The following table sets forth the aggregate tax basis of the Initial
Properties as of December 31, 1995 for federal income tax purposes:
<TABLE>
<CAPTION>
31.5 19
AGGREGATE 40 YEAR 39 YEAR YEAR YEAR 19 YEAR 18 YEAR 7 YEAR 5 YEAR
SUBMARKET/PROPERTY TAX BASIS LAND MACRS(1) MACRS(1) MACRS(1) ACRS(2) STRAIGHT-LINE STRAIGHT-LINE MACRS(3) ACRS(2)
- ------------------- --------- ------ ------- ------- ------- ------ ------------- ------------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HORSHAM/WILLOW
GROVE/JENKINTOWN,
PA
650 Dresher
Road........... $ 2,702 $ 413 -- -- -- $1,158 -- $ 967 $ 120 $ 44
1155 Business
Center Drive... 5,434 943 -- $4,491 -- -- -- -- -- --
500 Enterprise
Road........... 4,981 814 -- 4,167 -- -- -- -- -- --
One Progress
Avenue......... 3,687 803 -- 2,884 -- -- -- -- -- --
SOUTHERN ROUTE 202
CORRIDOR, PA
456 Creamery
Way............ 1,865 311 -- 1,554 -- -- -- -- -- --
486 Thomas Jones
Way............ 4,607 467 -- 322 $3,818 -- -- -- -- --
468 Creamery
Way............ 2,370 253 -- 118 1,999 -- -- -- -- --
WHITELANDS BUSINESS
PARK
110 Summit
Drive.......... 2,727 343 -- -- 183 888 1,039 -- 265 9
BLUE BELL/PLYMOUTH
MEETING/FORT
WASHINGTON, PA
2240/50 Butler
Pike........... 4,995 448 -- -- 275 903 -- 2,693 548 128
120 West
Germantown
Pike........... 3,558 379 -- -- 97 2,794 -- -- 283 5
140 West
Germantown
Pike........... 2,867 318 -- -- 509 1,723 -- -- 292 25
2260 Butler
Pike........... 3,023 381 -- -- 496 1,962 -- -- 159 25
MAIN LINE, PA
16 Campus
Boulevard...... 6,178 1,082 -- 5,096 -- -- -- -- -- --
18 Campus
Boulevard...... 3,414 692 -- 2,722 -- -- -- -- -- --
LEHIGH VALLEY, PA
7310 Tilghman
Street......... 2,789 213 -- -- 414 804 897 -- 437 24
7248 Tilghman
Street......... 2,519 371 -- -- 2,148 -- -- -- -- --
6575 Snowdrift
Road........... 3,184 245 -- 245 2,694 -- -- -- -- --
1510 Gehman
Road........... 4,998 526 -- 4,472 -- -- -- -- -- --
BURLINGTON COUNTY,
NJ
One Greentree
Centre......... 7,436 751 401 -- 617 5,667 -- -- -- --
Two Greentree
Centre......... 8,030 744 897 -- 594 5,795 -- -- -- --
Three Greentree
Centre......... 10,170 987 1,134 -- 423 7,626 -- -- -- --
CAMDEN COUNTY, NJ
457 Haddonfield
Road(4)........ 0 -- -- -- -- -- -- -- -- --
OTHER MARKETS
168 Franklin
Corner Road,
Lawrenceville,
NJ............. 3,199 481 -- 2,718 -- -- -- -- -- --
Twin Forks Office
Park
5910-6090 Six
Forks
Raleigh, NC...... 7,779 2,487 961 -- 537 3,794 -- -- -- --
</TABLE>
- ---------------
(1) Modified accelerated cost recovery system -- straight line.
(2) Accelerated cost recovery system.
(3) Modified accelerated cost recovery system -- accelerated.
(4) Acquired in July 1996.
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<PAGE> 111
C&W MID-YEAR REPORT AND C&W MARKET ANALYSES
The C&W Market Analyses were prepared for the Company by Cushman &
Wakefield of Pennsylvania, Inc., which is a real estate service firm with
significant experience and expertise relating to the Suburban Philadelphia
Office and Industrial Market and the various submarkets therein. The information
in the C&W Mid-Year Report and C&W Market Analyses reflect data available at
June 30, 1996 and August 1, 1996, respectively, and do not reflect data or
changes subsequent to those dates. The information contained in the C&W Mid-Year
Report and C&W Market Analyses have been gathered by C&W from sources assumed to
be reliable, including publicly available records. Because records of all
transactions are not readily available, the information contained in the C&W
Mid-Year Report and C&W Market Analyses may not reflect all transactions
occurring in the geographic area discussed in the C&W Mid-Year Report and C&W
Market Analyses. In addition, transactions that are reported may not be
described accurately or completely in the publicly available records. C&W shall
not be responsible for and does not warrant the accuracy or completeness of any
such information derived from such publicly available records (or information
relating to transactions that were not reported).
In connection with the C&W Mid-Year Report and C&W Market Analyses, C&W
made numerous assumptions with respect to industry performance, general business
and economic conditions, and other matters. Any estimates or approximations
contained therein could reasonably be subject to different interpretations by
other parties. Because predictions of future events are inherently subject to
uncertainty, none of C&W, the Company or any other person can assume that such
predicted rental rates, absorption or other events will occur as outlined or
predicted in the C&W Mid-Year Report or C&W Market Analyses. Reported asking
rental rates of properties, replacement cost rents or estimated replacement
costs do not purport to necessarily reflect the rental rates at which properties
may actually be rented, actual rents required to support new development or the
actual cost of replacement. In many instances, asking rents and actual rental
rates differ significantly.
Changes in local, national and international economic conditions will
affect the markets described in the C&W Mid-Year Report and C&W Market Analyses.
Therefore, C&W can give no assurance that occupancy and absorption levels and
rental rates as of the date of the C&W Mid-Year Report or C&W Market Analyses
will continue or that such occupancy levels and rental rates will be attained at
any time in the future. Forecasts of absorption rates, rental activity,
replacement cost rents and replacement costs are C&W's estimates as of the dates
of the C&W Mid-Year Report and C&W Market Analyses. Actual future market
conditions may differ materially from the forecasts and projections contained
therein.
C&W is a part of a national network of affiliated companies providing real
estate services. As such, from time to time, C&W and its affiliates have
provided and in the future may provide real estate related services, including
brokerage and leasing agent services, to the Company or its principals, or may
represent the Company, its principals or others doing business with the Company.
C&W received compensation of $21,000 from the Company in connection with C&W's
preparation of the C&W Market Analyses.
STRUCTURE OF THE COMPANY
The Company carries on its activities directly and through subsidiaries, as
described below. Currently, the Company holds fee title to one of the Initial
Properties and holds interests in two partnerships (the Operating Partnership
and BRP) that, in turn, either own Initial Properties in fee or hold interests
in partnerships that own Initial Properties in fee. In addition, the Company has
contributed the SERS Properties to the Operating Partnership in exchange for
1,606,060 GP Units and intends to contribute the net proceeds from the Offering
and the Concurrent Investments to the Operating Partnership in exchange for
5,345,453 GP Units.
OPERATING PARTNERSHIP
The Operating Partnership owns fee title to six of the Initial Properties
and the nine SERS Properties and owns partnership interests in partnerships that
own 17 Initial Properties. The four additional Acquisition Properties will be
acquired directly by the Operating Partnership. The Company is the sole general
partner of the Operating Partnership, which was formed in connection with the
SSI/TNC Transaction as a vehicle to: (i) consolidate the Company's real estate
holdings with those of SSI and TNC; (ii) facilitate future
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<PAGE> 112
acquisitions; (iii) enable the Company to comply with certain requirements under
the Code relating to REITs; and (iv) preserve certain tax advantages to SSI and
TNC.
As the sole general partner of the Operating Partnership, the Company
generally has the exclusive power under the Partnership Agreement to manage and
conduct the business of the Operating Partnership, subject to certain
limitations. See "Operating Partnership Agreement -- Management."
The Company's interest in the Operating Partnership will entitle it to
share in cash distributions from, and in profits and losses of, the Operating
Partnership. On a pro forma basis, the Company will hold 7,723,514 GP Units and
will be issued an additional 85,400 GP Units automatically in August 1997 in
respect of its contribution to the Operating Partnership of its remaining
interest in the BRP Partnership, and the limited partners of the Operating
Partnership will hold approximately 509,856 Class A Units (after giving effect
to the issuance of 44,322 Units in exchange for the Residual Interests). Each of
the Class A Units will be redeemable for cash or, at the option of the Company,
will be convertible into one Common Share. With each conversion of Class A Units
into Common Shares, the Company's percentage interest in the Operating
Partnership will increase. See "Operating Partnership Agreement -- Number, Class
and Owner of Units."
BRP
BRP is a general partnership that holds fee title to four of the Initial
Properties. The Company, the Operating Partnership and a third party are the
general partners of BRP, although the Company and the Operating Partnership
collectively hold a 98% interest in the profits and a 70% interest in the
capital of BRP. In addition, the Company and the Operating Partnership have the
exclusive power under the BRP Partnership Agreement to manage and conduct the
business of BRP. See "BRP General Partnership Agreement -- Management."
OWNERSHIP
The Company owns the Initial Properties directly and through its interests
in general and limited partnerships, as described below.
Fee title to the Property at 457 Haddonfield Road (LibertyView) is held by
the Company.
Fee title to each of One Greentree Centre, Two Greentree Centre and Three
Greentree Centre and Twin Forks Office Park is held by BRP.
Fee title to the Property at 108 Franklin Corner Road is held by a limited
partnership owned by the Operating Partnership and a subsidiary of the Company.
Fee title to the Properties at each of 7248 Tilghman, 6575 Snowdrift Road, One
Progress Avenue, 500 Enterprise Road, 1510 Gehman Road, 120 West Germantown
Pike, 18 Campus Boulevard, 456 Creamery Way, 468 Creamery Way and 486 Thomas
Jones Way is held by limited partnerships in which a subsidiary of the Company
and the Operating Partnership collectively own a 99% interest in the cash flow
and profits and an 89% interest in the capital in such partnership. The
Operating Partnership will be obligated to acquire the residual 1% cash flow and
profits interest and 11% capital interest in such partnership by September 1999
in exchange for 44,322 Units. Fee title to the Property at 16 Campus Boulevard
is held by a limited partnership (the "Newtech Partnership") in which a
subsidiary of the Company and the Operating Partnership collectively own a 64%
interest in the cash flow and profits and an 89% interest in the capital in such
partnership. The Operating Partnership will be required to acquire an additional
1% cash flow and profits interest and 11% capital interest by September 1999. An
affiliate of a tenant, N.E. Leasing, is a limited partner in Newtech Partnership
and is entitled to 35% of the residual cash flow of Newtech Partnership.
"Residual Cash Flow" means (i) with respect to operating cash flow, cash flow
remaining after the payment of debt service, the establishment of reserves and
payment of a 10% return on invested equity and (ii) with respect to cash flow
from the sale of 16 Campus Boulevard, the cash remaining after the payment of
all debt, the establishment of reserves, payment of a 10% return on invested
equity and return of the invested equity.
Fee title to the Properties at each of 650 Dresher Road, 7310 Tilghman
Street, 2240/50 Butler Pike, 2260 Butler Pike, 140 West Germantown Pike and 110
Summit Drive is held directly by the Operating
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<PAGE> 113
Partnership. Fee title to the Property at 1155 Business Center Drive is held by
a limited partnership indirectly owned by the Operating Partnership and a
wholly-owned subsidiary of the Company.
MANAGEMENT COMPANY
The Company conducts its real estate management services business through
the Management Company. The Company manages all of the Initial Properties
located within the Market through the Management Company; the Twin Forks
Building, located in North Carolina, is managed for the Company by an
unaffiliated third party. Through the Management Company, the Company also
manages properties on behalf of unaffiliated third parties. As of September 30,
1996, the Management Company managed properties containing an aggregate of
approximately 2.0 million net rentable square feet, of which approximately 1.3
million net rentable square feet related to Initial Properties owned by the
Company, 159,000 net rentable square feet related to the Option Properties and
approximately 575,000 net rentable square feet related to office properties
managed on behalf of third parties. The Company, through the Management Company,
will manage each Acquisition Property following its acquisition thereof. Through
its ownership of preferred stock and common stock of the Management Company, the
Operating Partnership is entitled to receive 95% of amounts paid as dividends by
the Management Company.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of the Company. These policies have been determined by the Company's
Board of Trustees and may be amended or revised from time to time by the Board
of Trustees without a vote of shareholders. No assurance can be given that the
Company's investment objectives will be attained or that the value of the
Company will not decrease.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. The primary
business objective of the Company is to realize and maximize cash flow and to
increase shareholder value by: (i) optimizing cash flow from the Properties
through continued active property management and prudent operating strategies;
(ii) acquiring Class A suburban office and industrial properties and/or
portfolios of such properties located in the Market and surrounding areas at
prices that are below replacement cost and at yields which exceed the Company's
cost of capital; (iii) redeveloping and improving acquired properties and, to a
lesser extent, developing build-to-suit properties as opportunities arise; (iv)
generating third party fee-related revenue; and (v) operating within a
conservative capital structure with financing policies that allow for continued
growth. For a discussion of the Properties and the Company's acquisition and
other strategic objectives, see "The Company," "Business and Growth Strategies"
and "Business and Properties."
Thirty-four of the 37 Properties are located in the Suburban Philadelphia
Office and Industrial Market, and the Company expects that future developments
and acquisitions are likely to continue to be made primarily in the Market. The
Company may, however, develop or acquire properties elsewhere if the Board of
Trustees determines that such developments or acquisitions would be desirable.
Future investments are not limited by property type, although the Company
expects that it will invest principally in suburban office and industrial
properties. The Company will not have any limit on the amount or percentage of
its assets invested in one property.
The Company may develop, purchase or lease income-producing properties for
long-term investment, expand and improve the Properties presently owned or other
properties purchased, or sell such properties, in whole or in part, when
circumstances warrant. Although there is no limitation on the types of
development activities that the Company may undertake, the Company expects that
its development activities will generally be on a build-to-suit basis for
particular tenants, or where a significant portion of the building is pre-leased
before construction begins. The Company may also participate with other entities
in property ownership through joint ventures or other types of co-ownership.
Equity investments may be subject to existing or future mortgage financing and
other indebtedness that will have priority over the equity interests in the
Company.
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<PAGE> 114
Securities of or Interests in Entities Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage of ownership limitations
and gross income tests necessary for REIT qualification, the Company also may
invest in securities of other REITs, other entities engaged in real estate
activities or securities of other issuers. The Company may enter into joint
ventures or partnerships for the purpose of obtaining an equity interest in a
particular property in accordance with the Company's investment policies. The
Company does not currently intend to invest in the securities of other issuers
except in connection with acquisitions of indirect interests in properties
(normally limited partnership interests in special purpose partnerships owning
properties).
Investments in Real Estate Mortgages. While the Company's current
portfolio consists of, and the Company's business objectives emphasize, equity
investments in commercial real estate, the Company may, in the discretion of the
Board of Trustees, invest in other types of equity real estate investments,
mortgages and other real estate interests. The Company does not presently intend
to invest to a significant extent in mortgages or deeds of trust, but may invest
in participating or convertible mortgages if the Company concludes that it may
benefit from the cash flow or any appreciation in the value of the property.
Investment through the Operating Partnership. The Company has made no
determination to conduct all of its activities through the Operating
Partnership. As of the date hereof, the Company owns one Property, the
LibertyView Building, directly and owns the balance of the Initial Properties
and the SERS Properties indirectly both through the Operating Partnership and
through its residual interest in BRP (which residual interest will be
automatically transferred to the Operating Partnership on August 23, 1997).
Although the Partnership Agreement of the Operating Partnership contains no
provision restricting the Company's ability to acquire additional properties
outside the Operating Partnership, the Partnership Agreement provides that if
the Company acquires additional properties outside the Operating Partnership,
the percentage of administrative fees of the Company allocated to the Operating
Partnership will be reduced to an amount that is fair and equitable under the
circumstances, as determined by the Company with the consent of the holders of a
majority of the outstanding Units. An inability of the Company and holders of
Units to agree upon such an allocation would be subject to resolution through
the arbitration provisions included within the Partnership Agreement. It is
expected that the Operating Partnership will hold title to all of the
Acquisition Properties.
DISPOSITIONS
The Company does not currently intend to dispose of any of the Properties,
although it reserves the right to do so if, based upon management's periodic
review of the Company's portfolio, the Board of Trustees determines that such
action would be in the best interests of the Company. The tax consequences of
the disposition of the Properties may, however, influence the decision of
certain Trustees and executive officers of the Company who hold Units as to the
desirability of a proposed disposition. See "Risk Factors -- Conflicts of
Interest."
FINANCING POLICIES
Upon the closing of the Offering and the Concurrent Investments and the
application of the net proceeds therefrom, the debt-to-total market
capitalization ratio (i.e., the total consolidated debt of the Company as a
percentage of the market value of issued and outstanding Common Shares,
Preferred Shares and Units plus total consolidated debt) of the Company will be
approximately 21.0% (19.8% if the Underwriters' over-allotment option is
exercised in full). This ratio will fluctuate with changes in the price of the
Common Shares (and the issuance of additional Common Shares) and differs from
the debt to book capitalization ratio, which is based upon book values. As the
debt to book capitalization ratio may not reflect the current income potential
of a company's assets and operations, the Company believes that the
debt-to-total market capitalization ratio provides a more appropriate indication
of leverage for a company whose assets are primarily income-producing real
estate.
The Company has adopted a policy to operate with a conservative ratio of
debt-to-total market capitalization of not more than 50%. The Company's
Declaration of Trust and Bylaws do not, however, limit the amount or percentage
of indebtedness that the Company may incur. In addition, the Company may from
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<PAGE> 115
time to time modify its debt policy in light of current economic conditions,
relative costs of debt and equity capital, market values of its properties,
general conditions in the market for debt and equity securities, fluctuations in
the market price of its Common Shares, growth opportunities and other factors.
Accordingly, the Company may increase or decrease its debt-to-market
capitalization ratio beyond the limits described above. To the extent that the
Board of Trustees decides to obtain additional capital, the Company may raise
such capital through additional equity offerings (including offerings of senior
or convertible securities), debt financings or retention of cash flow (subject
to provisions in the Code concerning taxability of undistributed REIT income),
or a combination of these methods. Borrowing may be unsecured or secured by any
or all of the assets of the Company, the Operating Partnership or any existing
or new property-owning partnership and may have full or limited recourse to all
or any portion of the assets of the Company, the Operating Partnership or any
existing or new property-owning partnership. Indebtedness incurred by the
Company may be in the form of bank borrowing, purchase money obligations to
sellers of the properties, publicly or privately placed debt instruments or
financing from institutional investors or other lenders. The proceeds from any
borrowing by the Company may be used for working capital, to refinance existing
indebtedness, to finance acquisition, expansion or development of new properties
and for the payment of distributions. The Company has not established any limit
on the number or amount of mortgages that may be placed on any single property
or on its portfolio as a whole.
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets. The Company has used total market capitalization because it believes
that the book value of its assets (which to a large extent is the depreciated
value of real property, the Company's primary tangible asset) does not
accurately reflect its ability to borrow and to meet debt service requirements.
The market capitalization of the Company, however, is more variable than book
value, and does not necessarily reflect the fair market value of the underlying
assets of the Company at all times. The Company will also consider factors other
than market capitalization in making decisions regarding the incurrence of
indebtedness, such as the purchase price of properties to be acquired with debt
financing, the estimated market value of its properties upon refinancing and the
ability of particular properties and the Company as a whole to generate cash
flow to cover expected debt service.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not
sufficient, access to borrowings) in amounts that the Board of Trustees
determines to be adequate to meet normal contingencies in connection with the
Company's business and investments.
CONFLICT OF INTERESTS POLICIES
Trustees and officers of the Company may be subject to certain conflicts of
interests in fulfilling their responsibilities to the Company. See "Risk
Factors -- Conflicts of Interest." The Company has not adopted any formal or
informal policies intended to eliminate the influence of conflicts of interest.
Under the Company's Declaration of Trust, a transaction effected by the Company
or any entity controlled by the Company in which a Trustee or officer has a
financial interest may only be consummated if the transaction is first approved
by a majority of the Trustees who have no interest in the transaction.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer Common Shares, preferred shares, senior
securities or other capital stock or options to purchase shares in exchange for
property and, to the extent permitted by applicable law, to repurchase or
otherwise acquire its Common Shares or other securities in the open market or
otherwise and may engage in such activities in the future. The Board of Trustees
has no present intention of causing the Company to repurchase any Common Shares.
The Company expects (but is not obligated) to issue Common Shares to holders of
Units in the Operating Partnership upon exercise of their redemption rights. The
Company may issue Preferred Shares from time to time, in one or more series, as
authorized by the Board of Trustees without the need for shareholder approval.
The Company has issued Series A Preferred Shares in the SERS Transaction. The
Series A Preferred Shares so issued are convertible, under certain
circumstances, into
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<PAGE> 116
up to 1,606,060 Common Shares and will be subject to redemption under certain
circumstances upon demand of the holder. See "The Company -- The SERS
Transaction" and "Description of Shares of Beneficial Interest -- Preferred
Shares." The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of issuers, nor has the Company invested in
the securities of issuers (other than the Operating Partnership and its
subsidiaries) for the purposes of exercising control, and does not intend to do
so. The Company intends to operate in a manner that will not subject it to
regulation as an investment company under the Investment Company Act. At all
times, the Company intends to make investments in such a manner as to qualify as
a REIT, unless because of circumstances or changes in the Code (or the Treasury
Regulations), the Board of Trustees determines that it is no longer in the best
interest of the Company to qualify as a REIT. The Company has not made any loans
to third parties, although it may in the future make loans to third parties,
including, without limitation, to joint ventures in which it participates. The
Company's policies with respect to such activities may be reviewed and modified
or amended from time to time by the Company's Board of Trustees without a vote
of the shareholders.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Trustees and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------- --- ------------------------------------------------
<S> <C> <C>
Anthony A. Nichols, Sr. ........... 57 Chairman of the Board and Trustee
Gerard H. Sweeney.................. 40 President, Chief Executive Officer and Trustee
Joseph L. Carboni.................. 60 Trustee
Richard M. Osborne................. 51 Trustee
Warren V. Musser................... 69 Trustee
Walter D'Alessio................... 62 Trustee
Charles P. Pizzi................... 46 Trustee
Brian F. Belcher................... 45 Executive Vice President -- Marketing and
Development
John P. Gallagher.................. 56 Executive Vice President -- Finance
</TABLE>
Each Trustee has been elected to serve for a one-year term expiring at the
1997 annual meeting of shareholders and until the election and qualification of
his successor.
TRUSTEES OF THE COMPANY
The following are biographical summaries of the Trustees of the Company:
ANTHONY A. NICHOLS, SR., Chairman of the Board and Trustee. Mr. Nichols was
elected a Trustee upon the closing of the SSI/TNC Transaction in August 1996.
Mr. Nichols founded TNC through a corporate joint venture with SSI, and has been
its President and Chief Executive Officer since 1982. From 1968 to 1982, Mr.
Nichols was Senior Vice President of Colonial Mortgage Service Company (now GMAC
Mortgage Corporation), a subsidiary of CoreStates Bank, N.A. Mr. Nichols has
been a member of the National Association of Real Estate Investment Trusts
("NAREIT"), a member of the Board of Governors of the Mortgage Banking
Association and Chairman of the Income Loan Committee of the regional Mortgage
Bankers Association. Mr. Nichols also serves on the Board of Directors of
CenterCore Inc. and is a member of the National Association of Industrial and
Office Parks, the Philadelphia Board of Realtors, and the Urban Land Institute.
GERARD H. SWEENEY, President, Chief Executive Officer and Trustee. Mr.
Sweeney was elected a Trustee on February 9, 1996. Mr. Sweeney has served as
President and Chief Executive Officer of the Company since August 8, 1994 and as
President since November 9, 1989. Prior to August 8, 1994, Mr. Sweeney served as
Vice President of LCOR, Incorporated ("LCOR"), a real estate development firm.
Mr. Sweeney was employed by The Linpro Company (a predecessor of LCOR) from 1983
to 1994 and served in several capacities, including Financial Vice President and
General Partner. During this period, Mr. Sweeney had operational and financial
responsibility for a portfolio of office and industrial properties located in
the Market that aggregated approximately 3.9 million net rentable square feet.
These responsibilities encompassed marketing, financing, leasing, and property
and construction management. Mr. Sweeney is a member of NAREIT, the Urban Land
Institute, the American Institute of Certified Public Accountants and the
Pennsylvania Institute of Certified Public Accountants.
JOSEPH L. CARBONI, Trustee. Mr. Carboni was elected a Trustee on May 14,
1991 and served as Chairman of the Board from October 11, 1994 until the closing
of the SSI/TNC Transaction in August 1996. Mr. Carboni has served as President
of JLC Associates, Inc., a commercial and real estate consulting firm since
1990. Prior to 1990, Mr. Carboni was a Senior Vice President of BNE Realty
Credit Corporation.
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<PAGE> 118
RICHARD M. OSBORNE, Trustee. Mr. Osborne was elected a Trustee on February
9, 1996. Mr. Osborne is President and Chief Executive Officer of OSAIR, Inc., a
property developer and manufacturer of industrial gases for pipeline delivery.
Mr. Osborne is a director of Great Lakes Bank, Mentor, Ohio.
WARREN V. MUSSER, Trustee. Mr. Musser was elected a Trustee upon the
closing of the SSI/TNC Transaction in August 1996. He has served as Chairman and
Chief Executive Officer of SSI since 1953. Mr. Musser also serves as the
Chairman of the Board of Directors of Cambridge Technology Partners, Inc., and
is a director of Coherent Communications Systems Corporation and CompuCom
Systems, Inc. Mr. Musser also serves on a variety of civic, educational, and
charitable Boards of Directors, including the Franklin Institute and the Board
of Overseers of the Wharton School of the University of Pennsylvania. He also
serves as Vice President/Development, Cradle of Liberty Council, Boy Scouts of
America and as Vice Chairman of the Technology Council of the Philadelphia
metropolitan area.
WALTER D'ALESSIO, Trustee. Mr. D'Alessio was elected a Trustee upon the
closing of the SSI/TNC Transaction in August 1996. He has served as President
and Chief Executive Officer of Legg Mason Real Estate Services, Inc., a mortgage
banking firm headquartered in Philadelphia, Pennsylvania since 1982. Legg Mason
Real Estate Services, Inc. is a wholly-owned subsidiary of Legg Mason, Inc., the
parent corporation of Legg Mason Wood Walker, Incorporated, one of the
Underwriters of the Offering. Previously, Mr. D'Alessio served as Executive Vice
President of the Philadelphia Industrial Development Corporation and Executive
Director of the Philadelphia Redevelopment Authority. He also serves on the
Board of Directors of the Philadelphia Electric Company, Pennsylvania Blue
Shield and Independence Blue Cross, the Philadelphia Private Industry Council
and the Greater Philadelphia Chamber of Commerce.
CHARLES P. PIZZI, Trustee. Mr. Pizzi was elected a Trustee upon the closing
of the SSI/TNC Transaction in August 1996. Mr. Pizzi has served as President of
the Greater Philadelphia Chamber of Commerce since 1989. Mr. Pizzi also serves
on a variety of civic, educational and charitable Boards of Directors including
the American Chamber of Commerce Executives, Boy Scouts of America (Philadelphia
Council), Drexel University, Greater Philadelphia Chamber of Commerce,
Independence Blue Cross, Pennsylvania Academy of the Fine Arts, Philadelphia
Convention & Visitors Bureau, Temple University School of Business Management,
United Way of Southeastern Pennsylvania, University of Pennsylvania Graduate
School of Education Board of Overseers and the Urban League of Philadelphia.
EXECUTIVE OFFICERS
The following are biographical summaries of the executive officers of the
Company who are not Trustees of the Company:
BRIAN F. BELCHER, Executive Vice President -- Marketing and Development.
Mr. Belcher became an executive of the Company upon the closing of the SSI/TNC
Transaction in August 1996. Mr. Belcher joined TNC in 1982 as Vice President of
Marketing and, from 1986 until completion of the SSI/TNC Transaction, served as
its Executive Vice President. From 1978 to 1982, Mr. Belcher was a marketing
specialist for Evans-Pitcairn Corporation, a real estate development firm. Prior
to that time, Mr. Belcher was a real estate broker with Cushman & Wakefield, a
national real estate firm, in the Philadelphia metropolitan area. Mr. Belcher
previously served as President of the Delaware Valley Chapter of the National
Association of Industrial and Office Parks, and is currently a member of the
Philadelphia Board of Realtors.
JOHN P. GALLAGHER, Executive Vice President -- Finance. Mr. Gallagher
became an executive of the Company upon the closing of the SSI/TNC Transaction
in August 1996. Mr. Gallagher served as Chief Financial Officer of TNC from 1989
until completion of the SSI/TNC Transaction. From 1983 until 1989, Mr. Gallagher
was employed by Pitcairn Financial Management Group, where he served in various
capacities, including Vice President of Finance, Senior Vice President and
Director. Prior to that time, he was Vice President of Finance for
Evans-Pitcairn Corporation, a real estate development firm. Mr. Gallagher was
associated with Price Waterhouse from 1964 until 1972. Mr. Gallagher is a
certified public accountant and a member of the American Institute of Certified
Public Accountants and the Institute of Management Accountants.
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<PAGE> 119
OTHER KEY OFFICERS
JOHN M. ADDERLY, JR., Vice President -- Operations. Mr. Adderly has served
as an officer of the Company since January 1995. Mr. Adderly was employed by the
Rodin Group, a Philadelphia-based real estate development, management and
brokerage firm from 1982 until 1995, where he served as Vice President and Chief
Financial Officer from 1986 until 1995, and as Corporate Controller from 1982
until 1986.
FRANCINE M. HAULENBEEK, Vice President, Secretary and Treasurer. Ms.
Haulenbeek has served as an executive of the Company since October 1994 and
previously from February 1991 through January 1993. Since January 1993, Ms.
Haulenbeek has served as President of Francine M. Haulenbeek & Company, a
certified public accounting firm. Prior to January 1993, Ms. Haulenbeek was an
employee of LCOR, Incorporated, and, prior to April, 1992, Ms. Haulenbeek was an
employee of The Linpro Company, a real estate development firm. During this time
period, Ms. Haulenbeek served in several capacities, including Regional
Controller and Assistant Financial Vice President. Ms. Haulenbeek is a member of
the American Institute of Certified Public Accountants, the Pennsylvania
Institute of Certified Public Accountants and the New Jersey Society of
Certified Public Accountants.
ANTHONY A. NICHOLS, JR., Vice President -- Marketing. Mr. Nichols became an
officer of the Company upon the closing of the SSI/TNC Transaction in August
1996. Previously Mr. Nichols was employed at TNC which he joined in 1989 as a
marketing representative. In 1992 Mr. Nichols became an Assistant Vice
President -- Property Management of TNC and in 1995 he became Vice
President -- Marketing. Mr. Nichols is the son of Anthony A. Nichols, Sr., the
Company's Chairman of the Board.
COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. The audit committee of the Board of Trustees (the "Audit
Committee") currently consists of Messrs. Carboni, D'Alessio and Pizzi. The
Audit Committee makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, approves professional services provided by
the independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
Compensation Committee. The compensation committee of the Board of
Trustees (the "Compensation Committee"), established in August 1996, currently
consists of Messrs. Carboni, D'Alessio and Pizzi. The Compensation Committee
determines compensation for the Company's executive officers and, pursuant to
the employment agreements between the Company and its executive officers, will
establish an incentive compensation program for the Company's employees.
Executive Committee. The executive committee of the Board of Trustees (the
"Executive Committee"), established in August 1996, currently consists of
Messrs. Nichols, the Chairman of the Executive Committee, Mr. Musser, Mr.
Osborne and Mr. Sweeney. The Executive Committee has been delegated all powers
of the Board of Trustees except the power to: (i) declare dividends or other
distributions on Shares; (ii) elect trustees; (iii) issue Shares (other than as
permitted by the By-Laws as in effect from time to time); (iv) recommend to
shareholders any action that requires shareholder approval; (v) amend the Bylaws
of the Company; or (vi) approve any merger or share exchange which does not
require shareholder approval.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the completion of the SSI/TNC Transaction, the Board of Trustees
had not established a separate compensation committee. No executive officer of
the Company serves on the Compensation Committee that was established by the
Board of Trustees in August 1996.
COMPENSATION OF TRUSTEES
The Company intends to pay its Trustees who are not officers of the Company
fees for their services as Trustees. Trustees will receive annual compensation
of $5,000 and a fee of $500 plus expenses for attendance
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in person at each meeting of the Board of Trustees or committee thereof and $500
for participation in each telephonic meeting of the Board of Trustees or
committee thereof.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid to the Company's President and Chief Executive Officer for the
years ended December 31, 1995, 1994 and 1993. No information is presented in the
table for the Company's other executive officers, Messrs. Nichols, Belcher or
Gallagher, because none of them became employees of the Company until completion
of the SSI/TNC Transaction on August 22, 1996. The terms of their compensation
are summarized below. See "-- Employment Agreements."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
SALARY($) SECURITIES
----------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS(#)
------------------------------------------------- ---- -------- ---------------
<S> <C> <C> <C>
Gerard H. Sweeney, President
and Chief Executive Officer...................... 1995 $130,000 -0-
1994 $ 55,000(1) 46,666
1993 (1) -0-
</TABLE>
- ---------------
(1) Prior to August 8, 1994, the date on which Mr. Sweeney became employed by
the Company, Mr. Sweeney's salary and bonus were paid to him by LCOR,
pursuant to his employment agreement with that firm. In February 1994, the
Company paid LCOR $110,000, and LCOR in turn used $60,000 of this amount to
pay Mr. Sweeney a bonus in recognition of his contribution to the Company's
January 1994 debt restructuring and its sale of the Lincoln Centre property
in February 1994.
(2) Amount reflects fully vested options to purchase 33,333 and 13,333 Common
Shares at exercise prices of $14.31 and $6.21 per share, respectively.
EMPLOYMENT AGREEMENTS
On August 22, 1996, each of Messrs. Nichols, Sweeney, Belcher and Gallagher
entered into a two-year employment agreement with the Management Company. With
the consent of the Company's executives, these employment agreements were
subsequently assigned to the Company. These employment agreements established
annual base salaries for each of Messrs. Nichols, Sweeney, Belcher and Gallagher
at $141,500, $141,500, $125,500 and $104,500, respectively, which compensation
may be increased by the Board of Trustees in its discretion.
In the event the Company were to terminate the employment of any of the
foregoing executives without cause, or were to elect not to renew the applicable
employment agreement on the second anniversary of the date it was entered into,
the Company would be obligated to provide the applicable executive with
severance for the greater of the remaining term under his employment agreement
or 12 months at a rate equal to his then effective salary. In addition, in the
event the particular executive were to terminate his employment with the Company
following a change in control, the Company would be obligated to provide the
applicable executive with the severance payments described in the preceding
sentence. The term "change in control," as defined in the employment agreements,
means the acquisition by any person (other than the Company and its affiliates)
of a majority of the outstanding Common Shares or voting securities of the
Company.
At the time each of the foregoing individuals entered into their employment
agreements, each received from the Company non-transferable warrants exercisable
for a six-year period at a price of $19.50 per share. The number of Common
Shares for which such warrants are exercisable are 40,000, 100,000, 40,000, and
40,000, for the warrants held by Messrs. Nichols, Sweeney, Belcher and
Gallagher, respectively.
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<PAGE> 121
In furtherance of the Company's efforts to preserve its REIT status and
ensure that not more than 50% in value of its outstanding Shares is owned,
directly or indirectly, by five or fewer individuals in the last half of any
taxable year, the warrants issued to the executives give the Company the right
to refuse to issue Common Shares upon the exercise thereof if the issuance of
such Common Shares would result in the Company being "closely held" within the
meaning of Section 856(h) of the Code or would bring the number of Common Shares
beneficially owned by the holder in excess of the ownership limit applicable to
such holder contained in the Declaration of Trust. If the Company were to
exercise such right, it would be required to pay to the holder an amount in cash
equal to the excess, if any (the "Spread"), of the current market price of a
Common Share over the exercise price in respect of each Common Share as to which
exercise had been sought but was denied. Upon such payment, the number of Common
Shares covered by the warrant would be automatically reduced. In addition, each
warrant includes a provision voiding the warrant ab initio if the issuance
thereof would, but for such provision, cause the Company to be "closely held"
and providing that, upon such a voiding, the warrant will be replaced with a
share appreciation right giving the Company the option, upon exercise thereof,
either to deliver cash in an amount equal to the Spread or Common Shares having
an aggregate market price equal to the Spread. Any such share appreciation right
would have the same term, and be exercisable in respect of the same number of
Common Shares, as the warrant it replaced.
