<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of
the Commission Only (as
permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
BRANDYWINE REALTY TRUST
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(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Shares of Beneficial Interest
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(2) Aggregate number of securities to which transaction applies:
2,363,172
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
$6.25 (average of high and low prices on American Stock
Exchange on May 7, 1996)
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(4) Proposed maximum aggregate value of transaction:
$14,769,825
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<PAGE>
(5) Total fee paid:
$2,954
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[x] Fee paid previously with preliminary materials.
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[x] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$2,954
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(2) Form, Schedule or Registration Statement No.:
Schedule 14A
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(3) Filing Party:
Brandywine Realty Trust
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(4) Date Filed:
May 9, 1996
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<PAGE>
BRANDYWINE REALTY TRUST
Two Greentree Centre
Suite 100
Marlton, NJ 08053
(609) 797-0200
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held August 22, 1996
To our Shareholders:
Notice is hereby given that the Annual Meeting of the
Shareholders of Brandywine Realty Trust (the "Trust") will be held at The Union
League of Philadelphia, 140 South Broad Street, Philadelphia, Pennsylvania on
Thursday, August 22, 1996, at 10:00 a.m., local time (the "Meeting"), to
consider and take action on the following matters:
1. To consider and vote upon a transaction (the "SSI/TNC
Transaction") in which the Trust: (i) will issue 775,000 common shares of
beneficial interest, par value $.01 per share ("Common Shares"), and a warrant
exercisable for an additional 775,000 Common Shares at a per share exercise
price of $6.50 (subject to customary antidilution adjustments) to Safeguard
Scientifics, Inc. ("SSI") in exchange for $426,250 and SSI's indirect ownership
interest in eight office and industrial buildings that contain an aggregate of
approximately 536,000 rentable square feet; (ii) will form a Delaware limited
partnership (the "Operating Partnership"), and obtain, through its partnership
interests therein, an indirect ownership interest in an additional 11 office and
industrial buildings that contain an aggregate of approximately 424,000 rentable
square feet; (iii) will contribute to the Operating Partnership a portion of its
general partnership interest in Brandywine Realty Partners ("BRP"), which owns
four office properties that contain an aggregate of approximately 254,552
rentable square feet, in exchange for additional interests in the Operating
Partnership, and will agree to contribute to the Operating Partnership the
balance of its general partnership interest in BRP approximately one year
following the closing in exchange for additional interests in the Operating
Partnership; (iv) will cause the Operating Partnership to enter into option
agreements conferring upon the Operating Partnership the option to acquire an
additional four office and industrial buildings that contain an aggregate of
approximately 159,000 rentable square feet; (v) will agree, subject to certain
conditions, to redeem for cash or up to approximately 1,647,353 Common Shares
(subject to increase or forfeiture based on the occurrence of certain events and
subject to customary antidilution adjustments) the limited partnership interests
("Units") in the Operating Partnership issued to SSI, The Nichols Company
("TNC") and six additional persons in exchange for their contribution to the
Operating Partnership of their ownership interests in the additional properties
referenced in clause (ii) above and related assets; (vi) will issue
non-transferable warrants
<PAGE>
exercisable for an aggregate of 400,000 Common Shares at a per share exercise
price of $6.50 (subject to customary antidilution adjustments) to certain
individuals who are currently employees of TNC and who are expected to become
employees of a subsidiary of the Trust; (vii) will issue non-transferable
warrants exercisable for an aggregate of 330,000 Common Shares at a per share
exercise price of $6.50 (subject to customary antidilution adjustments) to the
President and Chief Executive Officer of the Trust and to another current
executive of the Trust; and (viii) will expand the Board of Trustees from five
to seven and elect to the Board three individuals associated with or designated
by SSI and TNC, and one individual jointly designated by SSI, TNC and the Trust,
to fill the vacancies in the Board created by such expansion and the decision of
two current members of the Board not to stand for re-election; all as more fully
described in the accompanying Proxy Statement. The SSI/TNC Transaction, if
consummated, will result in a substantial change in the ownership and control of
the Trust and the concentration of such ownership and control in a small number
of Shareholders and will result in a contribution of the Trust's principal asset
(i.e., the Trust's interest in BRP) to the Operating Partnership.
Throughout this Proxy Statement, statements made as to the
approximate number of Units that will be issued on the date the SSI/TNC
Transaction is consummated (the "Closing Date") are based on the outstanding
principal balances of the mortgage debt encumbering the properties to be
acquired by the Operating Partnership as of March 31, 1996. The actual number of
Units that will be issued on the Closing Date will be adjusted to reflect the
actual debt balances relating to these properties on the Closing Date. Any
adjustment in the amount of such debt balances between March 31, 1996 and the
Closing Date is not expected to be material.
2. To amend the Declaration of Trust of the Trust in order to:
(i) increase the authorized number of Common Shares from 15,000,000 to
75,000,000; (ii) eliminate the restriction on the Trust's ability to issue
Common Shares or preferred shares of beneficial interest (collectively "Shares")
below "book value"; (iii) confirm the authority of the Board of Trustees to
effectuate, from time to time and without prior Shareholder approval, a "reverse
stock split" of the Shares and to provide that such authority may only be
exercised upon the approval of not less than 80% of the members of the Board;
(iv) eliminate the requirement that the Trust distribute to Shareholders not
less than 85% of the net proceeds attributable to the sale of, or refinancing of
debt secured by, any of its existing real estate holdings; and (v) substitute a
new provision limiting the transferability of Shares by imposing limitations on
the amount of Shares a Shareholder may own in order to reduce the risk that the
Trust would fail to satisfy one of the requirements for qualifying as a
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<PAGE>
real estate investment trust for Federal income tax purposes, subject to certain
exceptions, all as more fully described in the accompanying Proxy Statement.
Shareholders will have the opportunity to vote separately on each of the five
proposed amendments to the Declaration of Trust. If less than all of the
proposed amendments are approved by Shareholders, then only those which are
approved by Shareholders will become effective.
3. To restore voting rights to all Common Shares beneficially
owned by Richard M. Osborne, one of the Trustees, in excess of 20% of the Common
Shares from time to time outstanding which, by virtue of Subtitle 7 of Title 3
of the Maryland General Corporation Law, do not have voting rights. As of the
date hereof, Mr. Osborne beneficially owns 658,698 Common Shares. Mr. Osborne
beneficially owns 538,800 of these Common Shares through the Richard M. Osborne
Trust (the "RMO Trust"), of which Mr. Osborne is the sole trustee, and
beneficially owns 59,949 Common Shares and warrants exercisable for an
additional 59,949 Common Shares through Turkey Vulture Fund XIII, Ltd. (the "RMO
Fund"), a limited liability company controlled by Mr. Osborne. If voting rights
are restored to the Common Shares beneficially owned by Mr. Osborne at the
Meeting, Mr. Osborne has agreed to cause the 167,561 Common Shares owned by the
RMO Trust on the record date (specified below) which currently lack voting
rights, together with the additional 371,239 Common Shares owned by the RMO
Trust on the record date which have voting rights and which will be voted in
favor of the other Proposals contained herein, to be voted in favor of the other
Proposals contained herein. Accordingly, a vote will be taken on the Proposal to
restore voting rights to such Common Shares before a vote is taken on any other
matters that will be considered by Shareholders at the Meeting. If voting rights
are restored to such Common Shares, the RMO Trust, the RMO Fund and Mr. Osborne
would also be permitted, under Subtitle 7, to acquire up to one-third of the
outstanding Common Shares without losing voting rights thereon. Mr. Osborne, the
RMO Trust and the RMO Fund have entered into an agreement with the Trust
relating to the Common Shares owned by the RMO Trust and the RMO Fund, the
principal terms of which are summarized under the discussion of Proposal 3
contained in the accompanying Proxy Statement.
On June 21, 1996, the RMO Fund acquired from the Trust 59,949
Common Shares and a warrant exercisable for an additional 59,949 Common Shares.
Because the record date for the Meeting is June 12, 1996, no such Common Shares
will be entitled to vote at the Meeting.
4. To re-elect three Trustees to the Board of Trustees (in
addition to the four individuals who will be elected to the Board if the SSI/TNC
Transaction is approved and consummated).
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<PAGE>
5. The transaction of such other business as may properly come
before the Meeting or any adjournments thereof.
The Board of Trustees of the Trust has fixed the close of
business on June 12, 1996 as the record date for determination of the
Shareholders of the Trust entitled to notice of, and to vote at, the Meeting and
any adjournments and postponements thereof.
By order of the Board of Trustees,
Francine M. Haulenbeek, Secretary
July 18, 1996
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WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE MARK, DATE AND
SIGN YOUR PROXY, AND MAIL IT IN THE STAMPED ENVELOPE ENCLOSED FOR YOUR
CONVENIENCE. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO THE TRUST OF FURTHER
SOLICITATION, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY PROMPTLY. RETURNING
THE PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON ON ALL MATTERS BROUGHT
BEFORE THE MEETING, BUT WILL HELP ASSURE A QUORUM.
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<PAGE>
Brandywine Realty Trust
Two Greentree Centre
Suite 100
Marlton, NJ 08053
(609) 797-0200
PROXY STATEMENT FOR THE
ANNUAL MEETING OF SHAREHOLDERS
To be held on August 22, 1996
The enclosed proxy is solicited by and on behalf of the Board
of Trustees (the "Board of Trustees" or the "Board") of the Brandywine Realty
Trust (the "Trust") for use at the Annual Meeting of Shareholders to be held on
Thursday, August 22, 1996 at 10:00 a.m., local time, and at any adjournments or
postponements thereof (the "Meeting"). This Proxy Statement and the enclosed
form of proxy are first being mailed to shareholders of the Trust (the
"Shareholders") on or about July 19, 1996.
At the Meeting, the Shareholders will be asked to consider and
take action on the following matters (collectively, the "Proposals"):
1. To consider and vote upon a transaction (the "SSI/TNC
Transaction") in which the Trust (i) will issue 775,000 common shares of
beneficial interest, par value $.01 per share ("Common Shares"), and a warrant
(the "SSI Warrant") exercisable during the six-year period following its date of
issuance for an additional 775,000 Common Shares at a per share exercise price
of $6.50 (subject to customary antidilution adjustments) to Safeguard
Scientifics, Inc. ("SSI") in exchange for $426,250 and SSI's ownership interest
in a limited partnership (the "Witmer Partnership") formed to borrow up to
$32,211,600 million from General Electric Capital Corporation ("GECC") and to
own eight office and industrial buildings that contain an aggregate of
approximately 536,000 rentable square feet (the "Witmer Properties"); (ii) will
form a Delaware limited partnership (the "Operating Partnership"), and obtain,
through general and limited partnership interests therein, an indirect ownership
interest in an additional 11 office and industrial buildings that contain an
aggregate of approximately 424,000 rentable square feet (the "Other Initial
Properties" and together with the Witmer Properties, the "Initial Properties");
(iii) will contribute to the Operating Partnership a portion of its general
partnership interest in Brandywine Realty Partners ("BRP") in exchange for
additional limited partnership interests in the Operating Partnership and will
agree to contribute to the Operating Partnership the balance of its general
partnership interest in BRP approximately one year following the closing in
exchange for additional interests in the Operating Partnership; (iv) will
<PAGE>
cause the Operating Partnership to enter into option agreements conferring upon
the Operating Partnership the option to acquire an additional four office
buildings that contain an aggregate of approximately 159,000 rentable square
feet (the "Option Properties" and together with the Initial Properties, the
"Properties"); (v) will agree, subject to certain conditions, to redeem for cash
or up to approximately 1,647,353 Common Shares (subject to increase or
forfeiture based on the occurrence of certain events and subject to customary
antidilution adjustments), on or after the completion by the Trust of an equity
offering achieving certain targets or the satisfaction of an alternative
condition, the Class A limited partnership interests in the Operating
Partnership ("Class A Units") issued to SSI, The Nichols Company ("TNC") and six
additional persons, one of whom is an affiliate of TNC (collectively, the
"Owners") in exchange for their direct and indirect ownership interests in the
Other Initial Properties and related assets; (vi) will issue non-transferable
warrants (the "Executive Warrants") exercisable for an aggregate of 400,000
Common Shares at a per share exercise price of $6.50 (subject to customary
antidilution adjustments) to certain individuals who are currently employees of
TNC and who are expected to become employees of the Trust or a subsidiary of the
Trust; (vii) will issue non-transferable warrants exercisable for an aggregate
of 330,000 Common Shares at a per share exercise price of $6.50 (subject to
customary antidilution adjustments) to the President and Chief Executive Officer
of the Trust and to another current executive of the Trust; and (viii) will
expand the Board of Trustees from five to seven and elect to the Board three
individuals associated with or designated by SSI and TNC, and one individual
jointly designated by SSI, TNC and the Trust, to fill the vacancies in the Board
created by such expansion and the decision of two current members of the Board
not to stand for re-election; all as more fully described herein. The SSI/TNC
Transaction, if consummated, will result in a substantial change in the
ownership and control of the Trust and the concentration of such ownership and
control in a small number of Shareholders and will result in a contribution of
the Trust's principal asset (i.e., the Trust's interest in BRP) to the Operating
Partnership.
The formation and capitalization of the Operating Partnership
and the acquisition of the Properties will involve a series of transactions
which are explained in greater detail herein.
The SSI/TNC Transaction will involve certain risks.
See "Risk Factors Relating to the SSI/TNC Transaction" beginning
on page 35.
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<PAGE>
Throughout this Proxy Statement, statements made as to the
approximate number of Units that will be issued on the date the SSI/TNC
Transaction is consummated (the "Closing Date") are based on the outstanding
principal balances of the mortgage debt encumbering the Initial Properties as of
March 31, 1996. The actual number of Units that will be issued on the Closing
Date will be adjusted to reflect the actual debt balances relating to these
properties on the Closing Date. Any adjustment in the amount of such debt
balances between March 31, 1996 and the Closing Date (giving effect to both
principal amortization and additional advances under loan agreements) is not
expected to be material. The Trust estimates that the aggregate reduction in
debt balances would be approximately $7,000 and $53,000 assuming a Closing on
August 1 and September 1, respectively. Accordingly, if the Closing Date were
August 1 or September 1, the aggregate number of Class A Units that would be
issued on the Closing Date and within 37 months thereafter would be
approximately 1,647,818 or 1,655,636, as the case may be (rather than
approximately 1,647,353).
2. To amend the Declaration of Trust (the "Declaration") of
the Trust in order to (i) increase the authorized number of Common Shares from
15,000,000 to 75,000,000; (ii) eliminate the restriction on the Trust's ability
to issue Common Shares or preferred shares of beneficial interest ("Preferred
Shares" and, together with Common Shares, collectively, "Shares") below "book
value"; (iii) confirm the authority of the Board of Trustees to effectuate, from
time to time and without prior Shareholder approval, a "reverse stock split" of
the Shares and to provide that such authority may only be exercised upon the
approval of not less than 80% of the members of the Board; (iv) eliminate the
requirement that the Trust distribute to Shareholders not less than 85% of the
net proceeds attributable to the sale of, or refinancing of debt secured by, any
of its existing real estate holdings; and (v) substitute a new provision
limiting the transferability of Shares by imposing limitations on the amount of
Shares a Shareholder may own in order to reduce the risk that the Trust would
fail to satisfy one of the requirements for qualifying as a real estate
investment trust for Federal income tax purposes, all as more fully described
herein (collectively, the "Declaration Amendments"). Shareholders will have the
opportunity to vote separately on each of the five proposed Declaration
Amendments. If less than all of the proposed amendments are approved by
Shareholders, then only those which are approved by Shareholders will become
effective.
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<PAGE>
3. To restore voting rights to all Common Shares beneficially
owned by Richard M. Osborne, one of the Trustees, in excess of 20% of the Common
Shares from time to time outstanding which, by virtue of Subtitle 7 of Title 3
of the Maryland General Corporation Law (the "MGCL"), do not have voting rights.
As of the date hereof, Mr. Osborne beneficially owns 658,698 Common Share. Mr.
Osborne beneficially owns 538,800 of these Common Shares through the Richard M.
Osborne Trust (the "RMO Trust"), of which Mr. Osborne is the sole trustee, and
beneficially owns 59,949 Common Shares and warrants exercisable for an
additional 59,949 Common Shares through Turkey Vulture Fund XIII, Ltd. (the "RMO
Fund"), a limited liability company controlled by Mr. Osborne. If voting rights
are restored to the Common Shares beneficially owned by Mr. Osborne at the
Meeting, Mr. Osborne has agreed to cause the 167,561 Common Shares owned by the
RMO Trust on the record date (June 12, 1996) which currently lack voting rights,
together with the additional 371,239 Common Shares owned by the RMO Trust on the
record date which have voting rights and which will be voted in favor of the
other Proposals contained herein, to be voted in favor of the other Proposals
contained herein. Accordingly, a vote will be taken on the Proposal to restore
voting rights to such Common Shares before a vote is taken on any other matters
that will be considered by Shareholders at the Meeting. If voting rights are
restored to such Common Shares, the RMO Trust, the RMO Fund and Mr. Osborne
would also be permitted, under Subtitle 7, to acquire up to one-third of the
outstanding Common Shares without losing voting rights thereon. Mr. Osborne, the
RMO Trust and the RMO Fund have entered into an agreement with the Trust, the
principal terms of which are summarized under the discussion of Proposal 3
below.
On June 21, 1996, the RMO Fund acquired from the Trust 59,949
Common Shares and a warrant exercisable for an additional 59,949 Common Shares.
Because the record date for the Meeting is June 12, 1996, no such Common Shares
will be entitled to vote at the Meeting.
4. To re-elect three Trustees to the Board of Trustees (in
addition to the four individuals who will be elected to the Board if the SSI/TNC
Transaction is approved and consummated).
5. The transaction of such other business as may
properly come before the Meeting or any adjournments thereof.
The Board of Trustees has unanimously concluded that the
SSI/TNC Transaction is in the best interests of the Trust and its Shareholders
and is on terms and conditions fair to the Trust
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<PAGE>
and its Shareholders, and has unanimously approved the SSI/TNC Transaction. In
arriving at its conclusion as to the SSI/TNC Transaction, the Board of Trustees
considered the oral opinion of Legg Mason Wood Walker, Inc. ("Legg Mason")
rendered on May 6, 1996 that, as of such date, the consideration to be received
by the Trust under the SSI/TNC Transaction is fair to the Shareholders from a
financial point of view and the written confirmation of such opinion as of July
12, 1996. A copy of the written opinion of Legg Mason is attached to this Proxy
Statement as Appendix B and Shareholders are urged to read this opinion in its
entirety. The Board of Trustees has also unanimously approved each of the other
Proposals described herein and recommends that the Shareholders vote for each of
the Proposals at the Meeting.
The Board of Trustees knows of no business that will be
presented for consideration at the Meeting other than the matters described in
this Proxy Statement. If any other matter should be presented at the Meeting for
action, the persons named in the accompanying proxy card will vote the proxy in
their own discretion.
A Shareholder may revoke his or her proxy at any time by
executing and returning another proxy of a later date, by written notice to the
Trust (attention: Gerard H. Sweeney) at its address above, or by attending the
Meeting and voting in person.
In the event that there are not sufficient votes to approve
any of the Proposals, it is expected that the Meeting will be postponed or
adjourned in order to permit further solicitation of proxies by the Trust.
The delivery of this Proxy Statement shall not, under any
circumstances, create any implication that the information herein is correct
after the date hereof, July 18, 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
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<PAGE>
TABLE OF CONTENTS
Page
SUMMARY.................................................................. 9
The Meeting..................................................... 9
The SSI/TNC Transaction......................................... 11
The Declaration Amendments and Voting Rights
Restoration Proposals.......................................... 32
Recommendations of the Board of Trustees........................ 34
Contemplated Acquisitions....................................... 35
RISK FACTORS RELATING TO THE SSI/TNC TRANSACTION......................... 35
SUMMARY SELECTED FINANCIAL INFORMATION................................... 52
BRANDYWINE REALTY TRUST PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION........................................... 55
BRANDYWINE REALTY TRUST PRO FORMA CONDENSED CONSOLIDATING
BALANCE SHEET AS AT MARCH 31, 1996.............................. 58
BRANDYWINE REALTY TRUST PRO FORMA CONDENSED CONSOLIDATING
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1995............................................................ 59
BRANDYWINE REALTY TRUST PRO FORMA CONDENSED CONSOLIDATING
STATEMENT OF OPERATIONS FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1996 (Notes 1 and 3)............................ 60
BRANDYWINE REALTY TRUST NOTES AND MANAGEMENT'S ASSUMPTIONS
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION........................................... 61
COMPARISON OF PRO FORMA RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND THE YEAR ENDED
DECEMBER 31, 1995 TO THE TRUST'S HISTORICAL
CONSOLIDATED OPERATIONS......................................... 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE INITIAL PROPERTIES TO
BE ACQUIRED BY THE OPERATING PARTNERSHIP........................ 72
PROPOSAL NO. 1 - THE SSI/TNC TRANSACTION................................. 76
The SSI/TNC Transaction......................................... 76
Background of and Reasons for the SSI/TNC Transaction;
Board Recommendation............................................ 76
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<PAGE>
Page
Opinion of Financial Advisor.................................... 85
Market Analysis................................................. 93
Business Objectives Following the SSI/TNC Transaction........... 94
Description of the Properties................................... 95
Principal Features of the SSI/TNC Transaction...................105
The SSI/TNC Transaction Documents...............................132
General Authority if SSI/TNC Transaction is Approved............142
Consequences of Failure to Approve the SSI/TNC
Transaction...................................................142
Distributions...................................................143
Expenses of SSI/TNC Transaction ................................143
Management Following the SSI/TNC Transaction....................144
Accounting Treatment............................................146
Federal Income Tax Considerations...............................146
State and Local Taxes...........................................159
Regulatory Requirements; Approvals..............................160
Third Party Consents............................................160
Effective Date; Conditions to the SSI/TNC Transaction...........160
Recommendation of the Board of Trustees.........................160
PROPOSAL NO. 2 - AMENDMENT OF DECLARATION OF TRUST.......................161
General.........................................................161
Increase of Authorized Capital - First Proposed
Amendment.....................................................162
Elimination of Restriction on Share Issuances - Second
Proposed Amendment............................................163
Elimination of Mandatory Distribution Requirement -
Fourth Proposed Amendment.....................................166
New Limitation on Transferability of Shares - Fifth
Proposed Amendment............................................167
PROPOSAL NO. 3 - RESTORATION OF VOTING RIGHTS............................171
General.........................................................171
Recommendation of the Board of Trustees.........................174
PROPOSAL NO. 4 - ELECTION OF TRUSTEES....................................175
THE TRUST................................................................176
Contemplated Acquisitions.......................................176
Price Range of Common Shares and Dividend History...............179
Outstanding Shares..............................................180
Ownership of Certain Persons....................................180
Certain Transactions With Related Parties.......................184
Share Performance Graph.........................................187
Meetings of Trustees............................................189
Compensation of Trustees........................................189
Management and Executive Officers...............................189
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<PAGE>
Page
SUMMARY COMPENSATION TABLE...............................................190
Compensation Committee Interlocks and Insider
Participation.................................................192
Board Committee Report on Executive Compensation................193
Compliance with Section 16(a) of the Securities
Exchange Act of 1934..........................................193
INFORMATION REGARDING PROXIES............................................194
General.........................................................194
Quorum..........................................................194
Vote Required...................................................194
Description of Proxy............................................196
Appraisal Rights................................................196
Independent Public Accountants..................................196
Other Business..................................................196
Expenses of Solicitation........................................196
SEC Filings.....................................................197
Shareholder Proposals...........................................197
APPENDICES INDEX
Appendix A - Glossary of Certain Terms
Appendix B - Fairness Opinion of Legg Mason Wood Walker, Inc.
Appendix C - Amendments to Declaration of Trust
Appendix D - Trust's Annual Report on Form 10-K/A for fiscal
year ended December 31, 1995 (excluding exhibits)
Appendix E - Trust's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1996
Appendix F - Combined Financial Statements of Initial
Properties
Appendix G - Trust's Current Report on Form 8-K dated June 21,
1996 (excluding exhibits)
Appendix H - Financial Statements of the LibertyView Building
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<PAGE>
SUMMARY
The following is a summary of certain information contained in
this Proxy Statement. The following is not intended to be complete and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Proxy Statement and its appendices. Shareholders are urged to review
carefully the entire Proxy Statement and the appendices which form an important
part hereof. A Glossary of terms used in this Proxy Statement as defined terms
is attached as Appendix A. Such definitions are qualified in their entirety by
the more complete definitions of such terms found in the text of this Proxy
Statement.
The Meeting
Date, Time and Place:
Thursday, August 22, 1996 at 10:00 a.m., local time, at The
Union League of Philadelphia, 140 South Broad Street, Philadelphia,
Pennsylvania.
Purpose:
The purpose of the Meeting will be:
1. To consider and vote upon the SSI/TNC Transaction.
2. To consider and vote upon each of the Declaration
Amendments.
3. To consider and vote upon the restoration of voting rights
to those Common Shares now or hereafter beneficially owned by Richard M.
Osborne, including the Common Shares owned by the RMO Trust and the RMO Fund (up
to one-third of the outstanding voting power of the Trust's capital stock)
which, by virtue of the MGCL, do not presently or would not otherwise have
voting rights.
4. To elect three trustees to the Board of Trustees (in
addition to the four individuals who will be elected to the Board if the SSI/TNC
Transaction is approved and consummated).
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<PAGE>
Record Date:
The record date for the determination of Shareholders entitled
to notice of and to vote at the Meeting is June 12, 1996.
Quorum and Vote Required:
A majority of the outstanding Common Shares, represented in
person or by proxy and entitled to vote on the Proposals, will constitute a
quorum for the transaction of business at the Meeting. As of the Record Date,
1,856,200 Common Shares were issued and outstanding. The holder of each
outstanding Common Share as of the Record Date will be entitled to vote such
holder's Common Shares on each of the Proposals, subject to a limitation in
Subtitle 7 of Title 3 (Voting Rights of Certain Control Shares) of the MGCL
which, subject to certain exceptions, eliminates voting rights on Common Shares
held by persons in excess of certain percentage thresholds. To the Trust's
knowledge, on the Record Date, only one Shareholder, the RMO Trust, owned Common
Shares which, by virtue of Subtitle 7, do not have voting rights. On the Record
Date, the RMO Trust owned 538,800 Common Shares or approximately 29% of the
Common Shares then outstanding of which 167,561 currently lack voting rights.
The approval of the SSI/TNC Transaction (Proposal No. 1)
requires the affirmative vote of the holders of a majority of the votes cast on
the Proposal in person or by proxy. The approval of each of the Declaration
Amendments (Proposal No. 2) requires the affirmative vote of the holders of a
majority of the Common Shares outstanding and entitled to vote thereon.
Restoration of voting rights on those Common Shares now or hereafter
beneficially owned by Mr. Osborne which do not presently or would not otherwise
have voting rights (Proposal No. 3) requires the affirmative vote of two-thirds
of the Common Shares outstanding and entitled to vote thereon, excluding
"interested shares" (i.e., Common Shares owned by RMO Trust or its trustee,
Richard M. Osborne, or by RMO Fund, or owned by an officer of the Trust or any
employee of the Trust who is also a Trustee of the Trust). Election of Trustees
(Proposal No. 4) requires the favorable vote of a plurality of the Common Shares
present and entitled to vote, in person or by proxy, at the Meeting. For a more
detailed discussion, see "Information Regarding Proxies - Vote Required."
Richard M. Osborne, individually and as trustee of the RMO
Trust, has agreed to vote the 371,239 Common Shares owned by the RMO Trust as of
the Record Date and presently entitled to
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vote in favor of each of the Proposals. In the event that Proposal 3 is adopted,
Mr. Osborne, individually and as trustee of the RMO Trust, has agreed to vote
the 167,561 additional Common Shares owned by the RMO Trust as of the Record
Date in favor of each of the Proposals. The RMO Fund did not own Common Shares
on the Record Date.
If the SSI/TNC Transaction is approved, the Trust will have
the authority to complete such transaction upon the terms generally described in
this Proxy Statement, subject to such modifications as the Board of Trustees
determines to be fair and in the best interests of the Shareholders.
The SSI/TNC Transaction
Transaction Overview; Summary of Risk Factors:
The SSI/TNC Transaction involves the formation by the Trust of
a limited partnership (referred to herein as the Operating Partnership) in order
to acquire 19 properties in exchange for Common Shares, warrants exercisable for
Common Shares and limited partnership interests redeemable under certain
circumstances for additional Common Shares. The acquisition will be accompanied
by a consolidation of the managements of the Trust and TNC and the expansion of
the Trust's Board of Trustees to include designees of SSI and TNC. In short, the
SSI/TNC Transaction will involve a substantial change in the business of the
Trust; a substantial increase in the number of properties indirectly owned by
the Trust; and, given the mortgage debt encumbering the Initial Properties, a
substantial increase in the Trust's indebtedness.
As of the date of this Proxy Statement, 1,916,149 Common
Shares are issued and outstanding and options and warrants exercisable for an
additional 199,949 Common Shares are outstanding. In addition, the Trust's
portfolio of properties (which the Trust owns through its interest in Brandywine
Realty Partners) consists of four office properties aggregating 254,552 square
feet that are encumbered by approximately $8.9 million of indebtedness. As
explained more fully below, the Trust has also entered into an agreement to
acquire an additional office building in Cherry Hill, New Jersey (the
"LibertyView Building") containing 121,737 square feet for a purchase price of
$10.6 million. Upon completion of this acquisition, the Trust's portfolio will
aggregate 376,289 square feet and will be encumbered by approximately $18.38
million of indebtedness.
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Immediately following consummation of the SSI/TNC Transaction,
2,691,149 Common Shares will be issued and outstanding (of which 775,000 will be
owned by SSI) and, in addition to the options and warrants currently
outstanding, warrants exercisable for an aggregate of 730,000 Common Shares will
be outstanding. Moreover, each of the 1,647,353 Class A Units that will then be
either outstanding or subject to issuance within 37 months thereafter may, under
certain circumstances, be redeemed for an equal number of Common Shares.
Furthermore, assuming acquisition of the LibertyView Building (which the Trust
does not currently intend to contribute to the Operating Partnership), the Trust
will have an indirect ownership interest in 24 office and industrial properties
aggregating approximately 1.3 million square feet and encumbered by a total of
approximately $82 million of indebtedness. As part of the SSI/TNC Transaction,
three executives of TNC will become executive officers of the Trust and,
together with the current President and Chief Executive Officer, will enter into
two-year employment agreements with the Trust. In addition, three individuals
selected by SSI and TNC, and one individual selected jointly by SSI, TNC and the
Trust, will become members of the Trust's Board of Trustees. Two of the current
Board members will not stand for reelection to the Board.
The limited partnership agreement that the Trust will enter
into as part of the SSI/TNC Transaction will provide for the issuance of three
classes of limited partnership interest (in addition to the general partnership
interest which will be owned solely by the Trust): Class A, B and C Units. The
Class B and C Units will be issued solely to the Trust in exchange for its
contributions to the Operating Partnership, and the Class A Units will be issued
to SSI, TNC and six other persons in exchange for their contributions to the
Operating Partnership. Until the occurrence of a public or private equity
offering by the Trust yielding $35 million of net proceeds (or $25 million under
certain circumstances) (referred to elsewhere herein as a "Qualified Offering"),
the Class B Units will be entitled to receive an annual preferential cumulative
return in the amount of 9.5% of $3,937,000 and a liquidation preference over the
Class A Units in the amount of $3,937,000 plus the amount of any accrued but
unpaid preferential return. In addition, until the occurrence of a Qualified
Offering, the Class C Units will be specially allocated all income, gain,
profits, losses and cash flow realized by the Operating Partnership from its
ownership of the Trust's interest in Brandywine Realty Partners (the partnership
that owns the four properties in the Trust's current portfolio and which the
Trust will contribute to the partnership as part of the SSI/TNC Transaction).
Furthermore, following a
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Qualified Offering, holders of Class A Units will have the right to tender such
Units for redemption and the Trust, as general partner of the Operating
Partnership, will have the right to satisfy such redemption request by
delivering Common Shares (in the initial ratio of one Common Share for each
Class A Units for which redemption is requested).
The limited partnership agreement that the Trust will enter
into as part of the SSI/TNC Transaction contains an agreement by the Trust to
use reasonable efforts to complete a Qualified Offering as promptly as
practicable after the Closing. Although there can be no assurance that the Trust
will be able to complete a Qualified Offering, in the event it is able to do so,
the Class B and C Units will automatically be converted into additional general
partnership interests, and the Trust's entitlement to a preferential return and
a special allocation, as indicated above, will cease.
The size, complexity and nature of the SSI/TNC Transaction
present a number of risks to the Shareholders, which should be carefully
considered, including the following:
o Continuation of Historic Losses. The Properties
have historically operated at a significant loss and may continue
to operate at a loss in the future.
o Possible Decline in Common Share Trading Price. The
trading price of the Common Shares may decline as a result of the
SSI/TNC Transaction.
o Limitation on Ability to Fund Preferential Return; Impact on
Future Distributions. Certain agreements restrict the ability of the Trust to
receive distributions from the Operating Partnership. Failure of the Operating
Partnership to pay the Trust its Preferential Return may adversely affect the
Trust's ability to make distributions on its Common Shares.
o Substantial Debt Obligations. The SSI/TNC Transaction will
result in a substantial increase in both the Trust's long-term debt and the
Trust's long-term debt to total market capitalization. Inability of the Trust to
refinance a portion of such indebtedness through an equity offering may impair
the Trust's ability to make additional acquisitions.
o Inability to Pay Debt Service or Refinance Indebtedness.
There can be no assurance that the cash available from operations of the
Operating Partnership will enable it to pay debt service when due or that the
Operating Partnership will
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be able to refinance indebtedness when due. An inability of the Operating
Partnership to pay debt service when due or to refinance indebtedness at
maturity could cause the applicable lender to foreclose on its mortgage, which
could have a material adverse effect on the Trust.
o Multiple Properties Securing Individual Loans. Because
certain indebtedness is collateralized by more than one Property, a failure by
the Operating Partnership to pay debt service could allow the lender to
foreclose against one or more of such cross-collateralized Properties.
o Insufficient Working Capital. Because of the high debt
levels encumbering the Properties, substantially all cash available from
operations is expected to be used to pay debt service, rather than to generate
funds that could be used for general working capital purposes. Insufficient
working capital will limit the operating flexibility of the Operating
Partnership and the Trust.
o Absence of Independent Appraisals. Because the Trust has not
obtained independent appraisals of the Properties being contributed to the
Operating Partnership, there can be no assurance that the purchase price being
paid for the Properties accurately reflects their value.
o Dilution of Current Shareholders. The ownership of the
current Shareholders will decline dramatically and, as a result, the ability of
the current Shareholders, as a group, to determine the outcome of any matter
submitted to them for a vote will be diminished substantially. The ownership of
the current Shareholders will decline from 100% to approximately 33.5% if the
maximum number of Class A Units issuable for the Initial Properties (computed
without regard to the potential for additional Class A Unit issuances and Class
A Unit forfeitures based on the occurrence of future events) are converted into
Common Shares and if all the Warrants to be issued as part of the SSI/TNC
Transaction are exercised in full.
o Concentration of Ownership; Ownership Limitation. The
SSI/TNC Transaction will result in three persons (SSI, TNC and Richard M.
Osborne) having substantial control over the affairs of the Trust. One of the
proposed Declaration Amendments discussed under Proposal 2 - Amendment of
Declaration of Trust, will limit share ownership and have the effect of further
solidifying the control of these persons.
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o Liability of Trust as General Partner. As the sole general
partner of the Operating Partnership, the Trust will have unlimited liability
for all liabilities of the Operating Partnership other than contractual
liabilities which are non-recourse liabilities.
o Integration of Properties and Operations. The Trust may
experience difficulties in integrating its operations with those of TNC as a
result of the number of Properties involved in the SSI/TNC Transaction and the
number of persons to be employed by a new management company to be formed by the
Trust.
o Special Allocation of Certain Debt Discounts. In the event
that the debt on the Initial Properties (other than the eight Witmer Properties)
is refinanced at a discount, the Trust has agreed that 75% of the additional
equity thereby created will be allocated to the Owner contributing such Property
through the issuance of additional Class A Units.
o Conflicts of Interest. Conflicts of interest arising from
the ownership and management of the Trust and Operating Partnership may prevent
the Trust from taking certain actions that would be in the best interests of
Shareholders.
o Tax Risks. The SSI/TNC Transaction will subject the Trust to
additional risks that it may lose its status as a REIT and the favorable tax
treatment associated with such status.
o Possible Environmental Liability. As the general partner of
the Operating Partnership, the Trust could become responsible to pay clean-up
costs under current or future laws designed to protect the environment, whether
or not the Trust had any responsibility for creating, or knew of, the particular
hazard resulting in such liability.
o Limited Geographic Diversification. The limited
geographic diversification of the Properties will leave the Trust
vulnerable to downturns in the Greater Philadelphia Region.
o Risk of Future Vacancies. Each year a significant number of
leases at the Properties expire. A failure of the then existing tenants to renew
their leases may cause the vacancy rate at the Properties to increase and
require the Operating Partnership to expend additional funds attracting
replacement tenants.
o Financial Condition of Tenants; Dependence on Key
Tenants. A default by a tenant under its lease or a decision by
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a key tenant to vacate space could have a material adverse effect on the
Operating Partnership and the Trust.
o Rights of Third Parties with Respect to Certain of the
Properties. Certain of the Properties are burdened by rights of third parties
(such as rights of first refusal and first offer), and these rights may
adversely affect the Operating Partnership's ability to sell such Properties.
o Limited Indemnities. If any of the representations made to
the Trust by SSI and TNC are incorrect and the Trust suffers a loss as a result,
the Trust's ability to recover against the party making the incorrect
representation will be limited.
A more detailed discussion of the forgoing risk factors
is contained below. See "Risk Factors Relating to the SSI/TNC
Transaction."
Principal Features of the SSI/TNC Transaction:
The SSI/TNC Transaction will involve a number of related
transactions that are expected to occur simultaneously on the "Closing Date."
The summary below describes the principal features of the SSI/TNC Transaction.
o The issuance by the Trust to SSI of 775,000 Common
Shares and the SSI Warrant in exchange for $426,250 in
cash and SSI's indirect ownership interest in the
Witmer Properties (the "SSI Ownership Interest"). The
SSI Ownership Interest consists of the entire general
partnership interest in the Witmer Partnership and
SSI's entire limited partnership interest in the Witmer
Partnership.
o The contribution by the Trust to the capital of the
Operating Partnership of (i) $1,000 cash and furniture,
fixtures and equipment to be acquired by the Trust from
TNC for $25,000 in exchange for the entire general
partnership interest (which shall be comprised of units
("GP Units")) in the Operating Partnership (the
"General Partnership Interest") and (ii) substantially
all of the SSI Ownership Interest in exchange for Class
B limited partnership interests in the Operating
Partnership ("Class B Units"). The Class B Units will
entitle the Trust to receive an annual preferential
cumulative return in an amount equal to 9.5% of
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$3,937,000 (the "Preferential Return") and a liquidation
preference over the Class A Units in the amount of $3,937,000
plus the amount of any accrued but unpaid Preferential Return.
Payment by the Operating Partnership of the Preferential
Return will be subject to restrictions contained in the GECC
loan documents (collectively, the "GECC Loan Documents")
relating to the loan secured by the Witmer Properties and will
be subject to reduction as and to the extent the Trust
receives a distribution of proceeds from the sale of, or
refinancing of debt secured by, any of the Witmer Properties.
Following completion by the Trust of a Qualified Offering (as
defined below), the Class B Units will automatically convert
into an equal number of GP Units and will cease to be entitled
to receive any further accrual of the Preferential Return or a
liquidation preference. The term "Qualified Offering" means a
public or private sale of equity securities generating at
least $35 million of net proceeds to the Trust at a price per
share at least equal to the per share book value of the Common
Shares as of the end of the Trust's most recently completed
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 $5.50 (subject to adjustment in
the event of stock dividends, stock splits or reverse stock
splits).
o The sale to the Operating Partnership (i) by TNC, SSI
and certain other Owners (the "Other Owners") of
(a) all of the limited partnership interests (the
"Witmer Limited Partnership Interests") in the Witmer
Partnership owned by TNC and the Other Owners, and
(b) substantially all of the partnership interests of
the limited partnerships that own certain of the Other
Initial Properties and (ii) by SSI of fee title to the
six remaining Other Initial Properties, all of the
foregoing in exchange for an aggregate of approximately
1,515,499 Class A Units that may be redeemed, after
completion of a Qualified Offering or on any Redemption
Eligibility Date (as defined below), for cash or up to
1,515,499 Common Shares (subject to increase based on
the occurrence of certain events, including repayment
of certain indebtedness at a discount, subject to
forfeiture upon the occurrence of certain events,
including payment of participations to lenders holding
mortgages on certain of the Initial Properties, and
subject to customary antidilution adjustments). The
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Witmer Limited Partnership Interests to be sold to the
Operating Partnership by TNC and the Other Owners, together
with the additional limited partnership interests in the
Witmer Partnership included within the SSI Ownership Interest
and to be contributed to the Operating Partnership by the
Trust, will constitute all of the limited partnership
interests in the Witmer Partnership. The term "Redemption
Eligibility Date" means any 20 consecutive trading-day period,
occurring after the second anniversary of the Closing Date,
for which the average closing price of a Common Share equals
or exceeds $5.50 (subject to adjustment to reflect stock
splits, stock dividends and reverse stock splits).
o The agreement by the Operating Partnership to acquire
certain retained interests (the "Residual Interests")
in the Initial Properties on or before the first day of
the 37th full month following the Closing Date in
exchange for an aggregate of approximately 131,854
Class A Units that may be redeemed, after completion of
a Qualified Offering or on any Redemption Eligibility
Date, for cash or up to 131,854 Common Shares (subject
to forfeiture upon the occurrence of certain events,
including payment of participations to lenders holding
mortgages on certain of the Initial properties, and
subject to customary antidilution adjustments).
o The contribution to the Operating Partnership of the
Trust's general partnership interest in BRP (the "BRP
Partnership Interest") in exchange for an aggregate of
1,856,200 Units of Class C limited partnership
interests ("Class C Units") in the Operating
Partnership. 1,600,000 of these Class C Units will be
issued to the Trust at Closing in exchange for a
majority of the Trust's BRP Partnership Interest, and
approximately one year following the Closing 256,200
Class C Units (or GP Units, if by such time, a
Qualified Offering has occurred) will be issued to the
Trust in exchange for the balance of the BRP
Partnership Interest. Specifically, on the Closing
Date, the Trust will contribute to the Operating
Partnership a 97% profits interest and a 49% capital
interest in BRP (thereby retaining until approximately
one year after the Closing Date a 1% profits interest
and a 21% capital interest in BRP). Prior to a
Qualified Offering, the Class C Units will be specially
allocated all income, gain, profits, losses and cash
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flow realized by the Operating Partnership from its ownership
of the BRP Partnership Interest and will, upon the occurrence
of a Qualified Offering, automatically convert into an equal
number of GP Units. Prior to a Qualified Offering, the Class C
Units will not be allocated any income, gain, profits, losses
or cash flow relating to the ownership, operations or
disposition of any of the Properties. After a Qualified
Offering, the special allocation theretofore applicable to the
Class C Units will no longer be operative.
o The execution by the Operating Partnership of
agreements (the "Option Agreements") which provide the
Operating Partnership an option to acquire from TNC and
certain of the Other Owners substantially all of the
ownership interests in the Option Properties in
exchange for additional Class A Units that may be
redeemed, after completion of a Qualified Offering or
on any Redemption Eligibility Date, for cash or Common
Shares. The number of Class A Units that would be
issuable by the Operating Partnership upon the exercise
of its option to acquire an Option Property would be
equal to the agreed upon value of such Option Property,
minus debt secured thereby, divided by $5.50 (subject
to adjustment to reflect stock splits, stock dividends
and reverse stock splits of or on Common Shares). The
agreed upon value of each such Option Property would be
based upon the annual net operating income of such
property, as determined by the Operating Partnership
and the applicable Owner at or prior to the option
exercise. The Option Agreements will provide that the
only condition precedent to the Operating Partnership's
right to acquire each such Option Property will be the
consent of the mortgage lender of such Option Property.
