<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BRANDYWINE REALTY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
16 CAMPUS BOULEVARD
NEWTOWN SQUARE, PENNSYLVANIA 19073
(610) 325-5600
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
GERARD H. SWEENEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
16 CAMPUS BOULEVARD
NEWTOWN SQUARE, PENNSYLVANIA 19073
(610) 325-5600
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
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MICHAEL H. FRIEDMAN, ESQ. STEVEN L. LICHTENFELD, ESQ.
PEPPER, HAMILTON & SCHEETZ BATTLE FOWLER LLP
3000 TWO LOGAN SQUARE PARK AVENUE TOWER
18TH & ARCH STREETS 75 EAST 55TH STREET
PHILADELPHIA, PA 19103-2799 NEW YORK, NEW YORK 10022
(215) 981-4563 (212) 856-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF SECURITIES AMOUNT BEING MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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Common Shares of Beneficial
Interest, par value $0.01 per
share........................... 4,600,000(1) $16.875(3) 77,625,000 $20,455
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</TABLE>
(1) Includes 600,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(3) Adjusted to give effect to an anticipated one-for-three reverse share split
to be effected immediately prior to the consummation of the Offering, and,
pursuant to Rule 457(c), calculated upon the basis of the average of the
high and low prices of the Common Shares reported on the American Stock
Exchange on October 4, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996
PROSPECTUS
4,000,000 SHARES
BRANDYWINE REALTY TRUST
COMMON SHARES OF BENEFICIAL INTEREST
------------------
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
"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"). The Company also owns and operates a
commercial real estate management services company that as of August 31, 1996
managed approximately 2.0 million net rentable square feet (including the
Properties). As of August 31, 1996, the Properties were approximately 94.7%
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 consummation
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."
The Common Shares are traded on the American Stock Exchange (the "AMEX")
under the symbol "BDN." On October 9, 1996, the last reported sale price of the
Common Shares was $17.625 (adjusted to give effect to a one-for-three reverse
share split to be effective immediately prior to the consummation 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 18 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES.
------------------
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)
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PER SHARE........... $ $ $
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TOTAL(3)............ $ $ $
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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 $1,500,000.
(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 $ , $ and $ , 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 , 1996, at the offices of
Smith Barney Inc., 333 West 34th Street, New York, NY 10001.
------------------
SMITH BARNEY INC. LEGG MASON WOOD WALKER
INCORPORATED
, 1996
<PAGE> 3
[GRAPHICS]
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.
<PAGE> 4
TABLE OF CONTENTS
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PROSPECTUS SUMMARY..................... 1
The Company.......................... 1
Risk Factors......................... 3
Business and Growth Strategies....... 5
Recent Developments.................. 7
Business and Properties.............. 9
Structure of the Company............. 12
Benefits of the Offering to
Affiliates of the Company......... 12
The Offering......................... 13
Distribution Policy.................. 13
Tax Status of the Company............ 14
Summary Selected Financial Data...... 14
RISK FACTORS........................... 18
Limited Geographic Concentration..... 18
Risks Associated with the Recent
Acquisition of Many of the
Company's Properties; Lack of
Operating History................. 18
Risks Relating to Distributions...... 18
Conflicts of Interests............... 19
Real Estate Investment
Considerations.................... 19
Risks Associated with Indebtedness... 21
Historical Losses.................... 22
Risk of Acquisition, Development and
Renovation Activities............. 22
Tax Risks............................ 23
ERISA................................ 25
Lack of Appraisals................... 25
Possible Environmental Liabilities... 25
Uninsured Losses..................... 26
Risk of Third-Party Management,
Leasing and Related Service
Business.......................... 26
Changes in Policies Without
Shareholder Approval.............. 27
Influence of Executive Officers,
Trustees and Principal
Shareholders...................... 27
Dependence on Key Personnel.......... 27
Limits on Changes in Control......... 27
Effect on Price of Shares Available
for Future Sale................... 29
Immediate Dilution................... 29
Effect on Holders of Common Shares
of an Issuance of Preferred
Shares............................ 29
Effect of Market Interest Rates on
Price of Common Stock............. 29
THE COMPANY............................ 30
General.............................. 30
The SSI/TNC Transaction.............. 32
The Management Company............... 33
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BUSINESS AND GROWTH STRATEGIES......... 34
General.............................. 34
Management and Operating
Strategies........................ 35
Acquisition Strategies............... 35
Corporate Service Activities......... 36
Financing Policies................... 36
USE OF PROCEEDS........................ 37
DISTRIBUTION POLICY.................... 38
PRICE RANGE OF COMMON SHARES AND
DISTRIBUTION HISTORY................. 38
CAPITALIZATION......................... 39
DILUTION............................... 40
SELECTED FINANCIAL DATA................ 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 45
Overview............................. 45
Results of Operations................ 45
Liquidity and Capital Resources...... 48
Cash Flows........................... 49
Inflation............................ 49
Funds from Operations................ 50
SUBURBAN PHILADELPHIA ECONOMY AND
OFFICE
MARKETS.............................. 51
General.............................. 51
Suburban Philadelphia Office and
Industrial Market................. 53
BUSINESS AND PROPERTIES................ 57
General.............................. 57
Properties........................... 59
Tenants.............................. 61
Lease Expirations.................... 62
Historical Tenant Improvements and
Leasing Commissions............... 68
Historical Capital Expenditures...... 69
Potential Revenue Increase in
Replacement Cost Rents............ 69
Historical Occupancy................. 70
Office Submarkets and Property
Information....................... 74
Competition.......................... 82
Environmental Matters................ 82
Insurance............................ 84
Certain Property Tax Information..... 84
Employees............................ 84
</TABLE>
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<TABLE>
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Legal Proceedings.................... 84
Mortgage Debt and Line of Credit..... 84
Option Properties: General........... 86
C&W Report........................... 89
STRUCTURE OF THE COMPANY............... 89
Operating Partnership................ 89
BRP.................................. 90
Ownership............................ 90
Management Company................... 91
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES........................... 91
Investment Policies.................. 91
Dispositions......................... 92
Financing Policies................... 92
Working Capital Reserves............. 93
Conflict of Interests Policies....... 93
Policies with Respect to Other
Activities........................ 93
MANAGEMENT............................. 95
Trustees and Executive Officers...... 95
Trustees of the Company.............. 95
Executive Officers................... 96
Other Key Officers................... 97
Committees of the Board of
Trustees.......................... 97
Compensation Committee Interlocks and
Insider Participation............. 97
Compensation of Trustees............. 97
Executive Compensation............... 98
Employment Agreements................ 98
Stock Options Granted to Executive
Officers During Last Fiscal
Year.............................. 99
Stock Option held by Certain
Executive
Officer at December 31, 1995...... 99
401(k) Plan.......................... 99
Indemnification...................... 100
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................... 100
SSI/TNC Transaction.................. 100
Partnership Agreement; Redemption
Rights............................ 100
Repayment of Certain Advances to
SSI............................... 100
Indemnification of Certain Limited
Partners.......................... 101
Partnership Agreement; General
Indemnity......................... 101
Termination of Standstill
Agreements........................ 101
Option Properties.................... 101
SSI Right of First Refusal on
Additional Financings............. 101
Lease with SSI Affiliate............. 102
PAGE
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Environmental Indemnity.............. 102
Employment Agreements; Award of
Warrants.......................... 102
Prior Involvement of Legg Mason...... 102
Investment by RMO Fund............... 102
Prior Involvement of LCOR............ 102
PRINCIPAL SHAREHOLDERS................. 104
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST............................. 105
General.............................. 105
Transfer Agent and Registrar......... 105
Shares............................... 105
Reverse Split; Treatment of
Fractional Shares................. 106
Restrictions on Transfer............. 106
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S DECLARATION OF TRUST
AND BYLAWS........................... 108
Duration............................. 109
Board of Trustees.................... 109
Meetings of Shareholders............. 109
Preferred Shares..................... 109
Business Combinations................ 109
Control Share Acquisitions........... 110
Amendment to the Declaration of
Trust............................. 111
Termination of the Company and REIT
Status............................ 111
Transactions Between the Company and
its Trustees or Officers.......... 111
Limitation of Liability and
Indemnification................... 111
FEDERAL INCOME TAX CONSIDERATIONS...... 112
General.............................. 112
Taxation of the Company as a REIT.... 113
Qualification of the Company as a
REIT.............................. 113
Income Tests......................... 114
Asset Tests.......................... 115
Annual Distribution Requirements..... 116
Failure to Qualify................... 117
Income Taxation of the Operating
Partnership, the Title Holding
Partnerships and Their Partners... 117
Classification of the Operating
Partnership and Title Holding
Partnerships as Partnerships...... 117
Partnership Allocations.............. 118
Tax Allocations With Respect to
Contributed Properties............... 119
Depreciation......................... 119
</TABLE>
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Basis in Operating Partnership
Interest.......................... 120
Sale of Partnership Property......... 120
Taxation of Taxable Domestic
Shareholders...................... 120
Backup Withholding................... 121
Taxation of Tax-Exempt
Shareholders...................... 121
Taxation of Foreign Shareholders..... 122
Statement of Stock Ownership......... 123
Other Tax Consequences............... 123
Possible Federal Tax Developments.... 123
Real Estate Transfer Taxes........... 123
OPERATING PARTNERSHIP AGREEMENT........ 124
Management........................... 124
Classes of Partnership Interests;
Distributions to Partners......... 124
Tax Allocation....................... 125
Capital Contributions................ 125
Right of First Refusal on Additional
Financings........................ 125
Number, Class and Owner of Units..... 125
Additional Issuances of Class A
Units............................. 126
Redemption Rights.................... 126
Business Operations.................. 126
Registration Rights.................. 127
Amendments........................... 127
PAGE
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Tax Matters.......................... 127
Representations and Warranties....... 127
Term................................. 127
Indemnification...................... 127
BRP GENERAL PARTNERSHIP AGREEMENT...... 128
General.............................. 128
Management........................... 128
Amendments........................... 128
ERISA CONSIDERATIONS................... 128
Employee Benefit Plans, Tax-Qualified
Retirement Plans and IRAs......... 129
Status of the Company Under ERISA.... 129
SHARES AVAILABLE FOR FUTURE SALE....... 131
Registration Rights.................. 132
UNDERWRITING........................... 133
EXPERTS................................ 134
LEGAL MATTERS.......................... 134
TAX MATTERS............................ 134
AVAILABLE INFORMATION.................. 134
GLOSSARY............................... 136
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.
iii
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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; and (iii) the Company has
combined its Common Shares by means of a one-for-three reverse share split
immediately prior to the consummation of the Offering (the "Reverse Split").
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
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
(also referred to as the "Market"). The Company developed 19 of the Properties
and currently manages 23 of the Properties, in addition to managing
approximately 575,000 net rentable square feet of 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 August 31, 1996, the Properties were approximately
94.7% leased to approximately 160 tenants.
The Company believes that its Properties generally have excellent locations
and access and are among the highest quality properties within their markets.
The Company's portfolio is comprised primarily of suburban office properties (22
of which are Class A properties). The Company generally considers Class A
suburban office 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 9.8
years. The Company's 10 largest tenants as of August 31, 1996 (based on base
rents for the twelve-month period ended August 31, 1996) aggregate approximately
32.3% of the Company's total base rent and approximately 35.2% of the Company's
net rentable square feet and have a weighted average remaining lease term of
approximately 7.7 years. As of August 31, 1996, no single tenant accounted for
more than 5.1% of the Company's aggregate annualized base rent and only 31
tenants individually represented more than 1.0% of such aggregate annualized
base rent.
Leases representing approximately 69.7% of the net rentable square footage
at the Properties were signed during the period January 1, 1993 through December
31, 1995 (excluding the LibertyView and 168 Franklin Corner Road Properties,
which were not owned by the Company for the entire period), 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 eight months ended
August 31, 1996: (i) renewal leases at the 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
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
1
<PAGE> 8
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 its Properties through continued active
property management and prudent operating strategies;
- 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;
- 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 (collectively, 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
(source: C&W Mid-Year Report). The vacancy rates within the Market 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 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 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 95.6% as of August 31, 1996
(the "SSI/TNC Properties") and an option on the four Option Properties, each of
which is located within the Market. The SSI/TNC Transaction also included the
combination of the
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<PAGE> 9
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 headquarters), Penn Mutual Life Insurance Company
(headquarters), Advanta Corp. (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;
- risks associated with the acquisition of new properties, generally, and
with the Company's recent acquisition of many of the 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; 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 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 which 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 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
3
<PAGE> 10
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), 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;
- the lack of appraisals for the Properties, giving rise to the risk that
the combined value of the Common Shares and Units may be greater than the
aggregate fair market value of the Company's equity in the Properties;
- 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;
- 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;
- 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 of beneficial interest, par value $.01 per share
("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 and substantial 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; and
- 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 possible issuance of additional
Common Shares, all of which may adversely affect the market price of
Common Shares.
4
<PAGE> 11
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 (source: 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 (source: 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 $14.60 per square foot
at the Company's office Properties as of August 31, 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 254,000 net rentable square feet in a Market that
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 lack of 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 its 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:
- Leasing Vacant/Expiring Space: The Company expects to realize additional
cash flow through the potential leasing of approximately 71,000 net
rentable square feet of vacant space at its Properties as of August 31,
1996 (approximately 5.3% of the Company's total net rentable square
feet). In addition, the Company expects to experience cash flow growth
through the releasing of approximately 171,000 net
5
<PAGE> 12
rentable square feet of space under 59 leases that expire between
September 1, 1996 and December 31, 1997 and that have a weighted average
annual rental rate as of their expiration dates of $13.62 per square
foot. The Company believes that the majority of such leases are currently
at or below market rental rates. There can be no assurance the Company
will achieve any of the foregoing expectations;
- Contractual Rental Rate Increases: As of August 31, 1996, 59 leases,
representing approximately 36.9% of the Company's total leases and
approximately 53.5% of the net rentable square feet at the Properties,
included built-in contractual rental rate increases. Between August 31,
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 $1.1 million (not including increases attributable to the
transition from free or partial rent to full rent or increases that are
tied to indices such as the Consumer Price Index (the "CPI")); and
- Tenant Services: The Company consistently has been able to provide
tenants with a high level of service as evidenced by the tenant retention
rates of the Properties in 1993, 1994 and 1995 and the eight-month period
ended August 31, 1996 of 71.4%, 56.7%, 75.1% and 95.4%, 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, the Company's expected $80.0 million revolving credit facility (the
"Line of Credit") 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.
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 at 457 Haddonfield Road
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 August 31, 1996,
the LibertyView Building was approximately 78.3% 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 as of August 31, 1996 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 assurance that the Company will achieve such occupancy levels or
increases in returns. In addition, there can be no assurance that the Company
will be successful in making acquisitions on similar terms in the future. The
Company believes it could add a number of office properties to its existing
portfolio without requiring a
6
<PAGE> 13
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 to purchase the Option Properties from an
affiliate of TNC containing approximately 159,000 net rentable square feet. The
Option Properties are located in the Market, are managed by the Company and were
approximately 95.7% leased to 16 tenants as of August 31, 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: General."
CORPORATE SERVICE ACTIVITIES
The Company managed, as of August 31, 1996, approximately 2.0 million net
rentable square feet, including 575,000 net rentable square feet of office
properties on behalf of third parties. 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.,
and Premier Solutions, Inc., four of which are publicly-traded companies in
which SSI maintains an ownership interest. For the six months ended June 30,
1996, the real estate management services business had revenues of approximately
$277,000. 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, upon completion of the Offering, 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 Common 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 application of the net proceeds therefrom will be approximately 25.0% (23.1%
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
- The Company recently consummated the SSI/TNC Transaction in which it
acquired 19 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. The 19 Properties were acquired subject to
mortgage indebtedness aggregating approximately $64.0 million as of
August 31, 1996. See "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
7
<PAGE> 14
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.
PENDING ACQUISITIONS
- The Company has signed agreements of sale contemplating the purchase of
four additional office buildings located within the Market from
unaffiliated sellers. These properties aggregate approximately 242,000
net rentable square feet and are being sold by three unrelated sellers
for a total purchase price of approximately $24.5 million. The properties
are multi-tenant office buildings, three of which were 100% leased as of
August 31, 1996. The remaining property was vacant at August 31, 1996,
and the acquisition has been conditioned on the execution of two pending
leases acceptable to the Company covering 100% of the net rentable square
feet. The expected average capitalization rate applicable to the
acquisition of these properties is approximately 11.5% (calculated by
dividing (a) the expected net operating income generated by each property
based on annualized revenues from signed leases in place as of August 31,
1996 and leases for which signed commitments are a condition to the
acquisition by (b) the consideration expected to be paid for the
properties).
- The Company has signed a letter of intent with a pension fund advisor, as
representative of the owner, to purchase a nine property portfolio
located within the Market. The properties aggregate approximately 418,000
net rentable square feet for a total purchase price of approximately
$30.3 million.
These pending acquisitions are subject to completion of the Company's due
diligence and a number of other contingencies and conditions and, as a result,
no assurance can be given that these, or any other, acquisitions will be
completed. If these acquisitions are consummated, the Company's portfolio will
consist of 37 properties aggregating approximately 2.0 million net rentable
square feet.
FINANCING TRANSACTION
Richard M. Osborne, an Ohio-based investor and Trustee of the Company, has
made investments in the Company resulting in his beneficial ownership of 213,718
Common Shares and warrants to purchase 34,118 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. In June 1996, an affiliate of Mr.
Osborne invested approximately $1.3 million in the Company by loaning it
approximately $1.0 million on an unsecured basis at the prime rate (the "Osborne
Loan") and by acquiring 19,983 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.
Immediately following the consummation of the Offering, the Osborne Loan will be
repaid, pursuant to its terms, through the issuance of additional Paired Units.
The actual number of Paired Units so issued will equal the outstanding balance
of the Osborne Loan on the date of its repayment (which was approximately
$754,000 as of August 31, 1996) divided by $16.89 (or 44,615 Paired Units).
REVERSE SPLIT
Immediately prior to the consummation 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 distribute cash to such shareholders in redemption of
such fractional shares. See "Description of Shares of Beneficial
Interest -- Reverse Split; Treatment of Fractional Shares."
8
<PAGE> 15
BUSINESS AND PROPERTIES
PROPERTIES
The Company currently owns and operates interests in 24 Properties (23 of
which are located in the Market), aggregating approximately 1.3 million net
rentable square feet. The Properties are comprised of 23 office properties
totalling approximately 1.2 million net rentable square feet and one industrial
property (1510 Gehman Road) totalling approximately 152,000 net rentable square
feet. The Company's portfolio is comprised primarily of suburban office
properties (22 of which are Class A properties). The Company generally considers
Class A suburban office 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 August 31, 1996, the 23 office
Properties and the one industrial Property were approximately 94.0% and 100.0%
occupied, respectively, by approximately 160 tenants, of which two were
industrial property tenants. The Company's office properties are primarily one
to three story suburban office buildings containing an average of 55,575 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.
9
<PAGE> 16
PROPERTIES (CONTINUED)
The following table sets forth certain information with respect to the
Properties:
<TABLE>
<CAPTION>
TOTAL BASE RENT AVERAGE TOTAL BASE
FOR THE RENT PLUS EXPENSE
NET PERCENTAGE TWELVE MONTHS RECOVERIES PER
RENTABLE LEASED AS OF ENDED NET RENTABLE SQUARE
YEAR SQUARE AUGUST 31, JUNE 30, 1996(2) FOOT LEASED
SUBMARKET/PROPERTY BUILT FEET 1996(1) (000'S) JUNE 30, 1996(3)
- ----------------------------------------------------- ----- --------- ------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road.................................... 1984 30,138 100.0% $ 281 $ 14.79
1155 Business Center Drive.......................... 1990 51,388 99.4% 573 15.49
500 Enterprise Road................................. 1990 67,800 98.5% 657 13.20
One Progress Avenue................................. 1986 79,204 100.0% 674 10.62
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way(10)................................ 1987 47,604 100.0% 334 7.10
486 Thomas Jones Way................................ 1990 51,500 71.8% 443 16.68
468 Creamery Way.................................... 1990 28,934 100.0% 287 13.76
110 Summit Drive.................................... 1985 43,660 82.7% 253 10.91
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON, PA
2240/50 Butler Pike................................. 1984 52,183 99.4% 543 15.38
120 West Germantown Pike............................ 1984 30,546 100.0% 363 17.20
140 West Germantown Pike............................ 1984 25,953 98.7% 292 16.17
2260 Butler Pike.................................... 1984 31,892 100.0% 353 15.96
MAIN LINE, PA
16 Campus Boulevard................................. 1990 65,463 100.0% 362 8.38
18 Campus Boulevard................................. 1990 37,700 100.0% 404 14.08
LEHIGH VALLEY, PA
7310 Tilghman Street................................ 1985 40,000 99.0% 322 11.01
7248 Tilghman Street................................ 1987 42,863 93.8% 389 14.17
6575 Snowdrift Road................................. 1988 46,250 100.0% 328 9.19
1510 Gehman Road.................................... 1990 152,625 100.0% 771 7.52
BURLINGTON COUNTY, NJ
One Greentree Centre................................ 1982 55,838 100.0% 879 17.16
Two Greentree Centre................................ 1983 56,075 100.0% 769 13.76
Three Greentree Centre.............................. 1984 69,101 96.2% 969 15.31
CAMDEN COUNTY, NJ
457 Haddonfield Road (LibertyView).................. 1990 121,737 78.3% 1,201 17.85
OTHER MARKETS
168 Franklin Corner Road............................ 1976 32,000 54.4% 128 9.29
Lawrenceville, NJ
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks................................. 1982 73,339 100.0% 985 14.00
--------- ----- ------- ------
Total/Weighted Average 1,333,793 94.7% $ 12,560 $ 13.61(11)
========= ===== ======= ======
<CAPTION>
AVERAGE C&W RENTAL RATE
ANNUALIZED WEIGHTED INCREASE
RENTAL AVERAGE POTENTIAL
RATE AS OF CLASS A UNTIL MARKET
AUGUST 31, RENTAL RATE IS
SUBMARKET/PROPERTY 1996(4) RATES(5) ACHIEVED(6)
- ----------------------------------------------------- --------------- -------- ------------
<S> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road.................................... $ 16.50 $18.02 9.2%
1155 Business Center Drive.......................... 17.22 18.02 4.7%
500 Enterprise Road................................. 13.25 14.50 9.4%
One Progress Avenue................................. 13.53 18.02 33.2%
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way(10)................................ 7.25(7) 7.89(9) 8.8%
486 Thomas Jones Way................................ 15.52 15.55 0.2%
468 Creamery Way.................................... 13.88 13.61 --
110 Summit Drive.................................... 7.23(9) 7.89(9) 9.1%
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON, PA
2240/50 Butler Pike................................. 17.23 18.70 8.5%
120 West Germantown Pike............................ 17.52 18.70 6.7%
140 West Germantown Pike............................ 17.38 18.70 7.6%
2260 Butler Pike.................................... 17.88 18.70 4.6%
MAIN LINE, PA
16 Campus Boulevard................................. 13.58 20.27 49.3%
18 Campus Boulevard................................. 18.62 20.27 8.9%
LEHIGH VALLEY, PA
7310 Tilghman Street................................ 8.89(9) 10.50(9) 18.1%
7248 Tilghman Street................................ 14.76 15.34 3.9%
6575 Snowdrift Road................................. 7.15(9) 10.50(9) 46.9%
1510 Gehman Road.................................... 4.72(9) 5.95(9) 26.1%
BURLINGTON COUNTY, NJ
One Greentree Centre................................ 16.52 19.30 16.8%
Two Greentree Centre................................ 15.55 19.30 24.1%
Three Greentree Centre.............................. 16.40 19.30 17.7%
CAMDEN COUNTY, NJ
457 Haddonfield Road (LibertyView).................. 18.62 21.81 21.0%
OTHER MARKETS
168 Franklin Corner Road............................ 15.55 18.00(10) 15.8%
Lawrenceville, NJ
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks................................. 14.32 15.50(10) 8.2%
----- ----- -----
Total/Weighted Average $ 14.60(11) $16.83(8)(11) 15.3%(11)
===== ===== =====
<CAPTION>
TENANTS LEASING 10% OR
MORE OF RENTABLE
SQUARE FOOTAGE PER
PROPERTY AS OF
AUGUST 31, 1996
SUBMARKET/PROPERTY AND LEASE EXPIRATION DATE
- ----------------------------------------------------- -------------------------
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road.................................... GMAC (100%) - 5/03
1155 Business Center Drive.......................... IMS (79%) - 3/06;
Motorola (14)% - 2/99
500 Enterprise Road................................. Conti Mortgage (80%)
4/01; Pioneer (19%) 10/00
One Progress Avenue................................. Reed Technologies
(100%) - 6/11
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way(10)................................ Neutronics (100%) - 1/03
486 Thomas Jones Way................................ First American Real
Estate (20%) - 4/00
468 Creamery Way.................................... Franciscan Health
(82%) - 1/99;
American Day Treatment
(18%) - 6/00
110 Summit Drive.................................... Maris Equipment
(49%) - 4/99
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON, PA
2240/50 Butler Pike................................. CoreStates (59%) - 4/06;
TWA Marketing
(33%) - 10/99
120 West Germantown Pike............................ Clair O'Dell
(82%) - 7/01;
Kleinerts (13%) - 10/98
140 West Germantown Pike............................ Healthcare, Inc.
(46%) - 9/99; Henkle
(29%) - 1/98; National
Health Equity
(20%) - 5/99
2260 Butler Pike.................................... Information Resources
(66%) - 12/00; Med
Resorts (26%) - 1/01
MAIN LINE, PA
16 Campus Boulevard................................. New England Mutual
(52%) - 5/06; Atlantic
Employees C.U.