Section 162(m) of the Code provides that a publicly-held corporation may
not deduct compensation paid to any one of certain specified officers in excess
of $1 million per year unless such compensation qualifies as "performance-based"
compensation within the meaning of that Section. Neither the options nor the
warrants granted by the Company qualify as performance-based compensation under
Section 162(m) of the Code. Therefore, if the aggregate taxable income
recognized in any year by certain of the executive officers of the Company,
including any income recognized upon the exercise of options or warrants and any
bonuses, exceeds $1 million, the excess will not be deductible by the Company
unless it qualified as performance-based compensation.
The Company has filed a registration statement covering the Common Shares
issuable upon exercise of the warrants awarded to each of the foregoing
executives under the Securities Act so that, subject to restrictions arising
under the Securities Act applicable to "affiliates" of the Company, such Common
Shares may be publicly sold.
STOCK OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING LAST FISCAL YEAR
No options were granted by the Company to executive officers during 1995.
During 1996, as indicated above, the Company granted warrants exercisable for an
aggregate of 220,000 Common Shares to its executive officers. Each warrant has a
six-year term expiring in August 2002 and has an exercise price per share of
$19.50.
STOCK OPTIONS HELD BY CERTAIN EXECUTIVE OFFICER AT DECEMBER 31, 1995
The following table sets forth certain information regarding options for
the purchase of Common Shares that were exercised and/or held by the Trust's
President and Chief Executive Officer at December 31, 1995.
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<PAGE> 122
No other executive officer of the Trust held options for the purchase of Common
Shares at any time during 1995.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED
DECEMBER 31, 1995 AND 1995 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FY-END(#) FY-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE(1) UNEXERCISABLE
- ------------------------ --------------- ----------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Gerard H. Sweeney N/A N/A 40,000/6,666 $30,000(2)/$30,000(3)
President and Chief
Executive Officer
</TABLE>
- ---------------
(1) Does not include outstanding warrants.
(2) Amount reflects the market value of 6,666 Common Shares in respect of vested
options that were in the money at year-end ($10.69 per share) minus the
exercise price of $6.21 per share. The remaining options to purchase 33,333
Common Shares have an exercise price of $14.31 per share and were not in the
money at year-end.
(3) Amount reflects the market value of 6,666 Common Shares in respect of vested
options that were in the money at year-end ($10.69 per share) minus the
exercise price of $6.21 per share.
401(K) PLAN
TNC established a Section 401(k) and Profit Sharing Plan (the "401(k)
Plan") to cover its eligible employees and other designated affiliates. It is
anticipated that the Company will also adopt the 401(k) Plan for the benefit of
all of its eligible employees.
The 401(k) Plan will permit eligible employees of the adopting employers
(the "Participating Companies") to defer up to a designated percentage of their
annual compensation, subject to certain limitations imposed by the Code. The
employees' elective deferrals are immediately vested and non-forfeitable upon
contribution to the 401(k) Plan. Each Participating Company reserves the right
to make matching contributions or discretionary profit sharing contributions in
the future.
The 401(k) Plan is designed to qualify under section 401 of the Code so
that contributions by employees or by the Participating Companies to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by the
Participating Companies, if any, will be deductible by them when made.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's Trustees and officers, see "Certain Provisions of Maryland Law
and of the Company's Declaration of Trust and Bylaws -- Limitation of Liability
and Indemnification."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SSI/TNC TRANSACTION
The terms of the acquisition of interests in the SSI/TNC Properties by the
Operating Partnership are described under "The Company -- The SSI/TNC
Transaction" and "Structure of the Company."
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<PAGE> 123
PARTNERSHIP AGREEMENT; REDEMPTION RIGHTS
In connection with the SSI/TNC Transaction, the Company entered into the
Partnership Agreement with SSI, TNC and 11 other persons (collectively, the
"Limited Partners"). The number of Units issued by the Operating Partnership to
the Limited Partners at the closing of the SSI/TNC Transaction (495,837) plus
the number of additional Units that the Operating Partnership will be required
to issue to the Limited Partners by September 1999 (44,322) were and will be
issued in exchange for direct and indirect interests of the Limited Partners in
the 19 SSI/TNC Properties contributed to the Operating Partnership. The
Partnership Agreement provides, among other things, for the Limited Partners to
have the right to cause the Company to redeem their Units for cash, at a per
Unit price based on the average closing price of the Common Shares for the five
consecutive trading days prior to such determination (or, at the option of the
Company, Common Shares on a one Common Share per Unit basis, subject to
customary antidilution adjustments), at any time after the occurrence of an
equity offering meeting certain targets (a "Qualified Offering"). Because each
of the SERS Transaction and the Offering will constitute a Qualified Offering,
the Limited Partners have the right to exercise the foregoing redemption right.
See "Operating Partnership Agreement -- Exchange Rights." In addition, as a
result of the approximately $500,000 prepayment penalty associated with the
payoff of the debt encumbering 2240/2250 Butler Pike, 120 West Germantown Pike,
140 West Germantown Pike and 2260 Butler Pike, approximately 30,303 Units held
by Limited Partners will be cancelled by the Operating Partnership. See
"Operating Partnership Agreement -- Cancellation of Class A Units."
REPAYMENT OF CERTAIN ADVANCES TO SSI
In connection with the SSI/TNC Transaction, SSI agreed to loan the
Operating Partnership an aggregate of $400,000 on account of transaction
expenses and agreed to advance the Operating Partnership up to $700,000 to
provide it with working capital for the operation of certain of the Properties.
SSI also agreed to advance funds to the Operating Partnership to enable it to
make certain preferred distributions to the Company. These advances bear
interest at the prime rate. In addition, in June 1996, SSI provided a second
mortgage loan in the amount of $460,000 to a subsidiary of the Operating
Partnership to fund the cost of tenant improvements at one of the Properties
(650 Dresher Road). This loan also bears interest at prime rate. As of September
30, 1996, an aggregate of $364,000, excluding accrued interest, was owed to SSI
by the Operating Partnership on account of the second mortgage loan, all of
which, by its terms, shall become due and payable upon completion of the
Offering. See "The Company -- The SSI/TNC Transaction" and "Use of Proceeds."
INDEMNIFICATION OF CERTAIN LIMITED PARTNERS
The Partnership Agreement obligates the Company either to contribute
sufficient proceeds from the Offering to the Operating Partnership to enable it
to repay or refinance the mortgage debt (approximately $63.6 million as of
September 30, 1996) encumbering the SSI/TNC Properties, in lieu thereof, either
obtain general releases from the holders of such mortgages indebtedness
releasing the Limited Partners from all liability with respect thereto or make
other arrangements satisfactory to such Limited Partners to indemnify them
against such liability. Following the Offering, approximately $15.4 million of
such mortgage debt will remain outstanding, of which $10.4 million constitutes
recourse debt. Accordingly, the Company will indemnify the Limited Partners who
are liable on such recourse debt against liability thereon.
PARTNERSHIP AGREEMENT; GENERAL INDEMNITY
In the Partnership Agreement, SSI and TNC made customary representations
and warranties, on a several basis, in favor of the Company. The Company also
made customary representations and warranties in favor of SSI and TNC. In the
event the Company were to suffer a loss as a result of the inaccuracy of any of
the representations and warranties made in its favor, the recourse of the
Company against SSI and TNC is limited to the 497,895 Units issued to them in
the SSI/TNC Transaction (less the approximately 30,303 Units that will be
forfeited in connection with the repayment of debt upon closing of the
Offering). "See Risk Factors -- Conflicts of Interest -- Failure to Enforce
Terms of Acquisition Agreements."
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TERMINATION OF STANDSTILL AGREEMENTS
Each of SSI and Richard M. Osborne, a Trustee of the Company, is a party to
an agreement with the Company which, by its terms, will terminate upon
completion of the Offering. In its respective agreement, each of SSI and Mr.
Osborne agreed generally to vote its or his Common Shares in accordance with the
recommendation of a majority of the Board of Trustees on any matter submitted to
a vote of shareholders and to refrain from disposing of its or his Common Shares
other than in transactions under Rule 144, in certain private transactions and
in certain extraordinary transactions such as a third party tender offer or
merger. Following the Offering, neither SSI nor Mr. Osborne will hold Common
Shares subject to any contractual restrictions imposed by the Company.
Notwithstanding the termination of the standstill agreements, each of Mr.
Osborne and Warren V. Musser, Chairman and Chief Executive Officer of SSI, will
continue as Trustees of the Company.
OPTION PROPERTIES
At the closing of the SSI/TNC Transaction, the Operating Partnership
acquired an option from an affiliate of TNC entitling it to acquire, in the
Operating Partnership's discretion, the four Option Properties at any time
during the two-year period ending August 22, 1998 (subject to two extensions of
one year each). The parties have agreed that the purchase price payable by the
Operating Partnership upon exercise of its option will consist of $10.00 in
excess of the mortgage debt encumbering the Option Properties at the time of
exercise (which as of September 30, 1996, aggregated $21.0 million, including
approximately $4.2 million of accrued debt and unpaid interest). The right of
the Operating Partnership to exercise its option to acquire the Option
Properties is conditioned on receipt of consent of the mortgage lender for the
Option Properties, of which there can be no assurance. As of the date hereof, no
lender consent has been requested, and no determination to seek any such consent
has been made. See "Business and Properties -- Option Properties."
LEASE WITH SSI AFFILIATE
Approximately 21,580 net rentable square feet is leased by the Company to
an affiliate of SSI at an average rental rate of $9.66 per square foot under a
lease that expires in April 1999. The Company believes that this is the
prevailing market rate for comparable space.
ENVIRONMENTAL INDEMNITY
SSI has agreed to indemnify the Operating Partnership against the cost of
remediation that may be required to be undertaken on account of certain
environmental conditions at one of the SSI/TNC Properties acquired subject to an
aggregate maximum of approximately $2.0 million. The term of the SSI indemnity
agreement expires on August 22, 2001. See "Business and
Properties -- Environmental Matters."
EMPLOYMENT AGREEMENTS; AWARD OF WARRANTS
At the closing of the SSI/TNC Transaction, each of Messrs. Nichols,
Sweeney, Belcher and Gallagher entered into a two year employment agreement with
the Management Company. These employment agreements were, with the consent of
such executives, subsequently assigned to and assumed by the Company. In order
to induce each such executive to enter into such employment agreements, Messrs.
Nichols, Sweeney, Belcher and Gallagher were awarded warrants to purchase
40,000, 100,000, 40,000 and 40,000 Common Shares, respectively, at an exercise
price of $19.50 per share. See "Management -- Employment Agreements."
PRIOR INVOLVEMENT OF LEGG MASON
One of the Underwriters, Legg Mason Wood Walker, Incorporated ("Legg
Mason"), served as financial advisor to the Company in connection with the
SSI/TNC Transaction. In connection with the SSI/TNC Transaction, Legg Mason
delivered to the Board of Trustees its opinion to the effect that, as of July
12, 1996, the SSI/TNC Transaction was fair to the Company's shareholders from a
financial point of view. The Company paid Legg Mason a $100,000 fee for its
advisory services and reimbursed it $10,000 for expenses.
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Legg Mason is the parent of Legg Mason Real Estate Services, Inc., a mortgage
banking firm of which Walter D'Alessio, a member of the Company's Board of
Trustees and Compensation Committee, is President.
INVESTMENT BY RMO FUND
On June 21, 1996 (the "Investment Date"), Turkey Vulture Fund XIII, Ltd.
(the "RMO Fund"), a company controlled by Richard M. Osborne, a Trustee of the
Company, invested approximately $1.3 million in the Company, by: (i) making the
Osborne Loan to the Company and (ii) by acquiring 19,983 Paired Units at a per
unit price of $16.89. Under certain circumstances following the issuance by the
Company of additional Common Shares, the Company was obligated to issue
additional Paired Units, valued at $16.89 each, as a mandatory prepayment of the
Osborne Loan. Immediately following the closing of the SSI/TNC Transaction, the
Company issued to the RMO Fund an additional 14,135 Paired Units and thereby
reduced the outstanding balance of the Osborne Loan by approximately $239,000.
Immediately following closing of the SERS Transaction, the Osborne Loan was
repaid pursuant to its terms through the issuance by the Company of an
additional 46,321 Paired Units. The Company has agreed to provide the RMO Fund
with registration rights covering the Common Shares issued and issuable as part
of its investment. See "Shares Available For Future Sale -- Registration
Rights."
PRIOR INVOLVEMENT OF LCOR
Approximately 40 individual partners operating through more than 350
different limited partnerships, joint ventures and corporations (collectively,
the "Linpro Entities") were originally doing business under the name "The Linpro
Company". Central administrative and management functions for The Linpro
Entities are currently conducted by LCOR. Since its formation and through
February 1, 1995, the Company directly and, through its investment in BRP,
indirectly entered into several transactions with Linpro Entities.
Administration. Administrative and management functions for the Company
were performed by LCOR, Incorporated through August 8, 1994. Beginning in 1993
and continuing through August 8, 1994, the Company reimbursed LCOR up to
$100,000 per year for certain administrative expenses directly attributable to
the Company, consisting, in part, of a portion of the salaries for certain
personnel provided by LCOR. During 1994, this reimbursement totaled $75,000.
During 1995, no such reimbursement was made. Effective February 1, 1995, the
Company assumed management of three of the four Properties owned by BRP and
entered into a management agreement with an unrelated party for management of
the fourth.
BRP Property Management. In connection with the acquisition of each
Property owned by BRP in 1986, BRP entered into management agreements with the
Linpro Entities engaged in the property management business pursuant to which
the property manager provided leasing and property management services. During
1994, six of the then seven remaining Properties owned by BRP were operated
under a management agreement with a Linpro Entity and one of the Properties was
operated under a management agreement with an entity which is not a Linpro
Entity. For the period from January 1, 1995 through January 31, 1995, three of
the four Properties currently owned by BRP were operated under an agreement with
a Linpro entity and one of the BRP Properties was operated under a management
agreement with an entity which is not a Linpro Entity.
For their services rendered pursuant to the management agreements, the
property managers were entitled to reimbursement for certain expenses incurred
in connection with their management of the BRP Properties and were paid a
management fee monthly in arrears equal to 5% of the rental income of the BRP
Properties. Such management fees paid to Linpro Entities during 1995 and 1994
amounted to $10,000 and $187,000, respectively. In addition, during 1994 and
through January 31, 1995, the management companies received a 50% override in
leasing commissions payable to third party brokers and a full market commission
on non-brokered transactions. Such leasing commissions paid to the Linpro
Entities during 1995 and 1994 amounted to $47,000 and $56,000, respectively. For
the BRP Properties operated under a management agreement with a Linpro Entity,
during this same period, LCOR absorbed an amount equal to 2% of gross rents and
40% of a defined commission structure representing administrative costs, which
costs would otherwise have been borne by the Company. Such amounts absorbed by
LCOR representing administrative costs, which would otherwise have been borne by
the Company, totaled $23,000 in 1995 and $92,000 in 1994.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Shares (and Common Shares for which Units and Preferred
Shares may be exchanged) by each Trustee, by each executive officer, by all
Trustees and executive officers as a group, and by each person known to the
Company to be the beneficial owner of 5% or more of the outstanding Common
Shares immediately following the completion of the Offering and the Concurrent
Investments and assuming the issuance of Units in exchange for the Residual
Interests. Except as indicated below, to the Company's knowledge, all of such
Common Shares are owned directly, and the indicated person has sole voting and
investment power. Share amounts have been adjusted to reflect the Reverse Split.
<TABLE>
<CAPTION>
NAME AND BUSINESS NUMBER OF PERCENTAGE OF
ADDRESS OF BENEFICIAL OWNER(1) COMMON SHARES COMMON SHARES(2)
----------------------------------------------------- ------------- ----------------
<S> <C> <C>
RAI Real Estate Advisers, Inc.(3).................... 951,021 14.37%
Morgan Stanley Institutional Fund, Inc. -- U.S. Real
Estate Portfolio(4)................................ 425,454 6.75
Morgan Stanley SICAV Subsidiary S.A.(4).............. 283,636 4.50
Safeguard Scientifics Inc.(5)........................ 738,756 10.86
The Nichols Company.................................. 211,957 3.25
Anthony A. Nichols, Sr.(6)........................... 285,503 4.34
Joseph L. Carboni(7)................................. 166 *
Richard M. Osborne(8)................................ 440,478 6.90
Gerard H. Sweeney(9)................................. 146,934 2.28
Warren V. Musser(10)................................. 0 *
Walter D'Alessio(11)................................. 0 *
Charles P. Pizzi(12)................................. 0 *
John P. Gallagher(13)................................ 251,957 3.84
Brian F. Belcher(14)................................. 259,203 3.95
All Trustees and Executive Officers
as a Group (9 persons)............................. 986,084 14.34%
------ ------
</TABLE>
- ---------------
* Less than one percent.
(1) Unless indicated otherwise, the business address of each person listed is
16 Campus Boulevard, Newtown Square, Pennsylvania 19073.
(2) Assumes that all Units and Preferred Shares eligible for conversion held by
each named person or entity are converted into Common Shares. The total
number of Common Shares outstanding used in calculating the percentage of
Common Shares assumes that none of the Units or Preferred Shares eligible
for conversion held by other named persons or entities are converted into
Common Shares.
(3) The business address of RAI Real Estate Advisers, Inc. ("RAI") is 259
Radnor-Chester Road, Radnor, Pennsylvania 19087. Includes (a) 636,363
Common Shares, (b) 133,333 Common Shares issuable upon exercise of warrants
and (c) 181,325 Common Shares issuable upon conversion of Preferred Shares
prior to Conversion Approval. Does not include 1,424,735 Common Shares
issuable upon conversion of Preferred Shares after Conversion Approval. RAI
serves as the voting trustee under the SERS Voting Trust established for
the benefit of SERS. RAI disclaims beneficial ownership of such shares in
which it has no pecuniary interest.
(4) Morgan Stanley Asset Management Inc. ("MSAM"), as investment adviser of the
Morgan Stanley Funds, and Morgan Stanley Group Inc., as the owner of all
the common stock of MSAM, are deemed to beneficially own the Common Shares
beneficially owned by such funds. Morgan Stanley SICAV Subsidiary S.A. (the
"SICAV Subsidiary") is a wholly owned subsidiary of Morgan Stanley SICAV,
an investment company with variable capital ("societe d investissement a
capital variable") incorporated with limited liability under the laws of
the Grand Duchy of Luxembourg, and Morgan Stanley SICAV, on behalf of its
U.S. Real Estate Securities Fund (a sub-fund of Morgan Stanley SICAV), is
deemed to beneficially own all the Common Shares beneficially owned by the
SICAV Subsidiary. Morgan Stanley Institutional Fund, Inc. and MSAM maintain
their principal office at 1221 Avenue of the Americas, New York, New York
10020. Morgan Stanley SICAV and the SICAV Subsidiary maintain their
principal office at 6C route de Treves, L-2633 Senningerberg, Grand Duchy
of Luxembourg. Morgan Stanley Group Inc. maintains its principal office at
1585 Broadway, New York, New York 10036.
(5) The business address of SSI is 800 The Safeguard Building, 435 Devon Park
Drive, Wayne, Pennsylvania 19087. Includes (a) 241,560 Common Shares, (b)
241,560 Common Shares issuable upon exercise of warrants and (c) 255,636
Units, convertible into Common Shares.
(6) Includes (a) 16,773 Common Shares, (b) 56,773 Common Shares issuable upon
exercise of warrants and (c) 211,957 Units held by TNC, in which Mr.
Nichols, Mr. Gallagher and Mr. Belcher have shared investment voting power
and of which Mr. Nichols is a 44.2% stockholder and disclaims beneficial
ownership of the remaining 55.8% of such shares in which he has no
pecuniary interest. All of such 16,773 Common Shares and warrants to
purchase an additional 16,773 Common Shares were acquired by Mr. Nichols,
as a joint tenant with his spouse, from SSI on November 5, 1996 at a price
per share and warrant of $16.89.
(7) The business address of Mr. Carboni is Two Greentree Centre, Marlton, New
Jersey 08053.
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(8) The business address of Mr. Osborne is 7001 Center Street, Mentor, Ohio
44060. Includes (a) 179,600 Common Shares owned by The Richard M. Osborne
Trust (the "RMO Trust"), of which Mr. Osborne is the sole trustee, (b)
80,439 Common Shares and warrants exercisable for 80,439 Common Shares
included within Paired Units held by the RMO Fund and (c) 100,000 Common
Shares that Mr. Osborne has advised the Company he intends to purchase in
the Offering. Mr. Osborne has advised the Company that he possesses sole
authority over the voting and disposition of Common Shares owned by the RMO
Fund.
(9) Includes (a) 267 Common Shares, (b) 46,666 Common Shares issuable upon the
exercise of options and (c) 100,000 Common Shares issuable upon the
exercise of warrants.
(10) The business address of Mr. Musser is 800 The Safeguard Building, 435 Devon
Park Drive, Wayne, Pennsylvania 19087.
(11) The business address of Mr. D'Alessio is 1735 Market Street, Philadelphia,
Pennsylvania 19103.
(12) The business address of Mr. Pizzi is 1234 Market Street, Philadelphia,
Pennsylvania 19107.
(13) Includes (a) 40,000 Common Shares issuable upon the exercise of warrants
and (b) 211,957 Units held by TNC, in which Mr. Gallagher, Mr. Nichols and
Mr. Belcher have shared investment and voting power and of which Mr.
Gallagher is a 25% stockholder and disclaims beneficial ownership of the
remaining 75% of such shares in which he has no pecuniary interest.
(14) Includes (a) 40,000 Common Shares issuable upon the exercise of warrants
and (b) 211,957 Units held by TNC, in which Mr. Gallagher, Mr. Nichols and
Mr. Belcher have shared investment and voting power and of which Mr.
Belcher is a 25% stockholder and disclaims beneficial ownership of the
remaining 75% of such shares in which he has no pecuniary interest and (c)
7,246 Units convertible into Common Shares.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of
the Company does not purport to be complete and is subject to and qualified in
its entirety by reference to the Declaration of Trust, the Articles
Supplementary and the Bylaws of the Company, copies of which are exhibits to the
Registration Statement of which this Prospectus is a part. See "Available
Information."
GENERAL
The Declaration of Trust of the Company provides that the Company is
authorized to issue up to 80,000,000 shares of beneficial interest of the
Company ("Shares"), consisting of 75,000,000 common shares of beneficial
interest, par value $.01 per share ("Common Shares"), and 5,000,000 preferred
shares of beneficial interest, par value $.01 per share ("preferred shares").
Upon the closing of the Offering and after giving effect to the Reverse Split,
the Company will be authorized to issue up to 25,000,000 Common Shares and
5,000,000 preferred shares. Upon completion of the Offering (and after giving
effect to the closing of the SERS Transaction and the Concurrent Investments):
(i) 6,302,959 Common Shares will be issued and outstanding (6,902,959 Common
Shares if the Underwriters' over-allotment option is exercised in full),
excluding Common Shares that may be issued upon the conversion of Units; and
(ii) 481,818 preferred shares (all of which will consist of Preferred Shares)
will be issued and outstanding. Subject to certain conditions discussed below,
the Preferred Shares are convertible into 1,606,060 Common Shares.
Both Maryland statutory law governing real estate investment trusts
organized under Maryland law (the "Maryland REIT Law") and the Company's
Declaration of Trust provide that no shareholder of the Company will be
personally liable, by reason of his status as a shareholder of the Company, for
any obligation of the Company. The Company's Bylaws further provide that the
Company shall indemnify each shareholder against any claim or liability to which
such shareholder may become subject by reason of his being or having been a
shareholder, and that the Company shall reimburse each shareholder who has been
successful, on the merits or otherwise, in the defense of a proceeding to which
he has been made a party by reason of his status as such for all reasonable
expenses incurred by him in connection with any such claim or liability. In
addition, it is a requirement of the Declaration of Trust that all written
contracts to which the Company is a party shall include a provision to the
effect that shareholders shall not be personally liable thereon.
The Declaration of Trust provides that, subject to the provisions of any
class or series of preferred shares then outstanding and to the mandatory
provisions of applicable law, the shareholders are entitled to vote only on the
following matters: (i) election or removal of Trustees; (ii) amendment of the
Declaration of Trust; (iii) a determination by the Trust to invest in
commodities contracts (other than interest rate futures intended to hedge the
Company against interest rate risk), engage in securities trading (as compared
to investment) activities or hold properties primarily for sale to customers in
the ordinary course of business; and (iv) a merger of the Company with another
entity. Except with respect to the foregoing, no action taken by the
shareholders of the Company at any meeting shall in any way bind the Board of
Trustees.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is The Bank of New
York.
SHARES
Common Shares of Beneficial Interest
Each outstanding Common Share entitles the holder thereof to one vote on
all matters submitted to a vote of shareholders, including the election of
Trustees. There is no cumulative voting in the election of Trustees, which means
that, subject to the voting rights of holders of Preferred Shares and such
voting rights as may be granted by the Board of Trustees in connection with
future issuances of preferred shares, the holders of a majority of the
outstanding Common Shares can elect all of the Trustees then standing for
election. Subject to the preferential rights of the holders of Preferred Shares
and such preferential rights as may be granted by the Board of Trustees of the
Company in connection with the future issuance, if any, of preferred
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shares, holders of Common Shares are entitled to such distributions as may be
declared from time to time by the Board of Trustees out of funds legally
available therefor.
Holders of Common Shares have no conversion, exchange, redemption or
preemptive rights to subscribe to any securities of the Company. All outstanding
Common Shares will be fully paid and nonassessable. In the event of any
liquidation, dissolution or winding-up of the affairs of the Company, subject to
the preferential rights of the holders of Preferred Shares and such preferential
rights as may be granted by the Board of Trustees of the Company in connection
with the future issuance, if any, of preferred shares, holders of Common Shares
will be entitled to share ratably in the assets of the Company remaining after
provision for payment of liabilities to creditors. All Common Shares have equal
dividend, distribution, liquidation and other rights.
Preferred Shares of Beneficial Interest
The preferred shares authorized by the Company's Declaration of Trust may
be issued from time to time in one or more series. Prior to the issuance of
preferred shares of each such series, the Board of Trustees is required by the
Maryland REIT Law and the Company's Declaration of Trust to set for each series
the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms or conditions of
redemption, as are permitted by the Maryland REIT Law. Such rights, powers,
restrictions and limitations could include the right to receive specified
distributions and payments on liquidation prior to any such payments being made
to the holders of Common Shares. Under certain circumstances, the issuance of
preferred shares could have the effect of delaying, deferring or preventing a
change of control of the Company and may adversely affect the voting and other
rights of the holders of the Common Shares.
Classification or Reclassification of Preferred Shares
The Declaration of Trust authorizes the Trustees to classify or reclassify,
in one or more series, any unissued preferred shares by setting or changing the
number of shares constituting such series and the designation, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications or terms or conditions of redemption of such
shares.
PREFERRED SHARES
General
In connection with the SERS Transaction, the Company issued 481,818
Preferred Shares, which were designated as Series A Convertible Preferred
Shares.
Dividends
In the event that the Company pays a dividend or makes any distribution
with respect to the Common Shares, regardless of the form of such distribution,
the holders of the Preferred Shares shall be entitled to participate with the
holders of the Common Shares in all such dividends and distributions, such that
the holders of the Preferred Shares shall receive, with respect to each such
Preferred Share held, an amount equal to the product of: (i) the dividend or
distribution payable with respect to each such Common Share multiplied by (ii)
the number of Common Shares into which such Preferred Share is convertible as of
the record date for such dividend or distribution or the payment date with
respect to such dividend or distribution, if there is no record date. In the
event that a Conversion Approval has not occurred by July 1, 1997, then the
holders of the Preferred Shares shall be entitled to receive, with respect to
each such Preferred Share held, an amount equal to the product of: (i) 120% of
the dividend or distribution payable with respect to each such Common Share
multiplied by (ii) the number of Common Shares into which such Preferred Share
is convertible as of the record date for such dividend or distribution or the
payment date with respect to such dividend or distribution, if there is no
record date.
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Liquidation Preference; Merger or Consolidation
In the event of any liquidation, dissolution or winding up of the Company
(a "Liquidation"), regardless of whether such event is voluntary or otherwise,
each Preferred Share will entitle the holder to receive, before any
distributions are made on Common Shares, an amount equal to the greater of: (i)
the amount as would have been payable with respect to the Common Shares into
which such Preferred Share would have been convertible immediately prior to the
Liquidation if a Conversion Approval had previously occurred and (ii) the
product of $16.50 multiplied by the Conversion Number plus all declared but
unpaid dividends. In determining whether a distribution (other than upon
voluntary or involuntary liquidation), by dividend, redemption or other
acquisition of shares or otherwise, is permitted under applicable law, amounts
that would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of holders of
Preferred Shares will not be added to the Company's total liabilities.
Upon a merger, consolidation or similar transaction involving the Company,
holders of Preferred Shares will be entitled to receive such payments as would
have been made with respect to the Common Shares into which such Preferred
Shares would have been convertible immediately prior to such event if a
Conversion Approval had previously occurred.
Redemption
In the event that a Conversion Approval has not occurred by July 1, 1998,
each holder of Preferred Shares will have the right, at its option, to require
the Company to redeem from time to time all or a portion of the Preferred Shares
held by it at a price per share equal to the Redemption Price.
Voting Rights
Except as otherwise provided by law and as indicated below, the holders of
Preferred Shares shall be entitled to vote on all matters as to which the
holders of Common Shares shall be entitled to vote, together with the holders of
Common Shares as a single class, and shall be entitled to cast a number of votes
equal to the Conversion Number. Holders of Preferred Shares will not be entitled
to vote on the unlimited convertibility of Preferred Shares into Common Shares.
Conversion Rights
Subject to the conditions set forth below, each holder of the Preferred
Shares shall have the right, at any time, at such holder's option, to convert,
without the payment of any additional consideration, each Preferred Share held
by such holder into that number of non-assessable Common Shares equal to the
Conversion Number. Until Conversion Approval has occurred, the number of Common
Shares that may be issued in respect of the conversion of Preferred Shares is
limited to 181,325 in the aggregate. After Conversion Approval, there are no
limitations on the convertibility of the Preferred Shares into Common Shares.
If, at any time, the Company: (i) pays a dividend or makes a distribution
on any of its Shares in Common Shares; (ii) subdivides its outstanding Common
Shares into a greater number of Shares; (iii) combines outstanding Common Shares
into a smaller number of Shares; or (iv) issues Common Shares by
reclassification of any of its Shares, then the Conversion Number in effect
immediately prior to such action shall be adjusted such that the holders of
Preferred Shares may receive upon conversion the number of Common Shares that
such holders would have owned immediately following such action if the holders
had converted their Preferred Shares immediately prior to such action.
REVERSE SHARE SPLIT; TREATMENT OF FRACTIONAL SHARES
Prior to closing of the Offering, each three outstanding Common Shares will
be combined into one Common Share of the Company. The purpose of the Reverse
Split is to increase the liquidity and marketability of the Common Shares by
increasing the trading price per Common Share and attracting investors and
analysts who would otherwise be reluctant to deal in a lower-priced stock.
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The Reverse Split will result in certain existing shareholders owning
fractional shares of the Company. The Company will not issue fractional shares,
but will instead distribute cash to such shareholders in redemption of such
fractional shares. To make such payments, fractional shares will be aggregated
into whole shares and a certificate evidencing those shares will be sold by an
independent agent in the open market on behalf of shareholders who otherwise
would be entitled to receive fractional shares. Those shareholders will receive
a cash payment in the amount of their pro rata share of the total sales
proceeds. The independent agent will make such sales at such times and in such
amounts and through broker-dealers selected in the sole discretion of the
independent agent. None of the independent agent's actions will be subject to
the control of the Company. As long as the distribution of cash in payment for
such fractional shares represents merely a mechanical rounding off of the
fractions in the exchange and is not a separately bargained-for consideration,
the payments will be treated as redemptions, which should result in the
recognition of capital gain or loss, and not ordinary income, to the
shareholders. Promptly after the occurrence of the Reverse Split, a letter of
transmittal will be mailed to shareholders (other than shareholders who acquired
Common Shares in the Offering) containing instructions relating to the surrender
of outstanding certificates representing Common Shares in exchange for
certificates representing post-Reverse Split Common Shares. SHARE CERTIFICATES
SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding Shares may be owned, directly or indirectly, by five or
fewer individuals (defined in the Code to include certain entities such as
qualified pension plans) during the last half of a taxable year and Shares must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months (or during a proportionate part of a shorter
taxable year).
Because the Board of Trustees believes it is at present essential for the
Company to continue to qualify as a REIT, the Declaration of Trust, subject to
certain exceptions, contains provisions that restrict the number of Shares that
a person may own and that are designed to safeguard the Company against an
inadvertent loss of REIT status. In order to prevent any shareholder from owning
Shares in an amount that would cause more than 50% in value of the outstanding
Shares to be held by five or fewer individuals, the Board, pursuant to authority
granted in the Declaration of Trust, has passed a resolution that, subject to
certain exceptions described below, provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than
9.8% in value of the outstanding Shares, except for SSI which, pursuant to a
separate agreement with the Company, may own no more than 14.75% in value of the
outstanding Shares (the "Ownership Limit"). The Board of Trustees, subject to
limitations, retains the authority to effect additional increases to, or
establish exemptions from, the Ownership Limit. The Board of Trustees, pursuant
to authority granted in the Declaration of Trust, has passed a resolution that
provides that, for purposes of determining applicable ownership limitations: (i)
the beneficiaries of SERS (in accord with their actuarial interests therein),
and not SERS or the SERS Voting Trust, shall be deemed the direct owners of
Shares held by the SERS Voting Trust, and (ii) the owners of the Morgan Stanley
Funds (in proportion to their ownership therein), and not such Morgan Stanley
Funds nor a related entity, shall be deemed the direct owners of Shares held by
such Morgan Stanley Funds.
In addition, pursuant to the Declaration of Trust, no purported transfer of
Shares may be given effect if it would result in ownership of all of the
outstanding Shares by fewer than 100 persons (determined without any reference
to the rules of attribution) or result in the Company being "closely held"
within the meaning of Section 856(h) of the Code (the "Ownership Restrictions").
In the event of a purported transfer or other event that would, if effective,
result in the ownership of Shares in violation of the Ownership Limit or the
Ownership Restrictions, such transfer would be deemed void ab initio and such
Shares would automatically be exchanged for "Excess Shares" authorized by the
Declaration of Trust, according to rules set forth in the Declaration of Trust,
to the extent necessary to ensure that the purported transfer or other event
does not result in the ownership of Shares in violation of the Ownership Limit
or the Ownership Restrictions.
Holders of Excess Shares are not entitled to voting rights (except to the
extent required by law), dividends or distributions. If, after the purported
transfer or other event resulting in an exchange of Shares for
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Excess Shares and prior to the discovery by the Company of such exchange,
dividends or distributions are paid with respect to Shares that were exchanged
for Excess Shares, then such dividends or distributions would be repayable to
the Company upon demand. While outstanding, Excess Shares would be held in trust
by the Company for the benefit of the ultimate transferee of an interest in such
trust, as described below. While Excess Shares are held in trust, an interest in
that trust may be transferred by the purported transferee or other purported
holder with respect to such Excess Shares only to a person whose ownership of
the Shares would not violate the Ownership Limit or the Ownership Restrictions,
at which time the Excess Shares would be automatically exchanged for Shares of
the same type and class as the Shares for which the Excess Shares were
originally exchanged. The Declaration of Trust contains provisions that are
designed to ensure that the purported transferee or other purported holder of
the Excess Shares may not receive in return for such a transfer an amount that
reflects any appreciation in the Shares for which such Excess Shares were
exchanged during the period that such Excess Shares were outstanding. Any amount
received by a purported transferee or other purported holder in excess of the
amount permitted to be received would be required to be turned over to the
Company.