As of the date hereof, no such consent has been
requested, and no determination to seek such consent
has been made. The Trust does not believe the
acquisition of the Option Properties is probable for
the following reasons: (i) the Trust has made no
decision to acquire any of the Option Properties; (ii)
although the Trust, SSI and TNC have agreed upon a
methodology for computing the purchase price for each
of the Option Properties, no values have been agreed
upon pursuant to such methodology; (iii) no lender
consent for the transfer of any of the Option
Properties has been requested or received; and (iv) the
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Trust has not conducted a due diligence assessment of any of
the Option Properties.
o A commitment by SSI to loan the Operating Partnership
funds for the benefit of the Trust to subsidize the
Trust's distributions to its Shareholders to the extent
the Trust does not receive a full distribution of the
Preferential Return on its Class B Units, subject to
certain limitations (the "SSI Subsidy"). In no event
will SSI's payment obligations under the SSI Subsidy
for any quarter exceed the aggregate amount of
distributions paid or payable for such quarter by the
Trust on the 775,000 Common Shares to be issued by the
Trust to SSI as part of the SSI/TNC Transaction. SSI's
obligation to provide the SSI Subsidy will terminate
upon the earlier of the repayment of the GECC Loan
(which matures on November 30, 2000) and a Qualified
Offering.
o A commitment by SSI to loan up to $700,000 to the
Operating Partnership to fund its working capital
requirements, subject to certain limitations. SSI's
commitment will remain in effect until the earlier of:
(i) January 31, 1998; (ii) a Qualified Offering;
(iii) a refinancing by the Operating Partnership of
indebtedness secured by one or more of the Initial
Properties which results in net proceeds sufficient to
repay amounts loaned to the Operating Partnership by
SSI; and (iv) a liquidation of the Operating
Partnership.
o A loan by SSI to the Operating Partnership of funds
that will be used by the Operating Partnership to pay a
portion of the expenses incurred by the Operating
Partnership in connection with the SSI/TNC Transaction.
The Trust estimates that, in addition to the
approximately $707,500 of expenses that it will incur,
the Operating Partnership's expenses will aggregate
approximately $762,000, and that SSI will loan the
Operating Partnership approximately $400,000.
o The contribution by TNC of its management and leasing
operations to Brandywine Realty Services Company (the
"Management Company"), a newly-formed corporation, all of the
preferred stock and five percent (5%) of the common stock of
which will be owned by the Operating Partnership. The balance
of the common stock of the
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Management Company will be owned by a partnership formed by
officers of the Trust to hold such stock.
o The expansion of the Board of Trustees from five to
seven members, and the election to the Board of Anthony
A. Nichols, Sr., Warren V. Musser and Walter D'Alessio,
three individuals associated with or designated by SSI
and TNC, and the election to the Board of Charles P.
Pizzi, an individual jointly designated by SSI, TNC and
the Trust. Two current members of the Board (Messrs.
DiLullo and Jerome) will not be standing for re-
election.
o The execution by the Management Company of two-year
employment agreements with three individuals who are
currently executives of TNC (the "TNC Executives") and
who are expected to become executive officers of the
Trust and the issuance to such executives of Executive
Warrants exercisable during the six-year period
following the date of their issuance for an aggregate
of 360,000 Common Shares at a per share exercise price
of $6.50. The balance of the Executive Warrants
(exercisable for 40,000 Common Shares) will be issued
to approximately 10 TNC employees who are expected to
become employees of the Management Company. In
addition, warrants having the same terms as the
Executive Warrants and exercisable for 30,000 Common
Shares will be awarded to John Adderly, a current
executive of the Trust.
o The execution by the Management Company of a two-year
employment agreement with Gerard H. Sweeney, the
current President and Chief Executive Officer of the
Trust, replacing Mr. Sweeney's current employment
agreement with the Trust and providing for the issuance
to Mr. Sweeney of warrants exercisable during the six-
year period following their date of issuance for an
aggregate of 300,000 Common Shares at a per share
exercise price of $6.50.
o The taking of action by the Board of Trustees: (i) to exempt
SSI, TNC and their affiliates from the operation of two
Maryland "antitakeover" statutes and (ii) to exempt the
current President and Chief Executive Officer of the Trust
from the operation of one of such statutes.
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o The execution by SSI of a "standstill" agreement
generally requiring SSI to vote its Common Shares in
accordance with the recommendations of a majority of
the Board of Trustees; requiring SSI to vote its Common
Shares in favor of the reelection to the Board of
Trustees of Richard M. Osborne or his designee; and
restricting SSI's ability to sell its Common Shares
except under specified circumstances. The agreement is
for a period of three years but is subject to early
termination in the event the Trust completes a
Qualified Offering.
In certain instances, actions described herein as actions to
be taken by SSI may be taken by SSI directly or by a wholly-owned subsidiary of
SSI.
Initial Properties:
The 19 Initial Properties contain an aggregate of
approximately 960,000 rentable square feet and are located in the Greater
Philadelphia Region (as defined below). As of March 31, 1996, the Initial
Properties were approximately 94% leased to approximately 64 tenants. For a more
detailed description of the Initial Properties, see "The SSI/TNC Transaction -
Description of the Properties."
Option Properties:
The four Option Properties contain an aggregate of
approximately 159,000 rentable square feet and are located in the Greater
Philadelphia Region. As of March 31, 1996, the Option Properties were
approximately 83% leased to approximately 17 tenants. For a more detailed
description of the Option Properties, see "The SSI/TNC Transaction - Description
of the Properties." As of the date of this Proxy Statement, lender consents to
the exercise by the Operating Partnership of its right to exercise its purchase
options have not been requested or obtained. No determination to seek any such
consent has been made.
Classes of Units:
The Units initially issuable by the Operating Partnership will
consist of GP Units and Class A, B and C Units of limited partnership interests.
All GP Units and Class B and C Units will be issued to the Trust. All Class A
Units will be issued to SSI, TNC and the Other Owners. The Operating Partnership
will be permitted to create additional classes of
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Units in connection with future acquisitions or financings. Prior to a Qualified
Offering, the Operating Partnership may create such additional classes of Units
only with the consent of holders of at least 75% of the outstanding Class A
Units.
The Class B Units will be entitled to the Preferential Return
and a liquidation preference until the completion of a Qualified Offering. Upon
completion of a Qualified Offering, the Class B Units will automatically convert
into an equal number of GP Units and will cease to be entitled to receive any
further accrual of the Preferential Return or a liquidation preference. The
$3,937,000 base on which the Preferential Return will accrue on the Class B
Units prior to a Qualified Offering will be reduced as and to the extent any net
sale or refinancing proceeds are distributed to the Trust on account of its
Class B Units from the sale of, or refinancing of debt secured by, any of the
Witmer Properties.
Prior to a Qualified Offering, the Class C Units will be
entitled to a special allocation of all income, gain, profits, losses and cash
flow realized by the Operating Partnership from its ownership of all or a
portion of the BRP Partnership Interest and will, upon the occurrence of a
Qualified Offering, automatically convert into an equal number of GP Units.
Prior to a Qualified Offering, the Class C Units will not be allocated any
income, gain, profits, losses or cash flow relating to the ownership, operations
or disposition of any of the Properties. Upon completion of a Qualified
Offering, the Class C Units will automatically convert into an equal number of
GP Units and will cease to be entitled to a special allocation.
Holders of Class A Units will have the right, following a
Qualified Offering or on any Redemption Eligibility Date, to require the
Operating Partnership to redeem their Class A Units for cash. At its option, the
Trust, as the General Partner, may assume the Operating Partnership's redemption
obligation and pay the redemption price in cash or deliver Common Shares in
exchange for the Class A Units being redeemed at an initial exchange ratio of
one Common Share for each Class A Unit. If the Operating Partnership or the
Trust elects to redeem Class A Units for cash, the holder of Class A Units will
have the right to rescind his redemption request and continue to hold his Class
A Units. The initial exchange ratio will be subject to adjustment upon the
occurrence of certain events, including stock splits or reverse stock splits,
recapitalizations or other similar events or the issuance by the Trust of Common
Shares below the then prevailing market price.
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Prior to a Qualified Offering, and after the holders of the
Class B Units have received payment of their Preferential Return, the holders of
Class A Units will have the right, together with the holders of the GP Units and
the Class B Units, to share in distributions of cash made by the Operating
Partnership out of funds legally available therefor realized from the ownership
and operation of the Properties. Such distributions will be made at times and in
amounts determined by the General Partner in its discretion. Distributions of
such cash will be made to the holders of the GP Units and Class A and B Units
pro rata in accordance with the number of Units held by each holder. No
distributions will be payable to holders of GP Units or Class A or B Units
unless, prior to such payment, all accrued interest on amounts advanced to the
Operating Partnership by SSI has been paid, and no portion of the $700,000
working capital line or the loan to cover transaction expenses to be provided to
the Operating Partnership by SSI is then outstanding.
After a Qualified Offering (and assuming no additional classes
of Units in the Operating Partnership have then been created), 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
the number of outstanding Class A Units to the sum of the number of outstanding
Class A Units plus the number of outstanding Common Shares (other than
outstanding Excluded Common Shares, as defined below). The balance would be
distributed by the Operating Partnership to the Trust on account of its GP Units
for distribution to holders of Common Shares. As used herein, the term "Excluded
Common Shares" means any Common Shares issued by the Trust after May 1, 1996 the
net proceeds of which issuance are not contributed to the Operating Partnership.
Throughout this Proxy Statement, statements made as to the
approximate number of Units that will be issued on the Closing Date are based on
the outstanding principal balances of the mortgage debt encumbering the Initial
Properties as of March 31, 1996. The actual number of Units that will be issued
on the Closing Date will be adjusted to reflect actual debt balances relating to
the Initial Properties on the Closing Date. For each $5.50 of additional equity
created as the result of a reduction in the debt balance encumbering an Initial
Property between March 31 and the Closing Date, one Class A Unit will be issued.
The Operating Partnership may, in the future, issue additional
Class A Units (or other newly-created classes of
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limited partnership interests) to third parties in exchange for cash or other
property. Any such newly-created classes of limited partnership interest may
have a priority as to distributions or upon liquidation over any other class of
Units. Prior to a Qualified Offering, except as expressly permitted in the
Operating Partnership Agreement, the Operating Partnership will be permitted to
issue additional GP Units, Class A, B and C Units or a newly-created class of
limited partnership interest only with the consent of holders of at least 75% of
the then outstanding Class A Units.
Number, Class and Recipients of Units:
The table below sets forth the number and class of Units to be
issued on the dates indicated and to the parties indicated, based on the
outstanding principal balances of the mortgage indebtedness encumbering the
Initial Properties as of March 31, 1996.
Units
Issuance
Class Number Date Recipient
- ----- ------ -------- ---------
A 1,227,662 Closing Date Owners
A 287,837 Closing Date Escrow
A 131,854 (1) Owners
B 715,818 Closing Date Trust
C 1,600,000 Closing Date Trust
C 256,200 (2) Trust
GP 182 Closing Date Trust
=========
4,219,353
- ---------------------
(1) These units will be issued no later than the 37th full month following the
Closing Date.
(2) These units will be issued one year and one day following the Closing Date.
In the event the Closing Date occurs on August 1, the number
of Class A Units that would be issued would increase from 1,647,353 to
approximately 1,647,818. In the event the Closing Date occurs on September 1,
the number of Class A Units that would be issued would increase from 1,647,353
to approximately 1,655,636.
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Additional Share Issuances:
The Trust will be under no obligation to contribute the net
proceeds of Common Share issuances to the Operating Partnership, whether before
or after the occurrence of a Qualified Offering.
Prior to a Qualified Offering, the Trust may contribute
proceeds of additional Common Share issuances to the Operating Partnership only
with the consent of holders of at least 75% of the then outstanding Class A
Units. Following a Qualified Offering, the Trust may contribute proceeds of
additional Common Share issuances without such approval. A contribution of
proceeds prior to a Qualified Offering will be on terms agreed to by the Trust
and the Operating Partnership at the time of the contribution. A contribution of
proceeds following a Qualified Offering will be in exchange for a number of GP
Units equal to the number of Common Shares the proceeds of which are
contributed. In the event the Trust does not contribute such proceeds to the
Operating Partnership, the Common Shares so issued will constitute Excluded
Common Shares.
Reasons for the SSI/TNC Transaction:
The primary reasons why the Board of Trustees approved the
SSI/TNC Transaction, and is recommending its approval by Shareholders, are as
follows:
o Attractive Terms. The Trustees believe the economic
terms of the SSI/TNC Transaction (including the
valuation of the Properties, the Trust's receipt of a
preferred equity position in the Operating Partnership
prior to a Qualified Offering, the sale price of Common
Shares to SSI, the exercise price of the SSI Warrants
and the Executive Warrants and the option to acquire
the Option Properties) represent an attractive
investment.
o Size and Diversification of Assets. The SSI/TNC
Transaction will increase the size and diversity of the
Trust's asset base. Accordingly, the continuing
ownership interest of the Trust's current Shareholders
will represent an investment in an enterprise with a
significantly larger and more diversified property
portfolio and tenant base and enhanced operating
potential.
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o Enhanced Access to Capital Markets and Potential
Growth. The Trustees believe, based in part on the
analyses of the Trust's financial advisor, that the
SSI/TNC Transaction will enhance the Trust's ability to
obtain capital on attractive terms for property
acquisitions and debt refinancings. In contrast, the
Trustees believe that the Trust's current smaller size
has inhibited its ability to obtain public and private
financings on attractive terms.
o Increased Stability. The operations of the Trust
following the SSI/TNC Transaction are expected to
generate sufficient Funds from Operations better to
enable the Trust to maintain its existing dividend rate
or possibly increase its rate of distributions to
Shareholders. "Funds from Operations" is defined
generally as net income (loss), excluding extraordinary
items, gains and losses from sales of property, plus
depreciation and amortization and other non-cash
charges and similar adjustments for unconsolidated
subsidiaries. Actual Funds from Operations will depend
on a variety of factors, including occupancy levels,
rental rates at the Properties and interest rates. As
of March 31, 1996, mortgage indebtedness encumbering
the Initial Properties in the outstanding principal
amount of approximately $32.3 million bore interest at
a floating rate. Funds from Operations does not
represent net income or cash flows from operations as
defined by generally accepted accounting principles 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 Trust's operating performance or to
cash flows as a measure of liquidity.
o Preferred Equity Position in the Operating Partnership.
The SSI/TNC Transaction will provide the Trust, through
its ownership of Class B Units, with a preferred equity
position in the Operating Partnership. This preferred
equity position will entitle the Trust, prior to a
Qualified Offering and subject to restrictions in the
GECC Loan Documents, to the Preferential Return and a
liquidation preference over the Class A Units. The
Trustees believe the Trust's entitlement to the
Preferential Return represents an attractive return on
a portion of the Trust's investment in the Operating
Partnership.
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<PAGE>
o Affiliation with SSI. The significant investment SSI
will make in the Trust as part of the SSI/TNC
Transaction will be accompanied by the addition of
well-regarded executives within the Philadelphia
business community to the Board of Trustees, and will
provide an affiliation with SSI that may be beneficial
to the Trust. However, SSI and the Trust have not
entered into any contractual arrangements that would
obligate SSI to provide the Trust with any specific
management, administrative or other services.
o Additional Expertise. The SSI/TNC Transaction will transform
the Trust into a full-service, fully integrated and
self-managed commercial real estate company with ancillary
construction, acquisition, leasing, management and other
tenant-related services.
General Authority if Transaction is Approved:
If the SSI/TNC Transaction is approved, the Trust will have
the authority to complete it upon the terms generally
described in this Proxy Statement, subject to such
modifications as the Board of Trustees determine to be fair
and in the best interests of the Shareholders.
Consequences of Failure to Approve the SSI/TNC Transaction:
The failure of the Shareholders to approve the SSI/TNC
Transaction would result in the following consequences:
o The Trust would continue to conduct its business in a manner
consistent with past practices and the Trust's existing
Shareholders, as a group, would continue to determine the
outcome of any matter submitted to the Shareholders for
approval;
o The Trust will remain liable for expenses (estimated at
approximately $759,500) incurred by it in connection
with the SSI/TNC Transaction. If the SSI/TNC
Transaction is consummated, the Operating Partnership
will be responsible to pay approximately $52,000 of
such expenses. See, "The SSI/TNC Transaction -
Expenses of SSI/TNC Transaction."
There is no assurance that the SSI/TNC Transaction will be
consummated even if it is approved by Shareholders.
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<PAGE>
Management Following the SSI/TNC Transaction:
In connection with the SSI/TNC Transaction, it is anticipated
that substantially all of the employees of TNC (17 as of April 15, 1996) and of
the Trust (five as of April 15, 1996) will become employed by the Management
Company and the TNC Executives, Anthony A. Nichols, Sr., John P. Gallagher and
Brian F. Belcher, will become executive officers of the Trust. Mr. Nichols will
become Chairman of the Board of Trustees and Gerard H. Sweeney will remain the
Chief Executive Officer and President of the Trust. If the SSI/TNC Transaction
is consummated, the Board of Trustees will be expanded from five to seven
persons. In addition, an executive committee of the Board will be formed and
will have such authority as may from time to time be delegated to it by the full
Board, subject to applicable law. The initial members of the executive committee
of the Board are expected to be Anthony A. Nichols, Sr. (Chairman), Richard M.
Osborne, Gerard H. Sweeney and Warren V. Musser.
Interests of Certain Persons:
Following consummation of the SSI/TNC Transaction, Mr. Sweeney
will remain the President and Chief Executive Officer of the Trust. His annual
salary will be increased from $130,000 to $141,500 and he will enter into a
two-year employment agreement. In addition, Mr. Sweeney will be awarded warrants
exercisable for six years for 300,000 Common Shares at a per share exercise
price of $6.50 (subject to customary antidilution adjustments). Mr. Sweeney will
continue to hold the options exercisable for 140,000 Common Shares which were
awarded to him in 1994. In addition, John Adderly, an employee of the Trust,
will be awarded six-year warrants exercisable for 30,000 Common Shares at a per
share exercise price of $6.50 (subject to customary antidilution adjustments).
Three of the Trust's current five member Board of Trustees are
expected to remain members of the Board following completion of the SSI/TNC
Transaction.
The Trust anticipates that it will retain Legg Mason to serve
as an underwriter of the Trust's contemplated equity offering.
Tax Consequences to Shareholders:
The Shareholders of the Trust will not recognize gain
or loss as a result of the consummation of the SSI/TNC
Transaction. Following the SSI/TNC Transaction, the Trust
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intends to continue to qualify as a real estate investment trust ("REIT") for
federal income tax purposes. As a result of the SSI/TNC Transaction, certain
changes to the structure and nature of the Trust's operations will expose the
Trust to additional risks that it may fail to maintain such qualification. For a
discussion of the tax consequences of the SSI/TNC Transaction to the Trust and
its Shareholders and certain actions that have been taken by the Trust to
minimize tax risks, see "The SSI/TNC Transaction - Federal Income Tax
Considerations" and "Risk Factors."
Accounting Treatment:
The SSI/TNC Transaction will result in the acquisition of the
Initial Properties from SSI, TNC and the Other Owners in exchange for Class A
Units of the Operating Partnership, a subsidiary of the Trust. The Initial
Properties will be recorded at fair value using purchase accounting principles.
The Trust will transfer its 70% controlling interest in BRP to the Operating
Partnership in exchange for 1,856,200 Class C Units using the carryover basis of
the assets, since the Trust controls and will continue to consolidate these
assets in the Operating Partnership. TNC and SSI have certain other operations
which will not be acquired by the Operating Partnership and, therefore, the
combined financial statements of the Initial Properties are not intended to
represent the financial position and results of operations of TNC or SSI.
No Appraisal Rights:
Holders of Common Shares will not have appraisal rights (i.e.,
the right to receive payment of the fair value of their Common Shares in
exchange for their Common Shares) whether or not they vote for or against the
SSI/TNC Transaction.
Opinion of Legg Mason:
Legg Mason rendered an oral opinion to the Board of Trustees
on May 6, 1996 that the SSI/TNC Transaction is fair to the Shareholders from a
financial point of view. On July 12, 1996, Legg Mason delivered to the Board its
written opinion to the effect that, as of such date, the SSI/TNC Transaction is
fair to the Shareholders from a financial point of view. Legg Mason has received
a $100,000 fee from the Trust for its advisory services to the Board in
connection with the SSI/TNC Transaction. See, "The SSI/TNC Transaction - Opinion
of Financial Advisor" and Appendix B to this Proxy Statement.
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<PAGE>
Regulatory Requirements; Approvals:
No Federal or state regulatory requirements must be complied
with, nor any governmental approvals obtained, in connection with the SSI/TNC
Transaction. No Federal or state agency has passed upon the fairness of the
SSI/TNC Transaction.
Third Party Consents:
As of the date of this Proxy Statement, the consent of the
applicable lender to the exercise by the Operating Partnership of its option to
acquire the Option Properties has not been requested or obtained. No
determination to seek any such consent has been made because no determination to
acquire any of the Option Properties has been made.
Effective Date of the SSI/TNC Transaction:
It is contemplated that the SSI/TNC Transaction will occur as
soon as practicable after its approval by Shareholders.
Additional Information Concerning SSI:
SSI 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. Such reports, proxy statements and other information filed by SSI
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., located at Seven World Trade Center, New York, New York
10048 and at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511. Such material can also be inspected and copied at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005. SSI's Commission file number is 1-5620.
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<PAGE>
The Declaration Amendments and Voting Rights
Restoration Proposals
Declaration Amendments
If the Declaration Amendments are adopted, the Board of
Trustees will have the authority to cause the Trust to issue up to 60,000,000
Common Shares (in addition to the 15,000,000 Common Shares for which
authorization is already contained in the Declaration) at any price and on any
terms without approval of Shareholders. The Declaration Amendments will also
explicitly confirm the authority of the Board of Trustees to recapitalize or
consolidate the Shares, from time to time and without prior Shareholder
approval, by effectuating a reverse stock split, and will provide that such
authority may only be exercised upon the approval of not less than 80% of the
members of the Board. In addition, if the Declaration Amendments are adopted,
the Trust will no longer be required to distribute at least 85% of the net
proceeds received from the sale of, or refinancing of debt secured by, any of
the four office building currently owned by BRP. Finally, if the Declaration
Amendments are adopted, a limitation on Share ownership will be added, and such
limitation may have the effect of precluding acquisition of control of the Trust
by a third party without the consent of the Board of Trustees. Shareholders will
have the opportunity to vote separately on each of the five proposed Declaration
Amendments. See "Proposal No. 2 - Amendment of Declaration of Trust."
Adoption of the Declaration Amendments presents certain risks
to the Shareholders, which should be carefully considered, including the
following:
o Dilution of Ownership. The issuance of additional Common
Shares pursuant to the proposed amendment to increase the number of authorized
Common Shares will reduce the ownership interest in the Trust of the current
Shareholders.
o No Right to Approve Terms of Share Issuances. Unless
required by law or the rules of any stock exchange or automated quotation system
on which the Common Shares trade, Shareholders will have no right to approve
additional Share issuances, and future Share issuances may be on terms which the
Shareholders, as a group, would not approve if they were afforded the
opportunity to vote on the matter.
o Dilution of Book Value Per Share. Issuance of
Shares at a price below the per share book value may result in a
reduction in the trading price of the Common Shares and may
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result in Shareholders receiving a smaller distribution per Share
upon a liquidation of the Trust.
o Reduction in Liquidity. A reverse stock split may reduce the
liquidity of the Common Shares, and a reduction in liquidity may adversely
impact the trading price of the Common Shares.
o Possible Decline in Common Share Trading Price. The trading
price of the Common Shares may decline as the result of the adoption of, of
actions taken by the Trust pursuant to authority resulting from, any or all of
the Declaration Amendments.
o Elimination of Entitlement to Distributions. Elimination
from the Declaration of the mandatory distribution requirement applicable to net
sales and refinancing proceeds from four office buildings owned by the Trust may
have an adverse effect on any Shareholder who acquired Common Shares in
anticipation of receiving a distribution upon the sale of, or refinancing of
debt secured by, any of such buildings. In addition, there can be no assurance
that any determination by the Trust to retain any such net sales or refinancing
proceeds for reinvestment or other use will generate higher returns than
Shareholders would have obtained had they received distributions of such net
proceeds.
o Further Concentration of Share Ownership. Adoption
of the amendment limiting share ownership will have the effect of
concentrating the ownership of the Trust among a small number of
Shareholders.
Voting Rights Restoration Proposal
Subtitle 7 of Title 3 of the MGCL generally denies voting
rights to Common Shares acquired in a "control share acquisition" and within
certain ranges unless two-thirds of the outstanding Common Shares (other than
those held by the person who made the acquisition and those held by an officer
of the Trust or an employee of the Trust who is also a Trustee) vote to restore
such voting rights. A control share acquisition includes Shares owned within
certain ranges: (i) one-fifth or more but less than one-third of the outstanding
voting power of Shares (the "Applicable Range"); (ii) one-third or more but less
than a majority of the outstanding voting power of Shares; and (iii) a majority
or more of the outstanding voting power of Shares. Richard M. Osborne, through
two entities controlled by him, currently owns 658,698 Common Shares (of which
59,949 are
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issuable upon the exercise of warrants). As of the Record Date, one of these
entities, the RMO Trust, owned 538,800 Common Shares, of which 371,239 have
voting rights. If Proposal No. 3 is adopted, all Common Shares now or hereafter
owned by the RMO Trust or Richard M. Osborne or entities controlled by Mr.
Osborne (including the RMO Fund) within the Applicable Range will have voting
rights identical to the voting rights possessed by other outstanding Common
Shares. If the SSI/TNC Transaction is consummated, Common Shares owned by SSI,
TNC and their current or future affiliates will not, by virtue of action of the
Board of Trustees, be subject to the voting restrictions contained in Subtitle
7.
Subtitle 7 also confers upon the Trust the right to redeem
control shares for their "fair value" (computed without regard to the absence of
voting rights of such shares). The Board of Trustees has previously determined
that use of Trust funds to redeem the Common Shares owned by the RMO Trust which
do not presently have voting rights is not in the best interests of the Trust or
the Shareholders and, accordingly, have waived such redemption right. Such
waiver was not conditioned on a vote by Shareholders to restore voting rights to
those Common Shares owned by the RMO Trust which presently do not have voting
rights.
On June 21, 1996 (the "Investment Date"), the RMO Fund
invested $1,329,806 in the Trust, by loaning the Trust $992,293 on an unsecured
basis at the prime rate as in effect from time to time and by acquiring 59,949
units at a per unit price of $5.63. Each unit issued to the RMO Fund includes
one Common Share and one six-year warrant to purchase an additional Common Share
at $6.50 (subject to customary antidilution adjustments). Under certain
circumstances following the issuance by the Trust of additional Common Shares,
the Trust will be obligated to issue additional units, valued at $5.63 each, as
a mandatory prepayment of the RMO Fund's loan. The loan matures on the third
anniversary of the Investment Date. The RMO Fund is a limited liability company,
and Mr. Osborne has advised the Trust that he has the sole right to direct the
sale and voting of Common Shares owned by the RMO Fund.
Recommendations of the Board of Trustees:
The Board of Trustees unanimously recommends a vote FOR the
SSI/TNC Transaction, FOR the Declaration Amendments, FOR the restoration of
voting rights on those Common Shares owned by the RMO Trust and the RMO Fund
which do not have voting rights and FOR the election of the three Trustees
nominated by the Board (in
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addition to the four persons nominated for election as part of
the SSI/TNC Transaction).
Contemplated Acquisitions:
As of the date hereof, the Trust is actively evaluating
potential acquisitions of additional commercial real estate. In addition, the
Trust has entered into an agreement to acquire a seven-story, 121,737 square
foot office building in Cherry Hill, New Jersey for approximately $10.6 million.
The acquisition of this office building is conditioned on funding under a bank
commitment letter obtained by the Trust, including receipt by the bank of an
appraisal acceptable to it. If the Trust completes the foregoing acquisition,
the Trust does not intend, as of the date hereof, to contribute the acquired
property to the Operating Partnership. See "The Trust - Contemplated
Acquisitions."
RISK FACTORS RELATING TO THE SSI/TNC TRANSACTION
There are risks to the current Shareholders associated with
the SSI/TNC Transaction, including but not limited to the following:
o Continuation of Historic Losses. The Properties have,
in the aggregate, historically operated at a
significant loss. For the year ended December 31,
1995, the aggregate net loss before extraordinary items
on the Initial Properties was $3,379,000 and the
aggregate net loss on the Option Properties was
approximately $1,064,000. See "Brandywine Realty Trust
- Pro Forma Condensed Financial Information." No
assurance can be provided that, following the
consummation of the SSI/TNC Transaction, these losses
will not continue in the future.
o Possible Decline in Common Share Trading Price. The
SSI/TNC Transaction will also result in a pro forma
increase in the Trust's net loss for the year ended
December 31, 1995 from ($824,000) ($.44 per share) to
($3.332 million) ($1.21 per share). See "Brandywine
Realty Trust - Pro Forma Condensed Financial
Information." There can be no assurance that, as a
result of this or other factors relating to the SSI/TNC
Transaction, the trading price of the Common Shares
following consummation of the SSI/TNC Transaction will
not be less than the current market price for the
Common Shares.
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<PAGE>
o Limitation on Ability to Fund Preferential Return; Impact on
Future Distributions. The GECC Loan Documents permit the
Witmer Partnership to distribute to its partners a nine
percent (9%) non-compounding return on its equity of
$3,805,400 (plus draws made on a $1,500,000 letter of credit
posted by SSI as additional collateral for the GECC Loan), but
only so long as (i) space currently occupied by a designated
tenant in one of the Witmer Properties has been re- leased to
such designated tenant or to another tenant on terms approved
by GECC, (ii) the Adjusted Net Operating Income (calculated
without regard to the revenues or expenses of the Witmer
Property located in Lawrenceville, New Jersey and referred to
herein as the "Lawrenceville Premises") and the Debt Service
Coverage Ratio (calculated both inclusive of the Lawrenceville
Premises and exclusive of the Lawrenceville Premises), as such
terms are defined in the GECC Loan Documents, all meet certain
thresholds. As of this date, the condition referenced in
clause (i) of the preceding sentence has been satisfied but
the conditions referenced in clause (ii) have not been
satisfied. In the event the Witmer Partnership is unable to
satisfy the conditions referenced in clause (ii) above, then,
provided the condition referenced in clause (i) above has been
satisfied, the Witmer Partnership nevertheless has a one-time
right to distribute to its partners a 6% return on its equity.
The Preferential Return to which the Trust would be entitled
prior to a Qualified Offering as a result of its ownership of
Class B Units will be dependent upon the income generated by
all of the Initial Properties, including the Witmer
Properties. There can be no assurance either that the Witmer
Partnership will be able to make distributions to the
Operating Partnership, or that the Operating Partnership will
be able to pay (rather than accrue) the Preferential Return.
Failure of the Operating Partnership to pay the Preferential
Return may adversely affect the Trust's ability to make
distributions on its Common Shares.
o Substantial Debt Obligations. As of March 31, 1996, the
principal amount of the Trust's outstanding long-term debt was
approximately $8.9 million (which matures in April 2001
subject to the lender's right to require payment in April
1998), and its ratio of long-term debt to total market
capitalization was approximately 47%. If the SSI/TNC
Transaction is consummated (and assuming
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the Trust completes its contemplated acquisition of the
LibertyView Building and thereby incurs an additional $9.5
million of indebtedness), the Trust's pro forma outstanding
long-term debt would be approximately $82 million (of which
approximately $5.5 million matures prior to 1998), and the
Trust's ratio of long-term debt to total market capitalization
(based on (i) the number of Common Shares outstanding on March
31, 1996, (ii) an additional 1,647,353 Common Shares that
would be outstanding if the 1,647,353 Class A Units to be
issued on the Closing Date and within 37 months thereafter had
been redeemed for an equal number of Common Shares, (iii) the
775,000 Common Shares issuable to SSI pursuant to the SSI/TNC
Transaction and (iv) 59,949 Common Shares issued to the RMO
Fund in connection with its investment in the Trust on June
21, 1996) would be approximately 78%. In the event the Trust
is unable to refinance a portion of such debt through an
equity offering and thereby reduce the higher leverage ratio,
the Trust believes its ability to make additional acquisitions
will be impaired. There can be no assurance that the Trust
will be able to effect any such refinancing through an equity
offering or that any equity offering which the Trust might
effect will be on attractive terms.
o Inability to Pay Debt Service or Refinance Indebtedness. The
approximately $30.7 million of mortgage indebtedness secured
by the Witmer Properties as of March 31, 1996 and the
approximately $32.6 million of mortgage indebtedness secured
by the other Initial Properties as of March 31, 1996 require
aggregate payments of principal and interest of approximately
$6.9 million in 1997, $12.8 million in 1998 and $4.0 million,
in 1999. For purposes of the foregoing sentence, interest
rates in effect on March 31, 1996 have been assumed to remain
unchanged. While the Operating Partnership's cash available
from operations is anticipated to be sufficient to make the
required payments on such indebtedness, there can be no
assurance that such cash available from operations will not
decrease as the result of tenant delinquencies, a higher than
expected level of future vacancies, an increase in interest
rates or other circumstances and, as a result, render the
Operating Partnership unable to make debt service payments
when due. Moreover, even if cash available from operations is
sufficient to make regular debt services payments when due,
there can be
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no assurance that the Operating Partnership will be able to
refinance the indebtedness at maturity. An inability to make
regular debt service payment when due or to refinance
indebtedness when due could cause the applicable lender to
foreclose on its mortgage, which could have a material adverse
effect on the Trust.
o Multiple Properties Securing Individual Loans. The
approximately $30.7 million mortgage indebtedness owed by the
Witmer Partnership as of March 31, 1996 is secured by
mortgages held by GECC on each of the Witmer Properties. These
mortgages are cross-collateralized with one another. The
approximately $6.5 million mortgage indebtedness owed to
Fidelity Bank, N.A. as of March 31, 1996 (and referred to
herein as "Fidelity I") is secured by a single mortgage lien
encumbering Oaklands Corporate Center Buildings 45 and 50. The
approximately $13.5 million mortgage indebtedness owed to New
England Mutual Life Insurance Company ("NEMLICO") as of March
31, 1996 (and referred to herein as "NEMLICO I") is secured by
a single mortgage lien encumbering Meetinghouse Buildings 1,
2, 3 and 4. Under "cross-collateralization" provisions, the
lender would be entitled to foreclose against any property
subject to such provisions in order to recover obligations
owed with respect to another one of the subject properties.
Each of the Properties referenced above is described more
fully below. See "Description of Properties."
o Debt Financing Risks Generally. Required payments on mortgage
debt incurred to fund a substantial portion of the cost of the
Properties is not reduced if the economic performance of any
of the Properties declines. If such decline occurs, the
revenues of the Operating Partnership and the funds available
for distribution to the Trust and its Shareholders could be
adversely affected. The Operating Partnership will be subject
to risks associated with debt financing generally, including
the risk that its revenues will not be sufficient to meet
required payments of principal and interest, the risk that
indebtedness on the Properties, which in many cases will not
have been fully amortized at maturity, will not be able to be
refinanced or that the terms of such refinancing will not be
as favorable as the terms of existing indebtedness, and the
risk that necessary capital expenditures for such purposes as
renovations and reletting space will not be able to
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<PAGE>
be financed on favorable terms, or at all. If the Operating
Partnership or its subsidiary partnerships are unable to meet
a mortgage payment, the Property which is mortgaged to secure
such payments could be transferred to the mortgagee with a
consequent loss of income and asset value to the Operating
Partnership and consequently the Trust.
o Insufficient Working Capital. The Initial Properties other
than the Witmer Properties consist of 11 Properties which
secure an aggregate of approximately $32.6 million of mortgage
indebtedness as of March 31, 1996. This amount of mortgage
indebtedness will require the Operating Partnership to use
substantially all of the cash available from operations
generated by these Properties to service such indebtedness and
to establish reserves for maintenance and improvements.
Therefore, these Properties are not expected to generate
excess funds which the Operating Partnership could use for
general working capital purposes. In addition, the GECC Loan
Documents restrict the ability of the Witmer Partnership
holding the Witmer Properties to make distributions to the
Operating Partnership. Although SSI has agreed, subject to
certain conditions, to loan the Operating Partnership up to
$700,000 for working capital purposes during the 18-month
period following the Closing Date, immediately following
consummation of the SSI/TNC Transaction, the Operating
Partnership will have no other third-party source of funding
for working capital purposes. Accordingly, unless the mortgage
indebtedness encumbering the Initial Properties is refinanced,
the Operating Partnership may have insufficient funds to meet
its working capital needs, and may have insufficient funds to
pay the full amount of the Preferential Return to the Trust.
The Trust can make no assurances that any such refinancing
will occur, or that the Operating Partnership will develop any
additional sources of funding for working capital purposes.
o Absence of Independent Appraisals. The Trust has not obtained
independent appraisals of the Properties being contributed to
the Operating Partnership in connection with the SSI/TNC
Transaction. Accordingly, there can be no assurance that the
value of the Class A Units to be received by the Owners in
exchange for their contribution will accurately reflect the
value of the assets contributed by them.
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<PAGE>
o Potential Acceleration of Certain Indebtedness. In accordance
with the bank loan in the approximate amount of $9.8 million
that is anticipated to finance the acquisition by the Trust of
the LibertyView Building, the bank has reserved the right to
approve of any material changes in the ownership of the Trust,
including a change resulting from the SSI/TNC Transaction, and
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 the SSI/TNC Transaction and require
repayment of its loan, the Trust would be required to seek
replacement financing and there can be no assurance that the
Trust could obtain such replacement financing or that any such
replacement financing would be on terms acceptable to the
Trust. If the Trust were unable to refinance the loan, the
LibertyView Building could be transferred to the bank with a
consequent loss of income and asset value to the Trust.
o Dilution of Current Shareholders. The ownership of Shares by
the current Shareholders (computed without regard to the
issuance of Common Shares upon the exercise of options and
warrants presently outstanding or the warrants to be issued as
part of the SSI/TNC Transaction) will decline from 100% to
45.5% in the event that the maximum number of Class A Units
issuable for the Initial Properties are issued and converted
into Common Shares (computed (i) without regard to the
additional Class A Units that are issuable in the event any of
the Option Properties are acquired or in the event that
indebtedness encumbering certain of the Properties is repaid
at a discount or at the time the Residual Interests are
acquired and (ii) without regard to the potential forfeiture
of Class A Units at the time equity participations of lenders
holding indebtedness encumbering certain of the Initial
Properties is satisfied). The ownership of Shares by the
current Shareholders will decline from 100% to 33.5% if, in
addition to the decline caused by the conversion of Class A
Units into Shares (computed without regard to the issuance of
Common Shares upon the exercise of options and warrants
presently outstanding), the SSI Warrant, the Executive
Warrants and the Warrants to be issued to Messrs. Sweeney and
Adderly were to be exercised in full. As a result, the ability
of the current Shareholders, as a group, to determine the
outcome any matter submitted to a vote of the Shareholders,
such as the election of Trustees, will be diminished
substantially.
o Concentration of Ownership. SSI, TNC and their affiliates,
certain of whom will be executive officers and/or trustees of
the Trust, will own in the aggregate 3,465,499 Common Shares
on a fully diluted basis following consummation of the SSI/TNC
Transaction, assuming 1,515,499 Class A Units are issued for
the Initial Properties (which number has been computed (i)
without regard to the additional Class A Units that are
issuable in the event any of the Option Properties are
acquired or in the event that indebtedness encumbering certain
of the Properties is repaid at a discount or at the time the
Residual Interests are acquired and (ii) without regard to the
potential forfeiture of Class A Units at the time equity
participations of lenders holding indebtedness encumbering
certain of the Initial Properties is satisfied). Such fully
diluted ownership consists of
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(i) the 775,000 Common Shares to be issued to SSI by the Trust
on the Closing Date, (ii) the 1,175,000 Common Shares issuable
upon the exercise of the SSI Warrant and the Executive
Warrants and (iii) the Common Shares issuable in redemption of
the Class A Units, assuming all Class A Units are redeemed for
Common Shares. In addition, Richard M. Osborne beneficially
owns, as of the date hereof, 658,698 Common Shares (including
59,949 Common Shares issuable upon exercise of warrants) or
approximately 33.3% of the Common Shares presently
outstanding. As a result, each of SSI, TNC and Mr. Osborne
will have the ability to exert significant influence over the
affairs of the Trust. One of the proposed Declaration
Amendments will, if adopted, except from the 4.16% ownership
limitation to be established thereby each of SSI, TNC and
Richard M. Osborne, as well as entities controlled by Mr.
Osborne. This proposed amendment, which is being adopted to
protect the Trust's REIT status, will have the effect of
further solidifying the control SSI, TNC and Mr. Osborne will
have over the Trust.
o Ownership Limitation. One of the proposed Declaration
Amendments will, if adopted, limit any person from acquiring
in excess of 4.16% in value of the Trust's Shares. Certain
attribution rules will apply for purposes of determining
compliance with this ownership limitation. This proposed
amendment is being adopted to protect the Trust's REIT status.
Although the Trust is unaware of any Shareholder who will,
immediately following consummation of the SSI/TNC Transaction,
own in excess of such ownership limitation (other than SSI,
TNC and Richard M. Osborne and their affiliates, each of which
will be subject to a separate, higher ownership limitation),
any Shares owned by any other Shareholders in excess of such
ownership limitation will automatically be deemed to have been
transferred to the Trust, as trustee of a special trust for
the benefit of a person to whom the Shares may be transferred
without violating the ownership limitation. While held in such
a trust, such Shares will not be entitled to dividends or
distributions and will not be entitled to vote on any matters.
The entire text of the proposed Declaration Amendments is
included in Appendix C to this Proxy Statement.
o Liability of Trust as General Partner. As part of the SSI/TNC
Transaction, the Trust will become the general partner in the
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Operating Partnership and will contribute substantially all of
its assets to the Operating Partnership. As the general
partner, the Trust will have unlimited liability for all the
liabilities of the Operating Partnership other than
liabilities under certain of the mortgage loans secured by
Properties which will be non-recourse to the Operating
Partnership.
o Integration of Properties and Operations. The SSI/TNC
Transaction contemplates the acquisition of a substantial
number of properties, personnel and business operations.
Following completion of the SSI/TNC Transaction, the Trust
will have increased the number of persons it employs, directly
and through the Management Company, from 5 to approximately
22, and will have increased the number of properties that it
owns or controls from 4 to 27. As such, the SSI/TNC
Transaction may involve potential difficulties in integrating
the operations of TNC with those of the Trust. Consequently,
no assurance can be given as to the effect of the SSI/TNC
Transaction on the Trust's business or results of operations.
o Special Allocation of Certain Debt Discounts. In the event
that additional equity in any of the Initial Properties (other
than the eight Witmer Properties) is refinanced at a discount,
the Trust has agreed that 75% of the additional equity thereby
created will be allocated to the Owner contributing such
Property through the issuance of additional Class A Units.
o Conflicts of Interest. The Operating Partnership's ownership
of the Properties will result in certain conflicts of interest
between the Trust and the holders of Class A Units. Holders of
Class A Units and the Trust may have different objectives
regarding the appropriate pricing and timing of any sale of
Properties since, prior to the exchange of Class A Units for
Common Shares, holders of such Units will suffer different and
more adverse tax consequences than the Trust upon the sale of
any of the Properties. Therefore, holders of Class A Units,
including the individuals who will constitute three of the
Trust's seven Trustees, may be opposed to the sale of a
Property even though such sale might otherwise be in the
interest of the Trust. In addition, prior to a Qualified
Offering, the Operating Partnership Agreement will restrict
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the ability of the Trust, as the Operating Partnership's
general partner, to take certain actions without the consent
of holders of at least 75% of the outstanding Class A Units.
To the extent such holders and the Trust have different
objectives with respect to any of these actions, such holders
will be able to prevent the Trust from taking any such action.
The Operating Partnership's ability to sell or refinance debt
secured by any of the Properties will not, however, be subject
to the approval or consent of holders of Class A Units.
o Tax Risks. The SSI/TNC Transaction will subject the Trust to
additional risks that it may lose its status as a REIT.
- Required Distributions; Potential Requirement to
Borrow. To obtain the favorable tax treatment
associated with qualification as a REIT, the Trust
generally will be required each year to distribute
to its Shareholders at least 95% of its net
taxable income. The Trust intends to make
distributions to its Shareholders to comply with
the distribution provisions of the Internal
Revenue Code of 1986, as amended (the "Code") and
to avoid income and other taxes. Differences in
timing between the receipt of income and the
payment of expenses in arriving at taxable income
(of the Trust or the Operating Partnership) and
the effect of required debt amortization payments,
as well as the limitations imposed by the GECC
Loan Documents on the Witmer Partnership's ability
to make distributions to the Operating
Partnership, could require the Trust, on its own
behalf or through the Operating Partnership, to
borrow funds on a short-term basis to meet the
distribution requirements that are necessary to
achieve the tax benefits associated with
qualifying as a REIT. In such instances, the
Trust, 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.