(35%) - 1/06
18 Campus Boulevard................................. 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................................ AT&T (83%) - 12/96-8/98
7248 Tilghman Street................................ IDS Financial
(29%) - 7/01;
Ohio Casualty
(46%) - 7/01;
Meridian Mortgage
(12%) - 6/99
6575 Snowdrift Road................................. Corning Packaging
(100%) - 2/99
1510 Gehman Road.................................... Ford Electronics
(35%) - 6/98;
Nibco (65%) - 8/99
BURLINGTON COUNTY, NJ
One Greentree Centre................................ American Executive
Centers (30%) - 1/06;
West Jersey (15%) - 4/01;
Temple Sports Med.
(18%) - 12/97
Two Greentree Centre................................ Merrill Lynch
(23%) - 11/05;
ReMax Suburban
(12%) - 11/05;
Del-Val Tech
(10%) - 11/00
Three Greentree Centre.............................. 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).................. HIP Health Plan
(31%) - 12/07
OTHER MARKETS
168 Franklin Corner Road............................ Dr. Belden (12%) - 5/01;
Lawrenceville, NJ Crawford & Co.
(14%) - 11/99
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks................................. GE Mortgage (26%) - 9/96
Total/Weighted Average
</TABLE>
10
<PAGE> 17
- ---------------
(1) Calculated by dividing net rentable square feet included in leases dated on
or before August 31, 1996, divided by the aggregate net rentable square
feet included in the Property.
(2) "Total Base Rent" for the twelve months ended June 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 June 30, 1996,
plus tenant reimbursements for the twelve months ended June 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 August 31, 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 August 31, 1996. In
both cases, the annualized rental rate is divided by the total square
footage leased as of August 31, 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 C&W weighted average rental rate
exceeds the average annualized rental rate of the applicable Property.
(7) Building 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) Represents the Class A weighted average rental rate for the submarkets in
which the Properties are located as compared to the Class A office weighted
average asking rate of $18.94 per square foot for the Market as identified
in the C&W Mid-Year Report.
(9) 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).
(10) Rental rates represent management's estimate of current market rental
rates.
(11) Excludes 1510 Gehman Road, which is an industrial Property.
11
<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
consummation of the Offering:
LOGO
- ---------------
(1) The Operating Partnership holds controlling interests in each of the
property partnerships.
(2) The Operating Partnership owns all of the 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 540,159 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 497,896 Units, will realize an immediate
accretion in the net tangible book value of their investment in the
Company of approximately $5.59 per Common Share;
12
<PAGE> 19
- Approximately $1.8 million of indebtedness secured by the Properties and
for which TNC and SSI are liable will be repaid from proceeds of the
Offering, thereby relieving TNC and SSI of such potential liability. In
addition, the Company will become obligated to indemnify TNC and SSI
against liability under approximately $8.7 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;
- The Osborne Loan, having an outstanding balance of approximately $754,000
as of August 31, 1996, will be prepaid pursuant to its terms through the
issuance of Paired Units. The actual number of Paired Units issued in
respect of the repayment of such loan will be equal to the balance of the
Osborne Loan divided by $16.89 (44,615 Paired Units as of August 31,
1996); 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. Each of SSI, TNC, the
Trustees and executive officers of the Company and certain of their
respective affiliates, have agreed not to sell, offer to sell, grant any
option for the sale of, or otherwise dispose of any Common Shares or any
securities convertible into or exchangeable or exercisable for Common
Shares during the 180-day period after the effective date of this
Prospectus (the "Lock-up Period").
THE OFFERING
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....................................... 4,000,000
Common Shares Outstanding After the Offering................ 5,495,959(1)
Use of Proceeds............................................. Repayment of certain
indebtedness related to the
Properties and for working
capital purposes. See "Use of
Proceeds."
AMEX Symbol................................................. "BDN"
</TABLE>
- ---------------
(1) Includes 540,159 Common Shares issuable upon the conversion of Units and
44,615 Common Shares to be issued immediately following the Offering in
connection with prepayment of the Osborne Loan. Excludes 580,400 Common
Shares reserved for issuance upon the exercise of warrants at an exercise
price of $19.50 per share and 46,666 Common Shares reserved for issuance
upon the exercise of options at exercise prices of $14.31 and $6.21 per
share in respect of the purchase of 33,333 and 13,333 Common Shares,
respectively. See "Capitalization" and "The Operating Partnership
Agreement -- Redemption Rights."
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."
13
<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 June 30, 1996, the Company would
have been required to distribute approximately $ million or $ 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 combined financial
and operating information on a pro forma basis for the Company and on a combined
historical basis for the Company and the SSI/TNC Properties. Such information
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Prospectus. The following tables also set forth
certain 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 six-months
ended June 30, 1995 and 1996, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the Company.
The unaudited pro forma financial and operating information for the six
months ended June 30, 1996 and for the year ended December 31, 1995 is presented
as if the following transactions had been consummated on June 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 its partnership
interests in the Operating Partnership; (ii) the Operating Partnership acquired
the SSI/TNC Properties in connection with the SSI/TNC Transaction; (iii) the
Company acquired the LibertyView Building directly; and (iv) 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.
14
<PAGE> 21
BRANDYWINE REALTY TRUST
COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
----------------- PRO FORMA ----------------- PRO FORMA
1994 1995 1995 1995 1996 1996
------- ------- --------- ------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Base rents.............................................. $12,209 $11,346 $12,465 $ 5,743 $ 5,795 $ 6,400
Tenant reimbursements................................... 3,130 2,961 3,496 1,381 1,938 2,179
Management fees......................................... 946 617 -- 319 277 --
Other................................................... 79 86 86 23 152 152
------- ------- ------- ------- ------- ------
Total revenue..................................... 16,364 15,010 16,047 7,466 8,162 8,731
------- ------- ------- ------- ------- ------
Expenses --
Interest................................................ 7,877 6,648 2,997 3,447 2,997 1,500
Depreciation and amortization........................... 4,988 5,738 5,490 2,722 2,568 2,619
Property expenses....................................... 5,897 5,032 5,830 2,375 3,182 3,550
General and administrative.............................. 2,054 1,588 1,352 772 715 496
Provision for loss on real estate investments........... 5,400 202 -- -- -- --
------- ------- ------- ------- ------- ------
Total expenses.................................... 26,216 19,208 15,669 9,316 9,462 8,165
------- ------- ------- ------- ------- ------
Income (loss) before gains on sales of real estate
investments, minority interest and extraordinary
items................................................... (9,852) (4,198) 378 (1,850) (1,300) 566
Gains on sales of real estate investments................. 1,410 -- -- -- -- --
Equity income of management company....................... -- -- 179 -- -- 58
Income (loss) before extraordinary items.................. (2,807) (4,203) 358 (1,850) (1,305) 537
Income (loss) per share before extraordinary items........ $ 0.07 $ 0.11
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
COMBINED PRO
HISTORICAL FORMA
-------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments, net of accumulated
depreciation.......................................... $69,744 $100,808
Total assets............................................ 79,048 121,599
Mortgages and notes payable............................. 73,556 32,340
Total liabilities....................................... 76,045 34,993
Minority interest....................................... -- 1,101
Shareholders' equity.................................... 3,003 85,505
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
-------------------- PRO FORMA ------------------- PRO FORMA
1994 1995 1995 1995 1996 1996
-------- ------- --------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)............................. $ 645 $ 1,382 $5,626 $ 796 $ 1,145 $3,034
Cash flows provided by (used in):
Operating activities............................... 1,534 1,886 (d) 1,436 1,389 (d)
Investing activities............................... 7,844 (3,490) (d) (1,186) (1,884) (d)
Financing activities............................... (10,171) 1,013 (d) (505) 1,180 (d)
Total cash distributions declared.................... 3,680 1,021 -- 743 144 --
PROPERTY DATA:
Number of properties owned at period end............. 22 23 24 22 23 24
Gross rentable square feet owned at period end
(000's)............................................ 1,180 1,212 1,334 1,180 1,212 1,334
</TABLE>
15
<PAGE> 22
BRANDYWINE REALTY TRUST
HISTORICAL SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total operating revenue(b)................... $ -- $ -- $ -- $ 4,192 $ 3,666 $ 1,806 $ 2,027
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) (440) 1
Net income (loss) per share.................. (10.83) -- 3.99 11.22 (1.32) (0.69) --
Cash distributions declared.................. -- -- -- 2,914 1,021 743 111
Cash distributions per share................. -- -- -- 4.71 1.65 1.20 .18
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 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 $13,789 $13,752
Total assets................................. 2,128 2,123 4,604 17,873 17,105 17,380 18,167
Mortgage notes payable(c).................... -- -- -- 6,899 8,931 8,983 8,878
Total liabilities............................ 58 55 68 8,684 9,761 9,373 10,595
Shareholders' equity......................... 2,070 2,068 4,536 9,189 7,344 8,007 7,572
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)..................... $ (5) $ (1) $ (1) $ (533) $ 537 $ 329 $ 450
Cash flows provided by (used in):
Operating activities....................... -- -- -- (628) 497 193 394
Investing activities....................... -- 2,469 9,559 (701) (893) (107)
Financing activities....................... -- -- -- (9,635) (722) (228) 516
PROPERTY DATA:
Number of properties owned at period end..... 7 7 7 4 4 4 4
Gross rentable square feet owned at period
end (000's)................................ 546 546 546 255 255 255 255
</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
16
<PAGE> 23
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) 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.
(c) 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.
(d) 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.
17
<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
Twenty-three of the 24 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 continued demand for office and
other commercial space in the Market. The Company's revenue and the value of its
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.
RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF MANY OF THE COMPANY'S
PROPERTIES;
LACK OF OPERATING HISTORY
Twenty of the Company's 24 Properties have been acquired within the past
six months, including 19 Properties acquired in the SSI/TNC Transaction. These
recently acquired 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.
The Company is currently experiencing a period of rapid growth. 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.
RISKS RELATING TO DISTRIBUTIONS
The Company pays regular distributions to its shareholders and expects to
increase its quarterly distribution rate following consummation 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 that 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. 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
18
<PAGE> 25
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
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 of the Company 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 and TNC under those agreements is limited to the
497,896 Units issued to them. 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 flow 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 15.2% of the Company's aggregate annualized base rent as of August
31, 1996 (representing 12.9% of the net rentable square feet at the Properties)
expire without penalty or premium through the end of 1997, and leases accounting
for approximately 6.2% of aggregate annualized base rent from the Properties as
of August 31,
19
<PAGE> 26
1996 (representing 7.5% 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 -- Lease Expirations." 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 flow and ability to make expected distributions
to shareholders could be adversely affected.
Dependence on Key Tenants. The Company's 10 largest tenants as of August
31, 1996 (based on base rents for the twelve-month period ended August 31, 1996)
aggregate approximately 32.3% of the Company's aggregate annualized base rent
and approximately 35.2% of the Company's net rental square feet and have a
weighted average remaining lease term of approximately 7.7 years. The Company's
largest tenant, Reed Technologies, represents approximately 5.1% of the
aggregate annualized base rent and 5.9% of the 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 lessee,
the Company may experience delays in enforcing its rights as lessor 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 the 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 August 31, 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
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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 interest in 23 of the Properties through the
Operating Partnership. In addition, the Company may also participate with other
entities in property ownership through 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, 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 consummation of the Offering and the
application of the net proceeds therefrom, the Company expects to have
outstanding indebtedness of approximately $32.3 million, which will have
principal repayments of $2.9 million, $9.6 million, $8.3 million, $2.6 million
and $8.3 million in 1997, 1998, 1999, 2000 and 2001, respectively. In addition,
upon consummation of the Offering the Company expects to enter into the Line of
Credit that will be secured by a number of the Properties and is expected to
have a minimum term of two years. If principal payments due at maturity cannot
be refinanced, extended or paid with proceeds of other capital transactions,
such as new equity capital, the Company 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,
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 consummation of
the Offering 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 Company expects to enter into the Line of Credit. Advances
under the Line of Credit are expected to bear interest at a variable rate. 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."
Potential Acceleration of Certain Indebtedness. The bank that financed the
Company's acquisition of the LibertyView Building reserved the right to approve
of any material changes in the ownership of the
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Company. In the event the bank does not approve of any ownership change, the
loan, at the bank's option, will become repayable without penalty upon 120 days
notice. If the bank were to withhold approval of any material changes in the
ownership of the Company and require repayment of its loan (approximately $9.5
million outstanding as of August 31, 1996), the Company would be required to
seek replacement financing and there can be no assurance that the Company could
obtain such replacement financing or that any such replacement financing would
be on terms acceptable to the Company. If the Company were unable to refinance
the loan, the LibertyView Building could be foreclosed upon with a consequent
loss of income and asset value to the Company.
No Limitation on Debt. Upon completion of the Offering and the application
of the use of proceeds therefrom, the debt-to-total market capitalization ratio
of the Company will be approximately 25.0%. 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, the amount available for distribution to shareholders and could
increase the risk of default on the Company's indebtedness.
HISTORICAL LOSSES
The Company had net losses of approximately $824,000 in 1995. The SSI/TNC
Properties also experienced net losses of approximately $2.2 million and $1.8
million in 1993 and 1994, 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 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 Line of Credit, 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 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
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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 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 approximately
5% of the voting 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 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."
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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) and
the effect of required debt amortization payments 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 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
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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."
LACK OF APPRAISALS
The Company did not obtain independent appraisals of the Properties
recently 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 by the Operating Partnership (exclusive of mortgage
indebtedness encumbering the acquired Properties) for the Properties acquired in
the SSI/TNC Transaction accurately reflects their value.
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's business, assets or results of operations. 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
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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 to shareholders. 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 Properties,
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 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 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.
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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 consummation of the Offering, all
Trustees and executive officers as a group will own approximately 9.9% of the
total issued and outstanding Common Shares (assuming the conversion of all Units
held by them into Common Shares). Such ownership would increase to 16.2% if all
options and warrants held by them were exercised. 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 restricts the ability of any person from
acquiring in excess of 9.8% in value of the Company's outstanding capital
shares. Excepted from this provision are SSI and Richard M. Osborne who will,
immediately following completion of the Offering, beneficially own 11.6% and
6.7% of the Common Shares, respectively (giving effect to the repayment of the
Osborne Loan with Paired Units and assuming the conversion of all Units held by
SSI into Common Shares and the exercise of all warrants held by SSI). However,
such persons are subject to separate contractual ownership limitations of 14.75%
and 9.8%, respectively. The ownership restrictions could have the effect of
further solidifying the control SSI and Mr. Osborne have 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. 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 of the Company
(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
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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 Limits
included in the Declaration of Trust will limit actual or constructive ownership
of the outstanding Common Shares by any shareholder to 9.8% in value of the
outstanding Common Shares, subject to certain exceptions. See "Description of
Shares of Beneficial Interest -- Restrictions on Transfer." Although the Board
of Trustees presently has no intention of doing so (except as described below),
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. The Board of Trustees has
waived the Ownership Limits with respect to SSI and Richard M. Osborne and
certain of their affiliates and permitted such persons to actually and
constructively own up to 14.75% and 9.8%, respectively, of the Common 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." 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.
Exemptions from the Maryland Business Combination Law. Under the Maryland
General Corporation Law, as amended ("MGCL"), 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 conditions 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 statutory restrictions
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 and 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. See "Certain Provisions of
Maryland Law and the Company's Declaration of Trust and Bylaws -- Business
Combinations."
Maryland Control Share Acquisition Statute. The MGCL provides that
"control shares" of a Maryland corporation or 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 directors or
trustees who are employees of the corporation or 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
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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 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. Common Shares beneficially owned by Richard M. Osborne have not been
exempted from the statute. See "Certain Provisions of Maryland Law and 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) 540,159 Common Shares for issuance upon
conversion of Units; and (ii) 627,067 Common Shares for issuance upon exercise
of outstanding options and warrants (after giving effect to the 44,615
additional warrants to be issued in connection with the prepayment of the
Osborne Loan). In addition, the Company may issue additional equity securities
in connection with future acquisitions. Each of SSI, TNC, the Trustees and
executive officers of the Company and certain of their respective affiliates,
have agreed, subject to certain limited exceptions, not to offer, sell, contract
to sell or otherwise dispose of any Common Shares (or any securities convertible
into or exercisable for Common Shares) during the Lock-up Period without the
prior written consent of the Underwriters. The Company has also agreed with the
Underwriters not to offer, sell, contract to sell or issue Common Shares or
securities convertible into or exercisable for Common Shares (except pursuant to
the conversion of outstanding Units, the exercise of outstanding options or
warrants and the prepayment of the Osborne Loan) during the Lock-up Period. See
"Shares Available for Future Sale." 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
substantially less than the expected public offering price per share in the
Offering. Accordingly, shareholders acquiring Common Shares in the Offering will
experience an immediate and substantial dilution of $0.83 per share (based on an
assumed public offering price of $17.625, the last reported sale price of the
Common Shares on the AMEX on October 9, 1996) 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.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
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.
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<PAGE> 36
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 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. The Company developed 19 of
the Properties and currently manages 23 of the Properties, in addition to
managing approximately 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. As of August 31, 1996, the Properties were approximately
94.7% leased to approximately 160 tenants.
The Company believes that its Properties generally have excellent locations
and access and are among the highest quality properties within their markets.
The Company's portfolio is comprised primarily of suburban office properties (22
of which are Class A properties). The Company generally considers Class A
suburban office 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 9.8
years. The Company's 10 largest tenants as of August 31, 1996 (based on base
rents for the twelve-month period ended August 31, 1996) aggregate approximately
32.3% of the Company's total base rent and approximately 35.2% of the Company's
net rentable square feet and have a weighted average remaining lease term of
approximately 7.7 years. As of August 31, 1996, no single tenant accounted for
more than 5.1% of the Company's aggregate annualized base rent and only 31
tenants individually represented more than 1.0% of such aggregate annualized
base rent.
Leases representing approximately 69.7% of the net rentable square footage
at the Properties were signed during the period January 1, 1993 through December
31, 1995 (excluding the LibertyView and 168 Franklin Corner Road Properties,
which were not owned by the Company for the entire period), 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 eight months ended
August 31, 1996: (i) renewal leases at the 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
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 with 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 its Properties through continued active
property management and prudent operating strategies;
- 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;
- redeveloping and improving acquired properties and, to a lesser extent,
developing build-to-suit properties as opportunities arise;
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- 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
(source: C&W Mid-Year Report). These vacancy rates 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 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 August 31, 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 95.6% as of August 31, 1996)
and an option on the four Option Properties, each of which is located in 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 square feet of office and industrial properties in the
Market, including the development of build-to-suit facilities for GMAC (Mortgage
Division headquarters), Penn Mutual Life Insurance Company (headquarters),
Advanta Corp. (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.
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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 are entitled
to receive 95% of the dividends) of the Management Company. 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; and (iv) the obligation of the Operating
Partnership to acquire by September 1999 the Residual Interests in exchange for
44,322 Units 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 cash or Common Shares. The SSI/TNC Properties were conveyed to the
Operating Partnership subject to approximately $64.0 million in mortgage
indebtedness, as of August 31, 1996.
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 Offering and the application of the net proceeds thereof,
the mortgage indebtedness that is subject to this provision will have an
outstanding principal balance of approximately $13.6 million and will encumber
six of the SSI/TNC Properties. See "Business -- 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 August 31, 1996, the
outstanding balance of the SSI Loan was approximately $539,000. Upon the
consummation 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 debt encumbering the Option Properties. See "Business and
Properties -- Option Properties: General."
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."
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THE MANAGEMENT COMPANY
The Company conducts its real estate management services business through
the Management Company. The Company manages all but one of the Properties
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 manages additional properties on behalf of
unaffiliated third parties. As of August 31, 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 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. Through
its ownership of 100% of the preferred stock and 5% 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.
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.
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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 (source: 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 (source: 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 $14.60 per square foot
at the Company's office Properties as of August 31, 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 254,000 net rentable square feet in a Market that
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 lack of 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 its 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.
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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:
- Leasing Vacant/Expiring Space: The Company expects to realize additional
cash flow through the potential leasing of approximately 71,000 net
rentable square feet of vacant space at its Properties as of August 31,
1996 (approximately 5.3% of the Company's total net rentable square
feet). In addition, the Company expects to experience cash flow growth
through the releasing of approximately 171,000 net rentable square feet
of space under 59 leases that expire between September 1, 1996 and
December 31, 1997 and that have a weighted average annual rental rate as
of their expiration dates of $13.62 per square foot. The Company believes
that the majority of such leases are currently at or below market rental
rates. There can be no assurance the Company will achieve any of the
foregoing expectations;
- Contractual Rental Rate Increases: As of August 31, 1996, 59 leases,
representing approximately 37.5% of the Company's total leases and
approximately 53.5% of the net rentable square feet at the Properties,
include built-in contractual rental rate increases. Between August 31,
1996 and June 30, 2011, the contractual base rents under such leases are
expected to increase by an aggregate of approximately $1.1 million (not
including increases attributable to the transition from free or partial
rent to full rent or increases that are tied to indices such as the CPI);
and
- Tenant Services: The Company consistently has been able to provide
tenants with a high level of service as evidenced by the tenant retention
rates of the Properties in 1993, 1994 and 1995 and the eight-month period
ended August 31, 1996 of 71.4%, 56.7%, 75.1% and 95.4%, 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 the Company's expected Line of Credit 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.
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 at 457 Haddonfield
Road, 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 August 31, 1996,
the LibertyView Building was approximately 78.3% 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 as of August 31, 1996 by (b) the consideration paid for the property). The
Company estimates that the
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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 or increases in returns. In
addition, there can be no assurance that the Company will be successful in
making acquisitions on similar 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 to purchase the Option Properties from an
affiliate of TNC containing approximately 159,000 net rentable square feet. The
Option Properties are located in the Market, are managed by the Company and were
approximately 95.7% leased to 16 tenants as of August 31, 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: General."
The Company expects to obtain the Line of Credit secured by mortgages on 13
of the Properties. The Line of Credit will assist the Company to efficiently
execute targeted acquisition opportunities and expand its market presence. There
can be no assurance that the Company will obtain the Line of Credit.
CORPORATE SERVICE ACTIVITIES
In addition to managing all of the Properties located within the Market,
the Company managed, as of August 31, 1996, approximately 2.0 million net
rentable square feet, including 575,000 net rentable square feet of office
properties on behalf of third parties. 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. and Premier
Solutions, Inc. and Sanchez Computer Associates, Inc., four of which are
publicly-traded companies in which SSI maintains an ownership interest. For the
six months ended June 30, 1996, the real estate management services business had
revenues of approximately $277,000. 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, upon completion of the Offering, 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 Common 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 application of the net proceeds therefrom will be approximately 25.0% (23.1%
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."
36
<PAGE> 43
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after estimated
underwriting discounts and commissions and estimated expenses of the Offering,
are expected to be approximately $64.1 million (approximately $73.9 million if
the Underwriters' over-allotment option is exercised in full), based on an
assumed public offering price of $17.625 per share, the last reported sale price
for the Common Shares on the AMEX on October 9, 1996 (adjusted to give effect to
the Reverse Split). The Company will retain $14.1 million of the proceeds ($23.9
million if the Underwriters' over-allotment option is exercised) for working
capital purposes and will contribute $50.0 million to the Operating Partnership,
which will use such contribution as follows: (i) to repay approximately $49.2
million of mortgage debt secured by the Properties; and (ii) to repay
approximately $800,000 of debt owed to SSI.
If the Underwriters' over-allotment option is exercised in full, the
Company expects to use the additional net proceeds to repay additional mortgage
debt or for working capital or to make additional acquisitions.
Pending the application of the net proceeds from the Offering, 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 and other indebtedness to
be repaid upon completion of the Offering had a weighted average interest rate
of approximately 7.8% and a weighted average remaining term to maturity of
approximately 4.4 years as of June 30, 1996.
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
OUTSTANDING INTEREST
JUNE 30, 1996 PREPAYMENT PREMIUMS RATE MATURITY
PROPERTY (000'S)(1) OR PENALTIES AT JUNE 30, 1996 DATE
- -------------------------------- ----------------- ------------------- ---------------- -------
<S> <C> <C> <C> <C>
1155 Business Center Drive...... $30,789(2) None 8.150%(5) 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............. 13,467(3) None 7.125%(6) 7/2000
120 West Germantown Pike........ (3)
140 West Germantown Pike........ (3)
2260 Butler Pike................ (3)
7248 Tilghman Street............ 3,218 None 7.0%(7) 6/2004
486 Thomas Jones Way............ 1,291(4) None 8.0% 2/1998
468 Creamery Way................ (4)
6375 Snowdrift Road............. 471 None 8.0% 2/1998
-----------------
Total................. $49,236
============
</TABLE>
- ---------------
(1) Exact repayment amounts may differ due to amortization and exclusion of
accrued interest estimated to be approximately $300,000.