The Declaration of Trust also provides that Excess Shares shall be deemed
to have been offered for sale to the Company, or its designee, which shall have
the right to accept such offer for a period of 90 days after the later of: (i)
the date of the purported transfer or event which resulted in an exchange of
Shares for such Excess Shares; and (ii) the date the Board of Trustees
determines that a purported transfer or other event resulting in an exchange of
Shares for such Excess Shares has occurred if the Company does not receive
notice of any such transfer. The price at which the Company may purchase such
Excess Shares would be equal to the lesser of: (i) in the case of Excess Shares
resulting from a purported transfer for value, the price per share in the
purported transfer that caused the automatic exchange for such Excess Shares or,
in the case of Excess Shares resulting from some other event, the market price
of such Shares on the date of the automatic exchange for Excess Shares; or (ii)
the market price of such Shares on the date that the Company accepts such Excess
Shares. Any dividend or distribution paid to a proposed transferee on Excess
Shares prior to the discovery by the Company that such Shares have been
transferred in violation of the provisions of the Declaration of Trust shall be
repaid to the Company upon demand. If the foregoing restrictions are determined
to be void or invalid by virtue of any legal decision, statute, rule or
regulation, then the intended transferee or holder of any Excess Shares may be
deemed, at the option of the Company, to have acted as an agent on behalf of the
Company in acquiring or holding such Excess Shares and to hold such Excess
Shares on behalf of the Company.
The Trustees may waive the Ownership Restrictions if evidence satisfactory
to the Trustees and the Company's tax counsel or tax accountants is presented
showing that such waiver will not jeopardize the Company's status as a REIT
under the Code. As a condition of such waiver, the Trustees may require that an
intended transferee give written notice to the Company, furnish such opinions of
counsel, affidavits, undertakings, agreements and information as may be required
by the Trustees and/or an undertaking from the applicant with respect to
preserving the status of the Company. The Ownership Restrictions will not apply
if the Company determines that it no longer will attempt to qualify, or continue
to qualify, as a REIT. Any transfer of Shares or any security convertible into
Shares that would: (i) create a direct or indirect ownership of Shares in excess
of the Ownership Limit; or (ii) result in the violation of the Ownership
Restrictions will be void with respect to the intended transferee and will
result in Excess Shares as described above.
Neither the Ownership Restrictions nor the Ownership Limit will be
automatically removed even if the REIT provisions of the Code are changed so as
no longer to contain any ownership concentration limitation or if the ownership
concentration limitation is increased. Except as otherwise described above, any
change in the Ownership Restrictions would require an amendment to the
Declaration of the Trust. Amendments to the Declaration require the affirmative
vote of holders owning not less than a majority of the outstanding Shares
entitled to vote thereon. In addition to preserving the Company's status as a
REIT, the Ownership Restrictions and the Ownership Limit may have the effect of
precluding an acquisition of control of the Company without the approval of the
Board of Trustees.
All persons who own, directly or by virtue of the applicable attribution
provisions of the Code, more than 4.0% of the value of any class of outstanding
Shares, must file an affidavit with the Company containing the
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information specified in the Declaration by January 31 of each year. In
addition, each shareholder shall upon demand be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of Shares as the Trustees deem necessary to comply with
the provisions of the Code applicable to REITs, to comply with the requirements
of any taxing authority or governmental agency or to determine any such
compliance.
The Ownership Limit could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
All certificates representing Shares that are hereafter issued will bear a
legend referring to the restrictions and limitations described above.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and to the
Declaration of Trust and Bylaws, copies of which are exhibits to the
Registration Statement of which this Prospectus is a part. See "Available
Information."
DURATION
Under the Company's Declaration of Trust, the Company has a perpetual term
and will continue perpetually subject to the authority of the Board of Trustees
to terminate the Company's existence and liquidate its assets and subject to
termination pursuant to the Maryland REIT Law.
BOARD OF TRUSTEES
The Company's Declaration of Trust provides that the number of Trustees of
the Company shall not be less than three nor more than 15. Any vacancy
(including a vacancy created by an increase in the number of Trustees) will be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the Trustees (although less than a quorum). The
Trustees will each serve for a term of one year (except that an individual who
has been elected to fill a vacancy will hold office only until the next annual
meeting of shareholders and until his successor has been duly elected and
qualified).
The Declaration of Trust provides that a Trustee may be removed from office
only at a meeting of the shareholders called for that purpose, by the
affirmative vote of the holders of not less than a majority of the Shares
entitled to vote in the election of Trustees; provided, however, that in the
case of any Trustees elected solely by holders of a series of preferred shares,
such Trustees may be removed by the affirmative vote of a majority of the
preferred shares of that series then outstanding and entitled to vote in the
election of Trustees, voting together as a single class.
MEETINGS OF SHAREHOLDERS
The Declaration of Trust requires the Company to hold an annual meeting of
shareholders for the election of Trustees and the transaction of any other
proper business. Special meetings of shareholders may be called upon the written
request of shareholders holding at least 10% of the Common Shares. Special
meetings of shareholders may also be called by the holders of preferred shares
to the extent, if any, determined by the Board of Trustees in connection with
the establishment of a class or series of preferred shares. Any action required
or permitted to be taken by shareholders must be taken at a duly called annual
or special meeting of shareholders and may not be effected by any consent in
writing of shareholders.
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PREFERRED SHARES
The Company's Declaration of Trust authorizes the Board of Trustees to
establish one or more series of preferred shares and to determine, with respect
to any series of preferred shares, the number of shares constituting such series
and the designation, preferences, rights and other terms of such series. See
"Description of Shares of Beneficial Interest -- Shares -- Preferred Shares of
Beneficial Interest." The Company believes that the ability of the Board of
Trustees to issue one or more series of preferred shares will provide the
Company with increased flexibility in structuring possible future financings and
acquisitions, and in meeting other trust needs which might arise. The authorized
Preferred Shares, as well as the authorized Common Shares, will be available for
issuance without further action by the Company's shareholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded. In connection with the SERS Transaction, the Company issued 481,818
Preferred Shares that are convertible, under certain circumstances, into
1,606,060 Common Shares. See "The Company -- The SERS Transaction."
BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland real estate investment trusts,
certain "business combinations" (including a merger, consolidation, share
exchange, or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland real estate investment
trust and any person who beneficially owns, directly or indirectly, 10% or more
of the voting power of the trust's shares (an "Interested Shareholder") must be:
(a) recommended by the trustees of such trust and (b) approved by the
affirmative vote of at least: (i) 80% of the votes entitled to be cast by
holders of outstanding voting shares of beneficial interest of the trust; and
(ii) two-thirds of the votes entitled to be cast by holders of outstanding
voting shares of beneficial interest other than shares held by the Interested
Shareholder with whom the business combination is to be effected, unless, among
other conditions, the trust's common shareholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Shareholder for its
shares. In addition, an Interested Shareholder or any affiliate thereof may not
engage in a "business combination" with the trust for a period of five years
following the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. These provisions of the MGCL do not apply, however, to
business combinations that are approved or exempted by the board of trustees of
the trust prior to the time that the Interested Shareholder becomes an
Interested Shareholder. An amendment to a Maryland REIT's declaration of trust
electing not to be subject to the foregoing requirements must be approved by the
affirmative vote of at least 80% of the votes entitled to be cast by holders of
outstanding voting shares of beneficial interest of the trust, voting together
as a single voting group, and two-thirds of the votes entitled to be cast by
holders of outstanding voting shares of beneficial interest other than shares of
beneficial interest held by Interested Shareholders. Any such amendment shall
not be effective until 18 months after the vote of shareholders and does not
apply to any business combination of the trust with an Interested Shareholder on
the date of the shareholder vote. The Board of Trustees has exempted any
business combinations involving SSI, TNC, Gerard H. Sweeney and their respective
affiliates from the business combination provisions of the MGCL and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between any of them and the Company. As
a result, SSI, TNC, Gerard H. Sweeney and their respective affiliates may be
able to enter into business combinations that may not be in the best interest of
the shareholders without compliance by the Company with the super-majority vote
requirements and the other provisions of the statute. In addition, the Company
has exempted any business combination involving SERS or the SERS Voting Trust
and any of their respective existing or future affiliates and Morgan Stanley
Asset Management Inc. and the Morgan Stanley Funds and any of their respective
existing or future affiliates from the business combination provisions of the
MGCL.
The business combination statute could have the effect of delaying,
deferring or preventing offers to acquire the Company and of increasing the
difficulty of consummating any such offer.
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CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland real estate investment trusts, provides
that "control shares" of a Maryland real estate investment trust acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter by
shareholders, excluding shares owned by the acquiror, by officers or by trustees
who are employees of the trust in question. "Control shares" are voting shares
which, if aggregated with all other shares previously acquired by such acquiror,
would entitle the acquiror to exercise voting power in the election of trustees
within one of the following ranges of voting power: (a) one-fifth or more but
less than one-third, (b) one-third or more but less than a majority, or (c) a
majority or more of all voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the trust's board of trustees to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the trust may redeem any or all
of the control shares, except those for which voting rights have previously been
approved, for fair value determined, without regard to the absence of voting
rights, as of the date of the last control share acquisition by the acquiror or
of any meeting of shareholders at which the voting rights of such shares are
considered and not approved. If voting rights for control shares are approved at
a shareholders meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the trust is a party to the
transaction, or to acquisitions approved or exempted by the declaration of trust
or bylaws of the trust. Pursuant to the statute, the Company has exempted any
and all acquisitions of Shares by SSI, TNC and any current or future affiliate
or associate of theirs from the control share provisions of the MGCL. As a
result, SSI or TNC will be able to possess voting power not generally available
to other persons and the effect may be to further enhance their ability to
control the Company. In addition, pursuant to the statute, the Company has
exempted any and all acquisitions of Shares by SERS and the SERS Voting Trust
and any of their respective current or future affiliates or associates and
Morgan Stanley Asset Management Inc. and the Morgan Stanley Funds and any of
their respective current or future affiliates or associates from the control
share provisions of the MGCL.
The control share acquisition statute could have the effect of delaying,
deferring or preventing offers to acquire the Company and of increasing the
difficulty of consummating any such offer.
AMENDMENT TO THE DECLARATION OF TRUST
The Company's Declaration of Trust may be amended only by the affirmative
vote of the holders of not less than a majority of the Shares then outstanding
and entitled to vote thereon, except for the provisions of the Declaration of
Trust relating to the MGCL provisions on business combinations, amendment of
which require the affirmative vote of the holders of not less than 80% of the
Shares then outstanding and entitled to vote. In addition, in the event that the
Board of Trustees shall have determined, with the advice of counsel, that any
one or more of the provisions of the Company's Declaration of Trust (the
"Conflicting Provisions") are in conflict with the Maryland REIT Law, the Code
or other applicable Federal or state law(s), the Conflicting Provisions shall be
deemed never to have constituted a part of the Declaration of Trust, even
without any amendment thereof.
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TERMINATION OF THE COMPANY AND REIT STATUS
Subject to the rights of any outstanding preferred shares and to the
provisions of the Maryland REIT Law, the Company's Declaration of Trust permits
the termination of the Company and the discontinuation of the election by the
Board of Trustees that the Company be taxed as a REIT.
TRANSACTIONS BETWEEN THE COMPANY AND ITS TRUSTEES OR OFFICERS
The Company's Declaration of Trust provides that any contract or
transaction between the Company and one or more Trustees or officers of the
Company must be approved by a majority of the disinterested Trustees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by Maryland law.
The Company's Bylaws require it to indemnify (a) any present or former
Trustee, officer or shareholder who has been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by reason
of such status, against reasonable expenses incurred by him in connection with
the proceeding; (b) any present or former Trustee or officer against any claim
or liability to which he may become subject by reason of his status as such
unless it is established that (i) his act or omission was committed in bad faith
or was the result of active and deliberate dishonesty, (ii) he actually received
an improper personal benefit in money, property or services or (iii) in the case
of a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful; and (c) each shareholder or former shareholder against
any claim or liability to which he may be subject by reason of his status as a
shareholder or former shareholder. In addition, the Company's Bylaws require it
to pay or reimburse, in advance of final disposition of a proceeding, reasonable
expenses incurred by a present or former Trustee, officer or shareholder made a
party to a proceeding by reason of his status as a Trustee, officer or
shareholder provided that, in the case of a Trustee or officer, the Company
shall have received (i) a written affirmation by the Trustee or officer of his
good faith belief that he has met the applicable standard of conduct necessary
for indemnification by the Company as authorized by the Bylaws and (ii) a
written undertaking by or on his behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of conduct
was not met. The Company's Bylaws also (i) permit the Company to provide
indemnification and payment or reimbursement of expenses to a present or former
Trustee, officer or shareholder who served a predecessor of the Company in such
capacity, and to any employee or agent of the Company or a predecessor of the
Company, (ii) provide that any indemnification or payment or reimbursement of
the expenses permitted by the Bylaws shall be furnished in accordance with the
procedures provided for indemnification and payment or reimbursement of expenses
under Section 2-418 of the MGCL for directors of Maryland corporations and (iii)
permit the Company to provide such other and further indemnification or payment
or reimbursement of expenses as may be permitted by the MGCL for directors of
Maryland corporations.
The Partnership Agreement also provides for indemnification by the
Operating Partnership of the Company, as general partner, and its Trustees and
officers for any costs, expenses or liabilities incurred by them by reason of
any act performed by them for or on behalf of the Operating Partnership or the
Company; provided that such person's actions were taken in good faith and in the
belief that such conduct was in the best interests of the Operating Partnership
and that such person was not guilty of fraud, willful misconduct or gross
negligence.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Trustees and officers of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that, although
the validity and scope of the governing statute has not been tested in court, in
the opinion of the
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Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
addition, indemnification may be limited by state securities laws.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material Federal income tax considerations
regarding the Offering is based on current Federal income tax law and is for
general information only and is not tax advice. In the opinion of Arthur
Andersen LLP, tax advisor to the Company (the "Tax Advisor") the discussion
below, insofar as it relates to Federal income tax matters, is correct in all
material respects, and fairly summarizes the federal income tax considerations
that are material to a shareholder. This discussion does not purport to deal
with all aspects of taxation that may be relevant to particular shareholders in
light of their personal investment or tax circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt organizations, financial
institutions or broker dealers, foreign corporations and persons who are not
citizens or residents of the United States, except to the extent discussed under
"Taxation of Foreign Shareholders" below) subject to special treatment under the
Federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company first elected to be taxed as a REIT for its taxable year ended
December 31, 1986, and has operated and expects to continue to operate in such a
manner so as to qualify as a REIT for Federal income tax purposes. In the
opinion of the Tax Advisor, and based on certain representations made by the
Company relating to the organization and operation of the Company and the
Operating Partnership, the Company will continue to qualify as a REIT under the
Code. However, the opinion of the Tax Advisor is not binding upon the IRS and no
absolute assurance can be given that the Company will continue to operate in a
manner so as to remain qualified as a REIT.
The following is a general summary of the Code sections that govern the
Federal income tax treatment of a REIT and its shareholders. These sections of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof as currently in effect. There is no assurance that there
will not be future changes in the Code or administrative or judicial
interpretation thereof which could adversely affect the Company's ability to
continue to qualify as a REIT or adversely affect the taxation of holders of
Common Shares or which could further limit the amount of income the Company may
derive from the management, construction, development, leasing or sale of
properties owned by the Operating Partnership or by third parties or in
partnerships with third parties.
TAXATION OF THE COMPANY AS A REIT
An entity that qualifies for taxation as a REIT and distributes to its
shareholders at least 95% of its REIT taxable income is generally not subject to
Federal corporate income taxes on net income that it currently
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distributes to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a corporation. However, the Company will be subject to Federal
income tax as follows:
(i) The Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
(ii) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference, if any.
(iii) If the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property
other than foreclosure property held primarily for sale to customers in the
ordinary course of business) such income will be subject to a 100% tax. See
"-- Sale of Partnership Property."
(iv) If the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the
75% or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.
(v) If the Company should fail to distribute during each calendar year
at least the sum of (1) 85% of its REIT ordinary income for such year, (2)
95% of its REIT capital gain net income for such year, and (3) any
undistributed taxable income from prior years, it would be subject to a 4%
excise tax on the excess of such required distribution over the amounts
actually distributed.
(vi) If the Company has (1) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by the Company by foreclosure or otherwise or default on a loan
secured by the property) which is held primarily for sale to customers in
the ordinary course of business or (2) other nonqualifying income from
foreclosure property, it will be subject to tax on such income at the
highest corporate rate.
(vii) If the Company acquires any asset from a C corporation (i.e.,
generally a corporation subject to tax at the corporate level) in a
transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property)
in the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the 10-year period (the "Restriction
Period") beginning on the date on which such asset was acquired by the
Company then, pursuant to guidelines issued by the IRS, the excess of the
fair market value of such property at the beginning of the applicable
Restriction Period over the Company's adjusted basis in such asset as of
the beginning of such Restriction Period will be subject to a tax at the
highest regular corporate rate. The results described above with respect to
the recognition of built-in gain assume that the Company will make an
election pursuant to IRS Notice 88-19 or applicable future administrative
rules or Treasury Regulations to avail itself of the benefits of the
Restriction Period.
QUALIFICATION OF THE COMPANY AS A REIT
The Code defines a REIT as a corporation, trust or association:
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation but for Sections
856 through 859 of the Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(5) which has the calendar year as its taxable year;
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(6) the beneficial ownership of which is held by 100 or more persons;
(7) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
exempt organizations); and
(8) which meets certain income, asset and distribution tests,
described below.
Conditions (1) through (5), inclusive, must be satisfied during the
entire taxable year, and condition (6) must be satisfied during at least
335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. The Company has previously issued
Common Shares in sufficient proportions to allow it to satisfy requirements
(6) and (7) (the "100 Shareholder" and "five-or-fewer" requirements),
respectively. In addition, the Company's Declaration of Trust provides
restrictions regarding the transfer of its Shares that are intended to
assist the Company in continuing to satisfy the share ownership
requirements described in (6) and (7) above. See "Description of Shares of
Beneficial Interest -- Restrictions on Transfer." However, these
restrictions may not ensure that the Company will, in all cases, be able to
satisfy the share ownership requirements described in (6) and (7) above. If
the Company fails to satisfy such share ownership requirements, the
Company's status as a REIT will terminate. See "-- Failure to Qualify."
A REIT is permitted to have a wholly-owned subsidiary (also referred to as
a "qualified REIT subsidiary"). A qualified REIT subsidiary is not treated as a
separate entity for Federal income tax purposes. Rather, all of the assets and
items of income, deductions and credit of a qualified REIT subsidiary are
treated as if they were those of the REIT. The Company may in the future form
one or more qualified REIT subsidiaries.
A REIT is deemed to own its proportionate share of the assets of a
partnership in which it is a partner and is deemed to receive its proportionate
share of the income of the partnership. Thus, the Company's proportionate share
of the assets and items of income of the Operating Partnership and each of the
Title Holding Partnerships will be treated as assets and items of income of the
Company for purposes of applying the requirements described herein, provided
that the Operating Partnership and the Title Holding Partnerships are treated as
partnerships for Federal income tax purposes. In addition, the character of the
assets and gross income of such partnerships shall retain the same character in
the hands of the REIT for purposes of the requirements applicable to REITs under
the Code including satisfying the income tests and the asset tests. See
" -- Income Taxation of the Operating Partnership, the Title Holding
Partnerships and Their Partners."
INCOME TESTS
To maintain qualification as a REIT, there are three gross income
requirements that must be satisfied annually. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and interest on obligations secured by a mortgage on real
property) or from "qualified temporary investment income" (described below).
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from investments
qualifying under the 75% test above, and from dividends, interest, and gain from
the sale or disposition of stock or securities or from any combination of the
foregoing. Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions, and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year. In applying these tests, the Company will
be treated as realizing its share of any income and bearing its share of any
loss of the Operating Partnership and the character of such income or loss, as
well as other partnership items, will be determined at the partnership level.
Rents received by the Company will qualify as "rents from real property"
for purposes of satisfying the 75% and 95% gross income tests only if several
conditions are met. First, the amount of rent must not be based
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in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the REIT, or an
owner of 10% or more of the REIT, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the REIT does not derive
any income; provided, however, that the Company may directly perform certain
customary services (e.g., furnishing water, heat, light and air conditioning,
and cleaning windows, public entrances and lobbies) other than services which
are considered rendered to the occupant of the property (e.g., renting parking
spaces on a reserved basis to tenants).
It is expected that the Company's real estate investments, which include
its allocable share of income from the Operating Partnership, will give rise to
income that qualifies as "rents from real property" for purposes of the 75
percent and 95 percent gross income tests, other than rents received from Maris
Equipment, Inc., which is a Related Party Tenant. However, the Company has
represented that the rents received from Maris Equipment, Inc., in addition to
all other income which is not qualifying income for the 75 percent and 95
percent gross income tests, does not exceed five percent of the Company's gross
income, and therefore, the Company's status as a REIT should not be jeopardized.
The Company has represented that it does not and will not (i) charge rent
for any property that is based in whole or in part on the income or profits of
any person (other than being based on a percentage of receipts or sales); (ii)
receive rents in excess of a de minimis amount from Related Party Tenants; (iii)
derive rents attributable to personal property which constitute greater than 15%
of the total rents received under the lease; or (iv) perform services considered
to be rendered to the occupant of property, other than through an independent
contractor from whom the Company derives no income.
The Operating Partnership owns 5% of the voting common stock, and all of
the preferred stock of the Management Company, a corporation that is taxable as
a regular corporation. The Management Company performs management, development
and leasing services for the Operating Partnership and other real properties
owned in whole or in part by third parties. The income earned by and taxed to
the Management Company would be nonqualifying income if earned directly by the
Company. As a result of the corporate structure, the income will be earned by
and taxed to the Management Company and will be received by the Company only
indirectly as dividends. Although interest and dividends are generally
qualifying income under the 95% test, the IRS has announced a no-ruling policy
on this issue when the dividends and interest are earned in this manner.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if (i) the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its return, and
(iii) any incorrect information on the schedule was not due to fraud with intent
to evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of these relief provisions. As
discussed above in "Taxation of the Company as a REIT," even if these relief
provisions apply, a tax would be imposed with respect to the excess net income.
No similar mitigation provision applies to provide relief if the 30% income test
is failed, and in such case, the Company would cease to qualify as a REIT. See
"-- Failure to Qualify."
ASSET TESTS
In order for the Company to maintain its qualification as a REIT, at the
close of each quarter of its taxable year it must also satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of
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the Company's total assets must be represented by real estate assets (which for
this purpose include (i) its allocable share of real estate assets held by
partnerships in which the Company or a "qualified REIT subsidiary" of the
Company owns an interest and (ii) stock or debt instruments purchased with the
proceeds of a stock offering or a long-term (at least five years) debt offering
of the Company and held for not more than one year from the date the Company
receives such proceeds), cash, cash items, and government securities. Second,
not more than 25% of the Company's total assets may be represented by securities
other than those described above in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets, and the Company may not own more than 10% of any one issuer's
outstanding voting securities (excluding securities of a qualified REIT
subsidiary, of which the REIT is required to own all of such stock, or another
REIT).
The Company anticipates that it will be able to comply with these asset
tests. The Company is deemed to hold directly its proportionate share of all
real estate and other assets of the Operating Partnership and should be
considered to hold its proportionate share of all assets deemed owned by the
Operating Partnership through its ownership of partnership interests in other
partnerships. As a result, the Company plans to hold more than 75% of its assets
as real estate assets. In addition, the Company does not plan to hold any
securities representing more than 10% of any one issuer's voting securities,
other than any qualified REIT subsidiary of the Company, nor securities of any
one issuer exceeding 5% of the value of the Company's gross assets (determined
in accordance with generally accepted accounting principles). As previously
discussed, the Company is deemed to own its proportionate share of the assets of
a partnership in which it is a partner so that the partnership interest, itself,
is not a security for purposes of this asset test.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such other
action within 30 days after the close of any quarter as may be required to cure
any noncompliance. However, there can be no assurance that such other action
will always be successful. If the Company fails to cure any noncompliance with
the asset test within such time period, its status as a REIT would be lost.
As noted above, one of the requirements for qualification as a REIT is that
a REIT not own more than 10 percent of the voting stock of a corporation other
than the stock of a qualified REIT subsidiary (of which the REIT is required to
own all of such stock) and stock in another REIT. The Operating Partnership will
own only approximately 5 percent of the voting stock and all of the non-voting
preferred stock of the Management Company and therefore will comply with this
rule. However, the IRS could contend that the Company's ownership, through its
interest in the Operating Partnership, of all of the non-voting preferred stock
in the Management Company should be viewed as voting stock because of its
substantial economic position in the Management Company. If the IRS were to be
successful in such a contention, the Company's status as a REIT would be lost
and the Company would become subject to federal corporate income tax on its net
income, which would have a material adverse affect on the Company's Cash
Available for Distribution. The Company does not have the ability to designate a
seat on the Board of Directors of the Management Company. The Company does not
believe that it will be viewed as owning in excess of 10 percent of the voting
stock of the Management Company.
ANNUAL DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its Shareholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the REIT's net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid
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on or before the first regular dividend payment after such declaration. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains and ordinary corporate tax rates. Furthermore, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT net capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the Partnership Agreement
authorizes the Company, as general partner, to take such steps as may be
necessary to cause the Operating Partnership to distribute to its partners an
amount sufficient to permit the Company to meet these distribution requirements.
It is possible that the Company, from time to time, may not have sufficient cash
or other liquid assets to meet the 95% distribution requirement due primarily to
the expenditure of cash for nondeductible items such as principal amortization
or capital expenditures and for the redemption of the Preferred Shares if a
Conversion Event has not occurred prior to July 1, 1998. (See "The
Company -- The SERS Transaction"). In order to meet the 95% distribution
requirement, the Company may borrow or may cause the Operating Partnership to
arrange for short-term or other borrowing to permit the payment of required
distributions or attempt to declare a consent dividend, which is a hypothetical
distribution to holders of Common Shares out of the earnings and profits of the
Company. The effect of such a consent dividend (which, in conjunction with
distributions actually paid, must not be preferential to those holders who agree
to such treatment) would be that such holders would be treated for federal
income tax purposes as if they had received such amount in cash, and they then
had immediately contributed such amount back to the Company as additional
paid-in capital. This would result in taxable income to those holders without
the receipt of any actual cash distribution but would also increase their tax
basis in their Common Shares by the amount of the taxable income recognized.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a certain year by paying "deficiency
dividends" to shareholders in a later year that may be included in the Company's
deduction for distributions paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay to the IRS interest based upon the
amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable to them as ordinary income, and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
INCOME TAXATION OF THE OPERATING PARTNERSHIP, THE TITLE HOLDING PARTNERSHIPS AND
THEIR PARTNERS
The following discussion summarizes certain Federal income tax
considerations applicable to the Company's investment in the Operating
Partnership and its subsidiary partnerships (referred to herein as the "Title
Holding Partnerships").
CLASSIFICATION OF THE OPERATING PARTNERSHIP AND TITLE HOLDING PARTNERSHIPS AS
PARTNERSHIPS
The Company will hold a substantial part of its investments through the
Operating Partnership. The Company will be entitled to include in its income its
distributive share of the income and to deduct its
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distributive share of the losses of the Operating Partnership (including the
Operating Partnership's share of the income or losses of the Title Holding
Partnerships) only if the Operating Partnership and the Title Holding
Partnerships (collectively, the "Partnerships") are classified for Federal
income tax purposes as partnerships rather than as associations taxable as
corporations. An organization formed as a partnership will be treated as a
partnership for Federal income tax purposes rather than as a corporation only if
it has no more than two of the four corporate characteristics that the Treasury
Regulations use to distinguish a partnership from a corporation for tax
purposes. These four characteristics are continuity of life, centralization of
management, limited liability, and free transferability of interests.
Neither the Operating Partnership nor any of the Title Holding Partnerships
has requested, nor do they intend to request, a ruling from the IRS that they
will be treated as partnerships for Federal income tax purposes. The Company
will receive an opinion of the Tax Advisor, which is not binding on the IRS,
that the Operating Partnership and the Title Holding Partnerships will each be
treated as partnerships for Federal income tax purposes and not as an
association or publicly traded partnership taxable as a corporation. The opinion
of the Tax Advisor is based on the provisions of the Partnership Agreement and
the limited partnership agreements of the Title Holding Partnerships,
respectively, and certain factual assumptions and representations described in
the opinion. There is no assurance that the IRS will not challenge the status of
the Operating Partnership or the Title Holding Partnerships as partnerships for
federal income tax purposes. If such challenge were sustained by a court, the
Operating Partnership and/or a Title Holding Partnership could be treated as a
corporation for federal income tax purposes.
If for any reason the Operating Partnership or a Title Holding Partnership
was classified as an association taxable as a corporation rather than as a
partnership for Federal income tax purposes, the Company would not be able to
satisfy the income and asset requirements for REIT status. See "-- Income Tests"
and "-- Asset Tests." In addition, any change in any such Partnership's status
for tax purposes might be treated as a taxable event, in which case the Company
might incur a tax liability without any related cash distribution. See
"-- Annual Distribution Requirements." Further, items of income and deduction of
any such Partnership would not pass through to its partners (e.g., the Company),
and its partners would be treated as shareholders for tax purposes. Any such
Partnership would be required to pay income tax at corporate tax rates on its
net income and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
Recently proposed Treasury Regulations (the "Proposed Regulations") would
eliminate the four-factor test described above and instead permit a partnership
or limited liability company to elect to be taxed as a partnership for federal
income tax purposes without regard to the number of corporate characteristics
possessed by such entity. The Proposed Regulations would apply for tax periods
beginning on or after the date that such regulations are finalized. Until such
time, the existing regulations will continue to apply. The Proposed Regulations
would not permit the IRS to challenge the classification of an existing
partnership or limited liability company for tax periods to which the existing
Treasury Regulations apply if (1) the entity had a reasonable basis for its
claimed classification, (2) the entity claimed that same classification in all
prior years and (3) as of the date that the Proposed Regulations were published,
neither the entity nor any member of the entity had been notified in writing
that the classification of the entity is under examination by the IRS.
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the allocation of
income and losses among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) and the
Treasury Regulations promulgated thereunder, which require that partnership
allocations respect the economic arrangement of the partners.
If an allocation is not recognized for Federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to
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comply with the requirements of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
The Company has represented that the fair market values of the Properties
contributed directly or indirectly to the Operating Partnership as part of the
SSI/TNC Transaction were higher than the tax basis of such Properties. Pursuant
to Section 704(c) of the Code, items of income, gain, loss, and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be allocated for
Federal income tax purposes in a manner such that the contributor is charged
with or benefits from the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of contribution (the "Pre-Contribution
Gain or Loss"). The partnership agreement of the Operating Partnership requires
allocations of income, gain, loss and deduction attributable to such contributed
property to be made in a manner that is consistent with Section 704(c) of the
Code. Thus, if the Operating Partnership sells contributed property at a gain or
loss, such gain or loss will be allocated to the contributing partners, and away
from the Company, generally to the extent of the Pre-Contribution Gain or Loss.
The Treasury Department has issued final and temporary regulations under
Section 704(c) of the Code (the "Regulations") which give partnerships great
flexibility in ensuring that a partner contributing property to a partnership
receives the tax burdens and benefits of any Pre-Contribution Gain or Loss
attributable to the contributed property. The Regulations permit partnerships to
use any "reasonable method" of accounting for Pre-Contribution Gain or Loss. The
Regulations specifically describe three reasonable methods, including (i) the
"traditional method" under current law, (ii) the traditional method with the use
of "curative allocations" which would permit distortions caused by
Pre-Contribution Gain or Loss to be rectified on an annual basis, and (iii) the
"remedial allocation method" which is similar to the traditional method with
"curative allocations." The Partnership Agreement permits the Company, as a
general partner, to select one of these methods to account for Pre-Contribution
Gain or Loss.
DEPRECIATION
The Operating Partnership's assets other than cash consist largely of
appreciated property contributed by its partners. Assets contributed to a
partnership in a tax-free transaction generally retain the same depreciation
method and recovery period as they had in the hands of the partner who
contributed them to the partnership. Accordingly, the Operating Partnership's
depreciation deductions for its real property are based largely on the historic
tax depreciation schedules for the Properties prior to their contribution to the
Operating Partnership. The Properties are being depreciated over a range of 15
to 40 years using various methods of depreciation which were determined at the
time that each item of depreciable property was placed in service. Any real
property purchased by the Partnerships will be depreciated over at least 39
years. In certain instances where a partnership interest rather than real
property is contributed to the Partnership, the real property may not carry over
its recovery period but rather may, similarly, be subject to the lengthier
recovery period.
Section 704(c) of the Code requires that depreciation as well as gain and
loss be allocated in a manner so as to take into account the variation between
the fair market value and tax basis of the property contributed. Thus, because
most of the property contributed to the Operating Partnership is appreciated,
the Company will generally receive allocations of tax depreciation in excess of
its percentage interest in the Operating Partnership. Depreciation with respect
to any property purchased by the Operating Partnership subsequent to the
admission of its partners, however, will be allocated among the partners in
accordance with their respective percentage interests in the Partnerships.
As described above (see "-- Tax Allocations with Respect to Contributed
Properties"), the Treasury Department has recently issued Regulations which give
partnerships flexibility in ensuring that a partner
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contributing property to a partnership receives the tax benefits and burdens of
any Pre-Contribution Gain or Loss attributable to the contributed property.
As described previously, the Company, as a general partner, may select any
permissible method to account for Pre-Contribution Gain or Loss. The use of
certain of these methods may result in the Company being allocated lower
depreciation deductions than if a different method were used. The resulting
higher taxable income and earnings and profits of the Company, as determined for
federal income tax purposes, should decrease the portion of distributions by the
Company which may be treated as a return of capital. See "-- Annual Distribution
Requirements."
BASIS IN OPERATING PARTNERSHIP INTEREST
The Company's adjusted tax basis in each of the partnerships in which it
has an interest generally (i) will be equal to the amount of cash and the basis
of any other property contributed to such partnership by the Company, (ii) will
be increased by (a) its allocable share of such partnership's income and (b) its
allocable share of any indebtedness of such partnership, and (iii) will be
reduced, but not below zero, by the Company's allocable share of (a) such
partnership's loss and (b) the amount of cash and the fair market value of any
property distributed to the Company and by constructive distributions resulting
from a reduction in the Company's share of indebtedness of such partnership.
If the Company's allocable share of the loss (or portion thereof) of any
partnership in which it has an interest would reduce the adjusted tax basis of
the Company's partnership interest in such partnership below zero, the
recognition of such loss will be deferred until such time as the recognition of
such loss (or portion thereof) would not reduce the Company's adjusted tax basis
below zero. To the extent that distributions from a partnership to the Company,
or any decrease in the Company's share of the nonrecourse indebtedness of a
partnership (each such decrease being considered a constructive cash
distribution to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive distributions) would
constitute taxable income to the Company. Such distributions and constructive
distributions normally would be characterized as long-term capital gain if the
Company's interest in such partnership has been held for longer than the
long-term capital gain holding period (currently one year).
SALE OF PARTNERSHIP PROPERTY
Generally, any gain realized by a partnership on the sale of property held
by the partnership for more than one year will be long-term capital gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. However, under the requirements applicable to REITs under the Code,
the Company's share as a partner of any gain realized by the Operating
Partnership on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of a trade or business
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. See "-- Taxation of the Company as a REIT." Such prohibited
transaction income will also have an adverse effect upon the Company's ability
to satisfy the income tests for REIT status. See "-- Income Tests." Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. A safe harbor to avoid classification as a prohibited transaction
exists as to real estate assets held for the production of rental income by a
REIT for at least four years where in any taxable year the REIT has made no more
than seven sales of property or, in the alternative, the aggregate of the
adjusted bases of all properties sold does not exceed 10% of the adjusted bases
of all of the REIT's properties during the year and the expenditures includible
in a property's net sales price. The Company, as general partner of the
Operating Partnership, has represented that the Operating Partnership and the
Title Holding Partnerships intend to hold the Properties for investment with a
view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating and leasing properties and to make such
occasional sales of the properties as are consistent with the Company's and the
Operating Partnership's investment objectives. No assurance can be given,
however, that every property sale by the Partnerships will constitute a sale of
property held for investment.
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TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be dividends taxable
to such U.S. shareholders as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held its shares
of beneficial interest. However, corporate shareholders may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Distributions in
excess of current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that distributions in excess of current and accumulated earnings
and profits exceed the adjusted basis of a shareholder's shares, such
distributions will be included in income as long-term capital gain (or
short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any losses
of the Company.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent such
shareholder has received distributions from the Company required to be treated
as long-term capital gain.
Distributions from the Company and gain from the disposition of Common
Shares will not be treated as passive activity income and, therefore,
shareholders may not be able to apply any "passive losses" against such income.
Dividends from the Company (to the extent they do not constitute a return of
capital or capital gain dividends) and, on an elective basis, capital gain
dividends and gain from the disposition of Common Shares will generally be
treated as investment income for purposes of the investment income limitation.
BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and the IRS the amount of
distributions paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to distributions paid unless such
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A shareholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to the Company. See "-- Taxation of Foreign
Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Distributions by the Company to a shareholder that is a tax-exempt entity
should not constitute "unrelated business taxable income" ("UBTI"), as defined
in Section 512(a) of the Code provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial
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interests in the qualified trust, instead of treating the qualified trust as a
single individual (the "look-through exception"). A qualified trust that holds
more than 10 percent of the shares of a REIT is required to treat a percentage
of REIT dividends as UBTI if the REIT incurs debt to acquire or improve real
property. This rule applies, however, only if (i) the qualification of the REIT
depends upon the application of the "look through" exception (described above)
to the restriction on REIT shareholdings by five or fewer individuals, including
qualified trusts (see "Description of Shares of Beneficial
Interest -- Restrictions on Transfer") and (ii) the REIT is "predominantly held"
by qualified trusts, i.e., if either (x) a single qualified trust holds more
than 25 percent by value of the interests in the REIT or (y) one or more
qualified trusts, each owning more than 10 percent by value, holds in the
aggregate more than 50 percent of the interests in the REIT. The percentage of
any dividend paid (or treated as paid) to such a qualified trust that is treated
as UBTI is equal to the amount of modified gross income (gross income less
directly connected expenses) from the unrelated trade or business of the REIT
(treating the REIT as if it were a qualified trust), divided by the total
modified gross income of the REIT. A de minimis exception applies where the
percentage is less than 5 percent.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of Federal, state and local income tax laws with regard to an
investment in shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the shares is treated as effectively connected with the
Non-U.S. Shareholder's conduct of a United States trade or business, the
Non-U.S. Shareholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. shareholders are taxed with respect to such
distributions (and may also be subject to the 30% branch profits tax in the case
of a shareholder that is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a shareholder to the extent that such distributions do not exceed
the adjusted basis of the shareholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Shareholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of his shares in the Company, as described
below. If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the distributions will be subject to withholding at the same rate as
dividends. However, amounts thus withheld are refundable if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Shareholder as if
such gain were effectively connected with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required by applicable
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Treasury Regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gains dividend. The amount is creditable
against the Non-U.S. Shareholder FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the shares of beneficial interest was
held directly or indirectly by foreign persons. It is currently anticipated that
the Company will be a "domestically controlled REIT," and therefore the sale of
Shares will not be subject to taxation under FIRPTA. However, because the Common
Shares will be publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT." Gain not subject to FIRPTA will
be taxable to a Non-U.S. Shareholder if (i) investment in the shares is
effectively connected with the Non-U.S. Shareholder's United States trade or
business, in which case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of Shares were to be subject to taxation
under FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as
U.S. shareholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals).
STATEMENT OF STOCK OWNERSHIP
The Company is required to demand annual written statements from the record
holders of designated percentages of its Shares disclosing the actual owners of
the Shares. The Company must also maintain, within the Internal Revenue District
in which it is required to file its federal income tax return, permanent records
showing the information it has received as to the actual ownership of such
Shares and a list of those persons failing or refusing to comply with such
demand.
OTHER TAX CONSEQUENCES
The Company, the Operating Partnership, the Title Holding Partnerships and
the Company's shareholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company, the
Operating Partnership, the Title Holding Partnerships and the Company's
shareholders may not conform to the Federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Company.
POSSIBLE FEDERAL TAX DEVELOPMENTS
The rules dealing with Federal income taxation are constantly under review
by the IRS, the Treasury Department and Congress. New Federal tax legislation or
other provisions may be enacted into law or new interpretations, rulings,
Treasury Regulations or court decisions could be adopted, all of which could
adversely affect the taxation of the Company or of its shareholders. No
prediction can be made as to the likelihood of passage of any new tax
legislation or other provisions or court decisions either directly or indirectly
affecting the Company or its shareholders. Consequently, the tax treatment
described herein may be modified prospectively or retroactively by legislative,
judicial or administrative action.
REAL ESTATE TRANSFER TAXES
The transfer to the Operating Partnership of certain limited partnership
interests in Title Holding Partnerships as part of the SSI/TNC Transaction was
structured as transfers of 89% of the capital interests and 99% of the cash flow
and profit interests in the Title Holding Partnership owning such properties
with the Residual Interests to be acquired by the Operating Partnership on or
before September 1999. This transaction structure is intended to comply with
non-binding informal advice provided by the Pennsylvania Department of Revenue
to the effect that such transfers are not subject to Pennsylvania real estate
transfer taxes. However, the Company has not obtained a formal ruling from the
Pennsylvania Department of Revenue on this issue. If
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the Operating Partnership desired or were required, for financing purposes or
otherwise, to acquire such Residual Interests before September 1999, or if the
use of this structure resulted in the imposition of Pennsylvania real estate
transfer taxes, the Operating Partnership could be required to pay such real
estate transfer taxes, which are estimated at $640,000.
OPERATING PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, including the
descriptions of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. See "Available Information."
MANAGEMENT
Brandywine Operating Partnership, L.P. (the "Operating Partnership") has
been organized as a Delaware limited partnership pursuant to the terms of an
agreement of limited partnership, as amended (the "Partnership Agreement").
Generally, pursuant to the Partnership Agreement, the Company, as the sole
general partner of the Operating Partnership, has full and complete power,
authority and discretion in the management and control of the Operating
Partnership and the limited partners of the Operating Partnership (the "Limited
Partners") will have no authority to transact business for, or participate in
the management activities or decisions of, the Operating Partnership.
CLASSES OF PARTNERSHIP INTERESTS; DISTRIBUTIONS TO PARTNERS
At the time of its formation in connection with the SSI/TNC Transaction,
the partnership interests issued by the Operating Partnership consisted of four
classes: (i) general partnership interests ("GP Units"); (ii) Class A Units
(referred to generally in this Prospectus as "Units"); (iii) Class B Units; and
(iv) Class C Units. All of the GP Units and Class B and Class C Units were
issued to the Company, and all of the Class A Units were issued to SSI, TNC and
11 other persons contributing interests in the SSI/TNC Properties to the
Operating Partnership.
Upon completion of the Offering or the SERS Transaction, the Class B Units
and the Class C Units will automatically convert into an equal number of GP
Units. Accordingly, upon completion of the Offering or the SERS Transaction, the
partnership interests in the Operating Partnership will consist of two classes:
GP Units (all of which will be owned by the Company) and Class A Units (all of
which will be owned by SSI, TNC and the other persons who contributed interests
in the SSI/TNC Properties as part of the SSI/TNC Transaction). References
elsewhere in this Prospectus to "Units" without any specific designation of
class are intended to refer to Class A Units.
Distributions made by the Operating Partnership following the Offering will
be made on a pro rata basis among holders of GP Units and Class A Units. The
Partnership Agreement provides that whenever the Operating Partnership makes a
distribution, it will be required to distribute to the holders of the Class A
Units, as a group, an amount equal to the product that results from multiplying
the total amount to be distributed by the ratio of: (i) the number of Class A
Units outstanding divided by; (ii) the sum of (x) the number of Class A Units
outstanding plus the number of outstanding Shares (other than Excluded Shares,
as defined below). The term "Excluded Shares" means any Shares issued by the
Company after May 1, 1996 the net proceeds of which issuance are not contributed
to the Operating Partnership. Immediately following closing of the Offering and
the Concurrent Investments and repayment of the Osborne Loan, an aggregate of
7,909,019 Common Shares will be issued and outstanding (assuming no Class A
Units are converted into Common Shares and assuming conversion of all
outstanding Preferred Shares into Common Shares), of which 105,674 will
constitute Excluded Common Shares. Immediately following the Offering
approximately 509,856 Class A Units (after taking into account the impact of the
approximately 30,303 Units that will be cancelled by the Operating Partnership
in connection with the prepayment of certain mortgage debt) will be outstanding
or issuable no later than September 1999. On the basis of the foregoing,
approximately 6% of distributions made
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by the Operating Partnership would be allocated to holders of the Class A Units,
as a group, and the remaining amount would be distributed to the Company in
respect of its GP Units.
TAX ALLOCATION
Upon completion of the Offering, income, gain, loss and deduction of the
Operating Partnership will be allocated among the holders of the Class A Units
and the holders of GP Units in a manner consistent with such holders' rights to
receive distributions and applicable federal income tax principles. Thus, such
profits will generally be allocated to such partners, first, to eliminate
deficit capital accounts; second, to the extent necessary to cause the positive
capital account balances of such partners to be in proportion to their
percentage interests; and third, to such partners in proportion to their
percentage interests. Similarly, such losses, if any, will generally be
allocated, first, so as to cause the positive capital account balances of such
partners to be in proportion to their percentage interests; second, to each such
partner in proportion to its percentage interest until the capital account
balances of the partners equal zero; and third, to the partners in proportion to
their percentage interests.
CAPITAL CONTRIBUTIONS
Although the Partnership Agreement does not obligate the Company to
contribute net proceeds of any equity offering to the Operating Partnership, the
Partnership Agreement provides that if the Company contributes proceeds of an
offering to the Operating Partnership, the Operating Partnership shall issue to
the Company that number of GP Units equal to the number of Common Shares issued
in respect of such Offering. Because the Company will contribute all of the net
proceeds of the Offering and the Concurrent Investments to the Operating
Partnership, the Operating Partnership will, in turn, issue to the Company a
number of GP Units equal to the number of Common Shares that produced such net
proceeds in the Offering. See "Use of Proceeds."
The Operating Partnership may in the future issue additional Class A Units
(or other newly-created classes of limited partnership interests) to third
parties in exchange for cash or other property. Any such newly-created classes
of limited partnership interests may have a priority as to distributions or upon
liquidation over any other class of partnership interest.
NUMBER, CLASS AND OWNER OF UNITS
The table below sets forth the number, class and holder of Units
outstanding immediately following the Offering, assuming the Operating
Partnership has issued an aggregate of 44,322 Units in exchange for the Residual
Interests:
UNITS FOLLOWING OFFERING
<TABLE>
<CAPTION>
NUMBER CLASS HOLDER
- ---------- ----- --------------------
<S> <C> <C>
509,856 A Limited Partners(1)
7,723,514 GP Company(2)
</TABLE>
- ---------------
(1) "Limited Partners" consist of SSI, TNC and 11 other persons who contributed
interests in the SSI/TNC Properties as part of the SSI/TNC Transaction.
(2) Includes 6,951,513 GP Units to be issued to the Company in exchange for its
contribution to the Operating Partnership of the SERS Properties and the net
proceeds from the Offering and the Concurrent Investments. Excludes an
additional 85,400 GP Units that will be automatically issued to the Company
on August 23, 1997 in respect of the contribution of its interests in BRP to
the Operating Partnership.
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ADDITIONAL ISSUANCES OF CLASS A UNITS
Under certain circumstances, the Operating Partnership will be required to
issue additional Class A Units on account of the contribution to it of certain
of the SSI/TNC Properties, as summarized below.
Repayment of Certain Mortgage Indebtedness at a Discount
The Partnership Agreement provides that in the event additional equity is
created in certain of the SSI/TNC Properties on account of the refinancing of
the indebtedness encumbering such Properties at a discount, additional Units
will be issued at the rate of one Unit for each $16.50 of additional equity so
created. Twenty-five percent of the additional Units (comprised of GP Units)
will be issued to the Company and 75% of the additional Units (comprised of
Class A Units) will be issued to the persons who contributed such Properties to
the Operating Partnership. Following the Offering, mortgage indebtedness having
an aggregate outstanding balance of approximately $15.4 million as of September
30, 1996 and secured by six of the Properties will remain outstanding and
subject to the foregoing provisions.
Acquisition of Residual Interests
The transfer to the Operating Partnership of certain limited partnership
interests in Title Holding Partnerships as part of the SSI/TNC Transaction was
structured as transfers of 89% of the capital interest and 99% of the cash flow
and profits interests in the Title Holding Partnership owning such Properties
(collectively, the "Residual Interests"). See "Structure of the
Company -- Ownership." This transaction structure is intended to comply with
non-binding informal advice provided by the Pennsylvania Department of Revenue
to the effect that such transfers are not subject to Pennsylvania real estate
transfer taxes. The Operating Partnership has the right to acquire, at any time,
and the obligation to acquire by September 1999, the Residual Interests (11%
capital and 1% cash flow and profits) in each of such Title Holding Partnerships
in exchange for an aggregate of 44,322 Class A Units. At the time the Operating
Partnership acquires the Residual Interests, it will be required to pay to each
person receiving Class A Units on account thereof the amount, if any, that is
equal to the excess of (i) the aggregate amount that would have been distributed
to them prior to such acquisition in respect of such Units had they been issued
on August 22, 1996 (the closing date of the SSI/TNC Transaction) over (ii) the
aggregate amount distributed in respect of the Residual Interests between the
closing date and the date of such acquisition.
CANCELLATION OF CLASS A UNITS
The Partnership Agreement provides for the forfeiture of Units upon the
repayment of indebtedness encumbering certain of the SSI/TNC Properties if a
"participation payment" is made to the lender in connection with such repayment.
The number of Units subject to forfeiture would be in the amount of the
participation payment divided by $16.50. In connection with the prepayment of
certain mortgage indebtedness encumbering the Initial Properties, a yield
maintenance penalty in the estimated amount of $500,000 will be paid from a
portion of the net proceeds of the Offering and the Concurrent Investments. As a
result of such payment, SSI and TNC have agreed to forfeit a number of Units
(estimated to be 30,303) equal to the amount of such penalty divided by $16.50.
Such forfeited Units will be cancelled.
REDEMPTION RIGHTS
At any time following the Offering, a holder of a Class A Unit may require
the Operating Partnership to redeem such Unit for cash. At its option, the
Company may assume the Operating Partnership's obligation to redeem any such
Unit and either pay the redemption price in cash or deliver one Common Share
(subject to antidilution adjustments). The Company presently anticipates that it
will elect to issue Common Shares in exchange for Units in connection with a
redemption request, rather than having the Operating Partnership pay cash.
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BUSINESS OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any Federal income or excise tax
liability.
The Partnership Agreement provides that following the Offering all fees and
other costs that the Company incurs for legal and accounting services provided
to it in connection with the preparation and maintenance of the Company's books
and records, financial statements, tax returns and reports to shareholders and
the Securities and Exchange Commission shall be allocated to the Operating
Partnership, provided that if the Company acquires properties that it holds
outside of the Operating Partnership (such as the LibertyView Building), such
fees and other costs will be allocated between the Company and the Operating
Partnership in a fair and equitable manner.
REGISTRATION RIGHTS
For a description of certain registration rights held by holders of Class A
Units, see "Shares Available for Future Sale -- Registration Rights."
AMENDMENTS
The Partnership Agreement generally may be amended only with the consent of
holders of at least 75% of the Class A units then outstanding except to: (i) add
to the obligations of the general partner; (ii) reflect the issuance of
additional partnership interests in the Operating Partnership; and (iii) cure
ambiguities.
TAX MATTERS
The Company will be the tax matters partner of the Operating Partnership
and, as such, will have authority to make tax elections under the Code on behalf
of the Operating Partnership.
The net taxable income or net taxable loss of the Operating Partnership
will generally be allocated to the Company and the Limited Partners in
accordance with their percentage interests, subject to compliance with the
provisions of Sections 704(b) and 704(c) of the Code and the regulations
promulgated thereunder.
REPRESENTATIONS AND WARRANTIES
SSI and TNC made customary representations and warranties as part of the
SSI/TNC Transaction regarding the SSI/TNC Properties contributed directly and
indirectly to the Operating Partnership, including representations and
warranties relating to compliance with laws, environmental matters, title and
the absence of liens and encumbrances, tenant leases, litigation, contractual
obligations, absence of undisclosed liabilities and existence of insurance. The
Partnership Agreement provides that the representations and warranties
thereunder will survive the SSI/TNC Transaction, provided that no claim for
breach may be maintained by the Operating Partnership or the Company unless
notice shall have been delivered to SSI or TNC, as applicable, on or before
August 22, 1998. Recourse by the Company for a breach of such representations
and warranties is limited to the ownership interest of the breaching limited
partner in the Units issued to it and any Common Shares acquired by such limited
partner upon conversion of its Units into Common Shares.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2094 or until sooner dissolved upon the bankruptcy or the
dissolution of the Company (unless the Limited Partners elect to continue the
Operating Partnership), the election of the Company and the Limited Partners to
effect a dissolution, the entry of a dissolution decree by a court or the sale
or other disposition of all or substantially all of the assets of the Operating
Partnership.
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INDEMNIFICATION
The Partnership Agreement provides for indemnification by the Operating
Partnership of the Company, as general partner, and its Trustees and officers
for any costs, expenses or liabilities incurred by them by reason of any act
performed by them for or on behalf of the Operating Partnership or the Company;
provided that such person's conduct was taken in good faith and in the belief
that such conduct was in the best interests of the Operating Partnership and
that such person was not guilty of fraud, willful misconduct or gross
negligence.
BRP GENERAL PARTNERSHIP AGREEMENT
The following summary of the General Partnership Agreement, as amended, of
BRP (the "BRP Partnership Agreement") is qualified in its entirety by reference
to the BRP Partnership Agreement, which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Available
Information."
GENERAL
The Company owns four of its Properties through BRP. The Operating
Partnership currently owns a 97% profits interest and a 49% capital interest in
BRP and the Company currently owns directly a 1% profits interest and a 21%
capital interest in BRP. On August 23, 1997, pursuant to the BRP Partnership
Agreement, the Operating Partnership will acquire the Company's profits and
capital interest in BRP in exchange for 85,400 GP Units, thereby giving the
Operating Partnership a 98% profits interest and a 70% capital interest in BRP.
The other partner in BRP is a limited partnership, Brandywine Specified Property
Investors Limited Partnership (the "Class B Partner").
MANAGEMENT
In the BRP Partnership Agreement, the Class B Partner waived any rights it
might have to vote on or approve any matter relating to the affairs of BRP, and
the Company has the full and complete power, authority and discretion in the
management and control of BRP, and the Class B Partner has no authority to
transact business for, or participate in the management activities or decisions
of, the Operating Partnership.
AMENDMENTS
The BRP Partnership Agreement confers on the Company complete power and
authority, without having to obtain the consent of the Class B Partner, to amend
any provisions of the BRP Partnership Agreement so long as no amendment has the
effect of requiring any capital contributions by the Class B Partner not
otherwise required by the BRP Partnership Agreement or which would affect any
right of the Class B Partner to receive distributions of cash or property or
allocations of taxable income, gain or loss under the BRP Partnership Agreement.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "Status of the Company under ERISA," to a prospective
purchaser that is not an employee benefit plan, another tax-qualified retirement
plan, or an individual retirement account (an "IRA")). This discussion does not
purport to deal with all aspects of ERISA or Section 4975 of the Code or, to the
extent not preempted, state law that may be relevant to particular employee
benefit plan shareholders (including plans subject to Title I of ERISA, other
retirement plans and IRAs subject to the prohibited transaction provisions of
Section 4975 of the Code and governmental plans or church plans that are exempt
from ERISA and Section 4975 of the Code but that may be subject to state law
requirements) in light of their particular circumstances.
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<PAGE> 154
A FIDUCIARY MAKING THE DECISION TO INVEST IN COMMON SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT PLAN OR
AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975
OF THE CODE AND (TO THE EXTENT NOT PREEMPTED) STATE LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP OR SALE OF COMMON SHARES BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan") should carefully consider whether
an investment in Common Shares is consistent with his fiduciary responsibilities
under ERISA. The fiduciary requirements of Part 4 of Title I of ERISA generally
require that an ERISA Plan's investments be (i) prudent and for the exclusive
benefit of the ERISA Plan, its participants and beneficiaries, (ii) diversified
in order to reduce the risk of large losses, unless it is clearly prudent not to
do so, and (iii) authorized under the terms of the governing documents of the
ERISA Plan. In determining whether any investment in Common Shares is prudent
for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should
consider all of the facts and circumstances, including those matters described
under "Risk Factors."
Fiduciaries of IRAs, retirement plans for self-employed individuals ("Keogh
Plans") and other plans subject to Section 4975 of the Code but not subject to
ERISA (IRAs, Keogh Plans and such other plans are referred to herein as "IRC
Plans") should consider that an IRC Plan may only make investments that are
authorized by the appropriate governing documents and under applicable state
law.
Fiduciaries of ERISA Plans, as well as fiduciaries of IRC Plans, should
also consider in making their investment decision the application of the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Code. Administrators of ERISA Plans and IRC Plans and individuals with IRAs
should consult their own legal advisors regarding potential prohibited
transaction issues and whether an exemption is applicable.
STATUS OF THE COMPANY UNDER ERISA
This section discusses certain principles that apply in determining whether
the fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and the Code apply to an entity because one or more investors in the
entity's acquired interests is an ERISA Plan or an IRC Plan. This section also
identifies considerations that would be relevant in the unlikely event that the
ERISA fiduciary requirements were applicable to the Company's operation.
In certain circumstances, where equity interests in any entity are owned by
one or more ERISA Plans or IRC Plans, the investing plans will, for purposes of
ERISA and Section 4975, be considered to own not only the equity interest in the
entity, but a proportionate individual interest in the underlying assets of the
entity. In such a case, the underlying assets of the entity are deemed to be
"plan assets" and, as described below, ERISA's fiduciary requirements and the
excise tax under Section 4975 of the Code would be relevant to the operations of
the entity. As described below, the Company does not believe that its assets
will be considered "plan assets" of investing plans for these purposes.
The U.S. Department of Labor ("DOL"), which has certain administrative
responsibility with respect to ERISA Plans and certain IRC Plans, has issued a
regulation defining the term "plan assets" (the "DOL Regulation"). The DOL
Regulation generally provides that when an ERISA Plan or an IRC Plan acquires a
security that is an equity interest in an entity and that security is neither a
"publicly offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA Plan's or IRC
Plan's assets include both the equity interest and an undivided interest in each
of the underlying assets of the entity, unless it is established either that the
entity is an "operating company" or that equity participation in the entity by
benefit plan investors is not significant. The Company believes that its Common
Shares are a publicly offered security within the meaning of the DOL Regulation.
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The DOL Regulation defines a publicly offered security as a security that
is "widely held," "freely transferable" and either part of a class of securities
registered under the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") or sold pursuant to an effective registration
statement under the Securities Act (provided the class of securities of which
such security is part is registered under the Securities Exchange Act of 1934
within 120 days after the end of the fiscal year of the issuer during which the
offering occurred). The Common Shares are being issued pursuant to an effective
registration statement under the Securities Act and the class of securities of
which Common Shares are part has been registered under the Securities Exchange
Act.
The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company believes that the Common Shares are currently "widely held" and expects
the Common Shares to continue to be "widely held" upon completion of the
Offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulation further provides that where
a security is part of an offering in which the minimum investment is $10,000 or
less (as is the case with the Offering), certain restrictions ordinarily will
not, alone or in combination, affect a finding that such securities are freely
transferable. The restrictions on transfer enumerated in the DOL Regulation as
ordinarily not affecting that finding include: (i) any restriction on or
prohibition against any transfer or assignment that would result in a
termination or reclassification of the Company for Federal or state tax
purposes, or that would otherwise violate any state or Federal law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the Company, (iii) any requirement that either the transferor or the
transferee, or both, execute documentation setting forth representations as to
compliance with any restrictions on transfer that are among those enumerated in
the final DOL Regulation as not affecting free transferability, (iv) any
administrative procedure that establishes an effective date, or any event (such
as completion of the Offering) prior to which a transfer or assignment will not
be effective, and (v) any limitation or restriction on transfer or assignment
that is not imposed by the issuer or a person acting on behalf of the issuer.
The Company believes that the restrictions imposed under the Declaration of
Trust on the transfer of Common Shares are limited to restrictions on transfer
which, under the DOL Regulation, ordinarily do not affect a finding of free
transferability, and are unlikely to result in the failure of the Common Shares
to be considered "freely transferable" for purposes of the DOL Regulation. In
addition, the Company is not aware of any other facts or circumstances limiting
the transferability of the Common Shares that are not included among those
enumerated as not affecting their free transferability under the DOL Regulation,
and the Company does not expect or intend to impose in the future (or to permit
any person to impose on its behalf) any limitations or restrictions on transfer
that would not be among the enumerated permissible limitations or restrictions.
The DOL Regulation only establishes a presumption in favor of a finding of free
transferability, and no assurances can be given that the DOL, the Treasury
Department or a court will not reach a contrary conclusion.
Assuming that Common Shares will be "widely held" and that no other facts
and circumstances exist that restrict transferability of Common Shares, the
Company believes that the Common Shares should be treated as a "publicly offered
security" within the meaning of the DOL Regulation and, accordingly, that the
underlying assets of the Company should not be considered to be "plan assets" of
any ERISA Plan or IRC Plan investing in Common Shares.
If the assets of the Company were deemed to be "plan assets" under ERISA
and Section 4975 of the Code, (i) the prudence standards and other provisions of
Part 4 of Subtitle B of Title I of ERISA would be applicable to any transactions
involving the Company's assets, (ii) persons who exercise any authority or
control over the Company's assets, or who provide investment advice to the
Company, would (for purposes of the fiduciary responsibility provisions of ERISA
and Section 4975 of the Code) be fiduciaries of each ERISA Plan or IRC Plan that
acquires Common Shares, (iii) transactions involving the Company's assets
undertaken at the direction or pursuant to the advice of such fiduciaries might
be violative of their fiduciary responsibilities under ERISA, especially with
regard to conflicts of interest, (iv) a fiduciary exercising its investment
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discretion over the assets of the ERISA Plan to cause it to acquire or hold
Common Shares could be liable under the aforementioned Part 4 of Subtitle B of
Title I of ERISA for transactions entered into by the Company that do not
conform to ERISA standards of prudence and fiduciary responsibility, (v) certain
transactions that the Company might enter into in the ordinary course of its
business and operations might constitute "prohibited transactions" under ERISA
and the Code, and (vi) fiduciaries of ERISA Plans may violate ERISA's
prohibition against the improper delegation of control or responsibility for
"plan assets" and may be liable for breaches of ERISA's fiduciary duties
committed by co-fiduciaries.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offering and the Concurrent Investments, there will
be 6,302,959 Common Shares issued and outstanding (6,902,959 Common Shares if
the Underwriters' over-allotment option is exercised in full). In addition, (i)
509,856 Common Shares will be reserved for issuance upon the conversion of Units
into Common Shares, (ii) 762,104 Common Shares will be reserved for issuance
upon exercise of outstanding options and warrants and (iii) 481,818 Preferred
Shares will be outstanding and, prior to the occurrence of a Conversion
Approval, will be convertible into 181,325 Common Shares, and, following the
occurrence of a Conversion Approval, will be convertible into an additional
1,424,735 Common Shares. All of the Common Shares issued in the Offering will be
freely tradable by persons other than "affiliates" of the Company without
registration or other restrictions under the Securities Act, subject to
limitations on ownership set forth in the Declaration of Trust. See "Description
of Shares of Beneficial Interest -- Restrictions on Transfer." 618,733 of the
Common Shares outstanding prior to the Offering are also freely tradeable by
persons other than affiliates of the Company without registration or other
restriction under the Securities Act, subject to the above-referenced
limitations on ownership set forth in the Declaration of Trust. The remaining
338,772 Common Shares outstanding prior to the Offering; the Common Shares
issuable upon the conversion of Units; the Common Shares issuable upon
conversion of the Preferred Shares to be issued in the SERS Transaction; the
Common Shares issuable to the Voting Trust and the Morgan Stanley Funds in the
Concurrent Investments; and the Common Shares that will be issued in connection
with the prepayment of the Osborne Loan (collectively, "Restricted Shares"),
will be "restricted" securities within the meaning of Rule 144 under the
Securities Act and may be sold only pursuant to an effective registration
statement under the Securities Act or an applicable exemption, including an
exemption under Rules 144 and 144A under the Securities Act. The Company has
registered the issuance of 290,000 Common Shares upon the exercise of
outstanding options and warrants, and the resale of 266,666 of such Common
Shares, so that such securities may be freely sold by the holders, whether or
not affiliates of the Company, without registration or other restriction.
In general, under Rule 144, as currently in effect, if two years have
elapsed since the later of the date of the acquisition of Restricted Shares from
the Company or the date of acquisition of Restricted Shares from any "affiliate"
of the Company, as that term is defined in the Securities Act, the acquiror or
subsequent holder is entitled to sell within any three-month period a number of
Common Shares that does not exceed the greater of 1% of the then-outstanding
Common Shares or the average weekly trading volume of Common Shares on all
exchanges and reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain restrictions on the manner of sales, notice requirements
and the availability of current public information about the Company. If three
years have elapsed since the date of acquisition of Restricted Shares from the
Company or from any "affiliate" of the Company, and the acquiror or subsequent
holder thereof is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, such person would be entitled to sell
such Common Shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements. As defined in Rule 144, an "affiliate" of an issuer is a
person that directly or indirectly, through the use of one or more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer.
In connection with the Offering, the Operating Partnership, the Company,
its Trustees and executive officers, and certain shareholders of the Company
(including SSI, TNC, the RMO Trust, the RMO Fund and
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<PAGE> 157
the SERS Voting Trust) have agreed, subject to certain limited exceptions, not
to sell, offer to sell, solicit an offer to buy, contract to sell, grant any
option to purchase or otherwise transfer or dispose of any Common Shares or any
securities convertible into or exchangeable or exercisable for Common Shares
until expiration of the Lock-up Period without the prior written consent of
Smith Barney Inc., except, in the case of the Company and the Operating
Partnership, for the issuance of such securities in connection with the
acquisition of any office or industrial property; upon the redemption of any
Units issued in connection with the SSI/TNC Transaction; upon the exercise of
any options or warrants of the Company; in connection with the Concurrent
Investments; or upon conversion of any Preferred Shares issued in connection
with the SERS Transaction.
No prediction can be made as to the effect that future market sales of
Restricted Shares or the availability of such Restricted Shares for sale will
have on the market price of the Common Shares prevailing from time to time.
Sales of substantial amounts of Restricted Shares in the public market (or the
perception that such sales could occur) might adversely affect prevailing market
prices for the Common Shares. See "Risk Factors -- Effect on Price of Shares
Available for Future Sale."
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with each
holder of Units, with SSI and with the RMO Fund (the "Initial Registration
Rights Agreement") obligating the Company to register: (i) 258,333 Common Shares
initially issued to SSI; (ii) 258,333 Common Shares that may be issued upon the
exercise of warrants initially issued to SSI; (iii) Common Shares that may be
issued upon the conversion of Units; (iv) 160,878 Common Shares issued to the
RMO Fund (including 80,439 Common Shares that may be issued upon exercise of
warrants) in connection with its investment in the Company in June 1996 and in
connection with the repayment of the Osborne Loan; and, pursuant to an amendment
to the Initial Registration Rights Agreement, additional Common Shares acquired
in the open market by the foregoing (collectively, "Registrable Securities").
The Initial Registration Rights Agreement provides that, at the request of the
holders of Registrable Securities, the Company will, at its expense, register up
to two underwritten distributions of Common Shares and provide for an annual
shelf registration of such Common Shares for sale at the market through brokers'
transactions and thereafter with market makers; provided, however, that the
Company will not be obligated to pay the expenses of an underwritten offering
during the period ending August 22, 1997. The holders of Registrable Securities
are also entitled to "piggyback" on the Company's future registrations of its
Common Shares, if any. In connection with such registrations, the Company and
the selling shareholders will mutually indemnify each other against certain
liabilities, including liabilities under the federal securities laws. At the
closings of the SERS Transaction and the Morgan Stanley Private Placement, the
Company will enter into agreements with the Voting Trust and the Morgan Stanley
Funds on terms substantially similar to those in the Initial Registration Rights
Agreement obligating the Company to register the Common Shares to be issued in
the Concurrent Investments as well as the Common Shares issuable upon conversion
or exercise of the Preferred Shares and warrants issued in the SERS Transaction
as well as additional Common Shares acquired in the open market by or for SERS
and the Morgan Stanley Funds (collectively, the "Additional Registrable
Securities"). In these registration rights agreements and an amendment to the
Initial Registration Rights Agreement, the Company will agree to use
commercially reasonable best efforts to register the resale of the Registrable
Securities and the Additional Registrable Securities no later than the earlier
of: (i) March 31, 1997 and (ii) 120 days following the consummation of the
Concurrent Investments.
The Company has filed a registration statement on Form S-8 registering the
issuance of an aggregate of 290,000 Common Shares upon the exercise of
outstanding options and warrants held by employees of the Company and the resale
of 266,666 of such Common Shares by persons who may be deemed to be affiliates
of the Company.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter, the
number of Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Smith Barney Inc........................... 1,535,000
Legg Mason Wood Walker, Incorporated....... 1,535,000
Alex. Brown & Sons Incorporated............ 70,000
Dean Witter Reynolds Inc................... 70,000
Donaldson, Lufkin & Jenrette
Securities Corporation................... 70,000
EVEREN Securities, Inc..................... 50,000
Goldman, Sachs & Co........................ 70,000
Janney Montgomery Scott Inc................ 50,000
Lehman Brothers Inc........................ 70,000
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Morgan Stanley & Co. Incorporated.......... 70,000
PaineWebber Incorporated................... 70,000
Prudential Securities Incorporated......... 70,000
Raymond James & Associates, Inc............ 50,000
Robertson, Stephens & Company LLC.......... 70,000
The Robinson-Humphrey Company, Inc......... 50,000
Tucker Anthony Incorporated................ 50,000
Wheat, First Securities, Inc............... 50,000
---------
Total.............................. 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares offered hereby are
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the Common
Shares offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Legg Mason Wood Walker,
Incorporated are acting as the Representatives, propose to offer part of the
shares directly to the public at the public offering price set forth on the
cover page of this Prospectus and part of the shares to certain dealers at a
price which represents a concession not in excess of $0.61 per share under the
public offering price. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $0.10 per share to certain other dealers. After
the offering of the shares to the public, the public offering price and such
concessions may be changed by the Representatives. The Representatives of the
Underwriters have advised the Company that the Underwriters do not intend to
confirm any sales to any accounts over which they exercise discretionary
authority.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus, to purchase up to 600,000
additional Common Shares at the price to public set forth on the cover page of
this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the offering of the shares offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
In connection with the Offering, the Operating Partnership, the Company,
its Trustees and executive officers, and certain shareholders of the Company
designated by the Representatives (including SSI, TNC, the RMO Trust, the RMO
Fund and the SERS Voting Trust) have agreed, subject to certain limited
exceptions, not to sell, offer to sell, solicit an offer to buy, contract to
sell, grant any option to purchase or otherwise transfer or dispose of any
Common Shares or any securities convertible into or exchangeable or exercisable
for Common Shares until expiration of the 180-day period after the effective
date of this Prospectus, without the prior written consent of Smith Barney Inc.,
except, in the case of the Company and the Operating Partnership, for the
issuance of such securities in connection with the acquisition of any office or
industrial property; upon the redemption of any Units issued in connection with
the SSI/TNC Transaction; upon the exercise of any options or warrants of the
Company; in connection with the Concurrent Investments; or upon conversion of
any Preferred Shares issued in connection with the SERS Transaction.
At the request of the Company, the Underwriters have reserved up to 50,000
Common Shares for sale at the public offering price to certain Trustees and
employees of the Company, their business affiliates and
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<PAGE> 159
related parties who have expressed an interest in purchasing shares. Such
purchases will be made under the same terms and conditions as will be offered by
the Underwriters in the public offering.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933.
The Company has agreed to pay to Smith Barney Inc. and Legg Mason Wood
Walker, Incorporated an advisory fee equal to 1.70% of the gross proceeds of the
Offering (including any exercise of the Underwriters' over-allotment option) for
advisory services rendered by them in connection with the evaluation, analysis
and structuring of the Offering.
Smith Barney Mortgage Capital Group, Inc. an affiliate of Smith Barney
Inc., is the syndication agent for the Credit Facility. In connection with the
closing of the Credit Facility, the Company will pay Smith Barney Mortgage
Capital Group, Inc. a fee of $300,000. In addition, Smith Barney Mortgage
Capital Group, Inc. is entitled to receive a pro rata portion of the fee on the
unused portion of the Credit Facility equal to 1/8% per annum from the date of
the closing of the Credit Facility through March 31, 1997, and 1/4% per annum
thereafter.
In connection with the SSI/TNC Transaction, Legg Mason Wood Walker,
Incorporated, one of the Representatives, rendered advisory services and
provided an opinion to the Board of Trustees of the Company for which it was
paid a total of $100,000. Walter D'Alessio, a member of the Company's Board of
Trustees, is President of Legg Mason Real Estate Services, Inc., a subsidiary of
Legg Mason, Inc., the parent of Legg Mason Wood Walker, Incorporated.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The C&W Market Analyses were prepared for the Company by Cushman &
Wakefield of Pennsylvania, Inc., which is a real estate service firm with
significant experience and expertise relating to the Suburban Philadelphia
Office and Industrial Market. C&W is a part of a national network of affiliated
companies providing real estate related services. The statistical and other
information from the C&W Mid-Year Report and C&W Market Analyses appearing in
this Prospectus and the Registration Statement have been included herein in
reliance on C&W's expertise as a real estate service firm, with respect to the
Suburban Philadelphia Office and Industrial Market.