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<PAGE>
- Ownership Limits. In order to maintain its
qualification for Federal income tax purposes as a
REIT, not more than 50% in value of the
outstanding Shares of the Trust may be owned,
directly or indirectly, by five or fewer
individuals (as defined in the Code to include
certain entities) in the last half of any taxable
year. To ensure that the Trust will not fail to
qualify as a REIT under this test, the Declaration
Amendments will limit any person or entity from
owning in excess of a specified percentage in
value of Shares. The Trust believes, on the basis
of facts known to it as of the date hereof and
advice from its tax advisors, that ownership of
the Shares on the date hereof and on a pro forma
basis giving effect to the Shares to be issued in
the SSI/TNC Transaction, will not cause the Trust
to fail to comply with the foregoing requirement.
If the Internal Revenue Service ("IRS")
successfully were to challenge the Trust's
compliance with such requirement, the Trust's REIT
status, and the favorable tax treatment relating
to such status, could be lost.
- Consequences of Failure of the Operating
Partnership (or the Witmer Partnership or a Title
Holding Partnership) To Be Treated as a
Partnership. The Operating Partnership, the
Witmer Partnership and the Title Holding
Partnerships (as defined below) are intended to be
treated as partnerships (or other pass-through
entities) for Federal income tax purposes. If the
IRS successfully were to challenge the tax status
of the Operating Partnership, the Witmer
Partnership or any Title Holding Partnership as a
partnership (or other pass-through entity) for
Federal income tax purposes, the Operating
Partnership, the Witmer Partnership or the
affected Title Holding Partnership would be
taxable as a corporation. In such event, since
the value of the Trust's ownership interest in the
Operating Partnership would exceed, and the value
of the Operating Partnership's ownership interest
in the Witmer Partnership, or in any Title Holding
Partnership could exceed, 5% of the Trust's
assets, the Trust would cease to qualify as a REIT
for Federal income tax purposes.
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<PAGE>
- Consequences of the Management Company Corporate
Structure. A requirement for REIT qualification
is that the value of any one issuer's securities
held by the Trust not exceed 5% of the value of
the Trust's total assets on certain testing dates.
In addition, the Trust may not own more than 10%
of any one issuer's outstanding securities
(excluding securities of a qualified REIT
subsidiary or another REIT). The Operating
Partnership will own 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 will
perform management, development and leasing
services for the Operating Partnership and other
real estate owned in whole or in part by third
parties. A portion of the income earned by and
taxed to the Management Company would be
nonqualifying income if earned directly by the
Trust. 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
Trust only indirectly as dividends and interest
that qualify under the 95% gross income test. The
Trust believes that its indirect interest in the
securities of the Management Company will not
exceed 5% of the value of the Trust's total
assets. In addition, the Trust will not own
directly or indirectly more than 10% of the voting
securities of the Management Company. If the
Trust were to fail to satisfy the 5% value
requirement or the 10% voting securities test
described above, or otherwise were to fail to
qualify as a REIT, it generally would be subject
to Federal income tax (including any applicable
alternative minimum tax) on its taxable income at
regular corporate rates. In addition, unless
entitled to relief under certain statutory
provisions, the Trust would be disqualified from
treatment as a REIT for the four taxable years
following the year during which qualification is
lost. The additional tax would significantly
reduce the Funds from Operations available for
distributions to Shareholders.
- Real Estate Transfer Taxes. The transfer to the
Operating Partnership of certain of the Initial
Properties (the "Interests Transfer Properties")
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has been structured as transfers of 89% of the
capital interests and 99% of the cash flow and profit
interests in the limited partnerships ("Title Holding
Partnerships") owning such Properties with the
remaining interests (the "Residual Interests") to be
acquired by the Operating Partnership on the first
business day of the 37th month following the initial
transfer. 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. If the informal advice
from the Department of Revenue were ultimately
determined to be incorrect, or the Department of
Revenue changes its position, the Operating
Partnership could be required to pay real estate
transfer taxes at a time when it might not have funds
available for such purposes. Moreover, if the Trust
desired or were required, for financing purposes or
otherwise, to cause the Operating Partnership to
acquire such Residual Interests prior to the first
business day of the 37th month after such initial
transfer, the Operating Partnership could be required
to pay real estate transfer taxes. The transfer of
six of the Initial Properties (the "Title Transfer
Properties") to the Operating Partnership will result
in fee title thereto being acquired by the Operating
Partnership and will result in an immediate real
estate transfer tax.
o Possible Environmental Liability. Under various Federal, state
and local laws, ordinances and regulations, an owner of real
estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the
presence of such hazardous or toxic substances. 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. All of the Properties have been subjected to Phase
1 or similar environmental audits (which involve inspection
without soil sampling or ground water analysis) by independent
environmental consultants. Except as indicated below with
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<PAGE>
respect to the Whitelands Business Park in Exton, Pennsylvania
(the "Whitelands Property"), these environmental audit reports
(all of which have been performed or updated within the
preceding 12 months) have not revealed any significant
environmental liability, nor is the Trust aware of any
environmental liability with respect to the Properties that
the Trust's management believes would have a material adverse
effect on the Trust'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 Trust 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 duration
of SSI's indemnity agreement is five years. 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 Trust. Because the Trust 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
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liabilities or that any prior owner of any such property did
not create any material environmental condition not known to
the Trust. 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 Trust, SSI or TNC.
o Limited Geographic Diversification. Each of the Properties is
located in the Greater Philadelphia Region. The Trust's
strategy for growth is predominantly based upon expansion
within this area and into adjacent areas through acquisitions.
This limited geographic diversification will leave the Trust
vulnerable to a downturn in the economy of such region.
o Risk of Future Vacancies. Each year a significant portion of
the leases may expire at one or more of the Properties. During
1996, 17 leases covering approximately 99,000 square feet (or
10.31% of the rentable square feet of the Initial Properties)
are scheduled to expire at the Initial Properties. During
1997, five leases covering approximately 75,000 square feet
(or 7.81% of the rentable square feet of the Initial
Properties) are scheduled to expire at the Initial Properties.
If existing tenants do not renew their leases upon expiration,
the rental space will have to be re-leased, and there can be
no assurance that the vacated space will be re-leased at the
rents paid under the expired leases. Replacement leases
typically require the landlord to incur tenant improvements,
other tenant inducements and leasing commissions, in each case
which may be higher than for renewal leases.
o Financial Condition of Tenants. In the event of a default by a
tenant under its lease at any of the Properties, the Operating
Partnership may experience delays in enforcing its rights as
lessor and may incur substantial costs in protecting its
investment. At any time a tenant may seek the protection of
the bankruptcy laws, which could result in the rejection and
termination of such tenant's lease and thereby reduce the
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cash available for distribution by the Operating Partnership
to the Trust and by the Trust to its Shareholders.
o Dependence on Key Tenants. As of March 31, 1996, 10 tenants
occupied in excess of 30,000 square feet each at the
Properties. A loss of any one such significant tenant could
have an adverse effect on the Operating Partnership and the
Trust.
o Competition; General Factors. The Trust 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
Trust. No assurances can be given that such competition will
not adversely affect the Trust's revenues and funds available
for distribution to Shareholders. Income from the Properties
may also be adversely affected by the general economic
climate, local economic conditions where the Properties are
located, the attractiveness of the Properties to tenants,
competition from other available space, the ability to provide
for adequate maintenance and insurance and increased operating
expenses. Income and real estate values may also be adversely
affected by such factors as applicable laws, interest rate
levels and the availability of financing. In addition, real
estate investments are relatively illiquid and, therefore, the
Operating Partnership's ability to vary its portfolio promptly
in response to change in economic or other conditions will be
limited.
o Rights of Third Parties With Respect to Certain of the
Properties. Certain of the Properties are subject to, or
burdened by, rights of third parties to either purchase such
Properties, or participate in the sale proceeds upon the
transfer of such Properties, or both. NEMLICO has a right of
first refusal to purchase Horsham Business Center Buildings
11-14 (which are Option Properties) pursuant to which such
lender must be given the right to purchase such properties on
the terms and conditions set forth in a bona fide third party
offer to purchase such properties before such third party
offer can be accepted. NEMLICO also has a right of first
refusal to purchase Iron Run Industrial Park, Building 3 (an
Initial Property). In addition, GECC has a right of first
offer on each of the Witmer Properties, pursuant to which none
of the Witmer Properties may be offered to a third party
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<PAGE>
unless such Witmer Property is first offered to GECC at the
stated price net of GECC's participation interest and the
outstanding loan balance, which offer GECC shall have 30 days
to accept. In addition, a tenant at 16 Campus Boulevard,
Newtown Square (an Initial Property) has a right of first
offer to purchase the property during the term of its lease,
which expires in June 2006 and which is subordinate to GECC's
right of first offer. Finally, the tenant at One Progress
Avenue has a right of first offer to purchase the property
during the term of its lease, which expires in July 2006.
These rights of first refusal and first offer may adversely
affect the Operating Partnership's ability to sell these
Properties.
Certain of the Properties are subject to third party
participation rights. An affiliate of the tenant at 16 Campus
Boulevard, Newtown Square (an Initial Property) is a special
limited partner in Newtech III Limited Partnership (a
subsidiary of the Witmer Partnership and the fee owner of such
property) and, as such, is entitled to receive a thirty-five
percent (35%) participation in the residual cash flow of that
property, defined to include operating cash flow and
extraordinary cash flow (cash flow from the sale of the
property) after (i) a payment of 10% of residual cash flow on
the invested equity in the Property and (ii) payment of the
accrued but unpaid 10% return on the invested equity and
return of the invested equity from any extraordinary cash
flow. In addition, GECC is entitled to participate in the
proceeds generated by a sale or refinancing of the
indebtedness secured by the Witmer Properties. NEMLICO
participates in the cash flow generated by the Meetinghouse
Buildings 1, 2, 3 and 4, and Iron Run III (all Initial
Properties), and in the proceeds generated by a sale thereof,
and NEMLICO is also entitled to receive a participation in the
proceeds generated by a sale or refinancing of the Option
Properties. All of these participation rights diminish the
economic benefits that the Operating Partnership can obtain
from ownership of such Properties. Each of the Properties
referenced above is described more fully below. See
"Description of Properties."
o Limited Indemnities. Although SSI and TNC will make customary
representations and warranties, on a several basis, in favor
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of the Trust and the Operating Partnership in connection with
the SSI/TNC Transaction, in the event that the Trust or the
Operating Partnership were to suffer a loss as a result of the
inaccuracy of any such representations and warranties, the
recourse of the Trust and the Operating Partnership against
them will be limited to the Class A Units issued to them.
797,665 of the Class A Units to be issued to TNC will be
subject to a prior pledge to secure obligations of TNC to GECC
and therefore may be unavailable to secure indemnification
obligations of TNC in favor of the Trust. Under certain
circumstances, the Trust or the Operating Partnership could be
required to make a cash payment to a third party and be
limited, in its indemnity claim relating to such payment, to
recovery of certain of the Class A Units.
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SUMMARY SELECTED FINANCIAL INFORMATION
The following sets forth summary selected financial information for the
Trust for each of the five years during the period ended December 31, 1995 and
as of and for the three months ended March 31, 1996.
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the Trust and all of the financial statements included in the
Trust's Annual Report on Form 10-K for the year ended December 31, 1995, and in
the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
each as previously filed with the Securities and Exchange Commission. Copies of
such Reports are attached hereto as Appendices D and E respectively.
Brandywine Realty Trust (dollars in thousands except per share data)
--------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months
Ended
1991 1992 1993 1994 1995 March 31, 1996
---- ---- ---- ---- ---- --------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenue(a) $ -- $ -- $ -- $ 4,192 $ 3,666 $ 1,045
Income from acquisition -- -- 2,469 -- -- --
of limited partner
interests in Brandywine
Specified Property
Investors Limited
Partnership
Provision for loss on (6,700) -- -- (5,400) -- --
real estate investments
Gain on sales of real -- -- -- 1,410 -- --
estate investments
Extraordinary item: gain on -- -- -- 7,998 -- --
extinguishment of debt
Net income (loss) (6,705) (1) 2,468 7,567(b) (824) 10
Net income (loss) per share (3.61) -- 1.33 3.74 (0.44) 0.01
Cash Distributions -- -- -- 2,914 1,021 --
Cash Distributions per Share -- -- -- 1.57 0.55 --
Total Assets 2,128 2,123 4,604 17,873 17,105 16,957
Mortgage notes payable -- -- -- 6,899 8,931 8,905
Other Data:
Funds from operations(b) -- -- 2,467 (706)(b) 578 244
Cash flows from operating -- -- -- (628) 497 196
activities
Cash flows from investing -- -- 2,469 9,559 (701) (44)
activities
Cash flows from financing -- -- -- (9,635) (722) (291)
activities
</TABLE>
<PAGE>
(a) Prior to 1994, the Trust accounted for its investment in Brandywine
Realty Partners ("BRP") using the equity method of accounting and,
accordingly, received no operating revenue from its investment in BRP
for the years ended December 31, 1991, 1992 and 1993, respectively.
(b) Management generally considers Funds from Operations to be a useful
financial performance 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 Trust'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 Trust'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 Trust's
calculation of Funds from Operations. In 1996, the Trust adopted the
new definition of Funds from Operations. The new definition of 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 non-recurring items. The old definition of Funds from
Operations is defined as net income (loss) excluding extraordinary
items, gains and losses from sales of property, plus depreciation and
amortization and other non-cash charges and similar adjustments for
unconsolidated subsidiaries. Had the Trust used the new definition in
calculating Funds from Operations for 1991 through 1995, Funds from
Operations for such years would be as indicated in the following table
(in thousands):
<TABLE>
<CAPTION>
Three Months
Ended
1991 1992 1993 1994 1995 March 31, 1996
---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(6,705) $ (1) $ 2,468 $ 7,567 $ (824) $ 10
Add back (deduct from):
Depreciation attributable -- -- -- 1,146 869 202
to real property
Amortization attributable -- -- -- 162 138 32
to leasing costs,
tenant allowances and
improvements
Gain on sales of real -- -- -- (1,410) -- --
estate investments
</TABLE>
-53-
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended
1991 1992 1993 1994 1995 March 31, 1996
---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Extraordinary gain on -- -- -- (7,998) -- --
extinguishment of debt
Nonrecurring items
Provision for loss on 6,700 -- -- -- -- --
real estate
investments
Income from acqui- -- -- (2,469) -- -- --
sition of limited
partner interests
in BSPI
Write off of deferred -- -- -- -- 354 --
loans costs in
connection with
debt refinancing _____ ____ _______ ______ ____ ____
$ (5) $ (1) $ (1) $ (533)(c) $ 537 $ 244
======= ======= ======= ======= ======= =======
</TABLE>
(c) Funds from operations and net income in 1994 includes the payment of
$1,114,000 from escrowed cash reserves of all future Additional
Interest (as defined in Note 5 to the Financial Statements of the Trust
for its fiscal year ended December 31, 1995) to the mortgage lender on
December 28, 1994.
-54-
<PAGE>
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(Unaudited)
The following sets forth the pro forma condensed consolidating
balance sheet of Brandywine Realty Trust as of March 31, 1996 and the pro forma
condensed consolidating statements of operations for the year ended December 31,
1995, and the three-month period ended March 31, 1996.
The pro forma condensed consolidating financial information is
presented as if (i) the transactions contemplated had been consummated on March
31, 1996, for balance sheet purposes and January 1, 1995 for purposes of the
statements of operations; (ii) the Trust recorded its general partnership
interest and approximately 58% limited partnership interest in the Operating
Partnership using the consolidation method of accounting; (iii) the
contributions of the Initial Properties had occurred as described elsewhere
herein; (iv) the investment by the RMO Fund of $1,330,000 in debt and equity
securities of the Trust had occurred; and (v) the acquisition of the LibertyView
Building had occurred directly by the Trust. This unaudited pro forma condensed
consolidating financial information should be read in conjunction with the
historical financial statements of the Trust and the Initial Properties and the
related notes thereto included elsewhere herein. In management's opinion, all
adjustments necessary to reflect the effects of the transactions to be
consummated have been made. The accounting effecting the pro forma condensed
consolidated financial information is summarized as follows:
o The Trust formed the Operating Partnership by contributing
$3,937,000 of partnership interests in the Initial Properties
in exchange for all the Class B Units (715,818 Units). The
Trust is entitled to receive a 9.5% Preferential Return on
this contribution.
o The Operating Partnership acquired the remaining limited
partnership interests in the Initial Properties, which
includes the Witmer Properties, in exchange for 1,647,353
Class A Units.
o Initial 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.
-55-
<PAGE>
o The Trust's interest in the Operating Partnership has been
determined after giving effect to the expected issuance of an
additional 131,854 Class A Units in the Operating Partnership
in connection with the acquisition of the Residual Interests
in the Title Holdings Partnerships since the Operating
Partnership and Residual Interests holders have agreed to the
purchase and sale of these interests within 37 months of the
Closing Date. Accordingly, these Units are included in the
1,647,353 Class A Units issued to SSI, TNC and the other
Owners in Note 1 to the pro forma financial information. At a
value of $5.50 per Class A Unit, the aggregate value of the
additional Class A Units to be issued for the Residual
Interests equals $725,197. The agreed purchase price
consideration for the Residual Interests is to be paid by 1999
and is equal to the amount of Class A Units in the Operating
Partnership that the Residual Interests holders would have
received at Closing, plus the cash amount necessary for the
Residual Interests holders to receive the same economic
benefit as if these interests had been transferred at Closing.
In addition, the Operating Partnership may issue additional
Class A Units if certain economic performance criteria are
achieved in the future.
o The Trust owns a 70% controlling general partnership interest
in Brandywine Realty Partners ("BRP") as disclosed in the
Trust's 1995 financial statements. The Operating Partnership
acquired the Trust's interests in BRP in exchange for
1,856,200 Class C Units which will be valued at the Trust's
carryover basis since the Trust will continue to consolidate
these assets. A total of 1,600,000 Class C Units will be
issued at Closing, and 256,200 Class C Units will be exchanged
within approximately one year. The impact on the Trust's
effective ownership of the Operating Partnership from this
second exchange will be to increase its percentage ownership
of the Operating Partnership from 58% to 61%. Since the Trust
will continue to receive substantially all of the income
allocated from BRP, there will be no material impact on the
Trust's consolidated results of Operations.
o The Trust will acquire the LibertyView Building and will
retain 100% of the ownership interests therein and therefore
consolidate it at the Trust level.
-56-
<PAGE>
o The Operating Partnership will own 5% of the voting common
stock of the Management Company and will be entitled to
receive approximately 95% of the economic benefits through its
ownership of all the preferred stock of the Management
Company. The balance of the common stock will be owned by a
partnership comprised of the officers of the Trust. The
Management Company will employ all of the key officers of the
Trust and a majority of the employees responsible for
managing, leasing and developing the Trust's properties. Since
the Operating Partnership will receive substantially all of
the economic benefits of ownership and will have common
officers and employees, the Management Company will be
reflected using the consolidation method of accounting.
The pro forma condensed consolidating financial information is
unaudited and is not necessarily indicative of what the actual financial
position would have been at March 31, 1996, nor does it purport to represent the
future financial position and the results of operations of the Trust.
-57-
<PAGE>
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
AS AT MARCH 31, 1996 (Notes 1 and 2)
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Brandywine Initial
Realty Trust Properties
Historical Historical Liberty View
Consolidated Combined Pro Forma Building Pro Forma
(A) (B) Adjustments Subtotal (J) Consolidated
------------ ----------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Real estate investments, net $13,770 $56,479 $19,836 (D)(E)(F)(H) $90,085 $10,600 $100,685
Cash and cash equivalents 701 601 1,270 (C)(D)(F)(G) 2,572 (1,420) 1,152
Escrowed cash 760 782 -- 1,542 -- 1,542
Deferred costs, net 1,336 2,194 (1,461)(E)(H) 2,069 -- 2,069
Other assets 390 1,609 (860)(H) 1,139 300 1,439
-------- -------- -------- ------ ------ --------
Total assets $16,957 $61,665 $18,785 $97,407 $ 9,480 $106,887
======= ======= ======= ======= ======= --------
Liabilities:
Mortgages and notes payable $8,905 $63,281 $ 1,328 (D)(F)(G) $73,514 $ 9,480 $82,994
Other liabilities 698 2,647 82 (H) 3,427 -- 3,427
-------- -------- ------- ------ ------- --------
Total liabilities 9,603 65,928 1,410 76,941 9,480 86,421
-------- -------- ------- ------ ------ --------
Minority Interest -- -- 8,521 (D)(H) 8,521 -- 8,521
------ ------ -------
Shareholders' Equity:
Common shares of beneficial 19 -- 8 (C)(G) 27 -- 27
interest
Additional paid-in capital 16,772 -- 3,999 (C)(D)(E)(G) 20,771 -- 20,771
(H)(I)
Stock warrants -- -- 584 (C)(G) 584 -- 584
Accumulated equity (deficit) (9,437) (4,263) 4,263 (C)(I) (9,437) -- (9,437)
-------- --------- ------- ------- --------
Total shareholders' equity 7,354 (4,263) 8,854 11,945 -- 11,945
-------- --------- ------- ------- ------ --------
Total liabilities and $16,957 $ 61,665 $18,785 $97,407 $ 9,480 $106,887
shareholders' equity ======= ======== ======= ======= ======== ========
</TABLE>
The accompanying notes and management assumptions are an integral
part of these statements.
-58-
<PAGE>
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 (Notes 1 and 3)
(Unaudited)
(in thousand, except Share and per Share amounts)
<TABLE>
<CAPTION>
Brandywine Initial Liberty Liberty
Realty Trust Properties View View
Historical Historical Building Building
Consolidated Combined Pro Forma Historical Pro Forma Pro Forma
(A) (B) Adjustments Subtotal (G) Adjustments Consolidated
------------ ---------- ----------- -------- ----- ----------- ------------
<S> <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
Other 83 3 -- 86 -- -- 86
---------- ---------- ------ ------ ------ ------ -----
Total revenue 3,666 11,344 -- 15,010 1,654 -- 16,664
---------- -------- ------ ------ ------- ------ ------
Operating expenses:
Interest 793 5,855 113 (D) 6,761 -- 678 (I) 7,439
Depreciation and
amortization 1,402 4,336 (401)(C)(E) 5,337 -- 459 (H)(J) 5,796
Other expenses 2,290 4,532 -- 6,822 798 -- 7,620
--------- -------- ------ ------ ------- ------ -------
Total operating
expenses 4,485 14,723 (288) 18,920 798 1,137 20,855
--------- -------- ------ ------ ------- ------ --------
Income (loss) before
minority interest (819) (3,379) 288 (3,910) 856 (1,137) (4,191)
Minority interest in
income (loss) 5 -- (1,263)(F) (1,258) -- -- (1,258)
--------- ------ ------ ------ -------
Income (loss) before
extraordinary items $ (824) $ (3,379) $1,551 $(2,652) $ 856 $ (1,137) $ (2,933)
======== ====== ======= ======= ========= =========
Earnings per share of
beneficial interest $ (0.44) $ (1.08)
========
Weighted average
number of shares
outstanding including
share equivalents 1,874,372 2,709,372
=========
</TABLE>
The accompanying notes and management assumptions are an integral
part of these statements.
-59-
<PAGE>
BRANDYWINE REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1996 (Notes 1 and 3)
(Unaudited)
(in thousand, except Share and per Share amounts)
<TABLE>
<CAPTION>
Brandywine Initial Liberty Liberty
Realty Trust Properties View View
Historical Historical Building Building
Consolidated Combined Pro Forma Historical Pro Forma Pro Forma
(A) (B) Adjustments Subtotal (G) Adjustments Consolidated
------------ ---------- ----------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Base rents $ 972 $1,886 $ -- $ 2,858 $ 300 $ -- $ 3,158
Tenant reimbursements 35 933 -- 968 122 -- 1,090
Management fees -- 161 -- 161 -- -- 161
Other 38 1 -- 39 -- -- 39
------ ------- ------ ------ ------ ------ -----
Total revenue 1,045 2,981 -- 4,026 422 -- 4,448
------ ------- ------ ------- ------ ------ ------
Operating expenses:
Interest 207 1,308 28 (D) 1,543 -- 170 (I) 1,713
Depreciation and
amortization 242 1,042 (64)(C)(E) 1,220 -- 115 (H)(J) 1,335
Other expenses 584 1,431 -- 2,015 212 -- 2,227
--------- -------- ------ ------ ------- ------ -------
Total operating
expenses 1,033 3,781 (36) 4,778 212 285 5,275
--------- -------- ------ ------ ------- ------ -------
Income (loss) before
minority interest 12 (800) 36 (752) 210 (285) (827)
Minority interest in
income (loss) 2 -- (312)(F) (310) -- -- (310)
--------- -------- ------ ------ ------- ------ -------
Income (loss) before
extraordinary items $ 10 $ (800) $ 348 $ (442) $ 210 $ (285) $ (517)
======== ========= ======= ======= ======= ======= =======
Earnings per share of
beneficial interest $ 0.01 $ (.19)
======== =======
Weighted average
number of shares
outstanding including
share equivalents 1,876,944 2,711,944
========= =========
</TABLE>
The accompanying notes and management assumptions are an integral
part of these statements.
-60-
<PAGE>
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 "Trust") is a Maryland real estate
investment trust. The Trust owns 4 properties and will own or hold an interest
in 24 properties, consisting of suburban office buildings in three states. Upon
consummation of the transactions contemplated herein, the Trust will be the sole
general partner and will hold an approximately 58% interest in Brandywine
Operating Partnership, L.P. (the "Operating Partnership"). The following is a
summary of the Units to be allocated based on the transactions contemplated:
Trust TNC SSI Total
--------- --------- --------- ---------
General Partner
interest 182 (1) -- -- 182
Limited Partner
interests
Class A units -- 1,251,747 (2) 395,606 (2) 1,647,353
Class B units 715,818 -- -- 715,818
Class C units 1,600,000 -- -- 1,600,000
--------- --------- --------- ---------
2,316,000 (3)(4) 1,251,747 395,606 3,963,353
========= ========= ========= =========
Ownership interest 58%(4) 32% 10% 100%
========= ========= ========= =========
(1) See Note 2(C) for the Trust's acquisition of Class B
units.
(2) Units issued to TNC, other Owners and SSI resulting from
the sale to the Operating Partnership by TNC, SSI and
other Owners of substantially all of their ownership
interests in the Initial Properties. The 1,647,353 Class
A Units include 131,854 Units to be issued within 37
-61-
<PAGE>
months following the Closing Date in exchange for Residual
Interests (of which 122,410 will be issued to TNC and other
Owners and 9,444 will be issued to SSI). SSI owns 40% of the
capital stock of TNC.
(3) Units issued to the Trust at Closing in exchange for the
contribution to the Operating Partnership of a majority
the Trust's general partnership interest in Brandywine
Realty Partners (BRP). The Trust's remaining interest in
BRP will be consolidated directly by the Trust until
contributed to the Operating Partnership at the Trust's
carryover basis.
(4) Approximately one year after Closing, the Trust will
contribute its remaining general partnership interest in
BRP in exchange for an additional 256,200 Class C Units.
This contribution will result in an increase in the
Trust's ownership of the Operating Partnership from 58%
to 61% at such time. There is no material impact on the
pro forma financial statements as a result of this two-
step contribution.
Accordingly, the Trust will control the Operating Partnership and will
consolidate the Operating Partnership for financial reporting purposes.
These pro forma financial statements should be read in conjunction
with the historical financial statements and notes thereto of the Trust, the
Initial Properties and the LibertyView Property included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the effects of the
acquisition of the Initial Properties and the LibertyView Building by the Trust
have been made.
2. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING BALANCE
SHEET:
(A) Reflects the historical consolidated balance sheet of the Trust as
of March 31, 1996.
(B) Reflects the historical combined balance sheet of the Initial
Properties as of March 31, 1996.
(C) The Trust is issuing 775,000 Common Shares and Warrants to SSI in
exchange for SSI's Ownership Interest in the Witmer Properties and
$426,250 in cash. SSI's investment in the Initial Properties
reflects SSI's recent cash investment to facilitate a debt
financing of
-62-
<PAGE>
the Witmer Properties in November 1995. The Trust will issue
699,289 Common Shares and Warrants in exchange for the SSI
Ownership Interest at a value of $3,937,000. The $5.63 per Common
Share and Warrant value is based on the range of trading prices of
the Common Shares at the time the SSI/TNC Transaction was
announced ($4-7/8 and $4-7/16 being the high and low sales prices
on March 27, 1996, the last full trading day prior to the public
announcement) and based on a $.70 per warrant value (based on a
modified Black Scholes calculation). The Trust will issue 75,711
Common Shares and Warrants at the same $5.63 per unit in exchange
for $426,250 in cash.
Dr. Cash $ 426,000
Dr. Accumulated equity (deficit) 3,937,000
Cr. Common shares of beneficial interest $ 7,000
Cr. Additional paid-in capital 3,813,000
Cr. Stock warrants (at $.70 per warrant) 543,000
The Trust contributed its investment in the limited
partnership to form the Operating Partnership and obtained the
general partnership interest and all of the Class B limited
partnership interest (715,818 Units) in the Operating
Partnership as follows:
Dr. Investment in Operating Partnership $3,937,000
Cr. Investment in limited partnership $3,937,000
(D) To borrow funds from SSI (item i) and pay the costs
associated with the acquisition of the real estate
investment of the Initial Properties totaling $650,000
(item ii). 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 Trust and
have been charged against equity and minority interest in
proportion to the respective ownership interests (58% to
the Trust and 42% 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.
(i) Dr. Cash $224,000
Cr. Mortgages and notes payable $224,000
-63-
<PAGE>
(ii) Dr. Real estate investments $325,000
Dr. Additional paid-in capital 189,000
Dr. Minority interest 136,000
Cr. Cash $650,000
-64-
<PAGE>
(E) To reflect the allocation of previously deferred costs associated
with the acquisition of the real estate investments of the Initial
Properties and the issuance of equity interests by the Trust.
Dr. Real estate investments $324,000
Dr. Additional paid-in capital 324,000
Cr. Deferred costs $648,000
(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 Initial Properties partially funded
by a loan from SSI, payable in 1999, with interest accruing at
prime.
Dr. Real estate investments $172,000
Cr. Mortgages and notes payable $112,000
Cr. Cash 60,000
(G) Reflects the investment in the Trust by the RMO Fund funded by a
note bearing interest at prime and 60,000 Common Shares plus one
warrant for 60,000 Common Shares at a price of $.70 per share. The
warrant is exercisable at $6.50 per share. The loan matures in
1999.
Dr. Cash and cash equivalents $1,330,000
Cr. Mortgage and notes payable $992,000
Cr. Common shares of beneficial interest 1,000
Cr. Additional paid-in capital 295,000
Cr. Stock warrants 42,000
(H) To record the purchase of the Initial Properties by the Trust in
exchange for 1,647,353 Class A Units at $5.50 per unit
($9,060,000) and 715,818 Class B Units at $5.50 ($3,937,000) for a
total consideration value of $12,997,000. Such value was
determined based upon (i) the $75,494,000 fair value of the real
estate assets received, (ii) the adjusted fair value of other
assets received of $3,513,000 and (iii) the fair value of the
total liabilities assumed of $66,010,000, 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 March 31, 1996, as follows:
-65-
<PAGE>
(a) Real estate investments at
fair value per Purchase
Agreement $75,494,000
(b) Other assets acquired 5,186,000 (i)
Less: deferred financing costs (813,000) (ii)
Less: straight-line rent,
receivables (860,000)(iii)
---------
Net other assets 3,513,000
(c) Mortgage Notes ($63,281,000) (i)
Other liabilities (2,647,000) (i)
Other debt transfer costs (82,000) (i)
-----------
(66,010,000)
-----------
Total Equity Consideration $ 12,997,000
Less: Accumulated Deficit of
Initial Properties (4,263,000)
----------
Total Adjustments 17,260,000
Less - Minority interest share (8,657,000)(iv)
----------
Trust - Additional paid-in capital $ 8,603,000
===========
(i) 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.
(ii) These financing costs were deferred on a historical basis by the
Initial Properties. However, the Trust 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.
(iii) The accrued straight line rent receivable has no future fair
market value as the leases acquired are at market rates.
-66-
<PAGE>
(iv) Presented below is the calculation of the minority interest share
as reflected above and reconciled to the pro formas (in thousands):
Allocation
-------------------------
Minority
Total BRT (58%) Interest (42%)
------- --------- --------------
The Trust:
Trust's equity at 3/31/96 $ 7,354
Issuance of shares to SSI in exchange for:
LP units 3,937
Cash 426
-------
Pro Forma Equity at $11,717 $ 6,834 $ 4,883
3/31/96 =======
Operating Partnership
(BOP):
Total equity investment $12,997
SSI GP interest acquired (3,937)
by BRT ------
BOP adjusted equity $ 9,060 $ 5,286 $ 3,774
------- ------- -------
$20,777 $12,120 $ 8,657
======= ======= =======
Charges against minority
interest reflecting the
cost of issuing the
Common Shares to SSI and (136)
-------
other equity interests of
the Trust (see (D)(ii))
Total pro forma
minority interest $ 8,521
at 3/31/96 =======
-67-
<PAGE>
(I) To adjust the accumulated deficit of Initial Properties
acquired subsequent to the distribution to SSI per 2(D)(i):
Dr. Additional paid-in capital $4,263,000
Cr. Accumulated equity
(deficit) $4,263,000
Dr. Additional paid-in capital $3,937,000
Cr. Accumulated equity
(deficit) $3,937,000
(J) Reflects the Trust's acquisition of the LibertyView
Building as of March 31, 1996, based upon the purchase
price of $10,600,000 acquired with cash of $1,420,000,
a mortgage note payable of $8,480,000 due in January
1999 with interest payable monthly at 8% and a note
payable to the seller of $1,000,000 due in December
1997 with no interest payable. Deferred financing
costs of $300,000 related to the mortgage note payable
have been capitalized.
3. ADJUSTMENTS TO PRO-FORMA CONDENSED CONSOLIDATING STATEMENT
OF OPERATIONS:
(A) Reflects the historical consolidated operations of the
Trust.
(B) Reflects the historical operations of the Initial Properties,
excluding the extraordinary gain on restructuring of debt of
$5,559,000.
(C) Reflects depreciation of the capitalized transfer taxes and
amortization of the deferred costs included in real estate
investments on the SSI/TNC Transaction of $7,000 and $20,000,
respectively, for the year ended December 31, 1995. For the
three months ended March 31, 1996, depreciation and
amortization was $2,000 and $6,000, respectively.
(D) Reflects the increase in interest expense of (i) $29,000 and
(ii) $84,000 related to the notes payable to SSI and the RMO
Fund, respectively (which bear interest at prime), assuming a
prime rate of 8.25%. For the three-month period ended March
31, 1996, the increase in interest expense was (i) $7,000 and
(ii) $21,000, respectively.
-68-
<PAGE>
(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 5 years in general. The
adjustments to depreciation expense for the year ended
December 31, 1995 and for the three-month period ended March
31, 1996 were determined as follows (in thousands).
<TABLE>
<CAPTION>
PRO-FORMA PRO-FORMA
FAIR MARKET AMOUNTS AMOUNTS
VALUE 12/31/95 3/31/96
<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 $ 53,816
Tenant $ 6,132 $ 6,132 $ 6,132 $ 6,545
Improvements
FF&E $ 37 $ 37 $ 37 $ 34
Total $ 56,521 $ 75,494 $ 75,494 $ 75,494
Depreciation Expense:
Buildings $ 54,226/25 years $ 2,169
$ 53,816/25 years/3 mos. $ 538
Tenant $ 6,132/5 years $ 1,227
Improvements
$ 6,545/5 years/3 mos. $ 327
FF&E $ 37/5 years $ 7
$ 34/5 years/3 mos. $ 2
Total pro-forma depreciation expense $ 3,403 $ 867
Historical depreciation expense of the initial $ 3,831 $ 939
Properties -------- --------
Pro-forma adjustments $ (428) $ (72)
========= =========
</TABLE>
(F) Minority interest in income (loss) has been reflected in
accordance with the terms of the Operating Partnership
Agreement. Upon consummation of the transactions described
herein, the Trust will own 58% of the Operating Partnership.
The remaining 42% of the Operating Partnership will be owned
by TNC, SSI and the
-69-
<PAGE>
other Owners whose interests are reflected as Minority
Interest. The adjustments to record the income effect of
Minority Interest Share of Loss for the periods ended December
31, 1995 and March 31, 1996 in the pro-forma statements of
operations were computed as follows:
For the For the Three
Year Ended Months Ended
December 31, 1995 March 31, 1996
----------------- --------------
Initial Properties loss before
Minority Interest $ (3,379,000) $ (800,000)
Impact of pro-forma adjustments (3)
(C,D(i),E) 372,000 57,000
------------ ---------
Total Loss $ (3,007,000) $ (743,000)
Minority Share (42%) x42% x42%
------------- ----------
Pro-forma Minority Interest in Loss
(F) $ (1,263,000) $ (312,000)
============= ===========
(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.
(H) Reflects depreciation totaling $339,000 and $85,000,
respectively, of the LibertyView Building using a 25- year
depreciable life for the year ended December 31, 1995, and the
three-month period ended March 31, 1996.
(I) Reflects the increase in interest expense of $678,000 and
$170,000, respectively, related to the mortgage note payable
of the LibertyView Building, which has an interest rate of 8%
per annum for the year ended December 31, 1995 and for the
three-month period ended March 31, 1996.
(J) Reflects the amortization of deferred financing costs related
to the LibertyView Building of $120,000 and $30,000,
respectively, for the year ended December 31, 1995 and the
three-month period ended March 31, 1996.
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COMPARISON OF PRO FORMA RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
TO THE TRUST'S HISTORICAL CONSOLIDATED OPERATIONS
On a pro forma basis, after giving effect to the proposed
acquisition of the Initial Properties and the LibertyView Building, revenue was
$4.4 million for the three months ended March 31, 1996 and $16.7 million for the
year ended December 31, 1995, representing an increase of $3.4 million and $13.0
million, respectively, over the historical consolidated revenues of the Trust
for such periods. These increases were attributable to the inclusion of revenues
from the acquisitions of the Initial Properties and the LibertyView Building.
Pro forma operating expenses were $5.5 million for the three
months ended March 31, 1996 and $21.9 million for the year ended December 31,
1995, representing an increase of $4.5 million and $17.5 million, respectively,
over the comparable historical periods. These increases are attributable to the
inclusion of the operating expenses, including interest expense and depreciation
and amortization, of the Initial Properties and the LibertyView Building.
Pro forma net loss was $0.6 million for the three months ended
March 31, 1996 and $3.5 million for the year ended December 31, 1995,
representing an increase of $0.6 million and $2.7 million, respectively, from
the historic net income (loss) for such periods. This increase results from the
inclusion of the net losses of the Initial Properties and the LibertyView
Building.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE INITIAL
PROPERTIES TO BE ACQUIRED BY THE OPERATING PARTNERSHIP
Results of Operations
The following table presents the historical combined results
of operations of the Initial Properties to be acquired by the Operating
Partnership for the three years in the period ended December 31, 1995 and for
the three months ended March 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Quarter ended
Year Ended December 31, March 31,
------------------------------------ --------------------
1995 1994 1993 1996 1995
<S> <C> <C> <C> <C> <C>
Revenues $11,344 $12,172 $11,687 $2,981 $2,894
------- ------- ------- ------ ------
Operating expenses 4,532 5,015 4,508 1,431 1,055
Depreciation and amortization 4,336 3,618 3,568 1,042 947
Interest 5,855 5,915 5,807 1,308 1,502
----- ----- ----- ----- -----
Total Expenses 14,723 14,548 13,883 3,781 3,504
------ ------ ------ ----- -----
Loss before extraordinary items ($3,379) ($2,376) ($2,196) ($800) ($610)
-------- -------- -------- ------ ------
</TABLE>
Comparison of Three Months Ended March 31, 1996 to Three Months
Ended March 31, 1995
Total revenues increased by $0.1 million or 3%, to $3.0
million from $2.9 million in the first three months of 1996. This increase
consisted of an increase in tenant expense recoveries of $0.25 million due to
increases in actual operating expenses, a decrease of $0.1 million of base rents
due to interim vacancy from lease roll-overs and a decrease of $0.05 million in
management revenue resulting from discontinued contracts on certain managed
properties sold.
Operating expenses increased by $0.4 million in the first
three months of 1996 compared to the first three months of 1995. This increase
was attributable to increases in maintenance and snow removal costs resulting
from severe winter storms in the region of the Initial Properties. Depreciation
and amortization has increased $0.1 million in the first three months of 1996 as
a result of the additional amortization of deferred financing costs incurred in
December 1995.
Interest expense decreased by $0.2 million in the first
three months of 1996. This decrease results from a debt
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reduction of $7.0 million resulting primarily from a $30.5 million debt
refinancing in the fourth quarter of 1995 and interest rate reductions in two
other loans.
The loss before extraordinary items increased $0.2 million to
$0.8 million in the first three months of 1996 from $0.6 million in the first
three months of 1995. The loss before extraordinary items increase was
attributable to the reduction in base rents and the increase in operating
expenses, partially offset by a decrease in interest costs.
Comparison of Year Ended December 31, 1995 to Year Ended
December 31, 1994
Total revenues decreased by $0.8 million or 6.8%, to $11.4
million in 1995 from $12.2 million in 1994. This decrease consisted of a
decrease of $0.2 million in base rents due to interim vacancy from lease
roll-overs, a decrease in tenant expense recoveries of $0.2 million due to a
decrease in actual operating expenses and a decrease of $0.4 million in
management revenue resulting from discontinued contracts on certain managed
properties sold and less brokerage transactions.
Operating expenses decreased by $0.5 million in 1995 compared
to 1994. This decrease was attributable to reductions in real estate taxes
resulting from tax assessment appeals, reduction in building operating expenses
associated with occupancy levels and reductions in general and administrative
expenses due to staff reductions and the elimination of certain non-recurring
expenses. Depreciation and amortization expense increased $0.7 million in 1995.
This increase is attributable to the additional tenant improvements completed in
1995 and the write off of unamortized tenant improvements associated with leases
subject to termination options.
Interest expense decreased by $0.1 million in 1995. This
decrease results from interest rate reductions in two restructured loans.
The loss before extraordinary items increased $1.0 million to
$3.4 million in 1995 from $2.4 million in 1994. The increase was attributable to
reductions in rents collected and management revenue, partially offset by
reductions in operating expenses.
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Comparison of Year Ended December 31, 1994 to Year Ended
December 31, 1993
Total revenues increased by $0.5 million or 4.1%, to $12.2
million in 1994 from $11.7 million in 1993. This increase resulted primarily
from an increase in base rents of $0.1 million relating to increased occupancy
and an increase in tenant expense recoveries of $0.4 million due to increases in
actual operating expenses.
Operating expenses increased by $0.5 million in 1994 compared
to 1993. This increase was attributable to increases in building operating
expenses associated with occupancy levels, significant snow removal costs and
certain non-recurring expenses.
Interest expense increased by $0.1 million in 1994. This
increase results from prime interest rate increases.
The loss before extraordinary items increased $0.2 million to
$2.4 million in 1994 from $2.2 million in 1993. The increase was attributable to
increases in operating expenses and interest costs.
Liquidity and Capital Resources
The principal uses of the Initial Properties liquidity and
capital resources have historically been for debt service, capital expenditures
and investment in rental properties in connection with their development
program. Management anticipates that these will continue to be the principal
uses of the Initial Properties liquidity and capital resources after the
proposed acquisition by the Operating Partnership.
The principal sources of funding have historically been cash
flow from operations and proceeds from construction and permanent debt
financing. Equity investments and advances from SSI have historically been
sources of funding. In connection with the SSI/TNC Transactions, SSI will
provide a working capital loan of up to $0.7 million; a loan to the Operating
Partnership of approximately $0.4 million to pay a portion of the costs of the
SSI/TNC Transaction; a distribution support loan which will assist the Trust in
maintaining its dividend level; and letters of credit of $2.0 million
collateralizing certain loans secured by the Initial Properties.
Management believes the above-mentioned sources of funds plus
cash flow from operation of the Properties will be
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sufficient for the next 12 month period to meet cash flow requirements including
debt service and capital expenditures which are anticipated to be consistent
with prior years. The Trust is also presently evaluating additional sources of
funds to include a potential public equity offering to provide funding for
additional capital needs and property acquisitions.