(2) All of these Properties secure a single loan.
(3) All of these Properties secure a single loan.
(4) Both of these Properties secure a single loan.
(5) Interest rate is variable and equal to lender's composite commercial paper
rate plus 2.75% per annum.
(6) Additional interest in an amount equal to 50% of cash flow (as defined in
the applicable loan documents) is also payable on such loan.
(7) Additional interest in an amount equal to 80% of cash flow (as defined in
the applicable loan documents) is also payable on such loan.
37
<PAGE> 44
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 October
8, 1996, there were approximately 344 holders of record of the Common Shares. On
October 9, 1996, the last reported sale price of the Common Shares on the AMEX
was $17.625 (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. The
following table gives 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 7/16 $ 4 7/8 $ 0.12
Second Quarter 1994................. $12 3/4 $ 9 3/8 $ 0.15
Third Quarter 1994.................. $18 $11 13/16 $ 2.19(1)
Fourth Quarter 1994................. $13 1/2 $10 7/8 $ 2.25(1)
----------- ----------- ------
First Quarter 1995.................. $13 1/2 $11 5/8 $ 1.20(1)
Second Quarter 1995................. $11 1/4 $10 11/16 $ 0.15
Third Quarter 1995.................. $11 5/8 $10 7/8 $ 0.15
Fourth Quarter 1995................. $11 1/4 $10 1/8 $ 0.15
----------- ----------- ------
First Quarter 1996.................. $16 1/2 $10 1/2 $ 0.18(2)
Second Quarter 1996................. $22 5/16 $15 3/8 $ 0.18(3)
Third Quarter 1996.................. $18 3/4 $16 7/8 $ 0.00(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 which 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 which was paid to shareholders of
record as of July 26, 1996.
(4) On October , 1996, the Company declared a distribution of per share
relating to third quarter operations.
38
<PAGE> 45
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 and on a pro forma basis as of that same date assuming the completion
of the Offering and the use of proceeds from the Offering 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 JUNE 30, 1996
------------------------------
HISTORICAL(1) PRO FORMA
------------- ------------
<S> <C> <C>
Debt:
Mortgages and notes payable, net of current
portion........................................... $ 9,870,000 $ 32,340,000
Line of Credit....................................... -- --
Minority Interest in the Operating Partnership....... -- 1,016,000
Shareholders' Equity:
Preferred Shares of beneficial interest, $.01 par
value;
5,000,000 shares authorized; no shares issued and
outstanding....................................... -- --
Common Shares of beneficial interest, $.01 par value;
25,000,000 shares authorized; 638,716 historical
and 4,955,800 pro forma shares issued and
outstanding....................................... 6,000 50,000(2)
Additional paid-in capital........................... 17,081,000 92,812,000
Share Warrants....................................... 42,000(3) 890,000(4)
Accumulated deficit.................................. (9,557,000) (9,557,000)
----------- ------------
Total shareholders' equity........................ 7,572,000 84,195,000
----------- ------------
Total capitalization......................... $ 17,442,000 $117,551,000
=========== ============
</TABLE>
- ---------------
(1) Does not include mortgage debt associated with the SSI/TNC Transaction and
the acquisition of the LibertyView Building or the other pro forma
adjustments.
(2) Includes 44,615 Common Shares to be issued immediately following the
Offering in connection with the prepayment of the Osborne Loan. Excludes:
(i) 540,159 Common Shares reserved for issuance upon the conversion of
Units; (ii) 580,400 Common Shares reserved for issuance, at an exercise
price of $19.50 per share, upon the exercise of warrants; and (iii) 46,666
Common Shares reserved for issuance upon the exercise of options at exercise
prices of $14.31 and $6.21 per share 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.
(4) Represents, on a pro-forma basis, 258,333 warrants issued to SSI at a price
of $2.10 per warrant and an additional 58,750 warrants issued to the RMO
Fund at a price of $5.19 per warrant and, together with the other warrants
issued to the RMO Fund, represents a total value of $890,000. These are the
only warrants for which value was received by the Company for warrants
issued by the Company.
39
<PAGE> 46
DILUTION
At June 30, 1996, the Company had a net tangible book value of $7.2
million, or $11.21 per outstanding Common Share. Without taking into account any
other changes in such net tangible book value after June 30, 1996, other than to
give effect to the sale by the Company of the Common Shares in this Offering and
the application of the net proceeds therefrom, the net tangible book value of
the Company at June 30, 1996 would have been $83.3 million, or $16.80 per share.
This amount represents an immediate increase in net tangible book value per
share of $5.59 to current shareholders and an immediate dilution in net tangible
book value per share to purchasers of Common Shares in the Offering of
approximately $0.83 per share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per Common Share..................... $ 17.63
Net tangible book value per Common Share before the
Offering(1)................................................... $ 11.21
Increase in net tangible book value per Common Share attributable
to the Offering(2)............................................ 5.59
Net tangible book value per Common Share after the Offering(2)..... $ 16.80
Dilution in net tangible book value per Common Share to new
investors(3)(4).................................................. $ 0.83
</TABLE>
- ---------------
(1) Net tangible book value per share before the Offering is determined by
dividing net tangible book value of the Company (total tangible assets of
$119,261 after deducting prepaid financing costs of $943, less total
liabilities of $34,993 and minority interests of $1,016 to holders of Units)
by the number of Common Shares outstanding.
(2) Based on an assumed public offering price of $17.63 per Common Share, the
last reported sales price of the Common Shares on the AMEX on October 9,
1996, and after deducting Underwriters' discounts and commissions and
estimated Offering expenses. Includes 44,615 Common Shares to be issued
immediately following the Offering in prepayment of the Osborne Loan.
Excludes: (i) 540,159 Common Shares reserved for issuance upon the
conversion of Units; (ii) 580,400 Common Shares reserved for issuance, at an
exercise price of $19.50 per share, upon the exercise of warrants; and (iii)
46,666 Common Shares reserved for issuance upon the exercise of options at
exercise prices of $14.31 and $6.21 per share 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 from the assumed per share public offering price.
(4) Dilution in net tangible book value per Common Share to purchasers of Common
Shares would be $2.29 if the 540,159 Units were converted into Common
Shares, resulting in 5,495,959 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 June 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 72.8% $64,065 76.0% $17.63(1)
Common Shares and Units of Continuing
Investors............................ 1,496 27.2% $20,203(2) 24.0% $13.51
Total........................ 5,496 100.0% $84,268 100.0%
</TABLE>
- ---------------
(1) Before deducting underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Based on the June 30, 1996 net book value of the assets of $84,268
(including financing costs of $943 and net of liabilities to be assumed of
$34,993 on a pro forma basis). Minority interests of $1,016 assuming all
Units issued or issuable are converted into Common Shares.
40
<PAGE> 47
SELECTED FINANCIAL DATA
The following tables set forth certain selected combined financial and
operating information on a pro forma basis for the Company and on a combined
historical basis, for the Company and the SSI/TNC Properties. The combined
information has been derived from, and should be read in conjunction with, the
historical financial statements and notes thereto of the Company and the SSI/TNC
Properties included elsewhere in this Prospectus. The selected combined
financial and operating information for the six months ended June 30, 1996 and
June 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 sets forth certain 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 six months ended June 30, 1996 and 1995 and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for the Company.
The unaudited pro forma financial and operating information for the six
months ended June 30, 1996 and for the year ended December 31, 1995 is presented
as if the following transactions had been consummated on June 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 its partnership
interests in the Operating Partnership; (ii) the Operating Partnership acquired
the SSI/TNC Properties in connection with the SSI/TNC Transaction; (iii) the
Company acquired the LibertyView Building directly; and (iv) the completion of
this Offering and the application of the net proceeds therefrom. 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.
41
<PAGE> 48
BRANDYWINE REALTY TRUST
COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 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 $12,465 $ 5,743 $ 5,795 $ 6,400
Tenant reimbursements................................... 3,130 2,961 3,496 1,381 1,938 2,179
Management fees......................................... 946 617 -- 319 277 --
Other................................................... 79 86 86 23 152 152
------- ------- ------- ------- ------- ------
Total revenue..................................... 16,364 15,010 16,047 7,466 8,162 8,731
Expenses --
Interest................................................ 7,877 6,648 2,997 3,447 2,997 1,500
Depreciation and amortization........................... 4,988 5,738 5,490 2,722 2,568 2,619
Property expenses....................................... 5,897 5,032 5,830 2,375 3,182 3,550
General and administrative.............................. 2,054 1,588 1,352 772 715 496
Provision for loss on real estate investments........... 5,400 202 -- -- -- --
------- ------- ------- ------- ------- ------
Total expenses.................................... 26,216 19,208 15,669 9,316 9,462 8,165
------- ------- ------- ------- ------- ------
Income (loss) before gains on sales of real estate
investments, minority interest and extraordinary
items................................................... (9,852) (4,198) 378 (1,850) (1,300) 566
Gains on sales of real estate investments................. 1,410 -- -- -- -- --
Equity income of management company....................... -- -- 179 -- -- 58
Income (loss) before extraordinary items.................. (2,807) (4,203) 358 (1,850) (1,305) 537
Income (loss) per share before extraordinary items........ $ 0.07 $ 0.11
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
COMBINED PRO
HISTORICAL FORMA
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Real estate investments, net of accumulated
depreciation............................................ $69,744 $100,808
Total assets.............................................. 79,048 121,599
Mortgages and notes payable............................... 73,556 32,340
Total liabilities......................................... 76,045 34,993
Minority interest......................................... -- 1,101
Shareholders' equity...................................... 3,003 85,505
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
COMBINED COMBINED
HISTORICAL HISTORICAL
-------------------- PRO FORMA ------------------- PRO FORMA
1994 1995 1995 1995 1996 1996
-------- ------- --------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)............................. $ 645 $ 1,382 $5,606 $ 796 $ 1,145 $3,005
Cash flows provided by (used in):
Operating activities............................... 1,534 1,886 (d) 1,436 1,389 (d)
Investing activities............................... 7,844 (3,490) (d) (1,186) (1,884) (d)
Financing activities............................... (10,171) 1,013 (d) (505) 1,180 (d)
Total cash distributions declared.................... 3,680 1,021 -- 743 144 --
PROPERTY DATA:
Number of properties owned at period end............. 23 23 24 23 23 24
Gross rentable square feet owned at period end
(000's)............................................ 1,214 1,214 1,336 1,214 1,214 1,336
</TABLE>
42
<PAGE> 49
BRANDYWINE REALTY TRUST
HISTORICAL SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total operating revenue(b)................... $ -- $ -- $ -- $ 4,192 $ 3,666 $ 1,806 $ 2,027
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) (440) 1
Net income (loss) per share.................. (10.83) -- 3.99 11.22 (1.32) (0.69) --
Cash distributions declared.................. -- -- -- 2,914 1,021 743 111
Cash distributions per share................. -- -- -- 4.71 1.65 1.20 .18
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 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 $13,789 $13,752
Total assets................................. 2,128 2,123 4,604 17,873 17,105 17,380 18,167
Mortgage notes payable(c).................... -- -- -- 6,899 8,931 8,983 8,878
Total liabilities............................ 58 55 68 8,684 9,761 9,373 10,595
Shareholders' equity......................... 2,070 2,068 4,536 9,189 7,344 8,007 7,572
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(a)..................... $ (5) $ (1) $ (1) $ (533) $ 537 $ 329 $ 450
Cash flows provided by (used in):
Operating activities....................... -- -- -- (628) 497 193 394
Investing activities....................... -- -- 2,469 9,559 (701) (893) (107)
Financing activities....................... -- -- -- (9,635) (722) (228) 516
PROPERTY DATA:
Number of properties owned at period end..... 7 7 7 4 4 4 4
Gross rentable square feet owned at period
end (000's)................................ 546 546 546 255 255 255 255
</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
43
<PAGE> 50
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) 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, $290 and $568 for the years ended December 31, 1991,
1992 and 1993, respectively. Subsequent to 1993, the Company acquired
control of BRP and consolidated this investment.
(c) 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.
(d) 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.
44
<PAGE> 51
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 acquisition of the LibertyView Building 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 Properties and 67.1% of the
Company's pro forma rental revenue (including tenant reimbursements) for the six
months ended June 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.
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 Six Months Ended June 30, 1996 to the Six Months Ended
June 30, 1995. Rental revenue increased by approximately $192,000 or 10.8% for
the six months ended June 30, 1996 compared to the six months ended June 30,
1995 primarily due to improved overall occupancy levels.
Depreciation and amortization expense decreased by approximately $334,000
or 41.8% primarily as a result of the non-recurring write-off of approximately
$254,000 in deferred loan costs associated with refinancing of mortgage debt in
April 1995. Maintenance expense increased by approximately $118,000 or 44.7%
primarily due to snow removal costs incurred during the winter of 1996 and
increased janitorial and payroll costs associated with higher occupancy levels.
Non-maintenance operating expense remained relatively consistent between the two
periods. Administrative expenses decreased by approximately $35,000 or 11.9%
primarily due to reduced payroll and office costs.
As a result of the foregoing, the Company's consolidated net income for the
period from January 1, 1996 to June 30, 1996 was $1,000 as compared to a
consolidated net loss of $440,000 or $0.69 per share for the period January 1,
1995 to June 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 13.9% 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 write-off of deferred loan fees in 1995 totaling
approximately $354,000 resulting from: (i) the refinancing of mortgage debt in
April
45
<PAGE> 52
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 the Principal
Financial Group mortgage loans obtained 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 Six Months Ended June 30, 1996 to the Six Months Ended
June 30, 1995. Total revenue, on a combined historical basis, increased by
approximately $696,000 or 9.3% for the six months ended June 30, 1996 compared
to the six months ended June 30, 1995. Base rental revenue accounted for
approximately $52,000 of the increase and was primarily due to improved
occupancy levels of certain of the Properties. Tenant reimbursements accounted
for approximately $557,000 of the increase and was primarily due to increased
tenant recoveries resulting from increased operating expenses.
Interest expense, on a combined historical basis, decreased by
approximately $450,000 or 13.1% for the first six months of 1996 as compared to
the first six months of 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 $154,000 or 5.7% for the six months
ended June 30, 1996 compared to the six months ended June 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 $807,000 or 34.0% for the six months ended
June 30, 1996 compared to the six months ended June 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 $57,000 or 7.4% primarily due to reduced payroll and
office 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 $1.3 million for
the six months ended June 30, 1996 compared to approximately $1.9 million for
the six months ended June 30, 1995.
46
<PAGE> 53
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, no such writedown was required to be recorded.
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 $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 Six Months Ended June 30, 1996 on a Pro Forma Basis to
the Six Months Ended June 30, 1996 on a Historical Basis. Pro forma total
revenue was approximately $8.7 million for the six months ended June 30, 1996,
representing an approximately $6.7 million or 330.7% increase over historical
results for this period, resulting primarily from an increase of approximately
$6.6 million in rental revenue associated with the Company's acquisition of
LibertyView Building and SSI/TNC Properties in 1996.
The historical 1996 interest expense of approximately $416,000 increased to
$1.5 million on a pro forma basis. Interest expense as a percentage of total
revenue dropped from 20.5% of total revenue in historical 1996 to 17.2% of total
revenue on a pro forma basis. The net reduction of 3.3% 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 six
months ended June 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 (after the impact
of the minority interest in the Operating Partnership) would have been
approximately $530,000 for the six months ended June 30, 1996 comparing
positively to the historical net income of approximately $1,000 for the six
months ended June 30, 1996. This positive comparison results primarily from a
substantial increase in total revenue, due to the benefit of a pro forma full
six months of revenue from the LibertyView Building and the SSI/TNC Properties
acquired in 1996.
47
<PAGE> 54
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 $16.0 million for the year ended December 31, 1995, representing
an approximately $12.4 million or 337.7% increase over historical results for
this period, resulting primarily from an increase of approximately $12.4 million
in rental revenue associated with the acquisition of the LibertyView Building
and SSI/TNC Properties in 1996.
The historical 1995 interest expense of approximately $793,000 increased to
$3.0 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 18.7% of total revenue on a pro forma basis. The net
reduction of 2.9% 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 (after the impact
of the minority interest in the Operating Partnership) would have been
approximately $342,000 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 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Offering, the Company expects to sell an additional
4,000,000 shares of Common Stock and realize net proceeds of approximately $64.1
million. The Company intends to use these funds to reduce existing indebtedness
by approximately $50.0 million and $14.1 million for general working capital
purposes. See "Use of Proceeds."
As of June 30, 1996, and following consummation of the Offering, the
Company will have approximately $32.3 million of pro forma debt outstanding
consisting of nine mortgage notes which have a weighted average interest rate of
8.4%. The notes mature between June 1997 and April 2001. The mortgage note on
110 Summit Drive matures in June 1997, and totalled approximately $1.6 million
at June 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 total market
capitalization at June 30, 1996 of approximately $129.2 million, the Company's
consolidated debt represents 25.0% of its total market capitalization.
The Company intends to enter into the Line of Credit contemporaneously with
the Offering. The Line of Credit is intended to be used to finance the
acquisition of properties, provide funds for tenant improvements and capital
expenditures and for general working capital purposes. There can be no assurance
that the Company will be able to enter into the Line of Credit on terms
satisfactory to it.
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 Line of Credit, 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 $16.2 million at December 31,
1995 and on a pro forma basis at June 30, 1996, respectively. The increase in
cash and cash equivalents primarily resulted from cash flows provided by
operating and investing 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 qualify 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.
48
<PAGE> 55
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 Line of Credit to finance acquisitions
and capital improvements on an interim basis.
CASH FLOWS
Cash and cash equivalents were $840,000 and $16.2 million at December 31,
1995 and on a pro forma basis at June 30, 1996, respectively. The increase in
cash and cash equivalents primarily resulted from cash flows provided by
operating and investing 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 the Principal Financial Group mortgage loans
obtained 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.
49
<PAGE> 56
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 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 six months ended June 30, 1996 is summarized in the following table
(in thousands, except share data).
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------
YEAR ENDED SIX MONTHS
DECEMBER 31, 1995 ENDED JUNE 30, 1996
----------------- -------------------
<S> <C> <C>
Income before minority interest........................... $ 358 $ 537
Add:
Equity in earnings of the Management Company......... 179 58
Depreciation attributable to real property........... 4,549 2,251
Amortization attributable to leasing costs, tenant
allowances and improvements........................ 520 159
--------- ---------
Funds from Operations................................ $ 5,606 $ 3,005
========= =========
Weighted average Common Shares and Units
outstanding(1)..................................... 5,502,016 5,502,392
========= =========
</TABLE>
- ---------------
(1) Includes 540,159 Common Shares issuable upon the conversion of 540,159 Units
issued or issuable, as the case may be, as part of the SSI/TNC Transaction
and 44,615 Common Shares to be issued immediately following the Offering in
connection with prepayment of the Osborne Loan. Excludes 627,067 Common
Shares reserved for issuance upon the exercise of outstanding warrants and
options. See "Capitalization" and "The Operating Partnership
Agreement -- Redemption Rights."
During 1995, the Company declared distributions totaling $1.65 per share.
On May 1, 1996 and July 11, 1996, the Company declared distributions of $0.18
and $0.18 per share, respectively.
50
<PAGE> 57
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 represents 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 $14.60 in the Company's office portfolio as of August
31, 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
C&W Mid-Year Report, the Philadelphia primary metropolitan statistical area
(including Bucks, Chester, Delaware, 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, I-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.
51
<PAGE> 58
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 and has, in fact, surpassed the national average for the
10-year period from 1980 to 1990.
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.
52
<PAGE> 59
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
financial, insurance and real estate) 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 service 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 Market was
9.2%, which compares favorably with the total
53
<PAGE> 60
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 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 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, 1996. 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 Properties are combination office/flex facilities
(500 Enterprise Road; 456 Creamery Way; 7310 Tilghman Street; 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 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 Properties, 1510
Gehman Road, is a combination office and industrial facility.
HISTORICAL OVERALL OFFICE VACANCY
PENNSYLVANIA SUBURBS
<TABLE>
<CAPTION>
Six Months
Ended
1990 1991 1992 1993 1994 1995 June 30, 1996
---- ---- ---- ---- ---- ---- -------------
<C> <C> <C> <C> <C> <C> <C>
20.0 19.3 18.8 17.1 14.7 14.9 9.5
</TABLE>
54
<PAGE> 61
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 translates to an overall vacancy rate of 15.7%
within these counties.
55
<PAGE> 62
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>
THE INDUSTRIAL MARKET
HISTORICAL VACANCY RATES
<TABLE>
<CAPTION>
Six Months
Ended
1993 1994 1995 June 30, 1996
---- ---- ---- -------------
<C> <C> <C> <C>
17.7% 14.2% 12.8% 13.1%
</TABLE>
56
<PAGE> 63
BUSINESS AND PROPERTIES
GENERAL
The Properties include 23 suburban office buildings and one industrial
facility (1510 Gehman Road). The Company developed 19 of the Properties and
currently manages 23 of the 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. The Properties
are located in the Market, with the exception of 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. 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 1.3 million net rentable square feet and,
as of August 31, 1996 were approximately 94.7% leased to approximately 160
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 Company believes that its Properties generally have excellent locations
and access and are among the highest quality properties within their markets.
The Company's portfolio is comprised primarily of suburban office properties (22
of which are Class A properties). The Company generally considers Class A
suburban office 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 9.8
years. The Company's 10 largest tenants as of August 31, 1996 (based on base
rents for the twelve-month period ended August 31, 1996) aggregate approximately
32.3% of the Company's total base rent and approximately 35.2% of the Company's
net rentable area and have a weighted average remaining lease term of
approximately 7.7 years. As of August 31, 1996, no single tenant accounted for
more than approximately 5.1% of the Company's aggregate annualized base rent and
only 31 tenants individually represented more than 1.0% of such aggregate
annualized base rent.
Leases representing approximately 69.7% of the net rentable square footage
at the Properties were signed during the period January 1, 1993 through December
31, 1995 (excluding the LibertyView and 168 Franklin Corner Properties, which
were not owned by the Company for the entire period), 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 eight months ended August 31, 1996:
(i) renewal leases at the 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 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
Properties as of August 31, 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 August 31, 1996 and under
which the tenants typically pay for all real estate taxes and operating expenses
above those for an established base year).
57
<PAGE> 64
Under the Company's leases, the landlord is generally responsible for
structural repairs. Most leases do not permit early termination; however,
approximately 12 leases covering an aggregate of approximately 184,000 net
rentable square feet permit the tenant to terminate the lease prior to its
initial term (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).
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 are 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.