LEGAL MATTERS
The validity of the Common Shares offered hereby, as well as certain legal
matters relating to the Company, will be passed upon for the Company by Pepper,
Hamilton & Scheetz, Philadelphia, Pennsylvania. Certain legal matters related to
the Offering will be passed upon for the Underwriters by Battle Fowler LLP, New
York, New York. Pepper, Hamilton & Scheetz and Battle Fowler LLP will rely on
Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, as to certain matters of
Maryland law.
TAX MATTERS
The statements in this Prospectus under the caption "Federal Income Tax
Considerations" and the other statements herein relating to the Company's
qualification as a REIT and the taxation of the Company's shareholders, are
based upon the opinion of Arthur Andersen LLP.
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<PAGE> 160
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"), pursuant to the Exchange
Act. The Registration Statement, as well as such reports, proxy statements and
other information filed by the Company with the Commission, may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and are also available for inspection and copying
at the regional offices of the Commission located at Seven World Trade Center,
New York, New York 10048 and at Citicorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661. Such material can also be inspected and copied
at the offices of the American Stock Exchange, Inc., 86 Trinity Place, New York,
New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act, and the rules and regulations promulgated
thereunder, with respect to the Common Shares offered pursuant to this
Prospectus. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and financial schedules thereto. For further information concerning
the Company and the Common Shares offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith, which may
be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Commission and its regional offices at the locations listed
above. Any statements contained herein concerning the provisions of any document
are not necessarily complete, and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
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<PAGE> 161
GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus:
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"AMEX" means American Stock Exchange, Inc.
"Average Annualized Rental Rate" means (i) for office leases written on a
triple net basis, the sum of the annualized contracted base rental rates payable
for all space leased as of September 30, 1996 without giving effect to free rent
or scheduled rent increases that would be taken into account under generally
accepted accounting principles plus the 1996 budgeted operating expenses
excluding tenant electricity; and (ii) for office leases written on a full
service basis, the annualized rental rate is divided by the total square footage
leased as of September 30, 1996 without giving effect to free rent or scheduled
rent increases that would be taken into account under generally accepted
accounting principles.
Acquisition Properties" means, collectively, the SERS Properties and the
four additional office buildings that the Company will acquire prior to or
concurrent with the closing of the Offering.
"Board of Trustees" means the Board of Trustees of the Company.
Book Value Per Share" means, as of any date: (i) the total beneficiaries'
equity as shown on the Company's consolidated balance sheet as of the fiscal
quarter end immediately prior to the applicable date (with appropriate
adjustments for any material events subsequent thereto) prepared in accordance
with rules and regulations of the SEC and GAAP applied on a consistent basis (as
adjusted to reflect the consideration received by the Company upon the Exercise
(defined below) of any Convertible Securities (defined below) which are included
in the computation in (ii) below), divided by (ii) the sum of the number of
Common Shares outstanding on such date plus the number of Common Shares issuable
upon the exercise, conversion or exchange (collectively, "Exercise") of
outstanding options, warrants, Preferred Shares and other convertible securities
or similar rights (collectively, "Convertible Securities") to the extent that
the consideration payable upon the exercise of such Convertible Securities is
less than the Market Value Per Share of the Common Shares issuable upon such
Exercise.
"BRP" means Brandywine Realty Partners, a general partnership that owns the
four BRP Properties.
"BRP Partnership Agreement" means the General Partnership Agreement, as
amended, of BRP.
"BRP Properties" means the following four Properties owned by BRP: One
Greentree Centre, Two Greentree Centre, Three Greentree Centre and Twin Forks.
"Bylaws" means the Bylaws of the Company.
"C&W" means Cushman & Wakefield of Pennsylvania, Inc.
"C&W Market Analyses" means the 10 market analyses prepared for the Company
by C&W.
"C&W Mid-Year Report" means the Mid-Year 1996 Philadelphia Office Market
Report and Philadelphia Industrial Market Report prepared by C&W.
"Cash Available for Distribution" means Funds from Operations adjusted for
principal amortization payments and reserves for capital expenditures.
"Class A Units" means the limited partnership interests of the Operating
Partnership that will remain outstanding upon completion of the Offering and
that will be exchangeable for Common Shares.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the common shares of beneficial interest, par value
$.01 per share, of the Company.
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<PAGE> 162
"Company" means Brandywine Realty Trust, a Maryland real estate investment
trust, and those entities over which Brandywine Realty Trust has control or of
which it owns a majority of the economic interests, unless the context otherwise
indicates.
"Concurrent Investments" means, collectively, the Morgan Stanley Private
Placement and the SERS Private Placement.
"Conflicting Provisions" means provisions of the Company's Declaration of
Trust which are in conflict with the Maryland REIT Law, the Code or other
applicable federal or state law(s).
"Conversion Approval" means approval of the unlimited conversion of Series
A Preferred Shares into Common Shares by a majority of the votes cast by holders
of Common Shares at a meeting of shareholders in which holders of Preferred
Shares have no right to vote.
"Conversion Number" means the number of Common Shares into which a
Preferred Share is, or Preferred Shares are, convertible.
"CPI" means the consumer price index.
"Credit Facility" means the $80 million, two-year revolving line of credit
for which the Company has obtained a commitment from a group of lenders.
"Declaration of Trust" means the Declaration of Trust of the Company, as
amended.
"Employment Agreements" means the two-year employment agreements dated July
31, 1996 entered into by the Company with its Chief Executive Officer and its
three other executive officers.
"EPA" means Environmental Protection Agency.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, or other employee benefit
plan subject to Title 1 of ERISA.
"Excluded Common Shares" means any Common Shares issued by the Company
after May 1, 1996, the net proceeds of which issuance are not contributed to the
Operating Partnership.
"Final Annualized Base Rent" means the base rental rate payable under the
applicable lease in the month that the lease expires multiplied by twelve.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Funds from Operations" means net income (loss) adjusted for depreciation
expense attributable to real property, amortization expense attributable to
capitalized leasing costs, tenant allowances and improvements, gains on sales of
real estate investments and extraordinary nonrecurring items.
"GAAP" means generally accepted accounting principles.
"Initial Properties" means, collectively, the BRP Properties, the SSI/TNC
Properties and the LibertyView Building.
"Interested Shareholder" means any person, or an affiliate thereof, who
beneficially owns 10% or more of the voting power of a Maryland real estate
investment trust's outstanding shares.
"Investment Date" means June 21, 1996.
"IRA" means individual retirement account.
"IRS" means the United States Internal Revenue Service.
"LCOR" means LCOR Incorporated, a real estate development firm.
""Legg Mason" means Legg Mason Wood Walker, Incorporated.
"LibertyView Building" means the Property at 457 Haddonfield Road, Cherry
Hill, New Jersey.
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"Limited Partners" means the limited partners of the Operating Partnership.
"Linpro Entities" means the more than 350 different limited partnerships,
joint ventures and corporations which were originally doing business under the
name "The Linpro Company".
"Lock-up Period" means the 180-day period after the effective date of this
Prospectus.
"Management Company" means Brandywine Realty Services Corporation, the
Company's property management subsidiary.
"Market" means the Suburban Philadelphia Office and Industrial Market.
"Market Value Per Share" means, as of any date (the "Valuation Date"), the
average of the closing per share sale price(s) of the Common Shares for the
period of 20 consecutive trading days ending on the trading date immediately
preceding the Valuation Date as such prices are reported by the principal United
States securities exchange on which the Common Shares are then traded or, if the
Common Shares are not then traded on any such exchange, the closing per share
sale price (or the average of the quoted per share closing bid and asked prices
if no sale is reported) as reported by the National Association of Securities
Dealers, Inc. ("NASD"), Automated Quotation System ("NASDAQ") or any comparable
system or, if the Common Shares are not then quoted on NASDAQ or any comparable
system, the average of the closing per share bid and asked prices as furnished
by any member of the NASD selected by the Board of Trustees.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland.
"MGCL" means the Maryland General Corporation Law.
"Morgan Stanley Funds" means the two investment funds managed by Morgan
Stanley Asset Management Inc. that have agreed to purchase Common Shares in the
Morgan Stanley Private Placement.
"Morgan Stanley Private Placement" means the private placement by the
Company of 709,090 Common Shares to the Morgan Stanley Funds at a price per
share of $16.50 (representing an aggregate purchase price of $11.7 million) to
be consummated concurrent with the closing of the Offering.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Net Operating Income" means the total property gross income less operating
expenses exclusive of interest expense, income taxes and all non-cash charges.
"Newtech Partnership" means the limited partnership which holds fee title
to the Property at 16 Campus Boulevard.
"Non-ERISA Plan" means a qualified retirement plan not subject to Title 1
of ERISA because it is a governmental or church plan or because it does not
cover common law employees.
"Non-U.S. Shareholders" means nonresidential alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
"Offering" means the offering of Common Shares to the public by the
Underwriters pursuant to this Prospectus.
"Operating Partnership" means Brandywine Operating Partnership, L.P., a
limited partnership organized under the laws of Delaware.
"Option Properties" means the four properties that the Company acquired
options to purchase in the SSI/TNC Transaction.
"Osborne Loan" means the loan made by the RMO Fund to the Company on June
21, 1996 in the original principal amount of approximately $990,000.
"Owners" means SSI, TNC and the 11 other persons who contributed interests
in the 19 SSI/TNC Properties to the Operating Partnership as part of the SSI/TNC
Transaction.
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<PAGE> 164
"Ownership Limits" means the Company's Declaration of Trust provisions
prohibiting, subject to certain exceptions, any shareholder or group of
affiliated shareholders from owning more than 9.8% in value of the Common
Shares.
"Ownership Restrictions" means the provisions of the Declaration of Trust
prohibiting any transfer of Common Shares if, as a result of such transfer, the
Common Shares would be held by fewer than 100 persons or results in the Company
being "closely held" within the meaning of Section 856(h) of the Code.
"Paired Unit" means a unit comprised of one Common Share and a six-year
warrant exercisable for one additional Common Share at the exercise price of
$19.50 per share (subject to customary antidilution adjustments).
"Partnership Agreement" means the agreement of limited partnership, as
amended, of the Operating Partnership.
"Phase I" means an environmental site assessment performed by independent
third parties to evaluate the environmental condition of, and potential
environmental liabilities associated with, the Properties.
"Philadelphia PMSA" means Philadelphia primary metropolitan statistical
area.
"Preferred Shares" means the 481,818 Series A preferred shares of
beneficial interest, par value $.01 per share, of the Company issued to the SERS
Voting Trust in connection with the SERS Transaction which Preferred Shares are
convertible, under certain circumstances, into 1,606,060 Common Shares.
"Properties" means, collectively, the Initial Properties and the
Acquisition Properties.
"Qualified Offering" means a public or private sale of equity securities
generating at least $35 million of net proceeds to the Company at a price per
share at least equal to the per share book value of the Common Shares as of the
end of the most recently preceding quarter preceding the sale or at least $25
million of net proceeds, but less than $35 million of net proceeds, at a price
per share of at least $16.50 (subject to adjustment in the event of stock
dividends, stock splits or reverse stock splits).
"RAI" means Radnor Advisors Inc.
"Redemption Price" means, in respect of a Preferred Share, the greater of:
(i) the product of (a) $16.50 plus an amount (the "Return Amount") equal to 8.0%
of $16.50 per annum from the date of issuance of such Series A Preferred Share
to the redemption date thereof less an amount (not to exceed the Return Amount)
equal to distributions actually received by the holder on account of such
Preferred Share and (b) the Conversion Number and (ii) the product of the market
price of a Common Share and the Conversion Number.
"Registration Rights Agreement" means the agreement among the Company, SSI,
each holder of Class A Units and the RMO Fund obligating the Company to register
Common Shares issued and issuable to such person under certain circumstances.
"REIT" means a real estate investment trust as defined by Sections 856
through 860 of the Code and applicable Treasury regulations.
"Replacement Cost Rents" the rental rate that would provide a reasonable
return on investment to a developer of a new Class A multi-tenant office
building.
"Residual Interests" means the residual 11% capital and 1% cash flow and
profits interest in certain of the Title Holding Partnerships that the Operating
Partnership has the obligation to acquire by September 1999.
"Reverse Split" means the combination of outstanding Common Shares by means
of a one-for-three reverse share split prior to the closing of the Offering.
"RMO Fund" means Turkey Vulture Fund XIII, Ltd.
"RMO Trust" means the Richard M. Osborne Trust.
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<PAGE> 165
"Rule 144" means the rule promulgated under the Securities Act that permits
holders of restricted securities as well as affiliates of an issuer of
securities, pursuant to certain conditions and subject to certain restrictions,
to sell their securities publicly without registration under the Securities Act.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"SERS" means the Pennsylvania State Employes' Retirement System and its
subsidiaries.
"SERS Private Placement" means the private placement by the Company of
$10.5 million of Common Shares to the SERS Voting Trust at a price per share
equal to the public offering price that will be consummated concurrent with the
closing of the Offering.
"SERS Properties" means the nine Acquisition Properties that the Company
acquired from SERS pursuant to the SERS Transaction.
"SERS Transaction" means the transaction in which the Company will acquire
the SERS Properties.
"SERS Voting Trust" means the voting trust established for the benefit of
SERS, as shareholder, and of which RAI Real Estate Advisers, Inc. is the voting
trustee.
"Shares" means, collectively, the up to 30,000,000 authorized shares of
beneficial interest of the Company.
"SSI" means Safeguard Scientifics, Inc.
"SSI Loan" means the several loans by SSI to the Operating Partnership or a
subsidiary in the aggregate principal amount of $764,000, as of September 30,
1996, to finance certain expenses in connection with the SSI/TNC Transaction,
provide working capital, finance certain preferred distributions to the Company
and finance tenant improvements.
"SSI/TNC Properties" means the 19 Properties, either individually or in
combination, acquired by the Operating Partnership in the SSI/TNC Transaction.
"SSI/TNC Transaction" means the transactions pursuant to which the Company
acquired interests in the SSI/TNC Properties."
"Suburban Philadelphia Office and Industrial Market" means the areas
comprised of the following counties: Bucks, Chester, Delaware, Lehigh,
Montgomery and Northampton in Pennsylvania and Burlington and Camden in New
Jersey.
"Title Holding Partnerships" means the Company's partnership subsidiaries
holding fee title to certain of the Properties.
"TNC" means The Nichols Company and its affiliates.
"Total Base Rent" for the twelve months ended September 30, 1996 means base
rents received during such period, excluding tenant reimbursements calculated on
a straight-line basis in accordance with generally accepted accounting
principles. Tenant reimbursements generally include payment of real estate
taxes, operating expenses and escalations and common area maintenance and
utility charges.
"Treasury Regulations" means the income tax regulations that have been
promulgated under the Code.
"Trustees" means the Trustees of the Company.
"Underwriters" means the underwriters named in this Prospectus, for whom
Smith Barney Inc. and Legg Mason Wood Walker, Incorporated are acting as
representatives.
"Underwriting Agreement" means the Underwriting Agreement between the
Company and the Underwriters.
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"United States" means the United States of America (including the District
of Columbia), its territories, possessions and other areas subject to its
jurisdiction.
"Units" means Class A Units of limited partnership interests of the
Operating Partnership.
"Whitelands Property" means the Whitelands Business Park in Exton,
Pennsylvania.
"Witmer Properties" means the eight Properties held by a subsidiary of the
Operating Partnership and that secure repayment of a mortgage loan made by
General Electric Credit Corporation. The following Properties are the Witmer
Properties: 1155 Business Center Drive; One Progress Avenue; 500 Enterprise
Road; 1510 Gehman Road; 168 Franklin Corner Road; 16 Campus Boulevard; 18 Campus
Boulevard; and 456 Creamery Way.
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BRANDYWINE REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- Pro Forma Condensed Consolidating Balance Sheet as of September 30,
1996.................................................................. F-4
- Pro Forma Condensed Consolidating Statements of Operations for the
Year Ended December 31, 1995, and the Nine-Months Ended September 30,
1996.................................................................. F-5
- Notes and Management's Assumptions to Unaudited Pro Forma Condensed
Consolidating Financial Information................................... F-7
II. BRANDYWINE REALTY TRUST
- Report of Independent Public Accountants.............................. F-14
- Consolidated Balance Sheets as of December 31, 1994 and 1995 (audited)
and September 30, 1996 (Unaudited)...................................... F-15
- Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 (audited) and for the Nine-Months Ended September
30, 1995 and 1996 (Unaudited)......................................... F-16
- Consolidated Statements of Beneficiaries' Equity for the Years Ended
December 31, 1993, 1994 and 1995 (audited), and for the Nine-Months
Ended September 30, 1996 (Unaudited).................................. F-17
- Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 (audited), and for the Nine-Months Ended September
30, 1995 and 1996 (Unaudited)......................................... F-18
- Notes to Consolidated Financial Statements............................ F-19
III. SSI/TNC PROPERTIES
- Report of Independent Public Accountants.............................. F-35
- Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
June 30, 1996 (Unaudited)............................................. F-36
- Combined Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 (audited), and for the Six-Months Ended June 30,
1995 and 1996 (Unaudited)............................................. F-37
- Combined Statements of Owners' Deficit for the Years Ended December
31, 1993, 1994 and 1995 (audited), and for the Six-Months Ended June 30,
1996 (Unaudited)...................................................... F-38
- Combined Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 (audited), and for the Six-Months Ended June 30,
1995 and 1996 (Unaudited)............................................. F-39
- Notes to Combined Financial Statements................................ F-40
IV. LIBERTYVIEW BUILDING
- Report of Independent Public Accountants.............................. F-46
- Statements of Revenue and Certain Expenses for the Year Ended December
31, 1995, and Six-Months Ended June 30, 1996 (Unaudited)................ F-47
- Notes to Statements of Revenue and Certain Expenses................... F-48
</TABLE>
F-1
<PAGE> 168
<TABLE>
<S> <C> <C>
V. SERS PROPERTIES
- Report of Independent Public Accountants.............................. F-50
- Statements of Revenue and Certain Expenses for the Year Ended December
31, 1995, and Nine-Months Ended September 30, 1995 and 1996
(Unaudited)........................................................... F-51
- Notes to Statement of Revenue and Certain Expenses.................... F-52
VI. DELAWARE CORPORATE CENTER
- Report of Independent Public Accountants.............................. F-53
- Statements of Revenue and Certain Expenses for the Year Ended December
31, 1995, and Nine-Months Ended September 30, 1995 and 1996
(Unaudited)........................................................... F-54
- Notes to Statement of Revenue and Certain Expenses.................... F-55
VII. 700/800 BUSINESS CENTER DRIVE
- Report of Independent Public Accountants.............................. F-57
- Statements of Revenue and Certain Expenses for the Year Ended December
31, 1995, and Nine-Months Ended September 30, 1995 and 1996
(Unaudited)........................................................... F-58
- Notes to Statement of Revenue and Certain Expenses.................... F-59
VIII. FINANCIAL STATEMENT SCHEDULE
- Schedule III -- Real Estate and Accumulated Depreciation -- December
31, 1995.............................................................. F-60
</TABLE>
F-2
<PAGE> 169
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following sets forth the pro forma condensed consolidating balance
sheet of Brandywine Realty Trust ("the Company) as of September 30, 1996, and
the pro forma condensed consolidating statements of operations for the year
ended December 31, 1995 and the nine-month period ended September 30, 1996.
The unaudited pro forma condensed consolidating financial information is
presented as if the following transactions had been consummated on September 30,
1996, for balance sheet purposes, and at the beginning of the period presented,
for purposes of the statements of operations:
- The Company consummated the Offering and applied the net proceeds
therefrom as described under "Use of Proceeds". This pro forma condensed
consolidating financial information should be read in conjunction with
the historical financial statements of the Company, the SSI/TNC
Properties, the LibertyView Building, and the Acquisition Properties
(defined below) and the related notes thereto included elsewhere herein.
In management's opinion, all adjustments necessary to reflect the effects
of the transactions to be consummated have been made.
- The Company issued 4,000,000 Common Shares at $16.50 per share.
- The $774,000 loan from the RMO Fund was satisfied by the Company by the
issuance of 46,321 Paired Units to the RMO Fund.
- The Company acquired its partnership interests in the Operating
Partnership.
- The Operating Partnership acquired the 19 SSI/TNC Properties in
connection with the SSI/TNC transaction.
- The Company acquired the LibertyView Building.
- In conjunction with the Offering the Company acquired the SERS
Properties, Delaware Corporate Center I, 700/800 Business Center Drive,
and 8000 Lincoln Drive (hereinafter referred to as the "Acquisition
Properties") for $26,444,000 of Preferred Shares, $3,225,000 of deferred
payments, $56,000 of warrants and $24,293,000 of cash.
- The Company will contribute the net proceeds from the Offering to the
Operating Partnership in exchange for 4,000,000 GP Units.
- The Company will issue 636,363 Common Shares at $16.50 per share to SERS
Voting Trust, in exchange for $10.5 million and contribute such proceeds
to the Operating Partnership in exchange for 636,363 GP Units.
- Following the Offering and the application of the net proceeds therefrom,
the Operating Partnership will repay $47,868,000 of indebtedness secured
by the Properties, $764,000 of loans made by SSI to the Operating
Partnership and a $500,000 prepayment penalty.
- The Company will issue 709,090 Common Shares at $16.50 per share in the
Morgan Stanley Private Placement and contribute the proceeds to the
Operating Partnership in exchange for 709,090 GP Units.
The pro forma condensed consolidating financial information is unaudited
and is not necessarily indicative of what the actual financial position would
have been at September 30, 1996, nor does it purport to represent the future
financial position and the results of operations of the Company.
F-3
<PAGE> 170
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1996 (NOTES 1 AND 2)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BRANDYWINE
REALTY TRUST PRO FORMA
HISTORICAL ACQUISITION OFFERING PRO FORMA
CONSOLIDATED(A) PROPERTIES(B) ADJUSTMENTS CONSOLIDATED
--------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Real estate investments, net................. $ 98,818 $ 52,853 $ -- $151,671
Cash and cash equivalents.................... 1,859 (24,293) 31,147(C) 8,713
Escrowed cash................................ 966 1,355 (145)(D) 2,176
Deferred costs, net.......................... 2,290 -- 355(E) 2,645
Other assets................................. 2,250 (190) -- 2,060
-------- ------- ------- --------
Total assets......................... $ 106,183 $ 29,725 $ 31,357 $167,265
======== ======= ======= ========
LIABILITIES:
Mortgages and notes payable.................. $ 83,020 $ 3,225 $ (49,406)(F) $ 36,839
Other liabilities............................ 3,096 -- (745)(G) 2,351
-------- ------- ------- --------
Total liabilities.................... 86,116 3,225 (50,151) 39,190
-------- ------- ------- --------
MINORITY INTEREST.............................. 8,758 -- (8,233)(H) 525
-------- ------- ------- --------
Convertible Preferred Shares................... -- 26,444 -- 26,444
-------- ------- ------- --------
BENEFICIARIES' EQUITY:
Common shares of beneficial interest......... 9 -- 54(I) 63
Additional paid-in capital................... 20,443 -- 89,439(J) 109,882
Stock warrants............................... 658 56 248(K) 962
Accumulated equity (deficit)................. (9,801) -- -- (9,801)
-------- ------- ------- --------
Total beneficiaries' equity.......... 11,309 56 89,741 101,106
-------- ------- ------- --------
Total liabilities and beneficiaries'
equity............................. $ 106,183 $ 29,725 $ 31,357 $167,265
======== ======= ======= ========
</TABLE>
The accompanying notes and management assumptions are an integral part of these
statements.
F-4
<PAGE> 171
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 (NOTES 1 AND 3)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADJUSTED
SSI/TNC
PROPERTIES
BRANDYWINE AND
REALTY LIBERTYVIEW TOTAL
TRUST BUILDING ADJUSTED
HISTORICAL COMBINED ACQUISITION PRO FORMA TOTAL PRO
CONSOLIDATED HISTORICAL PROPERTIES OFFERING FORMA
(A) (B) (C) ADJUSTMENT CONSOLIDATED
------------ ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Base rents........................... $ 3,517 $ 8,948 $ 6,348 $ -- $ 18,813
Tenant reimbursements................ 66 3,430 450 -- 3,946
Other................................ 83 3 -- -- 86
------ ------- ------ ------- -------
Total revenue................ 3,666 12,381 6,798 -- 22,845
------ ------- ------ ------- -------
Operating expenses:
Interest............................. 793 6,700 258 (4,355)(D) 3,396
Depreciation and amortization........ 1,402 4,090 1,691 415(E) 7,598
Property expenses.................... 1,608 4,222 3,408 891(G) 10,129
General and administrative........... 682 670 -- (562)(H) 790
------ ------- ------ ------- -------
Total operating expenses..... 4,485 15,682 5,357 (3,611) 21,913
------ ------- ------ ------- -------
Income (loss) before minority
interest................... (819) (3,301) 1,441 3,611 932
Minority interest in income (loss)..... 5 (1,182) -- 1,307(F) 130
------ ------- ------ ------- -------
Income (loss) before uncombined entity
and extraordinary items.............. (824) (2,119) 1,441 2,304 802
Equity income of management company.... -- 179 -- (107)(I) 72
------ ------- ------ ------- -------
Income (loss) before extraordinary
items................................ (824) (1,940) 1,441 2,197 874
Income allocated to Preferred Shares... -- -- -- 2,248(J) 2,248
------ ------- ------ ------- -------
Income (loss) allocated to
Common Shares........................ $ (824) $(1,940) $ 1,441 $ (51) $ (1,374)
====== ======= ====== ======= =======
Earnings (loss) per share before
extraordinary items:.................
Income (loss) before extraordinary
items............................. $ (1.32) $ 0.14
====== =======
Income (loss) allocated to Common
Shares............................ $ (1.32) $ (0.22)
====== =======
Weighted average number of shares
outstanding including share
equivalents.......................... 624,791 6,309,016
====== =======
</TABLE>
The accompanying notes and management assumptions are an integral part of these
statements.
F-5
<PAGE> 172
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (NOTES 1 AND 3)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADJUSTED
SSI/TNC
PROPERTIES
BRANDYWINE AND
REALTY LIBERTYVIEW TOTAL
TRUST BUILDING ADJUSTED
HISTORICAL COMBINED ACQUISITION PRO FORMA TOTAL PRO
CONSOLIDATED HISTORICAL PROPERTIES OFFERING FORMA
(A) (B) (C) ADJUSTMENT CONSOLIDATED
------------ ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Base rents........................... $ 4,063 $ 5,714 $ 5,828 $ -- $ 15,605
Tenant reimbursements................ 467 2,511 277 -- 3,255
Other................................ 69 100 -- -- 169
------- ------- ------ ------- ---------
4,599 8,325 6,105 -- 19,029
------- ------- ------ ------- ---------
Operating expenses:
Interest............................. 1,342 3,783 194 (2,746)(D) 2,573
Depreciation and amortization........ 1,173 2,819 1,268 311(E) 5,571
Property expenses.................... 1,867 2,831 2,724 605(G) 8,027
General and administrative........... 439 715 -- (567)(H) 587
------- ------- ------ ------- ---------
Total operating expenses..... 4,821 10,148 4,186 (2,397) 16,758
------- ------- ------ ------- ---------
Income (loss) before minority
interest................... (222) (1,823) 1,919 2,397 2,271
Minority interest in income (loss)..... (40) (513) 737(F) 184
------- ------- ------ ------- ---------
Income (loss) before uncombined entity
and extraordinary items.............. (182) (1,310) 1,919 1,660 2,087
Equity income of management company.... 54 75 115(I) 244
------- ------- ------ ------- ---------
Income (loss) before extraordinary
items................................ $ (128) $(1,235) $ 1,919 $ 1,775 $ 2,331
Income (loss) allocated to Preferred
Shares............................... -- -- -- 1,686(J) 1,686(I)
------- ------- ------ ------- ---------
Income (loss) allocated to Common
Shares............................... $ (128) $(1,235) $ 1,919 $ 89 $ 645
======= ======= ====== ======= =========
Earnings per common share before
extraordinary items..................
Income (loss) before extraordinary
items............................. $ (0.19) $ 0.37
======= =========
Income (loss) allocated to Common
Shares............................ $ (0.19) $ 0.10
======= =========
Weighted average number of shares
outstanding.......................... 676,801 6,308,053(K)
======= =========
</TABLE>
The accompanying notes and management assumptions are an integral part of these
statements.
F-6
<PAGE> 173
BRANDYWINE REALTY TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
1. BASIS OF PRESENTATION:
Brandywine Realty Trust (the "Company") is a Maryland real estate
investment trust. As of September 30, 1996, the Company owned interests in 24
properties, consisting of 23 suburban office buildings in three states and one
industrial property. The Company is the sole general partner and has an
approximately 59% interest in Brandywine Operating Partnership, L.P. (the
"Operating Partnership"). The minority interests in the Operating Partnership
include TNC and other owners, and SSI, which have ownership interests of 31% and
10%, respectively.
These pro forma financial statements should be read in conjunction with the
historical financial statements and notes thereto of the Company, the SSI/TNC
Properties, the LibertyView Building and the Acquisition Properties included
elsewhere herein. In management's opinion, all adjustments necessary to reflect
the effects of the Offering and the Concurrent Investments, the acquisitions of
the SSI/TNC Properties, the LibertyView Building and the Acquisition Properties
by the Company have been made.
2. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET:
(A) Reflects the historical consolidated balance sheet of the Company as of
September 30, 1996.
Acquisition Properties
(B) Reflects the combined balance sheets of the acquisitions of the
Acquisition Properties as follows:
<TABLE>
<CAPTION>
DELAWARE 700/800
CORPORATE BUSINESS 8000
SERS CENTER CENTER LINCOLN
PROPERTIES(I) I(II) DRIVE(II) DRIVE(II) COMBINED
------------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Real estate investments, net........ $29,496 $ 12,954 $ 7,313 $ 3,090 $ 52,853
Cash and cash equivalents........... (1,126) (12,839) (7,263) (3,065) (24,293)
Other assets........................ -- (115) (50) (25) (190)
Escrowed cash....................... 1,355 -- -- -- 1,355
------- -------- ------- ------- --------
Total assets.............. $29,725 $ -- $ -- $ -- $ 29,725
======= ======== ======= ======= ========
Liabilities:
Mortgages and notes payable....... $ 3,225 $ -- $ -- $ -- $ 3,225
------- -------- ------- ------- --------
Total liabilities......... 3,225 -- -- -- 3,225
------- -------- ------- ------- --------
Convertible Preferred Shares........ 26,444 -- -- -- 26,444
------- -------- ------- ------- --------
Total beneficiaries'
equity.................. 56 -- -- -- 56
------- -------- ------- ------- --------
Total liabilities and
beneficiaries' equity... $29,725 $ -- $ -- $ -- $ 29,725
======= ======== ======= ======= ========
</TABLE>
- ---------------
(i) The purchase price for the SERS Properties consists of: (i) 481,818 Series A
Preferred Shares, convertible, under certain circumstances, into 1,606,060
Common Shares; (ii) two year warrants to purchase 133,333 Common Shares at
an exercise price of $25.50 per share and based on a $.42 per warrant value
(based on a modified Black Scholes calculation); and (iii) deferred payments
aggregating $3.8 million, of which $2.5 million is payable in June 1998 and
$1.3 million is due in December 1999. The Company recorded a $575 adjustment
to the purchase price to reflect the fair value of the deferred payments. In
addition, closing costs of $1,126 have been capitalized to real estate
investments, net.
F-7
<PAGE> 174
(ii) Reflects the Company's acquisition of these properties based upon the
purchase price plus closing costs as follows:
<TABLE>
<CAPTION>
PURCHASE CLOSING
PRICE COSTS TOTAL
-------- ------- -------
<S> <C> <C> <C>
Delaware Corporate Center I............................. $ 12,700 $ 254 $12,954
700/800 Business Center Drive........................... 7,100 213 7,313
8000 Lincoln Drive...................................... 3,000 90 3,090
------- ---- -------
$ 22,800 $ 557 $23,357
======= ==== =======
</TABLE>
Offering
(C) Pro forma cash and cash equivalents were determined as follows:
<TABLE>
<S> <C> <C>
- Net proceeds from this Offering after underwriting discounts and
commissions and estimated Offering expenses of $6,870............. $ 59,130
- Net proceeds from the Morgan Stanley Private Placement............ 11,700
- Net proceeds from the SERS Private Placement...................... 10,500
- Repayment of mortgages and notes payable including related
costs............................................................. (49,132)
- Payment of commitment fee on the Credit Facility.................. (875)
Other cash activities --
- Release of escrowed cash resulting from the repayment of mortgage
notes payable....................................................... 145
- Payment of accrued interest....................................... (321)
--------
- Net increase in cash and cash equivalents......................... $ 31,147
========
(D) Release of escrowed cash resulting from the repayment of mortgage
notes payable....................................................... $ (145)
========
(E) Reflects the net increase in deferred financing costs as follows:
- Credit Facility................................................... $ 875
- Elimination of previously deferred costs.......................... (424)
- Repayment of mortgage notes....................................... (96)
--------
$ 355
========
(F) Reflects the net decrease in mortgages and notes payable:
- Repayment of mortgages and notes payable from net proceeds of this
Offering.......................................................... $(48,632)
- Payment of the note payable to the RMO Fund through the issuance
of Paired Units..................................................... (774)
--------
$(49,406)
========
(G) Reflects the payment of accrued interest in connection with the
repayment of mortgages and notes payable and payment of previously
deferred costs...................................................... $ (745)
========
(H) Reflects the reduction of minority interest upon the Company's
equity contribution of the net proceeds from the Offering to the
Operating Partnership and $22.2 million of net proceeds from the
private placement and the issuance of Common Shares. Upon making
this contribution, the Company will receive 5,345,453 GP Units which
will increase its ownership percentage to 94%....................... $ (8,233)
========
(I) Par value of the Common Shares to be issued......................... $ 54
========
</TABLE>
F-8
<PAGE> 175
<TABLE>
<S> <C> <C>
(J) Reflects (i) the issuance of 4,000,000 Common Shares, par value of $.01 per
share, at the offering price of $16.50 per share; (ii) the issuance of 709,090
Common Shares, at $16.50 per share in the Morgan Stanley private placement;
(iii) the issuance of 636,363 Common Shares at the offering price of $16.50
per share to SERS Voting Trust in connection with the SERS Private Placement;
and (iv) the issuance of 46,321 Paired Units to the RMO Fund. The following
table sets forth the adjustments to additional paid-in capital:
- Net proceeds from the Offering of Common Shares after
underwriting discounts and commissions and Offering
expenses................................................. $59,130
-------
Less: Adjusted par value of Common Shares at $.01 par...... (40) $59,090
------- -------
- Net proceeds from the Concurrent Investments net of par
value of $13............................................... 22,187
- Write-off of deferred financing costs.................... (96)
- Additional capital contribution to the Operating
Partnership.............................................. 8,233
- Prepayment of note payable to the RMO Fund, net of par
value of $1................................................ 525
- Prepayment penalty....................................... (500)
-------
Net increase in additional paid-in capital................. $89,439
=======
(K) Reflects the issuance of 46,321 warrants to the RMO Fund,
based on a $5.40 per warrant value (based on a modified
Black Scholes calculation)................................. $ 248
=======
</TABLE>
3. ADJUSTMENTS TO PRO FORMA CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS:
(A) Reflects the historical consolidated operations of the Company.
SSI/TNC Transaction and LibertyView Building Acquisition
(B) Reflects the adjusted historical operations of the SSI/TNC Properties
which were acquired on August 22, 1996 and LibertyView Building which
was acquired on July 19, 1996. The historical operations of the
SSI/TNC Properties exclude the extraordinary gains on restructuring
of debt of $5,559 and $494 for the year ended December 31, 1995 and
the nine-month period ended September 30, 1996, respectively.