The following table represents the Initial Properties
principal sources and uses of funds during the three years ended December 31,
1995, 1994 and 1993 and for the three months ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------- -------------------
1995 1994 1993 1996 1995
Sources
<S> <C> <C> <C> <C> <C>
Net cash from operations (before
interest) $7,643 $7,925 $6,855 $2,579 $2,032
Borrowings on mortgage notes payable -- 1,200 414 175 --
Advances from sponsors 405 64 752 123 194
Capital contributions 3,951 -- -- -- --
----- ----- ----- ----- -----
Total Sources 11,999 9,189 8,021 2,877 2,226
------ ===== ===== ===== =====
Uses
Investments in rental properties 2,789 1,715 1,483 1,565 390
Repayment of borrowings 1,899 874 1,038 153 278
Repayment of sponsor advances -- -- -- -- --
Distributions to sponsors -- 766 -- 33 --
Interest paid on borrowings 6,254 5,763 5,411 1,290 1,366
Other uses 722 160 (17) 8 20
------ ----- ----- ----- -----
Total Uses 11,664 9,278 7,915 3,049 2,054
------ ----- ----- ----- -----
Net increase (decrease) cash $ 335 $ (89) $ 106 $ (172) $ 172
======= ======= ====== ====== ======
</TABLE>
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PROPOSAL NO. 1 - THE SSI/TNC TRANSACTION
The SSI/TNC Transaction
The SSI/TNC Transaction will involve a number of related
transactions. See "Principal Features of the SSI/TNC Transaction" below and
"Summary - The SSI/TNC Transaction Principal Features of the SSI/TNC
Transaction."
Background of and Reasons for the SSI/TNC Transaction;
Board Recommendation
At the 1994 Annual Meeting of Shareholders of the Trust, the
Shareholders approved amendments to the Trust's Declaration of Trust that
eliminated the Trust's finite life and increased the Trust's authorized capital.
Since that time, the Trustees and management of the Trust have sought to enhance
Shareholder value by maximizing the value of the Trust's existing assets and
exploring acquisitions of additional properties by the Trust and equity and debt
investments by third parties in the Trust.
In recognition of its relatively small size, the Trust has
concentrated its business development efforts on transactions that would
significantly increase the assets and revenues of the Trust and thereby enable
it to become a more effective competitor in the Greater Philadelphia Region. In
furtherance of these efforts, the Trust has focused on potential acquisitions of
commercial real estate in the Greater Philadelphia Region with privately-held
real estate development companies and public companies owning real estate as
non-core assets as well as with institutional investors seeking ownership
diversification in their real estate portfolios. Management of the Trust has met
with numerous potential investors and other companies in the real estate
industry as well as investment bankers to discuss acquisition and investment
opportunities.
In general, transactions previously discussed with third
parties contemplated equity investments in the Trust and acquisitions by the
Trust of one or more properties for cash, securities or a combination of cash
and securities. One transaction contemplated the formation by the Trust of a
joint venture with an institutional lender to acquire commercial real estate.
These transactions were not pursued, primarily due to issues relating to asset
quality, pricing terms, geographic focus and/or control of the Trust. In
assessing potential acquisitions and third party investments, the principal
focus of the Trustees and management has been on both the potential returns
available
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to the Shareholders from the particular transaction and the risks
to the Trust associated with the transaction.
SSI is a publicly-held company headquartered in suburban
Philadelphia. SSI's direct and indirect ownership of real estate is located in
the Greater Philadelphia Region and, in the view of the Trustees, presented the
Trust with an attractive business opportunity. SSI is a corporate partner of TNC
and has a 40% interest in TNC.
Prior to the 1994 Annual Meeting of Shareholders, Mr. Sweeney,
the President and Chief Executive Officer of the Trust, initially met with
representatives of SSI and TNC to explore a potential transaction. The ensuing
discussions were general in nature, but led to the development of an informal
professional relationship between the Trust and senior executives of SSI and
TNC. The general discussions, which were conducted informally and sporadically,
focused on the general state of the real estate industry and respective
operating philosophies.
Management of the Trust formally met with representatives of
SSI and TNC on March 17, 1995 to explore the possible acquisition by the Trust
of all or a portion of the SSI/TNC real estate portfolios and the combination of
the management teams of TNC and the Trust. Following this meeting, discussions
among members of management of the Trust, SSI and TNC occurred periodically;
however, management of the Trust continued to have numerous discussions with
other parties concerning alternative transactions.
Discussions among the Trust, SSI and TNC began in earnest
following meetings of the Board of Trustees on June 7, June 14 and July 7, 1995.
In these meetings, the Trustees focused on the structure of an acquisition of
the real estate portfolios of SSI and TNC and numerous issues relating to such
an acquisition. These issues included but were not limited to: (i) valuation of
the Properties and the Common Shares and warrants that would be issuable in the
acquisition and whether valuation of the Properties should be supported by
appraisals, (ii) the quality of the Properties that would be included in the
acquisition and the occupancy levels of such Properties, (iii) the priority
return to be available to the Trust on its investment in the Operating
Partnership, (iv) the status of the loans relating to the Properties, (v) the
adequacy of working capital for the operation and maintenance of the Properties,
(vi) the post-acquisition management team of the Trust, (vii) liabilities which
might be assumed by the Trust in the acquisition, (viii) the significant
ownership interest of SSI in
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the Trust following the acquisition and the dilutive effect the acquisition
would have on the ownership interest in the Trust of the Trust's current
Shareholders, (ix) the potential benefits to the Trust of an affiliation with
SSI and TNC, (x) the potential for the acquisition to facilitate the Trust's
ability to raise additional capital, (xi) the estimated costs of the acquisition
and (xii) the engagement by the Trust of an investment banker to provide it with
financial advice on the acquisition and its fairness to the Shareholders.
At the meeting on July 7, 1995, the Trustees authorized the
President and Chief Executive Officer of the Trust to develop a term sheet for
the proposed acquisition. Discussions among the Trust, SSI and TNC concerning
the terms of the proposed acquisition commenced promptly and resulted in the
execution of a non-binding letter of intent on August 22, 1995 among the Trust,
SSI and TNC.
Following the execution of the letter of intent in August, the
Board of Trustees held numerous meetings focusing on various aspects the SSI/TNC
Transaction. In the course of meetings held on September 12, September 26,
October 11, October 31 and November 6, the Trustees: (i) met with the Trust's
management and legal advisors to review and direct the course of negotiations of
the economic and structural terms of the SSI/TNC Transaction, (ii) met with
representatives of SSI and TNC to discuss their respective views of the SSI/TNC
Transaction, (iii) reviewed with the Trust's management and an independent
consultant engaged by the Trust the results of their operational and financial
due diligence of the Properties, SSI and TNC, (iv) reviewed the results of a
survey of the markets of the properties prepared for the Trust by Cushman &
Wakefield of Pennsylvania, Inc., (v) met with representatives of the Trust's
independent accounting firm to discuss the accounting treatment of the SSI/TNC
Transaction and the historical and pro forma financial statements of the
Properties, (vi) authorized the engagement of Legg Mason as financial advisor to
the Trust and met with representatives of Legg Mason to receive advice on the
SSI/TNC Transaction generally and, in particular, the fairness of the SSI/TNC
Transaction, the anticipated affect of the SSI/TNC Transaction on the market
price of the Common Shares and the Trust's ability to raise capital following
completion of the SSI/TNC Transaction, (vii) reviewed reports on the financial
performance of the Properties, (viii) considered the advisability of adopting
the Declaration Amendments and (ix) generally considered ways to structure the
SSI/TNC Transaction to ensure an attractive return to the Shareholders while
minimizing risks of loss to the Trust's assets.
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Discussions among the parties slowed in November and December,
primarily as the result of differences among the parties as to the appropriate
valuation for the Properties, and did not resume in earnest until late January
1996. During this period, the Trust conducted additional due diligence,
including lease reviews, capital expenditure forecasts and market reviews. In
addition, TNC successfully renewed several existing leases and attracted several
new tenants to the Initial Properties, thereby improving the occupancy rate and
reducing lease rollover exposure.
The valuation methodology utilized by the Trust, SSI and TNC
was based upon the net operating income of the Initial Properties, taking into
account tenant credit and lease rollover risks and projected capital
expenditures, and capitalizing net operating income at capitalization rates
prevailing in the market for comparable quality properties.
On February 6, following a series of discussions among
management of the Trust, SSI and TNC, the Board reviewed the status of the
transaction, including the proposed valuation of the Properties, and authorized
the President of the Trust to execute a new letter of intent, reflecting the
negotiations subsequent to the August letter of intent. On February 9, the
Trustees elected Messrs. Osborne and Sweeney to the Board, and by unanimous
consent effective February 12, the newly expanded Board reaffirmed the February
6 Board authorization. Mr. Osborne was elected to the Board following his
acquisition of in excess of twenty percent of the outstanding Common Shares,
making him the Trust's largest shareholder.
On March 20, following a series of discussions among
management of the Trust, SSI, TNC and Mr. Osborne, as to timing and structure of
the SSI/TNC Transaction, the parties executed a new letter of intent. At the
same time, Mr. Osborne, the RMO Trust and the Trust executed the RMO Agreement,
the principal terms of which are summarized in the discussion of Proposal 3
below. Mr. Osborne's and the RMO Trust's execution of the RMO Agreement was
premised on the understanding that SSI would enter into a substantially similar
agreement as part of the SSI/TNC Transaction. Mr. Osborne participated in the
foregoing discussions both in his capacity as a Trustee and as the largest
shareholder of the Trust.
Between March 20 and May 6, the parties, together with their
counsel, accountants and, in the case of the Trust, financial advisor,
negotiated the terms of definitive documentation of the SSI/TNC Transaction.
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The basic framework of the SSI/TNC Transaction was conceived
by the President of the Trust and senior executives of SSI and TNC as a way to
achieve (i) the Trust's objective of acquiring additional real estate in the
Greater Philadelphia Region for an attractive price and (ii) the objective of
SSI and TNC in achieving greater liquidity in their real estate holdings.
The initial letter of intent executed on August 22, 1995
contemplated the formation by the Trust, SSI and TNC of the Operating
Partnership as the vehicle to acquire the Properties. This vehicle was selected
primarily for two reasons: (i) to afford SSI and TNC the opportunity to defer
recognition of taxable gain on their contribution of properties and (ii) to
restrict the ability of holders of Class A Units to participate in the economic
returns on the Trust's existing portfolio of properties until certain conditions
had been satisfied. In the course of negotiation, the parties agreed upon two
such conditions: the occurrence of a Qualified Offering and the occurrence of a
Redemption Eligibility Date. The Trust agreed to the former condition because of
its belief that, following a Qualified Offering, the debt-to-equity ratio of the
Initial Properties would be significantly reduced and agreed to the latter
condition because it restricts holders of Class A Units from converting their
Units into Common Shares at a time when the market price of the Common Shares is
lower than the agreed upon value of a Class A Unit.
Many of the principal features of the SSI/TNC Transaction were
reflected in the initial letter of intent, including the following:
(i) The issuance by the Trust of Common
Shares (initially only 675,000) and six-year Warrants exercisable for an
additional 675,000 Common Shares at a price of $6.50, with the proceeds of such
issuance to be contributed by the Trust to the Operating Partnership in exchange
for a preferred equity position bearing a 9.5% rate of return (and initially
having a $3.6 million liquidation preference).
(ii) The contribution to the Operating
Partnership of the Properties in exchange for units of limited partnership
interest (convertible after two years into Common Shares on a one-for-one basis)
in an amount based on the value of the Properties contributed, with the value
determined based upon the net operating income of the Properties, capitalized at
an agreed capitalization rate, and with the value of each Unit in the Operating
Partnership deemed to have a value of $5.50. For a more specific discussion of
the methodology used to determine the
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number of Units to be issued, see "Principal Features of the SSI/TNC Transaction
- -- Determination of Number, and Class, of Units to be Issued."
(iii) The issuance of the Executive Warrants
exercisable for 400,000 Common Shares at $6.50 per share.
(iv) The allocation of additional equity on the
Properties (other than the Witmer Properties) based on a 25% (Trust)--75%
(Owners) split.
(v) The addition to the Board of Trustees of Messrs.
Musser, Nichols and D'Alessio.
(vi) Execution of employment agreements with the TNC
Executives and formation of the Management Company.
The negotiations that ensued following execution of the
initial letter of intent resulted in the following principal changes, and for
the reasons indicated:
(i) An increase in the number of Common Shares and
SSI Warrants (from 675,000 to 775,000) to provide the Trust with additional
funds for transaction expenses. The initial letter of intent contemplated that
SSI would pay the Trust $5.63 in exchange for a unit consisting of one Common
Share and one Warrant, and that the Trust would use the cash proceeds to
facilitate a refinancing of indebtedness on the Witmer Properties at a discount.
However, because such a refinancing occurred in November 1995, with SSI
providing an equity contribution to the Witmer Partnership to facilitate the
refinancing, the parties agreed that the Trust would receive SSI's interests in
the Witmer Partnership in exchange for the Common Shares and SSI Warrant.
(ii) The Trust agreed to contribute its interest in
Brandywine Realty Partners ("BRP") in exchange for Class C Units in furtherance
of the desire of the parties to combine their real estate portfolios but, in
recognition of the high debt-to-equity ratio of the Initial Properties,
negotiated for a special allocation of all income, gain, profits, losses and
cash flow realized by the Operating Partnership from the Trust's contributed
interest in BRP until a Qualified Offering.
(iii) In recognition of the right of certain lender's
to participate in sale and refinancing proceeds relating to the Initial
Properties, the Trust negotiated for a forfeiture of Class A Units based on
payments to lenders on account of such
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participations. See "Principal Features of the SSI/TNC Transaction --
Determination of Number, and Class, of Units to be Issued."
(iv) In recognition of the significant amount of
indebtedness encumbering the Initial Properties, and the impact of the
associated debt service on the liquidity of the Operating Partnership, the Trust
obtained from SSI an agreement to provide a $700,000 working capital facility
for the 18-month period following the Closing Date. Similarly, the Trust
requested, and SSI agreed, to provide the SSI Subsidy until the earlier of the
repayment of the GECC Loan and a Qualified Offering in order to address the
Trustee's concerns that issuance of 775,000 Common Shares and the SSI Warrant to
SSI in exchange for its ownership interest in the Witmer Partnership could have
an adverse impact on the Trust's ability to maintain distributions to its
Shareholders at the current level.
(v) In recognition of the potential for losses in the
event that any of the representations and warranties made for the benefit of the
Trust by SSI and TNC prove to be inaccurate, the Trust sought to have full
recourse on the indemnities; however, apart from SSI's willingness to provide a
full-recourse indemnity as to losses that may be incurred on account of known
environmental conditions at the Whitelands Property, SSI and TNC were only
willing to pledge their Class A Units to secure their indemnity obligations. The
Trustees recognize that the non-recourse, non-cash nature of the indemnity will
limit the Trust's ability to be held harmless from losses that it may incur if
any of the SSI or TNC representations or warranties are inaccurate.
(vi) The Trust requested, and SSI and TNC agreed,
that the Option Properties would not be contributed at the Closing because of
their relatively high vacancy rate, and that the Trust would have an option to
acquire such Properties for a two-year period.
On May 6, 1996, the Board reviewed the SSI/TNC Transaction
with Legg Mason and Legg Mason delivered to the Board its oral opinion that, as
of such date, the SSI/TNC Transaction was fair to the Shareholders from a
financial point of view. At this meeting, the Board also reviewed the
transaction with the Trust's legal counsel and accountants. Following such
review, the Board authorized the Trust to execute definitive documentation
providing for consummation of the SSI/TNC Transaction, subject to receipt from
Legg Mason of a written confirmation of its fairness opinion. In reaching its
decision
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to pursue and ultimately approve the SSI/TNC Transaction, the Board considered
numerous factors. Throughout the course of its extensive deliberations, the
Board's primary consideration was to best serve the interests of the Trust's
Shareholders in view of the Trust's overall business prospects and financial
condition, and general economic and stock market conditions. The Board analyzed
the totality of circumstances surrounding the SSI/TNC Transaction and did not
assign relative degrees of importance to any specific factors considered. The
factors listed below were expressly considered by the Board in its meetings and
its decision to approve the SSI/TNC Transaction:
1. The economic terms of the SSI/TNC Transaction, including:
(i) the valuation of the Properties (which the Trustees believe is fair and
reasonable), (ii) the Trust's entitlement to the Preferential Return and the
related SSI Subsidy prior to a Qualified Offering (which the Trustees believe
will provide Shareholders with a greater assurance that the issuance of Common
Shares to SSI pursuant to the SSI/TNC Transaction will not result in a reduction
in distributions to Shareholders), (iii) the special allocation to which the
Class C Units will be entitled prior to a Qualified Offering, thereby
restricting participation of holders of Class A Units in the returns on the
Trust's existing portfolio of properties until the debt-to-equity ratio of the
Initial Properties has been reduced, (iv) the Trust's potential to receive
additional equity in the Properties upon a refinancing of the debt secured by
the Properties at a discount from the principal balance thereof, (v) the
restriction on convertibility of the Class A Units into Common Shares prior to a
Qualified Offering or a Redemption Eligibility Date and (vi) the sale of Common
Shares at, and the sale of the SSI Warrants with an exercise price at, a premium
to both the market price of the Common Shares and the book value of the Common
Shares prior to the public announcement of the SSI/TNC Transaction.
2. The increase in the size of the Trust's assets, and the
diversity of such assets, as a result of the SSI/TNC Transaction and the
anticipated enhanced ability of the Trust to obtain lower-cost capital to
refinance debt encumbering the Properties and to acquire additional properties.
In this regard, the Trustees recognize that the SSI/TNC Transaction will result
in a significant increase in both the Trust's debt-to-equity ratio and the
Trust's administrative costs and further recognize that there can be no
assurance that the Trust will be able to complete an equity offering on
acceptable terms.
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3. The quality, condition and location of the Properties and
the occupancy and rental rates at the Properties. The Trustees recognize that
the limited geographic diversity of the Properties leaves the Trust vulnerable
to a downturn in the economy of the Greater Philadelphia Region. The Trustees
also recognize, however, that recent leasing activity has resulted in relatively
low rollover of leases at the Initial Properties through 1998. See "Description
of the Properties - Lease Expirations."
4. The affiliation with SSI that will result from the SSI/TNC
Transaction and SSI's favorable reputation and extensive business contacts in
the Greater Philadelphia business community. Although the Trust and SSI have not
entered into any contractual arrangement whereby SSI will be required to provide
the Trust with any services or to maintain any affiliation with the Trust or to
maintain its ownership position in the Trust, the Trustees have taken into
account SSI's reputation for providing management support for companies in which
it invests.
5. SSI's willingness to provide (i) up to $700,000 of working
capital support to the Operating Partnership following the Closing Date, subject
to certain conditions, (ii) to provide the SSI Subsidy and (iii) to loan the
Operating Partnership funds to pay a portion of the expenses to be incurred by
it in connection with the SSI/TNC Transaction. The $700,000 working capital
support has been established to provide funding for working capital and capital
expenditures during the 18 month period following the Closing Date. The Trustees
recognize that actual results may vary from assumed results and that the
$700,000 ceiling may prove to be inadequate.
6. The additional expertise that will inure to the Trust as a
result of the expansion of the Board to include additional Trustees and the
expansion of the Trust's management to include TNC executives. The Trustees also
recognize, however, that engagement by the Trust of TNC employees will increase
the Trust's overhead expenses and could entail difficulties in integrating the
employees with the Trust's operations.
7. The audited historical financial statements of the Initial
Properties and the unaudited pro forma financial information of the Trust
prepared in connection with the SSI/TNC Transaction and included herein.
Although on a pro forma basis the SSI/TNC Transaction will result in an increase
in shareholders' equity, it will also result in a decrease in earnings per
share, primarily as a result of increased interest expense on indebtedness and
increased depreciation and
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amortization. The Trustees recognize that the increased debt-to-equity ratio
resulting from the SSI/TNC Transaction represents a risk to the Trust and its
Shareholders.
8. The Board's judgment as to the Trust's uncertain prospects
which the Board thought would be improved by the SSI/TNC Transaction.
9. The legal and accounting advice provided by the Trust's
counsel and accountants, respectively, concerning the terms of the SSI/TNC
Transaction.
10. The oral opinion rendered by Legg Mason as to the fairness
of the SSI/TNC Transaction to the Shareholders from a financial point of view.
Based on the foregoing, the Board concluded that the SSI/TNC
Transaction is fair and would be in the best interests of the Shareholders and
authorized the Trust to consummate the SSI/TNC Transaction subject to receipt of
required Shareholder approval and receipt from Legg Mason of a written
confirmation of its fairness opinion. Legg Mason has delivered to the Board a
written opinion confirming its earlier oral opinion that, as of July 12, 1996,
the SSI/TNC Transaction is fair to the Shareholders from a financial point of
view. The Board adopted Legg Mason's analyses in reaching its conclusion.
Accordingly, the Board of Trustees unanimously recommends that the Shareholders
vote in favor of the SSI/TNC Transaction.
Opinion of Financial Advisor
On May 6, 1996, the Board of Trustees reviewed the SSI/TNC
Transaction with Legg Mason and Legg Mason delivered to the Board its oral
opinion that, as of such date, the SSI/TNC Transaction was fair to the
Shareholders from a financial point of view. On July 12, 1996, Legg Mason
delivered its written opinion to the Board of Trustees to the effect that, as of
such date, the SSI/TNC Transaction is fair to the Shareholders from a financial
point of view. No limitations were imposed by the Board upon Legg Mason with
respect to the investigations made or the procedures followed by it in rendering
its opinion.
Legg Mason is a nationally recognized investment banking firm
and, as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements and valuations for
corporate and other purposes. The Board selected Legg Mason to
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act as its financial advisor on the basis of Legg Mason's favorable reputation
and extensive experience in evaluating transactions involving real estate
investment trusts. Legg Mason has not previously acted as financial advisor to
the Trust. Legg Mason is the parent of Legg Mason Real Estate Services, a
mortgage banking firm of which Walter D'Alessio is President. Mr. D'Alessio will
become a member of the Board if the SSI/TNC Transaction is consummated.
In rendering its opinion, Legg Mason has, among other things:
(i) reviewed the Contribution Agreement and the documents related thereto; (ii)
reviewed a draft in substantially final form of this Proxy Statement; (iii)
reviewed the audited financial statements of the Trust for the years ended
December 31, 1993, 1994 and 1995, the unaudited financial statements of the
Trust for the quarter ended March 31, 1996 and the unaudited pro forma
consolidated financial information contained herein; (iv) reviewed the audited
financial statements of the Initial Properties for the years ended December 31,
1993, 1994 and 1995 and the unaudited financial statements of the Initial
Properties for the quarter ended March 31, 1996; (v) reviewed certain internal
information, primarily financial in nature, concerning the business and
operations of the Trust and the Initial Properties; (vi) reviewed certain
publicly available information concerning the Trust; (vii) reviewed cash flow
forecasts of the Trust and Initial Properties furnished by senior management of
the Trust and TNC; (viii) reviewed certain publicly available financial and
stock market data with respect to operating statistics relating to selected
public companies that it deemed relevant to its inquiry; (ix) analyzed certain
publicly available information concerning the terms of selected merger and
acquisition transactions that it considered relevant to its inquiry; (x) held
meetings and discussions with certain trustees, officers and employees of the
Trust, SSI and TNC concerning the operations, financial condition and future
prospects of the Trust following the SSI/TNC Transaction; and (xi) conducted
such other financial studies, analyses and investigations and considered such
other information as it deemed appropriate.
In preparing its opinion, Legg Mason relied, without
independent verification, on the accuracy and completeness of all information
that was publicly available, supplied or otherwise communicated to it by the
Trust, SSI and TNC. Legg Mason assumed that the financial forecasts examined by
it were reasonably prepared and reflected the best currently available estimates
and good faith judgments of the managements of the Trust, SSI and TNC as to the
future performance of the Trust and the Initial Properties, respectively. Legg
Mason also assumed, without
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independent verification, that (i) the SSI/TNC Transaction will be accounted for
under the purchase method of accounting and (ii) any material liabilities
(contingent or otherwise, known or unknown) of the Trust and the Initial
properties are as set forth in the consolidated financial statements of the
Trust and the Initial properties contained herein. Legg Mason did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Trust or the Initial Properties, nor was Legg Mason furnished
with any such evaluations or appraisals. Legg Mason's opinion is based upon
economic, monetary and market conditions existing on the date its opinion was
rendered. Furthermore, Legg Mason expressed no opinion as to the price or
trading range at which the Common Shares will trade in the future.
The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant quantitative methods of
financial analyses and the application of such methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Accordingly, Legg Mason believes that
its opinion must be considered as a whole and that considering any portion of
the analyses and of the factors bearing on the opinion, without considering all
analyses and factors bearing on the opinion, could create a misleading or
incomplete picture of the process underlying the opinion. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the
values of properties or businesses do not purport to be appraisals or to reflect
the prices at which properties or businesses may actually be acquired or sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty and neither the Trust nor Legg Mason assumes responsibility for the
accuracy of such analyses or estimates. The following paragraphs summarize the
significant quantitative and qualitative analyses performed by Legg Mason in
arriving at its opinion.
In its analysis, Legg Mason assumed the consideration for the
Initial Properties to be approximately $11.4 million (the "Equity
Consideration"). Legg Mason arrived at this amount by valuing the 775,000 Common
Shares issuable to SSI and the approximately 1,647,000 Class A Units issuable as
part of the SSI/TNC Transaction (including approximately 288,000 Class A Units
which are to be deposited into escrow) at $4.38 (the average closing price of
the Trust's Common Shares for the twenty trading days prior to the public
announcement of the SSI/TNC
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Transaction) and then adding this value to the value of the SSI Warrant and
Executive Warrant (exercisable for an aggregate of 1,175,000 Common Shares),
with each such Warrant valued, on a per share basis, at $.69. Legg Mason assumed
the unleveraged maximum consideration for the SSI/TNC Transaction to be
approximately $76.3 million (the "Unleveraged Consideration"). Legg Mason
arrived at this amount by adding $64.9 million of indebtedness on the Initial
Properties to the Equity Consideration.
Selected Public Companies Analysis. Legg Mason compared
certain financial information relating to the Trust and the Initial Properties
to certain corresponding financial information from a group of eleven REITs
engaged primarily in the acquisition, operation and management of office and
industrial properties. Legg Mason considered the following companies: Beacon
Properties Corporation, Bedford Property Investors, Inc., Cali Realty
Corporation, Carr Realty Corporation, CenterPoint Properties Corporation, Duke
Realty Investments, Inc., Highwoods Properties, Inc., Koger Equity, Inc.,
Liberty Property Trust, Reckson Associates Realty Corporation and Weeks
Corporation (the "Public Companies").
Funds from Operations Analysis. Legg Mason noted that the
multiple of the equity market capitalization to actual Funds from Operations
("FFO") for the twelve months ended December 31, 1995 for the Public Companies
was in a range from 10.8x to 14.6x with a mean of 11.9x. When compared to the
Public Companies' projected FFO for the years ended December 31, 1996 and
December 31, 1997 (based on average FFO estimates provided by First Call), the
multiples of equity market capitalization to projected FFO were in a range from
9.6x to 13.2x with a mean of 10.8x for 1996 and in a range from 8.5x to 11.8x
with a mean of 10.2x for 1997. This FFO analysis resulted in an equity
capitalization of the Initial Properties ranging from $9.1 million to $12.2
million with a mean of $10.0 million based on the actual 1995 FFO of the Initial
Properties of $0.8 million; $25.2 million to $34.7 million with a mean of $28.4
million based on the projected 1996 FFO of the Initial Properties of $2.6
million; and $31.8 million to $44.2 million with a mean of $38.2 million based
on the projected 1997 FFO of the Initial Properties of $3.7 million. These
figures were then compared to the imputed value of the Equity Consideration of
approximately $11.4 million under the terms of the SSI/TNC Transaction.
Dividend Yield and FFO Payout Ratio Analysis. Legg Mason also
calculated various equity capitalizations of the Initial Properties using the
range of the Public Companies' 1995
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FFO Payout Ratios (defined as indicated annual total dividends payable to common
shareholders divided by total actual 1995 FFO available to common shareholders
on a fully diluted basis) from 77.3% to 89.8% with a mean of 83.9%; 1996 FFO
Payout Ratios (defined as indicated annual total dividends payable to common
shareholders divided by total projected 1996 FFO available to common
shareholders on a fully diluted basis) from 71.1% to 83.3% with a mean of 77.3%;
and 1997 FFO Payout Ratios (defined as indicated annual total dividends payable
to common shareholders divided by total projected 1997 FFO available to common
shareholders on a fully diluted basis) from 62.5% to 77.4% with a mean of 70.7%.
Legg Mason also utilized the range of the Public Companies' current dividend
yield (defined as total indicated annual dividends payable to common
shareholders divided by total equity market capitalization) of 6.0% to 8.1% with
a mean of 7.0%.
Legg Mason then multiplied the actual 1995 FFO and projected
1996 and 1997 FFOs of the Initial Properties by the range of appropriate Public
Company FFO Payout Ratios and then divided by the range of Public Company
current dividend yields to arrive at hypothetical equity capitalization ranges
for the Initial Properties. These equity capitalization ranges were then
discounted by 12.5% annually (the estimated opportunity cost of capital invested
in real estate) in order to calculate a net present value. This analysis
resulted in a range of the Initial Properties' hypothetical equity
capitalization of $8.0 million to $12.5 million with a mean of $10.0 million
based on the Initial Properties' actual 1995 FFO of $0.8 million; $20.5 million
to $32.5 million with a mean of $25.8 million based on the Initial Properties'
projected 1996 FFO of $2.6 million; and $22.8 million to $38.2 million with a
mean of $29.9 million based on the Initial Properties' projected 1997 FFO of
$3.7 million. These figures were then compared to the Equity Consideration of
approximately $11.4 million under the terms of the SSI/TNC Transaction.
Capitalization Rate Analysis. Legg Mason also noted that the
percentage of total market capitalization represented by Net Operating Income
(defined as total revenues less total expenses before interest expense and
depreciation and amortization) for the twelve months ended December 31, 1995 for
the Public Companies (the "Capitalization Rate") was in a range from 5.8% to
10.0% with a mean of 7.6%. This Capitalization Rate analysis resulted in a
hypothetical total capitalization of the Initial Properties ranging from $72.2
million to $125.0 million with a mean of $95.3 million based on actual 1995 Net
Operating Income of $7.2 million of the
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Initial Properties. By applying this same range of Capitalization Rates to
projected Net Operating Income of the Initial Properties for 1996 and 1997, and
applying a discount rate of 12.5% annually (the estimated opportunity cost of
capital invested in real estate), the hypothetical total capitalization of the
Initial Properties ranged from $69.8 million to $120.8 million with a mean of
$92.2 million based on projected 1996 Net Operating Income of $7.9 million of
the Initial Properties and from $70.9 million to $122.6 million with a mean of
$93.6 million based on projected 1997 Net Operating Income of $9.0 million of
the Initial Properties. These figures were then compared to the Unleveraged
Consideration of approximately $76.3 million under the terms of the SSI/TNC
Transaction.
Discounted Cash Flow Analysis. Legg Mason analyzed the
financial terms of the SSI/TNC Transaction using a discounted cash flow
approach. The discounted cash flow approach assumes, as a basic premise, that
the intrinsic value of any business is the current value of the future cash flow
that the business will generate for its owners. To establish a current implied
value under this approach, future cash flow must be estimated and an appropriate
discount rate determined. Legg Mason used projections and other information
provided by the managements of the Trust and TNC to estimate the free cash
flows, defined as total revenue minus property operating and maintenance
expenses, property management expenses, real estate taxes and capital
expenditures, tenant improvements and leasing commissions ("Free Cash Flows")
for the years ended December 31, 1996 through December 31, 2005, inclusive,
using discount rates ranging from 10.0% to 15.0% and terminal value
capitalization rates applied to 2005 projected Free Cash Flows plus capital
expenditures, tenant improvements and leasing commissions ranging from 9.0% to
10.5%. Legg Mason's calculations resulted in a range of imputed values of total
capitalization of the Initial Properties of $61.2 million to $89.5 million with
a mean of $74.0 million. These figures were then compared to the Unleveraged
Consideration of approximately $76.3 million under the terms of the SSI/TNC
Transaction.
Legg Mason also applied a discounted cash flow analysis to the
Initial Properties' projected FFO less capital expenditures, tenant improvement
and leasing commissions ("Funds Available for Distribution") for the years ended
December 31,1996 through December 31, 2005, inclusive, using discount rates
ranging from 10.0% to 15.0% and terminal value capitalization rates applied to
2005 projected Funds Available for Distribution plus capital expenditures,
tenant improvements and leasing commissions ranging from 9.0% to 10.5%. Legg
Mason's
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calculations resulted in a range of the values of equity capitalization of the
Initial Properties of $34.2 million to $47.7 million with a mean of $40.4
million. These figures were then compared to the Equity Consideration of
approximately $11.4 million under the terms of the SSI/TNC Transaction.
Pro Forma SSI/TNC Transaction Analysis. Legg Mason performed
an analysis of the effect of the SSI/TNC Transaction on the Trust's actual FFO
per share for the year ended December 31, 1995 and the projected FFO for the
years ending December 31, 1996 and December 31, 1997, which assumed that the
SSI/TNC Transaction had been consummated on January 1, 1995. Legg Mason utilized
the pro forma consolidated financial information of the Trust contained herein
and combined the projected operating results of the Trust (based on internal
estimates provided by the Trust's senior management) and the projected operating
results of the Initial Properties (based on internal estimates provided by TNC's
senior management) for the years ending December 31, 1996 and December 31, 1997.
Legg Mason assumed no synergistic savings from the SSI/TNC Transaction. Legg
Mason then compared the pro forma consolidated FFO per share to the Trust's
stand-alone FFO per share to determine the actual and projected pro forma impact
of the SSI/TNC Transaction on the Trust's FFO per fully diluted share. This
analysis indicated that the pro forma impact of the SSI/TNC Transaction was
accretive to the Trust's FFO in 1995, 1996 and 1997.
While Legg Mason noted that this accretion to the Trust's
actual and projected FFO per share was substantial, Legg Mason also noted that
the SSI/TNC Transaction resulted in a substantial increase in the Trust's ratio
of debt to total market capitalization. Specifically, Legg Mason noted that this
ratio would increase, on a pro forma basis, as a result of the SSI/TNC
Transaction based on the debt outstanding of the Trust and the Initial
Properties on March 31, 1996. Legg Mason also noted that a significant reduction
in this ratio (by means of a common equity offering or other equity financing)
would be likely to significantly reduce the accretive impact of the SSI/TNC
Transaction.
Legg Mason derived an implied range of the Common Share prices
(on both a stand-alone and a post-SSI/TNC Transaction basis) based on
hypothetical equity transactions that would allow the Trust to achieve a ratio
of debt to total market capitalization similar to comparable office/industrial
REITs (i.e., 25% to 35%). The analysis was based on adjustments to the projected
1996 FFO estimates of management of the Trust and TNC (on a stand-alone and pro
forma basis) related to the reduction
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of debt and increase in the number of outstanding Common Shares resulting from
the hypothetical equity offerings. Legg Mason noted that assuming the respective
hypothetical equity offerings, the pro forma impact of the SSI/TNC Transaction
was accretive to the Trust's FFO in 1995, 1996 and 1997.
Contribution Analysis. Legg Mason reviewed the Trust's and the
Initial Properties' financial contribution to the combined entity on an actual
and a projected pro forma basis. On a pro forma basis, current Shareholders of
the Trust are retaining approximately 47.5% of the ownership of the Trust
(assuming conversion of 1,359,516 Class A Units into Common Shares). Based on
audited financial statements of the Trust and the Initial Properties and
projected operations for 1996 and 1997, as provided by senior managements of the
Trust and TNC, the Trust would contribute: (i) 25.0%, 25.4% and 23.5% of the
1995 actual, 1996 projected and 1997 projected rental revenues of the Operating
Partnership; (ii) 24.4%, 24.0% and 22.6% of the 1995 actual, 1996 projected and
1997 projected total revenues of the Operating Partnership; (iii) 15.4%, 19.3%
and 17.9% of the 1995 actual, 1996 projected and 1997 projected net operating
income of the Operating Partnership; (iv) and 33.6%, 27.6% and 21.3% of the 1995
actual, 1996 projected and 1997 projected FFO of the Operating Partnership.
Comparative Merger Analysis. Using public information, Legg
Mason compared selected financial, operating and stock market performance data
of the Trust and the Initial Properties with that of certain REITs that have
recently consummated merger or acquisition transactions with publicly-owned
REITs or previously privately-owned real estate companies. These transactions
consisted of Bradley Real Estate, Inc.'s acquisition of Tucker Properties Group;
Wellsford Residential Properties, Inc.'s acquisition of Holly Residential
Property Trust; Horizon Outlet Centers, Inc.'s acquisition of McArthur/Glen
Realty Corporation; BRE Properties, Inc.'s acquisition of REIT of California;
Simon Property Group's pending acquisition of DeBartolo Realty Corporation;
Liberty Property Trust's acquisition of Lingerfelt Development Corporation;
Highwoods Properties, Inc.'s acquisition of the Forsyth Group; Reckson
Associates acquisition of Halpern Enterprises; and Beacon Properties Group's
acquisition of Taylor and Mathis. In view of the fact the REITs involved in
these transactions do not own or manage properties having similar
characteristics or located in similar markets to the office/industrial
properties owned and managed by the Trust and by the Owner, Legg Mason did not
believe that any statistical or financial analyses of these transactions was
meaningful as a basis for evaluating the SSI/ TNC
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Transaction. Accordingly, Legg Mason did not rely on any such analyses in
reaching its conclusion.
For advising the Trust regarding the SSI/TNC Transaction,
including providing its opinion, Legg Mason has been paid a fee of $100,000 by
the Trust, and will be reimbursed for its reasonable out-of-pocket expenses, not
to exceed $10,000. The Trust has also agreed to indemnify Legg Mason and its
affiliates, and their respective directors, officers, employees and agents,
against certain liabilities and expenses in connection with its services.
The full text of the opinion of Legg Mason, which sets forth
the assumptions made, methodologies utilized, matters considered and limits on
the review undertaken, by Legg Mason, is attached as Appendix B to this Proxy
Statement. Shareholders are urged to read this opinion in its entirety. Legg
Mason's opinion is directed only to the fairness of the SSI/TNC Transaction from
a financial point of view, and such opinion does not constitute a recommendation
to any Shareholder as to how such Shareholder should vote at the Meeting. In
addition, Legg Mason's opinion does not address the relative merits of the
SSI/TNC Transaction and any other transactions or business strategies considered
by the Board of Trustees of the Trust as alternatives to the SSI/TNC
Transaction. The summary of the opinion of Legg Mason set forth herein is
qualified in its entirety by reference to the full text of such opinion.
Market Analysis
Although the Trust did not obtain third-party appraisals to
support the valuation of each of the Properties, the Trust engaged Cushman and
Wakefield of Pennsylvania, Inc. ("C&W") to assist it in assessing the market
position of each of the Properties and to prepare an analysis to be used in
conjunction with the Trust's due diligence review of the Properties. In no
instance was an opinion of value rendered by C&W. The Board considered the
information in C&W's analysis in recommending the SSI/TNC Transaction to
Shareholders.
The analysis concentrated on the seven submarkets in the
Greater Philadelphia region in which the Properties are located, specifically:
Horsham, Plymouth Meeting, Lansdale, Allentown, Newtown Square, Whitelands and
Oaklands. C&W's scope of services consisted of an inspection of each of the
Properties, a summary of any neighborhood trends with an emphasis on C&W's
perspective on how these trends would be either positively or negatively
impacted by projected economic conditions, and an
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analysis of submarket rental conditions, a replacement cost analysis and a
review of comparable sales activity. No limitations were imposed by the Board of
Trustees upon C&W with respect to the investigation made or the procedures
followed by it in rendering its analysis.
C&W is a nationally recognized real estate firm and regularly
engages in the market review of real property. The Board of Trustees selected
C&W to perform a market analysis on the basis of C&W's favorable reputation and
on the basis of its prior relationship with C&W.
For preparation of the market analysis described above, C&W
has been paid a fee of $25,000 by the Trust.
Business Objectives Following the SSI/TNC Transaction
Following consummation of the SSI/TNC Transaction, the Trust's
business objectives will generally be to increase its Funds From Operations by
(i) maintaining occupancy levels and increasing rental rates in its portfolio of
properties (including the Properties), (ii) providing a full line of real estate
services to the tenants in such properties and to other third parties, (iii)
raising capital through a public or private offering of equity or debt
securities , (iv) seeking to refinance debt encumbering the Properties on more
favorable terms and (v) acquiring or developing additional real estate. There
can be no assurance that the Trust will be successful in accomplishing any of
the foregoing. See "The Trust - Contemplated Acquisitions."
The Operating Partnership Agreement will obligate the Trust to
use reasonable efforts to complete a Qualified Offering as promptly as
practicable after the completion of the SSI/TNC Transaction. The net proceeds of
such a Qualified Offering will be used for purposes determined by the Trustees
at the time, which may include repayment of existing debt on the Properties,
acquiring or developing other properties, and other purposes.
The Operating Partnership Agreement will provide that if the
Trust does not use the proceeds of a Qualified Offering to retire the existing
mortgage indebtedness on those Properties where, under the terms of such
indebtedness, the lender has recourse against TNC or SSI for payment of the
mortgage loan, or holds a letter of credit under which SSI is the account party
responsible for repayment to the issuing bank of amounts advanced under such
letter of credit, the Trust must either (i) obtain from the lender a release of
TNC and SSI from such recourse
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liability or liability under such letter of credit, or (ii) make other
arrangements satisfactory to them to indemnify them against such liability.
Description of the Properties
As part of the SSI/TNC Transaction, the Trust will form the
Operating Partnership which will obtain title to, or through various Title
Holding Partnerships, will acquire indirect ownership of, up to 23 office and
industrial Properties located in the Greater Philadelphia Region. The Properties
aggregate approximately 1.18 million square feet and as of March 31, 1996 were
approximately 92% leased. The majority of the Properties were initially
developed by TNC.