58
<PAGE> 65
PROPERTIES
The following table sets forth certain information with respect to the
Properties:
<TABLE>
<CAPTION>
TOTAL BASE RENT AVERAGE TOTAL BASE
FOR THE RENT PLUS EXPENSE
NET PERCENTAGE TWELVE MONTHS RECOVERIES PER
RENTABLE LEASED AS OF ENDED NET RENTABLE SQUARE
YEAR SQUARE AUGUST 31, JUNE 30, 1996 FOOT LEASED
SUBMARKET/PROPERTY BUILT FEET 1996(1) (000'S)(2) JUNE 30, 1996(3)
- ----------------------------------------------------- ----- --------- ------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C>
HORSHAM/WILLOW GROVE/JENKINTOWN, PA
650 Dresher Road.................................... 1984 30,138 100.0% $ 281 $ 14.79
1155 Business Center Drive.......................... 1990 51,388 99.4% 573 15.49
500 Enterprise Road................................. 1990 67,800 98.5% 657 13.20
One Progress Avenue................................. 1986 79,204 100.0% 674 10.62
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way(10)................................ 1987 47,604 100.0% 334 7.10
486 Thomas Jones Way................................ 1990 51,500 71.8% 443 16.68
468 Creamery Way.................................... 1990 28,934 100.0% 287 13.76
110 Summit Drive.................................... 1985 43,660 82.7% 253 10.91
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON, PA
2240/50 Butler Pike................................. 1984 52,183 99.4% 543 15.38
120 West Germantown Pike............................ 1984 30,546 100.0% 363 17.20
140 West Germantown Pike............................ 1984 25,953 98.7% 292 16.17
2260 Butler Pike.................................... 1984 31,892 100.0% 353 15.96
MAIN LINE, PA
16 Campus Boulevard................................. 1990 65,463 100.0% 362 8.38
18 Campus Boulevard................................. 1990 37,700 100.0% 404 14.08
LEHIGH VALLEY, PA
7310 Tilghman Street................................ 1985 40,000 99.0% 322 11.01
7248 Tilghman Street................................ 1987 42,863 93.8% 389 14.17
6575 Snowdrift Road................................. 1988 46,250 100.0% 328 9.19
1510 Gehman Road.................................... 1990 152,625 100.0% 771 7.52
BURLINGTON COUNTY, NJ
One Greentree Centre................................ 1982 55,838 100.0% 879 17.16
Two Greentree Centre................................ 1983 56,075 100.0% 769 13.76
Three Greentree Centre.............................. 1984 69,101 96.2% 969 15.31
CAMDEN COUNTY, NJ
457 Haddonfield Road (LibertyView).................. 1990 121,737 78.3% 1,201 17.85
OTHER MARKETS
168 Franklin Corner Road............................ 1976 32,000 54.4% 128 9.29
Lawrenceville, NJ
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks................................. 1982 73,339 100.0% 985 14.00
--------- ----- ------- ------
Total/Weighted Average 1,333,793 94.7% $ 12,560 $ 13.61(11)
========= ===== ======= ======
<CAPTION>
AVERAGE C&W RENTAL RATE TENANTS LEASING 10% OR
ANNUALIZED WEIGHTED INCREASE MORE OF RENTABLE
ANNUAL RENTAL AVERAGE POTENTIAL SQUARE FOOTAGE PER
RATE AS OF CLASS A UNTIL MARKET PROPERTY AS OF
AUGUST 31, RENTAL RATE IS AUGUST 31, 1996
SUBMARKET/PROPERTY 1996(4) RATES(5) ACHIEVED(6) AND LEASE EXPIRATION DATE
- ----------------------------------------------------- --------------- -------- ------------ -------------------------
<S> <C><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 4.7% IMS (79%) - 3/06;
Motorola (14)% - 2/99
500 Enterprise Road................................. 13.25 14.50 9.4% Conti Mortgage (80%)
4/01; Pioneer (19%) 10/00
One Progress Avenue................................. 13.53 18.02 33.2% Reed Technologies
(100%) - 6/11
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way(10)................................ 7.25(7) 7.89(9) 8.8% Neutronics (100%) - 1/03
486 Thomas Jones Way................................ 15.52 15.55 0.2% First American Real
Estate (20%) - 4/00
468 Creamery Way.................................... 13.88 13.61 -- Franciscan Health
(82%) - 1/99;
American Day Treatment
(18%) - 6/00
110 Summit Drive.................................... 7.23(9) 7.89(9) 9.1% Maris Equipment
(49%) - 4/99
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON, PA
2240/50 Butler Pike................................. 17.23 18.70 8.5% 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; Henkle
(29%) - 1/98; National
Health Equity
(20%) - 5/99
2260 Butler Pike.................................... 17.88 18.70 4.6% 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(9) 10.50(9) 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(9) 10.50(9) 46.9% Corning Packaging
(100%) - 2/99
1510 Gehman Road.................................... 4.72(9) 5.95(9) 26.1% Ford Electronics
(35%) - 6/98;
Nibco (65%) - 8/99
BURLINGTON COUNTY, NJ
One Greentree Centre................................ 16.52 19.30 16.8% American Executive
Centers (30%) - 1/06;
West Jersey (15%) - 4/01;
Temple Sports Med.
(18%) - 12/97
Two Greentree Centre................................ 15.55 19.30 24.1% Merrill Lynch
(23%) - 11/05;
ReMax Suburban
(12%) - 11/05;
Del-Val Tech
(10%) - 11/00
Three Greentree Centre.............................. 16.40 19.30 17.7% 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).................. 18.62 21.81 17.1% HIP Health Plan
(31%) - 12/07
OTHER MARKETS
168 Franklin Corner Road............................ 15.55 18.00(10) 15.8% Dr. Belden (12%) - 5/01;
Lawrenceville, NJ Crawford & Co.
(14%) - 11/99
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks................................. 14.32 15.50(10) 8.2% GE Mortgage (26%) - 9/96
----- ----- -----
Total/Weighted Average $ 14.60(11) $16.83(8)(11) 15.3%(11)
===== ===== =====
</TABLE>
59
<PAGE> 66
- ---------------
(1) Calculated by dividing net rentable square feet included in leases dated on
or before August 31, 1996, divided by the aggregate net rentable square
feet included in the Property.
(2) "Total Base Rent" for the twelve months ended June 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 June 30, 1996,
plus tenant reimbursements for the twelve months ended June 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 August 31, 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 August 31, 1996. In
both cases, the annualized rental rate is divided by the total square
footage leased as of August 31, 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 C&W weighted average rental rate
exceeds the average annualized rental rate of the applicable Property.
(7) Building 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) Represents the Class A weighted average rental rate for the submarkets in
which the Properties are located as compared to the weighted average asking
rate of $18.94 per square foot for the Market as identified in the C&W
Mid-Year Report.
(9) 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).
(10) Rental rates represent management's estimate of current market rental
rates.
(11) Excludes 1510 Gehman Road, which is an industrial Property.
60
<PAGE> 67
TENANTS
The Properties are leased to approximately 160 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
as of August 31, 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....... 1 181 79,204 5.9% $ 733 5.1%
Conti Mortgage........ 1 57 53,905 4.0% 596 4.2%
IMS................... 1 117 40,774 3.1% 494 3.5%
HIP Health Plan of
NJ.................. 1 137 37,515 2.8% 462 3.2%
Clair O'Dell Agency... 1 59 25,177 1.9% 441 3.1%
CoreStates............ 1 118 30,359 2.2% 410 2.9%
Nibco, Inc............ 1 35 98,725 7.4% 395 2.8%
Parker, McKay &
Criscuolo........... 1 58 25,905 1.9% 388 2.7%
GMAC.................. 1 82 30,138 2.3% 354 2.5%
Neutronics............ 1 77 47,604 3.6% 345 2.4%
Corning Packaging..... 1 29 46,250 3.5% 331 2.3%
Ford Motor Co......... 1 21 53,900 4.0% 326 2.3%
Marshall, Dennehey.... 2 (i) 19,633 1.5% 320 2.2%
Creative Financial.... 1 119 31,907 2.4% 319 2.2%
AT&T.................. 3 (ii) 32,774 2.5% 288 2.0%
Information
Resources........... 1 52 21,008 1.6% 284 2.0%
American Executive
Centers............. 1 115 16,853 1.2% 278 1.9%
Devco Mutual.......... 1 53 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% 224 1.6%
--
---- ------- ---- ----- ----
Total/Weighted
Average..... 23 66 748,249 56.1% $ 7,447 52.1%
== ==== ======= ==== ===== ====
</TABLE>
- ---------------
(i) 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.
(ii) 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.
61
<PAGE> 68
LEASE EXPIRATIONS
The following table sets forth detailed lease expiration information for
the Properties for leases in place as of August 31, 1996, assuming that none of
the tenants exercise renewal options or termination rights, if any, at or prior
to the scheduled expirations:
<TABLE>
<CAPTION>
RENTABLE PERCENTAGE OF
NUMBER OF SQUARE FINAL ANNUALIZED TOTAL FINAL
LEASES FOOTAGE BASE RENT PER ANNUALIZED BASE
EXPIRING SUBJECT TO FINAL ANNUALIZED SQUARE FOOT RENT FROM
WITHIN THE EXPIRING BASE RENT UNDER UNDER PROPERTIES UNDER CUMULATIVE
YEAR OF LEASE EXPIRATION YEAR LEASES EXPIRING LEASES(1) EXPIRING LEASES(1) EXPIRING LEASES TOTAL
- -------------------------- ---------- ---------- ------------------ ------------------ ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996(2)................... 18 60,534 $ 700,218 $11.57 4.6 % 4.6 %
1997...................... 41 110,940 1,635,650 14.74 10.6 % 15.2 %
1998...................... 19 100,621 (3) 951,841(3) 9.46 6.2 % 21.4 %
1999...................... 29 295,094 (3) 2,491,236(3) 8.44 16.2 % 37.6 %
2000...................... 12 72,245 1,020,817 14.13 6.6 % 44.2 %
2001...................... 21 223,800 3,177,877 14.20 20.7 % 64.9 %
2002...................... 2 13,429 232,566 17.32 1.5 % 66.4 %
2003...................... 8 104,777 1,274,927 12.17 8.3 % 74.7 %
2004...................... -- -- -- -- -- 74.7 %
2005...................... 2 19,387 365,564 18.86 2.4 % 77.1 %
2006...................... 6 145,449 1,942,732 13.36 12.6 % 89.7 %
2007 and thereafter....... 2 116,719 1,580,118 13.54 10.3 % 100.0 %
--- --------- ----------- ------ ------ ---- --
Total/Weighted
Average......... 160 1,262,995 $ 15,373,546 $12.17 100.00% 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 August 31, 1996 through December 31, 1996.
(3) Includes 152,625 net rentable square feet and $780,711 of annualized base
rent ($5.12 per net rentable square foot) associated with 1998 and 1999
lease expirations on the Company's industrial Property.
62
<PAGE> 69
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 August 31, 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>
HORSHAM/WILLOW GROVE/
JENKINTOWN, PA
650 Dresher Road
Square Footage of Expiring Leases............ -- -- -- -- -- -- --
Percentage of Total Leased Square Feet....... -- -- -- -- -- -- --
Final Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- -- -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- -- -- -- --
Percentage of Total Final Annualized 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 Annualized 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 Annualized 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 Annualized 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 Annualized 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 Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- -- -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- -- -- -- --
Percentage of Total Final Annualized 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>
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 Annualized Base Rent Under
Expiring Leases(2).......................... $406,863 -- -- -- -- $406,863
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $13.50 -- -- -- -- $13.50
Percentage of Total Final Annualized 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 Annualized 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 Annualized 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 Annualized 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 Annualized 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 Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- 100.0% 100.0%
Number of Leases Expiring.................... -- -- -- -- 1 1
</TABLE>
63
<PAGE> 70
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- --------------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- --------------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <<C> <C> <C> <C> <C> <C>
SOUTHERN ROUTE 202 CORRIDOR, PA
456 Creamery Way
Square Footage of Expiring Leases............ -- -- -- -- -- -- --
Percentage of Total Leased Square Feet....... -- -- -- -- -- -- --
Final Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- -- -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- -- -- -- --
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- -- --
Number of Leases Expiring.................... -- -- -- -- -- -- --
486 Thomas Jones Way
Square Footage of Expiring Leases............ 8,901 -- 8,612 10,086 4,856 -- 4,517
Percentage of Total Leased Square Feet....... 24.1% -- 23.3% 27.3% 13.1% -- 12.2%
Final Annualized Base Rent Under
Expiring Leases(2).......................... $103,918 -- $99,944 $113,468 $58,467 -- $63,238
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $11.67 -- $11.61 $11.25 $12.04 -- $14.00
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 23.7% -- 22.7% 25.8% 13.3% -- 14.5%
Number of Leases Expiring.................... 2 -- 3 1 2 -- 1
468 Creamery Way
Square Footage of Expiring Leases............ -- -- -- 23,588 5,346 -- --
Percentage of Total Leased Square Feet....... -- -- -- 81.5% 18.5% -- --
Final Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- -- 76.8% 23.2% -- --
Number of Leases Expiring.................... -- -- -- 1 1 -- --
110 Summit Drive
Square Footage of Expiring Leases............ 9,200 -- -- 26,920 -- -- --
Percentage of Total Leased Square Feet....... 25.5% -- -- 74.5% -- -- --
Final Annualized Base Rent Under
Expiring Leases(2).......................... $71,288 -- -- $191,110 -- -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $7.75 -- -- $7.10 -- -- --
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 27.2% -- -- 72.8% -- -- --
Number of Leases Expiring.................... 2 -- -- 2 -- -- --
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 Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- 8.1% 27.0% -- -- --
Number of Leases Expiring.................... -- -- 1 1 -- -- --
<CAPTION>
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 Annualized 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 Annualized 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............ -- -- -- -- -- 36,972
Percentage of Total Leased Square Feet....... -- -- -- -- -- 100.0%
Final Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- -- -- $439,034
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- -- -- $11.87
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- 100.0%
Number of Leases Expiring.................... -- -- -- -- -- 9
468 Creamery Way
Square Footage of Expiring Leases............ -- -- -- -- -- 28,934
Percentage of Total Leased Square Feet....... -- -- -- -- -- 100.0%
Final Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- 100.0%
Number of Leases Expiring.................... -- -- -- -- -- 2
110 Summit Drive
Square Footage of Expiring Leases............ -- -- -- -- -- 36,120
Percentage of Total Leased Square Feet....... -- -- -- -- -- 100.0%
Final Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- -- -- $262,398
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- -- -- $7.26
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- 100.0%
Number of Leases Expiring.................... -- -- -- -- -- 4
BLUE BELL/PLYMOUTH MEETING/ FORT WASHINGTON,
2240/50 Butler Pike
Square Footage of Expiring Leases............ -- -- -- 30,359 -- 51,869
Percentage of Total Leased Square Feet....... -- -- -- 58.5% -- 100.0%
Final Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- -- 64.9% -- 100.0%
Number of Leases Expiring.................... -- -- -- 1 -- 3
</TABLE>
64
<PAGE> 71
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- --------------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- --------------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <<C> <C> <C> <C> <C> <C>
120 West Germantown Pike
Square Footage of Expiring Leases............ 3,919 -- 1,450 -- -- 25,177 --
Percentage of Total Leased Square Feet....... 12.8% -- 4.8% -- -- 82.4% --
Final Annualized Base Rent Under
Expiring Leases(2).......................... $50,947 -- $17,400 -- -- $459,480 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $13.00 -- $12.00 -- -- $18.25 --
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 9.7% -- 3.3% -- -- 87.0% --
Number of Leases Expiring.................... 1 -- 1 -- -- 1 --
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 Annualized 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 Annualized 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 Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... 9.8% -- -- -- 67.0% 23.2% --
Number of Leases Expiring.................... 1 -- -- -- 1 1 --
MAIN LINE, PA
16 Campus Boulevard
Square Footage of Expiring Leases............ -- -- -- -- -- 8,000 --
Percentage of Total Leased Square Feet....... -- -- -- -- -- 12.2% --
Final Annualized 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 Annualized 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 Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- 14.2% -- 4.8% -- 81.0% --
Number of Leases Expiring.................... -- 1 -- 1 -- 3 --
<CAPTION>
120 West Germantown Pike
Square Footage of Expiring Leases............ -- -- -- -- -- 30,546
Percentage of Total Leased Square Feet....... -- -- -- -- -- 100.0%
Final Annualized 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 Annualized 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 Annualized 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 Annualized 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 Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- -- -- $423,307
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- -- -- $13.27
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- 100.0%
Number of Leases Expiring.................... -- -- -- -- -- 3
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 Annualized 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 Annualized 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 Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- 100.0%
Number of Leases Expiring.................... -- -- -- -- -- 5
</TABLE>
65
<PAGE> 72
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- --------------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- --------------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <<C> <C> <C> <C> <C> <C>
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 Annualized 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 Annualized 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 Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- 13.6% -- 7.1% -- 79.3% --
Number of Leases Expiring.................... -- 1 -- 1 -- 2 --
6575 Snowdrift Road
Square Footage of Expiring Leases............ -- -- -- 46,250 -- -- --
Percentage of Total Leased Square Feet....... -- -- -- 100.0% -- -- --
Final Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- -- 100.0% -- -- --
Number of Leases Expiring.................... -- -- -- 1 -- -- --
1510 Gehman Road
Square Footage of Expiring Leases............ -- -- 53,900 98,725 -- -- --
Percentage of Total Leased Square Feet....... -- -- 35.3% 64.7% -- -- --
Final Annualized 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 Annualized 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 6,331 -- 8,387 --
Percentage of Total Leased Square Feet....... 6.6% 27.6% 9.3% 11.3% -- 15.0% --
Final Annualized Base Rent Under
Expiring Leases(2).......................... $60,813 $247,192 $84,954 $113,958 -- $144,676 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $16.43 $16.06 $16.43 $18.00 -- $17.25 --
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 6.2% 25.1% 8.6% 11.6% -- 14.7% --
Number of Leases Expiring.................... 2 6 3 2 -- 1 --
<CAPTION>
LEHIGH VALLEY, PA
7310 Tilghman Street
Square Footage of Expiring Leases............ -- -- -- -- -- 39,583
Percentage of Total Leased Square Feet....... -- -- -- -- -- 100.0%
Final Annualized 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 Annualized 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 Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- -- -- $439,461
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- -- -- $10.93
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- 100.0%
Number of Leases Expiring.................... -- -- -- -- -- 4
6575 Snowdrift Road
Square Footage of Expiring Leases............ -- -- -- -- -- 46,250
Percentage of Total Leased Square Feet....... -- -- -- -- -- 100.0%
Final Annualized 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 Annualized Base
Rent Represented by Expiring Leases......... -- -- -- -- -- 100.0%
Number of Leases Expiring.................... -- -- -- -- -- 1
1510 Gehman Road
Square Footage of Expiring Leases............ -- -- -- -- -- 152,625
Percentage of Total Leased Square Feet....... -- -- -- -- -- 100.0%
Final Annualized 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 Annualized 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 Annualized Base Rent Under
Expiring Leases(2).......................... -- -- -- $332,847 -- $984,440
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- -- -- $19.75 -- $17.63
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- -- -- 33.8% -- 100.0%
Number of Leases Expiring.................... -- -- -- 1 -- 15
</TABLE>
66
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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>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- --------------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <<C> <C> <C> <C> <C> <C>
Two Greentree Centre
Square Footage of Expiring Leases............ -- 18,838 3,732 3,183 5,680 -- --
Percentage of Total Leased Square Feet....... -- 33.6% 6.7% 5.7% 10.1% -- --
Final Annualized Base Rent Under
Expiring Leases(2).......................... -- $283,350 $43,853 $50,928 $99,400 -- --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- $15.04 $11.75 $16.00 $17.50 -- --
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- 30.0% 4.7% 5.4% 10.5% -- --
Number of Leases Expiring.................... -- 6 2 1 1 -- --
Three Greentree Centre
Square Footage of Expiring Leases............ -- 16,625 -- -- 13,150 27,481 --
Percentage of Total Leased Square Feet....... -- 25.0% -- -- 19.8% 41.3% --
Final Annualized Base Rent Under
Expiring Leases(2).......................... -- $297,834 -- -- $242,155 $470,854 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... -- $17.91 -- -- $18.41 $17.13 --
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... -- 25.2% -- -- 20.5% 39.9% --
Number of Leases Expiring.................... -- 2 -- -- 2 3 --
CAMDEN COUNTY, NJ
457 Haddonfield Road
Square Footage of Expiring Leases............ 2,998 11,521 -- 7,233 5,798 12,271 8,912
Percentage of Total Leased Square Feet....... 3.2% 12.1% -- 7.6% 6.1% 12.9% 9.4%
Final Annualized Base Rent Under
Expiring Leases(2).......................... $57,112 $184,682 -- $105,819 $102,032 $249,994 $169,328
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $19.05 $16.03 -- $14.63 $17.60 $20.37 $19.00
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 3.4% 11.1% -- 6.4% 6.1% 15.0% 10.2%
Number of Leases Expiring.................... 1 1 -- 1 2 4 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 Annualized 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 Annualized 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............ 7,200 27,794 3,842 18,740 -- 12,239 --
Percentage of Total Leased Square Feet....... 9.8% 37.9% 5.2% 25.6% -- 16.7% --
Final Annualized Base Rent Under
Expiring Leases(2).......................... $99,650 $390,483 $58,175 $286,838 -- $199,205 --
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $13.84 $14.05 $15.14 $15.31 -- $16.28 --
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 9.1% 35.7% 5.3% 26.2% -- 18.2% --
Number of Leases Expiring.................... 5 22 5 11 -- 2 --
<CAPTION>
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 Annualized Base Rent Under
Expiring Leases(2).......................... $99,845 -- $365,564 -- -- $942,940
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $19.00 -- $18.86 -- -- $16.82
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 10.6% -- 38.8% -- -- 100.0%
Number of Leases Expiring.................... 3 -- 2 -- -- 15
Three Greentree Centre
Square Footage of Expiring Leases............ 9,226 -- -- -- -- 66,482
Percentage of Total Leased Square Feet....... 13.9% -- -- -- -- 100.0%
Final Annualized Base Rent Under
Expiring Leases(2).......................... $170,681 -- -- -- -- $1,181,524
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $18.50 -- -- -- -- $17.77
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 14.4% -- -- -- -- 100.0%
Number of Leases Expiring.................... 1 -- -- -- -- 8
CAMDEN COUNTY, NJ
457 Haddonfield Road
Square Footage of Expiring Leases............ 9,030 -- -- -- 37,515 95,278
Percentage of Total Leased Square Feet....... 9.3% -- -- -- 39.4% 100.0%
Final Annualized Base Rent Under
Expiring Leases(2).......................... $180,600 -- -- -- $612,245 $1,661,811
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $20.00 -- -- -- $16.32 $17.44
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 10.9% -- -- -- 36.9% 100.0%
Number of Leases Expiring.................... 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 Annualized 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 Annualized 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 -- -- -- -- 73,339
Percentage of Total Leased Square Feet....... 4.8% -- -- -- -- 100.0%
Final Annualized Base Rent Under
Expiring Leases(2).......................... $59,908 -- -- -- -- $1,094,258
Final Annual Base Rent per Square Foot
Under Expiring Leases(3).................... $17.00 -- -- -- -- $14.92
Percentage of Total Final Annualized Base
Rent Represented by Expiring Leases......... 5.5% -- -- -- -- 100.0%
Number of Leases Expiring.................... 1 -- -- -- -- 46
</TABLE>
67
<PAGE> 74
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- --------------------------------------------- -------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 THEREAFTER TOTAL
- --------------------------------------------- ---------- -------- -------- ---------- ---------- -----------
<S> <<C> <C> <C> <C> <C> <C>
PORTFOLIO TOTALS
Square Footage of Expiring Leases........... 60,534 110,940 100,621 295,094 72,245 223,800 13,429
Percentage of Total Leased Square Feet...... 4.8% 8.8% 8.0% 23.4% 5.7% 17.7% 1.1%
Total Annualized Base Rent Under
Expiring Leases(2)........................ $700,218 $1,635,650 $951,841 $2,491,236 $1,020,817 $3,177,877 $232,566
Total Annualized Base Rent per Square Feet
Under Expiring Leases(3).................. $11.57 $14.74 $9.46 $8.44 $14.13 $14.20 $17.32
Percentage of Total Final Annualized Base
Rate Represented by Expiring Leases....... 4.6% 10.6% 6.2% 16.2% 6.6% 20.7% 1.5%
Number of Leases Expiring................... 18 41 19 29 12 21 2
<CAPTION>
PORTFOLIO TOTALS
Square Footage of Expiring Leases........... 104,777 -- 19,387 145,449 116,719 1,262,995
Percentage of Total Leased Square Feet...... 8.3% -- 1.5% 11.5% 9.2% 100.0%
Total Annualized Base Rent Under
Expiring Leases(2)........................ $1,274,927 -- $365,564 $1,942,732 $1,580,118 $15,373,546
Total Annualized Base Rent per Square Feet
Under Expiring Leases(3).................. $12.17 -- $18.86 $13.36 $13.54 $12.17
Percentage of Total Final Annualized Base
Rate Represented by Expiring Leases....... 8.3% -- 2.4% 12.6% 10.3% 100.0%
Number of Leases Expiring................... 8 -- 2 6 2 160
</TABLE>
- ---------------
(1) Represents lease expirations from August 31, 1996 to December 31, 1996.
(2) Represents annual base rent for the final annual period in accordance with
lease terms.
(3) Calculated as Final Annualized Base Rent under expiring leases divided by
rentable square feet subject to such leases.
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 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
eight-month period ended August 31, 1996 are not necessarily indicative of the
results that may be expected for the full fiscal year.
<TABLE>
<CAPTION>
JANUARY 1 TO TOTAL/WEIGHTED
1993 1994 1995 AUGUST 31, 1996 AVERAGE
-------- -------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C>
NEW TENANTS(1)(2)
Number of Leases............. 21 8 31 14 74
Square feet of re-tenanted
space...................... 91,590 52,312(2) 168,618 150,061 462,581
TI per square foot........... $ 7.01 $ 22.72(2) $ 4.26 $ 3.33 $ 6.59
LC per square foot........... $ 2.87 $ 2.67 $ 2.19 $ 1.21 $ 2.06
-------- -------- -------- --------------- --------------
Total TI and LC per
square foot............. $ 9.88 $ 25.39(2) $ 6.45 $ 4.54 $ 8.65
======== ======== ======== =========== ===========
RENEWAL/EXPANSION LEASES(1)
Number of Leases............. 24 29 32 21 106
Square feet of
Renewals/Expansions........ 67,634 134,059 308,558 158,395 668,646
TI per square foot........... $ 3.53 $ 4.44 $ 4.88 $ 3.26 $ 4.27
LC per square foot........... $ 0.70 $ 1.94 $ 0.79 $ 1.23 $ 1.11
-------- -------- -------- --------------- --------------
Total TI and LC per
square foot............. $ 4.23 $ 6.38 $ 5.67 $ 4.49 $ 5.38
======== ======== ======== =========== ===========
TOTAL NEW TENANTS AND
RENEWAL/EXPANSION
LEASES(1)(2)
Number of Leases............. 45 37 63 35 180
Square feet.................. 159,224 186,371 477,176 308,456 1,131,227
TI per square foot........... $ 5.54 $ 9.57 $ 4.66 $ 3.30 $ 5.22
LC per square foot........... $ 1.95 $ 2.15 $ 1.28 $ 1.22 $ 1.53
-------- -------- -------- --------------- --------------
Total TI and LC per
square foot............. $ 7.49 $ 11.72 $ 5.94 $ 4.52 $ 6.75
======== ======== ======== =========== ===========
</TABLE>
- ---------------
(1) Includes TI and LC costs relating to the Company's 23 office Properties
only and excludes its one industrial property.