F-9
<PAGE> 176
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL ADJUSTED
SSI/TNC
PROPERTIES
AND
SSI/TNC LIBERTYVIEW
PROPERTIES LIBERTYVIEW BUILDING
HISTORICAL BUILDING PRO FORMA COMBINED
COMBINED HISTORICAL ADJUSTMENTS HISTORICAL
---------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Revenue:
Base rents............................... $ 7,829 $1,119 $ -- $ 8,948
Tenant reimbursements.................... 2,895 535 -- 3430
Management fees.......................... 617 -- (617)(iv) --
Other.................................... 3 -- -- 3
--------- ------ -------- --------
Total revenue......................... 11,344 1,654 (617) 12,381
--------- ------ -------- --------
Operating expenses:
Interest................................. 5,855 -- 845(i) 6,700
Depreciation and amortization............ 4,336 -- (246)(ii) 4,090
Property expenses........................ 3,424 798 -- 4,222
General and administrative............... 1,108 -- (438)(iv) 670
--------- ------ ------- --------
Total operating expenses.............. 14,723 798 161 15,682
Income (loss) before minority
interest............................ (3,379) 856 (778) (3,301)
Minority interest in income (loss)......... -- -- (1,182)(iii) (1,182)(iii)
--------- ------ ------- --------
Income (loss) before uncombined entity and
extraordinary items...................... (3,379) 856 404 (2,119)
Equity income of management company........ -- -- 179 179
--------- ------ ------- --------
Income (loss) before extraordinary items... $ (3,379) $ 856 $ 583 $ (1,940)
======== ====== ======= ========
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
TOTAL
ADJUSTED
SSI/TNC
SSI/TNC PROPERTIES AND
PROPERTIES LIBERTYVIEW LIBERTYVIEW
HISTORICAL PROPERTY BUILDING
COMBINED HISTORICAL PRO FORMA COMBINED
THRU 8/22/96 THRU 7/19/96 ADJUSTMENTS HISTORICAL
------------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Revenue:
Base rents............................. $ 5,059 $ 655 $ -- $ 5,714
Tenant reimbursements.................. 2,250 261 -- 2,511
Management fees........................ 778 -- (778)(iv) --
Other.................................. 100 -- -- 100
-------- ------ ------- --------
Total revenue....................... 8,187 916 (778) 8,325
-------- ------ ------- --------
Operating expenses:
Interest............................... 3,322 -- 461(i) 3,783
Depreciation and amortization.......... 2,717 -- 102(ii) 2,819
Property expenses...................... 2,831 -- -- 2,831
General and administrative............. 599 399 (283)(iv) 715
-------- ------ ------- --------
Total operating expenses............ 9,469 399 280 10,148
Income (loss) before minority
interest.......................... (1,282) 517 (1,058) (1,823)
Minority interest in income (loss)....... -- -- (513)(iii) (513)
-------- ------ --------- --------
Income (loss) before uncombined entity
and extraordinary items................ (1,282) 517 (545) (1,310)
Equity income of management company...... -- -- 75(iv) 75
-------- ------ --------- --------
Income (loss) before extraordinary
items.................................. $ (1,282) $ 517 $ (470) $ (1,235)
======== ====== ======= ========
</TABLE>
F-10
<PAGE> 177
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, 1996
TO THE
FOR THE RESPECTIVE
YEAR ENDED ACQUISITION
DECEMBER 31, 1995 DATE
----------------- ---------------
<S> <C> <C> <C>
(i) Reflects the increase in interest expense resulting
from:
- the Note payable to SSI (which bears interest at
prime) assuming a prime rate of 8.25%................. $ 33 $ 21
- the Mortgage and notes payable of the LibertyView
Building, with effective rates of 8% per annum........ 750 406
- the Note payable to the RMO fund (which bears interest
at prime) assuming a prime rate of 8.25%.............. 62 34
----- -----
$ 845 $ 461
===== =====
(ii) Reflects the (decrease) increase in depreciation and
amortization as follows:
- Depreciation of capitalized costs from the SSI/TNC
Transaction included in real estate investments....... $ 33 $ 24
- Depreciation of buildings acquired over a 25-year
useful life and tenant improvements and other
furniture, fixtures and equipment (FF&E) over five
years in general...................................... (563) (76)
- Depreciation of the LibertyView Building over a
35-year useful life................................... 244 132
- Amortization of deferred financing costs related to
the LibertyView Building.............................. 40 22
----- -----
$(246) $ 102
======= =====
</TABLE>
(iii) Minority interest in income (loss) has been reflected in accordance
with the terms of the Operating Partnership Agreement. As of
September 30, 1996, the Company owns 59% of the Operating
Partnership. The remaining 41% of the Operating Partnership is owned
by TNC, SSI and the other owners whose interests are reflected as
minority interest. The adjustments to record the income effect of
minority interest share of loss for the periods ended December 31,
1995, and September 30, 1996, in the pro forma statements of
operations were computed as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED NINE-MONTHS
DECEMBER 31, ENDED
1995 SEPTEMBER 30, 1996
------------ ------------------
<S> <C> <C>
SSI/TNC Properties loss before Minority
Interest............................... $ (3,379) $ (1,282)
Impact of pro forma adjustments.......... 497 31
-------- --------
Total loss..................... $ (2,882) $ (1,251)
======== ========
Pro forma minority interest in loss
(41%).................................. $ (1,182) $ (513)
======== ========
</TABLE>
(iv) Reflects the results of operations of the Management Company from
third party management services as accounted for using the equity
method.
Acquisition Properties
(C) Reflects the combined pro forma statements of operations of the
Acquisition Properties for the year ended December 31, 1995 and the
nine months ended September 30, 1996, respectively.
F-11
<PAGE> 178
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DELAWARE 700/800
SERS CORPORATE BUSINESS 8000 LINCOLN PRO FORMA COMBINED
PROPERTIES(I) CENTER I(I) CENTER DRIVE(I) DRIVE(I) ADJUSTMENTS(II) TOTAL
------------- ----------- ---------------- ------------ --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Base rents................ $ 4,366 $ 410 $567 $1,005 $ -- $6,348
Tenant reimbursements..... 238 -- 188 24 -- 450
------ ----- ---- ---- -------- ------
4,604 410 755 1,029 -- 6,798
------ ----- ---- ---- -------- ------
Operating expenses:
Interest.................. -- -- -- -- 258(ii) 258
Depreciation and
amortization............ -- -- -- -- 1,691(iii) 1,691
Property expenses......... 2,236 502 305 365 -- 3,408
------ ----- ---- ---- -------- ------
Total operating
expenses.............. 2,236 502 305 365 1,949 5,357
------ ----- ---- ---- -------- ------
Income (loss) before
minority interest..... $ 2,368 $ (92) $450 $ 664 $(1,949) $1,441
====== ===== ==== ==== ======== ======
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DELAWARE 700/800
SERS CORPORATE BUSINESS 8000 LINCOLN PRO FORMA COMBINED
PROPERTIES(I) CENTER I(I) CENTER DRIVE(I) DRIVE(I) ADJUSTMENTS(II) TOTAL
------------- ----------- ---------------- ------------ --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Base rents................ $ 3,435 $ 1,666 $533 $194 $ -- $5,828
Tenant reimbursements..... 213 -- 62 2 -- 277
------ ----- ---- ---- -------- ------
3,648 1,666 595 196 -- 6,105
------ ----- ---- ---- -------- ------
Operating expenses:
Interest.................. -- -- -- -- 194(ii) 194
Depreciation and
amortization............ -- -- -- -- 1,268(iii) 1,268
Property expenses......... 1,862 452 221 189 -- 2,724
------ ----- ---- ---- -------- ------
Total operating
expenses.............. 1,862 452 221 189 1,462 4,186
------ ----- ---- ---- -------- ------
Income (loss) before
minority interest..... $ 1,786 $ 1,214 $374 $ 7 $(1,462) $1,919
====== ===== ==== ==== ======== ======
</TABLE>
- ---------------
(i) Reflects the historical operations of the Acquisition Properties, excluding
certain expenses such as interest, depreciation and amortization,
professional costs, and other costs not directly related to the future
operations of the Acquisition Properties.
(ii) Reflects the interest on the note payable to the Seller of the SERS
Properties using an effective rate of 8%.
(iii) Reflects the depreciation of the Acquisition Properties using a 25-year
useful life.
F-12
<PAGE> 179
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE
DECEMBER NINE-MONTHS
31, ENDED
1995 SEPTEMBER 30, 1996
----------- ------------------
<S> <C> <C> <C>
Offering
(D) Reflects the net reduction of interest expense
associated with the mortgages and notes payable
assumed to be repaid using net proceeds from the
Offering. ....................................... $(4,355) $ (2,746)
----------- ----------
(E) Reflects the net increase in amortization of
deferred financing costs related to the mortgage
notes paid off and the new Credit Facility. ..... $ 415 $ 311
----------- ----------
(F) Reflects adjustment for minority interest in the
Operating Partnership of 6%. .................... $ 1,307 $ 737
----------- ----------
(G) To record management fees charged by the
Management Company. ............................. $ 891 $ 605
----------- ----------
(H) To transfer general and administrative expenses
to the Management Company. ...................... $ (562) $ (567)
----------- ----------
(I) To record share of income (loss) from the
Management Company............................... $ (107) $ 115
----------- ----------
(J) To record dividends on 481,818 Preferred Shares
at an annual rate of $4.67 per share. ........... $ 2,248 $ 1,686
----------- ----------
(K) Reflects the weighted average number of Common
Shares outstanding including share equivalents.
If all Units (509,856) were converted as of
January 1, 1995, the weighted average number of
shares outstanding would have been 6,818,872 and
6,817,910, respectively. ........................
</TABLE>
F-13
<PAGE> 180
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Beneficiaries of
Brandywine Realty Trust:
We have audited the consolidated balance sheets of Brandywine Realty Trust
(a Maryland corporation) as of December 31, 1994 and 1995, and the related
consolidated statements of operations, beneficiaries' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 Brandywine
Realty Trust as of December 31, 1994 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule III is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, PA,
March 4, 1996 (except with respect
to the matters discussed in Note 16,
as to which the date is October 7, 1996)
F-14
<PAGE> 181
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS
Operating properties, at adjusted cost................... $21,335 $21,823 $ 106,744
Accumulated depreciation................................. (7,387) (8,114) (7,926)
------- ------- --------
13,948 13,709 98,818
CASH AND CASH EQUIVALENTS.................................. 1,766 840 1,859
ESCROWED CASH.............................................. 1,114 1,155 966
DEFERRED COSTS net of accumulated amortization of $519 in
1994 and $507 in 1995 and $588 at September 30, 1996
(unaudited).............................................. 813 1,027 2,290
DUE FROM AFFILIATE......................................... -- -- 222
ACCOUNTS RECEIVABLE........................................ 207 261 1,102
INVESTMENT IN AFFILIATE.................................... -- -- 117
OTHER ASSETS............................................... 25 113 809
------- ------- --------
Total assets..................................... $17,873 $17,105 $ 106,183
======= ======= ========
LIABILITIES AND BENEFICIARIES' EQUITY
MORTGAGE NOTES PAYABLE..................................... $ 6,899 $ 8,931 $ 81,482
NOTES PAYABLE TO SHAREHOLDERS.............................. -- -- 1,538
ACCRUED MORTGAGE INTEREST.................................. 57 33 529
TENANT SECURITY DEPOSITS AND DEFERRED RENTS................ 207 250 715
ACCOUNTS PAYABLE AND ACCRUED EXPENSES...................... 222 454 1,852
DISTRIBUTIONS PAYABLE...................................... 1,299 93 --
------- ------- --------
Total liabilities................................ 8,684 9,761 86,116
------- ------- --------
MINORITY INTEREST.......................................... -- -- 8,758
COMMITMENTS AND CONTINGENCIES
BENEFICIARIES' EQUITY
Shares of beneficial interest, $0.01 par value, 5,000,000
preferred shares, authorized, none outstanding;
25,000,000 common shares authorized, 618,733 shares
issued and outstanding at December 31, 1994 and 1995
and 911,184 at September 30, 1996, respectively....... 6 6 9
Additional paid-in capital............................... 16,785 16,785 20,443
Stock warrants........................................... -- -- 658
Cumulative deficit....................................... (2,262) (3,086) (3,214)
Cumulative distributions................................. (5,340) (6,361) (6,587)
------- ------- --------
Total beneficiaries' equity...................... 9,189 7,344 11,309
------- ------- --------
Total liabilities and beneficiaries' equity...... $17,873 $17,105 $ 106,183
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE> 182
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------- FOR THE NINE-MONTH PERIOD
PRO FORMA ENDED SEPTEMBER 30,
HISTORICAL CONSOLIDATED CONSOLIDATED CONSOLIDATED -------------------------
1993 1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Rents and tenant reimbursements... $ -- $ 5,451 $ 4,159 $ 3,583 $ 2,637 $ 4,530
Income from acquisition of limited
partner interests in Brandywine
Specified Property Investors
Limited Partnership............. 2,469 2,469 -- -- -- --
Allocated income from Brandywine
Realty Partners................. 568 -- -- -- -- --
Other income...................... 25 106 33 83 54 69
---------- ---------- ---------- ---------- ---------- ----------
Total revenue............... 3,062 8,026 4,192 3,666 2,691 4,599
---------- ---------- ---------- ---------- ---------- ----------
EXPENSES:
Interest.......................... -- 2,400 1,962 793 572 1,342
Depreciation and amortization..... 1 1,949 1,370 1,402 1,084 1,173
Utilities......................... -- 762 607 531 397 491
Real estate taxes................. -- 721 498 391 297 432
Maintenance....................... -- 910 783 586 407 776
Management fee.................... -- 264 144 47 44 108
Other operating expenses.......... -- 223 70 53 43 60
Administrative expenses........... 593 1,053 834 682 439 439
Provision for loss on real estate
investments..................... -- -- 5,400 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total expenses.............. 594 8,282 11,668 4,485 3,283 4,821
---------- ---------- ---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE GAIN ON SALES
OF REAL ESTATE INVESTMENTS,
MINORITY INTEREST AND
EXTRAORDINARY ITEM................ 2468 (256) (7,476) (819) (592) (222)
GAIN ON SALES OF REAL ESTATE
INVESTMENTS....................... -- -- 1,410 -- -- --
MINORITY INTEREST IN INCOME (LOSS)
OF AFFILIATES..................... -- (2,724) (5,635) 5 -- (40)
EQUITY IN NET INCOME OF MANAGEMENT
COMPANY........................... -- -- -- -- -- 54
---------- ---------- ---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE EXTRAORDINARY
ITEM.............................. 2,468 2,468 (431) (824) (592) (128)
EXTRAORDINARY ITEM: GAIN ON
EXTINGUISHMENT OF DEBT (NET OF
$20,109 ALLOCATED TO MINORITY
INTEREST)......................... -- -- 7,998 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................... $ 2,468 $ 2,468 $ 7,567 $ (824) $ (592) $ (128)
========== ========== ========== ========== ========== ==========
PER SHARE DATA:
Earnings per share of beneficial
interest
Primary
(Loss) income before
extraordinary item............ $ 3.99 $ 3.99 $ (.64) $ (1.32) $ (.95) $ (.19)
Extraordinary item.............. 0.00 0.00 11.86 0.00 0.00 0.00
---------- ---------- ---------- ---------- ---------- ----------
Net income...................... $ 3.99 $ 3.99 $ 11.22 $ (1.32) $ (.95) $ (.19)
========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding including share
equivalents..................... 618,733 618,733 674,327 624,791 624,953 676,801
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE> 183
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON
SHARES
OF CAPITAL
BENEFICIAL PAR IN EXCESS STOCK CUMULATIVE CUMULATIVE
INTEREST VALUE OF PAR VALUE WARRANTS DEFICIT DISTRIBUTIONS
-------- ----- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993............. 618,733 $ 6 $ 16,785 $ -- $(12,297) $(2,426)
Net income......................... -- -- -- -- 2,468 --
-------- --- -------- ---- -------- -------
BALANCE, December 31, 1993........... 618,733 6 16,785 -- (9,829) (2,426)
Net income......................... -- -- -- -- 7,567 --
Distributions ($4.71 per share).... -- -- -- -- -- (2,914)
-------- --- -------- ---- -------- -------
BALANCE, December 31, 1994........... 618,733 6 16,785 -- (2,262) (5,340)
Net loss........................... -- -- -- -- (824) --
Distributions ($1.65 per share).... -- -- -- -- -- (1,021)
-------- --- -------- ---- -------- -------
BALANCE, December 31, 1995........... 618,733 6 16,785 -- (3,086) (6,361)
Net loss........................... -- -- -- -- (128) --
Contributions...................... 292,451 3 3,658 658 -- --
Distributions ($0.36 per share).... -- -- -- -- -- (226)
-------- --- -------- ---- -------- -------
BALANCE, September 30, 1996
(Unaudited)........................ 911,184 $ 9 $ 20,443 $658 $ (3,214) $(6,587)
========= === ======== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 184
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------- FOR THE NINE MONTH PERIOD
PRO FORMA ENDED SEPTEMBER 30,
HISTORICAL CONSOLIDATED CONSOLIDATED CONSOLIDATED -------------------------
1993 1993 1994 1995 1995 1996
---------- ------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME.......................... $ 2,468 $ 2,468 $ 7,567 $ (824) $ (592) $ (128)
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Extraordinary gain on extinguishment of
debt (net of $20,109 allocated to
minority interest).................... -- -- (7,998) -- -- --
Gain on sales of real estate
investments........................... -- -- (1,410) -- -- --
Minority interest in income (loss) of
affiliates............................ -- (2,724) (5,635) 5 -- (40)
Income from acquisitions of limited
partner interests in Brandywine
Specified Property Investors Limited
Partnership........................... (2,469) (2,469) -- -- -- --
Depreciation and amortization........... 1 1,949 1,370 1,402 1,084 1,173
Equity in net income of management
company............................... -- -- -- -- -- (54)
Provision for loss on real estate
investments........................... -- -- 5,400 -- -- --
Changes in assets and liabilities
(Increase) decrease in accounts
receivable.......................... -- (140) 483 (54) (25) (452)
Decrease (increase) in other assets... (13) 166 (194) 13 (124) 77
(Decrease) increase in other
liabilities......................... 13 81 (211) (45) 20 311
------ ------ ------ ------ ---- ----
Net cash provided by (used in)
operating activities.............. -- (669) (628) 497 363 887
------ ------ ------ ------ ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of SSI/TNC Properties, net of
cash acquired........................... -- -- -- -- -- 287
Acquisitions of LibertyView Building...... -- -- -- -- -- (9,809)
Cash from Brandywine Realty Partners...... -- 2,110 -- -- --
Capital expenditures and leasing
commissions paid........................ -- (620) (493) (660) (371) (715)
Decrease (increase) in escrowed cash...... -- -- (1,114) (41) (572) 323
Net proceeds from real estate and other
assets sold............................. -- -- 9,223 -- -- --
Cash received from acquisitions of limited
partner interests in
Brandywine Specified Property Investors
Limited Partnership................... 2,469 2,469 -- -- -- --
Sales commission paid to related party.... -- -- (167) -- -- --
------ ------ ------ ------ ---- ----
Net cash (used in) provided by investing
activities............................ 2,469 1,849 9,559 (701) (943) (9,914)
------ ------ ------ ------ ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock and
warrants................................ -- -- -- -- -- 1,003
Distributions paid to shareholders........ -- -- (1,615) (2,227) (2,134) (319)
Minority Partner contributions............ -- 51 49 -- -- --
Minority Partner distributions............ -- (34) (7) (5) -- (7)
Proceeds from note payable to
shareholder............................. -- -- -- -- -- 1,392
Proceeds from mortgage notes payable...... -- -- 10,000 9,000 9,000 8,574
Repayment of mortgage notes payable....... -- -- (16,301) (6,968) (6,942) (350)
Costs associated with refinancing
transactions............................ -- -- (1,604) (250) (250) (128)
Costs associated with new ventures and
financing commitments................... -- -- (100) (221) -- (198)
Refundable deposit associated potential
financing commitments................... -- -- -- (95) -- --
Tenant security deposits and other
financing activities.................... -- 175 (57) 44 -- 79
------ ------ ------ ------ ---- ----
Net cash (used in) provided by financing
activities............................ -- 192 (9,635) (722) (326) 10,046
------ ------ ------ ------ ---- ----
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS.......................... 2,469 1,372 (704) (926) (906) 1,019
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR......................... 1 3,208 2,470 1,766 1,766 840
------ ------ ------ ------ ---- ----
CASH AND CASH EQUIVALENTS AT END OF YEAR.... $ 2,470 $ 4,580 $ 1,766 $ 840 $ 860 $ 1,859
====== ====== ====== ====== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 185
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND NATURE OF OPERATIONS:
Brandywine Realty Trust (the "Company") was formed on February 26, 1986 as
a Maryland real estate investment trust. On July 31, 1986, the Company sold
through an initial public offering 618,733 shares of beneficial interest, the
net proceeds of which were $17,168,000. On July 31, 1986, the Company acquired a
68% general partner interest in Brandywine Realty Partners ("Brandywine"), at a
total cost of $16,787,000. As of December 31, 1995, the partners of Brandywine
and their percentage ownership were as follows:
<TABLE>
<CAPTION>
% OWNERSHIP
-----------
<S> <C>
Brandywine Realty Trust, a Maryland real estate investment
trust.......................................................... 70%
Brandywine Specified Property Investors Limited Partnership
("BSPI"), a Pennsylvania limited partnership................... 30%
---
100%
===
</TABLE>
At December 31, 1995, the Company's portfolio was comprised of four
commercial real estate projects (the "Specified Projects"). The Specified
Projects are leased for office purposes. As of December 31, 1995, the overall
occupancy rate of the Specified Projects was 97% as compared to 86% one year
earlier. As of December 31, 1995, existing leases totaling 95,000 square feet or
37% of the total square feet, were scheduled to expire during 1996. However,
subsequent to year end, three different leases were renewed for 17,000, 8,000
and 5,000 square feet, respectively, for terms of ten, five and three years,
respectively. As of June 30, 1996, the overall occupancy rate of the Specified
Projects was 96%.
The Specified Projects held on December 31, 1995 are located in the greater
Philadelphia, Pennsylvania and Raleigh, North Carolina metropolitan areas. Each
of these markets is competitive, with the principal methods of competition
consisting in each case of rental rates (including rental concessions such as
initial periods of free occupancy), location, level of leasehold improvements
and building amenities. The Specified Projects compete for tenants with other
properties which may have competitive advantages.
On July 19, 1996, the Trust acquired a 122,000 square foot office building
(the "LibertyView Building") in Cherry Hill, New Jersey. On August 22, 1996, the
Company closed on the acquisition of 19 additional properties (the "SSI/TNC
Properties") and in the transaction (the "SSI/TNC Transaction") the Company
became the sole general partner of and obtained a 59% interest in Brandywine
Operating Partnership, L.P. (the "Operating Partnership") (see Note 5).
The financial statements as of September 30, 1996 and for the nine months
ended September 30, 1995 and 1996, are unaudited and have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of the
Company, all adjustments (consisting of normal recurring adjustments except for
the adjustments to record the effects of the acquisitions by the Company of the
LibertyView Building and the SSI/TNC Properties) necessary to present fairly the
financial position of the Company as of September 30, 1996, and the results of
its operations for the nine months ended September 30, 1995 and 1996 and its
cash flows for the nine months ended September 30, 1995 and 1996 have been
included. The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
F-19
<PAGE> 186
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
Since the Company gained control of Brandywine during 1994, the Company
consolidates the accounts of Brandywine with the Company and reflects the BSPI
investment as minority interest. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company consolidates the accounts of Brandywine and the Operating
Partnership and reflects the remaining interests in Brandywine and the Operating
Partnership as Minority Interest. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CAPITALIZATION OF COSTS
The Company has capitalized as deferred costs certain expenditures related
to the financing and leasing of the Specified Projects. Capitalized loan fees
are being amortized over the six-year term of the loan and leasing commissions
are being amortized over the term of the related leases.
As of December 31, 1995, the Company had incurred $357,000 in costs
associated with its pursuit of potential acquisitions of additional real estate
and third party equity and debt investments. Such costs are included in deferred
costs on the Company's balance sheet as of December 31, 1995. Further, in
connection with the Company's pursuit of potential acquisitions of additional
real estate and third party debt investments, as of December 31, 1995 and
September 30, 1996, the Company had deposited $95,000 and $225,000,
respectively, with several unrelated parties. Such deposits are included in
prepaid expenses and other assets on the balance sheets as of December 31, 1995
and September 30, 1996.
DEPRECIATION AND AMORTIZATION
Depreciation is computed using the straight-line method. Estimated useful
lives are 30 years for buildings and improvements and five years for personal
property. Amortization of tenant improvements is provided over the shorter of
the lease term or the life of the assets.
INVESTMENT IN BRANDYWINE
Until January 1994, the Company had a 68% partnership interest in
Brandywine which was previously accounted for using the equity method.
Summarized financial information for this investment for the year ended December
31, 1993 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------
<S> <C>
Total assets................................................. $39,994
Total revenue................................................ $ 5,532
Net loss..................................................... $(2,156)
Allocated income from Brandywine............................. $ 568
</TABLE>
F-20
<PAGE> 187
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT IN MANAGEMENT COMPANY
Investment in Brandywine Realty Services Corporation (the "Management
Company") in which the Operating Partnership owns all of the nonvoting Preferred
Stock and 5% of the Common Stock is accounted for by the equity method.
FEDERAL INCOME TAXES
The Company has elected to qualify as a real estate investment trust under
Sections 856-860 of the Internal Revenue Code and intends to remain so
qualified. Accordingly, no provision is made for Federal income taxes on any
real estate investment trust taxable income which has been or will be
distributed to shareholders within the prescribed time limits.
Taxable income (loss) for the years ended December 31, 1993, 1994 and 1995,
totaled ($926,000), $0 and ($652,000), respectively. In 1994 and 1995 the
differences between taxable income (loss) and net income (loss) as reported in
the financial statements were primarily due to differences between the
allocation of Brandywine's net income and loss for financial reporting purposes
and for tax reporting purposes. In 1993, the difference was primarily due to the
temporary difference related to the recognition of income from the settlements
with two limited partners of BSPI (see Note 8). For financial reporting
purposes, this item was recorded as income in 1993, while for tax reporting
purposes, it was deferred to 1994.
Under current law, the Company is subject to a 4% Federal excise tax if it
does not distribute a sufficient amount of its taxable income within the
prescribed time limits. The excise tax equals 4% of the amount, if any, by which
the sum of (a) 85% of the Company's ordinary income and (b) 95% of the Company's
capital gain net income (which was zero in each year since the Company's
inception) for the year exceeds cash distributions during the year and certain
taxes paid by the Company, if any. No excise tax was incurred in 1993, 1994 or
1995.
Total assets of the Company for tax purposes amounted to $15,348,000 and
$12,497,000, respectively as of December 31, 1994 and 1995 as compared to total
assets for financial reporting purposes which amounted to $17,873,000 and
$17,105,000, respectively.
REVENUE RECOGNITION
Rental income from tenants is recognized on a straight-line basis
regardless of when payments are due. Accrued rental income included in the
balance sheets with accounts receivable reflects such rental income due as
follows:
<TABLE>
<S> <C>
1996.............................................................. $ 32,000
1997.............................................................. 36,000
1998.............................................................. 29,000
1999.............................................................. 35,000
2000.............................................................. 36,000
2001 and thereafter............................................... 2,000
--------
Total............................................................. $170,000
========
</TABLE>
During 1995, Parker, McCay & Criscuolo represented 10% of the Company's
total rental revenue and American Executive Center represented 10% of the
Company's total rental revenue. No tenant represented 10% or more of the
Company's rental revenue in 1993 and 1994.
RECLASSIFICATIONS
Certain 1993 and 1994 amounts have been reclassified to conform to the
current year presentation.
F-21
<PAGE> 188
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated based upon the weighted average
shares outstanding which were 618,733 in 1993, 674,327 in 1994 and 624,791 in
1995 and 624,953 and 676,801 for the nine months ended September 30, 1995 and
1996, respectively. Earnings per share for 1994, 1995 and 1996 have been
computed by considering any share equivalents applying the "treasury stock"
method and assuming that all options were exercised on date of issue. The
proceeds obtained from the exercise of any options would be utilized to purchase
outstanding shares at the average market price for the primary earnings per
share calculation and at the higher of the average market price or the closing
market price as of December 31, 1994 and December 31, 1995, respectively, for
the fully diluted earnings per share calculation for the years ended December
31, 1994 and 1995 and as of September 30, 1995 and 1996, respectively, for the
nine months ended September 30, 1995 and 1996. No such options have been
exercised as of December 31, 1995 and as of September 30, 1996. If these options
had been exercised, the per share results would not be materially different from
the primary earnings per share presented.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less. At December 31, 1994 and 1995 and September 30, 1996, cash and cash
equivalents totaling $1,766,000, $840,000 and $1,859,000, respectively, included
tenant escrow deposits of $155,000, $198,000 and $616,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents reported in the
consolidated balance sheets approximate the fair value of those assets. The fair
values for mortgage notes payable also approximate the carrying costs of those
liabilities.
3. REAL ESTATE INVESTMENTS:
Real estate investments are carried at the lower of adjusted cost or
estimated net realizable value. On January 31, 1994, the outstanding mortgage
indebtedness totaling approximately $43 million was extinguished in exchange for
the payment of $14 million resulting, after costs, in an extraordinary gain of
approximately $28 million in the first quarter of 1994. Of the total
extraordinary gain, $20,109,000 was allocable to the Minority Interest partner.
The closing of this transaction resulted in management's determination that the
aggregate carrying value of the then owned seven Specified Projects exceeded the
estimated net realizable value of approximately $22 million. Management based
its estimate primarily upon third-party appraisals (reviewing each appraisal in
relation to the current real estate market) and a $10 million nonrecourse
mortgage. In the first quarter of 1994, a writedown of $5.4 million was recorded
to adjust the carrying value of the Specified Projects to the estimated net
realizable value.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of." This statement requires that long-lived
assets to be held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss should be recognized. Measurement of an impairment
loss for these assets should be based on the fair market value of the asset. On
January 1, 1996, the Company adopted this statement. There was no effect from
adopting this statement on the Company's financial position or results of
operations.
F-22
<PAGE> 189
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SALES OF REAL ESTATE INVESTMENTS:
On February 28, 1994, the Lincoln Centre project was sold for a net sales
price equal to its adjusted carrying value of approximately $2,300,000. Of the
total net proceeds, $1,500,000 was deposited with the mortgage lender as
escrowed cash reserves available for capital improvements, tenant improvements
and leasing commissions associated with the remaining Specified Projects and the
balance of net proceeds was maintained for general liquidity needs.
On August 8, 1994, the Academy Downs project was sold for a net sales price
of approximately $4,500,000. As a result, a net gain on the sale of $1,116,000
was recorded during the third quarter of 1994. Of the total net proceeds,
Brandywine paid the mortgage lender $2,497,000 as principal and $366,000 as
Additional Interest. After the required payments to the lender, eighty-five
percent of the balance of net proceeds or $1,355,000 was distributed to the
Company's shareholders as distributions totaling $2.19 per share.
On December 15, 1994, the Iron Run project was sold for a net sales price
of approximately $2,400,000. As a result, a net gain on the sale of $294,000 was
recorded during the fourth quarter of 1994. Of the total net proceeds,
Brandywine paid the mortgage lender $604,000 as principal and $436,000 as
Additional Interest. After the required payments to the lender, the Company, on
December 22, 1994, declared eighty-five percent of the balance of net proceeds
or approximately $1,207,000 as a distribution payable on February 2, 1995 to the
Company's shareholders of record as of January 24, 1995. Such distribution
totaled $1.95 per share.
The following unaudited pro forma financial information for the year ended
December 31, 1994 of Brandywine Realty Trust gives effect to the above sales of
the three Specified Projects as if the events had occurred on January 1, 1994.
The pro forma financial information is unaudited and is not necessarily
indicative of the results which actually would have occurred if the transactions
had been consummated at the beginning of the period presented, nor does it
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 (UNAUDITED IN THOUSANDS)
-------------------------------------------------------------------
<S> <C>
Pro forma total revenue............................................ $ 3,479
Pro forma total expenses........................................... 10,763
-------
Pro forma loss before minority interest, gain on sales of real
estate investments and extraordinary item........................ (7,284)
Pro forma minority interest in loss of Brandywine Realty
Partners......................................................... (5,635)
Pro forma extraordinary item: gain on extinguishment of debt (net
of $20,109 allocated to minority interest)....................... 7,998
-------
Pro forma net income............................................... $ 6,349
=======
Pro forma earnings per share:
Pro forma loss before extraordinary item......................... $ (2.43)
Pro forma extraordinary item..................................... 11.85
-------
Pro forma net income per share................................... $ 9.42
=======
</TABLE>
5. ACQUISITIONS (UNAUDITED):
On July 19, 1996, the Trust acquired the LibertyView Building, for $10.7
million, of which $9.8 million was paid at the closing and the remainder is due
to the seller between July 1997 and December 1997. The effect of the acquisition
was to increase real estate investments by $10.7 million, including costs
associated with the acquisition and to increase mortgage indebtedness by $9.5
million.
On August 22, 1996, the Company closed on the acquisition of substantially
all of the real estate holdings of Safeguard Scientifics, Inc. ("SSI") and SSI's
real estate affiliate, The Nichols Company ("TNC"), a
F-23
<PAGE> 190
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
private real estate development and management services company. In the SSI/TNC
Transaction, the Company acquired 19 properties at a purchase price of $75.5
million subject to related mortgage debt of $63.6 million.
Upon the August 22, 1996 closing (the "Closing") of the SSI/TNC
Transaction, the Company became the sole general partner of and holds a 59%
interest in the Operating Partnership. The following is a summary of the
Operating Partnership units issued SSI/TNC Transaction:
<TABLE>
<CAPTION>
TRUST TNC SSI TOTAL
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
General Partner interest.............. 61(1) -- -- 61
Limited Partner interests:
Class A units....................... -- 405,553(2) 134,606(2) 540,159
Class B units....................... 238,606(1) -- -- 238,606
Class C units....................... 533,333(3)(4) -- -- 533,333
--------- --------- ------- ---------
772,000 405,553 134,606 1,312,159
--------- --------- ------- ---------
Ownership interest.................... 59%(4) 31% 10% 100%
--------- --------- ------- ---------
</TABLE>
- ---------------
(1) The Company issued 258,333 common shares of beneficial interest of the
Company, par value $0.01 per share ("Common Shares") and Warrants for an
additional 258,333 Common Shares to SSI in exchange for SSI's ownership
interest in the certain of the SSI/TNC Properties and $426,250 in cash. The
Company contributed this investment (other than the cash) to the Operating
Partnership and obtained the general partnership interest and all of the
Class B limited partnership interest (238,606 Units) in the Operating
Partnership. The Company issued 233,096 Common Shares and Warrants in
exchange for the SSI Ownership Interest at a value of $3,937,000. The $16.89
per Common Share and Warrant value is based on the range of trading prices
of the Common Shares at the time the SSI/TNC Transaction was announced
($4 7/8 and $4 7/16 being the high and low sales prices on March 27, 1996,
the last full trading day prior to the public announcement) and based on a
$2.10 per warrant value (based on a modified Black Scholes calculation). The
Company issued 25,237 Common Shares and Warrants at the same $16.89 per unit
in exchange for $426,250 in cash.
(2) Units issued to TNC, other owners and SSI resulting from the sale to the
Operating Partnership by TNC, SSI and other owners of substantially all of
their ownership interest in the SSI/TNC Properties. The 540,159 Class A
Units include 44,322 Units to be issued by September 1999 in exchange for
residual interests in the SSI/TNC Properties (of which 41,076 will be issued
to TNC and other Owners and 3,247 will be issued to SSI). SSI owns 40% of
the capital stock of TNC.
(3) Units issued to the Company at Closing in exchange for the contribution to
the Operating Partnership of a majority of the Company's general partnership
interest in Brandywine.
(4) On August 23, 1997, it is expected that the Company will contribute its
remaining general partnership interest in Brandywine in exchange for an
additional 85,400 Class C Units.
The costs associated with the acquisition and the issuance of Common Shares
and other equity interests totaled $1,700,000. The costs associated with the
acquisition totaled $935,000 and have been capitalized to real estate
investments. The remaining costs attributed to issuing Common Shares to SSI and
other equity interests of the Company have been recorded as a $620,000 reduction
of additional paid-in capital and a $145,000 reduction of minority interest. The
acquisition of the SSI/TNC Properties by the Company in exchange for 540,159
Class A Units at $16.50 per unit ($8,913,000) and 238,606 Class B Units at
$16.50 per unit ($3,937,000) for a total consideration value at $12,850,000 was
recorded by the Company based upon fair
F-24
<PAGE> 191
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value of the real estate assets and other assets received net of total
liabilities encumbering the SSI/TNC Properties as of August 22, 1996 as follows
(in thousands):
<TABLE>
<S> <C> <C>
Real estate investments acquired at fair value................... $74,903
Other assets acquired............................................ 2,723
Mortgage notes................................................... (63,576)
Other liabilities................................................ (1,200)
-------
(64,776)
--------
Total equity consideration............................. $12,850
========
</TABLE>
The SSI/TNC Transaction included the consolidation of the managements of
the Company and TNC and the expansion of the Company's Board of Trustees to
include designees of SSI and TNC. The new management company responsible for the
managing, leasing and developing of the Company's Properties is owned by the
Operating Partnership and a partnership comprised of four officers of the
Company. In addition, employment agreements were executed with four key
executives and provide for compensation aggregating $513,000 annually through
August 22, 1998 and the issuance of six-year warrants for an aggregate of
220,000 Common Shares at a per share price of $19.50.