The Initial Properties
The Initial Properties are comprised of seven properties owned
directly and indirectly by SSI and 12 properties owned by certain of TNC's
affiliates and SSI. The Initial Properties aggregate approximately 960,000
square feet. All of the Initial Properties are located in the Greater
Philadelphia Region. As of March 31, 1996, the Initial Properties were
approximately 94% leased to approximately 64 tenants. The following tables set
forth summary information about the Initial Properties as of March 31, 1996:
Initial Properties - General Information
<TABLE>
<CAPTION>
Annualized
Occupancy Base Rent
Rentable Rate at Number as of
Property/ Transfer Square Acquisition March 31, of March 31,
Location Category(1) Use(2) Footage Price (3) 1996 Tenants 1996
-------- ----------- --- ------- ---------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Horsham Business Center Witmer O 51,388 $5,136,000 99.41% 4 $ 619,416
(Bldg. 15)
1155 Business Center Dr.
Horsham, PA 19044
Oaklands Corporate Center Witmer F 47,604 $3,136,000 100% 1 $ 345,132
(Bldg. 5)
456 Creamery Way
Exton, PA 19341
Newtown Square Corporate Witmer O 37,700 $3,918,000 82.33% 4 $ 414,132
Campus
(Bldg. 11)
18 Campus Boulevard
Newtown Square, PA 19073
Newtown Square Corporate Witmer O 67,722 $5,800,000 87.58% 4 $ 601,172
Campus
(Bldg. 12)
16 Campus Boulevard
Newtown Square, PA 19073
</TABLE>
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<TABLE>
<CAPTION>
Annualized
Occupancy Base Rent
Rentable Rate at Number as of
Property/ Transfer Square Acquisition March 31, of March 31,
Location Category(1) Use(2) Footage Price (3) 1996 Tenants 1996
-------- ----------- --- ------- ---------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Keith Valley Business Witmer F 67,800 $ 6,472,000 98.45% 2 $717,684
Park
(Bldg. 7)
500 Enterprise Road
Horsham, PA 19044
Keith Valley Business Witmer O 79,204 $ 6,977,000 100% 1 $732,636
Park
One Progress Avenue
Horsham, PA 19044
Lansdale Industrial Park Witmer I 152,624 $ 6,000,000 100% 2 $777,276
1510 Gehman Road
Lansdale, PA 19446
Lawrenceville Office Park Witmer O 32,000 $ 2,000,000 54.44% 6 $220,264
168 Franklin Corner Road
Lawrenceville, NJ 08648
Iron Run Industrial Park TI F 40,000 $ 2,782,000 91.76% 2 $322,884
(Bldg. 2)
7310 Tilghman Street
Allentown, PA 18106
Whitelands Business Park TI F 43,660 $ 2,018,000 82.73% 4 $248,552
110 Summit Drive
Exton, PA 19341
Meetinghouse Business TI O 52,183 $ 5,554,000 99.31% 3 $639,804
Center
(Bldg. 1A and 1B)
2240/50 Butler Pike
Plymouth Meeting, PA
19462
Meetinghouse Business PIT O 30,546 $ 3,445,000 100% 3 $379,824
Center
(Bldg. 2)
120 West Germantown Pike
Plymouth Meeting, PA
19462
Meetinghouse Business TI O 25,953 $ 2,420,000 98.94% 4 $313,536
Center
(Bldg. 3)
140 West Germantown Pike
Plymouth Meeting, PA
19462
Meetinghouse Business TI O 31,892 $ 3,327,000 100% 3 $431,820
Center
(Bldg. 4)
2260 Butler Pike
Plymouth Meeting, PA
19462
Horsham Business Center TI O 30,138 $ 3,200,000 100% 1 $354,120
(Bldg. 6)
650 Dresher Road
Horsham, PA 19044
Iron Run Industrial Park PIT O 42,863 $ 3,664,000 93.79% 4 $413,604
(Bldg. 3)
7248 Tilghman Street
Allentown, PA 18106
</TABLE>
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<TABLE>
<CAPTION>
Annualized
Occupancy Base Rent
Rentable Rate at Number as of
Property/ Transfer Square Acquisition March 31, of March 31,
Location Category(1) Use(2) Footage Price (3) 1996 Tenants 1996
-------- ----------- --- ------- ---------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Iron Run Industrial Park PIT F 46,250 $ 3,000,000 100% 1 $330,684
(Bldg. 5)
6575 Snowdrift Road
Allentown, PA 18106
Oaklands Corporate Center PIT O 28,934 $ 2,645,000 100% 2 $291,720
(Bldg. 45)
468 Creamery Way
Exton, PA 19341
Oaklands Corporate Center PIT O 51,500 $ 4,000,000 79.48% 10 $470,856
(Bldg. 50) -----------
486 Thomas Jones Way $75,494,000
Exton, PA 19341 ===========
</TABLE>
- ------------------------------
(1) "Witmer" denotes that the Operating Partnership will acquire the
Property through its acquisition of interests in the Witmer
Partnership; "TI" denotes that the Operating Partnership will acquire
directly title to the Property; and "PIT" denotes that the Operating
Partnership will acquire the Property through its acquisition of
interests in the limited partnerships that own such Property.
(2) "O" is Office; "I" is Industrial; and "F" is Flex.
(3) "Acquisition Price" represents the agreed upon price for each of the
Properties, computed prior to any reduction on account of indebtedness
encumbering such Properties.
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Initial Properties - Indebtedness
<TABLE>
<CAPTION>
Principal Debt
Balance at
Property/Location Lender March 31, 1996 Maturity Notes
<S> <C> <C> <C> <C>
Horsham Business Center GECC $30,648,000(1) 11/30/00 These properties are all encumbered by
(Bldg. 15) this one loan. The loan is a non-
1155 Business Center Dr. recourse obligation, subject to stated
Horsham, PA 19044 exclusions. Borrower must pay Additional
Amortization (as defined in the loan
Oakland Corporate Center GECC (1) 11/30/00 documents) to reduce principal of the
(Bldg. 5) loan. Borrower must also pay Additional
456 Creamery Way Interest (as defined in the loan
West Whiteland, PA 19341 documents) upon a sale or refinancing.
The loan may be prepaid subject to a
Newtown Square Corporate Campus GECC (1) 11/30/00 prepayment penalty but may not be
(Bldg. 11) prepaid prior to November 30, 1997
18 Campus Boulevard except in conjunction with an equity
Newtown Square, PA 19073 offering meeting certain conditions. The
loan is additionally secured by a
Newtown Square Corporate Campus GECC (1) 11/30/00 $1,500,000 letter of credit provided by
(Bldg. 12) SSI, a limited guaranty of TNC, and a
16 Campus Boulevard pledge and security agreement delivered
Newtown Square, PA 19073 by the Witmer Partnership. GECC retains
a right of first offer to purchase the
Keith Valley Business Park GECC (1) 11/30/00 properties and has a right of first
(Bldg. 7) offer to refinance its debt through a
500 Enterprise Road debt financing under certain
Horsham, PA 19044 circumstances.
Keith Valley Business Park GECC (1) 11/30/00
One Progress Avenue
Horsham, PA 19044
Lansdale Industrial Park GECC (1) 11/30/00
1510 Gehman Road
Lansdale, PA 19446
Lawrenceville Office Park GECC (1) 11/30/00
168 Franklin Corner Road
Lawrenceville, NJ 08648
Iron Run Industrial Park Pennsylvania State $2,544,320 3/31/00 The loan is a non-recourse
(Bldg. 2) Employees' obligation subject to
7310 Tilghman Street Retirement System stated exclusions.
Allentown, PA 18106
Whitelands Business Park Midlantic Bank, $1,623,502 6/1/97 The borrower is liable for
110 Summit Drive N.A. (a division the total amount of the
Exton, PA 19341 of PNC Bank) debt.
</TABLE>
-98-
<PAGE>
<TABLE>
<CAPTION>
Principal Debt
Balance at
Property/Location Lender March 31, 1996 Maturity Notes
<S> <C> <C> <C> <C>
Meetinghouse Business Center New England Mutual $13,509,000(2) 7/1/00 Meetinghouse buildings 1, 2, 3 and 4 are
(Bldg. 1A and 1B) Life Insurance Co. encumbered by this one loan. The loan is
2240/50 Butler Pike a non-recourse obligation, subject to
Plymouth Meeting, PA 19462 stated exclusions. Borrower must pay
Additional Interest and Appreciation
Meetinghouse Business Center New England Mutual (2) 7/1/00 Interest as such terms are defined in
(Bldg. 2) Life Insurance Co. the loan documents. The loan may be
120 West Germantown prepaid, subject to a prepayment
Pike Plymouth Meeting, PA 19462 penalty. The loan is additionally
secured by a $500,000 letter of credit
provided by SSI.
Meetinghouse Business Center New England Mutual (2) 7/1/00
(Bldg. 3) Life Insurance Co.
140 West Germantown Pike
Plymouth Meeting, PA 19462
Meetinghouse Business Center New England Mutual (2) 7/1/00
(Bldg. 4) Life Insurance Co.
2260 Butler Pike
Plymouth Meeting, PA 19462
Horsham Business Center Allmerica $2,894,000 1/1/97 The loan is a non-recourse obligation,
(Bldg. 6) Financial subject to 650 Dresher Road stated
650 Dresher Road exclusions. The Horsham, PA 19044 lender
Horsham, PA 19044 has agreed to accept $2,400,000 in full
repayment of the outstanding principal
balance of the loan if prepayment is
tendered on or before August 1, 1996.
Iron Run Industrial Park New England Mutual $3,217,626 6/1/04 The loan is a non-recourse obligation,
(Bldg. 3) Life Insurance Co. subject to stated exclusions. Borrower
7248 Tilghman Street must pay Additional Interest and
Allentown, PA 18106 Appreciation Interest as such terms are
defined in the loan documents. Lender
retains a right of first refusal on any
sale of the property.
Iron Run Industrial Park First Union, $2,367,113 2/1/98 The loan is guaranteed by TNC. The
(Bldg. 5) National Bank borrower is liable for the total amount
6575 Snowdrift Road of the debt.
Allentown, PA 18106
Oaklands Corporate Center First Union, $6,479,000(3) 2/1/98 Oaklands Corporate Center Buildings 45
(Bldg. 45) National Bank and 50 are encumbered by this one loan.
468 Creamery Way The loan is guaranteed by TNC. The
Exton, PA 19341 borrower is liable for the total amount
of the debt.
Oaklands Corporate Center First Union, (3) 2/1/98
(Bldg. 50) National Bank 486
Thomas Jones Way
Exton, PA 19341
</TABLE>
- ------------------
(1) All of these properties secure the GECC Loan. As of March 31, 1996 the
outstanding principal balance of this loan was $30,648,000.
(2) All of these Properties secure a single loan. As of March 31, 1996 the
outstanding principal balance of this loan was $13,509,000.
(3) Both of these Properties secure a single loan. As of March 31, 1996, the
outstanding principal balance of this loan was $6,479,000.
-99-
<PAGE>
The following table sets forth the principal amount of the
loans secured by the Initial Properties that is repayable in the years
indicated:
<TABLE>
<CAPTION>
Property/Location 1996 1997 1998 1999 2000 2001+
<S> <C> <C> <C> <C> <C> <C>
Horsham Business Center $140,000 $151,000 $150,000 $150,000 $29,932,000
(Bldg. 15) (1) (1) (1) (1) (1)
1155 Business Center Dr.
Horsham, PA 19044
Oakland Corporate Center (1) (1) (1) (1) (1)
(Bldg. 5)
456 Creamery Way
West Whiteland, PA 19341
Newtown Square Corporate (1) (1) (1) (1) (1)
Campus
(Bldg. 11)
18 Campus Boulevard
Newtown Square, PA 19073
Newtown Square Corporate (1) (1) (1) (1) (1)
Campus
(Bldg. 12)
16 Campus Boulevard
Newtown Square, PA 19073
Keith Valley Business Park (1) (1) (1) (1) (1)
(Bldg. 7)
500 Enterprise Road
Horsham, PA 19044
Keith Valley Business Park (1) (1) (1) (1) (1)
One Progress Avenue
Horsham, PA 19044
Lansdale Industrial Park (1) (1) (1) (1) (1)
1510 Gehman Road
Lansdale, PA 19446
Lawrenceville Office Park (1) (1) (1) (1) (1)
168 Franklin Corner Road
Lawrenceville, NJ 08648
Iron Run Industrial Park $24,000 $26,000 $29,000 $25,000 $2,446,000
(Bldg. 2)
7310 Tilghman Street
Allentown, PA 18106
Whitelands Business Park $72,000 $1,572,000
110 Summit Drive
Exton, PA 19341
</TABLE>
-100-
<PAGE>
<TABLE>
<CAPTION>
Property/Location 1996 1997 1998 1999 2000 2001+
<S> <C> <C> <C> <C> <C> <C>
Meetinghouse Business Center $164,000 $176,000 $188,000 $203,000 $12,818
(Bldg. 1A and 1B) (2) (2) (2) (2) (2)
2240/50 Butler Pike
Plymouth Meeting, PA 19462
Meetinghouse Business Center (2) (2) (2) (2) (2)
(Bldg. 2)
120 West Germantown Pike
Plymouth Meeting, PA 19462
Meetinghouse Business Center (2) (2) (2) (2) (2)
(Bldg. 3)
140 West Germantown Pike
Plymouth Meeting, PA 19462
Meetinghouse Business Center (2) (2) (2) (2) (2)
(Bldg. 4)
2260 Butler Pike
Plymouth Meeting, PA 19462
Horsham Business Center $2,894,000
(Bldg. 6)
650 Dresher Road
Horsham, PA 19044
Iron Run Industrial Park $3,218,000
(Bldg. 3)
7248 Tilghman Street
Allentown, PA 18106
Iron Run Industrial Park $43,000 $47,000 $2,287,000
(Bldg. 5)
6575 Snowdrift Road
Allentown, PA 18106
Oaklands Corporate Center $117,000 $128,000 $6,260,000
(Bldg. 45) (3) (3) (3)
468 Creamery Way
Exton, PA 19341
Oaklands Corporate Center (3) (3) (3)
(Bldg. 50)
486 Thomas Jones Way
Exton, PA 19341
</TABLE>
- ------------------
(1) All of these properties secure a single loan.
(2) All of these properties secure a single loan.
(3) Both of these properties secure a single loan.
-101-
<PAGE>
The Operating Partnership will acquire direct or indirect (as
the case may be) ownership of the Initial Properties, pursuant to the provisions
of the Contribution Agreement discussed below. The Contribution Agreement will
require the Trust to contribute to the capital of the Operating Partnership the
SSI Ownership Interest in the Witmer Partnership. The balance of the limited
partnership interests in the Witmer Partnership will be contributed to the
Operating Partnership by TNC and Other Owners, thereby providing the Operating
Partnership with an indirect ownership interest in substantially all of the
Witmer Properties. TNC, SSI and Other Owners will also be required to transfer
to the Operating Partnership substantially all of the partnership interests in
the Title Holding Partnerships which own the Other Initial Properties indicated
above under the designation "PIT," and SSI will be required to contribute to the
Operating Partnership fee title to the Initial Properties indicated above under
the designation "TI."
The Option Properties
The Option Properties are comprised of four properties owned
by TNC and certain of the Other Owners. The Option Properties aggregate
approximately 159,000 square feet. All of the Option Properties are located in
the Greater Philadelphia Region. As of March 31, 1996, the Option Properties
were approximately 83% leased to approximately 17 tenants. The following table
sets forth summary information about the Option Properties as of March 31, 1996:
Option Properties - General Information
<TABLE>
<CAPTION>
Annualized
Occupancy Base Rent
Rentable Rate at Number as of
Transfer Square March 31, of March
Property Category (1) Use(2) Feet 1996 Tenants 31, 1996
-------- ------------ ------ ---- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Horsham Business Center PIT O 50,550 96.61% 7 $575,832
(Bldg. 11)
255 Business Center Drive
Horsham, PA 19044
Horsham Business Center PIT O 26,637 51.96% 3 $120,564
(Bldg. 12)
355 Business Center Drive
Horsham, PA 19044
Horsham Business Center PIT O 51,505 62.23% 3 $418,044
(Bldg. 13)
455 Business Center Drive
Horsham, PA 19044
Horsham Business Center PIT O 30,122 98.72% 4 $341,088
(Bldg. 14)
555 Business Center Drive
Horsham, PA 19044
</TABLE>
-102-
<PAGE>
- --------------------------------
(1) "PIT" denotes that the Operating Partnership will acquire the Property
through its acquisition of interests in the non-Witmer Partnership limited
partnership that owns such Property.
(2) "O" is Office.
On the Closing Date, the Option Properties will be subject to
Option Agreements which will entitle the Operating Partnership, in its
discretion, to acquire such Option Properties at any time during the two-year
period (subject to two extensions of one year each) following the Closing Date.
The designation "PIT" set forth above indicates that the applicable Property
will be indirectly acquired by the Operating Partnership by the acquisition of
substantially all the partnership interests in the Title Holding Partnership
that owns such Property. As of the date of this Proxy Statement, the consent of
the applicable lender to the exercise by the Operating Partnership of its option
to acquire the Option Properties has not been requested or obtained. No
determination to seek any such consent has been made.
Lease Expirations
Initial Properties. The table set forth below shows
certain information regarding rental rates and lease expirations
for the Initial Properties.
-103-
<PAGE>
Scheduled Lease Expirations
(The Initial Properties)
<TABLE>
<CAPTION>
Rentable Square Percentage of Total Final
Year of Number of Leases Footage Subject to Final Annualized Base Annualized Base Rent From
Lease Expiring Within Expiring Rent From Properties Properties
Expiration the Year(1) Leases Under Expiring Leases(2) Under Expiring Leases
---------- ------------- ------------------- ------------------------ ----------------------
<C> <C> <C> <C> <C>
1996 17 99,143 $960,383 10.95%
1997 5 74,668 $558,204 6.36%
1998 6 32,450 $348,846 3.98%
1999 12 269,775 $2,123,131 24.21%
2000 9 58,761 $724,803 8.26%
2001 6 85,532 $1,032,397 11.77%
2002 1 4,517 $63,238 0.72%
2003 2 77,742 $711,152 8.11%
2004 and 6 199,928 $2,249,086 25.64%
thereafter --------------- --------------- -------------------- ---------------------
Total 64 902,516 $8,771,239 100.00%
=============== --------------- -------------------- ---------------------
</TABLE>
- ---------------------
(1) A lease is considered to expire if, and at any time, it is terminable by
the tenant without payment of penalty or premium.
(2) "Final Annualized Base Rent" for each lease scheduled to expire represents
the cash rental rate in the final month prior to expiration multiplied by
twelve.
Option Properties. The table set forth below shows
certain information regarding rental rates and lease expirations
for the Option Properties.
<TABLE>
<CAPTION>
Scheduled Lease Expirations
(The Option Properties)
Rentable Square Percentage of Total Final
Year of Number of Leases Footage Subject to Final Annualized Base Annualized Base Rent From
Lease Expiring Within Expiring Rent From Properties Properties
Expiration the Year(1) Leases Under Expiring Leases(2) Under Expiring Leases
---------- ------------- ------------------- ------------------------ ----------------------
<C> <C> <C> <C> <C>
1996 6 33,709 $420,550 27.12%
1997 5 32,539 $382,722 24.68%
1998 1 5,840 $55,480 3.58%
1999 3 41,763 $467,413 30.15%
2000 and 2 18,834 $224,300 14.47%
thereafter
Total 17 132,685 $ 1,550,465 100.00%
============== ============== ================= =======
</TABLE>
- ---------------------
(1) A lease is considered to expire if, and at any time, it is terminable by
the tenant without payment of penalty or premium.
(2) "Final Annualized Base Rent" for each lease scheduled to expire represents
the cash rental rate in the final month prior to expiration multiplied by
twelve.
-104-
<PAGE>
Principal Features of the SSI/TNC Transaction
The SSI/TNC Transaction will involve a number of related
transactions that are expected to occur simultaneously and are intended
ultimately to result in the Initial Properties and Option Properties being owned
by, or under the control of, the Operating Partnership.
The following summary describes the principal features of the
SSI/TNC Transaction. The SSI/TNC Transaction will be accomplished in several
separate transactions, the combined effect of which will be to form and
capitalize the Operating Partnership and the Management Company and to transfer
ownership of the Trust's interest in BRP and the Owners' interests in the
Initial Properties to the Operating Partnership in exchange for Class A, B and C
Units and the General Partnership Interest (comprised of GP Units) in the
Operating Partnership.
The SSI/TNC Transaction is being structured principally
through the Operating Partnership to enable the Owners of the Initial Properties
to defer certain tax consequences of the SSI/TNC Transaction and to permit the
Trust, through the Operating Partnership, to acquire from third parties
additional commercial properties that defer such parties' tax consequences.
-105-
<PAGE>
SSI's Investment in the Trust
Pursuant to the terms of a Share and Warrant Purchase
Agreement between SSI and the Trust (the "Share Purchase Agreement"), the Trust
will issue 775,000 Common Shares and the SSI Warrant in exchange for the SSI
Ownership Interest and $426,250 in cash. The SSI Warrant will be exercisable
immediately upon its issuance, will expire on the sixth anniversary of the
Closing Date and will entitle SSI to purchase 775,000 Common Shares at a price
of $6.50 per share. The number of Common Shares issuable pursuant to the SSI
Warrant, and the exercise price thereof, are subject to customary antidilution
adjustments.
The Common Shares to be issued to SSI and the Common Shares
issuable to SSI upon exercise of the SSI Warrant will be entitled to certain
registration rights as set forth in a registration rights agreement to be
executed by the Trust. See "The SSI/TNC Transaction - Registration Rights."
Use of Cash Proceeds
The Trust will use substantially all of the $426,250 in cash
it receives from SSI in order to pay the expenses incurred by the Trust and the
Operating Partnership in connection with the SSI/TNC Transaction and will use
the balance for general trust purposes. See "The SSI/TNC Transaction - Expenses
of SSI/TNC Transaction."
Transfer of Properties to the Operating Partnership
Pursuant to the terms of a Contribution Agreement among the
Trust, SSI and TNC (the "Contribution Agreement"), the Trust, SSI and TNC will
transfer to the Operating Partnership certain assets in exchange for interests
in the Operating Partnership, as summarized below:
(a) The Trust will contribute $1,000 cash in
exchange for the General Partnership Interest (comprised of 182
GP Units).
(b) The Trust will contribute substantially all
of the SSI Ownership Interest in exchange for approximately
715,818 Class B Units.
(c) The Trust owns almost all of the economic
interest in BRP through its stated 70% general partner interest, which entitles
it to receive 98% of the profits and cash flows
-106-
<PAGE>
and 70% of the capital interest. Such capital interest is entitled to receive a
preferential return upon the occurrence of major capital events up until such
time that the unrecovered capital in BRP has been returned. The other 30%
general partner in BRP is obligated to make up any deficit capital accounts
through various income and gain allocations for the benefit of the Trust. The
Trust will contribute on the Closing Date a majority of its BRP Partnership
Interest in exchange for 1,600,000 Class C Units and will contribute the balance
of its BRP Partnership Interest approximately one year after the Closing Date in
exchange for an additional 256,200 Class C Units (or GP Units if, by such time,
a Qualified Offering has occurred). Specifically, on the Closing Date, the Trust
will contribute to the Operating Partnership a 97% profits interest and a 49%
capital interest in BRP (thereby retaining until approximately one year after
the Closing Date a 1% profits interest and a 21% capital interest in BRP). The
Trust has computed an allocation of the total carryover value of the BRP
interests in determining how many Class C Units will be outstanding at Closing.
The 1,600,000 Units, together with the 256,200 Units which will be contributed
after a year, equal the number of shares that the Trust had prior to the
transactions. The allocated amounts are based on a combination of the relative
income and capital interests held at present. The relative number of Units as a
percentage of the capital and profits split (1,600,000/49%/97% versus
256,200/21%/1%) does not trigger any accounting changes on the Trust's ability
to continue to consolidate its BRP interests.
(d) SSI will sell fee title to six of the Initial
Properties and transfer its interest in one Title Holding Partnership for a
seventh Initial Property in exchange for approximately 395,606 Class A Units
(including Units to be issued for Residual Interests of SSI).
(e) TNC, SSI and the Other Owners will sell
(i) all of the limited partnership interests in the Witmer Partnership not
included within the SSI Ownership Interest and (ii) substantially all of the
partnership interests of the Title Holding Partnerships that own the balance of
the Initial Properties in exchange for an aggregate of 1,251,747 Class A Units
(including Units to be issued for Residual Interests of TNC).
-107-
<PAGE>
The following matrix presents the allocations of
Units by partner:
Trust SSI TNC(b) Total
--------- -------- --------- ---------
General 182 0 0 182
Partner
Class A 0 395,606 1,251,747 1,647,353(c)
Class B 715,818 0 0 715,818
Class C 1,600,000 0 0 1,600,000
--------- --------- --------- ---------
Total 2,316,000 395,606 1,251,747 3,963,353
Percentage 58%(a) 10% 32% 100%
(a) Computed excluding the effect of the issuance of an additional 256,200 Units
to be issued to the Trust one year and one day following the Closing Date.
(b) TNC includes TNC and the six other Owners (other than SSI). SSI owns 40%
of the capital stock of TNC.
(c) Computed as if the 131,854 Class A Units to be issued within 37 months of
the Closing Date were issued on the Closing Date.
In addition, the Contribution Agreement will require TNC to
enter into an Option Agreement relating to the four Option Properties. Each of
the Option Properties is currently owned by a limited partnership (a Title
Holding Partnership) controlled by TNC. The Option Agreement will grant the
Operating Partnership an option, exercisable in its discretion, to acquire, for
Class A Units, substantially all of the partnership interests in the Title
Holding Partnership owning the Option Properties. The Operating Partnership will
be entitled to exercise its option with respect to one or more of the Option
Properties at any time during the two-year period following the Closing Date.
The Operating Partnership will have the right to extend the option exercise
period for two consecutive one-year periods. Exercise by the Operating
Partnership of its option to acquire any one Option Property will not be
conditioned on exercise by the Operating Partnership of its option to acquire
any other Option Properties, although exercise of an option for less than all of
the Option Properties may not be permitted by the applicable lender since each
of the Option Properties secures a single loan. As of the date of this Proxy
Statement, the consent of the applicable lender to the exercise by the Operating
Partnership of its option to acquire the Option Properties has not been
-108-
<PAGE>
requested or obtained. No determination to seek any such consent has been made.
See "The SSI/TNC Transaction - Determination of Number, and Class, of Units to
be Issued."
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 Initial Properties. The Operating Partnership will be so
required to issue additional Class A Units when the mortgage indebtedness
encumbering any of the Initial Properties (other than Witmer Properties) is
repaid at a discount, and additional equity in such Properties is achieved as a
result. In the event the Operating Partnership exercises an option to acquire an
Option Property, the Operating Partnership will be required to issue additional
Class A Units in payment of the purchase price. See "The SSI/TNC Transaction
Determination of Number, and Class, of Units to be Issued." In addition, as
explained below, the Operating Partnership will be required to issue an
additional 131,854 Class A Units when it acquires the Residual Interests in the
Title Holding Partnerships.
The acquisition by the Operating Partnership of the limited
partnership interests in the "Title Holding Partnerships" will be accomplished
by the Operating Partnership acquiring a 99% interest in the cash flow and
profits and an 89% interest in the capital of such limited partnerships. This
transaction structure is intended to comply with informal advice provided by the
Pennsylvania Department of Revenue to the effect that such transfers are not
subject to Pennsylvania or local real estate transfer taxes. The Contribution
Agreement will give the Operating Partnership the right to acquire, at any time,
and the obligation to acquire at the beginning of the 37th full month following
the Closing Date, the Residual Interests (11% capital and 1% cash flow and
profits) in each of the Title Holding Partnerships in exchange for an aggregate
of 131,854 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 the Closing Date
over (ii) the aggregate amount distributed in respect of the Residual Interests
between the Closing Date and the date of such acquisition.
The transfer to the Operating Partnership of fee title to the
six Initial Properties currently owned in fee by SSI will be subject to state
and local real estate transfer taxes. The
-109-
<PAGE>
state transfer tax is 1% of the consideration paid for (or the "computed value"
[as defined by the applicable transfer tax regulations] of) the applicable
property; the local transfer tax varies according to the jurisdiction in which
the Property is located but is approximately 1% of the consideration paid for,
or the computed value of, the applicable property. The Trust anticipates that
state and local transfer taxes for the Initial Properties that will be
transferred by SSI directly to the Operating Partnership will be approximately
$344,167. Pursuant to agreement, SSI and the Operating Partnership will each be
responsible to pay one-half of such transfer taxes. SSI has agreed to loan the
Operating Partnership funds to enable the Operating Partnership to pay a portion
of the expenses incurred by it in connection with the SSI/TNC Transaction,
including the Operating Partnership's share of real estate transfer taxes. See
"Principal Features of the SSI/TNC Transaction - SSI Advances."
Determination of Number, and Class, of Units to be Issued
The aggregate number, and Class, of Units that will be issued
by the Operating Partnership in exchange for the contributions to be made to it
by the Trust, SSI, TNC and the Other Owners have been determined by negotiation
among the Trust, SSI and TNC.
The parties first agreed upon the value of each of the Initial
Properties, focusing primarily upon the net operating income generated by each.
Once the value of each Initial Property was determined, the parties agreed to
subtract the principal amount of indebtedness secured by each such Property as
of the Closing Date in order to arrive at the equity of each such Property. The
parties then agreed that one Class A Unit would be issued to the applicable
Owners for each $5.50 of equity, subject to certain conditions, as summarized
below. For example, if the equity of an Initial Property were $3,000,000, then
545,454 Class A Units would be issued to the Owners in exchange for its
contribution.
The parties agreed that the aggregate equity of the eight
Witmer Properties is $9,576,206, based upon the principal balance of the GECC
Loan outstanding as of March 31, 1996. The SSI Ownership Interest represents
approximately 41% of such equity and the interests of the other Owners represent
the balance. Accordingly, the parties agreed that the Operating Partnership will
issue approximately 715,818 Class B Units to the Trust on account of the SSI
Ownership Interest it will contribute (thereby giving the Trust an entitlement
to the Preferential Return and a liquidation preference prior to a Qualified
-110-
<PAGE>
Offering), and will issue approximately 927,808 Class A Units to TNC and the
Other Owners on account of their contribution of their ownership interests in
the Witmer Properties. In addition, the parties agreed that the Operating
Partnership would issue an additional 97,502 Class A Units at the time it
acquires the Residual Interests in the Witmer Properties.
The parties further agreed that where a Property (other than a
Witmer Property) has positive equity but is cross- collateralized with one or
more Properties which have negative equity, the equity of all such Properties
would be combined. If the combined equity were positive, and if none of such
Properties was subject to a Lender's right to participate in refinancing or sale
proceeds, then Class A Units would be issued at the $5.50 rate on account of
such positive equity. The parties also agreed that if additional combined equity
is created in such cross- collateralized Properties after the Closing Date
through a refinancing of the indebtedness secured by such Properties at a
discount, 25% of the additional combined equity would be allocated to the Trust
and 75% would be allocated to the Owner contributing such collateralized
Properties by means of the issuance to the Trust of additional GP Units and to
the Owner of additional Class A Units at $5.50 per Unit.
The parties further agreed that any Class A Units issued on
account of any Property (other than a Witmer Property) subject to a lender's
participation in operating cash flow or refinancing or sale proceeds would be
deposited into escrow until such time as the applicable indebtedness is repaid.
At such time, Class A Units would be released from escrow to the contributing
Owner at the $5.50 rate to the extent that the original agreed upon value of the
applicable Property exceeded the sum of the amount of indebtedness encumbering
such Property as of the Closing Date plus the amount paid to the lender on
account of such participation. The balance of such Class A Units would be
canceled. Based on the foregoing agreement, an aggregate of 287,837 Class A
Units to be issued on the Closing Date will be deposited into escrow for
disbursement and cancellation, as the case may be. Class A Units, while held in
escrow, will be deemed to be outstanding for all purposes, and the anticipated
recipients thereof will be entitled to receive all distributions made in respect
thereof and to all voting rights associated therewith. In the event any Class A
Units deposited into escrow are canceled, the accounting effect would be to
reduce the minority interest in the Operating Partnership and increase the
indebtedness to reflect the amount paid to the lender on account of its
participation in operating cash flow or refinancing or sale proceeds, thereby
having no effect on the
-111-
<PAGE>
consolidated net equity of the Trust in the Operating Partnership.
The parties further agreed that, in the event that additional
equity is created at any Property (other than a Witmer Property) that is not
cross-collateralized with any other Property through a refinancing of
indebtedness secured by such Property at a discount after the Closing Date, 25%
of the additional equity would be allocated to the Trust (through the issuance
of additional GP Units) and 75% would be allocated to the Owner contributing
such Property (through the issuance of additional Class A Units). Accordingly,
if a Property contributed to the Operating Partnership had an agreed upon value
of $3,000,000 and secured a $2,700,000 loan, 54,545 Class A Units would be
issued on account thereof at the time such Property is contributed to the
Operating Partnership. If, however, such indebtedness is ultimately repaid at a
$200,000 discount, then the amount of such discount will be allocated 25% to the
Trust (through the issuance of GP Units) and 75% to the Owner (through the
issuance of Class A Units), at the $5.50 rate. The parties further agreed,
however, that any additional equity created in one of the Initial Properties
(Horsham Business Center Building 6) after the Closing Date but pursuant to a
third-party commitment, effective as of the Closing Date, to provide funds to
effect a refinancing at a discount, will be allocated to SSI, the owner of such
Property, by means of the issuance of additional Class A Units at the $5.50
rate.
Based on the foregoing, in addition to the approximately
715,818 Class B Units that will be issued to the Trust in exchange for its
contribution of the SSI Ownership Interest and the approximately 927,808 Class A
Units that will be issued to certain Owners in exchange for their sale of
ownership interests in the Witmer Properties, an additional 587,691 Class A
Units will be issued on the Closing Date on account of the remaining 11 Initial
Properties. An aggregate of 287,837 of these Class A Units will be deposited in
escrow, as indicated above, for disbursement or cancellation, as the case may
be, at the time the lender participation relating to the mortgage debt
encumbering the applicable Properties is satisfied.
The parties agreed upon a methodology for establishing the
value of the Option Properties (but have not agreed upon the value of any of the
Option Properties) using a similar approach to that taken to valuing the Initial
Properties, and agreed that in the event the Operating Partnership exercises its
option to acquire an Option Property it will issue additional Class A Units
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per Option Property at the $5.50 rate based on the to be agreed upon equity in
such Option Properties.
The GECC Loan was incurred by the Witmer Partnership to
acquire the Lawrenceville Premises and to refinance the existing debt
encumbering the remaining Witmer Properties. At the time of repayment of the
GECC Loan, GECC is entitled to receive, in addition to payment of the then
outstanding principal balance of the loan and all accrued but unpaid interest
thereon, an additional participation payment measured by the net sale proceeds,
net refinance proceeds, and/or the fair market value or equity in the Witmer
Properties in an amount determined by formula, but in any event not less than
$1,000,000 (subject to reduction as set forth in the next paragraph).
Rents from tenants of the Lawrenceville Premises are currently
insufficient to pay operating expenses and to service the portion of the GECC
Loan allocated to the Lawrenceville Premises. Consequently, operations at the
Lawrenceville Premises are subsidized by the positive cash flow generated from
the other seven Witmer Properties. The GECC Loan Documents provide that the
amount of the participation payment otherwise due GECC upon repayment of the
GECC Loan will be adjusted in accordance with a formula that, in essence,
reflects the cash flow (positive or negative) generated by the Lawrenceville
Premises between the date of its acquisition and the date of its sale. The
Operating Partnership Agreement will provide that when the GECC Loan is paid in
full, to the extent a participation payment is made to GECC, certain partners in
the Operating Partnership will return Units to the Operating Partnership in
equal number to the quotient obtained by dividing the participation payment due
GECC by $5.50.
To the extent a participation payment is made to GECC, the
General Partner will return 25% of the total number of Units required to be
returned to the Operating Partnership in the form of GP Units, provided that the
total number of GP Units returned shall not exceed the number of GP Units
previously issued to the General Partner on account of any additional equity
created in other Properties as a result of the repayment of existing mortgage
debt at a discount. The holders of the Class A Units who contributed their
partnership interests in the Witmer Partnership to the Operating Partnership
will return the balance in the form of Class A Units.
An affiliate of a tenant of one of the Initial Properties, 16
Campus Boulevard, Newtown Square, is a special limited partner in the Title
Holding Partnership that owns that
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Property. Under the terms of the Partnership Agreement creating that Title
Holding Partnership, such special limited partner has the right to receive a
distribution equal to a 35% participation in the residual cash flow of the Title
Holding 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 (i.e.,
total equity invested less third party debt) and (ii) with respect to cash flow
from the sale of the Property, 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. In the event the Property is sold while it
remains subject to the GECC Loan for a price that is less than the sum of
approximately $6.1 million plus a 10% per annum return on approximately $460,000
from the Closing Date and a payment is made to the special limited partner, the
Operating Partnership Agreement will require the Owners that contributed to the
Operating Partnership the interests in the Title Holding Partnership that owns
such Property to return an aggregate maximum of approximately 49,000 Class A
Units (the precise amount to be determined in accordance with a formula
contained in the Partnership Agreement).
The $5.50 rate referenced herein at which Units will be issued
and returned will be subject to proportionate adjustment in the event the Common
Shares are subdivided or combined or the Trust pays a dividend on its Common
Shares with Common Shares.
Exchange of Class A Units for Common Shares
At any time following a Qualified Offering or on a Redemption
Eligibility Date, a holder of a Class A Unit may require the Operating
Partnership to redeem such Unit for cash. At its option, the Trust 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) in exchange for each such Unit. To the extent the
Trust elects to assume the redemption obligation of the Operating Partnership
and satisfy such obligation by the delivery of Common Shares with each such
exchange, the number of Common Shares owned by a limited partner and, therefore,
such partner's percentage interest in the Trust, will increase, causing a
corresponding decrease in the percentage interest in the Trust owned by the
current Shareholders.
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The Qualified Offering; Sale Option
The Trust will agree in the Operating Partnership Agreement to
use reasonable efforts to complete a Qualified Offering as promptly as
practicable after completion of the SSI/TNC Transaction. Although the Trust has
commenced discussions with Legg Mason and another investment banking firm
concerning the timing and size of an equity offering, there can be no assurance
the Trust will be able to complete an equity offering that qualifies as a
Qualified Offering nor can there be any assurance as to the terms of any
offering the Trust may complete. In order to effectuate a Qualified Offering, it
may be in the best interests of the Trust and its Shareholders to effectuate a
reverse split of its Common Shares in order to increase the market price of the
Common Shares as quoted on the American Stock Exchange. See "Proposal No. 2 -
Amendment of Declaration of Trust - Confirmation of Reverse Stock Split
Authority."
The Initial Properties were encumbered by approximately $63.5
million of debt as of March 31, 1996. An objective of the Trust will be to
accelerate efforts to refinance this debt. Such efforts will focus on
consummating a Qualified Offering, and using all or a portion of the proceeds of
such Offering in connection with such refinancing. At the time of such
refinancing, if a refinancing of debt at a discount achieves additional equity,
the Operating Partnership would be obligated to issue additional Units equal to
the amount of the additional equity so achieved divided by $5.50. Twenty-five
(25%) of such additional Units would be issued to the Trust as GP Units and the
remaining 75% would be issued to the initial Owners of the applicable Property
as Class A Units. See "Determination of Number, and Class, of Units to be
Issued."
The Operating Partnership Agreement provides that if the Trust
does not use the proceeds of a Qualified Offering to retire the existing
mortgage indebtedness on those Properties where, under the terms of such
indebtedness, the lender has recourse against TNC or SSI for payment of the
mortgage loan, or holds a letter of credit under which SSI is the account party
responsible for repayment to the issuing bank of amounts advanced under such
letter of credit, the Trust must either (i) obtain from the lender a release of
TNC and SSI from such recourse liability or liability under such letter of
credit, or (ii) make other arrangements satisfactory to them to indemnify them
against such liability.
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Upon completion of a Qualified Offering, all Class B and C
Units will automatically convert into an equal number of GP Units. Conversion of
Class B Units upon completion of a Qualified Offering will not relieve the
Operating Partnership of its obligation to pay the Trust, as the holder of such
converted Class B Units, the amount of the accrued but unpaid Preferential
Return as of the conversion date.
After a Qualified Offering (and assuming no additional classes
of Units in the Operating Partnership have been created), 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 the
number of outstanding Class A Units to the sum of the number of outstanding
Class A Units plus the number of outstanding Common Shares (other than
outstanding Excluded Common Shares). The balance would be distributed by the
Operating Partnership to the Trust on account of its GP Units for distribution
to holders of Common Shares.
If a Qualified Offering has not occurred by the fifth
anniversary of the Closing Date, holders of a majority of the Class A Units will
have the right and option, exercisable prior to a Qualified Offering, to require
the Operating Partnership to use its best efforts to sell the Initial
Properties, provided the net proceeds received from the sale are sufficient to
pay the liquidation preference on the Class B Units, together with any accrued
but unpaid Preferential Return thereon. The net proceeds from any such sale,
after payment of the Preferential Return on the Class B Units, would then be
distributed to the holders of the Class A and B Units and GP Units pro rata in
accordance with the number of Units held by each holder.
SSI Advances
On the Closing Date, SSI will enter into a Distribution
Support and Loan Agreement with the Operating Partnership that will obligate SSI
to do the following:
(a) To advance up to $700,000 to the Operating
Partnership to provide it with working capital needed for the operation of the
Initial Properties other than the Witmer Properties. SSI's commitment to advance
up to $700,000 will remain in effect until the earlier of: (i) January 31, 1998;
(ii) a Qualified Offering; (iii) a refinancing by the Operating Partnership of
indebtedness secured by one or more of the Initial Properties which results in
net proceeds sufficient to repay
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amounts loaned to the Operating Partnership by SSI; and (iv) a liquidation of
the Operating Partnership.
(b) To loan the Operating Partnership
approximately $400,000 to pay a portion of the costs incurred by the Operating
Partnership (estimated to be approximately $762,000) in connection with the
SSI/TNC Transaction (including the Operating Partnership's share of real estate
transfer taxes).
(c) Until the earlier of the repayment of the
GECC Loan (which matures on November 30, 2000) and a Qualified Offering, to
provide the SSI Subsidy. SSI's obligation to provide the SSI Subsidy in any
quarter will not exceed for such quarter the amount of the distributions paid or
payable for such quarter on the 775,000 Common Shares to be issued to SSI on the
Closing Date.
(d) Maintain the $1.5 million letter of credit
collateralizing the GECC Loan and the $500,000 letter of credit collateralizing
the loan secured by Meetinghouse Buildings 1, 2, 3 and 4 pursuant to their terms
until the maturity or earlier repayment of such loans.
The Distribution Support and Loan Agreement will also provide
that any amounts drawn under either of the letters of credit referenced in
clause (d) above will be treated as an advance to the Operating Partnership
thereunder. Any amounts drawn under the $500,000 letter of credit
collateralizing the loan secured by Meetinghouse Buildings 1, 2, 3 and 4 will
constitute an advance under the $700,000 working capital line referenced in
paragraph (a) above.
All amounts advanced or treated as advanced (collectively,
"SSI Advances") under the Distribution Support and Loan Agreement will earn
interest at prime, payable quarterly, but any current payments will be
subordinate to the Preferential Return and the liquidation preference on the
Class B Units. The SSI Advances (other than advances comprising the SSI Subsidy)
will be repayable in full upon the earlier to occur of (i) a Qualified Offering,
(ii) a refinancing of mortgage indebtedness encumbering all or a portion of the
Initial Properties that results in sufficient funds, after repayment of such
indebtedness, to repay the SSI Advances (a "Refinancing"), (iii) July 31, 1999
and (iv) a liquidation of the Operating Partnership. In the event a Qualified
Offering or a Refinancing has not occurred by July 31, 1999 and the Operating
Partnership lacks sufficient funds to repay the SSI Advances on July 31,
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1999, the repayment date will be automatically extended until the earlier to
occur of (i) a Qualified Offering or a Refinancing, (ii) December 31, 2001 or
(iii) a liquidation of the Operating Partnership. Amounts advanced as the SSI
Subsidy will be repayable in full upon the earlier to occur of (i) a Qualified
Offering, (ii) repayment of the GECC Loan, (iii) a liquidation of the Operating
Partnership and (iv) December 31, 2001. In the event of a liquidation of the
Operating Partnership, repayment of the SSI Advances will be subordinate to the
accrued but unpaid Preferential Return and the liquidation preference on the
Class B Units. In the event of a sale of, or refinancing of indebtedness secured
by, an Initial Property, any net proceeds will first be used by the Operating
Partnership to repay any accrued interest on SSI Advances and to repay SSI
Advances.
Indemnification; Forfeiture of Units
In the transaction documents, the Trust, on the one hand, and SSI and
TNC, on the other, will make customary representations and warranties for the
benefit of each other. SSI and TNC will pledge the Class A Units issued to them
in connection with the SSI/TNC Transaction to collateralize their respective
obligations to indemnify the Trust in the event that it incurs a loss as a
result of an inaccuracy in any such representation or warranty. The liability of
each of SSI and TNC for indemnification will be several, not joint and several,
and will be limited to the interests of SSI and TNC in the pledged collateral.
The indemnity obligations of SSI and TNC will be subject to limitations relating
to the amount of indemnification, the period in which claims for indemnification
may be asserted and the procedures for requesting indemnification.
Formation, Capitalization and Operation of the Management Company
On the Closing Date, SSI and TNC will assign to the Management
Company all existing management and leasing agreements for all Properties. At
that time all employees of the Trust and TNC will become employees of the
Management Company and will be compensated by that entity. Thereafter, the
Management Company will conduct property management and leasing services for
third parties on a fee basis and will provide management and administrative
services to the Operating Partnership.
To comply with certain technical requirements of the Code, the
Operating Partnership will own all of the shares of the Management Company's
non-voting preferred stock, and five percent (5%) of the shares of the
Management Company's common stock. The
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balance of the shares of the Management Company's common stock will be owned by
a general partnership, the initial general partners of which will be the Trust's
chief executive officer and the TNC Executives, but each of those individuals
will only be permitted to remain a partner in such partnership while he is an
officer of the Trust, and each will generally be required to transfer his
interest in such partnership to the partnership in the event he ceases to be an
officer of the Trust. Through the Operating Partnership's ownership of equity
interests in the Management Company, the Trust expects substantially all of the
economic benefits of ownership of such entity to flow to the Operating
Partnership. Although the Operating Partnership will be entitled to receive 99%
of the income of the Management Company by virtue of its equity ownership, the
Trust will not be able to elect directors of the Management Company and,
consequently, the Trust's ability to influence the day-to-day decisions of such
entity may be limited.