(2) Represents costs associated with conversion of approximately 44,000 net
rentable square feet of warehouse/laboratory space to office space.
68
<PAGE> 75
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 Company's 23 office Properties.
<TABLE>
<CAPTION>
JANUARY 1 TO
1993 1994 1995 AUGUST 31, 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 square foot.... $ -- $ 0.04 $ 0.08 $ 0.12
Annual Weighted Average per square foot
(1993 to August 31, 1996)......................................................... $ 0.07
</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) is excluded.
POTENTIAL REVENUE INCREASE AT REPLACEMENT COST RENTS
The Company believes that the SSI/TNC 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 Reports. 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
(approximately 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).
69
<PAGE> 76
HISTORICAL SQUARE FEET UNDER CONSTRUCTION
PHILADELPHIA MSA
[BAR GRAPH]
HISTORICAL OCCUPANCY
The table below sets forth the average occupancy rates, based on square
feet leased, of the Properties at the indicated dates:
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE RENTABLE LEASED AT
DATE SQUARE FEET(1) PERIOD END(2)
---------------------------------------------- ------------------ -------------
<S> <C> <C>
August 31, 1996............................... 1,333,793 94.7%
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 Properties 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.
70
<PAGE> 77
OCCUPANCY AND RENTAL RATES -- PROPERTY BY PROPERTY
The following table sets forth the occupancy rates and average annual
effective rental rate per leased square foot for each of the Properties during
the periods specified.
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- AUGUST 31,
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 $ 13.25
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 $ 13.53
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% 72%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1)............................. $ 14.91 $ 15.18 $ 14.75 $ 14.74 $ 14.58 $ 15.52
Total Annual Rental Revenue (2)... $ 416,000 $ 517,000 $ 646,000 $ 669,000 $ 649,000
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% 83%
Average Annual Effective Rental
Rate Per Leased Square Foot
(1)............................. $ 8.30 $ 10.13 $ 9.42 $ 9.60 $ 8.46 $ 7.23
Total Annual Rental Revenue (2)... $ 314,000 $ 356,000 $ 377,000 $ 419,000 $ 360,000
</TABLE>
71
<PAGE> 78
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- AUGUST 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 $ 17.23
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 $ 17.88
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
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 $ 12.39
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 $ 9.05
Total Annual Rental Revenue (2)... $ 315,000 $ 369,000 $ 374,000 $ 394,000 $ 340,000
</TABLE>
72
<PAGE> 79
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- AUGUST 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 $ 6.17
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 $ 16.52
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 $ 15.55
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 $ 16.40
Total Annual Rental Revenue (2)... $1,226,000 $1,194,000 $1,234,000 $ 957,000 $ 942,000
CAMDEN COUNTY, NJ
457 HADDONFIELD ROAD (LIBERTYVIEW)
Percentage Leased at Period End
(4)............................. -- -- -- -- 63% 78%
Average Annual Effective Rental
Rate Per Leased Square Foot
(4)............................. -- -- -- -- -- $ 18.62
Total Annual Rental Revenue (4)... -- -- -- -- --
OTHER MARKETS
168 FRANKLIN CORNER ROAD,
LAWRENCEVILLE, NJ
Percentage Leased at Period End
(5)............................. -- -- -- -- 54% 54%
Average Annual Effective Rental
Rate Per Leased Square Foot
(5)............................. -- -- -- -- $ 15.95 $ 15.55
Total Annual Rental Revenue (5)... -- -- -- -- $ 23,000
</TABLE>
73
<PAGE> 80
<TABLE>
<CAPTION>
AS OF AND
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- AUGUST 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 $ 14.32
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 eight-month period
ended August 31, 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 August 31, 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 August 31, 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 August 31, 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 Properties 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.
OFFICE SUBMARKETS AND PROPERTY INFORMATION
The Company owns and operates 24 Properties containing an aggregate of
approximately 1.3 million net rentable square feet. Twenty-three 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 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.
74
<PAGE> 81
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 August 31, 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 August 31, 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 expires 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 August 31, 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 August 31, 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 expiring in March 2006. There
are no existing leases that expire in 1996 or 1997.
KEITH VALLEY BUSINESS CENTER
Keith Valley Business Center contains office and office/flex 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 August 31, 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 August 31, 1996 excluding tenant utilities was
$13.25 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 expiring
in April 2001. The other lessee (of 12,845 net rentable square feet) at
this Property is Pioneer Technologies, under a lease expiring in October
2000. According to C&W, as of June 30, 1996, the competition for 500
Enterprise Road is the Fort Washington/Willow Grove office/flex submarket,
which consists of 1.7 million square feet and was 8.6%
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vacant. This vacancy rate compares favorably to the 10.6% overall vacancy
rate for flex space in the Market.
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 August 31, 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 August 31, 1996, excluding tenant utilities, is
$13.53 per leased square foot. Reed Technology is a wholly-owned subsidiary
of Reed Elsevier, and the lease expires in July 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 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 expiring 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 August 31, 1996, this Property was 72% leased to nine
tenants at an average annualized existing rental rate of $11.60 per square
foot. After factoring in 1996 projected operating expense recoveries, the
average annualized existing rental rate at this Property as of August 31,
1996
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excluding tenant utilities was $15.52 per leased square foot. The primary
tenant is First American Real Estate, which occupies 10,086 square feet
under a lease expiring 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 August 31, 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 August 31,
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 expiring 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 August 31, 1996, this Property was 82.7% leased to four
tenants at an average existing base rent of $7.23 per square foot. The
primary tenant is Maris Equipment, which occupies 21,580 square feet under
a lease expiring in April 1999.
BLUE BELL/PLYMOUTH MEETING/FORT WASHINGTON
The Company owns four Properties in the Blue Bell/Plymouth Meeting/Fort
Washington submarket. 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 August 31, 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 feet
while existing tenants in Meetinghouse were paying $15.45 to $18.60 per square
foot as of August 31, 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 August 31, 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 59% of the aggregate net rentable square
feet at the Property) at an existing
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annualized rental rate of $13.50 per square foot under a lease which
expires 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 expiring in October
1999. After factoring in 1996 projected operating expense recoveries, the
annual average existing rental rate for this Property as of August 31, 1996
excluding tenant utilities was $17.23 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 August 31, 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 expiring in
July 2001 at a gross average annualized existing 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
August 31, 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 August 31, 1996, this Property was 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 expiring 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 in this Property as of August 31, 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 August 31, 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 expiring 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 in this Property as of August 31, 1996 excluding tenant
utilities was $17.88 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
16 Campus Boulevard
16 Campus Boulevard is a three story office building completed in
1990. This Property contains 65,463 rentable square feet and is situated on
14.6 acres. This Property is constructed of structural steel framing with a
brick exterior. As of August 31, 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, New England Mutual Life, occupies 34,294 net
rentable square feet under a lease expiring 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 August 31, 1996
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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 expires 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. There are no existing leases
that expire in 1996. Aggregate square footage of leases expiring in 1997
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 August 31, 1996 excluding
tenant utilities was $18.62 per leased square foot.
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 full
service to $24.00 plus electricity. On a gross basis, excluding tenant
utilities, existing tenants in 16 and 18 Campus Boulevard were paying from
$11.34 to $16.00 and from $16.50 to $17.25, respectively, per leased square foot
plus electricity as of August 31, 1996.
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 the Lehigh and
Northampton submarket, certain of the Properties compete in the industrial/flex
market sector. According to C&W, throughout this market sector there were an
estimated 19.1 million net rentable square feet of industrial space located in
12 business parks as of June 30, 1996. As of June 30, 1996, the vacancy in this
market sector was 9.9%. Incorporated with this statistic are an estimated 1.7
million square feet of flex space. As of June 30, 1996, the vacancy for flex
space only was 14.2%.
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 a user and a life insurance company. The Company's three Iron
Run buildings aggregate 126,305 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 August 31, 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 which expire as
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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 August 31, 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 which expires in July 2001. After
factoring in 1996 projected operating expense recoveries, the annual
existing rental rate for this Property as of August 31, 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 range between $8.75 to $13.50 per square foot on a
net basis.
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 August 1, 1996, this Property was 100% leased
to Corning Packaging under a lease expiring in February 1999 at an average
annual rental rate of $7.15 per leased square foot.
According to C&W, the Lehigh Valley flex market consists of 1.7 million
square feet which, as of June 30, 1996, had an overall vacancy of 14.2%. C&W
identified seven flex complexes aggregating 629,000 net rentable square feet
that are directly competitive with the Properties within this submarket. The
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 properties
ranged from $3.75 to $10.50 per 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 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 August 31, 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 expiring in August
1999 at an existing rate of $4.00
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per net rentable square foot. Ford Electronics occupies 53,900 square feet
utilized as design space under a lease expiring in June 1998 at an existing
rate of $6.05 per net rentable square foot.
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 Properties 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 August 31, 1996, this Property was 100% occupied
to approximately 15 tenants at an average annualized base rent per leased
square foot of $16.52 full service. The largest tenant in this Property is
American Executive Centers, which occupies 16,853 square feet under a lease
expiring in January, 2006. Aggregate square footage of leases expiring in
1996, 1997 and 1998 represent 6%, 25% 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 August 31, 1996,
this Property was 100% leased to 11 tenants at an average annualized base
rent per lease square foot of $15.55 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 expiring in November 2005.
Aggregate square footage of leases expiring 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 August 31, 1996, this Property was 96% leased to
seven tenants at an average annualized base rent per lease square foot of
$16.40 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, expiring in May 2001. Aggregate square
footage of leases expiring in 1996, 1997 and 1998 represent 0%, 25% and 0%,
respectively, of this Property's total net rentable square feet.
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
full service.
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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. The vacancy rate for Class A space was 9.0%. While there
has been negative absorption in this submarket in the 18-month period ended June
30, 1996, in the three-month period ended June 30, 1996, according to C&W,
absorption has been a positive 112,572 square feet. In addition, during the
18-month period ended June 30, 1996, leasing activity 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. Features
include a two story marble lobby, working balconies on the upper floors,
permanent neon lighting and dramatic views of Center City Philadelphia. As
of August 31, 1996, this Property was 78% leased to twelve tenants at an
average annualized existing rental rate of $18.62 per square foot.
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 August 31, 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 1982 and contains 73,339 net rentable square feet.
As of August 31, 1996 this Property was 100% leased to 46 tenants at an
average annualized existing rental rate of $14.32 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 expiring 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 August 31, 1996, has completely released this space to four tenants
at an annualized existing rental rate of $14.84 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 building competes 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 Business Park in
Exton, Pennsylvania (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's business, assets or results of operations. 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 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 ceiling of
$2,018,000. The term of SSI's indemnity agreement expires on August 22, 2001.
Were SSI unable to fulfill its obligations under its indemnity agreement or were
the Operating Partnership required to undertake remedial action after the
expiration of the five-year term of the agreement, no assurances can be given
that the costs associated with any remediation would not be material to the
financial condition and results of operations of the Operating Partnership and
the Company. 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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<PAGE> 90
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.
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. More than 95.3% of the
aggregate annualized base rent for as of August 31, 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 August 31, 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 LINE OF CREDIT
Mortgage Indebtedness
The following table sets forth the Company's mortgage indebtedness that
will remain outstanding after the consummation of the Offering and the
application of the use of proceeds therefrom. In addition to
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<PAGE> 91
mortgage indebtedness listed below, the Line of Credit is expected to be secured
by 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 JUNE 30, 1996 JUNE 30, 1996 SERVICE(1) DATE PROVISIONS
- -------------------------------- ----------------- ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Horsham Business Center
Horsham, PA
650 Dresher Road(2)........... $ 2,894 8.25% $ 237(1) 8/1998 None
After
2/1/97
Oaklands Corporate Center
Exton, PA
486 Thomas Jones Way(3)....... 5,162 8.00% 638 2/1998 None
468 Creamery Way(3)........... None
Whitelands Business Park
Exton, PA
110 Summit Drive(4)........... 1,604 9.25% 220 6/1997 None
Iron Run Industrial Park
Allentown, PA
7310 Tilghman Street.......... 2,539 9.25% 274 3/2000 (8)
6375 Snowdrift Road........... 1,887 8.00% 230 2/1998 None
Greentree Centre
Marlton, New Jersey
One Greentree Centre(5)....... 6,165 9.00% 628 4/2001 (9)
Two Greentree Centre(5).......
Three Greentree Centre(5).....
LibertyView
Cherry Hill, NJ
457 Haddonfield Road(6)(7).... 8,480 8.00 % 339 1/1999 (10)
896 8.00 % 0 12/1997
None
Twin Forks Office Park
Raleigh, NC
5910-6090 Six Forks(5)........ $ 2,713 9.00 % $ 276 4/2001 (11)
------
TOTAL MORTGAGE
INDEBTEDNESS.................. $ 32,340 $ 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 August 31, 1996 have been assumed to remain constant for
the balance of 1996.
(2) On July 31, 1996, this loan was refinanced paying the former mortgage
lender $2,400,000 in full satisfaction thereof with partial proceeds of a
new loan, with GMAC in the amount of $2,500,000. 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%.
(5) These properties secure two loans payable to a single lender. The interest
rate is set at 9.0% through October 15, 1996 and 9.31% for the period from
October 16, 1996 through April 15, 1998. After April 15, 1998, the loan
rate is reset based upon the mortgage lender's evaluation of such factors
as
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<PAGE> 92
financial performance and projected risk of the Properties. 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 $8,480 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.
(7) The $896 of debt was incurred as a result of the acquisition of the
Property on July 19, 1996. The note payable totals $1.0 million, which is
due in December 1997 with no interest payable. 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.
(8) Four percent during year ending December 31, 1996. The prepayment penalty
is reduced by 1% for each subsequent year. No prepayment penalty is payable
after December 31, 1999.
(9) 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.
(10) One percent of the original principal amount of the loan (originally
$8,480,000).
(11) 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.
Line of Credit
The Company expects to obtain a commitment for the Line of Credit. The
Company believes that the Line of Credit will assist the Company in its
executions of targeted acquisition opportunities and expand its market presence.
There can be no assurance that the Company will obtain the Line of Credit.
OPTION PROPERTIES: GENERAL
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 it to acquire, in its discretion, the four Option
Properties at any time during the two-year period ending August 22, 1998
(subject to two extension of one year each). The Operating Partnership may not
exercise its option for less than all of the Option Properties. Although the
parties have agreed upon a methodology for establishing the purchase price
payable by the Operating Partnership upon exercise of its option (based on a
capitalization at 11% of the net operating income of the applicable Option
Property), the parties have not agreed upon the purchase price as of the date
hereof. The purchase price payable upon exercise of the option would be payable
in Units, with each Unit deemed to have a value of $16.50. Because the parties
have not agreed upon the purchase price payable upon exercise of the option,
there can be no assurance that the Company will be able to exercise the option
even if it desired to do so. In addition, 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.
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<PAGE> 93
The following table summarizes certain information with respect to the
Option Properties:
<TABLE>
<CAPTION>
TOTAL
TOTAL BASE RENT
BASE RENT PLUS EXPENSE
PERCENTAGE FOR THE TWELVE RECOVERIES PER
NET LEASED AS OF MONTHS ENDED LEASED SQUARE
YEAR RENTABLE AUGUST 31, JUNE 30, 1996 FOOT
PROPERTY/LOCATION BUILT SQUARE FEET 1996(1) (000'S)(2) JUNE 30, 1996(3)
- -------------------------------------------------- ----- ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
HORSHAM BUSINESS CENTER HORSHAM, PA
255 Business Center Drive....................... 1987 50,550 96.6% $ 492 $14.23
355 Business Center Drive....................... 1987 26,367 87.9% 137 7.50
455 Business Center Drive....................... 1988 51,505 97.0% 396 11.24
555 Business Center Drive....................... 1988 30,122 98.7% 310 14.35
-------- ----------
158,814 $1,335
======= ====
<CAPTION>
TENANTS LEASING 10% OR MORE
OF RENTABLE SQUARE FOOTAGE PER
PROPERTY AS OF AUGUST 31,
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 August 31, 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) Amount reflected includes Total Base Rent for the twelve months ended June
30, 1996 plus tenant reimbursements for the twelve-months ended June 30,
1996, divided by the net rentable square feet leased.
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<PAGE> 94
AGGREGATE TAX BASIS -- PROPERTY BY PROPERTY
The following table sets forth the aggregate tax basis of the Properties as
of December 31, 1995 for federal income tax purposes:
<TABLE>
<CAPTION>
31.5
AGGREGATE 40 YEAR 39 YEAR YEAR 19 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... 2,788 213 -- -- 413 1,701 -- -- 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> 95
C&W REPORT
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
explained below. Currently, the Company holds fee title to one of the Properties
and holds interests in two partnerships that, in turn, either own Properties in
fee or hold interests in partnerships that own Properties in fee: the Operating
Partnership and BRP.
OPERATING PARTNERSHIP
The Operating Partnership owns fee title to six of the Properties and owns
partnership interests in partnerships that own 17 Properties. 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
acquisitions; (iii) enable the
89
<PAGE> 96
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. Following the Offering, the Company will hold 3,737,007 GP Units
and will be issued an additional 85,400 GP Units automatically in August 1997,
and the limited partners of the Operating Partnership will hold 540,159 Class A
Units (giving effect to the issuance of 44,322 Units in exchange for the
Residual Interests). Each of the Class A Units will be convertible into a 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
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 Properties directly and through its interests in
general and limited partnerships, as summarized below.
Fee title to the Property at 457 Haddonfield Road 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 168 Franklin Corner Road is held by the
Operating Partnership. 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. The
Operating Partnership will be obligated to acquire the residual 1% cash flow and
profits interest and 11% capital interest by September 1999. 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. 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 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.
90
<PAGE> 97
MANAGEMENT COMPANY
The Company conducts its real estate management services business through
the Management Company. The Management Company manages all of the 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 August 31,
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 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. 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 investment
objectives of the Company are to realize and maximize cash flow and to increase
shareholder value by: (i) optimizing cash flow from its 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."
After consummation of the Offering, all but one of the Properties will be
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 this 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 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.
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, including for the purpose of
exercising control over such entities. The Company may
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<PAGE> 98
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 its 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.
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 completion of the Offering, 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 shares of Common Shares of the Company
plus total consolidated debt) of the Company will be approximately 25.0% (23.1%
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
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
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financings or retention of cash flow (subject to provisions in the Code
concerning taxability of undistributed REIT income), or a combination of these
methods. The Company presently anticipates that any additional borrowing would
be made through the Operating Partnership, although the Company might incur
indebtedness, the proceeds of which would be reloaned to the Operating
Partnership. 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, 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 exchange 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. See
"Description of Shares of Beneficial Interest -- 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
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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.................. 39 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................... 46 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. 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 CEO 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, a real estate development firm. Mr.
Sweeney was employed by The Linpro Company (a predecessor of LCOR, Incorporated
("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 and aggregating 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 Chairman of the Board on October 11, 1994. Mr. Carboni served as
Chairman of the Board 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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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 Independent 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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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 distributions on
Shares; (ii) issue Shares; (iii) recommend to shareholders any action that
requires shareholder approval; (iv) amend the Bylaws of the Company; and (v)
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 in person at each
meeting of the Board of Trustees, $500 for each telephonic meeting of the Board
of Trustees and $500 for each committee meeting attended.
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid to the Company's President and Chief Executive Officer for the
years ended December 31, 1995, 1994 and 1993. No information is presented in the
table for the Company's other executive officers, Messrs. Nichols, Belcher or
Gallagher, because none of them became employees of the Company until completion
of the SSI/TNC Transaction on August 22, 1996. The terms of their compensation
are summarized below. See "-- Employment Agreements."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
SALARY($) 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.
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 per share of $19.50. 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.
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
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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.
The Company intends to file 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
$19.50.
STOCK OPTION HELD BY CERTAIN EXECUTIVE OFFICER AT DECEMBER 31, 1995
The following table sets forth certain information regarding options for
the purchase of Common Shares that were exercised and/or held by the Trust's
President and Chief Executive Officer at December 31, 1995. No other executive
officer of the Trust held options for the purchase of Common Shares at any time
during 1995.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED
DECEMBER 31, 1995 AND 1995 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FY-END(#) FY-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ----------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Gerard H. Sweeney N/A N/A 40,000/6,666 $30,000(1)/$30,000(2)
President and Chief
Executive Officer
</TABLE>
- ---------------
(1) Amount reflects the market value of 6,666 Common Shares 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.
(2) Amount reflects the market value of 6,666 Common Shares 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.
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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."
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 the
Offering will constitute a Qualified Offering, the Limited Partners will have
the right to exercise the foregoing redemption right at any time after the
Offering. See "Operating Partnership Agreement -- Exchange Rights."
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 prime. 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
provide for tenant improvements at one of the Properties (650 Dresher Road).
This loan bears interest at prime. As of August 31, 1996, an aggregate of
$539,000, excluding accrued interest, is owed to SSI by the Operating
Partnership, all of which, by its terms, shall become due and payable upon
completion of a Qualified Offering. Accordingly, all such indebtedness will be
repaid upon consummation of the Offering with net proceeds therefrom. See "The
Company -- The SSI/TNC Transaction" and "Use of Proceeds."
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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 $63.7 million as of
August 31, 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 $13.6 million of
such mortgage debt will remain outstanding, of which $8.6 million constitutes
recourse debt. Accordingly, the Company has agreed to 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 497,896 Units issued to them. "See
Risk Factors -- Conflicts of Interest -- Failure to Enforce Terms of Acquisition
Agreements."
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 a Qualified Offering and, accordingly, 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. However,
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). Although the parties have agreed upon the methodology for
establishing the purchase price payable by the Operating Partnership upon
exercise of its option, the parties have not agreed upon the purchase price as
of the date hereof. 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: General."
SSI RIGHT OF FIRST REFUSAL ON ADDITIONAL FINANCINGS
The Partnership Agreement provides that any time the Operating Partnership
proposes to issue any additional partnership interests for cash, it shall first
offer SSI the right to acquire such interests on terms no less favorable to SSI
than those on which the Operating Partnership proposes to issue such additional
interests to other persons. The foregoing right of first refusal is inapplicable
to the Offering and expires on August 21, 2001.
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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 through
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 $2.0 million. The term of the SSI indemnity agreement runs
for the five-year period ending 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
connection with the executive of 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, Inc. ("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. Legg Mason is the parent of
Legg Mason Real Estate Services, 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 making the
Osborne Loan and 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 is 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. The Osborne Loan matures
on the third anniversary of the Investment Date. Pursuant to the terms of the
Osborne Loan, upon completion of the Offering, the outstanding balance thereof
(which was approximately $754,000 as of August 31, 1996) will become due and
payable and will be repaid through the issuance by the Company of additional
Paired Units. The actual number of Paired Units so issued will equal the
outstanding balance of the Osborne Loan on the date of its repayment divided by
$16.89. 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
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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
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 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 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, Incorporated 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 Incorporated 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 may be exchanged)
by each Trustee, 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 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>
Safeguard Scientifics Inc. (3)....................... 617,726 11.6%
The Nichols Company.................................. 363,289 6.8
Anthony A. Nichols, Sr. (4).......................... 436,835 8.1
Joseph L. Carboni (5)................................ 166 *
Richard M. Osborne (6)............................... 337,066 6.7
Gerard H. Sweeney (7)................................ 146,933 2.9
Warren V. Musser (8)................................. 0 *
Walter D'Alessio (9)................................. 0 *
Charles P. Pizzi (10)................................ 0 *
John P. Gallagher (11)............................... 40,000 *
Brian F. Belcher (12)................................ 40,000 *
All Trustees and Executive Officers
as a Group (9 persons)............................. 1,001,001 16.3%
------ ------
</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 held by each named person or entity are converted
into Common Shares. The total number of Common Shares outstanding used in
calculating the percentage assumes that none of the Units held by other
named persons or entities is converted into Common Shares.
(3) The business address of SSI is 800 The Safeguard Building, 435 Devon Park
Drive, Wayne, Pennsylvania 19087. Includes 241,560 Common Shares and
241,560 Common Shares issuable upon exercise of warrants and 134,606 Units,
all of which are held of record by wholly-owned subsidiaries of SSI. Does
not include Units held by TNC. SSI owns a 40% interest in TNC.
(4) Includes 16,773 Common Shares and 56,773 Common Shares issuable upon
exercise of warrants and 363,289 Units owned of record by TNC. All of such
16,773 Common Shares and warrants to purchase an additional 16,733 Common
Shares were acquired by Mr. Nichols from SSI on October , 1996.
(5) The business address of Mr. Carboni is Two Greentree Centre, Marlton, New
Jersey 08053.
(6) The business address of Mr. Osborne is 7001 Center Street, Mentor, Ohio
44060. Consists of: (i) 179,600 Common Shares owned by The Richard M.
Osborne Trust (the "RMO Trust"), of which Mr. Osborne is the sole trustee;
and (ii) 78,733 Common Shares and warrants exercisable for 78,733 Common
Shares included within Paired Units held by the RMO Fund (including Paired
Units that will be issued in repayment of the Osborne Loan immediately
following consummation of 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.