6. INVESTMENT IN MANAGEMENT COMPANY
The investment in management company was acquired by the Operating
Partnership through an initial contribution totalling $25,000 on August 22, 1996
and consists of a 100% ownership interest in the preferred stock and a 5%
ownership interest in the common stock of Brandywine Realty Services Company
(the "Management Company"). The Management Company is responsible for the
managing, leasing and developing of the Company's Properties. Total management
fees paid by the Company's Properties to the Management Company are included in
management fee expense in the accompanying statements of operations and amounted
to $76,000 for the period August 22, 1996 (inception) to September 30, 1996. The
Management Company also receives reimbursements of certain direct costs
attributable to the operation of the Properties. Such reimbursements are
included in maintenance expense in the accompanying statements of operations and
amounted to $36,000 for the period August 22, 1996 (inception) to September 30,
1996.
Summary unaudited financial information for the Management Company as of
September 30, 1996 and for the period from August 22, 1996 (inception) through
September 30, 1996 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
<S> <C>
Total assets................................................ $266,000
Total revenue............................................... $164,000
Net income.................................................. $ 97,000
Allocated net income from Management Company, net
of $38,000 allocated to minority interest................. $ 54,000
</TABLE>
7. MORTGAGE NOTES PAYABLE:
On April 21, 1995, the Company refinanced its then existing mortgage loan
with proceeds of mortgage loans totaling $6,250,000 and $2,750,000,
respectively, and providing for a fixed rate of interest. The mortgage loans are
cross-collateralized by the Specified Projects. The mortgage loans are due on
April 15, 2001, and the lender has the right to call the loans at par on April
15, 1998. Monthly payments of interest and principal are due based on a 25 year
amortization schedule for the period April 21, 1995 through April 15, 1998.
After April 15, 1998, monthly payments of interest and principal are due based
on a 22 year amortization schedule. The interest rate will be set at 8.75%
through April 15, 1996, 9.0% for the period from April 16, 1996 through October
15, 1996 and 9.31% for the period from October 16, 1996 through April 15, 1998.
After April 15, 1998
F-25
<PAGE> 192
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the loan rate is reset based upon the mortgage lender's evaluation, at that
time, of, among other factors, the financial performance and projected risk of
the Specified Projects, the financial status of the Company and the then
outstanding balance of the loans. For the year ended December 31, 1995, the
difference between the interest calculated at a weighted average rate of 9.19%
and the rate at which the interest was paid has been accrued as deferred
interest. Deferred interest at December 31, 1995 totaled $27,000 and is included
in accrued expenses. The mortgage loans provide for prepayment upon certain
conditions, including, among others, the payment of a Make Whole Premium,
defined as the greater of 1% of the principal amount to be prepaid or the
positive difference between the present value of the mortgage (or part of the
mortgage being prepaid) discounted at 9% through May 15, 1998 and U.S. Treasury
yields, thereafter, netted against the amount of prepaid proceeds. At December
31, 1995, principal repayments on the outstanding mortgage loans are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 107,000
1997............................................................. 111,000
1998............................................................. 122,000
1999............................................................. 134,000
2000............................................................. 147,000
2001............................................................. 8,310,000
----------
$8,931,000
==========
</TABLE>
The loan is generally nonrecourse to the Company as to interest and
principal, except in the event of a sale or encumbrance of the mortgaged
premises, or in the event of fraud or willful misrepresentation in connection
with the loan. In addition, the Company has agreed to be responsible to the
lender for certain other liabilities, including (i) environmental liabilities,
(ii) waste relating to the mortgaged premises, (iii) misapplication or
misappropriation of certain reserves and other amounts held in connection with
the operation of the mortgaged premises, (iv) failure to pay certain expenses
relating to the mortgage premises, including utilities, operating and
maintenance, taxes, assessments, and insurance, but only to the extent that the
Company received rents or other proceeds from the mortgaged premises during the
eighteen month period prior to an event of default under the loan documents, or
after the occurrence thereof, and (v) certain other enumerated liabilities.
The lender is entitled to hold escrow cash reserves for real estate taxes
and capital requirements in two interest-bearing accounts. On April 21, 1995, an
initial deposit of $1,559,000 was made into this account. Deposits to the real
estate tax escrow account are required to be made on a monthly basis. Ongoing
deposits to the capital escrow account are required of $10,000 per month during
the first year of the loans and $25,000 per month over the remainder of the term
of the loans. Amounts held in the capital escrow account may be advanced, from
time to time and subject to certain conditions, to pay for capital improvements,
tenant improvements and leasing commissions associated with the Projects and
distributions to Shareholders of the Company. The capital escrow account held by
the lender does not constitute additional collateral for the mortgage loans. At
December 31, 1995 and September 30, 1996, the principal balance of the loans
totaled $8,931,000 and $81,482,000, respectively, and the capital and real
estate tax escrow accounts totaled $1,155,000 and $905,000, respectively.
At December 31, 1994, the mortgage note payable totaled $6,899,000, was
non-recourse and was secured by first mortgages on the Specified Projects. The
mortgage loan was scheduled to mature on January 31, 1999 upon which date the
full outstanding principal balance would have been due. Minimum interest was
payable monthly at a floating rate equal to 4.25% per annum in excess of the
composite rate on the lender's United States commercial paper, adjusted monthly.
At December 31, 1994, the rate of minimum interest was set at 9.59%. During the
year ended December 31, 1994, the weighted average interest rate of minimum
interest and
F-26
<PAGE> 193
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additional Interest on the loan was 10.8% exclusive of the payment, discussed
below, of $1,114,000 made from escrowed cash to the mortgage lender on December
28, 1994.
The Company was also required to escrow cash reserves as additional
security for the repayment of the mortgage loan in non-interest bearing accounts
held by the lender. The lender held $125,000 as a deposit, escrowed real estate
tax payments with respect to the Specified Projects and escrowed cash reserves
to pay for capital improvements, tenant improvements and leasing commissions
associated with the Specified Projects. At December 31, 1994, total escrow cash
reserves held by the lender amounted to $1,114,000. In connection with the
refinancing, discussed above, these cash reserves were released to the Company.
During 1994, in connection with the sales of Academy Downs and Iron Run,
the Company repaid $3,101,000 of the mortgage loan balance as required under the
loan documents, representing 115% of the allocable share of the original loan
balance attributable to Academy Downs and Iron Run.
Further, the lender was entitled to receive as additional interest
("Additional Interest") (i) a 25% participation in the net cash flow of the
Specified Projects (other than the Lincoln Centre property) (the "Additional
Interest Projects") to be paid monthly; (ii) a 25% participation in the net
proceeds of any sale of an Additional Interest Project in excess of the
allocable basis of the Additional Interest Project; (iii) a 25% participation in
any proceeds of a refinancing relating to an Additional Interest Project in
excess of the allocable basis of the Additional Interest Project; and (iv) a 25%
participation at maturity, in the balance of the escrow account described above
in excess of $2,040,000 less funds deposited into the escrow account by
Brandywine pursuant to any sale or refinancing of an Additional Interest
Project. The sale and refinancing participations described in (ii) and (iii)
above were subject to a $1 million aggregate minimum payment. During 1994 in
connection with sales of Academy Downs and Iron Run, the Company paid the
mortgage lender $802,000, representing Additional Interest which Additional
Interest was applied against the $1 million aggregate minimum payment amount. On
December 28, 1994, the Company paid the mortgage lender $1,114,000 from escrowed
cash reserves. In return for receiving this payment, the mortgage lender agreed
to waive any future rights to receive Additional Interest from the Specified
Projects and to open the mortgages to prepayment without penalty or premium. As
a result of the lender receiving prepayment of Additional Interest, the option
agreement granted to the lender, described below, was terminated. Further, the
lender agreed to extend the commitment date on the Company's $26 million secured
credit facility, described below, and to reduce that facility's pay rate by 125
basis points.
On January 31, 1994, the Company granted the mortgage lender an option,
exercisable for the greater of 375,000 Common Shares or 15% of the outstanding
shares, which amount was subject to reduction to the extent of certain
Additional Interest paid to the lender in connection with a sale or refinancing
of a Specified Project. As a result of the sales of Academy Downs and Iron Run
and the related payments of principal and Additional Interest to the lender, the
number of Shares underlying the option was reduced from 375,000 to 274,000. The
option, priced at $1.875 per Share, was exercisable only upon the new lender's
release of its right to receive Additional Interest, from and after the date of
such exercise. As a result of the mortgage lender receiving $1,114,000 as
prepayment of Additional Interest on December 28, 1994, this option was
terminated.
During 1994, the Company obtained a $26 million commitment from the
mortgage lender to provide nonrecourse financing for the acquisition of
additional real estate properties. At December 31, 1994, no amounts were
borrowed against the commitment. At December 31, 1995, such commitment had been
terminated and $100,000 of associated deferred costs have been expensed.
During the years ended December 31, 1994 and 1995, mortgage interest paid
totaled $3,056,000 and $784,000 respectively. On a pro forma consolidated basis
(unaudited), mortgage interest paid for the year ended December 31, 1993 totaled
$2,230,000.
At December 31, 1995, the Company's mortgage loans totaled $8.9 million and
were cross collateralized by the Company's Properties. The mortgage loans were
obtained through a refinancing on April 21, 1995.
F-27
<PAGE> 194
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Such loans are due on April 15, 2001 and provide for a fixed rate of interest
which, as of December 31, 1995 and September 30, 1996, was set at 8.75% and
9.00%, respectively. As of September 30, 1996, such mortgage loans total $8.9
million.
In connection with the Company's acquisition of the LibertyView Building on
July 19, 1996, the Company obtained two mortgage loans which at September 30,
1996 aggregate $9.4 million. Of these mortgage loans, $8.4 million bears
interest at a fixed rate of 8% per annum and matures on January 1, 1999. The
second mortgage loan totaling $1.0 million was provided by the seller with no
interest payable and principal payments due between July 1997 and December 1997.
The Company recorded a $104,000 adjustment to the purchase price to reflect the
fair value of the note payable to the seller. Both mortgage loans are secured by
the LibertyView Building.
In connection with the SSI/TNC Transaction, the Company acquired 19
properties encumbered by mortgage debt totaling $63.6 million. As of September
30, 1996, such mortgage loans aggregate $63.3 million and are due between July
1997 and June 2004. The mortgage notes are collateralized by the SSI/TNC
Properties and the assignment of rents and generally require monthly principal
and interest payments. Of these mortgage notes payable, mortgage notes
aggregating $30.5 million at September 30, 1996, bear fixed annual interest
ranging from 7% to 9.25%. One mortgage note payable encumbering one of the
SSI/TNC Properties totals $1.6 million at September 30, 1996 and bears interest
at a variable rate of interest based upon prime plus 1%. Further one mortgage
note payable encumbering certain of the SSI/TNC Properties totals $31.2 million
and bears interest at a variable rate of interest based upon the lender's
commercial paper rate plus 2.75%. Interest payments are due monthly through
maturity, November 30, 2000, and minimum monthly principal payments are equal to
1/12 of 0.5% of the principal balance outstanding on the first day of each loan
year beginning December 1, 1996. Additional principal payments are due monthly
based on 100% of net cash flow from the Properties, as defined, including, among
other items, the deduction of $354,000 as a preference to the Company. No
principal payments were made from these participating interest in cash flows
during the nine months ended September 30, 1996. The loans are
cross-collateralized and cross-defaulted. The loan is further secured by a $1.5
million letter of credit provided by SSI, which security is scheduled to expire
in November 1996. The loans are subject to certain prepayment penalties, as
defined. As additional consideration, the lender may receive additional
contingent interest, as defined, at scheduled maturity or upon early loan
repayment. The percentage used to compute the additional contingent interest may
vary based upon the level of any additional drawdowns under the loan and was 25%
at September 30, 1996. No additional contingent interest was paid during the
nine months ended September 30, 1996.
Guarantees by SSI, TNC and certain other Class A Unit holders against
certain mortgage debt totaled $10,527,000 as of September 30, 1996. Further, at
September 30, 1996, two mortgage notes totaling $13,426,000 and $3,218,000, are
entitled to receive additional interest in the form of 50% and 80%,
respectively, of the cash flows, as defined. During the nine months ended
September 30, 1996, no additional interest expense was incurred.
The weighted average interest rate on the Company's mortgage loans for the
nine months ended September 30, 1996 and September 30, 1995, was 8.2% and 9.4%
respectively.
8. ISSUANCE OF STOCK AND WARRANTS AND NOTE PAYABLE TO SHAREHOLDER:
On June 21, 1996, an entity (the "RMO Fund") controlled by Richard M.
Osborne, a shareholder and Trustee of the Company, made an investment in the
Company in the aggregate amount of $1,330,000 (the "Aggregate Investment"). The
Company issued 19,983 Paired Units (each consisting of one Common Share and one
six-year warrant to purchase an additional Common Share at an exercise price of
$19.50 per share) in exchange for $338,000 of the Aggregate Investment. Of the
$338,000 total equity investment, the stock warrants totaled $42,000 and were
recorded based on a $2.10 per warrant value (based on a modified Black Scholes
calculation). Of the Aggregate Investment, the balance of $992,000 was made in
the form of a loan
F-28
<PAGE> 195
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(the "Loan") that will be subject to prepayment, under certain circumstances,
through the issuance by the Company of additional Paired Units. Proceeds of the
investment were used by the Company in its acquisition of the LibertyView
Building on July 19, 1996. (See Note 5.)
The Loan is unsecured and under its terms, the principal sum outstanding
from time to time will bear interest at an annual rate equal to the prime rate
of interest, and interest will be payable quarterly in arrears, provided that
the Company will have the right to have such accrued interest added to the
principal balance of the Loan. Principal and accrued interest will be payable in
full on the third anniversary of the date of the Loan. Under certain
circumstances, the Company will be required to repay principal plus accrued
interest on the Loan by delivering to the RMO Fund additional Paired Units at
$16.89 per unit. In connection with the SSI/TNC Transaction, the Company was
required to pay down principal on the Loan totaling $239,000 through the
issuance of 14,135 units (each consisting of one Common Share and one warrant
exercisable for six years for an additional Common Share at an initial exercise
price of $19.50). Of the $239,000 equity issuance, the stock warrants totaled
$73,000 and were recorded based on $5.19 per warrant value (based on a modified
Black Scholes calculation). As of September 30, 1996, the remaining Loan totaled
$774,000, including accrued interest of $20,000.
In connection with the SSI/TNC Transaction, SSI advanced to the Operating
Partnership $400,000 to pay for a portion of the expenses incurred by the
Operating Partnership in connection with the SSI/TNC Transaction. As of
September 30, 1996, $400,000 was outstanding on such loan. Further in connection
with the SSI/TNC Transaction, SSI committed to loan the Operating Partnership
$700,000 to fund working capital requirements of the Operating Partnership,
subject to certain limitations. SSI's commitment will remain in effect until the
earlier of: (1) January 31, 1998; (ii) a qualified offering by the Company;
(iii) a refinancing by the Operating Partnership of indebtedness secured by one
or more of the SSI/TNC Properties which results in net proceeds sufficient to
repay amounts loaned to the Operating Partnership by SSI; or (iv) a liquidation
of the Operating Partnership. As of September 30, 1996, no amount was
outstanding on such loan. Each of the above loans bear interest at prime with
payments of interest only due quarterly. Further, the loans mature on the
earliest to occur of (i) the completion of a secondary stock offering by the
Company; (ii) a refinancing by the Operating Partnership of indebtedness secured
by one or more of the SSI/TNC Properties which results in net proceeds
sufficient to repay amounts loaned to the Operating Partnership by SSI; or (iii)
a liquidation of the Operating Partnership; (iv) July 31, 1999, if the Operating
Partnership has sufficient funds for repayment; or (v) December 31, 2001.
Certain tenant improvements and leasing costs associated with one of the
SSI/TNC Properties have been financed by a loan from SSI which is secured by a
second mortgage on the property. The loan provides for an aggregate balance of
$460,000 of which $364,000 was outstanding as of September 30, 1996. The loan
requires interest payable monthly at the prime rate and matures on the earlier
of: (i) the completion of a secondary stock offering by the Company; (ii) a sale
or refinance of the property providing sufficient funds to satisfy all other
priority debts of the property; or (iii) July 31, 1999.
9. MINORITY INTEREST AND BENEFICIARIES' EQUITY:
MINORITY INTEREST
Under the terms of the Brandywine Partnership Agreement, contributions and
distributions and allocations of income (loss) were as follows:
Cash Contributions/Deficit Restoration Obligations
At December 31, 1993 BSPI, through its limited partners, had an
obligation to restore deficits in its capital account upon liquidation of
Brandywine to a maximum of $12,961,000 in accordance with the
F-29
<PAGE> 196
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Brandywine Partnership Agreement. This maximum obligation in the event of
liquidation would have been primarily available for distribution to the
Company.
In connection with the January 1994 refinancing of the Specified
Projects in order to obtain the requisite approvals for the refinancing,
the Company and Brandywine achieved a settlement (the "BSPI Settlement") of
the deficit restoration obligations contingently owed by BSPI to
Brandywine, which settlement was approved by holders of 93% of BSPI's
limited partner units. Under the terms of the BSPI Settlement, effective
January 1, 1994, the Company and Brandywine released BSPI and its limited
partners from any current or future obligation to restore deficit balances
in BSPI's capital account in Brandywine. In exchange, among other things,
the Company's participation in Brandywine's operating cash flow was
increased to 98% and BSPI waived certain voting rights in Brandywine. In
connection with the BSPI Settlement, Brandywine National transferred its
interest in Brandywine to the Company and the Company was designated as
Brandywine's new administrative partner. Further, the Company's 25.83%
interest in BSPI was transferred to a subsidiary of BSPI's general partner
and retired.
During the first quarter of 1994, in order to provide the cash
necessary to complete the January 1994 refinancing of the Specified
Projects, the Company contributed cash of $2,466,000 to Brandywine. This
contribution increased the Company's Unrecovered Capital, originally
defined in accordance with the Brandywine Partnership Agreement as an
amount equal to $18,562,000 to $21,028,000. Such Unrecovered Capital
represents the amount due to the Company as a first preference upon capital
events related to the Specified Projects. At December 31, 1994 and 1995,
the Company's Unrecovered Capital totaled $18,467,000 and $17,817,000,
respectively, in accordance with the Brandywine Partnership Agreement.
Cash Distributions
Effective January 1, 1994, distributions of cash flow from operations
are due first to the Company and BSPI, for reimbursement of administrative
expenses; and second to the Company, 98% of remaining cash flow; and to
BSPI, 2% of remaining cash flow. Distributions from capital events are due
first to the Company, up to its Unrecovered Capital as defined in the
Brandywine Partnership Agreement.
Brandywine made cash distributions in 1993, first to the Company, in
an amount equal to the Company's administrative expenses, and second to
BSPI, in an amount equal to BSPI's administrative expenses. During 1993 no
other cash distributions were made.
Allocation of Net Income (Losses) from Operations
During 1994 and 1995, for financial reporting purposes, income is
first allocated to the Company and BSPI in an amount equal to cash
distributions made to each partner. Thereafter, net losses are allocated to
BSPI to the extent of its positive capital account balance and its share of
Brandywine's "minimum gain" (as defined in the applicable United States
Treasury Department regulations). Remaining net income and net losses are
allocated to the Company.
During 1993, in accordance with the Brandywine Partnership Agreement,
net income (losses) from operations were allocated as follows:
- First, income to the Company and BSPI in an amount equal to cash
distributions made to such partner;
- Second, losses to Brandywine National in an amount equal to 1% of
Brandywine's gross rental income;
- Third, Net losses to BSPI to the extent of its positive capital
account balance, capital account deficit restoration obligation, and
its share of Brandywine's "minimum gain" (as defined in the applicable
United States Treasury Department regulations).
F-30
<PAGE> 197
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CASH DISTRIBUTIONS
For the years ended December 31, 1994 and 1995, the Company declared
distributions totaling $4.71 and $1.65 per share, respectively. The Company
determined that 100% of 1995 distributions or $1.65 per share represented a
return of capital to the recipient. Further, the Company determined that 45% of
1994 distributions or $2.10 per share paid in 1995 represented a return of
capital while the remaining 55% of 1994 distributions or $2.61 per share paid in
1994 represented ordinary income to the recipient.
No distributions were declared by the Company during 1993.
For the nine months ended September 30, 1996, the Company declared
distributions totaling $0.36 per share. On November 1, 1996, the Company
declared a distribution of $0.21 per share payable on November 22, 1996 to
shareholders of record as of November 11, 1996.
10. STOCK OPTIONS:
In 1994, the Board of Trustees adopted a stock option compensatory plan
benefiting an executive officer of the Company covering 46,667 Common Shares.
The plan includes options to purchase 33,333 shares at an exercise price of
$19.50 per share. Of the remaining 13,333 shares subject to options, options
covering 6,667 shares vested on August 8, 1995 and options covering 6,667 shares
vest on August 8, 1996. The exercise price of the 13,333 options was set at
$11.40. The per share exercise price of the options covering all 46,667 shares
is subject to reduction as proceeds from the sale of, or refinancing of debt
secured by, any Specified Projects are distributed by the Company to
shareholders by an amount equal to the amount so distributed, from time to time,
on account of each share. Accordingly, the per share exercise prices of the
options have been reduced to $14.31 and $6.21, respectively, as a result of
distributions to shareholders from proceeds of the Academy Downs and Iron Run
sales and the April 21, 1995 mortgage refinancing.
During the nine months ended September 30, 1996, the Company issued
six-year warrants to the RMO Fund exercisable for an aggregate of 34,118 Common
Shares (see Note 8).
In connection with the SSI/TNC Transaction, the Company issued a six-year
warrant to SSI exercisable for an aggregate of 258,333 Common Shares at a per
share exercisable price of $19.50. Further, in connection with the employment
agreements entered into upon the SSI/TNC Transaction, six-year warrants were
granted to four executive officers exercisable for an aggregate of 220,000
Common Shares at a per share exercise price of $19.50 and additional six-year
warrants for an aggregate of 23,333 Common Shares at a per share exercise price
of $19.50 were granted to employees of the Company's affiliated management
company (see Note 5).
During 1994 and 1995 and the nine months ended September 30, 1996, there
were no options exercised, canceled or expired.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The statement encourages all entities to adopt a new method
of accounting to measure compensation cost of all employee stock compensation
plans based on the estimated fair value of the award at the date it is granted.
Companies are, however, allowed to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting, which only
requires footnote disclosures concerning this new accounting pronouncement.
Management of the Company has adopted the pro forma method of disclosure as
described above.
11. INCOME FROM ACQUISITION OF LIMITED PARTNER INTERESTS IN BSPI:
During 1993, the Company obtained settlements with two limited partners of
BSPI prior to the occurrence of any event that would have required the settling
limited partners to restore their negative capital
F-31
<PAGE> 198
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accounts in BSPI. In the settlements, the Company received $2,469,000 in cash
and the settling limited partners' 25.83% limited partner interests in BSPI. As
the successor to the settling limited partners, the Company assumed all rights
and obligations of the settling limited partners to BSPI, including the settling
limited partners' deficit restoration obligations totaling approximately
$3,086,000. The Company also received from BSPI the right to setoff any future
claims (direct or indirect) between the Company and BSPI, including the
Company's deficit restoration obligations. The amount of cash received in
conjunction with these settlements has been recorded as income in the
accompanying financial statements due to the Company having received the right
of setoff.
Effective January 1, 1994, the Company and Brandywine released BSPI and its
limited partners from any current or future obligation to restore deficit
balances in BSPI's capital account in Brandywine and the Company's 25.83%
interest in BSPI was transferred to a subsidiary of BSPI's general partner and
retired.
12. RELATED-PARTY TRANSACTIONS:
Through January 31, 1994, upon the sale of a Specified Project, certain
related parties were entitled to a commission equal to 1.5% of the sales price
of the Specified Project. During 1994 an amount of $167,000 was paid from a
prior sale.
Effective February 1, 1995, the Company assumed management of three of the
four Specified Projects and entered into a management agreement with an
unrelated party for the management of the fourth Specified Project. During the
years 1993 and 1994 and the period January 1, 1995 through January 31, 1995, all
of the Specified Projects, except Academy Downs, were managed by related
parties. For their services, these property managers received an amount equal to
5% of rental income (excluding tenant reimbursements), which amount totaled
$219,000, $187,000 and $10,000 in 1993, 1994 and 1995, respectively, and is
included in management fees in the accompanying statements of operations. During
1993, the property managers also received reimbursements of certain direct costs
attributable to the operation of the Specified Projects. Such reimbursements
amounted to $154,000. Further, for the period February 1, 1994 through January
31, 1995, for the Specified Projects operated under a management agreement with
related parties, one affiliate absorbed an amount equal to 2% of gross rents
representing administrative costs, which costs would otherwise be borne by the
Company. In 1994 and 1995, these amounts totaled $70,000 and $4,000,
respectively. For the years 1993 and 1994 and through the period January 1, 1995
through January 31, 1995, certain related parties or employees thereof were paid
leasing commissions with respect to leases obtained through them. Leasing
commissions paid to such related parties in 1993, 1994 and 1995 amounted to
$28,000, $56,000, and $47,000, respectively. Further, for the period February 1,
1994 through January 31, 1995, one affiliate absorbed an amount equal to 40% of
the defined commission structure representing administrative costs, which costs
would otherwise be borne by the Company. In 1994 and 1995, these amounts totaled
$22,000 and $19,000, respectively.
During 1993 and 1994 certain administrative and management functions for
the Company were performed by a related party. During 1993 and continuing
through August 8, 1994, the Company reimbursed the related party up to $100,000
per year for certain administrative expenses directly attributable to the
Company. Such reimbursements amounted to $100,000 in 1993 and $75,000 in 1994.
13. OPERATING LEASES:
The Company leases its properties to tenants under operating leases with
various expiration dates extending to the year 2006. At December 31, 1995,
leases covering 95,000 square feet or approximately 37% of the net leasable
space were scheduled to expire during 1996. Subsequent to year end, three leases
were
F-32
<PAGE> 199
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
renewed which total 30,000 square feet or 12% of the net leasable space. Gross
minimum future rentals on noncancelable leases at December 31, 1995 were:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------------------------- ----------
<S> <C>
1996................................................ $3,223,000
1997................................................ 2,400,000
1998................................................ 1,660,000
1999................................................ 1,522,000
2000................................................ 1,371,000
2001 and thereafter................................. 4,231,000
</TABLE>
The total minimum future rentals presented above do not include amounts
that may be received as tenant reimbursements for charges to cover increases in
certain operating costs. Excluding projects sold in each year, these tenant
reimbursements amounted to $148,000, $47,000 and $66,000 in 1993, 1994, and
1995, respectively.
14. SUBSEQUENT EVENTS (UNAUDITED):
The Company has filed a Form S-11 Registration Statement with the
Securities and Exchange Commission to register the offer and sale of Common
Shares (the "Offering"). The Company anticipates contributing the net proceeds
to the Operating Partnership, to repay debt and provide funds for acquisitions
and retain any excess for working capital needs. Costs associated with the
proposed Offering are included in deferred costs and other liabilities on the
Company's balance sheet as of September 30, 1996.
Subsequent to September 30, 1996, the Company entered into agreements to
purchase 13 properties "Acquisition Properties" which contain an aggregate of
approximately 700,000 net rentable square feet located in the suburban
Philadelphia markets. Nine of the properties will be acquired from an unrelated
party for an aggregate purchase price of $30.3 million, consisting of: (i)
481,818 Series A preferred shares of beneficial interest, par value $.01 per
share, of the Company ("Preferred Shares") that are convertible into 1,606,060
Common Shares under certain circumstances; (ii) two-year warrants to purchase
133,333 Common Shares at an exercise price of $25.50 per share; and (iii)
deferred payments aggregating $3.8 million. The purchase prices for the other
four properties aggregates $22.8 million and will be paid in cash to unrelated
parties. In connection with the Company's pursuit of these acquisitions, as of
September 30, 1996, the Company had deposited $190,000 with the parties. Such
deposits are included in prepaid and other assets on the Company's balance sheet
as of September 30, 1996.
F-33
<PAGE> 200
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. SUMMARY OF INTERIM RESULTS (UNAUDITED):
The following is a summary of unaudited interim financial information for
the Company for the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1994
- -----
Operating revenue..................... $1,279 $ 1,092 $1,026 $ 795
Provision for loss on real estate
investments......................... $5,400(a) -- -- --
Gain on sales of real estate
investments......................... --(b) -- $1,116(d) $ 294(f)
Extraordinary gain on extinguishment
of debt............................. $7,998(c) -- -- --
Net income (loss)..................... $7,998(c) $ (188) $ 839(d) $(1,082)(e)(f)
Net income (loss) per share........... $11.85(c) $ (0.27) $ 1.23(d) $1.59(e)(f)
1995
- -----
Operating revenue..................... $ 927 $ 879 $ 885 $ 975
Net loss.............................. $ (70) $ (370)(g) $ (152) $ (232)(h)
Net loss per share.................... $(0.04) $ (0.20)(g) $(0.08) $ (0.12)(h)
</TABLE>
- ---------------
(a) During the first quarter of 1994, the Company recorded a write-down of
$5,400,000 to adjust the carrying value of the Specified Projects to
estimated net realizable value (see Note 3).
(b) During the first quarter of 1994, the Company sold the Lincoln Centre
project for a net sales price equal to its adjusted carrying value (see Note
4).
(c) During the first quarter of 1994, the Company extinguished mortgage
indebtedness totaling approximately $43 million resulting, after costs and
allocation to Minority Interest, in extraordinary gain to the Company of
$7,998,000 or $11.85 per share (see Note 3). Such extraordinary gain is
included in the Company's net income for the first quarter of 1994.
(d) During the third quarter of 1994, the Company sold the Academy Downs project
resulting in a net gain of $1,116,000 or $1.65 per share (see Note 4). Such
gain is included in the Company's net income for the third quarter of 1994.
(e) During the fourth quarter of 1994, the Company paid its then mortgage lender
$1,114,000 or $1.65 per share, which amount represented the prepayment of
Additional Interest and is included in the Company's net loss for the fourth
quarter of 1994 (see Note 5).
(f) During the fourth quarter of 1994, the Company sold the Iron Run project
resulting in a net gain of $294,000 or $0.45 per share (see Note 4). Such
gain is included in the Company's net loss for the fourth quarter of 1994.
(g) During the second quarter of 1995, the Company's net loss includes the
write-off of deferred loan fees totaling $254,000 or $0.42 per share as a
result of the Company's April 21, 1995 refinancing (see Note 5).
(h) During the fourth quarter of 1995, the Company's net loss includes the
write-off of deferred costs totaling $100,000 or $0.15 per share as a result
of the termination of the Company's $26 million commitment (see Note 5).
16. REVERSE SHARE SPLIT:
Prior to this Offering, the Company effected a one- for -three reverse
share split of its Common Shares. All share and per share amounts have been
retroactively restated for all years presented.
F-34
<PAGE> 201
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and Owners of the SSI/TNC Properties:
We have audited the accompanying combined balance sheets of the SSI/TNC
Properties, a nonlegal entity more fully described in Note 1, as of December 31,
1994 and 1995, and the related combined statements of operations, owners'
deficit, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the SSI/TNC
Properties' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the SSI/TNC
Properties as of December 31, 1994 and 1995 and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA,
April 12, 1996
F-35
<PAGE> 202
SSI/TNC PROPERTIES
COMBINED BALANCE SHEETS (NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31 AS OF
--------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate investments (Note 2) --
Operating properties, at cost...................... $ 75,577 $ 78,190 $ 79,563
Less- Accumulated depreciation..................... (17,858) (21,669) (23,571)
-------- -------- --------
57,719 56,521 55,992
Cash (Note 2)......................................... 438 773 655
Escrowed cash (Note 2)................................ 504 519 513
Accounts receivable................................... 386 253 651
Accrued rental income (Notes 2 and 6)................. 1,313 902 785
Deferred costs, net (Note 2).......................... 1,526 1,884 2,145
Prepaid expenses and other assets..................... 393 400 140
-------- -------- --------
$ 62,279 $ 61,252 $ 60,881
======== ======== ========
LIABILITIES AND OWNERS' DEFICIT
Mortgage notes payable (Note 3)....................... $ 70,515 $ 63,259 $ 63,322
Note payable (Note 7)................................. -- -- 364
Accrued interest payable.............................. 1,124 599 444
Tenant security deposits and other liabilities (Note
2)................................................. 729 947 1,320
-------- -------- --------
72,368 64,805 65,450
COMMITMENTS AND CONTINGENCIES (Note 6)
OWNERS' DEFICIT......................................... (10,089) (3,553) (4,569)
-------- -------- --------
$ 62,279 $ 61,252 $ 60,881
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE> 203
SSI/TNC PROPERTIES
COMBINED STATEMENTS OF OPERATIONS (NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 JUNE 30
--------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE (Note 4):
Base rents (Notes 2 and 6)................... $ 7,955 $ 8,050 $ 7,829 $ 3,960 $ 3,888
Tenant reimbursements........................ 2,754 3,130 2,895 1,381 1,870
Management operations (Note 2)............... 976 946 617 319 277
Other income................................. 2 46 3 -- 100
------- ------- ------- ------- -------
Total revenue........................ 11,687 12,172 11,344 5,660 6,135
------- ------- ------- ------- -------
OPERATING EXPENSES:
Interest (Note 3)............................ 5,807 5,915 5,855 3,051 2,581
Depreciation and amortization (Note 2)....... 3,568 3,618 4,336 1,923 2,103
Real estate taxes............................ 1,107 1,076 968 497 511
Building operating costs..................... 2,073 2,719 2,456 1,121 1,790
Selling, general and administrative (Note
5)........................................ 1,328 1,220 906 478 456
Provision for loss on real estate investments
(Note 2).................................. -- -- 202 -- --
------- ------- ------- ------- -------
Total operating expenses............. 13,883 14,548 14,723 7,070 7,441
------- ------- ------- ------- -------
LOSS BEFORE EXTRAORDINARY ITEMS................ (2,196) (2,376) (3,379) (1,410) (1,306)
EXTRAORDINARY ITEMS -- GAIN ON RESTRUCTURING OF
DEBT (Note 3)................................ -- 614 5,559 -- --
------- ------- ------- ------- -------
NET INCOME (LOSS).............................. $(2,196) $(1,762) $ 2,180 $(1,410) $(1,306)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE> 204
SSI/TNC PROPERTIES
COMBINED STATEMENTS OF OWNERS' DEFICIT (NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995,
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT JANUARY 1, 1993....................................................... $(6,181)
Contributions.................................................................. 752
Net loss....................................................................... (2,196)
-------
BALANCE AT DECEMBER 31, 1993..................................................... (7,625)
Contributions.................................................................. 64
Distributions.................................................................. (766)
Net loss....................................................................... (1,762)
-------
BALANCE AT DECEMBER 31, 1994..................................................... (10,089)
Contributions.................................................................. 4,356
Net income..................................................................... 2,180
-------
BALANCE AT DECEMBER 31, 1995..................................................... (3,553)
Contributions (Unaudited)...................................................... 323
Distributions (Unaudited)...................................................... (33)
Net loss (Unaudited)........................................................... (1,306)
-------
BALANCE AT JUNE 30, 1996 (Unaudited)............................................. $(4,569)
=======
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE> 205
SSI/TNC PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS (NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX-MONTH
DECEMBER 31 PERIOD ENDED JUNE 30
------------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $(2,196) $(1,762) $ 2,180 $(1,410) $(1,306)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities --
Extraordinary gain on extinguishment of
debt................................. -- (614) (5,559) -- --
Depreciation and amortization.......... 3,568 3,618 4,336 1,923 2,103
Provision for loss on real estate
investments.......................... -- -- 202 -- --
Changes in assets and
liabilities(Increase) decrease in --
Accounts receivable.................. (248) (14) 133 (64) (397)
Accrued rental income................ (72) 458 411 230 117
Prepaid expenses and other assets.... (52) 427 (7) 273 260
Increase (decrease) in --
Accrued interest payable............. 422 253 (525) 179 (155)
Tenant security deposits and other
liabilities.......................... 22 (204) 218 112 373
------- ------- ------- ------- -------
Net cash provided by operating
activities...................... 1,444 2,162 1,389 1,243 995
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and leasing
commissions paid....................... (908) (1,802) (2,774) (375) (1,783)
(Increase) decrease in escrowed cash...... (575) 87 (15) 82 6
------- ------- ------- ------- -------
Net cash used in investing
activities........................... (1,483) (1,715) (2,789) (293) (1,777)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions............................. $ 752 $ 64 $ 4,356 $ 287 $ 323
Distributions............................. -- (766) -- -- (33)
Repayments on mortgage notes payable...... (1,038) (874) (1,899) (531) (279)
Borrowings on mortgage notes payable...... 414 1,200 -- -- 342
Proceeds from note payable................ -- -- -- -- 364
Costs associated with financing........... 17 (160) (722) (33) (53)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............ 145 (536) 1,735 (277) 664
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH............. 106 (89) 335 673 (118)
CASH, BEGINNING OF PERIOD................... 421 527 438 438 773
------- ------- ------- ------- -------
CASH, END OF PERIOD......................... $ 527 $ 438 $ 773 $ 1,111 $ 655
------- ------- ------- ------- -------
SUPPLEMENTAL DISCLOSURE:
Interest paid............................. $ 5,411 $ 5,763 $ 6,254 $ 2,744 $ 2,736
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 206
SSI/TNC PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. ORGANIZATION AND BASIS OF COMBINATION:
The accompanying combined financial statements consist of the accounts of
the following properties and business operations:
The Property Management, Leasing, and Development
Operations of The Nichols Realty Services Company (the "Company")
The Nichols Company ("Nichols") Properties:
<TABLE>
<CAPTION>
PROPERTY SQUARE FOOTAGE
--------------------------------------------------------------- --------------
<S> <C>
456 Creamery Way, Exton, PA.................................... 47,600*
468 Creamery Way, Exton, PA.................................... 28,900
486 Thomas Jones Way, Exton, PA................................ 51,500
7248 Tilghman Street, Allentown, PA............................ 42,900
6575 Snowdrift Road, Allentown, PA............................. 46,250
1510 Gehman Road, Lansdale, PA................................. 152,600*
16 Campus Blvd., Newtown Square, PA............................ 67,700*
18 Campus Blvd., Newtown Square, PA............................ 37,700*
One Progress Avenue, Horsham, PA............................... 79,200*
1155 Business Center Drive, Horsham, PA........................ 51,400*
500 Enterprise Avenue, Horsham, PA............................. 67,800*
168 Franklin Corner Road, Lawrenceville, NJ.................... 32,000*
</TABLE>
- ---------------
* Included in the "Witmer Partnership".