Election of SSI/TNC Trustees
The Board of Trustees of the Trust currently consists of five
persons. If the SSI/TNC Transaction is consummated, the size of the Board of
Trustees will be expanded from five to seven. Two current members of the Board
(Messrs. DiLullo and Jerome) are not standing for reelection. Three individuals
associated with, or designated by, SSI and TNC (Messrs. Nichols, Musser and
D'Alessio) have been nominated by the Board for election as Trustees, and one
individual (Charles P. Pizzi) has been jointly designated by SSI, TNC and the
Trust to fill the vacancies that will be created by the expansion.
The following table sets forth information with respect to
persons who will be elected Trustees upon, and subject to the consummation of,
the SSI/TNC Transaction.
Name Age Position and Offices Held
---- --- -------------------------
Anthony A. Nichols, Sr. 56 Proposed Trustee*
Warren V. Musser 69 Proposed Trustee
Walter D'Alessio 61 Proposed Trustee
Charles P. Pizzi 46 Proposed Trustee
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* For biographical information concerning Mr. Nichols, see "The
SSI/TNC Transaction-Management Following the SSI/TNC
Transaction."
Warren V. Musser has been nominated to serve as a Trustee and
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, the Board of Overseers of the Wharton School of the University of
Pennsylvania, and 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. Mr. Musser received his Bachelor of Science
degree in Industrial Engineering from Lehigh University.
Walter D'Alessio has been nominated to serve as a Trustee. Mr.
D'Alessio 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, the financial advisor to the Trust. See, "The
SSI/TNC Transaction- Opinion of Legg Mason." Previously, Mr. D'Alessio served as
Executive Vice President of the Philadelphia Industrial Development Corporation
and Executive Director of the Philadelphia Redevelopment Authority. He also
serves on the Board of Directors of the Philadelphia Electric Company,
Pennsylvania Blue Shield and Independence Blue Cross, the Philadelphia Private
Industry Council, and the Greater Philadelphia Chamber of Commerce. Mr.
D'Alessio received his Bachelor of Science degree in Landscape Architecture from
Pennsylvania State University and his Master of Science degree in City Planning
from the University of Illinois.
Charles P. Pizzi has been nominated to serve as a
Trustee. Mr. Pizzi has been 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
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School of Business Management, United Way of Southeastern
Pennsylvania, University of Pennsylvania Graduate School of
Education Board of Overseers and Urban League of Philadelphia.
Mr. Pizzi received his Bachelor's degree from LaSalle University.
The Trust anticipates that an executive committee of the Board
will be formed and will have such authority as may from time to time be
delegated to it by the full Board, subject to applicable law. The initial
members of the executive committee are expected to be Anthony A. Nichols, Sr.
(Chairman), Richard M. Osborne, Gerard H. Sweeney and Warren V. Musser.
Employment Agreements with Executives; Warrant Issuances
The Management Company will enter into two-year employment
agreements with each of the TNC Executives. These agreements will establish
annual salaries for each of Messrs. Nichols, Belcher and Gallagher at $141,500,
$125,500 and $104,500, respectively, which compensation may be increased by the
Board of Trustees in its discretion. In the employment agreements, the
Management Company will agree to cause the Trust or the Operating Partnership to
adopt an incentive compensation program for the benefit of executive officers of
the Trust. As of the date of this Proxy Statement, the terms of any such
compensation program have not been determined, and it is anticipated that such
terms will be formulated by the Board or a to-be-formed compensation committee
of the Board following completion of the SSI/TNC Transaction.
The employment agreements will provide for the issuance to the
TNC Executives, collectively, of Executive Warrants exercisable for an aggregate
of 360,000 Common Shares at a per share exercise price of $6.50. The number of
Common Shares issuable pursuant to the Executive Warrants and the exercise price
thereof will be subject to customary antidilution provisions. The Executive
Warrants will be fully vested and exercisable on the date of grant. They will
expire on the sixth anniversary of the date of grant. These Executive Warrants
will be allocated as follows: 120,000 to Mr. Nichols; 120,000 to Mr. Gallagher;
and 120,000 to Mr. Belcher. The balance of the Executive Warrants (exercisable
for an aggregate of 40,000 Common Shares) will be issued to approximately 10 TNC
employees who are expected to become employees of the Management Company.
The Management Company will also enter into a two-year
employment agreement with Mr. Sweeney, who will remain the President and Chief
Executive Officer of the Trust following
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consummation of the SSI/TNC Transaction. Mr. Sweeney's annual salary will be
increased from $130,000 to $141,500 and he will be awarded warrants exercisable
during the six-year period following their date of issuance for an aggregate of
300,000 Common Shares at a per share exercise price of $6.50. The warrants will
be fully vested and exercisable on the date of grant and will be subject to
customary antidilution provisions. The provisions contained in Mr. Sweeney's
current employment agreement with the Trust governing his options exercisable
for 140,000 Common Shares will continue unchanged.
The obligations of the Management Company under the
employment agreements with the TNC Executives and Mr. Sweeney
will be guaranteed by the Operating Partnership.
In the event the Management Company were to terminate the
employment of any of the TNC Executives or Mr. Sweeney without cause, or were to
elect not to renew the applicable employment agreement on the second anniversary
of the Closing Date, the Management 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 Management Company following a change in control, the
Management Company would be obligated to provide the applicable executive the
severance payments described in the preceding sentence. The term "change in
control" means the acquisition by any person (other than the Trust and its
affiliates) of a majority of the outstanding Common Shares of the Trust or
voting securities of the Management Company.
In connection with the SSI/TNC Transaction, John Adderly, a
current employee of the Trust, will be granted warrants exercisable for an
aggregate of 30,000 Common Shares at a per share exercise price of $6.50. The
number of Common Shares issuable pursuant to such warrants and the exercise
price thereof will be subject to customary antidilution provisions. The warrants
will be fully vested and exercisable on the date of grant and will expire on the
sixth anniversary of their date of grant.
In furtherance of the Trust'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 Executive Warrants and the Warrants to be issued to
Messrs. Sweeney and Adderly will give the Trust the right to refuse to
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issue Common Shares upon the exercise thereof if the issuance of such Common
Shares would result in the Trust being "closely held" within the meaning of
Section 856(h) of the Code or would bring the number of Common Shares
beneficially owned by the holder in excess of the ownership limit applicable to
such holder contained in the Declaration Amendments. If the Trust 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 will include a provision voiding the Warrant ab initio if the issuance
thereof would, but for such provision, cause the Trust to be "closely held" and
providing that, upon such a voiding, the Warrant will be replaced with a stock
appreciation right giving the Trust 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 stock 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 holders of the Common Shares issuable upon exercise of the
Executive Warrants and the warrants to be issued to Messrs. Sweeney and Adderly
will have certain rights to require the Trust to register these Common Shares
under the Securities Act of 1933 so that such Shares may be publicly sold.
Waiver of Maryland Antitakeover Statutes
Business Combination Statute. Subtitle 6 of Title 3 of the
Maryland General Corporation Law ("MGCL") establishes special requirements with
respect to "business combinations" between Maryland corporations (including real
estate investment trusts such as the Trust) and "interested stockholders" unless
exemptions are applicable. The law generally prohibits for a period of five
years following the date on which a person or entity becomes an interested
stockholder a merger or other specified transaction between a company and the
interested stockholder and requires a super-majority vote for any such
transaction following such five-year period. An "interested stockholder" is any
person who beneficially owns, directly or indirectly, 10% or more of the
outstanding voting stock of a Maryland REIT. "Business combinations" include any
merger or similar transaction subject to a statutory vote and additional
transactions involving transfers of assets or securities in specified amounts to
an interested stockholder or its affiliates.
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Unless an exemption is available, business combinations may not be consummated
between a Maryland REIT and an interested stockholder or its affiliates for a
period of five years after the date on which the stockholder first became a
interested stockholder and thereafter generally may not be consummated unless
recommended by the board of trustees of the Maryland REIT and approved by the
affirmative vote of at least 80% of the votes entitled to be cast by all holders
of outstanding shares of voting stock and 66-2/3% of the votes entitled to be
cast by all holders of outstanding shares of voting stock other than the
interested stockholder. A business combination with an interested stockholder
which is approved by the board of trustees of a Maryland REIT at any time before
an interested stockholder first becomes an interested stockholder is not subject
to the 5- year moratorium or special voting requirements. An amendment to a
declaration of trust of a Maryland REIT 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 all holders of outstanding shares of voting
stock and 66-2/3% of the votes entitled to be cast by holders of outstanding
shares of voting stock who are not interested stockholders. Any such amendment
is not effective until 18 months after the vote of stockholders and does not
apply to any business combination of a Maryland REIT with a stockholder who was
an interested stockholder on the date of the stockholder vote.
Control Share Acquisition Statute. Subtitle 7 of Title 3 of
the MGCL imposes limitations on the voting rights of shares acquired in a
"control share acquisition." This statute is applicable to the Trust. This
statute defines a "control share acquisition" at the 20%, 331/3% and 50%
acquisition levels, and requires a two-thirds Shareholder vote (excluding shares
owned by the acquiring person and certain members of management) to accord
voting rights to stock acquired in a control share acquisition. The statute also
requires Maryland REITs to hold a special meeting at the request of an actual or
proposed control share acquiror generally within 50 days after a request is made
with the submission of an "acquiring person statement," but only if the
acquiring person (a) posts a bond for the cost of the meeting and (b) submits a
definitive financing agreement to the extent that financing is not provided by
the acquiring person. In addition, unless the declaration of trust or by-laws
provide otherwise, the statute gives the Maryland REIT, within certain time
limitations, various redemption rights if there is a Shareholder vote on the
issue and the grant of voting rights is not approved, or if an "acquiring person
statement" is not delivered to the Maryland REIT within 10 days following a
control share acquisition. Moreover, unless the declaration of trust or
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bylaws provide otherwise, the statute provides that if, before a control share
acquisition occurs, voting rights are accorded to control shares which result in
the acquiring person having majority voting power, then minority shareholders
have appraisal rights. An acquisition of shares may be exempted from the control
share statute provided that a declaration of trust or bylaw provision is adopted
for such purpose prior to the control share acquisition.
Reference is made to the full text of the foregoing statutes
for their entire terms, and the partial summary contained in this Proxy
Statement is not intended to be complete.
The Board of Trustees has agreed to exempt SSI, TNC and their
respective affiliates from the operation of the Maryland "business combination"
and "control share acquisition" statutes, conditioned on approval of the SSI/TNC
Transaction by Shareholders. The Board of Trustees has also agreed to exempt
Gerard H. Sweeney and his affiliates from the operation of the Maryland
"business combination" statute, conditioned on approval of the SSI/TNC
Transaction by Shareholders. The exemption from the "business combination"
statute will be accomplished by the adoption of an appropriate resolution by the
Board of Trustees of the Trust prior to the consummation of the SSI/TNC
Transaction. The exemption from the "control share acquisition" statute will be
accomplished by the adoption by the Board of Trustees of an amendment to the
Trust's bylaws. As the purpose of these provisions is to make more difficult the
acquisition of a company, and to discourage certain types of coercive takeover
practices, waiver of these provisions will have the effect, as to SSI, TNC and
Mr. Sweeney, of removing these barriers to their acquiring control of the Trust.
Standstill Arrangement
At the Closing Date, SSI will enter into an agreement (the
"SSI Agreement"). In the SSI Agreement, SSI will agree during the term of the
SSI Agreement to: (i) vote its Common Shares for the election of either Richard
M. Osborne or his designee for election to the Board of Trustees, but only for
so long as Mr. Osborne is the beneficial owner of at least 10% of the
outstanding Common Shares; (ii) refrain from engaging in proxy solicitations in
opposition to the position of a majority of the Board of Trustees and refrain
from engaging in election contests; (iii) vote its Common Shares in accordance
with the recommendation of a majority of the Board of Trustees on any matter
submitted to a vote of Shareholders other than (a) a merger, consolidation or
liquidation of the Trust or a sale by
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the Trust of all or substantially all of its assets or (b) any amendment to the
Trust's Declaration of Trust which adversely affects the rights of Shareholders;
(iv) refrain from disposing of any of its Shares other than (a) in transactions
under Rule 144, (b) in a private transaction to any person who is not then a
business competitor of the Trust and who, immediately following such
transaction, would own less than 5% of the outstanding Common Shares, (c) in
response to a bona fide third party tender or exchange offer for at least 80% of
the Common Shares and supported by a majority of the Board of Trustees, and (d)
in a merger or statutory share exchange in which ownership of the Trust is
acquired by a third party; and (v) not to pursue any action which may disqualify
the Trust's REIT status. The SSI Agreement will permit SSI to transfer up to
approximately 52,000 of its Common Shares to Mr. Nichols so long as he holds
such Common Shares subject to the same restrictions applicable to them while
they were owned by SSI. During the term of the SSI Agreement, but only for so
long as SSI is the beneficial owner of at least 10% of the outstanding Common
Shares, the Trust will cause three individuals designated by SSI to be nominated
for election to the Board of Trustees.
The term of the SSI Agreement will end on the earlier of (i)
the third anniversary of its date and (ii) completion by the Trust of a
Qualified Offering.
Registration Rights
The Trust will enter into a Registration Rights Agreement with
each holder of Class A Units, with SSI and with the RMO Fund (the "Registration
Rights Agreement") obligating the Trust to register Common Shares issuable upon
the exercise of the SSI Warrants, Common Shares held by SSI, Common Shares, if
any, which may be issued upon redemption of Class A Units and Common Shares
issued or issuable to the RMO Fund in connection with its investment in the
Trust on June 21, 1996 (collectively, "Registrable Securities"). The
Registration Rights Agreement will provide that, at the request of the holders
of Registrable Securities, the Trust 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
Trust will not be obligated to pay the expenses of an underwritten offering
during the first 12 months after the Closing Date. The holders of Registrable
Securities will also be entitled to "piggyback" on the Trust's registrations of
its Common Shares. In connection with such registrations, the Trust and the
selling shareholders will
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mutually indemnify each other against certain liabilities, including liabilities
under the federal securities laws.
Mortgage Loans
The GECC Loan
In November 1995, SSI and TNC reorganized the Title Holding
Partnerships which own the Witmer Properties (other than the Witmer Property
located in Lawrenceville, New Jersey, which was owned by GECC and not a Title
Holding Partnership), and formed the Witmer Partnership to hold substantially
all the partnership interests of such Title Holding Partnerships. In connection
therewith, the Witmer Partnership and the Witmer Partnership's subsidiary Title
Holding Partnerships obtained a non-recourse mortgage loan (referred to herein
as the "GECC Loan") from GECC in the aggregate maximum principal amount of
$32,211,600. The proceeds of this loan were used to purchase fee title to the
Witmer Property located in Lawrenceville, New Jersey, (the "Lawrenceville
Premises") and to satisfy the mortgage loans encumbering the other Witmer
Properties.
On the Closing Date, as a result of the Operating Partnership
indirectly acquiring all of the partnership interests in the Witmer Partnership
(which in turn owns substantially all the partnership interests in the Title
Holding Partnerships that own the Witmer Properties), the Operating Partnership
will indirectly own the Witmer Properties which will remain subject to the
indebtedness represented by the GECC Loan.
The GECC Loan is evidenced by a loan agreement and related
documents by and among GECC, the Witmer Partnership and its subsidiary Title
Holding Partnerships, and is secured by mortgage liens encumbering eight of the
Initial Properties: (1) Horsham Business Center, Building 15; (2) Oaklands
Corporate Center, Building 5; (3) and (4) Newtown Square Corporate Campus,
Buildings 11 and 12; (5) Keith Valley Business Park, Building 7; (6) the
building located at One Progress Avenue in Keith Valley Business Park; (7)
Lansdale Industrial Park; and (8) the Lawrenceville Premises. The GECC Loan is a
non-recourse obligation, subject to stated exclusions. The original principal
amount of the GECC Loan is $32,211,600; the GECC Loan matures on November 30,
2000 and bears interest at a contract rate equal to 2.75% per annum in excess of
GECC's Composite Commercial Paper Rate (as such term is defined in the GECC Loan
Documents).
In addition to the contract rate of interest, the borrowers
must also pay "additional amortization" based upon the net
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cash flow of the Witmer Properties, and "additional interest," based upon a
participation interest in any sale or refinancing of the Witmer Properties. The
SSI/TNC Transaction will not trigger payment of "additional interest" to GECC.
The monthly payments due under the GECC Loan will not fully amortize the
principal sums due thereunder; therefore, there will be a "balloon payment" of
the debt due on the maturity date in the approximate amount of $29,782,000. The
loan may be prepaid in full prior to maturity, subject to the payment of a
prepayment penalty.
The loan is secured by cross-collateralized mortgages
encumbering each of the eight Witmer Properties, assignments of leases, a
$1,500,000 letter of credit provided by SSI, a pledge and security agreement
delivered by the Witmer Partnership and a limited guaranty of TNC.
GECC also holds a right of first offer pursuant to which none
of the Witmer Properties, nor any interests in the Witmer Partnership nor in any
of the subsidiary Title Holding Partnerships may be offered to a third party
unless such property (or such interests) are first offered to GECC (at the
stated price, net of its remaining participation interests and the outstanding
loan balance), which offer GECC shall have 30 days within which to accept. This
right of first offer is inapplicable to the SSI/TNC Transaction. GECC also has a
right of first offer to refinance its debt through a debt financing under
certain circumstances.
The GECC Loan Documents permit the Witmer Partnership to
distribute to its partners a nine percent (9%) non-compounding return on the
stated amount of $3,805,400 plus draws made on a $1,500,000 letter of credit
posted as additional collateral for the GECC Loan (the "GECC Equity Amount"),
but only so long as (i) space presently occupied by a designated tenant in one
of the Witmer Properties is re-leased to such designated tenant or to another
tenant on terms approved by GECC, (ii) the Adjusted Net Operating Income
(calculated without regard to the revenues or expenses of the Witmer Property
located in Lawrenceville, New Jersey and referred to herein as the
"Lawrenceville Premises") and the Debt Service Coverage Ratio (calculated both
inclusive of the Lawrenceville Premises and excluding the Lawrenceville
Premises), as such terms are defined in the GECC Loan Documents, all meet
certain thresholds. As of this date, not all of such conditions to the payment
of the return on equity have been satisfied. In the event the Witmer Partnership
is unable to satisfy the conditions set forth in (ii) above, then, provided the
condition stated in clause (i) above has been satisfied, the
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Witmer Partnership nevertheless has a one-time right to distribute to its
partners a 6% return on the GECC Equity.
The New England Mutual Life Insurance Company Loans
The New England Mutual Life Insurance Company ("NEMLICO")
holds three mortgage loans, encumbering, in the aggregate, five of the Initial
Properties (Meetinghouse Buildings 1, 2, 3 and 4, and Iron Run III) and four of
the Option Properties (Horsham Buildings 11-14).
One of the NEMLICO loans ("NEMLICO I") encumbers Meetinghouse
Buildings 1, 2, 3 and 4. NEMLICO I is a non-recourse obligation, subject to
stated exclusions. The principal amount of NEMLICO I outstanding as of March 31,
1996 was $13,508,223; NEMLICO I matures on July 1, 2000 and bears interest at a
rate equal to 7.125% per annum. In addition to the contract interest rate, the
borrower must pay "additional interest" and "appreciation interest" to NEMLICO.
The monthly payments will not amortize fully the principal sums due under the
loan; therefore, there will be a "balloon payment" of the debt due on the
maturity date in the appropriate amount of $12,625,000. The loan may be prepaid
prior to maturity, subject to the payment of a prepayment penalty. The loan is
secured by a single mortgage encumbering the properties, assignments of leases,
and a $500,000 Letter of Credit provided by SSI. NEMLICO I may be prepaid
subject to a "yield maintenance" premium.
A second NEMLICO loan ("NEMLICO II") financed the development
of Iron Run III. The principal amount of NEMLICO II outstanding as of May 31,
1996 was $3,217,626; NEMLICO II matures on June 1, 2005 and bears interest at a
rate equal to 7% per annum. NEMLICO II is a non-recourse obligation, subject to
stated exclusions. In addition to contract interest, the borrower must pay
NEMLICO a participation in net cash flow and in sale and refinancing proceeds.
Monthly payments include interest only; therefore, there will be a "balloon
payment" of the debt due on the maturity date in the approximate amount of
$3,218,000. The loan is secured by a mortgage on the subject property and an
assignment of leases. NEMLICO retains a right of first refusal on sales of the
subject property. NEMLICO has the right to call NEMLICO II on December 31 of
each year if the outstanding principal balance plus accrued interest as of that
date exceeds a stated amount. NEMLICO II may be prepaid subject to a "yield
maintenance" premium.
A third NEMLICO loan ("NEMLICO III") encumbers Horsham
Buildings 11-14. NEMLICO III is a non-recourse obligation,
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subject to stated exclusions. The principal amount of NEMLICO III outstanding as
of March 31, 1996 was $16,763,000; NEMLICO III matures on April 1, 2003 and
bears interest at a rate equal to 7.5% per annum. In addition to contract
interest, the borrower must pay "additional interest" and "appreciation
interest" to NEMLICO. Any available net cash flow is applied against the
outstanding principal balance of NEMLICO III. The monthly payments will not
amortize fully the principal sums due under the loan; therefore, there will be a
"balloon payment" of the debt due on the maturity date in the approximate amount
of $16,763,000. The loan may be prepaid prior to maturity, subject to the
payment of a prepayment penalty. NEMLICO may accelerate the debt if on December
31 of any calendar year the principal sum (including accrued interest) exceeds
the maximum allowable amount for that year set forth in the promissory note.
NEMLICO III is secured by a single mortgage encumbering the aforementioned
properties, assignments of leases and an escrow of all tenant rent payments.
NEMLICO also holds a right of first refusal which provides that if the borrower
receives a bona fide offer to purchase the properties, it must offer to sell the
properties to NEMLICO on the same terms and conditions as those set forth in
such third party offer. NEMLICO III may be prepaid subject to a "yield
maintenance" premium.
The SSI/TNC Transaction will not trigger payment of
"additional interest" to NEMLICO.
The First Union Bank Loans
Fidelity Bank, N.A. (now First Union, National Bank) holds two
loans encumbering, in the aggregate, three of the Initial Properties. Proceeds
from one of the First Union loans ("First Union I") financed the development of
Oaklands Corporate Center Buildings 45 and 50. The principal amount of First
Union I outstanding as of March 31, 1996 was $6,479,000; First Union I matures
on February 1, 1998 and bears interest at 8% per annum. First Union I is
amortized on a 22-year graduated, self- amortizing basis; therefore, there will
be a "balloon payment" of the debt due on the maturity date in the approximate
amount of $6,260,000. The borrower is fully liable for the total amount of the
First Union I debt. First Union I is secured by cross- collateralized mortgages
on the subject properties, and an assignment of leases. Moreover, the loan is
guaranteed by TNC.
First Union I may be prepaid without a premium.
Proceeds from a second First Union Bank loan ("First Union
II") were used to finance the development of Iron Run Industrial Park Building
5. The principal amount of First Union
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II outstanding as of March 31, 1996 was $2,367,113; First Union II matures on
February 1, 1998 and bears interest at 8% per annum. First Union II is amortized
on a 22-year graduated, self- amortizing basis; therefore, there will be a
"balloon payment" of the debt due on the maturity date in the approximate amount
of $2,287,000. The borrower is fully liable for the total amount of the debt.
First Union II is secured by a mortgage on the subject property and an
assignment of leases. This loan is also guaranteed by TNC. First Union II may be
prepaid without a premium.
The Commonwealth of Pennsylvania State Employee Retirement System Loan
The Commonwealth of Pennsylvania State Employee Retirement
System holds a mortgage encumbering Iron Run II. Proceeds from that loan (the
"PSERS Loan") were used to finance the development of Iron Run II by SSI. The
principal amount of the PSERS Loan outstanding as of March 31, 1996 was
$2,544,320; the PSERS Loan matures on March 31, 2000 and bears interest at a
rate equal to 9.25% per annum. Under the terms of the PSERS Loan, SSI made 36
monthly payments of interest only through March 1, 1993; thereafter, SSI is
obligated to make 84 successive monthly payments of principal and interest based
on a 30-year amortization. Therefore, there will be a "balloon payment" of the
debt due on the maturity date in the approximate amount of $2,446,000. The PSERS
Loan is a non-recourse obligation, subject to stated exclusions. The PSERS Loan
is secured by a mortgage on the subject property and an assignment of leases.
The PSERS Loan may be prepaid subject to payment of a premium which reduces over
time.
Allmerica Financial Loan
Allmerica Financial (formerly, State Mutual Life Assurance
Company of America) ("Allmerica") holds a mortgage encumbering Horsham Business
Center Building 6. The principal amount of the Allmerica loan outstanding as of
March 31, 1996 was $2,894,000; the Allmerica loan matures on January 1, 1997 and
bears interest at a rate equal to 9.2% per annum. The Allmerica loan is a
non-recourse obligation, subject to stated exclusions. The Allmerica loan is
secured by a mortgage on the subject property and an assignment of leases.
Additionally, all security deposits, prepaid rent or similar tenant payments
must be deposited in an escrow account and all such funds may be disbursed only
upon the prior written consent of Allmerica. The Allmerica loan may be prepaid
without a premium.
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As of the date hereof, TNC is endeavoring to refinance the
Allmerica loan. Allmerica has agreed to accept $2,400,000 in full repayment of
the outstanding principal balance of the loan if payment is tendered on or
before August 1, 1996. There can be no assurance that the Allmerica loan will be
refinanced prior to maturity. In connection with such efforts, SSI has agreed to
advance $460,000 to fund tenant improvements at Building 6. SSI's advances will
bear interest at prime, be secured by a second mortgage on Building 6 and be
repayable upon the earlier of a Qualified Offering or the third anniversary of
the date of the loan. The amount of the SSI loan will be combined with the
outstanding balance of the senior mortgage debt encumbering Building 6 on the
Closing Date for purposes of determining the net equity in Building 6 and hence
the actual number of Class A Units issuable on account thereof.
Midlantic Bank Loan
Midlantic Bank, N.A. (a division of PNC Bank) holds the first
lien encumbering the Whitelands Business Park property owned by SSI. The
principal amount of the Midlantic loan outstanding as of March 31, 1996 was
$1,623,502; the Midlantic loan matures on June 1, 1997 and bears interest at a
rate of 1% above the lender's prime rate, but in no event less than 7.5% at any
time. The monthly payments of principal and interest were calculated to amortize
the Midlantic loan over a period of 15 years; therefore, there will be a
"balloon payment" upon the maturity date. SSI is liable for the total amount of
the debt. The Midlantic loan is secured by a mortgage on the subject property
and an assignment of leases. The Midlantic loan may be prepaid without a
premium.
The SSI/TNC Transaction Documents
The SSI/TNC Transaction will be accomplished through a series
of documents, certain of which are discussed above. See "The SSI/TNC Transaction
- - Principal Features of the SSI/TNC Transaction." The principal documents will
include customary representations and warranties and closing conditions. Such
representations and warranties will cover compliance with laws, environmental
matters, title to Properties, absence of undisclosed liabilities, encumbrances,
litigation, insurance and similar matters. The principal documents will consist
of the following:
(a) Share and Warrant Purchase Agreement pursuant to
which the Trust will issue to SSI 775,000 Common Shares and
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the SSI Warrant in exchange for substantially all of the SSI Ownership Interest
and $426,250.
(b) Contribution Agreement pursuant to which each of
the Trust, SSI and TNC will contribute certain direct and indirect interests in
real estate to the Operating Partnership in exchange for Units.
(c) Option Agreements between the Operating
Partnership and the entities which own the Option Properties pursuant to which
the Operating Partnership will acquire an option to purchase each of the Option
Properties.
(d) SSI Warrant and Executive Warrants issuable by
the Trust in favor of SSI, the TNC Executives and approximately 10 other TNC
employees, respectively; and Warrants exercisable for 300,000 Common Shares and
30,000 Common Shares, respectively, to two current executives of the Trust. The
foregoing Warrants will contain customary antidilution adjustments in the event
the Trust makes certain distributions to its Shareholders or issues Common
Shares or securities convertible into Common Shares at a price per share below
the then market price of the Common Shares, subject to certain exceptions.
(e) Registration Rights Agreement among the Trust,
SSI, TNC and the RMO Fund pursuant to which the Trust will grant both demand and
"piggy-back" registrations rights with respect to the 775,000 Common Shares
issuable to SSI, the Common Shares issuable upon exercise of the SSI Warrant and
conversion of the Class A Units and the Common Shares issued and issuable to the
RMO Fund pursuant to its investment in the Trust on June 21, 1996. In connection
with registrations under the Registration Rights Agreement, the Trust and the
selling shareholders will be required to mutually indemnify each other against
certain liabilities, including liabilities under the federal securities laws.
(f) Employment Agreements between the Management
Company and each of the three TNC Executives, and an Employment Agreement
between the Management Company and Mr. Sweeney replacing his existing employment
agreement with the Trust. The payment obligations of the Management Company
under the Employment Agreements will be guaranteed by the Operating Partnership.
(g) Bill of Sale and Assignment between the Trust and
TNC pursuant to which TNC will transfer to the Trust, in
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exchange for approximately $25,000, substantially all of its furniture, fixtures
and equipment. The Trust will thereupon contribute such furniture, fixtures and
equipment to the Operating Partnership which will, in turn, contribute such
assets to the Management Company.
(h) Distribution Support and Loan Agreement pursuant
to which SSI will agree to make the SSI Advances to the Operating Partnership.
(i) Environmental Indemnity Agreement between SSI and
the Operating Partnership pursuant to which SSI has agreed to indemnify and hold
harmless the Operating Partnership against costs associated with the cleanup of
the waste disposal area, together with any soil and groundwater contamination
related to such waste disposal area, at the Whitelands Property. The
Environmental Indemnity Agreement will not provide indemnity against cleanup
actions first asserted against the Operating Partnership more than five years
following the Closing Date.
In addition to the foregoing, the Trust, SSI, TNC and the
Other Owners will enter into the Operating Partnership Agreement, the principal
terms of which are summarized below.
Operating Partnership Agreement
In General. The Operating Partnership will be organized as a
Delaware limited partnership pursuant to the terms of the Limited Partnership
Agreement for the Operating Partnership (the "Operating Partnership Agreement").
The Operating Partnership will initially have four classes of partnership
interests: the "General Partnership Interest" (comprised of GP Units); "Class A
Units;" "Class B Units;" and "Class C Units." Each Unit within a class will
represent an equal undivided fractional interest in each item of Operating
Partnership income, gain and loss allocable to the class and in each
distribution of Partnership assets allocable to the class. The General
Partnership Interest and all of the Class B and Class C Units will be issued to
the Trust. All of the Class A Units initially issued by the Partnership will be
issued to SSI, TNC and the Other Owners in exchange for their contribution of
direct and indirect ownership interests in the Initial Properties.
Formation and Capital Structure. On the Closing Date, BRT,
SSI, TNC and the other persons acquiring an interest in the Operating
Partnership will organize and capitalize the Operating Partnership as follows:
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1. The Trust will contribute $1,000 cash and the furniture,
fixtures and equipment it acquires for $25,000 from TNC to the Operating
Partnership in exchange for the General Partnership Interest (comprised of GP
Units).
2. The Trust will contribute all of the limited partnership
interests in the Witmer Partnership in return for the issuance to it of Class B
Units and will contribute the general partnership interest in the Witmer
Partnership it acquires from SSI to a wholly-owned qualified REIT subsidiary;
3. The Trust will contribute a majority of its BRP Partnership
Interest to the Operating Partnership in return for the issuance to it of Class
C Units and will agree to contribute the balance of its BRP Partnership Interest
to the Operating Partnership approximately one year following the Closing Date
in exchange for additional Class C Units (or GP Units if, by such time, a
Qualified Offering has occurred);
4. TNC and the other existing partners of the Witmer
Partnership holding limited partnership interests in the Witmer Partnership will
sell all of such interests to the Operating Partnership in return for the
issuance to them of Class A Units;
5. SSI will sell title to the six Initial Properties that it
owns in fee in return for the issuance to it of Class A Units; and
6. TNC, SSI and certain other persons will sell partnership
interests, representing 99% of the profits interest and 89% of the capital
interest, in the Title Holding Partnerships owning the other five Initial
Properties, to the Operating Partnership in return for the issuance to them of
Class A Units.
Upon the completion of the transactions described above on the
Closing Date:
o The Operating Partnership will be created with the
Trust serving as the Operating Partnership's General
Partner and owning all of the GP Units.
o The Operating Partnership will own (i) a portion
of (and have the right to acquire the balance of)
the Trust's prior equity interest in BRP which in
turn owns the four existing properties of the
Trust; (ii) all of the outstanding capital stock
of the corporate general partner of the Witmer
Partnership, which in turn owns all of the general
partnership interests in the Witmer
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Partnership; (iii) all of the outstanding limited
partnership interests in the Witmer Partnership; (iv)
all six of the Initial Properties previously owned in
fee by SSI; and (v) partnership interests,
representing a 99% profits interest and an 89%
capital interest, in the Title Holding Partnerships
that own seven of the Initial Properties.
o The Witmer Partnership will own the Lawrenceville
Premises in fee and partnership interests,
representing a 99% profits interest and an 89%
capital interest, in the Title Holding Partnerships
that own seven of the other Initial Properties;
o The Operating Partnership will hold options to
purchase Horsham 11 through 14 Option Properties.
The Residual Interests in each of the Title Holding
Partnerships not acquired by the Operating Partnership will be held by TNC.
Under the Operating Partnership Agreement, TNC will be obligated to sell and the
Operating Partnership will be obligated to buy these Residual Interests on the
first business day of the 37th month after the Closing Date. At the time of the
Operating Partnership's acquisition of the Residual Interests, it will issue to
TNC additional Class A Units and will distribute to TNC the amount, if any, of
the Operating Partnership's periodic distributions during the period ending on
the date of purchase that would have been allocable to these additional
interests if they had been issued on the Closing Date. At its option, the
Operating Partnership may acquire any or all of the Residual Interests for the
same consideration at any time prior to the first business day of the 37th month
after the Closing Date, provided that the Operating Partnership pays any
Pennsylvania real estate transfer taxes resulting from such acquisition.
If any of the current mortgage indebtedness on the Initial
Properties (other than Properties owned by the Witmer Partnership) is repaid or
refinanced for an amount that is less than the then outstanding amount of such
indebtedness and additional equity is created as a result, the Operating
Partnership will be obligated to issue the number of Units that is equal to the
amount of the additional equity divided by $5.50. Twenty-five percent of such
additional Units (consisting of GP
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Units) are to be issued to the Trust with the remaining 75% (consisting of Class
A Units) being issued to the initial Owners.
Periodic and Liquidation Distributions. The rights of the
holders of the GP Units, Class A Units, Class B Units and Class C Units, prior
to a Qualified Offering, are as follows:
Class C Units. The Class C Units will receive a special
allocation of all income, gains, profits, losses and cash flow realized by the
Operating Partnership from its ownership and operation, indirectly through BRP,
of an interest in the four existing office properties owned by BRP on the date
of this Proxy Statement. Consequently, prior to a Qualified Offering, none of
TNC, SSI or any of the other Owners contributing a Property to the Operating
Partnership pursuant to the SSI/TNC Transaction will share in any of the income,
gains, profits, losses or cash attributable to the operation and ownership of
these existing four properties.
Class B Units. The Operating Partnership Agreement will
provide that the holders of the Class B Units will be entitled to receive
quarterly distributions in cash, accruing from the Closing Date, in an amount
that results in an annualized return of 9.5% on $3.937 million (referred to
herein as the Preferential Return), which sum represents the deemed value of the
capital contribution that the Trust will make to the Operating Partnership in
exchange for its Class B Units. The $3.937 million base on which the Class B
Unit holder's Preferential Return is calculated will be reduced from time to
time to reflect any return of capital made to the Class B Unit holders out of
the proceeds of a sale or refinancing of a Witmer Property. Arrearages on these
preferred quarterly distributions will accumulate, and no distributions to any
other Partner, other than the holders of the Class C Units, may be made unless
and until all arrearages have been paid and the Preferential Return through the
current quarter has been paid or provided for.
Provided that the Class B Unit holders have received payment
in full of their Preferential Return, the General Partner may, in its
discretion, distribute cash available from the ownership and operation of the
Properties to the holders of the Class B Units, the holders of the Class A
Units, and the General Partner. Such distributions will be divided among such
persons pro rata, based on the percentage that the number of Class A Units,
Class B Units and GP Units owned by any such person bears to the total number of
Class A Units, Class B Units and GP Units then outstanding.
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Upon a liquidation of the Operating Partnership, the holders
of the Class B Units will be entitled to receive, prior to the making of any
liquidating distributions to any other partner, other than a Class C Unit
holder, a preferred liquidating distribution equal to $3.937 million, less any
prior returns of capital, plus any unpaid accumulated Preferential Return. After
the holders of the Class B Units have received liquidating distributions in an
amount equal to their liquidation preference, any remaining cash or other assets
realized from or relating to the Properties will be divided pro rata among the
holders of the Class A Units, Class B Units and GP Units in accordance with each
such person's percentage ownership of such Units in the aggregate.
Class A Units. The Class A Units will have no right to receive
any income, gains, profits, losses or cash flow realized from the ownership and
operation of the four existing BRP Properties. Class A Units will not share in
the Preferential Return payable to the holders of the Class B Units, nor will
the Class A Units have any liquidation preference. After the accrued
Preferential Return has been paid in full, available cash flow and other assets
realized by the Operating Partnership from the ownership and operation of the
Properties contributed to the Partnership in the SSI/TNC Transaction will be
distributed pro rata among the holders of the Class A Units, Class B Units and
GP Units in accordance with each such person's percentage ownership of the total
number of such Units then outstanding. Except in respect of the Preferential
Return payable on the Class B Units, no distributions will be payable to holders
of GP Units or Class A or B Units unless, prior to such payment, all accrued
interest on amounts advanced to the Operating Partnership by SSI has been paid,
and no portion of the $700,000 working capital line or the loan to cover
transaction expenses to be provided to the Operating Partnership by SSI is then
outstanding.
Upon the completion of a Qualified Offering, the Class B Units
and the Class C Units will automatically convert into an equal number of GP
Units, with the result that from and after a Qualified Offering the two classes
of partnership interest that will be outstanding will consist of the Trust's
General Partnership Interest (comprised of GP Units) and the Class A Units
issued to SSI, TNC and Other Owners contributing Properties to the Operating
Partnership in the SSI/TNC Transaction.
Also, from and after completion of a Qualified Offering (and
assuming no additional classes of Units in the Operating Partnership have then
been created), whenever the Operating Partnership makes a distribution, it will
be required to
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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 the number of outstanding Class A Units to the sum of the number of
outstanding Class A Units plus the number of outstanding Common Shares (other
than outstanding Excluded Common Shares). The balance would be distributed by
the Operating Partnership to the Trust on account of its GP Units for
distribution to holders of Common Shares.
Income, gain, loss and deduction of the Operating Partnership,
other than items attributable to BRP, will be allocated among the holders of the
Class B Units, 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 holders of the Class B Units to the extent, if any, that their
liquidation preferences exceed their capital account balances; third, to the
extent necessary to cause the positive capital account balances of such partners
or, in the case of the holders of Class B Units, the excess of their positive
capital account balances over their liquidation preferences, to be in proportion
to their percentage interests, and, fourth, 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 or, in the case of the holders of Class B Units, the excess of their
positive capital account balances over their liquidation preferences, to be in
proportion to their percentage interests; second, to each such partner in
proportion to his percentage interest until the capital account balances of the
partners other than the holders of the Class B Units equal zero; third, to the
holders of the Class B Units until their capital accounts equal zero; and,
fourth, to the partners in proportion to their percentage interests.
Redemption of Class A Units. Pursuant to the Operating
Partnership Agreement, the holders of Class A Units will have the right to
require the Operating Partnership to redeem their Class A Units for cash. These
redemption rights may be exercised from time to time, in whole or in part, at
any time after the earlier of a Qualified Offering or on any Redemption
Eligibility Date.
At its option, the Trust, as the General Partner, may assume
the Operating Partnership's obligations to redeem the Class A Units and either
pay the redemption price in cash or deliver Common Shares in exchange for the
Units being redeemed at
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an initial exchange ratio of one Common Share for each Class A Unit. This
initial exchange ratio is subject to adjustment, from time to time, upon the
occurrence of certain events, including stock splits or combinations,
recapitalizations, or other similar events, the issuance by the Trust of Common
Shares at a price below the then prevailing market price, and the distribution
by the Trust of indebtedness or assets to all of the holders of its Common
Shares. If the Operating Partnership or the Trust elects to redeem Class A Units
for cash, the holder requesting redemption will have the right to rescind his
request and continue to hold his Class A Units.
The cash purchase price payable for redeemed Class A Units by
the Operating Partnership will be the fair market value of the number of Common
Shares the holders of Class A Units being redeemed would be entitled to receive
if the Trust were to exercise its option to deliver Common Shares therefor. The
fair market value of Common Shares will be based on their trading price at the
time of exercise of the right of redemption. If the Operating Partnership were
to fail to fulfill any of its obligations in respect of an exercised right of
redemption, the Trust would be required to assume and perform those obligations.
Management. The Trust will initially be the sole general
partner of the Operating Partnership with full and complete power, authority and
discretion in the management and control of the Operating Partnership, except in
certain circumstances where the General Partner must obtain the prior consent of
the holders of Class A Units.
In particular, the General Partner will not be permitted,
prior to the completion of a Qualified Offering, without the affirmative consent
of the holders of at least 75% of the then outstanding Class A Units, to take
any of the following actions:
(1) Except as otherwise required by the
Partnership Agreement, issue any additional GP Units, Class A Units, Class B
Units or Class C Units, or any other class of partnership interest;
(2) Dissolve and liquidate the Witmer
Partnership;
(3) Cause the Partnership to enter into any
arrangement, contract or business venture with the General Partner or any
affiliate of the General Partner involving payments by the Partnership to the
General Partner or any
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affiliate of an aggregate of more than $100,000 unless such transaction is (i)
expressly contemplated by the Operating Partnership Agreement and the documents
executed in connection with the SSI/TNC Transaction, or (ii) such transaction
involves a loan from the General Partner to the Partnership on terms and
conditions substantially similar to those customarily comprising commercial
loans of similar size and credit risk and at an interest rate not exceeding .5%
above the General Partner's internal cost of funds as of the date the loan is
made;
(4) Permit the Partnership to merge or
consolidate its operations with any other entity; or
(5) Permit or cause the Witmer Partnership or its
general partner to take any affirmative action that would violate the
partnership agreement creating the Witmer Partnership or that would result in a
breach of the GECC Loan Documents.
In addition, the General Partner must obtain the consent of
the holders of at least 75% of the Class A Units then outstanding in order to
amend the Operating Partnership Agreement, make a general assignment for the
benefit of creditors or appoint or acquiesce in the appointment of a custodian
receiver or trustee for all or any part of the assets of the Operating
Partnership, institute any voluntary proceeding for bankruptcy or terminate or
dissolve of the Operating Partnership. In addition, the Trust may only transfer
its interest as General Partner to a third party that is reasonably expected (as
determined by a majority of the Board of Trustees of the Trust) to be able to
fulfill the rights and responsibilities of the General Partner.
Business Operations. The Operating Partnership Agreement will
require that the Operating Partnership be operated in a manner that will enable
the General Partner to satisfy the requirements for being classified as a REIT
and to avoid the imposition of any Federal income or excise tax liability. The
Operating Partnership will pay when due, or reimburse the General Partner or
Management Company for payment of, accounting, administrative, legal, management
and other services rendered to the Operating Partnership.
Tax Matters. Pursuant to the Operating Partnership
Agreement, the General Partner will be the tax matters partner of
the Operating Partnership.
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Indemnification. The Operating Partnership Agreement will
provide that the General Partner is to be indemnified by the holders of Class A
Units, severally and not jointly, for breaches of representations and warranties
made by them in the Operating Partnership Agreement or in the documents executed
in connection with the SSI/TNC Transaction or the non-performance by such
Partners of their respective obligations thereunder. The General Partners's
recourse for such indemnification will be limited to Class A Units, all of which
will be pledged, either on a senior or subordinated basis, to secure the
indemnity obligations of holders of the Class A Units. In addition, the Trust
will indemnify each holder of Class A Units against non-performance by the Trust
of its obligations under the Operating Partnership Agreement and the documents
executed in connection with the SSI/TNC Transaction and for any breach by the
Trust of its representations and warranties contained therein. The indemnity
obligations of the holders of Class A Units and the Trust will be subject to
limitations relating to the amount of indemnification, the period in which
claims for indemnification may be asserted and the procedures for requesting
indemnification.