(7) Includes 46,666 Common Shares issuable upon the exercise of options and
100,000 Common Shares issuable upon the exercise of warrants.
(8) The business address of Mr. Musser is 800 The Safeguard Building, 435 Devon
Park Drive, Wayne, Pennsylvania 19087.
(9) The business address of Mr. D'Alessio is 1735 Market Street, Philadelphia,
Pennsylvania 19103.
(10) The business address of Mr. Pizzi is 1234 Market Street, Philadelphia,
Pennsylvania 19107.
(11) Consists of 40,000 Common Shares issuable upon the exercise of warrants.
(12) Consists of 40,000 Common Shares issuable upon the exercise of warrants.
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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 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 completion of the Offering, 4,955,800 Common Shares will be issued and
outstanding (5,555,700 Common Shares if the Underwriters' over-allotment option
is exercised in full), including 44,615 Common Shares that will be issued in
repayment of the Osborne Loan and excluding Common Shares that may be issued
upon the conversion of Units. No Preferred Shares will be issued or outstanding.
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 Declaration of Trust and 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 in the defense of a proceeding to which he
has been made a party in 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 mandatory provisions
of 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, 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 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 the holders of a majority of the outstanding Common Shares can elect all of
the Trustees then standing for election. Subject to 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 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
such preferential rights as may be granted by the Board of Trustees of the
Company in connection with the future issuance, if
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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 fix 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.
REVERSE SPLIT; TREATMENT OF FRACTIONAL SHARES
Immediately prior to consummation 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.
The Reverse Split will result in certain 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 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).
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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 Declaration of Trust
restricts any holder (other than SSI and certain entities affiliated with it)
from owning, either directly or indirectly under applicable attribution rules of
the Code, more than 9.8% 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.
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 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 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 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
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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 an
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 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 Declaration of Trust exempts the RMO Trust, the RMO Fund, Richard M.
Osborne, SSI and certain of their affiliates from the Ownership Limit and
creates separate ownership limitations for each of these parties. Although the
separate ownership limitations contained in the Declaration of Trust for the RMO
Trust, the RMO Fund, Richard M. Osborne and certain affiliates is 33.33%, and is
35.25% for SSI and certain affiliates, each of Mr. Osborne and SSI has agreed,
on behalf of themselves and such affiliates to be subject to an ownership limit
of 9.8% and 14.75%, respectively.
All certificates representing Shares that are hereafter issued will bear a
legend referring to the restrictions and limitations described above.
The ownership provisions contained in the Declaration of Trust could have
the effect of discouraging transactions that may be beneficial to the
shareholders. Such ownership provisions will limit the amount of Shares which a
potential acquiror may beneficially own. Specifically, immediately following the
Offering, any such potential acquiror will be precluded from purchasing more
than 9.8% in value of the Shares. Such ownership limitation will discourage any
tender offer which may be attractive to the shareholders and will limit the
opportunity for shareholders to receive a premium for their Common Shares that
might otherwise exist if an investor were attempting to assemble a block of
shares in excess of 9.8% in value of the Shares, or to otherwise effect a change
in control of the Company.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Declaration of Trust and Bylaws, which were each amended and
restated on August 22, 1996. This summary does not purport to be complete and
reference is made to Maryland law and to the Company's Declaration of Trust and
Bylaws for complete information.
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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.
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 ten percent 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.
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.
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 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
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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 shares of 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 shares of 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. Immediately prior to
the consummation of the Offering, SSI, TNC, Gerard H. Sweeney and their
respective affiliates beneficially own more than ten percent of the Company's
voting shares and would, therefore, be subject to the business combination
provision of the MGCL. However, pursuant to the statute, the Board of Trustees
has exempted any business combinations involving them 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.
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.
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.
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.
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AMENDMENT TO THE DECLARATION OF TRUST
The Company's Declaration of Trust may be amended only by the affirmative
of the holders vote 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.
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 operations of the
Company by the Board of Trustees.
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 the 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 Maryland General Corporation Law ("MGCL") for
directors of Maryland corporations and (iii) permit the Company to provide such
other and further indemnification or
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payment or reimbursement of expenses as may be permitted by the MGCL for
directors of Maryland corporations.
The Partnership Agreement of the Operating Partnership 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 SEC, 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.
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 COMMON 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.
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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 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;
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(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;
(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
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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 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 will enable it to satisfy all of the income tests described above.
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 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 Operating 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. 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 dividends 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 dividends 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 dividends 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 distributive share of the
losses of the Operating Partnership (including the Operating Partnership's share
of
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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 has
received 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 Operating Partnership
Agreement and the Title Holding Partnership Agreements, 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 comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
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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 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
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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.
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
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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 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"
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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. Because the Company expects the Common
Shares to be widely held, this new rule should not result in UBTI to any
tax-exempt entity.
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 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.
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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 Common Shares disclosing the actual
owners of the Common 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 Common 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 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
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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, 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, 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 Common Shares (other than Excluded
Common Shares, as defined below). The term "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. Immediately following
the Offering and repayment of the Osborne Loan, an aggregate of 4,886,486 Common
Shares will be issued and outstanding (assuming no conversion of Class A Units
and no exercise of the Underwriters' over-allotment option) of which 1,053,562
will constitute Excluded Common Shares. Immediately following the Offering
540,159 Class A Units will be outstanding or issuable no later than September
1999. On the basis of the foregoing, approximately 12% of distributions made by
the Operating Partnership would be allocated to holders of Class A Units, as a
group, and the remaining amount would be distributed to the Company in respect
of its GP Units.
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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 a portion of
the net proceeds of the Offering 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 Partnership Agreement grants SSI a right of first refusal
to provide the Operating Partnership additional cash contributions. See "--Right
of First Refusal on Additional Financings."
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.
RIGHT OF FIRST REFUSAL ON ADDITIONAL FINANCINGS
The Partnership Agreement provides that any time the Operating Partnership
proposes to issue any additional partnership interests for cash, it shall first
offer SSI the right to acquire such interests on terms no less favorable to SSI
that those on which the Operating Partnership proposes to issue such additional
interests to other persons. The foregoing right of first refusal is inapplicable
to the Offering and future equity offerings in excess of certain amounts and
expires on August 22, 2001.
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 HOLDER
- --------- -----------
<S> <C>
134,606 SSI(1)
363,289 TNC
42,263 Other(2)
3,822,407 Company(3)
</TABLE>
- ---------------
(1) SSI owns 40% of the capital stock of TNC. The number of Units shown as owned
by SSI does not include any Units owned by TNC and as to which SSI has an
indirect interest.
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<PAGE> 132
(2) "Other" consists of 11 other persons who contributed interests in the
SSI/TNC Properties as part of the SSI/TNC Transaction.
(3) Includes 3,050,408 GP Units to be issued to the Company in exchange for its
contribution to the Operating Partnership of net proceeds from the Offering.
In addition, an additional 85,400 GP Units will be automatically issued to
the Company on August 23, 1997.
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 $13.6 million as of August 31,
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.
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.
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.
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<PAGE> 133
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 Class A Units issued to it and any Common Shares acquired by such
limited partner upon conversion of its Class A Units.
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.
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.
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<PAGE> 134
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.
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.
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<PAGE> 135
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.
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
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<PAGE> 136
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
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
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<PAGE> 137
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, there will be 4,955,800 Common Shares
issued and outstanding (5,555,800 Common Shares if the Underwriters'
over-allotment option is exercised in full), including 44,615 Common Shares that
will be issued in connection with the prepayment of the Osborne Loan. In
addition, 540,159 Common Shares will be reserved for issuance upon the
conversion of Units into Common Shares, and an additional 627,067 Common Shares
will be reserved for issuance upon exercise of outstanding options and warrants.
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." The 618,733 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 292,452 Common Shares outstanding prior to
the Offering as well as Common Shares issuable upon the conversion of Units and
44,615 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 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 Company has agreed not to sell, offer
to sell, grant any option for the sale of, or otherwise dispose of any Common
Shares or any securities convertible into or exchangeable or exercisable for
Common Shares until expiration of the Lock-up Period, except for the issuance of
Common Shares in connection with property acquisitions, the repayment of the
Osborne Loan, the exercise of outstanding options and warrants or the conversion
of Units, without the prior written consent of the Underwriters. SSI, TNC, the
Trustees and executive officers of the Company and certain of their respective
affiliates have agreed not to sell, offer to sell, grant any option for the sale
of, or otherwise 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 the Underwriters.
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<PAGE> 138
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 "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 which may be
issued upon the conversion of Units; and (iv) Common Shares issued to the RMO
Fund in connection with its investment in the Company in June 1996 or in
repayment of the Osborne Loan (collectively, "Registrable Securities"). The
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.
The Company intends to file 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>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Smith Barney Inc.....................................................
Legg Mason Wood Walker, Incorporated.................................
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 $ . per share under
the public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ . 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 Company has agreed not to sell, offer
to sell, grant any option for the sale of, or otherwise dispose of any Common
Shares or any securities convertible into or exchangeable or exercisable for
Common Shares until expiration of the Lock-up Period, except for the issuance of
Common Shares in connection with property acquisitions, the repayment of the
Osborne Loan, the exercise of outstanding options and warrants or the conversion
of Units, without the written consent of the Underwriters. SSI, TNC, and each of
the Trustees and executive officers of the Company and certain of their
respective affiliates have agreed that, they will not, without the prior written
consent of the Underwriters, sell, offer to sell, grant any option for, the sale
of, or otherwise dispose of any Units, Common Shares or any securities
convertible into, or exercisable or exchangeable for, Common Shares.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933.
133
<PAGE> 140
The Company has agreed to pay to Smith Barney Inc. and Legg Mason Wood
Walker, Incorporated an advisory fee equal to 0.75% 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.
In connection with the SSI/TNC Transaction, Legg Mason Wood Walker, Inc.,
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, a subsidiary of Legg Mason Wood
Walker, Inc.
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.
Pepper, Hamilton & Scheetz and Battle Fowler LLP will rely on Ballard Spahr
Andrews & Ingersoll 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.
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 of 1933, as amended (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
134
<PAGE> 141
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.
135
<PAGE> 142
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.
"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 August 31, 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 August 31, 1996 without giving effect to free rent or scheduled
rent increases that would be taken into account under generally accepted
accounting principles.
"Board of Trustees" means the Board of Trustees of the Company.
"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 eight 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.
"Closing" means the closing of the Offering.
"CPI" means the Consumer Price Index.
"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.
"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.
"Declaration of Trust" means the Declaration of Trust of the Company.
"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.
"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.
136
<PAGE> 143
"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.
"IRA" means individual retirement account.
"IRS" means the United States Internal Revenue Service.
"Limited Partners" means the limited partners of the Operating Partnership.
"Line of Credit" means the $80 million revolving line of credit for which
the Company expects to obtain a commitment.
"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.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland.
"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.
"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 seven other persons who contributed
interests in the 19 SSI/TNC Properties to the Operating Partnership as part of
the SSI/TNC Transaction.
"Ownership Limits" means the Company's Declaration of Trust provisions
prohibiting 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.
137
<PAGE> 144
"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 (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.
"Preferred Shares" means the preferred shares of beneficial interest, par
value $.01 per share, of the Company.
"Properties" means the 24 properties, either individually or in
combination, that are owned directly and indirectly by the Company.
"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).
"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.
"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 immediately prior to the consummation of
the Offering.
"RMO Fund" means Turkey Vulture Fund XIII, Ltd.
"RMO Trust" means the Richard M. Osborne Trust.
"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.
"Shares" means, collectively, Common Shares and Preferred Shares.
"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 $539,000, as of August 31, 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."
138
<PAGE> 145
"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 June 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.
"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.
"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.
139
<PAGE> 146
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 June 30, 1996..... F-4
- Pro Forma Condensed Consolidating Statements of Operations for the Year
Ended December 31, 1995, and the Six-Months Ended June 30, 1996........... F-5
- Notes and Management's Assumptions to Unaudited Pro Forma Condensed
Consolidating Financial Statements...................................... 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 June 30, 1996 (Unaudited)............................................. F-15
- Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 (audited) and for the Six-Months Ended June 30, 1996
(Unaudited)............................................................. F-16
- Consolidated Statements of Beneficiaries' Equity for the Years Ended
December 31, 1993, 1994 and 1995 (audited), and for the Six-Months Ended
June 30, 1996 and 1995 (Unaudited)...................................... F-17
- Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 (audited), and for the Six-Months Ended June 30, 1996
(Unaudited)............................................................. F-18
- Notes to Consolidated Financial Statements.............................. F-19
III. SSI/TNC PROPERTIES
- Report of Independent Public Accountants................................ F-32
- Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
June 30, 1995 and 1996 (Unaudited)...................................... F-33
- 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-34
- Combined Statements of Owners' Deficit for the Years Ended December 31,
1993, 1994 and 1995 (audited), and for the Six-Months Ended June 30, 1995
and 1996 (Unaudited).................................................... F-35
- 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-36
- Notes to Combined Financial Statements.................................. F-37
IV. LIBERTYVIEW BUILDING
- Report of Independent Public Accountants................................ F-43
- Statements of Revenue and Certain Expenses for the Year Ended December
31, 1995, and Six-Months Ended June 30, 1996 (Unaudited).................. F-44
- Notes to Financial Statements........................................... F-45
V. FINANCIAL STATEMENT SCHEDULE
- Schedule III -- Real Estate and Accumulated Depreciation -- December 31,
1995.................................................................... F-47
</TABLE>
F-1
<PAGE> 147
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following sets forth the pro forma condensed consolidating balance
sheet of Brandywine Realty Company as of June 30, 1996, and the pro forma
condensed consolidating statements of operations for the year ended December 31,
1995 and the six-month period ended June 30, 1996.
The unaudited pro forma condensed consolidating financial information is
presented as if the following transactions had been consummated on June 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 its
partnership interests in the Operating Partnership; (ii) the operating
partnership acquired the SSI/TNC Properties in connection with the SSI/TNC
transaction; (iii) the Company acquired the LibertyView Building directly and
(iv) 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 and the LibertyView
Building 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 as follows:
- The Company formed the Operating Partnership by contributing $3,937,000
of partnership interests in the SSI/TNC Properties in exchange for all of
the Class B Units (258,333 Units).
- The Operating Partnership acquired fee title to, and limited partnership
interests in, the SSI/TNC Properties, in exchange for 540,159 Class A
Units.
- SSI/TNC Properties have been reflected at the fair value upon acquisition
to the extent that such properties are being acquired by the Operating
Partnership in exchange for Class A Units.
- The Company's interest in the Operating Partnership has been determined
after giving effect to the expected issuance of an additional 44,322
Class A Units in the Operating Partnership in connection with the
acquisition of the Residual Interests in the Title Holdings Partnerships
because the Operating Partnership and Residual Interests holders have
agreed to the purchase and sale of these interests in September 1999.
Accordingly, these Units are included in the 540,159 Class A Units issued
to SSI, TNC and the other Owners in Note 1 to the pro forma financial
information. At a value of $16.50 per Class A Unit, the aggregate value
of the additional Class A Units to be issued for the Residual Interests
equals $731,000.
- The Company owns a 70% controlling general partnership interest in BRP as
disclosed in the Company's 1995 financial statements. The Operating
Partnership acquired the Company's interests in BRP in exchange for
618,733 Class C Units which will be valued at the Company's carryover
basis because the Company will continue to consolidate these assets. A
total of 533,333 Class C Units were issued to the Company on August 22,
1996, and 85,400 Class C Units are expected to be issued on August 23,
1997.
- The Company acquired the LibertyView Building and will retain 100% of the
ownership interests therein and therefore consolidate it at the Company
level.
- 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) to the RMO Fund in exchange for
$338,000. The balance of the investment of $992,000 by the RMO Fund was
made in the form of a loan. The loan was partially prepaid in the
aggregate amount of $238,000 as of August 23, 1996, whereby the Company
issued 14,135 Paired Units to the RMO Fund.
- The Operating Partnership will own 5% of the voting common stock and all
of the preferred stock of the Management Company and will be entitled to
receive approximately 95% of the economic benefits through such
ownership. The balance of the common stock will be owned by a partnership
comprised of the officers of the Company. The Management Company will be
responsible for managing, leasing
F-2
<PAGE> 148
and developing the Company's properties. The Management Company is
accounted for using the equity method of accounting.
- The Company will issue 4,000,000 Common Shares at $17.63 per share, the
last reported sales price of the Common Shares on the AMEX on October 9,
1996, and will use the net proceeds from the Offering to make a $50
million capital contribution to the Operating Partnership. The $754,000
loan from the RMO Fund will be satisfied by the Company by the issuance
of 44,615 Paired Units to the RMO Fund.
- The Company will contribute $50 million of net proceeds from the Offering
to the Operating Partnership in exchange for 3,050,408 general
partnership units. Following the Offering and the application of the net
proceeds therefrom, the Operating Partnership will repay $49,236,000 of
indebtedness secured by the Properties and $764,000 of loans made by SSI
to the Operating Partnership.
The pro forma condensed consolidating financial information is unaudited
and is not necessarily indicative of what the actual financial position would
have been at June 30, 1996, nor does it purport to represent the future
financial position and the results of operations of the Company.
F-3
<PAGE> 149
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996 (NOTES 1 AND 2)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BRANDYWINE
REALTY SSI/TNC
TRUST PROPERTIES PRO FORMA
HISTORICAL HISTORICAL PRO FORMA LIBERTYVIEW OFFERING PRO FORMA
CONSOLIDATED(A) COMBINED(B) ADJUSTMENTS SUBTOTAL PROPERTY(J) ADJUSTMENTS CONSOLIDATED
--------------- ----------- ----------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate
investments,
net......... $13,752 $55,992 $20,368(D)(E)(F)(G) $90,112 $ 10,696 $ $100,808
Cash and cash
equivalents... 1,643 655 4(C)(D) 2,302 (1,120) 13,608(K) 14,790
Escrowed
cash........ 629 513 -- 1,142 -- (472)(L) 670
Deferred
costs,
net......... 1,411 2,145 (1,773)(D)(E)(G) 1,783 100 600(M) 2,483
Other
assets...... 732 1,576 (555)(D)(G) 1,753 (300) -- 1,453
------- ------- ------- ------- ------- -------- --------
Total
assets... $18,167 $60,881 $18,044 $97,092 $ 9,376 $ 13,736 $120,204
======= ======= ======= ======= ======= ======== ========
LIABILITIES:
Mortgages and
notes
payable..... $ 9,870 $63,686 $ 162(D)(F)(I) $73,718 $ 9,376 $ (50,754)(N) $ 32,340
Other
liabilities... 725 1,764 493(G) 2,982 -- (329)(O) 2,653
------- ------- ------- ------- ------- -------- --------
Total
liabilities.. 10,595 65,450 655 76,700 9,376 (51,083) 34,993
------- ------- ------- ------- ------- -------- --------
Minority
interest...... -- -- 8,469(D)(G) 8,469 -- (7,453)(P) 1,016
------- ------- ------- ------- ------- -------- --------
Shareholders'
equity:
Common shares
of
beneficial
interest.... 6 -- 3(C) 9 -- 41(Q) 50
Additional
paid-in
capital..... 17,081 -- 3,732(C)(D)(E) 20,813 -- 72,000(R) 92,812
(G)(H)(I)
Share
warrants.... 42 -- 616(C)(I) 658 -- 232(S) 890
Accumulated
equity
(deficit)... (9,557) (4,569) 4,569(C)(H) (9,557 ) -- -- (9,557)
------- ------- ------- ------- ------- -------- --------
Total
shareholders'
equity... 7,572 (4,569) 8,920 11,923 -- 72,272 84,195
------- ------- ------- ------- ------- -------- --------
Total
liabilities
and
shareholders'
equity... $18,167 $60,881 $18,044 $97,092 $ 9,376 $ 13,736 $120,204
======= ======= ======= ======= ======= ======== ========
</TABLE>
The accompanying notes and management assumptions are an integral part of these
statements.
F-4
<PAGE> 150
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>
BRANDYWINE
REALTY SSI/TNC LIBERTY LIBERTY
TRUST PROPERTIES VIEW VIEW
HISTORICAL HISTORICAL BUILDING BUILDING PRO FORMA
CONSOLIDATED COMBINED PRO FORMA HISTORICAL PRO FORMA OFFERING PRO FORMA
(A) (B) ADJUSTMENTS SUBTOTAL (G) ADJUSTMENT ADJUSTMENTS CONSOLIDATED
------------ -------- ----------- -------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Base
rents... $ 3,517 $ 7,829 $ -- $ 11,346 $1,119 $ -- $ -- $ 12,465
Tenant
reimbursements... 66 2,895 -- 2,961 535 -- -- 3,496
Management
fees... -- 617 -- 617 -- -- (617)(O) --
Other... 83 3 -- 86 -- -- -- 86
-------- ------- ------- ------- ------ ------- ------- ----------
Total
revenue... 3,666 11,344 -- 15,010 1,654 -- (617) 16,047
-------- ------- ------- ------- ------ ------- ------- ----------
Operating
expenses:
Interest... 793 5,855 33(D) 6,681 -- 812(I)(J) (4,496)(L) 2,997
Depreciation
and
amortization.. 1,402 4,336 (395)(C)(E) 5,343 -- 284(H)(K) (137)(M) 5,490
Property
expenses... 1,608 3,424 -- 5,032 798 -- -- 5,830
General
and
administrative... 682 1,108 -- 1,790 -- -- (438)(O) 1,352
-------- ------- ------- ------- ------ ------- ------- ----------
Total
operating
expenses... 4,485 14,723 (362) 18,846 798 1,096 (5,071) 15,669
-------- ------- ------- ------- ------ ------- ------- ----------
Income
(loss)
before
minority
interest... (819) (3,379 ) 362 (3,836) 856 (1,096) 4,454 378
Minority
interest
in
income
(loss)... 5 -- (1,237)(F) (1,232) -- -- 1,431(N) 199
-------- ------- ------- ------- ------ ------- ------- ----------
Income
(loss)
before
uncombined
entity
and
extraordinary
items... (824) (3,379 ) 1,599 (2,604) 856 (1,096) 3,202 179
Equity
income
of
management
company... -- -- -- -- -- -- 179(O) 179
-------- ------- ------- ------- ------ ------- ------- ----------
Income
(loss)
before
extraordinary
items... $ (824) $ 3,379 $ 1,599 $ (2,604) $ 856 $ (1,096) $ 3,381 $ 358
======== ======= ======= ======= ====== ======= ======= ==========
Earnings
(loss)
per
share... $ (1.32) $ 0.11
======== ==========
Weighted
average
number
of
shares
outstanding
including
share
equivalents... 624,791 4,961,857(Q)
======== ==========
</TABLE>
The accompanying notes and management assumptions are an integral part of these
statements.
F-5
<PAGE> 151
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996 (NOTES 1 AND 3)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BRANDYWINE
REALTY SSI/TNC LIBERTY LIBERTY
TRUST PROPERTIES VIEW VIEW
HISTORICAL HISTORICAL BUILDING BUILDING PRO FORMA
CONSOLIDATED COMBINED PRO FORMA HISTORICAL PRO FORMA OFFERING PRO FORMA
(A) (B) ADJUSTMENTS SUBTOTAL (G) ADJUSTMENT ADJUSTMENTS CONSOLIDATED
------------ -------- ----------- -------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Base
rents... $ 1,907 $ 3,888 $ -- $ 5,795 $605 $ -- $ -- $ 6,400
Tenant
reimbursements... 68 1,870 -- 1,938 241 -- -- 2,179
Management
fees... -- 277 -- 277 -- -- (277)(O) --
Other... 52 100 -- 152 -- -- -- 152
-------- ------- ------- ------- ----- - ------ - ------- ----------
2,027 6,135 -- 8,162 846 -- (277) 8,731
-------- ------- ------- ------- ----- - ------ - ------- ----------
Operating
expenses:
Interest... 416 2,581 17(D) 3,014 -- 404(I)(J) (1,918)(L) 1,500
Depreciation
and
amortization.. 465 2,103 (156)(C)(E) 2,412 -- 142(H)(K) 65(M) 2,619
Property
expenses... 881 2,301 -- 3,182 368 -- -- 3,550
General
and
administrative... 259 456 -- 715 -- -- (219)(O) 496
-------- ------- ------- ------- ----- - ------ - ------- ----------
Total
operating
expenses... 2,021 7,441 (139) 9,323 368 546 (2,072) 8,165
-------- ------- ------- ------- ----- - ------ - ------- ----------
Income
(loss)
before
minority
interest... 6 (1,306 ) 139 (1,161) 478 (546) 1,795 566
Minority
interest
in
income
(loss)... 5 -- (478)(F) (473) -- -- 561(N) 87
-------- ------- ------- ------- ----- - ------ - ------- ----------
Income
(loss)
before
uncombined
entity
and
extraordinary
items... 1 (1,306 ) 617 (688) 478 (546) 1,234 479
Equity
income
of
management
company... -- -- -- -- -- -- 58(O) 58
-------- ------- ------- ------- ----- - ------ - ------- ----------
Income
(loss)
before
extraordinary
items... $ 1 $(1,306 ) $ 617 $ (688) $478 $ (546) $ 1,292 $ 537
======== ======= ======= ======= ====== ======= ======= ==========
Earnings
per
share... $ 0.00 $ 0.11
======== ==========
Weighted
average
number
of
shares
outstanding
including
share
equivalents... 629,641 4,962,233(Q)
======== ==========
</TABLE>
The accompanying notes and management assumptions are an integral part of these
statements.