Safeguard Scientifics, Inc. ("Safeguard") Properties:
<TABLE>
<CAPTION>
PROPERTY SQUARE FOOTAGE
--------------------------------------------------------------- --------------
<S> <C>
650 Dresher Road, Horsham, PA.................................. 30,100
7310 Tilghman Street, Allentown, PA............................ 40,000
2240-50 Butler Pike, Plymouth Meeting, PA...................... 52,200
2260 Butler Pike, Plymouth Meeting, PA......................... 31,900
120 Germantown Pike, Plymouth Meeting, PA...................... 30,500
140 Germantown Pike, Plymouth Meeting, PA...................... 25,900
110 Summit Drive, Exton, PA.................................... 43,700
</TABLE>
The SSI/TNC Properties listed above have common management and were
developed by an affiliated ownership group referred to collectively as "Nichols
Safeguard." Nichols Safeguard is engaged in the development and ownership of
commercial and industrial real estate in the Philadelphia/Delaware Valley Area
and provides management, leasing, and development services on a contractual
basis to the above properties and third parties.
The SSI/TNC Properties are intended to be acquired in a transaction with
Brandywine Realty Trust (the "Trust"), which intends to remain qualified as a
real estate investment trust under the Internal Revenue Code. These financial
statements have been prepared on a combined basis to present the financial
position and results of operations of the 19 properties and the related
management business of Nichols Safeguard as if the operations were managed as a
single predecessor business under common control. Accordingly, all inter-entity
accounts have been eliminated to reflect the combined results.
F-40
<PAGE> 207
SSI/TNC PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
The combined financial statements as of June 30, 1996, and for the six
months ended June 30, 1995 and 1996, are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the combined financial statements for the
interim periods have been included. The results for the interim periods are not
necessarily indicative of the results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Real Estate Investments
A summary of real estate investments, less accumulated depreciation and
amortization at December 31, 1994 and 1995, and June 30, 1996, follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- --------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Land......................................... $ 8,975 $ 9,275 $ 9,275
Buildings.................................... 52,263 53,761 53,821
Tenant improvements.......................... 14,299 15,107 16,420
Furniture, fixtures and equipment............ 40 47 47
-------- -------- --------
75,577 78,190 79,563
Accumulated depreciation..................... (17,858) (21,669) (23,571)
-------- -------- --------
$ 57,719 $ 56,521 $ 55,992
======== ======== ========
</TABLE>
Costs associated with the acquisition, development and construction of
these properties are capitalized. Properties are carried at the lower of
depreciated cost or net realizable value. For financial reporting purposes,
depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, as follows:
<TABLE>
<S> <C>
Buildings 31.5 years
Tenant improvements 5 to 10 years, which reflect the expected terms of the lease
Furniture, fixtures and
equipment 3 to 5 years
</TABLE>
Management reviews the net realizable value of the properties periodically
to determine whether an allowance for possible losses is necessary. The carrying
value of the properties is evaluated on an individual basis, and to the extent
management's estimate of the net realizable value of each investment is less
than its carrying value, a provision for loss on real estate investments is
recorded. During 1995, a $202,000 provision for loss on real estate investments
was recorded.
For federal income tax purposes, the Company utilizes straight-line and
accelerated methods of depreciation. As a result, accumulated depreciation for
tax purposes differs from accumulated depreciation for financial statement
purposes by approximately $1,072,000 and $(408,000) at December 31, 1994 and
1995, respectively.
F-41
<PAGE> 208
SSI/TNC PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of." This statement requires that long-lived
assets to be held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, management
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss should be recognized. Measurement of an impairment
loss for these assets should be based on the fair market value of the asset. On
January 1, 1996, the Company adopted this statement. The effect of adopting this
statement was not material to the SSI/TNC Properties' financial position or
results of operations.
Escrowed Cash
In accordance with the mortgage agreements of several properties, the
owners were required to place funds on deposit in interest-bearing accounts to
secure the payments of real estate taxes, debt service and other anticipated
capital expenditures.
Deferred Costs
Fees and costs associated with lease origination and costs incurred to
obtain long-term financing have been capitalized and are being amortized on a
straight-line basis, which approximates the interest method, over the terms of
the respective leases or debt. At December 31, 1994 and 1995, and June 30, 1996,
deferred costs include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------- --------
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Deferred financing costs......................... $ 349 $1,009 $1,061
Deferred leasing costs........................... 2,957 2,770 3,190
------ ------ ------
3,306 3,779 4,251
Less -- Accumulated amortization................. 1,780 1,895 2,106
------ ------ ------
$1,526 $1,884 $2,145
====== ====== ======
</TABLE>
Revenue Recognition
Rental income from tenants is recognized on a straight-line basis
regardless of when payments are due. Accrued rental income represents rental
income recognized in excess of payments currently due (see Note 6).
The Company provides management, leasing and development services. Fees for
such services are based on contracted rates, which are consistent with the
general marketplace. Management fees, leasing commissions, and developer fees
are recognized as income in the period earned.
Income Taxes
No federal or state income taxes are payable by Nichols Safeguard, and none
have been provided in the accompanying financial statements. The partners are
required to include their respective shares of partnership profits and losses in
their individual tax returns.
F-42
<PAGE> 209
SSI/TNC PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
Tenant Security Deposits
Cash consists of demand accounts and money market accounts. At December 31,
1994 and 1995, and June 30, 1996, cash includes unrestricted tenant security
deposits of $270,000, $350,000, and $353,000, respectively.
3. MORTGAGE NOTES PAYABLE:
Mortgage notes payable are collateralized by the properties and the
assignment of rents and generally require monthly principal and interest
payments. Mortgage notes payable totaling $31,092,000 at December 31, 1995, bear
fixed annual interest ranging from 7% to 9.25%. Nichols Safeguard also has two
mortgage notes payable totaling $30,523,000 and $1,644,000 at December 31, 1995,
which have variable rates of interest based on the lender's commercial paper
plus 2.75% and prime plus 1%, respectively. At December 31, 1995, these interest
rates were 8.6% and 9.5%, respectively. The weighted average interest rates on
the mortgage notes for the years ended December 31, 1993, 1994 and 1995, were
8.2%, 8.0%, and 8.6% respectively. Weighted average interest rates for the six
months ended June 30, 1995 and 1996, were 8.3% and 8.2%, respectively.
In November 1995, Nichols Safeguard refinanced certain mortgage notes on
the Witmer properties totaling $37,354,000 with proceeds of mortgage loans
totaling up to $32,211,600, including tenant improvement holdbacks of
$1,688,000, plus cash of $4,052,000 contributed by Safeguard. At June 30, 1996,
$342,000 of the tenant improvement holdbacks had been advanced to Nichols
Safeguard and is included in mortgage notes payable. In connection with the
refinancing, Nichols Safeguard acquired the Lawrenceville, New Jersey property
with outstanding debt of $3,200,000 from the lender. As a result of the debt
refinancing, Nichols Safeguard recorded an extraordinary gain of $5,559,000 in
1995.
Commencing January 1, 1996, through maturity, November 30, 2000, Nichols
Safeguard will make monthly principal and interest payments with interest based
on the lender's composite commercial paper plus 2.75% per annum. Minimum monthly
principal payments are equal to 1/12 of .5% of the principal balance outstanding
on the first day of each loan year beginning December 1. Additional principal
payments will be made monthly on the $30,523,000 principal outstanding as of
December 31, 1995, based on 100% of the net cash flow from the properties, as
defined. No principal payments were made from these participating interests in
cash flows during 1995 or the six months ended June 30, 1996. The loans are
cross-collateralized and cross-defaulted. The loan is further secured by a
$1,500,000 letter of credit provided by Safeguard. The loans are subject to
certain prepayment penalties as defined. As additional consideration, the lender
may receive additional contingent interest, as defined, at scheduled maturity or
upon early loan repayment. The percentage used to compute the additional
contingent interest may vary based upon the level of any additional drawdowns
under the loan and was 25% at December 31, 1995. No additional contingent
interest was paid in 1995 or during the six months ended June 30, 1996.
In July 1994, Nichols Safeguard negotiated with a lender to restructure a
mortgage note totaling $4,718,000. The principal amount of the loan was reset at
$4,100,000. Interest was reset from prime plus 1% to prime plus .5% retroactive
to January 1, 1994, and the maturity was extended to March 31, 1996. As a result
of the debt restructuring, Nichols Safeguard recorded an extraordinary gain of
$614,000 during 1994. This mortgage note was included in the November 1995
refinancing.
Mortgage notes are due between December 1996 and June 2004. At December 31,
1995, the carrying value of the mortgage notes payable approximates the fair
value as the debt bears interest at rates that
F-43
<PAGE> 210
SSI/TNC PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
approximate current market rates. The annual maturities of the mortgage notes
payable as of December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
RECOURSE NONRECOURSE TOTAL
-------- ----------- -------
<S> <C> <C> <C>
1996........................................ $ 233 $ 3,222 $ 3,455
1997........................................ 1,746 354 2,100
1998........................................ 8,548 368 8,916
1999........................................ -- 378 378
2000........................................ -- 45,192 45,192
Thereafter.................................. -- 3,218 3,218
------- ------- -------
$ 10,527 $52,732 $63,259
======= ======= =======
</TABLE>
At December 31, 1995, mortgage notes payable of $30,523,000 and $13,548,000
are also collateralized by outstanding letters of credit totaling $1,500,000 and
$500,000 which expire in November 1996 and July 1996, respectively.
Guarantees by the Company and certain other limited partners totaled
$10,527,000. Two mortgage notes totaling $13,548,000 and $3,219,000 at December
31, 1995, are entitled to receive additional interest in the form of 50% and
80%, respectively, of the cash flows, as defined. During 1993, 1994 and 1995,
additional interest expense recorded as a result of cash flow participation by
lenders totaled $0, $201,000 and $61,000, respectively. For the six months ended
June 30, 1995 and 1996, additional interest expense totaled $114,000 and $0,
respectively.
4. RELATED-PARTY TRANSACTIONS:
The Company provides management, leasing and development services for
certain affiliated partnerships. Management and leasing fees earned by the
Company related to these partnerships totaled $359,000, $420,000 and $171,000,
respectively, for the years ended December 31, 1993, 1994 and 1995, and are
included in management operations.
Nichols Safeguard occupied approximately 28,000 square feet of the
properties during 1993, 1994 and 1995. In addition, 4,600 square feet was
occupied by a Nichols Safeguard affiliate during 1994 and part of 1993. Base
rents from these affiliates for the years ended December 31, 1993, 1994 and
1995, were $230,000, $260,000 and $246,000, respectively. Base rents from these
affiliated partnerships for the six months ended June 30, 1995 and 1996, were
$126,000 and $117,000, respectively.
5. EMPLOYEE BENEFIT PLAN:
Employees of the Company participate in a profit sharing plan covering
substantially all employees. Annual contributions are determined at the
discretion of the employer. No contributions were made in 1993, 1994 and 1995,
respectively.
6. OPERATING LEASES:
Nichols Safeguard leases its properties to tenants under operating leases
with various expiration dates extending to the year 2006. During 1996, leases
covering 99,000 square feet or approximately 11% of the net leasable space are
scheduled to expire.
F-44
<PAGE> 211
SSI/TNC PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
Future minimum rentals on non-cancelable tenant leases at December 31,
1995, excluding tenant reimbursements for increases in operating expenses are as
follows (in thousands):
<TABLE>
<CAPTION>
RENTAL DECREASE
PAYMENTS IN ACCRUED MINIMUM
DUE RENTAL INCOME RENTAL INCOME
----------- ------------- -------------
<S> <C> <C> <C>
1996.............................. $ 7,122 $ 163 $ 6,959
1997.............................. 5,209 227 4,982
1998.............................. 4,498 147 4,351
1999.............................. 3,358 138 3,220
2000.............................. 2,262 135 2,127
Thereafter........................ 2,187 92 2,095
------- ---- -------
$24,636 $ 902 $23,734
======= ==== =======
</TABLE>
During 1993, 1994 and 1995, no tenants individually accounted for more than
10% of rental revenue.
7. SUBSEQUENT EVENTS (UNAUDITED):
On August 22, 1996, the Trust consummated its transaction with Nichols and
Safeguard. Upon Closing, the Trust obtained controlling ownership interests of
the SSI/TNC Properties and received $426,250 in cash. In the SSI/TNC
Transaction, the Trust issued 258,333 common shares of beneficial interest
("Common Shares") and a six-year warrant exercisable for an additional 258,333
common shares of beneficial interest at a per share exercise price of $19.50.
The balance of the consideration was in the form of limited partnership units
issued or issuable, and convertible under certain circumstances, up to 540,159
Common Shares, subject to certain potential adjustments.
In July 1996, Nichols Safeguard refinanced $2,894,000 of mortgage notes
that were due in December 1996. The notes were satisfied by the payment of
$2,400,000, which represents the partial proceeds of a new mortgage loan of
$2,500,000 which bears interest at Libor plus 250 basis points and provides for
principal amortization of $4,000 per month during the period September 1, 1997
through July 1, 1998 and a final balance due August 1, 1998. As a result of the
refinancing, Nichols Safeguard recorded an extraordinary gain of $494,000.
Certain tenant improvements and leasing commissions associated with the same
property, in the aggregate amount of $460,000 ($364,000 outstanding as of June
30, 1996) have been financed by a loan from Safeguard and is secured by a second
mortgage on the property. The loan requires interest payable monthly at the
prime rate and matures on the earlier of: (a) the completion of a secondary
stock offering by the Trust (b) a sale or refinance of the property providing
sufficient funds to satisfy all other priority debts of the property or (c) July
31, 1999.
F-45
<PAGE> 212
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Brandywine Realty Trust:
We have audited the statement of revenue and certain expenses of the
LibertyView Building described in Note 1 for the year ended December 31, 1995.
This financial statement is the responsibility of the LibertyView Building's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission and is not intended to be a complete presentation of the
LibertyView Building's revenue and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain expenses of the LibertyView
Building for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA,
June 14, 1996
F-46
<PAGE> 213
LIBERTYVIEW BUILDING
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE
FOR THE SIX-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
REVENUE:
Base rents (Note 2).............................................. $1,119,000 $605,000
Tenant reimbursements............................................ 535,000 241,000
---------- --------
Total revenue............................................ 1,654,000 846,000
---------- --------
CERTAIN EXPENSES:
Maintenance...................................................... 277,000 104,000
Utilities........................................................ 215,000 114,000
Real estate taxes................................................ 274,000 134,000
Other operating expenses......................................... 32,000 16,000
---------- --------
Total certain expenses................................... 798,000 368,000
---------- --------
REVENUE IN EXCESS OF CERTAIN EXPENSES.............................. $ 856,000 $478,000
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 214
LIBERTYVIEW BUILDING
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1995
1. BASIS OF PRESENTATION:
The statements of revenue and certain expenses reflect the operations of
the LibertyView Office Building (the "LibertyView Building") located in New
Jersey, which will be acquired by Brandywine Realty Trust (the "Trust") from an
unaffiliated party by July 19, 1996. The LibertyView Building has an aggregate
net leasable area of approximately 121,700 square feet and is 63% leased as of
December 31, 1995.
The accounting records of the LibertyView Building are maintained on a
modified cash basis. Adjusting entries have been made to present the
accompanying financial statements in accordance with generally accepted
accounting principles. The accompanying financial statements exclude certain
expenses such as interest, depreciation and amortization, professional fees, and
other costs not directly related to the future operations of the LibertyView
Building or that may not be comparable to the expenses expected to be incurred
by the Trust.
The combined statements of revenue and certain expense s for the six months
ended June 30, 1996, are unaudited. In the opinion of management, all
adjustments consisting solely of normal recurring adjustments necessary for a
fair presentation of the financial statements for the interim period have been
included. The results for the interim period are not necessarily indicative of
the results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
2. OPERATING LEASES:
Base rents presented for the year ended December 31, 1995, and the
six-month period ended June 30, 1996, include straight-line adjustments for
rental revenue increases in accordance with generally accepted accounting
principles. The aggregate rental revenue increase resulting from the
straight-line adjustments for the year ended December 31, 1995, and the
six-month period ended June 30, 1996, was $127,000 and $12,000, respectively.
Tenants whose minimum rental payments equaled 10% or more of the total base
rents in 1995 were:
<TABLE>
<S> <C>
HIP Health Plan of NJ............................. $462,000
Shapiro and Kreisman.............................. 185,000
</TABLE>
In September 1995, the LibertyView Building entered into a 60-month lease
agreement with Sleepcare, a related party to the seller, of which $18,000 and
$27,000 of base rents for the year ended December 31, 1995, and the six-month
period ended June 30, 1996, respectively, is included in the statements of
revenue and certain expenses.
F-48
<PAGE> 215
LIBERTYVIEW BUILDING
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
The LibertyView Building is leased to tenants under operating leases with
expiration dates extending to the year 2007. Future minimum rentals under
noncancelable operating leases, excluding tenant reimbursements of operating
expenses as of December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996..................................................... $1,205,000
1997..................................................... 1,177,000
1998..................................................... 1,118,000
1999..................................................... 1,118,000
2000..................................................... 950,000
Thereafter............................................... 4,440,000
</TABLE>
Certain leases also include provisions requiring tenants to reimburse
management costs and other overhead up to stipulated amounts.
F-49
<PAGE> 216
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Brandywine Realty Trust:
We have audited the combined statement of revenue and certain expenses of
the Commonwealth of Pennsylvania State Employes' Retirement System (SERS)
Acquisition Properties (the "SERS Properties") described in Note 1 for the year
ended December 31, 1995. This financial statement is the responsibility of
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The combined statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11 of
Brandywine Realty Trust as described in Note 1 and is not intended to be a
complete presentation of the SERS Properties' revenue and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain expenses of the SERS
Properties for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 31, 1996
F-50
<PAGE> 217
SERS PROPERTIES
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE-MONTH PERIODS ENDED
YEAR ENDED -------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE:
Base rents (Note 2)................................ $4,366,000 $ 3,180,000 $ 3,435,000
Tenant reimbursements.............................. 238,000 221,000 213,000
---------- ---------- ----------
Total revenue.............................. 4,604,000 3,401,000 3,648,000
---------- ---------- ----------
CERTAIN EXPENSES:
Maintenance and other operating expenses........... 1,101,000 841,000 939,000
Utilities.......................................... 630,000 467,000 520,000
Real estate taxes.................................. 505,000 377,000 403,000
---------- ---------- ----------
Total certain expenses..................... 2,236,000 1,685,000 1,862,000
---------- ---------- ----------
REVENUE IN EXCESS OF CERTAIN EXPENSES................ $2,368,000 $ 1,716,000 $ 1,786,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 218
SERS PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1995
1. BASIS OF PRESENTATION:
The combined statement of revenue and certain expenses reflects the
operations of the Commonwealth of Pennsylvania State Employes' Retirement System
("SERS") Acquisition Properties (the "SERS Property") located in surburban
Philadelphia, Pennsylvania. These properties are expected to be acquired by
Brandywine Realty Trust (the "Company") from SERS in November 1996. The SERS
Properties have aggregate net rentable area of approximately 418,000 square feet
and were 83% leased as of December 31, 1995. This combined statement of revenue
and certain expenses is to be included in the Company's registration statement
on Form S-11 as the acquisition has been deemed significant pursuant to the
rules and regulations of the Securities and Exchange Commission.
The accounting records of the SERS Properties are maintained on a modified
cash basis. Adjusting entries have been made to present the accompanying
financial statements in accordance with generally accepted accounting
principles. The accompanying financial statements exclude certain expenses such
as interest, depreciation and amortization, professional fees, and other costs
not directly related to the future operations of the SERS Properties.
The combined statements of revenue and certain expenses for the nine months
ended September 30, 1996 and 1995, are unaudited. In the opinion of management,
all adjustments consisting solely of normal recurring adjustments necessary for
a fair presentation of the financial statements for the interim period have been
included. The results for the interim period are not necessarily indicative of
the results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. The ultimate results could differ from those estimates.
2. OPERATING LEASES:
Base rents presented for the year ended December 31, 1995, and the nine
months ended September 30, 1996 and 1995, include straight-line adjustments for
rental revenue increases in accordance with generally accepted accounting
principles. The aggregate rental revenue increase resulting from the
straight-line adjustments for the year ended December 31, 1995, and the nine
months ended September 30, 1996 and 1995, were $48,000, $7,000 (unaudited) and
$46,000 (unaudited), respectively.
Waste Management, Inc.'s minimum rental payments were $438,000 and were
greater than 10% of the total base rents in 1995.
The PASERS Acquisition Properties are leased to tenants under operating
leases with expiration dates extending to the year 2001. Future minimum rentals
under noncancelable operating leases, excluding tenant reimbursements of
operating expenses as of December 31, 1995, were as follows:
<TABLE>
<S> <C>
1996............................................................. $3,886,000
1997............................................................. 2,499,000
1998............................................................. 1,563,000
1999............................................................. 920,000
2000............................................................. 345,000
Thereafter....................................................... 147,000
</TABLE>
Certain leases also include provisions requiring tenants to reimburse the
Company for management costs and other operating expenses up to stipulated
amounts.
F-52
<PAGE> 219
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Brandywine Realty Trust:
We have audited the combined statement of revenue and certain expenses of
the Delaware Corporate Center Acquisition Property (the "Delaware Corporate
Center") described in Note 1 for the year ended December 31, 1995. This
financial statement is the responsibility of management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The combined statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11 of
Brandywine Realty Trust as described in Note 1 and is not intended to be a
complete presentation of the Delaware Corporate Center's revenue and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain expenses of the Delaware
Corporate Center for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 31, 1996
F-53
<PAGE> 220
DELAWARE CORPORATE CENTER
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE-MONTH PERIODS ENDED
YEAR ENDED ---------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------ ------------- -------------
UNAUDITED
<S> <C> <C> <C>
REVENUE:
Base rents (Note 2).............................. $410,000 $378,000 $1,666,000
-------- -------- ----------
Total revenue............................ 410,000 378,000 1,666,000
-------- -------- ----------
CERTAIN EXPENSES:
Maintenance and other operating expenses......... 122,000 72,000 146,000
Utilities........................................ 145,000 111,000 137,000
Real estate taxes................................ 126,000 91,000 87,000
Ground rent...................................... 109,000 82,000 82,000
-------- -------- ----------
Total certain expenses................... 502,000 356,000 452,000
-------- -------- ----------
REVENUE IN EXCESS OF CERTAIN EXPENSES.............. $(92,000) $ 22,000 $1,214,000
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 221
DELAWARE CORPORATE CENTER
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1995
1. BASIS OF PRESENTATION:
The combined statement of revenue and certain expenses reflects the
operations of the Delaware Corporate Center (the "Delaware Corporate Center")
located in New Castle County, Delaware. This property is expected to be acquired
by Brandywine Realty Trust (the "Company") from Koll Investment Management, Inc.
in November, 1996. The Delaware Corporate Center has aggregate net rentable area
of approximately 105,000 square feet and was 11% leased as of December 31, 1995.
This combined statement of revenue and certain expenses is to be included in the
Trust's registration statement on Form S-11 as the acquisition has been deemed
significant pursuant to the rules and regulations of the Securities and Exchange
Commission.
The accounting records of the Delaware Corporate Center are maintained on
an accrual basis. The accompanying financial statement excludes certain expenses
such as interest, depreciation and amortization, professional fees, and other
costs not directly related to the future operations of the Delaware Corporate
Center.
The combined statement of revenue and certain expenses for the nine months
ended September 30, 1996 and 1995, are unaudited. In the opinion of management,
all adjustments consisting solely of normal recurring adjustments necessary for
a fair presentation of the financial statements for the interim period have been
included. The results for the interim period are not necessarily indicative of
the results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
2. OPERATING LEASES:
Base rents presented for the nine-month period ended September 30, 1996,
include straight-line adjustments for rental revenue increases in accordance
with generally accepted accounting principles. The aggregate rental revenue
increase resulting from the straight-line adjustment for the nine-month period
ended September 30, 1996, was $302,000 (unaudited).
Existing tenants whose minimum rental payments equaled 10% or more of the total
base rents in 1995 were:
<TABLE>
<S> <C>
Great Western Mortgage Corporation................................. $63,000
Federal Deposit Insurance Corporation.............................. 46,000
The Lubrizol Corporation........................................... 42,000
</TABLE>
The Delaware Corporate Center is leased to tenants under operating leases
with expiration dates extending to the year 1999. Future minimum rentals under
noncancelable operating leases excluding tenant reimbursements of operating
expenses as of December 31, 1995 were as follows:
<TABLE>
<S> <C>
1996.............................................................. $209,000
1997.............................................................. 159,000
1998.............................................................. 142,000
1999.............................................................. 58,000
</TABLE>
Certain leases also include provisions requiring tenants to reimburse the
Company for management costs and other operating expenses up to stipulated
amounts.
F-55
<PAGE> 222
DELAWARE CORPORATE CENTER
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
DECEMBER 31, 1995
Subsequent to December 31, 1995, a significant tenant (Kimberly Clark)
entered into an operating lease to occupy 93,000 square feet of the Delaware
Acquisition Property. This lease extends to the year 2005, and the Delaware
Corporate Center is 100% occupied as a result of this lease.
3. LAND LEASE:
The Delaware Corporate Center is the leasee under a land lease extending to
the year 2048. Annual ground rent payments under this lease are presently
$109,000. Payments under the lease will be adjusted in 1998 and at each five
year period thereafter, based on increases on the consumer price index.
F-56
<PAGE> 223
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Brandywine Realty Trust:
We have audited the combined statement of revenue and certain expenses of
the Equivest Management, Inc. Acquisition Properties ("700/800 Business Center
Drive") described in Note 1 for the year ended December 31, 1995. This financial
statement is the responsibility of management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The combined statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11 of
Brandywine Realty Trust as described in Note 1 and is not intended to be a
complete presentation of 700/800 Business Center Drive's revenue and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain expenses of the 700/800
Business Center Drive for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 31, 1996
F-57
<PAGE> 224
700/800 BUSINESS CENTER DRIVE
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE-MONTH PERIODS ENDED
YEAR ENDED -------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------ ------------- -------------
UNAUDITED
<S> <C> <C> <C>
REVENUE:
Base rents (Note 2)................................ $567,000 $ 416,000 $ 533,000
Tenant reimbursements.............................. 188,000 144,000 62,000
-------- -------- --------
Total revenue.............................. 755,000 560,000 595,000
-------- -------- --------
CERTAIN EXPENSES:
Maintenance and other operating expenses........... 154,000 108,000 118,000
Utilities.......................................... 40,000 26,000 20,000
Real estate taxes.................................. 111,000 83,000 83,000
-------- -------- --------
Total certain expenses..................... 305,000 217,000 221,000
-------- -------- --------
REVENUE IN EXCESS OF CERTAIN EXPENSES................ $450,000 $ 343,000 $ 374,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 225
700/800 BUSINESS CENTER DRIVE
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1995
1. BASIS OF PRESENTATION:
The combined statement of revenue and certain expenses reflect the
operations of the Equivest Management, Inc. Acquisition Properties ("700/800
Business Center Drive") located in Horsham, Pennsylvania, which are expected to
be acquired by Brandywine Realty Trust (the "Company") from Equivest Management,
Inc. in November, 1996. The Acquisition Properties have aggregate net rentable
area of approximately 82,000 square feet and were 62% leased as of December 31,
1995. This combined statement of revenue and certain expenses is to be included
in the Company's registration statement on Form S-11 as the acquisition has been
deemed significant pursuant to the rules and regulations of the Securities and
Exchange Commission.
The accounting records of 700/800 Business Center Drive are maintained on a
modified cash basis. Adjusting entries have been made to present the
accompanying financial statements in accordance with generally accepted
accounting principles. The accompanying financial statements exclude certain
expenses such as interest, depreciation and amortization, professional fees, and
other costs not directly related to the future operations of 700/800 Business
Center Drive.
The combined statements of revenue and certain expenses for the nine months
ended September 30, 1996 and 1995, are unaudited. In the opinion of management,
all adjustments consisting solely of normal recurring adjustments necessary for
a fair presentation of the financial statements for the interim period have been
included. The results for the interim period are not necessarily indicative of
the results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. The ultimate results could differ from those estimates.
2. OPERATING LEASES:
Base rents presented for the year ended December 31, 1995, and the nine
months ended September 30, 1996 and 1995, include straight-line adjustments for
rental revenue increases in accordance with generally accepted accounting
principles. The aggregate rental revenue increase resulting from the
straight-line adjustments for the year ended December 31, 1995, and the nine
months ended September 30, 1996 and 1995, were $68,000, $76,000 (unaudited) and
$45,000 (unaudited), respectively.
Tenants whose minimum rentals were equal to 10% or more of total base rents
in 1995 are as follows:
<TABLE>
<S> <C>
Metpath, Inc...................................................... $310,000
Macro Corporation................................................. 201,000
</TABLE>
700/800 Business Center Drive are leased to tenants under operating leases
with expiration dates extending to the year 2012. Future minimum rentals under
noncancelable operating leases, excluding tenant reimbursements of operating
expenses as of December 31, 1995, were as follows:
<TABLE>
<S> <C>
1996............................................................. $ 414,000
1997............................................................. 381,000
1998............................................................. 508,000
1999............................................................. 529,000
2000............................................................. 474,000
Thereafter....................................................... 7,056,000
</TABLE>
Certain leases also include provisions requiring tenants to reimburse the
Company for management costs and other operating expenses up to stipulated
amounts.
F-59
<PAGE> 226
SCHEDULE III
BRANDYWINE REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION -- DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED
--------------------- NET IMPROVEMENTS DECEMBER 31, 1995 ACCUMULATED
BUILDINGS (RETIREMENTS) ------------------------------------ DEPRECIATION
ENCUMBRANCES AND SINCE BUILDINGS AT DECEMBER
PROPERTY AT DECEMBER IMPROVEMENTS ACQUISITION AND TOTAL (4)(5) 31, 1995
DESCRIPTION 31, 1995 LAND (2) (3) LAND IMPROVEMENTS & (6) (7)
- -------------- ------------ ------ ------------ ---------------- ------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Twin Forks $2,729(1) $2,442 $ 3,950 $ (532) $2,194 $ 3,666 $ 5,860 $ 1,736
Office
Raleigh, NC
One Greentree 6,202(1) 710 5,515 (1,562) 345 4,318 4,663 1,848
Office
Marlton, NJ
Two Greentree (1) 694 5,686 (1,496) 264 4,620 4,884 1,886
Office
Marlton, NJ
Three (1) 858 7,573 (2,015) 323 6,093 6,416 2,644
Greentree
Office
Marlton, NJ
------ ------ ------- ------- ------ ------- ------- ------
$8,391(1) $4,704 $ 22,724 $ (5,605) $3,126 $ 18,697 $ 21,823 $ 8,114
====== ====== ======= ======= ====== ======= ======= ======
<CAPTION>
PROPERTY DATE OF DATE DEPRECIATION
DESCRIPTION CONSTRUCTION ACQUIRED LIFE
- -------------- ------------ -------- ------------
<S> <C> <C> <C>
Twin Forks 1982 1986 30 years
Office
Raleigh, NC
One Greentree 1982 1986 30 years
Office
Marlton, NJ
Two Greentree 1983 1986 30 years
Office
Marlton, NJ
Three 1984 1986 30 years
Greentree
Office
Marlton, NJ
</TABLE>
- ---------------
(1) At December 31, 1995, there are two mortgage loans which total $8,391,000.
The loans are cross-collateralized and are secured by first mortgages on
each of these Properties.
(2) Amounts exclude equipment, furniture and fixtures and related accumulated
depreciation.
(3) Amounts include provisions for losses on real estate investments totaling
$7,891,000 recorded subsequent to acquisition.
(4) Acquisitions: All real estate investments were acquired in 1986 for cash,
subject to certain encumbrances which encumbrances were retired on January
31, 1994.
(5) The aggregate basis for Federal income tax purposes is $33,415,000 as of
December 31, 1995.
(6) Reconciliation of Real Estate:
The following table reconciles the real estate investments from January 1,
1995 to December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
INVESTMENTS
-----------
<S> <C>
Balance at beginning of year $21,335
Additions during period:
Capital expenditures 630
Deletions during period:
Sales --
Retirements (142)
---------
Balance at end of year $21,823
=========
</TABLE>
(7) Reconciliation of Accumulated Depreciation:
The following table reconciles the accumulated depreciation from January 1,
1995 to December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
INVESTMENTS
-----------
<S> <C>
Balance at beginning of year $ 7,387
Additions during period:
Capital expenditures 869
Deletions during period:
Sales --
Retirements (142)
---------
Balance at end of year $ 8,114
=========
</TABLE>
F-60
<PAGE> 227
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES,
OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFEROR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 19
The Company........................... 33
Business and Growth Strategies........ 39
Use of Proceeds....................... 42
Distribution Policy................... 43
Price Range of Common Shares and
Distribution History................ 43
Capitalization........................ 44
Dilution.............................. 45
Selected Financial Data............... 46
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 50
Suburban Philadelphia Economy and
Office Markets...................... 57
Business and Properties............... 63
Structure of the Company.............. 106
Policies With Respect to Certain
Activities.......................... 108
Management............................ 112
Certain Relationships and Related
Transactions........................ 117
Principal Shareholders................ 121
Description of Shares of Beneficial
Interest............................ 123
Certain Provisions of Maryland Law and
of the Company's Declaration of
Trust and Bylaws.................... 128
Federal Income Tax Considerations..... 132
Operating Partnership Agreement....... 144
BRP General Partnership Agreement..... 148
ERISA Considerations.................. 148
Shares Available for Future Sale...... 151
Underwriting.......................... 153
Experts............................... 154
Legal Matters......................... 154
Tax Matters........................... 154
Available Information................. 155
Glossary.............................. 156
Index to Financial Statements......... F-1
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
4,000,000 COMMON SHARES
OF
BENEFICIAL INTEREST
OF
BRANDYWINE REALTY TRUST
------------
PROSPECTUS
NOVEMBER 25, 1996
------------
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
- ------------------------------------------------------
- ------------------------------------------------------