Term. The Operating Partnership will continue in full force
and effect until December 31, 2094, or until sooner dissolved: (i) upon the sale
or other disposition in a single transaction or a series of related transactions
of all or substantially all of the assets of the Operating Partnership; (ii)
upon the occurrence of an event of withdrawal with respect to the General
Partner, unless holders of a majority of the Units elect to continue the
business of the Operating Partnership; (iii) upon the acquisition by a single
person of all of the partnership interests; (iv) upon the issuance of a decree
of dissolution by a court of competent jurisdiction; or (v) upon the consent of
the General Partner and holders of at least 75% of the Class A Units.
General Authority if SSI/TNC Transaction is Approved
If the SSI/TNC Transaction is approved, the Trust will have
the authority to complete the SSI/TNC Transaction upon the terms generally
described in this Proxy Statement, subject to such modifications as the Board of
Trustees determine to be fair and in the best interests of the Shareholders.
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Consequences of Failure to Approve the SSI/TNC Transaction
The failure of the Shareholders to approve the SSI/TNC
Transaction may result in the following consequences:
(i) The Trust would continue to conduct its business in a
manner consistent with past practices. This would involve the implementation of
the Trust's business plan by continuing to attempt to maximize the value of the
Trust's existing asset base and continuing to explore attractive third-party
equity investments and property acquisitions. See, "The SSI/TNC Transaction -
Business Objectives and Operating Strategy."
(ii) The Trust's existing Shareholders, as a group, would
continue to determine the outcome of any matter submitted to the Shareholders
for approval.
(iii) The Trust will remain liable for its share of
transaction expenses (estimated at approximately $759,500) incurred in
connection with the SSI/TNC Transaction, including legal and accounting fees,
Legg Mason's financial advisor fee, and due diligence expenses.
There is no assurance that the SSI/TNC Transaction will be
consummated even if the Shareholders approve it.
Distributions
During 1995, the Board of Trustees declared dividends on the
Common Shares aggregating $.55 per share. The Trust paid such dividends on the
following dates and in the following amounts: May 17, 1995, ($.05); May 17, 1995
($.35); July 31, 1995 ($.05); October 31, 1995 ($.05); and January 30, 1996
($.05). On May 15, 1996, the Trust paid a dividend of $.06 per share. To qualify
for taxation as a real estate investment trust, the Trust must distribute at
least 95% of its REIT taxable income (which essentially is its net ordinary
income, not including capital gains). Following the SSI/TNC Transaction, the
Trust intends to continue to pay regular quarterly dividends to its
Shareholders. The amount of dividends will be affected by a number of factors,
including revenues received from rental properties, the operating expenses of
the Trust, interest incurred on borrowings, capital expenditures, the annual
distribution requirements under the REIT provisions of the Code, proceeds from
the sale or refinancing of properties and such other factors as the Trustees
consider relevant.
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Expenses of SSI/TNC Transaction
Certain expenses incurred in connection with the SSI/TNC
Transaction will be borne directly by the Trust, whether or not the SSI/TNC
Transaction is consummated ("Trust Expenses") Certain expenses will be borne
directly by the Operating Partnership if the SSI/TNC Transaction is consummated
("Operating Partnership Expenses"). The following tables set forth a list of
estimated expenses falling into each of the above categories:
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Trust Expenses Amount
------
Legal fees and expenses.............................. $305,000
Accounting fees and expenses......................... $204,000
Financial advisory fees and expenses................. $100,000
Market analysis fee.................................. $ 25,000
Financial Due Diligence.............................. $ 21,000
Additional Listing Application....................... $ 17,500
Proxy Solicitation................................... $ 10,000
Miscellaneous........................................ $ 25,000
--------
$707,500
Operating Partnership Expenses Amount
------
Accounting fees and expenses......................... $132,000
Legal fees and expenses.............................. $265,000
Real estate transfer taxes........................... $172,000
Environmental/Structural review...................... $ 55,000
Surveys ................................... $ 15,000
Title Insurance...................................... $ 45,000
Miscellaneous........................................ $ 78,000
--------
$762,000
In the event the SSI/TNC transaction is not consummated,
expenses that would have been borne by the Operating Partnership will be
allocated among SSI, TNC and the Trust pursuant to negotiation.
Management Following the SSI/TNC Transaction
Following the consummation of the SSI/TNC Transaction, Gerard
H. Sweeney, a member of the Board of Trustees, will continue to serve as
President and Chief Executive Officer of the Trust. See, "The Trust - Management
and Executive Officers."
In connection with the SSI/TNC Transaction, it is anticipated
that substantially all of the employees of TNC (17 as of March 31, 1996) and the
Trust (five as of March 31, 1996) will become employed by the Management Company
and that Anthony A. Nichols, Sr., John P. Gallagher and Brian F. Belcher, the
TNC Executives who will assume, together with Mr. Sweeney, primary
responsibility for management of the Trust's operations.
Set forth below is biographical information concerning the TNC
Executives.
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Anthony A. Nichols, Sr. will be Chairman of the Board of
Trustees and chairman of the executive committee of the Board. Mr. Nichols
founded TNC through a corporate joint venture with SSI, and has been its
President since 1982. He structured TNC to include development, marketing,
management, construction and acquisition capabilities and was responsible for
the completion of 3.2 million square feet of construction during this 13 year
period. 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. There he was responsible for the income loan division that
provided commercial real estate financings through a national branch office
network and included construction and permanent debt, joint ventures,
acquisitions and sales. At the time he completed his tenure at Colonial
Mortgage, which extended from 1968 until 1982, he was President of Colonial
Advisors, the advisory company to PNB Mortgage and Realty Investors, a REIT. The
initial ten years of Mr. Nichols' business career was with The Philadelphia
Savings Fund Society where he was responsible for servicing its national
residential mortgage portfolio. Mr. Nichols' 38 year business career and
schooling have been spent in Philadelphia, Pennsylvania. During this time, he
was a member of the National Association of Real Estate Investment Trusts, 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,
Philadelphia Board of Realtors, and the Urban Land Institute.
John P. Gallagher will be Executive Vice President - Finance
of the Trust. Mr. Gallagher has served as Chief Financial Officer of TNC since
1989. From 1983 until 1989, Mr. Gallagher served as Vice President of Finance,
Senior Vice President and a director of Pitcairn Financial Management Group.
Prior to that time, he was Vice President of Finance for Evans- Pitcairn
Corporation. Mr. Gallagher was also 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. He is a graduate of LaSalle University.
Brian F. Belcher will be Executive Vice President Marketing
and Development of the Trust. Mr. Belcher joined TNC in 1982 as Vice President
of Marketing and, since 1986, has served as its Executive Vice President, where
he was responsible for the marketing and brokerage activities for more than 3.2
million square feet of office and industrial properties located
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in Delaware and Lehigh Counties, Pennsylvania and southern New Jersey. From 1978
to 1982, Mr. Belcher was a marketing specialist for Evans-Pitcairn Corporation,
and was responsible for its suburban office and industrial parks. Prior to that
time, Mr. Belcher was a real estate broker with Cushman and 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. He is a graduate of LaSalle University.
Accounting Treatment
The SSI/TNC Transaction will result in the acquisition of the
Initial Properties from SSI, TNC and the Other Owners in exchange for Class A
Units of the Operating Partnerships, a subsidiary of the Trust. The Initial
Properties will be recorded at fair value using purchase accounting principles.
The Trust will transfer its 70% controlling interest in BRP to the Operating
Partnership in exchange for 1,856,200 Class C Units using the carryover basis of
the assets, since the Trust controls and will continue to consolidate these
assets in the Operating Partnership. TNC and SSI have certain other operations
which will not be acquired by the Operating Partnership and, therefore, the
combined financial statements of the Initial Properties are not intended to
represent the financial position and results of operations of TNC or SSI.
Federal Income Tax Considerations
The following discussion summarizes the material Federal
income tax consequences to a holder of Common Shares who is a U.S. citizen or
resident or which is a tax exempt organization (including individual retirement
accounts). Such discussion is based on current law. The discussion is not
exhaustive of all possible tax considerations, nor does the discussion give a
detailed description of any state, local, or foreign tax considerations. The
discussion does not describe all of the aspects of Federal income taxation that
may be relevant to a Shareholder in light of his or her particular circumstances
or to certain types of Shareholders (including insurance companies, financial
institutions or broker-dealers, and foreign corporations) subject to special
treatment under the Federal income tax laws.
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General
The Trust expects to continue to be taxed as a REIT for
Federal income tax purposes. The Trustees believe that the Trust was organized,
has operated and, assuming consummation of the SSI/TNC Transaction, will
continue to operate after the SSI/TNC Transaction in such a manner as to meet
the requirements for qualification and taxation as a REIT under the Code. No
assurance, however, can be given that the Trust 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 Trust'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 Trust may
derive from the management, construction, development, leasing or sale of
properties owned by the Operating Partnership or by third parties or in
partnerships with third parties.
Taxation of the Trust as a REIT
An entity, such as the Trust, 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 Trust will be subject to
Federal income tax as follows:
(i) The Trust will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
(ii) Under certain circumstances, the Trust may be subject to
the "alternative minimum tax" on its items of tax preference, if any.
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(iii) If the Trust 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 Trust 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 Trust fails the 75% or 95% test, multiplied
by a fraction intended to reflect the Trust's profitability.
(v) If the Trust 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 Trust has (1) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
by the Trust 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 non-qualifying income from foreclosure property, it
will be subject to tax on such income at the highest corporate rate.
(vii) If the Trust 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 Trust'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 Trust 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 Trust 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 Trust'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 Trust will make an
election pursuant to
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IRS Notice 88-19 or applicable future administrative rules or Treasury
Regulations.
Qualification of the Trust as a REIT
The Code defines a REIT as a corporation, trust or
association:
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation but for
Sections 856 through 859 of the Code;
(4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code;
(5) which has the calendar year as its taxable year;
(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 and asset 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 Trust 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). In addition, the
Trust's Declaration of Trust provides restrictions regarding the transfer of its
shares that are intended to assist the Trust in continuing to satisfy the share
ownership requirements described in (6) and (7) above.
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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, liabilities and items of income, deductions and credit of a
qualified REIT subsidiary are treated as if they were those of the REIT.
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 Trust's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership and each of the Title Holding Partnerships will be treated
as assets, liabilities and items of income of the Trust 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.
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
Trust'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, in certain circumstances, interest) or from "qualified
temporary investment income" (described below). Second, at least 95% of the
Trust's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from such real property investments 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 Trust's gross income
(including gross income from prohibited transactions) for each taxable year. In
applying these tests, the Trust will be treated as realizing its share of the
income and bearing its share of the loss of the Operating Partnership, and the
character of such income or loss, as well as other partnership items, will be
determined at the partnership level.
Rents received by the Trust will qualify as "rents from real
property" only if several conditions are met. First, the amount of rent must not
be based in whole or in part on the
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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 Trust 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 Trust'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 Trust does not anticipate charging an amount of rent that
is based in whole or in part on the income or profits of any person. The Trust
does not anticipate receiving rents in excess of a de minimis amount from
Related Party Tenants. The Trust does not anticipate holding a lease on any
property in which rents attributable to personal property constitute greater
than 15% of the total rents received under the lease. The Trust will not
knowingly directly perform services considered to be rendered to the occupant of
property.
The Operating Partnership will own 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 will perform
management, development and leasing services for the Operating Partnership and
other real estate 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 Trust. As a result of the corporate structure, the income will
be earned by
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and taxed to the Management Company and will be received by the Trust only
indirectly as dividends. Although interest and dividends generally qualify under
the 95% test, the IRS refuses to rule on this issue when the dividends and
interest are earned in this manner.
If the Trust 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 Trust's failure
to meet such tests was due to reasonable cause and not due to willful neglect,
(ii) the Trust 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 Trust would be entitled to the benefit of these relief
provisions. As discussed above in "Taxation of the Trust 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 Trust would cease to qualify as a
REIT. See "Failure to Qualify."
Asset Tests
In order for the Trust 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 the Trust'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 Trust or a "qualified REIT subsidiary" of the
Trust 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 Trust and held for not more than one year from the date the Trust
receives such proceeds), cash, cash items, and government securities. Second,
not more than 25% of the Trust's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the Trust
may not exceed 5% of the value of the Trust's total assets, and the Trust may
not own more than 10% of any one issuer's outstanding voting securities
(excluding securities of a qualified REIT subsidiary or another REIT).
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The Trust anticipates that it will be able to comply with
these asset tests. The Trust 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 Trust plans to hold more than 75% of its assets
as real estate assets. In addition, the Trust 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 Trust, nor securities of any one
issuer exceeding 5% of the value of the Trust's gross assets (determined in
accordance with generally accepted accounting principles). As previously
discussed, the Trust 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.
The Operating Partnership will own 5% of the voting common
stock and all of the preferred stock of the Management Company. The Operating
Partnership will not own more than 10% of the voting securities of the
Management Company. The Trust believes that its indirect interest in the
securities of the Management Company will not exceed 5% of the total value of
the Company's assets. However, no independent appraisals have been obtained.
No assurance can be given that the Trust's indirect ownership
of the Management Company will meet the 10% voting securities test. Prior to
June 1994, the IRS routinely issued rulings that the 10% voting securities test
was met in any case where the REIT did not have more than 10% of the management
company's voting stock. However, in September 1994, the IRS reevaluated its
position on this issue and now refuses to issue a ruling on whether the 10%
voting securities test is met.
After initially meeting the asset tests at the close of any
quarter, the Trust 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 Trust 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
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any noncompliance. However, there can be no assurance that such
other action will always be successful.
Annual Distribution Requirements
The Trust, 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 Trust'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 Trust timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Trust 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 Trust 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 Trust would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
The Trust intends to make timely distributions sufficient to
satisfy the annual distribution requirements. In this regard, the Operating
Partnership Agreement authorizes the Trust, 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 Trust to meet these distribution
requirements. It is possible that the Trust, 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 expenses such as
principal amortization or capital expenditures. In order to meet the 95%
distribution requirement, the Trust may borrow or may cause the Operating
Partnership to arrange for short-term or other borrowing to permit the payment
of required dividends or pay dividends in the form of taxable stock dividends.
If the amount of nondeductible expenses exceeds non-cash deductions, the
Operating Partnership may refinance its indebtedness to reduce principal
payments and borrow funds for capital expenditures.
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Under certain circumstances, the Trust 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 Trust's deduction for dividends paid for the earlier year. Thus, the Trust
may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Trust 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 Trust fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, the Trust 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 Trust fails to qualify will not be deductible by the Trust,
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 statute provisions, the
Trust 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 Trust would be entitled to such
statutory relief.
Income Taxation of the Operating Partnership, the Title Holding
Partnerships (including the Witmer Partnership) and Their
Partners
The following discussion summarizes certain Federal income tax
considerations applicable to the Trust's investment in the Operating Partnership
and the Title Holding Partnerships (which, for purposes of this discussion,
includes the Witmer
Partnership).
Classification of the Operating Partnership and Title Holding
Partnerships as Partnerships
The Trust 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 the income or losses of the Title Holding Partnerships) only if the Operating
Partnership and
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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
Trust believes that the Operating Partnership and the Title Holding Partnerships
will each be treated as partnerships for Federal income tax purposes because
they will avoid the corporate characteristics of continuity of life,
centralization of management and limited liability.
If for any reason the Operating Partnership or a Title Holding
Partnership was taxable as a corporation rather than as a partnership for
Federal income tax purposes, the Trust 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 Trust 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, 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.
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 under Section 704(b) of the Code if they do not
comply with the provisions of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder as to substantial economic effect.
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If an allocation is not recognized for Federal income tax
purposes, the item subject to the allocation will be reallocated in accordance
with the partners' interests in the partnership, which will be determined by
taking into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. The 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.
Tax Allocations With Respect to Contributed Properties
The Initial Properties contributed directly or indirectly to
the Operating Partnerships will be appreciated. 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 partnership agreements of the
Partnerships will require 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 Partnerships sell
contributed property at a gain or loss, such gain or loss will be allocated to
the contributing partners, and away from the Trust, generally to the extent of
the pre- contribution unrealized gain or loss.
Depreciation
The Partnerships' assets other than cash will consist largely
of appreciated property contributed by its partners. Assets contributed to a
partnership in a tax-free transaction carry over their depreciation schedules.
Accordingly, the Operating Partnership's depreciation deductions for its real
property are based largely on the historic depreciation schedules for the
Properties. 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
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estate is contributed to the Partnership, the real estate may not carry over its
depreciation schedule but rather may, similarly, be subject to the lengthier
depreciation 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 will be appreciated, the Trust will generally receive allocations of
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.
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 REIT Requirements,
the Trust's share as a partner of any gain realized by the Partnerships 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 Trust as a REIT." Such prohibited transaction income will also
have an adverse effect upon the Trust'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
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
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with the Trust'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.
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 or Treasury Regulations could be adopted, all of which could affect the
taxation of the Trust or of its Shareholders. No prediction can be made as to
the likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting the Trust or its Shareholders. Consequently,
the tax treatment described herein may be modified prospectively or
retroactively by legislative, judicial or administrative action.
State and Local Taxes
Each of the Trust, the Operating Partnership, the Title
Holding Partnerships and the Shareholders will be subject to state, local or
other taxation in various state, local or other jurisdictions, including those
in which they transact business or reside. The tax treatment in such
jurisdictions may differ from the Federal income tax consequences discussed
above. Other taxes may be applied to each of the Trust, the Operating
Partnership, the Title Holding Partnerships and the Shareholders by varying
jurisdictions. In addition, the Trust may be subject to state or local taxes as
a result of holding a partnership interest in a partnership which holds real
estate in a particular state.
Real Estate Transfer Taxes
The transfer of certain of the Initial Properties to the
Operating Partnership has been structured as transfers of 89% of the capital
interests and 99% of the cash flow and profit interests in the limited
partnership owning such properties with the Residual Interests to be acquired by
the Operating Partnership on the first business day of the 37th month following
the initial transfer. 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. If the Operating Partnership desired or were required, for
financing purposes or otherwise, to acquire such Residual Interests within the
first 36 months of such period, the
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Operating Partnership could be required to pay real estate transfer taxes.
Regulatory Requirements; Approvals
No Federal or state regulatory requirements must be complied
with, nor any governmental approvals obtained in connection with, the SSI/TNC
Transaction. No Federal or state agency has passed upon the fairness of the
SSI/TNC Transaction.
Third Party Consents
As of the date of this Proxy Statement, the consent of the
applicable lender to the exercise by the Operating Partnership of its option to
acquire the Option Properties has not been requested or obtained. No
determination to seek any such consent has been made because no determination to
acquire any of the Option Properties has been made.
Effective Date; Conditions to the SSI/TNC Transaction
It is contemplated that the SSI/TNC Transaction will occur as
soon as practicable after approval by Shareholders.
Recommendation of the Board of Trustees
The Trustees unanimously recommend that Shareholders vote FOR
the SSI/TNC Transaction.
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PROPOSAL NO. 2 - AMENDMENT OF DECLARATION OF TRUST
General
The Board of Trustees has approved certain amendments
(collectively referred to herein as the "Declaration Amendments") to the Trust's
Declaration of Trust and has recommended to the Shareholders that these
amendments be adopted. The text of the Declaration Amendments, which have been
approved by the Board of Trustees for submission to the Shareholders for
adoption, is contained in Appendix C to this Proxy Statement, and the following
summaries are qualified in all respects by reference to the full text in
Appendix C. The Declaration Amendments, if adopted, would:
(i) increase the number of authorized Common Shares from
15,000,000 to 75,000,000 (the "First Proposed Amendment");
(ii) eliminate in its entirety Section 3.3(a) so that the
restrictions contained therein on the Trust's ability to issue Shares below
"book value" would be eliminated (the "Second Proposed Amendment");
(iii) confirm the authority of the Trustees to effectuate,
from time to time and without prior Shareholder approval, a "reverse stock
split" of the Shares and to provide that such authority may only be exercised
upon the approval of not less than 80% of the members of the Board (the "Third
Proposed Amendment");
(iv) eliminate in its entirety Section 6.4(b), which requires
the Trustees to cause the Trust to distribute to Shareholders within 60 days
following the sale of, or refinancing of debt secured by, any of the four office
buildings currently owned by Brandywine Realty Partners (i.e., One, Two and
Three Greentree Centres and Twin Forks) not less than 85% of the net sale or
refinancing proceeds (less necessary reserves) (the "Mandatory Distribution
Requirement") (the "Fourth Proposed Amendment"); and
(v) substitute a new provision limiting the transferability of
Shares by imposing limitations on the amount of Shares a Shareholder may own in
order to reduce the risk that the Trust would fail to satisfy one of the
requirement for qualifying as a REIT for Federal income tax purposes (the "Fifth
Proposed Amendment").
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Shareholders will have the opportunity to vote separately on
each of the five proposed amendments. If less than all of the proposed
amendments are approved by Shareholders, then only those which are approved by
Shareholders will become effective.
If the SSI/TNC Transaction is consummated, the Trust will
agree in the Operating Partnership Agreement to use reasonable efforts to
consummate the Qualified Offering. Although the Trust's obligation to conduct
the Qualified Offering will not be conditioned on adoption of any or all of the
proposed amendments contained in Proposal No. 2, the Trustees believe that
adoption of all of the proposed amendments contained in Proposal 2 will
facilitate the Trust's ability to complete the Qualified Offering on terms and
conditions attractive to the Trust. There can be no assurance that adoption of
all of the proposed amendments contained in Proposal No. 2 will enable the Trust
to complete the Qualified Offering or any other offering of debt or equity
securities on terms and conditions acceptable to the Trust.
As a result of certain of the Declaration Amendments, current
restrictions regarding the Trust's investment and related activities will be
eliminated and the Trust will have the ability to take certain actions that
previously required approval of Shareholders without obtaining such approval.
Increase of Authorized Capital - First Proposed Amendment
Under the current Declaration, the Trust is authorized to
issue up to 15,000,000 Common Shares and 5,000,000 Preferred Shares. As of the
date of this Proxy Statement, 1,916,149 Common Shares are issued and outstanding
(of which 1,856,200 were issued and outstanding on the Record Date), and no
Preferred Shares have been issued or are outstanding. Holders of Common Shares
participate equally in distributions when and as declared by the Trustees and,
upon liquidation of the Trust, are entitled to share ratably in the assets and
income available for distribution after payment of liabilities. Each of the
Common Shares has one vote and has no preference, conversion, exchange or
preemptive rights. The Preferred Shares are issuable from time to time in one or
more series in such amounts, at such prices (subject to the restriction in
Section 3.3(a) referenced above) and with such designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications in terms or conditions of redemption as may be fixed
by the Trustees.
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The Trustees believe it is desirable, in connection with the
SSI/TNC Transaction and in anticipation of the Contemplated Offering, to
increase the number of authorized Common Shares from 15,000,000 to 75,000,000.
The Trustees believe that the ability of the Trust to issue
additional Common Shares will provide it with increased flexibility in
structuring future financings and acquisitions, and in meeting other needs which
might arise. The authorized Preferred Shares, as well as authorized Common
Shares, will be available for issuance without further action by the
Shareholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Trust's securities
may be listed or traded. The Trustees would not expect to seek Shareholder
approval for the issuance of additional Common Shares or Preferred Shares unless
so required.
Issuance of additional Common Shares or Preferred Shares will
reduce the percentage ownership of the existing Shareholders in the Trust and,
because Shareholders will not have the right to approve any such issuance, may
be on terms that the Shareholders, as a group, would not approve were they
afforded the opportunity to vote on the matter.
If the Trust were to issue a series of Preferred Shares in
connection with the Contemplated Offering or otherwise, such series could,
depending on its terms, impede a merger, tender offer or other transactions that
some, or a majority, of the Shareholders might believe to be in their best
interests or in which Shareholders might receive a premium for their Shares over
the then current market price of such Shares.
Elimination of Restriction on Share Issuances - Second Proposed Amendment
Under the current Declaration, the Trust is generally
restricted from issuing additional Shares if such issuance would result in a
lower Book Value Per Share. The Term "Book Value Per Share" is defined in the
Declaration to mean an amount equal to the quotient obtained by dividing (i) the
Shareholders' equity, as shown on the Trust's most recent annual or quarterly
financial statements by (ii) the number of Shares outstanding as of the date of
such financial statements, subject to certain adjustments.
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The Trustees believe that Section 3.3(a) unduly restricts the
Trust's flexibility to access the capital markets at a time when the Book Value
Per Share may be higher than the price the Trust could then command for its
Shares. Historically, the Common Shares have traded at a discount to the Book
Value Per Share. Section 3.3(a) was added to the Declaration in 1994 at the time
the Trust was converted from a limited-life entity to an infinite-life entity.
Identified below are the closing sale prices of the Common Shares, as reported
by the American Stock Exchange, and the Book Value Per Share, in each case as of
the dates indicated:
Date Closing Sale Price Book Value Per Share
---- ------------------ --------------------
March 31, 1995 $4 $4.81
June 30, 1995 $3-11/16 $4.22
September 30, 1995 $3-5/8 $4.09
December 31, 1995 $3-9/16 $3.87
March 31, 1996 $5-5/16 $3.68
If the Trust were to issue Shares below the then Book Value
Per Share following approval of the Second Proposed Amendment, the Book Value
Per Share represented by each outstanding Share would decline. There can be no
assurance that the market price of the Shares would not decline as a result of
such issuance. In addition, upon a liquidation of the Trust, each outstanding
Share may receive a lower liquidating distribution than it would have received
additional Shares not been issued at a price below the Book Value Per Share.
Confirmation of Reverse Stock Split Authority - Third Proposed Amendment
The Current Declaration Provision
Under the current Declaration, subject to the express
limitations therein and the bylaws of the Trust, the Trustees have full,
exclusive and absolute power, control and authority over the Trust's property
and over the business of the Trust as if they, in their own right, were the sole
owners thereof. In furtherance of the foregoing authority, the Declaration
enumerates specific powers and authorities that the Trustees may exercise
without any vote, action or consent by the Shareholders, but also grants the
Trustees such further power and authority as
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shall be necessary, useful or desirable to carry on the business of the Trust,
even if such powers are not specifically provided therein. Accordingly, the
Trustees believe that they have the authority under the current Declaration to
effectuate a reverse stock split.
The Amended Declaration Provision
The Trustees desire to confirm the authority of the Trustees
to effectuate, from time to time, a reverse stock split of the Trust's Shares.
However, the Trustees desire to provide that such authority may only be
exercised upon the approval of not less than 80% of the Trustees. The proposed
amendment to the Declaration would explicitly confirm the authority of not less
than 80% of the Trustees to cause the Shares of the Trust to be recapitalized or
consolidated by effecting a reverse stock split without vote of or other action
by the Shareholders. The proposed amendment would also permit the Trust to
redeem for cash any fractional Shares created thereby.
Purposes for a Reverse Stock Split
The Trustees believe that a reverse stock split should result
in an increased market price of Common Shares. The Trustees further believe that
the decrease in the number of Shares outstanding as a consequence of a reverse
stock split (as compared to the Shares that would be outstanding in the absence
of such reverse stock split) will result in a quoted market price of such Shares
at a level which the Trustees believe is a more readily accepted trading price
in the capital markets. As such, either in connection with a Qualified Offering
or otherwise, the Trustees may conclude that a reverse stock split is in the
best interests of the Trust and its Shareholders. There can be no assurance,
however, that any such increase in market price would be in proportion to the
applicable reverse stock split ratio (the "Ratio"), or that the per share price
level achieved immediately after a reverse stock split would be maintained for
any period of time.
Effects of a Reverse Stock Split
A reverse stock split will decrease by the inverse of the
applicable Ratio the number of Shares of the applicable series or class
outstanding immediately prior to such reverse stock split. A reverse stock split
will not affect any Shareholder's proportionate equity interest in the Trust
(other than as a result of the treatment of fractional interests, if applicable)
or the rights, preferences, privileges or priorities
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of such Shares. Furthermore, a reverse stock split will not affect the
Shareholders' equity in the Trust as reflected in the financial statements of
the Trust as of the date of such reverse stock split, except to change the
number of issued and outstanding Shares. A reverse stock split will, however,
reduce the number of Shares outstanding and may consequently reduce the
liquidity of such Shares. A reduction in the liquidity of the Shares may
adversely impact their trading price.
Elimination of Mandatory Distribution Requirement - Fourth
Proposed Amendment
By virtue of the Mandatory Distribution Requirement contained
in Section 6.4(b) of the current Declaration, the Trust is required to
distribute to Shareholders, within 60 days following the sale of, or refinancing
of debt secured by, any of the four office buildings currently owned by
Brandywine Realty Partners ("BRP") not less than 85% of the net sale or
refinancing proceeds (less necessary reserves). Section 6.4(b) was added to the
Declaration in 1994 at the time the Trust was converted from a limited-life
entity to an infinite-life entity. Although elimination of the Mandatory
Distribution Requirement would not restrict the ability of the Trust to
distribute at least 85% of the net sale or refinancing proceeds attributable to
any of the foregoing properties, the Trustees believe that they should have the
flexibility to assess whether such a distribution represents the most attractive
use of Trust funds at the time of a sale or refinancing. In any event, the
Trustees intend to cause the Trust to make such distributions as shall be
necessary to preserve the tax benefits the Trust realizes by virtue of its
status as a REIT.
Elimination of the Mandatory Distribution Requirement may have
an adverse effect on any Shareholder who acquired Common Shares in anticipation
of receiving a distribution from the Trust upon a sale of, or refinancing of
debt secured by, any of the four office buildings owned by BRP. In addition,
there can be no assurance that any determination by the Trust to retain any such
net sales or refinancing proceeds for reinvestment or other use will generate
higher returns than the Shareholders would have obtained had the Trust
distributed such proceeds to them.
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New Limitation on Transferability of Shares - Fifth Proposed
Amendment
The Current Declaration Provision
For the Trust 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) during the last half of a taxable year and the Shares of the Trust
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). To reduce the risk that the Trust would fail to meet these
conditions, Section 6.6 of the current Declaration authorizes the Trustees (i)
to call for purchase from any Shareholder a number of Shares sufficient in the
opinion of the Trustees to bring the ownership of Shares into conformity with
the REIT qualification requirements and (ii) to refuse to register the transfer
of Shares to any person whose acquisition of such Shares would, in the opinion
of the Trustees, result in the Trust being unable to conform with the REIT
qualification requirements.
The Amended Declaration Provision
The proposed amendment would change the transferability
restrictions in Section 6.6 of the Declaration. The transferability provisions
are intended to provide the Trust with greater flexibility in reducing the risk
that the Trust would inadvertently fail to qualify as a REIT.
The proposed amendment to the Declaration contains provisions
which would restrict the ownership and transfer of Shares and which are designed
to safeguard the Trust against an inadvertent loss of REIT status. In order to
prevent any Shareholder from owning Shares in an amount which would cause more
than 50% of the value of the outstanding Shares to be held by five or fewer
individuals, under the proposed amendment and subject to certain exceptions, no
holder (other than the RMO Trust, the RMO Fund, Richard M. Osborne, SSI, TNC and
certain entities affiliated with them) would be permitted to own, either
directly or indirectly under the applicable attribution rules of the Code, more
than 4.16% in value of the outstanding Shares (the "Ownership Limit"), which
percentage may be increased by the Trustees under certain circumstances.
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The amendment to the Declaration will also provide that no
purported transfer of Shares may be given effect if it results in ownership of
all of the outstanding Shares by fewer than 100 persons or results in the Trust
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 Limits 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 proposed amendment to the Declaration, according to
rules set forth in the proposed amendment to the Declaration, 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 Limits or the Ownership
Restrictions.
Holders of Excess Shares would not be 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 Trust of such exchange,
dividends or distributions are paid with respect to the Shares that were
exchanged for Excess Shares, then such dividends or distributions would be
repayable to the Trust upon demand. While outstanding, Excess Shares would be
held in trust by the Trust 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 amended Declaration would contain 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 Trust.
The proposed amendment to the Declaration would provide that
the Trust, by notice to the holder thereof, may purchase any or all Excess
Shares that have been automatically exchanged for outstanding Shares as a result
of any transfer or other event.
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The price at which the Trust 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 Trust accepts such Excess Shares. 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 Trust, to have acted as an
agent on behalf of the Trust in acquiring or holding such Excess Shares and to
hold such Excess Shares on behalf of the Trust.
The Trustees may waive the Ownership Restrictions if evidence
satisfactory to the Trustees and the Trust's tax counsel or tax accountants is
presented showing that such waiver will not jeopardize the Trust'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 Trust, 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 Trust. The Ownership Restrictions will
not apply if the Trust determines that it no longer will attempt to qualify, or
continue to qualify, as an 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, (ii) result in the Shares violating the
Ownership Restrictions, or (iii) result in the Trust being "closely held" within
the meaning of Section 856(h) of the Code, 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. Amendments to the Declaration require the
affirmative vote of holders owning a majority of the outstanding Shares. In
addition to preserving the Trust's status as an REIT, the Ownership Restrictions
and the Ownership Limit may have the effect of precluding an acquisition of
control of the Trust without the approval of the Board of Trustees.
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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 Trust containing the
information specified in the Declaration within 30 days after January 1 of each
year. In addition, each Shareholder shall upon demand be required to disclose to
the Trust 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 a real estate investment trust, to
comply with the requirements of any taxing authority or governmental agency or
to determine any such compliance.
The proposed amendment to the Declaration would exempt the
Richard M. Osborne Trust and Richard M. Osborne, SSI and TNC and certain of
their affiliates (collectively, the "Exempt Parties") from the Ownership Limit
and would create separate ownership limitations for each of these parties. Such
separate ownership limitations would be as follows: (i) for the RMO Trust, the
RMO Fund, Richard M. Osborne and certain affiliates, 33.33%; (ii) for SSI and
certain affiliates, 35.25%; and (iii) for TNC and certain affiliates, 9.25%.
All certificates representing Shares that are hereafter issued
will bear a legend referring to the restrictions and limitations described
above.
Antitakeover Effect
The ownership provisions contained in the proposed amendment
could have the effect of discouraging transactions which may be beneficial to
the Shareholders. Such ownership provisions will limit the amount of Shares
which a potential acquiror may beneficially own. Specifically, any such
potential acquiror will be precluded from purchasing more than 4.16% in value of
the Trust's Shares. Such ownership limitation, if approved, 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 4.16% in value of the Trust's Shares, or to otherwise effect
a change in control of the Trust.
Recommendation of the Board of Trustees
The Trustees unanimously recommend that Shareholders vote FOR
each of the Declaration Amendments.
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PROPOSAL NO. 3 - RESTORATION OF VOTING RIGHTS
General
Subtitle 7 of Title 3 of the Maryland General Corporation Law
generally denies voting rights to Common Shares acquired in a "control share
acquisition" and within certain ranges unless two-thirds of the outstanding
Common Shares (other than those held by the person who made the acquisition and
those held by an officer of the Trust or an employee of the Trust who is also a
Trustee of the Trust) vote to restore such voting rights. A control share
acquisition includes shares owned within certain ranges: (i) one-fifth or more
but less than one-third of the outstanding voting power of Shares (the
"Applicable Range"); (ii) one-third or more but less than a majority of the
outstanding voting power of Shares; and (iii) a majority or more of the
outstanding voting power of Shares. Richard M. Osborne, through the RMO Trust
and the RMO Fund, currently beneficially owns 658,698 Common Shares (including
59,949 Common Shares issuable upon exercise of warrants) or 33.3% of the
outstanding Common Shares. As of the Record Date, the RMO Trust beneficially
owned 538,800 Common Shares. If this Proposal is adopted, all Common Shares now
or hereafter owned by the RMO Trust, the RMO Fund or RMO within the Applicable
Range will have voting rights identical to the voting rights possessed by other
outstanding Common Shares. If the SSI/TNC Transaction is consummated, Common
Shares owned by SSI, TNC and their current or future affiliates will not, by
virtue of action of the Board of Trustees, be subject to the voting restrictions
contained in Subtitle 7.
Subtitle 7 also confers upon the Trust the right to redeem
control shares for their "fair value" (computed without regard to the absence of
voting rights of such shares). The Board of Trustees has previously determined
that use of Trust funds to redeem the Common Shares beneficially owned by Mr.
Osborne which do not presently have voting rights is not in the best interests
of the Trust or the Shareholders and, accordingly, have waived such redemption
right. Such waiver was not conditioned on a vote by Shareholders to restore
voting rights to the Common Shares beneficially owned by Mr. Osborne in excess
of 20% of the outstanding Common Shares from time to time outstanding.
If this Proposal is adopted, then the following
sentence will be added to the By-laws of the Trust: "Common
Shares now or hereafter beneficially owned by either the Richard
M. Osborne Trust, Turkey Vulture Fund XIII, Ltd. or by Richard M.
Osborne are hereby exempted from the restrictions contained in
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Subtitle 7 of Title 3 of the Maryland General Corporation Law and the Trust
shall have no right to exercise a redemption right with respect to such Common
Shares arising under said Subtitle 7, but only in respect of any such Common
Shares which, when added to all other Common Shares beneficially owned by the
Richard M. Osborne Trust, Turkey Vulture Fund XIII, Ltd. or by Richard M.
Osborne, do not equal or exceed one-third of the voting power of the outstanding
capital stock of the Trust."
On March 20, 1996, the Trust entered into an agreement (the
"RMO Agreement") with RMO and the RMO Trust (collectively, the "RMO Holders").
In the RMO Agreement, the Trust agreed, subject to the conditions contained
therein, to: (i) nominate RMO for election to the Board of Trustees for so long
as the RMO Holders are the beneficial owners of at least 10% of the outstanding
Common Shares and (ii) waive the statutory right of the Trust to redeem the
Common Shares of the RMO Holders, whether now owned or hereafter acquired, for
the fair value thereof. In the RMO Agreement, the RMO Holders agreed, subject to
the conditions contained therein, to: (i) limit their ownership of Common Shares
and securities convertible into Common Shares to one-third of the sum of the
outstanding Shares plus the Common Shares that would be outstanding if
convertible securities acquired by the RMO Holders were converted; (ii) refrain
from engaging in proxy solicitations in opposition to the position of a majority
of the Board of Trustees and refrain from engaging in election contests with
respect to the Trust; (iii) vote their Common Shares in accordance with the
recommendation of a majority of the Board of Trustees on any matter submitted to
a vote of Shareholders other than (a) a merger, consolidation or liquidation of
the Trust or a sale by the Trust of all or substantially all of its assets or
(b) any amendment to the Trust's Declaration of Trust which adversely affects
the rights of Shareholders; (iv) refrain from disposing of any of their Common
Shares other than (a) in transactions under Rule 144, (b) in a private
transaction to any person who is not then a business competitor of the Trust and
who, immediately following such transaction, would own less than 5% of the
outstanding Common Shares; (c) in response to a bona fide third party tender or
exchange offer for at least 80% of the Common Shares and supported by a majority
of the Board of Trustees; (d) in a merger or statutory share exchange in which
ownership of the Trust is acquired by a third party; and (e) pursuant to the
laws of descent and distribution, provided that any person acquiring Common
Shares pursuant to such laws of descent and distribution agrees to hold them for
the balance of the term of the RMO Agreement subject to the agreements of the
Holders contained in the RMO Agreement; (v) not to pursue any action which may
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disqualify the Trust's REIT status; and (vi) vote their Common Shares in favor
of (a) any financing for which Shareholder approval is sought and (b) the
SSI/TNC Transaction, provided that in each case the financing or transaction is
recommended by a majority of the Board of Trustees.
The term of the RMO Agreement will end on the earlier of (i)
the third anniversary of its date and (ii) completion by the Trust of a
Qualified Offering. In addition, RMO may terminate the RMO Agreement in the
event that, on or prior to October 31, 1996 and subject to certain conditions,
SSI has not executed an agreement containing (i) provisions substantially
similar to those contained in the RMO Agreement (other than the limitation as to
Common Share ownership applicable to the RMO Holders) and (ii) an agreement by
SSI to vote any Common Shares it acquires from the Trust, during the term of the
Agreement, either (a) for the election of RMO to the Board of Trustees so long
as certain conditions are satisfied or (b) for the election of a person
designated by RMO and reasonably acceptable to a majority of the Board of
Trustees. As discussed under Proposal 1, SSI has agreed to enter into such an
agreement as part of the SSI/TNC Transaction.
On June 21, 1996 (the "Investment Date"), the RMO Fund
invested $1,329,806 in the Trust, by loaning the Trust $992,293 on an unsecured
basis at the prime rate as in effect from time to time and by acquiring 59,949
units at a per unit price of $5.63. Each unit issued to the RMO Fund includes
one Common Share and one six-year warrant to purchase an additional Common Share
at $6.50 (subject to customary antidilution adjustments). Under certain
circumstances following the issuance by the Trust of additional Common Shares,
the Trust will be obligated to issue additional units, valued at $5.63 each, as
a mandatory prepayment of the RMO Fund's loan. The loan matures on the third
anniversary of the Investment Date. At the time of its investment, the RMO Fund
agreed to be bound by all of the restrictions in the RMO Agreement applicable to
the RMO Holders. The Trust has agreed to provide the RMO Fund with registration
rights covering the Common Shares issued and issuable as part of its investment
pursuant to the Registration Rights Agreement to be executed as part of the
SSI/TNC Transaction. If the SSI/TNC Transaction is not consummated, the Trust
will provide registration rights to the RMO Fund on substantially similar terms
to those that would have been provided in the Registration Rights Agreement.
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Recommendation of the Board of Trustees
The Trustees unanimously recommend that Shareholders vote FOR
Proposal 3.
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PROPOSAL NO. 4 - ELECTION OF TRUSTEES
The Trustees have nominated the following individuals for
election as Trustees at the Meeting: Joseph L. Carboni, Richard M. Osborne and
Gerard H. Sweeney. Mr. Carboni was first elected a Trustee on May 14, 1991.
Messrs. Osborne and Sweeney were elected as Trustees by action of the other
Trustees on February 9, 1996. The Trustees have no reason to believe that any of
the foregoing nominees will be unable or unwilling to be a candidate for
election at the time of the Meeting. If any nominee is unable or unwilling to
serve, the persons named in the proxy will use their best judgment in selecting
and voting for a substitute candidate. Peter P. DiLullo and Garry P. Jerome,
currently Trustees, will not continue as Trustees following the Meeting.
As part of the SSI/TNC Transaction (Proposal No. 1), four
additional individuals (Anthony A. Nichols, Sr., Warren V. Musser, Walter
D'Alessio and Charles P. Pizzi) have been nominated for election as Trustees. If
Proposal No. 1 is adopted and the SSI/TNC Transaction is consummated, these four
individuals (or their successors if any of them is unable to serve) will,
together with the three nominees identified above, constitute the Board of
Trustees. The Trustees have no reason to believe that any of Messrs. Nichols,
Musser, D'Alessio or Pizzi will be unable or unwilling to serve as a Trustee at
the time the SSI/TNC Transaction is consummated.
Each individual elected as a Trustee at the Meeting as well as
the four individuals who will become members of the Board of Trustees if the
SSI/TNC Transaction is consummated will serve for a term expiring at the 1997
annual meeting of Shareholders and until the election and qualification of his
successor.
The Trustees unanimously recommend that Shareholders vote FOR
the election of each of the nominees as Trustees.
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THE TRUST
Contemplated Acquisitions
In the ordinary course of business, the Trust evaluates
potential acquisitions of commercial real estate. From time to time discussions
between the Trust's management and the owner of a property progress to a point
where the parties believe it is appropriate to afford each other the opportunity
to review non-public information concerning the other in order that each may
conduct its evaluation and related due diligence in greater detail.
Typically, the Trust will devote significant management time
to evaluating the potential acquisition of a property only if the owner agrees
to take the property off the market for a limited period of time (30 to 60 days)
in order to afford the Trust the opportunity to determine whether it wishes to
proceed with the acquisition. The basic terms of a potential acquisition (i.e.,
price, due diligence issues, time frames and closing conditions) are usually
contained in a letter of intent or an agreement of sale, which is non-binding on
the Trust, imposes a confidentiality obligation on the owner and contemplates
that any formal decision to proceed will be subject to completion of due
diligence, evaluation and approval by the Trust's Board of Trustees, receipt of
acceptable financing, receipt of necessary third party approvals and other
customary conditions. Because (i) such letters of intent or agreements of sale
are non-binding on the Trust, (ii) all funds advanced as deposits are completely
refundable, (iii) the letters or agreements are cancelable during the due
diligence period at the option of the Trust and (iv) the letters or agreements
are executed in the preliminary stages of the Trust's evaluation of potential
acquisitions, the Trust will publicly announce the transactions contemplated
thereby only if it determines, following consultation with counsel, that
disclosure is either required by law or is otherwise appropriate.