F-6
<PAGE> 152
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 June 30, 1996, the Company owned four properties. As of
August 22, 1996, the Company owned interests in 24 properties, consisting of 23
suburban office buildings in three states and one industrial property. The
Company became the sole general partner and obtained an approximately 59%
interest in Brandywine Operating Partnership, L.P. (the "Operating
Partnership"). The following is a summary of the partnership interests issued as
of August 22, 1996:
<TABLE>
<CAPTION>
COMPANY 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) See Note 2(C).
(2) Units issued to TNC, SSI and other owners resulting from the sale to the
Operating Partnership by TNC, SSI and other owners of substantially all of
their ownership interests in the SSI/TNC Properties. The 540,159 Class A
Units include 44,322 Units to be issued in September 1999 in exchange for
Residual Interests (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 in exchange for the contribution to the
Operating Partnership of a majority of the Company's general partnership
interest in BRP.
(4) On August 23, 1997, the Company will contribute its remaining general
partnership interest in BRP in exchange for an additional 85,400 general
partnership units.
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 and the LibertyView Building included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the effects of the
Offering, the acquisitions of the SSI/TNC Properties and the LibertyView
Building 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
June 30, 1996.
(B) Reflects the historical combined balance sheet of the SSI/TNC
Properties as of June 30, 1996.
SSI/TNC Transaction
(C) The Company issued 258,333 Common Shares and Warrants to SSI in
exchange for SSI's ownership interest in eight Properties and $426 in
cash. SSI's investment in the SSI/TNC Properties reflects SSI's recent
cash investment to facilitate a debt financing in November 1995. The
Company issued 233,333 Common Shares and Warrants in exchange for the
SSI ownership
F-7
<PAGE> 153
interest at a value of $3,937. The $16.89 Paired Unit value is based on
the range of trading prices at the time the SSI/TNC Transaction was
announced, adjusted to give effect to the Reverse Split ($14.625 and
$13.3125) 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 25,222 Paired Units at the same $16.89
per unit in exchange for $426 in cash.
<TABLE>
<S> <C> <C>
Dr. Cash................................................... $ 426
Dr. Accumulated equity (deficit)........................... 3,937
Cr. Common shares of beneficial interest................. $ 3
Cr. Additional paid-in capital........................... 3,817
Cr. Stock warrants (at $2.10 per warrant)................ 543
</TABLE>
The Company contributed its investment in the limited partnership to
form the Operating Partnership and obtained the general partnership
interest and all of the Class B Units (238,606) in the Operating
Partnership as follows:
<TABLE>
<S> <C> <C>
Dr. Investment in Operating Partnership.................... $3,937
Cr. Investment in limited partnership.................... $3,937
</TABLE>
(D) To borrow funds from SSI (item i); to pay the costs associated with the
acquisition of the real estate investment of the SSI/TNC Properties
totaling $650 (item ii); and to reflect the $230 of deferred leasing
commissions as a receivable from TNC upon closing (item iii). The costs
associated with the acquisition (50% of the total) have been
capitalized. The remaining costs are attributed to the cost of issuing
the common shares to SSI and other equity interests of the Company and
have been charged against equity and minority interest in proportion to
the respective ownership interests (59% to the Company and 41% to the
Minority Interest) by the cash proceeds raised from the stock issuance
and by a loan from SSI, payable in 1999, with interest accruing at
prime.
<TABLE>
<S> <C> <C>
(i)
Dr. Cash................................................. $228
Cr. Mortgages and notes payable....................... $228
(ii)
Dr. Real estate investments.............................. $325
Dr. Additional paid-in capital........................... 192
Dr. Minority interest.................................... 133
Cr. Cash.............................................. $650
(iii)
Dr. Accounts receivable.................................. $230
Cr. Deferred costs.................................... $230
</TABLE>
(E) To reflect the allocation of previously deferred costs associated with
the acquisition of the real estate investments of the SSI/TNC
Properties and the issuance of equity interests by the Company.
<TABLE>
<S> <C> <C>
Dr. Real estate investments................................ $369
Dr. Additional paid-in capital............................. 369
Cr. Deferred costs....................................... $738
</TABLE>
(F) To increase real estate investments and related notes payable for the
capitalization of the Operating Partnership's portion of the transfer
taxes on six of the SSI/TNC Properties partially funded by a loan from
SSI, payable in 1999, with interest accruing at prime.
<TABLE>
<S> <C> <C>
Dr. Real estate investments................................ $172
Cr. Mortgages and notes payable.......................... $172
</TABLE>
F-8
<PAGE> 154
(G) To record the purchase of the SSI/TNC Properties by the Company in
exchange for 540,159 Class A Units at $16.50 per unit ($8,913) and
238,606 Class B Units at $16.50 ($3,937) for a total consideration
value of $12,850. Such value was determined based upon (1) the $75,494
fair value of the real estate assets received, (2) the adjusted fair
value of other assets received of $3,299 and (3) the fair value of the
total liabilities encumbering the SSI/TNC Properties of $65,943, as
adjusted. The step-up adjustment was recorded as additional
paid-in-capital after recognition of the minority interest shares of
such adjustments as of June 30, 1996, as follows:
<TABLE>
<S> <C> <C> <C>
(1) Real estate investments acquired at fair $ 75,494
value per Purchase Agreement.................
(2) Other assets acquired........................ $ 4,889(a)
Less: Deferred financing costs............... (805)(b)
Less: Straight-line rent receivables......... (785)(c)
--------
Net other assets............................. 3,299
(3) Mortgage Notes............................... $(63,686)(a)
Other liabilities............................ (1,764)(a)
Additional debt borrowings to closing........ (493)(a)
--------
(65,943)
Total equity consideration................... $ 12,850
Less: Accumulated deficit of SSI/TNC (4,569)
Properties...................................
Total adjustments............................ 17,419
Less: Minority interest share................ (8,604)(d)
Company -- Additional paid-in capital........ $ 8,815
</TABLE>
- ---------------
(a) Other assets include cash and cash equivalents, escrowed cash, deferred
costs, net, and other. The fair values of all assets, mortgage notes
payable and other liabilities approximate their carrying amounts.
(b) These financing costs were deferred on a historical basis by the SSI/TNC
Properties. However, the Company will write off these deferred financing
costs, as the debt and related future interest costs have been reflected at
fair market value absent these deferred costs.
(c) The accrued straight-line rent receivable has no future fair market value,
as the leases acquired are at market rates.
(d) Presented below is the calculation of the minority interest share as of June
30, 1996 as reflected above and reconciled to the pro formas:
<TABLE>
<CAPTION>
ALLOCATION
----------------------------
MINORITY
TOTAL BRT (59%) INTEREST (41%)
------- --------- --------------
<S> <C> <C> <C>
The Company:
Company's equity......................... $ 7,573
Issuance of Common Shares to SSI in
exchange for:
Units.................................. 3,937
Cash................................... 426
-------
Pro forma equity......................... 11,936 $ 7,009 $4,927
-------
(continued)
</TABLE>
F-9
<PAGE> 155
<TABLE>
<CAPTION>
ALLOCATION
MINORITY
TOTAL BRT (59%) INTEREST (41%)
------- ------- ------
<S> <C> <C> <C>
Operating Partnership (BOP):
Total equity investment.................. $12,850
SSI general partnership interest acquired
by BRT................................. (3,937)
-------
BOP adjusted equity...................... 8,913
------- ------- ------
5,238 3,675
------- ------
$20,849 $12,247
======= =======
8,602
Charges against minority interest
reflecting the cost of issuing the
Common Shares to SSI and other equity
interests of the Company (see (D) (ii))
------
(133)
------
Total pro forma minority interest...... $8,469
</TABLE>
(H) To adjust the accumulated deficit of SSI/TNC Properties acquired
subsequent to the distribution to SSI:
<TABLE>
<S> <C> <C> <C>
Dr. Additional paid-in capital........... $4,569
Cr. Accumulated equity (deficit)....... $4,569
Dr. Additional paid-in capital........... $3,937
Cr. Accumulated equity (deficit)....... $3,937
</TABLE>
(I) To reflect the partial prepayment of the note payable to the RMO Fund
through the issuance of 14,135 Paired Units. The $23.19 per Paired
Unit value, adjusted to reflect the Reverse Split is based on the
trading price of the Common Shares at the time of the prepayment ($18
per share) and based on a $5.19 per-warrant value (based on a modified
Black Scholes calculation).
<TABLE>
<S> <C> <C> <C>
Dr. Mortgages and Notes Payable.......... $238
Cr. Common Shares of Beneficial
Interest............................ $--
Cr. Additional paid-in capital......... 165
Cr. Stock warrants (at $5.19 per
warrant)............................ 73
</TABLE>
LibertyView Building Acquisition
(J) Reflects the Company's acquisition of the LibertyView Building as of
June 30, 1996, based upon the purchase price of $10,600 plus closing
costs of $200 acquired with cash of $1,120, a mortgage note payable of
$8,480 due in January 1999, with interest payable monthly at 8% and a
note payable to the seller of $1,000 due in December 1997 with no
interest payable. The Company recorded a $104 adjustment to the
purchase price to reflect the fair value of the note payable to the
seller. Deferred financing costs of $100 related to the mortgage note
payable have been capitalized and $300 of deposits included in other
assets at June 30, 1996, were applied to the purchase price.
Offering
(K) 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 $6,435............. $ 64,065
- Repayment of mortgages and notes payable.......................... (50,000)
- Payment of commitment fee on the Line of Credit................... (600)
</TABLE>
F-10
<PAGE> 156
<TABLE>
<S> <C> <C>
Other cash activities --
- Release of escrowed cash resulting from the repayment of mortgage
notes payable....................................................... 472
- Payment of accrued interest....................................... (329)
- Net increase in cash and cash equivalents......................... $ 13,608
(L) Release of escrowed cash resulting from the repayment of mortgage
notes payable....................................................... $ (472)
(M) Reflects the increase in deferred financing costs associated with
the Line of Credit.................................................. $ 600
(N) Reflects the net decrease in mortgage and notes payable of the
Operating Partnership
- repayment of mortgages and notes payable from net proceeds of this
Offering.......................................................... $(50,000)
- reflects payment of the note payable to the RMO Fund through the
issuance of Paired Units............................................ (754)
$(50,754)
(O) Reflects the payment of accrued interest in connection with the
repayment of mortgages and notes payable............................ $ (329)
(P) Reflects the reduction of minority interest upon the Company's
equity contribution of $50 million of net proceeds from the Offering
to the Operating Partnership. Upon making this contribution, the
Company will receive 3,050 general partner units which will increase
its ownership percentage to 88%..................................... $ (7,453)
(Q) Par value of the Common Shares to be issued......................... $ 41
(R) Reflects the (i) issuance of 4,000,000 Common Shares, par value of $.01 per
share, at an assumed offering price of $17.63 per share the last reported
sales price of the Common Shares on the AMEX on October 9, 1996, and (ii) the
issuance of 44,615 share 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................................................. $64,065
Less: Adjusted par value of Common Shares at $.01 par...... (40) $64,025
-------
- Additional capital contribution to the Operating
Partnership.............................................. 7,453
- Prepayment of note payable to the RMO Fund............... 521
-------
Net increase in additional paid-in capital................. $71,999
=======
(S) Reflects the issuance of 44,615 warrants to the RMO Fund,
based on a $5.19 per warrant value (based on a modified
Black Scholes calculation)................................. $ 232
=======
</TABLE>
3. ADJUSTMENTS TO PRO FORMA CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS:
(A) Reflects the historical consolidated operations of the Company.
(B) Reflects the historical operations of the SSI/TNC Properties,
excluding the extraordinary gain on restructuring of debt of $5,559.
F-11
<PAGE> 157
SSI/TNC Transaction
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE
DECEMBER SIX MONTHS
31, ENDED
1995 JUNE 30, 1996
----------- -------------
<S> <C> <C> <C>
(C) Reflects depreciation of the capitalized transfer
taxes................................................ $ 7 $ 4
Amortization of the deferred costs included in real
estate investments on the SSI/TNC Transaction........ 26 13
----------- -------------
$ 33 $ 17
========= ==========
(D) Reflects the increase in interest expense related to
the notes payable to SSI (which bear interest at
prime) assuming a prime rate of 8.25%................ $ 33 $ 17
========= ==========
(E) Reflects depreciation of the buildings acquired over a 25-year useful life and
tenant improvements and other furniture, fixtures and equipment ("FF&E") over five
years in general. The adjustments to depreciation expense for the year ended
December 31, 1995, and for the six-month period ended June 30, 1996, were determined
as follows:
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AMOUNTS AMOUNTS
FAIR MARKET DECEMBER 31, JUNE 30,
VALUE 1995 1996
----------- ------------ ---------
<S> <C> <C> <C> <C>
HISTORICAL NET BOOK VALUE:
Land........................ $ 9,275 $15,099 $ 15,099 $15,099
Buildings................... $41,077 $54,226 $ 54,226 $53,899
Tenant Improvements......... $ 6,132 $ 6,132 $ 6,132 $ 6,462
FF&E........................ $ 37 $ 37 $ 37 $ 34
Total............. $56,521 $75,494 $ 75,494 $75,494
DEPRECIATION EXPENSE:
Buildings................... $54,226/25 years $ 2,169 $
$53,899/25 years/6 mos. $ 1,078
Tenant Improvements......... $ 6,132/5 years $ 1,227
$ 6,462/5 years/6 mos. $ 646
FF&E........................ $ 37/5 years $ 7
$ 34/5 years/6 mos. $ 4
Total pro forma depreciation
expense................... $ 3,403 $ 1,728
Historical depreciation
expense of the SSI/TNC
Properties................ $ 3,831 $ 1,901
------ ------
Pro forma
adjustments..... $ (428) $ (173)
------ ------
</TABLE>
(F) Minority interest in income (loss) has been reflected in accordance
with the terms of the Operating Partnership Agreement. As of August
22, 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
F-12
<PAGE> 158
the income effect of minority interest share of loss for the periods
ended December 31, 1995, and June 30, 1996, in the pro forma
statements of operations were computed as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED SIX-MONTHS
DECEMBER 31, ENDED
1995 JUNE 30, 1996
------------ -------------
<S> <C> <C>
SSI/TNC Properties loss before Minority
Interest................................... $ (3,379) $(1,306)
Impact of pro forma adjustments(3)(C, D,
E)......................................... 362 139
------- -------
Total loss......................... $ (3,017) $(1,167)
======= =======
Pro forma minority interest in loss
(41%)(F)................................... $ (1,237) $ (478)
======= =======
</TABLE>
LibertyView Building Acquisition
(G) Reflects the historical operations of the LibertyView Building,
excluding certain expenses such as interest, depreciation and
amortization, professional costs, and other costs not directly
related to the future operations of the LibertyView Building.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE
DECEMBER SIX-MONTHS
31, ENDED
1995 JUNE 30, 1996
----------- -------------
<S> <C> <C> <C>
(H) Reflects depreciation of the LibertyView Building
using a 35-year depreciable life. ................... $ 244 $ 122
----------- -------------
(I) Reflects the increase in interest expense related to
the mortgage and notes payable of the LibertyView
Building, with effective interest rates of 8% per
annum. .............................................. $ 750 $ 375
----------- -------------
(J) Reflects the increase in interest expense related to
the note payable to the RMO Fund (which bears
interest at prime) assuming a prime rate of
8.25%. .............................................. $ 62 $ 29
----------- -------------
(K) Reflects the amortization of deferred financing costs
related to the LibertyView Building. ................ $ 40 $ 20
----------- -------------
Offering
(L) Reflects the net reduction of interest expense
associated with the mortgages and notes payable
assumed to be repaid using net proceeds from the
Offering. ........................................... $(4,696) $(2,018)
----------- -------------
(M) Reflects the net increase (decrease) in amortization
of deferred financing costs related to the mortgage
notes paid off and the new Line of Credit. .......... $ (437) $ 85
----------- -------------
(N) Reflects adjustment for minority interest in the
Operating Partnership of 12%. ....................... $ 1,431 $ 561
----------- -------------
(O) Reflects the results of operations of the Management
Company from third party management services as
accounted for using the equity method. ..............
(Q) Reflects the weighted average number of Common Shares
outstanding including share equivalents. If all Units
(540,159) were converted as of January 1, 1995 and
1996, the weighted average number of shares
outstanding would have been 5,502,016 and 5,502,392,
respectively. .......................................
</TABLE>
F-13
<PAGE> 159
After giving effect to the reverse share split discussed in Note 14, we
would be in a position to render the following audit report.
ARTHUR ANDERSEN LLP
Philadelphia, PA,
March 4, 1996 (except with respect
to the matters discussed in Notes 11 and 14,
as to which the date is March 20, 1996 and October 7, 1996, respectively)
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.
F-14
<PAGE> 160
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS
Operating properties, at adjusted cost.................... $21,335 $21,823 $21,082
Accumulated depreciation.................................. (7,387) (8,114) (7,330)
------- ------- -------
13,948 13,709 13,752
CASH AND CASH EQUIVALENTS................................... 1,766 840 1,643
ESCROWED CASH............................................... 1,114 1,155 629
DEFERRED COSTS net of accumulated amortization of $519 in
1994 and $507 in 1995 and $474 at June 30, 1996
(unaudited)............................................... 813 1,027 1,411
ACCOUNTS RECEIVABLE......................................... 207 261 294
OTHER ASSETS................................................ 25 113 438
------- ------- -------
Total assets...................................... $17,873 $17,105 $18,167
======= ======= =======
LIABILITIES AND BENEFICIARIES' EQUITY
MORTGAGE NOTES PAYABLE...................................... $ 6,899 $ 8,931 $ 8,878
NOTE PAYABLE TO SHAREHOLDER................................. -- -- 992
ACCRUED MORTGAGE INTEREST................................... 57 33 78
TENANT SECURITY DEPOSITS AND DEFERRED RENTS................. 207 250 235
ACCOUNTS PAYABLE AND ACCRUED EXPENSES....................... 222 454 412
DISTRIBUTIONS PAYABLE....................................... 1,299 93 --
------- ------- -------
Total liabilities................................. 8,684 9,761 10,595
------- ------- -------
MINORITY INTEREST........................................... -- -- --
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 638,716 at June 30, 1996, respectively............. 6 6 6
Additional paid-in capital................................ 16,785 16,785 17,081
Stock warrants............................................ -- -- 42
Cumulative deficit........................................ (2,262) (3,086) (3,085)
Cumulative distributions.................................. (5,340) (6,361) (6,472)
------- ------- -------
Total beneficiaries' equity....................... 9,189 7,344 7,572
------- ------- -------
Total liabilities and beneficiaries' equity....... $17,873 $17,105 $18,167
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE> 161
BRANDYWINE REALTY TRUST
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PRO FORMA FOR THE SIX-MONTH PERIOD
CONSOLIDATED CONSOLIDATED CONSOLIDATED ENDED JUNE 30,
1993 1994 1995 -------------------------
------------ ------------ ------------ 1995 1996
----------- -----------
HISTORICAL (UNAUDITED) (UNAUDITED)
1993
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Rents and tenant reimbursements... $ -- $ 5,451 $ 4,159 $ 3,583 $ 1,783 $ 1,975
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 23 52
---------- ---------- ---------- ---------- ---------- ----------
Total revenue............... 3,062 8,026 4,192 3,666 1,806 2,027
---------- ---------- ---------- ---------- ---------- ----------
EXPENSES:
Interest.......................... -- 2,400 1,962 793 396 416
Depreciation and amortization..... 1 1,949 1,370 1,402 799 465
Utilities......................... -- 762 607 531 249 261
Real estate taxes................. -- 721 498 391 195 197
Maintenance....................... -- 910 783 586 264 382
Management fee.................... -- 264 144 47 -- --
Other operating expenses.......... -- 223 70 53 49 41
Administrative expenses........... 593 1,053 834 682 294 259
Provision for loss on real estate
investments..................... -- -- 5,400 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total expenses.............. 594 8,282 11,668 4,485 2,246 2,021
---------- ---------- ---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE GAIN ON SALES
OF REAL ESTATE INVESTMENTS,
MINORITY INTEREST AND
EXTRAORDINARY ITEM................ 2468 (256) (7,476) (819) (440) 6
GAIN ON SALES OF REAL ESTATE
INVESTMENTS....................... -- -- 1,410 -- -- --
MINORITY INTEREST IN INCOME (LOSS)
OF BRANDYWINE REALTY PARTNERS..... -- (2,724) (5,635) 5 -- 5
---------- ---------- ---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE EXTRAORDINARY
ITEM.............................. 2,468 2,468 (431) (824) (440) 1
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) $ (440) $ 1
========== ========== ========== ========== ========== ==========
PER SHARE DATA:
Earnings per share of beneficial
interest
Primary
(Loss) income before
extraordinary item............ $ 3.99 $ 3.99 $ (.64) $ (1.32) $ (.70) $ 0.00
Extraordinary item.............. 0.00 0.00 11.86 0.00 0.00 0.00
---------- ---------- ---------- ---------- ---------- ----------
Net income...................... $ 3.99 $ 3.99 $ 11.22 $ (1.32) $ (.70) $ 0.00
========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding including share
equivalents..................... 618,733 618,733 674,327 624,791 625,082 629,641
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE> 162
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
AND THE SIX MONTHS ENDED JUNE 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 income......................... -- -- -- -- 1 --
Contributions...................... 19,983 -- 296 42 -- --
Distributions ($0.18 per share).... -- -- -- -- -- (111)
--------
- -- -
------- --- ------- -------
BALANCE, June 30, 1996 (Unaudited)... 638,716 $ 6 $ 17,081 $ 42 $ (3,085) $(6,472)
========= === ======= === ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 163
BRANDYWINE REALTY TRUST
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
PRO FORMA FOR THE SIX MONTH PERIOD
HISTORICAL CONSOLIDATED CONSOLIDATED CONSOLIDATED ENDED JUNE 30,
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) $ (440) $ 1
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
Brandywine Realty Partners............ -- (2,724) (5,635) 5 -- 5
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 1,402 799 465
Provision for loss on real estate
investments........................... -- -- 5,400 -- -- --
Changes in assets and liabilities
(Increase) decrease in accounts
receivable.......................... -- (140) 483 (54) 70 (33)
Decrease (increase) in other assets... (13) 166 (194) 13 (137) (19)
(Decrease) increase in other
liabilities......................... 13 81 (211) (45) (99) (25)
------ ------ ------ ------ ---- ----
Net cash provided by (used in)
operating activities.............. -- (669) (628) 497 193 394
------ ------ ------ ------ ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from Brandywine Realty Partners...... -- 2,110 -- -- --
Capital expenditures and leasing
commissions paid........................ -- (620) (493) (660) (340) (633)
Decrease (increase) in escrowed cash...... -- -- (1,114) (41) (553) 526
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) (893) (107)
------ ------ ------ ------ ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock and
warrants................................ -- -- -- -- -- 338
Distributions paid to shareholders........ -- -- (1,615) (2,227) (2,042) (204)
Minority Partner contributions............ -- 51 49 -- -- --
Minority Partner distributions............ -- (34) (7) (5) -- (5)
Proceeds from note payable to
shareholder............................. -- -- -- -- -- 992
Proceeds from new mortgage loan........... -- -- 10,000 9,000 9,000 --
Repayment of mortgage notes payable....... -- -- (16,301) (6,968) (6,916) (53)
Costs associated with refinancing
transactions............................ -- -- (1,604) (250) (250) --
Costs associated with new ventures and
financing commitments................... -- -- (100) (221) -- (560)
Refundable deposit associated potential
financing commitments................... -- -- -- (95) -- --
Tenant security deposits and other
financing activities.................... -- 175 (57) 44 (20) 8
------ ------ ------ ------ ---- ----
Net cash (used in) provided by financing
activities............................ -- 192 (9,635) (722) (228) 516
------ ------ ------ ------ ---- ----
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS.......................... 2,469 1,372 (704) (926) (928) 803
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 $ 838 $ 1,643
====== ====== ====== ====== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 164
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 Company acquired a seven-story 122,000 square foot
office building (the "LibertyView Building") in Cherry Hill, New Jersey (See
Note 12).
Subsequent to June 30, 1996, the Company formed an investment partnership
with Safeguard Scientifics, Inc. ("SSI") and SSI's real estate affiliate, The
Nichols Company ("TNC") and acquired, for cash and equity interests, 19
properties (the "SSI/TNC Properties") formerly owned by SSI, TNC and their
affiliates (collectively, the "SSI/TNC Transaction"). The SSI/TNC Transaction
involved the formation by the Company of a limited partnership (the "Operating
Partnership") in order to acquire the SSI/TNC Properties in exchange for common
shares of beneficial interest ("Common Shares"), warrants exercisable for
additional Common Shares and certain limited partnership interests redeemable
for cash or, at the option of the Company, Common Shares. The acquisition was
accompanied by a 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. In short, the SSI/TNC Transaction involved a substantial change in the
business of the Company; a substantial increase in the number of properties
indirectly owned by the Company; and, given the mortgage debt encumbering the
SSI/TNC Properties, a substantial increase in the Company's indebtedness (See
Note 12).
On August 22, 1996, in connection with the SSI/TNC Transaction, the Company
executed (i) a Contribution Agreement dated as of July 31, 1996 with SSI and TNC
and (ii) a Share and Warrant Purchase Agreement dated as of July 31, 1996 with
SSI. In addition, on August 22, 1996, a newly-formed subsidiary of the Company
entered into employment agreements with each of Anthony A. Nichols, Sr., Gerard
H. Sweeney, Brian Belcher and John P. Gallagher. Such employment agreements
provide for annual compensation aggregating $513,000 for a two year period.
Further, in connection with these agreements, six-year
F-19
<PAGE> 165
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
warrants are to be issued for an aggregate of 233,333 Common Shares at a per
share price of $19.50. The employment agreements became effective upon the
closing of the above-referenced SSI/TNC Transaction.
The financial statements as of June 30, 1996 and for the six months ended
June 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) necessary
to present fairly the financial position of the Company as of June 30, 1996, and
the results of its operations for the six months ended June 30, 1995 and 1996
and its cash flows for the six months ended June 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.
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.
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 and June 30, 1996, the Company had incurred
$357,000 and $738,000, respectively, 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
sheets as of December 31, 1995 and June 30, 1996. Further, in connection with
these efforts, as of December 31, 1995 and June 30, 1996, the Company had
deposited $95,000 with an unrelated party. Such deposit is included in other
assets on the balance sheets as of December 31, 1995 and June 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.
F-20
<PAGE> 166
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-21
<PAGE> 167
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 625,082 and 629,641 for the six months ended June 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 June 30, 1995 and 1996, respectively, for the six months ended
June 30, 1995 and 1996. No such options have been exercised as of December 31,
1995 and as of June 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 June 30, 1996, cash and cash equivalents
totaling $1,766,000, $840,000 and $1,643,000, respectively, included tenant
escrow deposits of $155,000, $198,000 and $203,000, 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 consummation 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.
During the first six months of 1996, the Company retired fully depreciated
assets totaling $1,167,000.
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
F-22
<PAGE> 168
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-23
<PAGE> 169
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. 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 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
F-24
<PAGE> 170
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
mortgage loans. At December 31, 1995 and June 30, 1996, the principal balance of
the loans totaled $8,931,000 and $8,878,000, respectively, and the capital and
real estate tax escrow accounts totaled $1,155,000 and $629,000, 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 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.
F-25
<PAGE> 171
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
6. 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 (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 12.)
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.
7. 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 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
F-26
<PAGE> 172
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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).
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.
F-27
<PAGE> 173
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On May 1, 1996, the Company declared a distribution of $.18 per share
payable on May 15, 1996 to shareholders of record as of May 10, 1996. Subsequent
to June 30, 1996, on July 11, 1996, the Company declared a distribution of $.18
per share payable on July 31, 1996 to shareholders of record as of July 26,
1996.
8. STOCK OPTIONS:
On August 8, 1994, subject to shareholder approval which was received at
the annual meeting of shareholders on October 11, 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 1994 and 1995 and for the six months ended June 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.
9. 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 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.
10. 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.
F-28
<PAGE> 174
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
11. 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 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.
12. SUBSEQUENT EVENTS:
On July 19, 1996, the Company acquired the LibertyView Building, a
seven-story, 122,000 square foot office building in Cherry Hill, New Jersey,
from UM Real Estate Investment Company, LLC ("UM") for a
F-29
<PAGE> 175
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
cash price of $10.6 million, of which $9.6 million was paid at the closing. The
balance is payable to UM, in installments, as outlined below:
<TABLE>
<CAPTION>
DUE DATE AMOUNT
--------------------------------------------------- --------
<S> <C>
July 31, 1997...................................... $100,000
August 31, 1997.................................... $100,000
September 31, 1997................................. $100,000
October 31, 1997................................... $100,000
November 31, 1997.................................. $100,000
December 31, 1997.................................. $500,000
</TABLE>
The amount of the purchase price was determined through arm's-length
negotiation between the Company and UM.
The LibertyView Building was completed in 1990 and, as of June 30, 1996,
the occupancy level was approximately 67%. A single tenant, HIP Health Plan of
NJ, an HMO provider, occupies 37,515 square feet under a lease expiring in 2007.
No other tenant occupies more than 10% of the building. Rentals of another
tenant, Shapiro and Kreisman, a law firm, comprise approximately 15.4% of the
total current base rents for the property. Other tenants in the LibertyView
Building include a regional bank, big six accounting firm and several
Philadelphia-based law firms.
The Company financed its acquisition of the LibertyView Building through a
combination of term financing ($9,777,140), from a commercial bank (Summit Bank,
formerly known as United Jersey Bank), and proceeds from a recent investment in
the Company by an affiliate of Richard M. Osborne, a shareholder and a Trustee
of the Company. The acquisition portion of the bank loan ($8,480,000) bears
interest at a fixed rate of 8% per annum and matures on January 1, 1999. The
bank loan provides for additional funding of an amount not to exceed $1.3
million, which will be advanced for tenant finishing and leasing commissions on
currently vacant space. The additional funding will be repayable at prime plus
1% and will mature on January 1, 1999. The bank loan is secured by a first
mortgage on the LibertyView Building, and is generally non-recourse to the
Company.
On August 22, 1996 the Company closed on the acquisition of the SSI/TNC
Properties at a purchase price of $75.5 million subject to related mortgage debt
encumbering the SSI/TNC Properties of $63.7 million. Upon closing, the Company
received $426,000 in cash and obtained a controlling interest in a newly formed
limited partnership which acquired direct and indirect ownership interests of
the SSI/TNC Properties. In the SSI/TNC Transaction, the Company issued 258,333
Common Shares and a six-year warrant to purchase 258,333 Common Shares at an
exercise price of $19.50 per share. The balance of the consideration was in the
form of limited partnership units of the Operating Partnership issued or
issuable, and convertible, under certain circumstances, into 540,159 Common
Shares, subject to certain potential adjustments. The acquisition resulted in a
combination of the management functions of the Company and TNC and the expansion
of the Company's Board of Trustees to include designees of SSI and TNC. At the
Company's annual meeting of shareholders held on August 22, 1996, the
shareholders of the Company approved the SSI/TNC Transaction.
As of August 23, 1996, the Company issued 14,135 Paired Units to the RMO
Fund pursuant to, and in accordance with, the terms of the Loan payable to the
RMO Fund in the original principal amount of $992,000. Under the terms of the
Loan, each unit issued reduced the principal amount of the Loan by $16.89 or an
aggregate of $238,000 thereby reducing the principal amount of the outstanding
Loan to $754,000.
F-30
<PAGE> 176
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. 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).
14. REVERSE STOCK SPLIT
Immediately prior to this Offering, the Company effected a one- for -three
Reverse Split of its Common Shares. All share and per share amounts have been
retroactively restated for all years presented.
F-31
<PAGE> 177
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-32
<PAGE> 178
SSI/TNC PROPERTIES
COMBINED BALANCE SHEETS (NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31
---------------------
1994 1995
-------- -------- AS OF
JUNE 30,
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-33
<PAGE> 179
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-34
<PAGE> 180
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-35
<PAGE> 181
SSI/TNC PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS (NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH
FOR THE YEAR ENDED PERIOD ENDED JUNE
DECEMBER 31 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-36
<PAGE> 182
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-37
<PAGE> 183
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-38
<PAGE> 184
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-39
<PAGE> 185
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-40
<PAGE> 186
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-41
<PAGE> 187
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-42
<PAGE> 188
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-43
<PAGE> 189
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-44
<PAGE> 190
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-45
<PAGE> 191
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-46
<PAGE> 192
SCHEDULE III
BRANDYWINE REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION -- DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED
INITIAL COST
--------------------- 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-47
<PAGE> 193
- ------------------------------------------------------
- ------------------------------------------------------
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.......................... 18
The Company........................... 30
Business and Growth Strategies........ 34
Use of Proceeds....................... 37
Distribution Policy................... 38
Price Range of Common Shares and
Distribution History................ 38
Capitalization........................ 39
Dilution.............................. 40
Selected Financial Data............... 41
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 45
Suburban Philadelphia Economy and
Office Markets...................... 51
Business and Properties............... 57
Structure of the Company.............. 89
Policies With Respect to Certain
Activities.......................... 91
Management............................ 95
Certain Relationships and Related
Transactions........................ 100
Principal Shareholders................ 104
Description of Shares of Beneficial
Interest............................ 105
Certain Provisions of Maryland Law and
the Company's Declaration of Trust
and Bylaws.......................... 108
Federal Income Tax Considerations..... 112
Operating Partnership Agreement....... 124
BRP General Partnership Agreement..... 128
ERISA Considerations.................. 128
Shares Available for Future Sale...... 131
Underwriting.......................... 133
Experts............................... 134
Legal Matters......................... 134
Tax Matters........................... 134
Available Information................. 134
Glossary.............................. 136
Index to Financial Statements......... F-1
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
4,000,000 COMMON SHARES
OF
BENEFICIAL INTEREST
OF
BRANDYWINE REALTY TRUST
------------
PROSPECTUS
, 1996
------------
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 194
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Company in
connection with the Offering of the Common Shares being registered. All the
amounts shown are estimates except the Securities and Exchange Commission (the
"SEC") registration fee, the National Association of Securities Dealers, Inc.
(the "NASD") filing fee and the American Stock Exchange listing fee.
<TABLE>
<S> <C>
SEC Registration fee....................................................... $20,455
------
NASD filing fee............................................................ 8,263
------
American Stock Exchange listing fee........................................ *
Transfer agent's and registrar's fee....................................... *
Printing and engraving fee................................................. *
Legal fees and expenses (other than Blue Sky).............................. *
Financial Advisory Fee..................................................... *
Accounting fees and expenses............................................... *
Blue Sky fees and expenses (including fees of counsel)..................... *
Miscellaneous expenses
------
Total............................................................ $
======
</TABLE>
- ---------------
* To be furnished by amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
See Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
The information presented below gives effect to the one-for-three reverse
share split to be effected by the Company immediately prior to the consummation
of the Offering of Common Shares registered hereby.
On August 8, 1994, the Company awarded its President and Chief Executive
Officer, Gerard H. Sweeney, options to purchase 46,666 Common Shares. No
monetary consideration was paid to the Company for the options. All of such
options are currently exercisable. None of such options has been exercised as of
the date hereof.
On June 21, 1996, the Company sold 19,983 Common Shares and warrants
exercisable for an additional 19,983 Common Shares to Turkey Vulture Fund XIII,
Ltd. (the "RMO Fund"). The purchase price totalled $337,513 and was paid in
cash. The warrants are currently exercisable in full at a per share exercise
price of $19.50. The RMO Fund is controlled by Richard M. Osborne, a Trustee of
the Company.
On August 22, 1996, the Company sold 258,333 Common Shares and warrants
exercisable for an additional 258,333 Common Shares to Safeguard Scientifics,
Inc. ("SSI") in exchange for SSI's ownership interest in a limited partnership
owning real estate and $426,250 in cash. The warrants are currently exercisable
in full at a per share exercise price of $19.50.
On August 22, 1996, the Company awarded employees warrants exercisable for
an aggregate of 256,666 Common Shares, including warrants exercisable for
100,000 Common Shares awarded to the Company's President and Chief Executive
Officer and warrants exercisable for an aggregate of 130,000 Common Shares
awarded to three other executive officers of the Company. No monetary
consideration was paid to the Company for the warrants. The warrants are
currently exercisable in full at a per share exercise price of $19.50.
II-1
<PAGE> 195
On August 22, 1996, the Operating Partnership issued and committed to issue
an aggregate of 540,159 Units which are exchangeable for an equal number of
Common Shares. The Operating Partnership issued the Units in exchange for the
contribution to it of direct and indirect interests in 19 properties by SSI, TNC
and six other persons.
On August 23, 1996, the Company issued to the RMO Fund 14,135 units (each
of which consists of one Common Share and one warrant exercisable for an
additional Common Share). Each unit so issued effected a $16.89 prepayment of a
loan made by the RMO Fund to the Company on June 21, 1996 in the original
principal amount of $992,293.
No underwriter was involved in connection with any of the foregoing
securities issuances.
Each of the above transactions is exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, as transactions not
involving public offerings.
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
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 the Maryland law.
The Company's Bylaws require it to indemnify (a) any present or former
Trustee or officer 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
and (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. 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 or officer made a party to a proceeding
by reason of his status as a Trustee or officer provided that 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, with the approval of
its Trustees, to provide indemnification and payment or reimbursement of
expenses to a present or former Trustee or officer 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 Maryland General
Corporation Law ("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 of the Operating Partnership 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 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.
II-2
<PAGE> 196
The form of Underwriting Agreement to be filed as Exhibit 1.1 to this
Registration Statement will provide for the reciprocal indemnification by the
Underwriters of the Company, and its trustees, officers and controlling persons,
and by the Company of the Underwriters, and their respective directors, officers
and controlling persons, against certain liabilities under the Securities Act.
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 SEC, 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.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED.
The consideration to be received by the registrant for the Common Shares
registered will be credited to the appropriate capital share account.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<C> <S> <C>
I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- Pro Forma Condensed Consolidating Balance Sheet as of June 30, F-5
1996...............................................................
- Pro Forma Condensed Consolidating Statements of Operations for the F-6
Year Ended December 31, 1995, and the Six-Month Ended June 30,
1996...............................................................
- Notes and Management's Assumptions to Unaudited Pro Forma Condensed F-8
Consolidating Financial Statements.................................
II. BRANDYWINE REALTY TRUST
- Report of Independent Public Accountants........................... F-
- Consolidated Balance Sheets as of December 31, 1994 and 1995 F-
(audited) and June 30, 1996 (Unaudited)..............................
- Consolidated Statements of Operations for the Years Ended December F-
31, 1993, 1994 and 1995 (audited) and for the Six-Months Ended June
30, 1996 (Unaudited)...............................................
- Consolidated Statements of Beneficiaries' Equity for the Years F-
Ended December 31, 1993, 1994 and 1995 (audited), and for the Six
Months Ended June 30, 1996 and 1995 (Unaudited)....................
- Consolidated Statements of Cash Flows for the Years Ended December F-
31, 1993, 1994 and 1995 (audited), and for the Six Months Ended June
30, 1996 (Unaudited)...............................................
- Notes to Consolidated Financial Statements......................... F-
III. SSI/TNC PROPERTIES
- Report of Independent Public Accountants........................... F-
- Combined Balance Sheets as of December 31, 1994 and 1995 (audited) F-
and June 30, 1995 and 1996 (Unaudited)...............................
- Combined Statements of Operations for the Years Ended December 31, F-
1993, 1994 and 1995 (audited), and for the Six Months Ended June
30, 1995 and 1996 (Unaudited)......................................
- Combined Statements of Owners' Deficit for the Years Ended December F-
31, 1993, 1994 and 1995 (audited), and for the Six-Months Ended June
30, 1995 and 1996 (Unaudited)......................................
- Combined Statements of Cash Flows for the Years Ended December 31, F-
1993, 1994 and 1995 (audited), and for the Six-Months Ended June
30, 1995 and 1996 (Unaudited)......................................
- Notes to Combined Financial Statements............................. F-
IV. LIBERTYVIEW BUILDING
- Report of Independent Public Accountants........................... F-
</TABLE>
II-3
<PAGE> 197
<TABLE>
<C> <S> <C>
- Statements of Revenue and Certain Expenses for the Year Ended F-
December 31, 1995, and Six Months Ended June 30, 1996 (Unaudited)....
- Notes to Financial Statements...................................... F-
V. FINANCIAL STATEMENT SCHEDULES
- Schedule III -- Real Estate and Accumulated F-
Depreciation -- December 31, 1995....................................
- Notes to Schedule III.............................................. F-
</TABLE>
(B) EXHIBITS.
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement between the Company and the Representatives.
**3.1 Amended and Restated Declaration of Trust of the Company.
**3.2 Amended and Restated Bylaws of the Company.
***4.1 Form of Common Share Certificate.
*5.1 Opinion of Pepper, Hamilton & Scheetz regarding the validity of the
securities being registered.
*8.1 Opinion of Arthur Andersen LLP regarding tax matters.
****10.01 Brandywine Realty Partners General Partnership Agreement.
#10.02 Settlement Agreement with Mutual Release (among the Company, Brandywine,
BSPI, Brandywine National, Brandywine Enterprises and the BSPI limited
partners).
#10.03 Amendment to Brandywine Realty Partners General Partnership Agreement.
#10.04 Mutual Settlement and Release (among the Company, Brandywine, BSPI,
Brandywine National and Brandywine Enterprises).
#10.05 Purchase and Sale Agreement and Certain Related Documents (relating to sale
of Company's interest in BSPI).
***10.06 Purchase and Sale Agreement (relating to sale of Iron Run).
###10.07 Secured Promissory Notes, Security Agreements and Assignments of Leases and
Rents -- April 1995 refinancing.
###10.8 Indemnity Agreement -- April 1995 refinancing.
###10.9 Escrow Agreement -- April 1995 refinancing.
####10.10 Agreement among the Company, Richard M. Osborne and the Richard M. Osborne
Trust.
+10.11 Loan and Securities Purchase Agreement, dated June 21, 1996, between Turkey
Vulture Fund XIII, Ltd. (the "RMO Fund") and the Company.
+10.12 Promissory Note, dated June 21, 1996, in the original principal amount of
$992,293 issued by the Company to the RMO Fund.
+10.13 Warrant to purchase Common Shares, dated June 21, 1996, issued by the
Company to the RMO Fund.
++10.14 Purchase and Sale Agreement between UM Real Estate Investment Company, LLC
("UM") and the Company.
++10.15 First Amendment to Purchase and Sale Agreement between UM and the Company.
++10.16 Second Amendment to Purchase and Sale Agreement between UM and the Company.
++10.17 Third Amendment to Purchase and Sale Agreement between UM and the Company.
++10.18 Promissory Note in the principal amount of $1,000,000 from the Company to
UM.
++10.19 Subordinated Mortgage from the Company to UM.
++10.20 Amended and Restated Loan Agreement between the Company and Summit Bank
("SB").
++10.21 Amended and Restated Promissory Note from the Company to SB.
++10.22 Amended and Restated Mortgage from the Company to SB.
+++10.23 Contribution Agreement among the Company, Safeguard Scientifics, Inc.
("SSI") and The Nichols Company ("TNC").
+++10.24 Share and Warrant Purchase Agreement between the Company and SSI.
+++10.25 Employment Agreement between the Company and Anthony A. Nichols, Sr.++
</TABLE>
II-4
<PAGE> 198
<TABLE>
<C> <S>
+++10.26 Employment Agreement between the Company and Gerard H. Sweeney.++
+++10.27 Employment Agreement between the Company and Brian F. Belcher.++
+++10.28 Employment Agreement between the Company and John P. Gallagher.++
**10.29 Agreement of Limited Partnership of Brandywine Operating Partnership, L.P.
(the "Operating Partnership").
**10.30 Amendment No. 1 to Agreement of Limited Partnership of Operating
Partnership.
**10.31 Distribution Support and Loan Agreement between the Operating Partnership
and SSI.
**10.32 Agreement among the Company, SSI and Safeguard Scientifics (Delaware), Inc.
**10.33 Registration Rights Agreement among the Company, SSI, TNC, the RMO Fund and
certain other persons.
**10.34 Warrant to purchase Common Shares issued by the Company to SSI.
**10.35 Third Amendment to Brandywine Realty Partners General Partnership
Agreement.
**10.36 Form of Warrant issued to Executive Officers.++
**10.37 Environmental Indemnity Agreement between the Company and SSI.
**10.38 Option Agreement between the Operating Partnership and C/N Horsham Towne
Limited Partnership.
**10.39 Articles of Incorporation of Brandywine Realty Services Corporation, as
amended.
21.1 List of Subsidiaries of the Company.
23.1 Consents of Arthur Andersen LLP.
23.2 Consent of Cushman & Wakefield of Pennsylvania, Inc.
*23.3 Consent of Pepper, Hamilton & Scheetz (contained in Exhibit 5.1).
24.1 Powers of Attorney (included on signature page hereto).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed as an exhibit to the Company's Form 8-K dated August 22,
1996 and incorporated by reference as an exhibit to this registration
statement.
*** Previously filed as an exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 1994 and incorporated by reference as an exhibit to
this registration statement.
**** Previously filed as an exhibit to the Company's Registration statement of
Form S-11 (File No. 33-4175) and incorporated by reference as an exhibit to
this registration statement.
# Previously filed as an exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 1993 and incorporated by reference as an exhibit to
this registration statement.
## Compensatory Arrangement.
### Previously filed as an exhibit to the Company's Form 8-K dated April 21,
1995 and incorporated by reference as an exhibit to this registration
statement.
#### Previously filed as an exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 1995 and incorporated by reference as an exhibit to
this registration statement.
+ Previously filed as an exhibit to the Company's Form 8-K dated June 21,
1996 and incorporated by reference as an exhibit to this registration
statement.
++ Previously filed as an exhibit to the Company's Form 8-K dated July 19, 1996
and incorporated by reference as an exhibit to this registration statement.
+++ Previously filed as an exhibit to the Company's Form 10-Q for the quarter
ended June 30, 1996 and incorporated by reference as an exhibit to this
registration statement.
II-5
<PAGE> 199
ITEM 36. UNDERTAKINGS.
The Company undertakes to provide to the Underwriters at the Closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to Trustees,
officers and controlling persons of the Registrant pursuant to the provisions
described under Item 33 above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 200
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on
October 11, 1996.
BRANDYWINE REALTY TRUST
By: /s/ GERARD H. SWEENEY
------------------------------------
Gerard H. Sweeney
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints each of Anthony A. Nichols, Sr. and Gerard
H. Sweeney his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or either of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------------- -----------------
<C> <S> <C>
/s/ ANTHONY A. NICHOLS, SR. Chairman of the Board of Trustees October 11, 1996
- ----------------------------------------
Anthony A. Nichols, Sr.
/s/ GERARD H. SWEENEY President, Chief Executive Officer October 11, 1996
- ---------------------------------------- and Trustee (Principal Executive
Gerard H. Sweeney Officer)
/s/ JOHN P. GALLAGHER Executive Vice October 11, 1996
- ---------------------------------------- President -- Finance (Principal
John P. Gallagher Financial and Accounting Officer)
/s/ JOSEPH L. CARBONI Trustee October 11, 1996
- ----------------------------------------
Joseph L. Carboni
/s/ RICHARD M. OSBORNE Trustee October 11, 1996
- ----------------------------------------
Richard M. Osborne
/s/ WARREN V. MUSSER Trustee October 11, 1996
- ----------------------------------------
Warren V. Musser
/s/ WALTER D'ALESSIO Trustee October 11, 1996
- ----------------------------------------
Walter D'Alessio
/s/ CHARLES P. PIZZI Trustee October 11, 1996
- ----------------------------------------
Charles P. Pizzi
</TABLE>
II-7
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<S> <C>
1. Brandywine Operating Partnership, L.P. a Delaware limited partnership.
2. Brandywine Realty Services Corporation, a Pennsylvania corporation.
3. Brandywine Holdings I, Inc., a Pennsylvania corporation.
4. Brandywine Holdings II, Inc., a Pennsylvania corporation.
5. Brandywine Holdings III, Inc., a Pennsylvania corporation.
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 4, 1996 (except with respect to the matters discussed in Notes 11
and 14, as to which the dates are March 20, 1996 and October 7, 1996,
respectively) on the consolidated financial statements of Brandywine Realty
Trust as of December 31, 1994 and 1995, and for each of the three years in the
period ended December 31, 1995, and to all references to our firm included in or
made a part of this Registration Statement on Form S-11. It should be noted that
we have not audited any financial statements of Brandywine Realty Trust
subsequent to December 31, 1995 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 10, 1996
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 12, 1996 on the combined financial statements of the SSI/TNC
Properties as of December 31, 1994 and 1995 and for each of the three years in
the period ended December 31, 1995, and to all references to our firm included
in or made a part of this Registration Statement on Form S-11. It should be
noted that we have not audited any financial statements of the SSI/TNC
Properties subsequent to December 31, 1995 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 10, 1996
<PAGE> 3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated June 14, 1996 on the statement of revenue and certain expenses of the
LibertyView Building for the year ended December 31, 1995, and to all references
to our firm included in or made a part of this Registration Statement on Form
S-11. It should be noted that we have not audited any financial statements of
the LibertyView Building subsequent to December 31, 1995 or performed any audit
procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 10, 1996
<PAGE> 1
CONSENT
We hereby consent to the references in the Prospectus which is part of
the Registration Statement on Form S-11 for Brandywine Realty Trust (the
"Registration Statement") to the statistical and other information from our
Mid-Year 1996 Philadelphia Office Market Report and Mid-Year 1996 Philadelphia
Industrial Market Report and from nine additional market analyses, each dated
August 1, 1996, which were prepared by us at the request of Brandywine Realty
Trust, and we further consent to the reference to us under the heading "Experts"
in the Registration Statement.
CUSHMAN & WAKEFIELD OF
PENNSYLVANIA, INC.
By: /s/ John B. Rush
--------------------------
Name: John B. Rush
Title: Director
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