Consistent with the foregoing, on March 21, 1996, the Trust
entered into a letter of intent with UM Real Estate Investment Company, LLC
("UM") contemplating the acquisition of a seven-story, 121,737 square foot
office building in Cherry Hill, New Jersey (the "LibertyView Building"). On
March 28, the Trust and UM entered into an agreement of sale providing for the
sale of the LibertyView Building for a cash price of $10.6 million, of which
$9.6 million would be payable at closing and the balance would be payable, in
installments, one year to fifteen months from closing. The pending acquisition
was subject to completion of due diligence by the Trust and receipt by the Trust
of
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acceptable financing. On May 30, the Trust extended the agreement of sale until
June 14 in order to determine whether it could obtain acceptable financing of
the acquisition. On June 13, the Trust obtained a bank commitment to finance its
acquisition and on June 14, the Board of Trustees approved the terms of the
acquisition and the related financing. The Trust and the owner thereupon agreed
that the acquisition would proceed, subject to funding of the bank financing.
The bank commitment is subject to customary closing conditions. The bank has
reserved the right to approve of any material change in the ownership of the
Trust, including a change resulting from the SSI/TNC Transaction, and in the
event the bank does not approve of any such ownership change, the loan, at the
bank's option, will become repayable without penalty upon 120 days notice. A
closing on the acquisition is currently scheduled to occur on July 19. Given the
conditions to the bank's obligation to make its loan, there can be no assurance
that the acquisition will be completed.
The LibertyView Building was completed in 1990 and, as of May
30, 1996, the occupancy level was 66.5%. A single tenant, HIP-Rutgers, an HMO
provider, occupies 37,515 square feet under a lease expiring January 2008. No
other tenant occupies more than 10% of the building. Rentals of another tenant,
however, a law firm, comprise approximately 15.4% of the total current base
rents for the property. Other tenants in the LibertyView Building include a
bank, accounting firm and several Philadelphia-based law firms.
The following table sets forth scheduled lease expirations for
leases in place at the LibertyView Building as of June, 1996 for each of the
years beginning January 1, 1996, assuming no tenant exercises renewal options or
is terminated due to default:
<TABLE>
<CAPTION>
Rentable
Number of Square Annual
Leases Footage Percentage of Minimum Average Per
Expiring Subject to Occupied Rent Under Square Footage Percentage of Total
Within the Expiring Rentable Square Expiring Rent Expiring Rent Under
Year Leases Footage Leases Leases Expiring Leases
---------- ---------- --------------- ---------- --------------- -------------------
<C> <C> <C> <C> <C> <C> <C>
1996 1 2,998 3.70% $ 53,964 $18.00 4.51%
1997 1 11,521 14.23% 184,662 16.03 15.42%
1998 0 0 0.00% -- -- 0.00%
1999 1 7,233 8.93% 105,840 14.63 8.84%
2000 2 5,798 7.16% 99,196 17.11 8.28%
2001 2 6,978 8.62% 126,734 18.16 10.58%
2002 1 8,912 11.01% 164,872 18.50 13.77%
</TABLE>
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<TABLE>
<CAPTION>
Rentable
Number of Square Annual
Leases Footage Percentage of Minimum Average Per
Expiring Subject to Occupied Rent Under Square Footage Percentage of Total
Within the Expiring Rentable Square Expiring Rent Expiring Rent Under
Year Leases Footage Leases Leases Expiring Leases
---------- ---------- --------------- ---------- --------------- -------------------
<C> <C> <C> <C> <C> <C> <C>
2003 0 0 0.00% -- -- 0.00%
2004 0 0 0.00% -- -- 0.00%
2005 0 0 0.00% -- -- 0.00%
2006 and 1 37,515 46.34% 462,185 12.32 38.60%
thereafter - ------ ------ ---------- ----- ------
TOTAL 9 80,955 100.00% $1,197,453 $14.79 100.00%
= ====== ======= ========== ====== =======
</TABLE>
The Trust intends to finance its acquisition of the
LibertyView Building through a combination of term financing, from a commercial
bank (United Jersey Bank) and proceeds from the investment by the RMO Fund. The
bank loan will bear interest at a fixed rate of 8% per annum and will mature on
January 1, 1999. The loan will also provide for additional funding of $1.3
million, which will be advanced for tenant finish and leasing commissions on the
currently vacant space. The additional funding will be payable at prime plus 1%
and will mature on January 1, 1999.
The bank loan will be secured by a first mortgage on the
LibertyView Building, and will generally be non-recourse to the Trust, except
that the Trust will be required to guarantee up to $3 million of the bank loan
plus the amount of principal and interest unpaid as of the date of acceleration
of the bank loan in the event of a default thereunder. The bank's obligation to
close on the loan is subject to customary closing conditions. Accordingly, there
can be no assurance that the Trust will complete its acquisition of the
LibertyView Building.
Included as Appendix H to this Proxy Statement is an audited
statement of revenues and certain expenses for the LibertyView Building for the
year ended December 31, 1995.
If the Trust completes the acquisition of the LibertyView
Building, the Trust does not intend, as of the date hereof, to contribute it to
the Operating Partnership.
At the present time, the Trust is evaluating several other
potential acquisitions. Consistent with its standard business practice, the
Trust anticipates initially documenting these potential acquisitions by a
non-binding letter of intent
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and/or agreement of sale. After executing a letter or agreement, the Trust would
expect to post a completely refundable deposit and proceed with its due
diligence activities. These activities normally include lease reviews; review of
an operating and capital expense history; review of revenue/expense projections;
credit analysis of key tenants; structural, mechanical, environmental and zoning
reviews; identifying project financing alternatives; and other such
investigations as the Trust's management deems necessary to determine the
desirability of the proposed acquisition.
At the current time, with the exception of the LibertyView
Building acquisition, no other acquisition opportunities have non-refundable
deposits posted and all other pending acquisition opportunities are subject to
completion of due diligence and a number of other contingencies. At the result,
no assurance can be given that any of these acquisitions will be completed.
All pending acquisition opportunities are in the Greater
Philadelphia Region and none has advanced beyond the preliminary stages of due
diligence. These acquisition opportunities range from a single property
acquisition to a nine property portfolio. Regarding the portfolio, the Trust
anticipates entering into a non-binding agreement whereby the Trust and a
pension fund advisor, as representative of the owner, will engage in mutual due
diligence activities. The portfolio acquisition value would approximate $31
million and the proposed acquisition may involve the issuance of additional
shares of Common Stock.
At the current time, none of the pending acquisition
opportunities is probable for Securities and Exchange Commission reporting
purposes.
Price Range of Common Shares and Dividend History
The Common Shares are traded on the American Stock Exchange
under the symbol "BDN." As of April 1, 1996, there were approximately 372
holders of record of the Common Shares and the Trust estimates that there were
approximately 1,000 beneficial owners of Common Shares. The Trust suspended
distributions on the Common Shares commencing with the third quarter of 1988 and
did not declare distributions through December 31, 1993. Distributions declared
for each quarter in 1994 and 1995 are identified below along with the high and
low sale prices of the Common Shares for each fiscal quarter for the past eleven
quarters:
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Stock Price Stock Price Distributions
High Low Declared
----------- ----------- -------------
First Quarter 1994 $3-13/16 $ 1-5/8 $ 0.04
Second Quarter 1994 $ 4-1/4 $ 3-1/8 $ 0.05
Third Quarter 1994 $ 6 $3-15/16 $ 0.73
Fourth Quarter 1994 $ 4-1/2 $ 3-5/8 $ 0.75
First Quarter 1995 $ 4-1/2 $ 3-7/8 $ 0.40
Second Quarter 1995 $ 3-3/4 $ 3-9/16 $ 0.05
Third Quarter 1995 $ 3-7/8 $ 3-5/8 $ 0.05
Fourth Quarter 1995 $ 3-3/4 $ 3-3/8 $ 0.05
First Quarter 1996 $ 5-1/2 $ 3-1/2 $ 0.00
On March 27, 1996, the last full trading day prior to the public announcement of
the SSI/TNC Transaction, the high and low sales prices per Common Share, as
reported by the American Stock Exchange, were $4-7/8 and $4-7/16, respectively.
Outstanding Shares
The Trust currently has one class of Common Shares, of
which 1,916,149 shares are outstanding. 1,856,200 Common Shares
were outstanding on the Record Date. No Preferred Shares are
issued and outstanding.
Ownership of Certain Persons
The following table sets forth, as of April 1, 1996, certain
information with respect to each person who is the beneficial owner of more than
5% of the Common Shares, each person who is a Trustee or nominee for election as
a Trustee and the sole executive officer of the Trust:
<TABLE>
<CAPTION>
Business Experience
Amount of for at Least the
Beneficial Percent of Past
Ownership as of Class as of Five Years;
Age April 1, 1996 (1) April 1, 1996 Directorships
--- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Joseph L. Carboni 59 500 less than 1% 1990-Present:
212 Haddon Avenue President, JLC
Westmont, NJ 08108 Associates, Inc., a
(Nominee) commercial and real
estate consulting
firm. Prior to
1990: Senior Vice
President of BNE
Realty Credit
Corporation
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Business Experience
Amount of for at Least the
Beneficial Percent of Past
Ownership as of Class as of Five Years;
Age April 1, 1996 (1) April 1, 1996 Directorships
--- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Garry P. Jerome 45 937 less than 1% 1988-Present:
Suite 400 Managing Director
1515 Market Street in the Philadelphia
Philadelphia, PA 19102 Office of William
M. Mercer,
Incorporated. Mr.
Jerome will not be
standing for re-
election to the
Board. (2)
Peter P. DiLullo 45 66,500(3)(4) 3.6% 1992 to Present:
300 Berwyn Park Executive Vice
Berwyn, PA 19312 President and Chief
Operating Officer
of LCOR,
Incorporated. Mr.
DiLullo has served
as Executive Vice
President of The
Linpro Company from
1989 to the
present. From 1989
to 1994, he was
Vice President-
Finance of the
Trust, and was
Treasurer of the
Trust from 1993 to
1994. Mr. DiLullo
is also a partner
in various Linpro
Entities. Mr.
DiLullo will not be
standing for re-
election to the
Board.
Richard M. Osborne 50 538,800(5) 29% For more than five
7001 Center Street years, Mr. Osborne's
Mentor, OH 44060 principal occupation
(Nominee) has been President
and Chief Executive
Officer of the Board
of OsAir, Inc., a
property developer
and manufacturer of
industrial gases for
pipeline delivery.
Mr. Osborne also serves
as a director of
Great Lakes Bank,
Mentor, Ohio.
Richard M. Osborne N/A 538,800(6) 29% N/A
Trust
7001 Center Street
Mentor, OH 44060
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Business Experience
Amount of for at Least the
Beneficial Percent of Past
Ownership as of Class as of Five Years;
Age April 1, 1996 (1) April 1, 1996 Directorships
--- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Gerard H. Sweeney 39 120,800(7) 6.1% 1994 to Present:
Two Greentree Centre President and Chief
Suite 100 Executive Officer
Marlton, NJ 08053 of the Trust. 1989
(Nominee) to Present:
President of the
Trust. 1985 to
1989: Vice
President-Finance
of the Trust. 1992
to 1994: Vice
President of LCOR,
Incorporated.
Prior to 1992:
Financial Vice
President of The
Linpro Company. Mr.
Sweeney is a
partner in various
Linpro Entities.
Anthony A. Nichols, Sr. 56 0 -- % (8)
16 Campus Boulevard
Newtown Square, PA 19073
(Nominee)
Warren V. Musser 69 0 -- % (8)
800 The Safeguard
Building
435 Devon Park Drive
Wayne, PA 19087
(Nominee)
Walter D'Alessio 61 0 -- % (8)
1735 Market Street
Philadelphia, PA 19103
(Nominee)
Charles P. Pizzi 46 0 -- % (8)
1234 Market Street
Philadelphia, PA 19107
(Nominee)
All Trustees and N/A 727,537 36.8% (N/A)
Executive Officers as a
Group
</TABLE>
- -------------------------------
(1) Unless otherwise indicated, beneficial owners of Common Shares have sole
voting and investment power.
(2) William M. Mercer, Incorporated provides employee benefits consulting
services to certain Linpro Entities. Fees payable in connection with such
services in 1994 were less than 5% of the gross revenues of Wm. M. Mercer,
Incorporated during 1994.
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(3) Includes 20,000 Shares owned by Brandywine Property Enterprises, Inc., of
which Mr. DiLullo is Vice President and 16.66% owner, with respect to
which Shares Mr. DiLullo disclaims beneficial ownership.
(4) Includes of 46,500 Shares held by a trust of which Mr. DiLullo is a
trustee.
(5) All of such Shares are owned by the Richard M. Osborne Trust, of which Mr.
Osborne is the sole trustee. Does not reflect the additional 59,949 Common
Shares and warrants exercisable for 59,949 Common Shares acquired by the
RMO Fund after April 1, 1996. Mr. Osborne has advised the Trust that he
possesses sole authority over the voting and disposition of Common Shares
owned by the RMO Fund.
(6) Richard M. Osborne is the sole trustee of the Richard M. Osborne Trust.
Does not reflect the additional 59,949 Common Shares and warrants
exercisable for 59,949 Common Shares acquired by the RMO Fund after April
1, 1996. Mr. Osborne has advised the Trust that he possesses sole
authority over the voting and disposition of Common Shares owned by the
RMO Fund.
(7) Includes 120,000 Common Shares issuable upon exercise of options held by
Mr. Sweeney.
(8) See, "The SSI/TNC Transaction -- Election of SSI/TNC Trustees."
Certain Transactions With Related Parties
Approximately 40 individual partners operating through more
than 350 different limited partnerships, joint ventures and corporations
(collectively, the "Linpro Entities") were originally doing business under the
name "The Linpro Company." Central administrative and management functions for
The Linpro Entities are currently conducted by LCOR, Incorporated. Since its
formation and through February 1, 1995, the Trust has directly and, through its
investment in Brandywine Realty Partners, a general partnership ("BRP"),
indirectly, entered into several significant transactions with Linpro Entities,
as described below.
Investment in BRP. The Trust was formed in 1986 to acquire a
68% equity interest in BRP. BRP was formed at the same time to acquire from
Linpro Entities eight real estate projects (collectively, the "Projects")
located in Colorado, New Jersey, North Carolina and Pennsylvania. One of these
Projects was sold in 1988 and three were sold in 1994, in each case, to an
unrelated party.
The original partners of BRP, from its inception in 1986
through January 1994, were the Trust, Brandywine National Corporation
("Brandywine National"), which was formed by certain principals of Linpro
Entities to act as the Administrative Partner of BRP, with a 2% general partner
interest, and BSPI, with a 30% general partner interest. Brandywine Property
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<PAGE>
Enterprises, Inc. ("Brandywine Enterprises"), a Linpro Entity, acts as the sole
general partner of BSPI.
In connection with the refinancing of the Projects in January
1994, in order to obtain the requisite approvals for the refinancing, the Trust
and BRP achieved a settlement of certain deficit restoration obligations
contingently owed by BSPI to BRP. Under the terms of the settlement, the Trust
and BRP released BSPI and its limited partners from any current or future
obligation to restore deficit balances in BSPI's capital account in BRP. In
exchange, among other things, the Trust's participation in BRP's net cash flow
was increased to 98% and BSPI waived certain voting rights in BRP. Further,
Brandywine National transferred its interest in BRP to the Trust and the Trust
was designated as BRP's new administrative partner.
The Trust and BSPI, as general partners of BRP, are entitled
pursuant to the BRP partnership agreement to certain distributions from BRP.
Brandywine Enterprises, as the general partner of BSPI, is entitled to certain
distributions from BSPI.
The principal purpose of BRP is to engage in the business of
owning, leasing, operating and ultimately selling the Projects for the benefit
of the Trust and BSPI. Generally, all decisions relating to the administration
and day-to-day operations of BRP, and all decisions required or permitted to be
made by BRP as a participant in any legal entity in which it may have any
interest, were made through January 1994 by Brandywine National, in its capacity
as administrative partner, or its designee. However, pursuant to the BRP
partnership agreement, through January 1994 certain decisions affecting BRP
required the unanimous consent of the partners, including decisions relating to
the acquisition of real estate other than the Projects, the refinancing of the
Projects or the entry into certain other indebtedness by BRP and, in some
instances, the sale of the Projects. Additionally, the approval of at least 70%
in interest of the partners was required for certain actions, including (i) the
approval of BRP's annual budget, (ii) making certain expenditures in excess of
budgeted amounts, (iii) the settlement of condemnation cases or insured casualty
losses or claims asserted against BRP in excess of specified amounts, (iv) the
entry into, amendment or termination of a lease in excess of one-third of the
net leasable area of a Project or which requires the approval of BRP pursuant to
the terms of a management agreement and (v) the entry into, amendment, renewal
or extension of a contract between BRP and Brandywine National or an affiliate
of Brandywine National.
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When the Trust was designated as the administrative partner of
BRP in January 1994, the Trust received substantially complete control with
respect to the business and affairs of BRP, including complete discretion with
respect to the sale or refinancing of the Projects, without the need to obtain
the consent of BSPI or BSPI's limited partners. However, the Trust must obtain
BSPI's consent in order to, among other things, (i) amend the BRP Operating
Partnership Agreement to require additional capital contributions by BSPI or to
revise any cash or property distributions or tax allocations due BSPI or (ii)
acquire any real estate investments in the name of BRP in addition to the
Projects. The Trust, however, may, in its discretion, make future real estate
investments in its own name.
Settlement with BSPI. As part of the settlement with BSPI in
connection with the January 1994 refinancing, the Trust's 25.83% limited partner
interest in BSPI was transferred to a subsidiary of Brandywine Enterprises and
later retired. The Trust also agreed to indemnify Brandywine Enterprises against
potential liability in connection with the foregoing transactions up to a
maximum of $300,000 and transferred to Brandywine Enterprises certain rights to
receive distributions relating to contingent deficit restoration obligations.
Trust Administration. Administrative and management functions
for the Trust were performed by LCOR, Incorporated through August 8, 1994.
Beginning in 1993 and continuing through August 8, 1994, the Trust reimbursed
LCOR, Incorporated up to $100,000 per year for certain administrative expenses
directly attributable to the Trust, consisting, in part, of a portion of the
salaries for certain personnel provided by LCOR, Incorporated. During 1994, this
reimbursement totaled $75,000. During 1995, no such reimbursement was made.
During August of 1994, the Trust hired two full-time employees
and, as of December 31, 1995, had three full-time employees. Effective February
1, 1995, the Trust assumed management of three of the four Projects and entered
into a management agreement with an unrelated party for the management
of the fourth Project.
Brandywine Property Management. In connection with the
acquisition of each Project, BRP entered into management agreements with Linpro
Entities engaged in the property management business (each, "Property Manager")
pursuant to which the Property Manager provided leasing and property management
services. During 1994, six of the then owned seven Projects were operated under
a management agreement with a Linpro Entity
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<PAGE>
and one of the Projects was operated under a management agreement with an entity
which was not a Linpro Entity. For the period January 1, 1995 through January
31, 1995, three of the four Projects were operated under an agreement with a
Linpro entity and one of the Projects 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 Projects and are
paid a management fee monthly in arrears equal to 5% of the rental income of the
Projects. In addition, during 1994 and through January 31, 1995, the Property
Managers received a 50% override on leasing commissions payable to third party
brokers and a full market commission on non-brokered transactions. For the
Projects operated under a management agreement with a Linpro Entity, LCOR,
Incorporated absorbed an amount equal to 2% of gross rents and 40% of the
defined commission structure representing administrative costs, which costs
would otherwise have been borne by the Trust.
Trustee and Officer Interests in Related Parties. Mr. DiLullo,
a Trustee of the Trust, is a partner in or an officer of, or has direct or
indirect ownership interests in, certain Linpro Entities as follows: Brandywine
Property Enterprises, Inc. (16.66%); Brandywine National Corporation; and the
Property Manager of One, Two and Three Greentree Centres through January 31,
1995. Management fees paid to the Property Manager of One, Two and Three
Greentree Centres were $10,000 in 1995.
Mr. Sweeney, the President and Chief Executive Officer and a
Trustee of the Trust, was a partner in or an officer of, or had direct or
indirect ownership interests in, certain Linpro Entities as follows: Brandywine
Enterprises through January 1, 1995 and the Property Manager of One, Two and
Three Greentree Centres through January 31, 1995 (7.0%).
Share Performance Graph
The Securities and Exchange Commission requires the Trust to
present a chart comparing the cumulative total Shareholder return on the Common
Shares with the cumulative total Shareholder return of (i) a broad equity index
and (ii) a published industry or peer group index. The following chart compares
the cumulative total Shareholder return for the Common Shares with the
cumulative Shareholder return of companies on (i) the S&P Composite Index as
provided by the National Association of Real Estate Investment Trusts and (ii)
the NAREIT
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<PAGE>
ALL-REIT Total Return Index as provided by the National Association of Real
Estate Investment Trusts for the period beginning December 31, 1990 and ending
December 31, 1995.
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<PAGE>
COMPARISON OF CUMULATIVE SHAREHOLDERS' RETURN
The Trust, S&P 500 Index and NAREIT All-REIT Index
1000 ------------------------------------------------------------------------
| * |
| * |
900 ------------------------------------------------------------------------
| |
| |
800 ------------------------------------------------------------------------
| |
| |
700 ------------------------------------------------------------------------
D | |
O | |
L 600 ------------------------------------------------------------------------
L | |
A | |
R 500 ------------------------------------------------------------------------
S | |
| |
400 ------------------------------------------------------------------------
| |
| * |
300 ------------------------------------------------------------------------
| |
| #@ |
200 ------------------------------------------------------@-----------------
| $ @ # |
| #@ # # |
100 -----*#@----------------------------------------------------------------
| * |
| * |
0 ------------------------------------------------------------------------
Dec. 90 Dec. 91 Dec. 92 Dec. 93 Dec. 94 Dec. 95
* = The Trust
# = S&P 500 Index
@ = NAREIT All-REIT Index
<TABLE>
<CAPTION>
Dec. 90 Dec. 91 Dec. 92 Dec. 93 Dec. 94 Dec. 95
<S> <C> <C> <C> <C> <C> <C>
The Trust $ 100.00 $ 88.89 $ 66.67 $ 333.33 $ 904.31 $ 950.01
S&P 500 Index $ 100.00 $ 130.55 $ 140.56 $ 154.60 $ 156.63 $ 215.25
NAREIT All-REIT Index $ 100.00 $ 135.68 $ 152.20 $ 180.43 $ 181.88 $ 215.18
</TABLE>
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<PAGE>
Meetings of Trustees
The Trustees held nine meetings in 1995. Each of Messrs. Carboni and
DiLullo attended all meetings. Mr. Jerome attended eight of the meetings. Mr.
O'Leary attended seven of the meetings. Messrs. Carboni and Jerome each served
as a member of the Audit Committee. One meeting of the Audit Committee was held
in 1995 to discuss the 1995 audit with Arthur Andersen LLP, the Trust's
independent public accountants. Otherwise, the Board of Trustees currently acts
as a whole and is not subdivided into special purpose committees.
Compensation of Trustees
In 1995, the Trust paid each of Messrs. Carboni, DiLullo, Jerome and
O'Leary (a former trustee who resigned as of January 31, 1996), a fee of $5,000
per year for his services as a Trustee plus $500 for each meeting of the
Trustees or of a committee of the Trustees attended in person. In 1995, the
Trust paid Mr. Carboni $7,917, each of Messrs. DiLullo and Jerome $7,417 and Mr.
O'Leary $6,417 for their services and attendances at meetings during 1995. The
Trust also reimburses the Trustees for their expenses incurred in connection
with their duties as Trustees.
Management and Executive Officers
Gerard H. Sweeney (age 39) was elected by the Trustees as President and
Chief Executive Officer of the Trust on August 8, 1994. From November 9, 1989
until August 8, 1994, Mr. Sweeney had served upon his election by the Trustees
as President of the Trust. Prior to August 8, 1994, Mr. Sweeney was a general
partner in various Linpro Entities and also Vice President of LCOR,
Incorporated. Prior to April 23, 1992, Mr. Sweeney was Financial Vice President
of, and a partner in affiliates of, The Linpro Company. Mr. Sweeney served as
Vice President - Finance of the Trust from March 13, 1986 until his election to
serve as President of the Trust. Mr. Sweeney was elected a Trustee by the other
Trustees on February 9, 1996.
Francine M. Haulenbeek (age 39) was elected by the Trustees as Vice
President - Finance and Secretary of the Trust on October 12, 1994 to serve
until her resignation or removal by the Trustees. Ms. Haulenbeek is the
President of Francine M. Haulenbeek & Company, a certified public accounting
firm. From February 13, 1991 until January 8, 1993, Ms. Haulenbeek served as
Secretary-Treasurer of the Trust. From April 1992 through January 8, 1993, Ms.
Haulenbeek was an employee of LCOR,
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<PAGE>
Incorporated. Prior to April 23, 1992, Ms. Haulenbeek was
Assistant Financial Vice President of The Linpro Company.
Executive Compensation
Cash and Non-Cash Compensation Paid to Certain Executive Officers
Beginning in 1993 and continuing through August 8, 1994, the Trust
reimbursed LCOR, Incorporated up to $100,000 for certain administrative expenses
directly attributable to the Trust, consisting, in part, of a portion of the
salaries for personnel provided by LCOR, Incorporated other than salaries of the
President and Trustees of the Trust. During 1994 and 1993, this reimbursement
totaled $75,000 and $100,000, respectively.
The following table sets forth, for the years ended December 31, 1994
and 1995, compensation information with respect to the Trust's President and
Chief Executive Officer. No information is included in the tables set forth
below in respect of Ms. Haulenbeek. Effective October 1, 1994, the Trust entered
into an employment agreement with Ms. Haulenbeek. The term of the agreement has
been extended through the date of the Meeting and under the agreement Ms.
Haulenbeek is entitled to receive an annual salary of $100,000. Ms. Haulenbeek's
annual 1994 salary plus bonus totaled $23,000 (consisting of $21,000 in salary
and $2,000 in bonus) and her annual 1995 salary totaled $93,000. From January 1,
1994 through September 30, 1994 and for the years ended December 31, 1993 and
1992, the Trust paid Francine M. Haulenbeek & Company, a certified public
accounting firm owned by Ms. Haulenbeek, a total of $50,000, $110,000 and
$46,000, respectively, for consulting services. Ms. Haulenbeek has not been
granted any options or other equity awards in the Trust.
SUMMARY COMPENSATION TABLE
(a) (b) (c) (d)
Long-Term Compensation
Name and Principal Securities underlying
Position Year Salary Options/SAR's (#)
- -------------------------------------------------------------------------------
Gerard H. Sweeney 1995 $130,000 (1) -0-
President and Chief 1994 $55,000 (1)(2) 140,000 (1)
Executive Officer 1993 (2) -0-
- ----------------------------
(1) On August 8, 1994, the Trust entered into an employment agreement with Mr.
Sweeney. The term of the employment agreement
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<PAGE>
is one year and continues thereafter until either party provides notice to the
other of its election to terminate the agreement. Under the employment
agreement, Mr. Sweeney is entitled to receive an annual salary of $130,000. In
addition, under the employment agreement, the Trust granted Mr. Sweeney options
to purchase 40,000 Common Shares at a per share exercise price of $3.80 and
options to purchase 100,000 Common Shares at a per share exercise price of
$6.50. The per share exercise price of the options is subject to reduction as
proceeds from the sale of, or refinancing of debt secured by, Projects are
distributed by the Trust to holders of Common Shares by an amount equal to the
amount so distributed, from time to time, on account of each Common Share.
Accordingly, the per share exercise prices of the options has been reduced to
$2.07 (in respect of the options for 40,000 Common Shares) and to $4.77 (in
respect to the options for 100,000 Common Shares) as a result of distributions
to Shareholders from proceeds of the sale of two Projects during 1994 and the
April 1995 refinancing of the mortgage loan. In the event the employment of Mr.
Sweeney is terminated without cause, or in the event Mr. Sweeney terminates his
employment under certain circumstances, in either case following a change in
control of the Trust, the Trust will be obligated to pay Mr. Sweeney, as
severance, up to 150% of his base salary less the value of certain unexercisable
options on the date of termination. If the SSI/TNC Transaction is consummated,
Mr. Sweeney's employment agreement with the Trust will be terminated and he will
enter into a new employment agreement with the Management Company. Mr. Sweeney
will continue to hold his options following consummation of the SSI/TNC
Transaction. See "Proposal I - The SSI/TNC Transaction - Principal Features of
the SSI/TNC Transaction - Employment Agreements with Executives."
(2) Prior to August 8, 1994, the date on which Mr. Sweeney became employed by
the Trust, under an employment agreement, his salary and bonus were paid to him
by LCOR, Incorporated. In February 1994, the Trust paid LCOR, Incorporated
$110,000, and LCOR, Incorporated in turn used $60,000 of this amount to pay Mr.
Sweeney a bonus in recognition of his contribution to the restructuring by the
Trust of its debt in January 1994 and its sale of the Lincoln Centre Project in
February 1994.
As discussed above, in February 1994, the Trust paid LCOR, Incorporated
$110,000, which LCOR, Incorporated in turn used to pay each of Messrs. Sweeney,
then President of the Trust, Madere, then Trustee of the Trust, and DiLullo,
then Trustee and Vice-President - Finance and Treasurer of the Trust, $60,000,
$30,000 and $20,000, respectively, as a bonus in recognition of his contribution
to the Trust's restructuring of its debt in January
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<PAGE>
1994 and its sale of the Lincoln Centre Project in February 1994. The Trust
recorded this payment as a cost charge against the sale of the Lincoln Centre
Project.
Stock Options Granted to Executive Officers During
Last Fiscal Year
No options were awarded by the Trust to executive officers during 1995.
Stock Options Held by Certain Executive Officer
at December 31, 1995
The following table sets forth certain information regarding options
for the purchase of Common Shares that were exercised and/or held by the Trust's
President and Chief Executive Officer at December 31, 1995. No other executive
officer of the Trust held options for the purchase of Common Shares at any time
during 1995.
Aggregated Option/SAR Exercises in Fiscal Year Ended
December 31, 1995 and FY 1995-End Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the Money
Unexercised Options/SARs at
Shares Value Options/SARs at FY-End ($)
Acquired on Realized FY-End (#) Exercisable/
Name Exercise (#) ($) Exercisable/Unexercisable (1) Unexercisable
---- ------------ ----- ----------------------------- -------------
<S> <C> <C> <C> <C>
Gerard H. Sweeney N/A N/A 120,000/20,000 $30,000/$30,000
President and
Chief Executive
Officer
</TABLE>
- -----------------------------
(1) All figures represent options.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
The Trust does not maintain a Compensation Committee or any
committee performing similar functions.
Board Committee Report on Executive Compensation
On August 8, 1994, the Trust entered into an employment agreement with
Mr. Sweeney. No modifications were made to the employment agreement during 1995.
The term of the employment agreement is one year and continues thereafter until
either party provides notice to the other of its election to terminate the
agreement. Under the employment agreement, Mr. Sweeney is entitled to receive an
annual salary of $130,000. In addition, under the employment agreement, the
Trust granted Mr. Sweeney options to purchase 40,000 Common Shares at a per
share exercise price of $3.80 (computed as the average closing price of the
Shares for the twenty trading days ending June 23, 1994) and options to purchase
100,000 Common Shares at a per share exercise price of $6.50. The per share
exercise price of the options is subject to reduction as proceeds from the sale
of, or refinancing of debt secured by, Projects are distributed by the Trust to
holders of Common Shares by an amount equal to the amount so distributed, from
time to time, on account of each Common Share. Accordingly, the per share
exercise prices of the options has been reduced to $2.07 (in respect of the
40,000 options) and to $4.77 (in respect of the 100,000 options) on account of
distributions to Shareholders from proceeds of the sale of two Projects (Academy
Downs and Iron Run) during 1994 and the April 1995 refinancing of the mortgage
loan.
Joseph L. Carboni
Garry P. Jerome
Peter P. DiLullo
Compliance with Section 16(a) of the Securities
Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Trust's officers, Trustees and persons who own more than 10% of the
Common Shares to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the American Stock Exchange. Officers,
Trustees and greater than 10% Shareholders are required by regulation to furnish
the Trust with copies of all Section 16(a) forms they file.
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<PAGE>
Based solely on a review of the copies of such forms furnished to the
Trust, or written representations that no Annual Statements of Beneficial
Ownership of Securities on Form 5 were required, the Trust believes that during
the fiscal year ended December 31, 1995, all Section 16(a) filing requirements
applicable to its officers, Trustees and greater than 10% Shareholders were
complied with.
INFORMATION REGARDING PROXIES
General
Shareholders are entitled to one vote for each Common Share
owned of record as of June 12, 1996 (the "Record Date"), subject to a limitation
in Subtitle 7 of Title 3 (Voting Rights of Certain Control Shares) of the MGCL
which, subject to certain exceptions, eliminates voting rights on Common Shares
held by persons in excess of certain percentage thresholds. The Shareholders
have no cumulative voting rights at this time. The number of Common Shares
outstanding on the Record Date was 1,856,200 and the number of Common Shares
entitled to vote on the matters to be considered at the Meeting is 1,688,639.
However, if Proposal 3 is adopted, the 167,561 Common Shares with respect to
which voting rights have been restored will be entitled to vote on all other
matters to be considered at the Meeting.
Quorum
All valid Proxies returned, including abstentions and "broker
non-votes," are included in the determination of whether a quorum is present at
the Meeting.
Vote Required
Approval of the SSI/TNC Transaction (Proposal No. 1) requires
the affirmative vote of a majority of the votes cast on the proposal in person
or by proxy. Approval of the Declaration Amendments (Proposal No. 2) requires
the affirmative vote of the holders of a majority of the Common Shares
outstanding and entitled to vote thereon. Restoration of voting rights on those
Common Shares now or hereafter owned by the RMO Trust which do not presently or
would not otherwise have voting rights (Proposal No. 3) requires the affirmative
vote of two-thirds of the Common Shares outstanding and entitled to vote
thereon, excluding "interested shares" (i.e., Common Shares owned by RMO Trust
or its trustee, Richard M. Osborne, or owned by an officer of the Trust or any
employee of the Trust who is also a Trustee of the
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<PAGE>
Trust). Election of Trustees (Proposal No. 4) requires the favorable vote of a
plurality of the Common Shares present and entitled to vote, in person or by
proxy, at the Meeting. An automated system administered by the Trust's Transfer
Agent tabulates the votes.
Regarding the vote on the SSI/TNC Transaction (Proposal No.
1), Common Shares represented by Proxies marked "For" such Proposal will be
counted in favor of such Proposal. Common Shares represented by Proxies marked
"Abstain" and "broker non-votes" in respect of such Proposal will not be
counted as votes cast on the Proposal and will not affect the outcome. IN THE
ABSENCE OF SPECIFIC DIRECTION, SHARES REPRESENTED BY A PROXY WILL BE VOTED "FOR"
SUCH PROPOSAL.
Regarding the Declaration Amendments (Proposal No. 2), Common
Shares represented by Proxies marked "For" such Proposal will be counted in
favor of such Proposal. Common Shares represented by Proxies marked "Abstain"
and "broker non-votes" in respect of such Proposal will not be counted in favor
of such Proposal and will be, therefore, the equivalent of a vote "Against" such
Proposal. IN THE ABSENCE OF SPECIFIC DIRECTION, SHARES REPRESENTED BY A PROXY
WILL BE VOTED "FOR" SUCH PROPOSAL.
Regarding the restoration of voting rights on those Common
Shares now or hereafter owned by the RMO Trust which do not presently or would
not otherwise have voting rights (Proposal No. 3), Common Shares represented by
Proxies marked "FOR" such Proposal will be counted in favor of such Proposal.
Common Shares represented by Proxies marked "Abstain" and "broker non-votes" in
respect of such Proposal will not be counted in favor of such Proposal and will
be, therefore, the equivalent of a vote "Against" such Proposal. IN THE ABSENCE
OF SPECIFIC DIRECTION, SHARES REPRESENTED BY A PROXY WILL BE VOTED "FOR" SUCH
PROPOSAL.
Regarding the election of Trustees (Proposal No. 4), Common
Shares represented by Proxies marked "For" such Proposal will be counted in
favor of all nominees, except to the extent the Proxy withholds authority to
vote for, or indicates a vote against, a specified nominee. Common Shares
represented by Proxies marked "Against," "Abstain" or withholding authority to
vote will not be counted in favor of any nominee. However, because Trustees are
elected by a plurality vote, abstentions and broker non-votes will not affect
the election of the candidates receiving the most votes. IN THE ABSENCE OF
SPECIFIC DIRECTION, SHARES REPRESENTED BY A PROXY WILL BE VOTED "FOR" THE
ELECTION OF ALL NOMINEES.
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The Trustees intend to vote their Common Shares in favor of
Proposal Nos. 1, 2, 3 and 4. If Proposal 3 is approved, the RMO Trust will vote
those Common Shares with respect to which voting rights have been restored in
favor of the other Proposals.
Description of Proxy
The accompanying proxy is solicited by the Board of Trustees
of the Trust. A Shareholder may revoke his or her proxy at any time by execution
of another proxy of a later date, by written notice to the Trust (attention:
Gerard H. Sweeney) at its address above, or by attending the Meeting and voting
in person.
Appraisal Rights
In the event that any of the Proposals covered by this Proxy
Statement are approved by Shareholders, dissenting Shareholders will not have
appraisal or similar rights under the Maryland statutes applicable to the Trust.
Independent Public Accountants
The Trustees have selected Arthur Andersen LLP to serve as the
Trust's independent public accountants for 1996 and to audit the Trust's
financial statements for 1996. A representative of Arthur Andersen LLP will be
present at the Meeting, will be available to respond to appropriate questions,
and will have an opportunity to make a statement.
Other Business
The Trust knows of no business which will be presented at the
Meeting other than as set forth in this Proxy Statement. However, if other
matters should properly come before the Meeting, it is the intention of the
persons named in the enclosed proxy to vote in accordance with their best
judgment on such matters.
Expenses of Solicitation
The solicitation of proxies on behalf of the Trustees and all
expenses in connection therewith will be paid by the Trust. Request will be made
of brokerage houses and other custodians, nominees and fiduciaries to forward
the solicitation material, at the expense of the Trust, to the beneficial owners
of Common Shares held of record by such persons. In addition to
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<PAGE>
being solicited through the mails, proxies may also be solicited personally or
by telephone by Trustees and officers of the Trust. The Trust has also engaged
Beacon Hill Partners, Inc. to assist in soliciting proxies for the Meeting for a
fee of approximately $10,000 plus reasonable out-of-pocket expenses.
SEC Filings
The following documents (exclusive of exhibits) previously
filed with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 are attached to this Proxy Statement as Appendices D, E and
G, respectively: (i) the Trust's Annual Report on Form 10-K/A for the year ended
December 31, 1995, (ii) the Trust's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 and (iii) the Trust's Current Report on Form 8-K
dated June 21, 1996. The Trust will provide to each person to whom a copy of
this Proxy Statement is delivered without charge and upon written or oral
request of such person, by first class mail, a copy of any of the exhibits to
any of such documents. Written requests for any exhibit should be directed to
the Secretary of the Trust, Francine M. Haulenbeek, at Two Greentree Centre,
Suite 100, Marlton, New Jersey 08053. Oral requests should be directed to the
Secretary at (609) 797-0200.
Shareholder Proposals
Proposals by Shareholders intended to be presented at the next
annual meeting of Shareholders of the Trust must be received by the Trust at its
offices at Two Greentree Centre, Suite 100, Marlton, New Jersey 08053 on or
before March 20, 1997 to be included in the Trust's proxy statement and form of
proxy for the 1997 annual meeting.
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ARTHUR ANDERSEN LLP
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 matter discussed in Note 11, as
to which the date is March 20, 1996) on the consolidated financial statements of
Brandywine Realty Trust as of December 31, 1995 and 1994, 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 Proxy Statement. 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.
/s/ ARTHUR ANDERSEN LLP
-----------------------------------
Philadelphia, Pa.,
July 12, 1996
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<PAGE>
ARTHUR ANDERSEN LLP
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 Initial
Properties as of December 31, 1995 and 1994, 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 Proxy Statement. It should be noted that we have not
audited any financial statements of the Initial Properties subsequent to
December 31, 1995 or performed any audit procedures subsequent to the date of
our report.
/s/ ARTHUR ANDERSEN LLP
-----------------------------------
Philadelphia, Pa.,
July 12, 1996
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<PAGE>
ARTHUR ANDERSEN LLP
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 Proxy Statement. 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.
/s/ ARTHUR ANDERSEN LLP
-----------------------------------
Philadelphia, Pa.,
July 12, 1996
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APPENDICES INDEX
Appendix A - Glossary of Certain Terms
Appendix B - Fairness Opinion of Legg Mason Wood Walker, Inc.
Appendix C - Amendments to Declaration of Trust
Appendix D - Trust's Annual report on Form 10-K/A for fiscal
year ended December 31, 1995 (excluding exhibits)
Appendix E - Trust's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1996
Appendix F - Combined Financial Statements of Initial
Properties
Appendix G - Trust's Current Report on Form 8-K dated June 21,
1996 (excluding exhibits)
Appendix H - Financial Statements of LibertyView Building
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APPENDIX A
GLOSSARY OF CERTAIN TERMS*
Applicable Range One-fifth or more but less
than one-third of the outstanding
voting power of Shares.
Board of Trustees or The Board of Trustees of the Trust.
Board
BRP Brandywine Realty Partners, a
general partnership.
BRP Partnership Interest The Trust's entire general
partnership interest in BRP, which
the Trust will transfer to the
Operating Partnership.
C&W Cushman and Wakefield of
Pennsylvania, Inc., which company
was retained by the Trust to
evaluate the market position of each
of the Properties.
Class A Units The limited partnership interests in
the Operating Partnership to be
issued (or issuable) to the Owners
in exchange for their ownership
interests in the Properties.
Class B Units The limited partnership interests in
the Operating Partnership to be
issued to the Trust in exchange for
the SSI Ownership Interest. Class B
Units will automatically convert
into an equal number of GP Units
upon completion of a Qualified
Offering.
--------
*The definitions of the following terms are qualified in their entirety by the
more complete definitions of such terms found in the text of the Proxy
Statement.
A-1
<PAGE>
Class C Units The limited partnership interests in
the Operating Partnership to be
issued to the Trust in exchange for
its BRP Partnership Interest. Class
C Units will automatically convert
into an equal number of GP Units
upon completion of a Qualified
Offering.
Closing Date The date on which the SSI/TNC
Transaction is closed.
Code The Internal Revenue Code of 1986,
as amended.
Common Shares Common shares of beneficial
interest of the Trust, par value
$.01 per share.
Contribution Agreement The Contribution Agreement among the
Trust, SSI and TNC pursuant to which
the Trust will contribute $1,000 and
the SSI Ownership Interest to the
Operating Partnership in exchange
for the General Partnership Interest
and Class B Units, respectively, and
the Owners will contribute their
interests in the Initial Properties
to the Operating Partnership in
exchange for Class A Units.
Declaration The Declaration of Trust of the
Trust.
Declaration Amendments The Proposals relating to the
amendments to the Declaration set
forth in Proposal 2 of this Proxy
Statement.
Excluded Common Shares Common Shares issued after May 1,
1996, the net proceeds of which are
not contributed to the Operating
Partnership.
Executive Warrants Warrants exercisable for 400,000
Common Shares to be issued to the
TNC Executives and certain other TNC
employees.
Exempt Parties Those parties the Declaration
Amendments would exempt from the
Ownership Limit.
A-2
<PAGE>
Funds from Operations In general, net income (loss),
excluding extraordinary items, gains
and losses from sales of property,
plus depreciation and amortization
and other non-cash charges and
similar adjustments for
unconsolidated subsidiaries.
GECC General Electric Capital
Corporation.
GECC Loan The loan relating to and secured by
the Witmer Properties.
GECC Loan Documents The documents evidencing and
securing the GECC Loan.
General Partner The General Partner of the Operating
Partnership.
General Partnership The entire general partnership
Interest interest in the Operating
Partnership (which will be comprised
of GP Units and which will be held
by the Trust).
GP Units The general partnership interests in
the Operating Partnership.
Greater Philadelphia The geographic area that includes
Region Philadelphia and its surrounding
counties and suburbs, including
Southern New Jersey and
Lawrenceville, New
Jersey.
Initial Properties Collectively, the Witmer Properties
and the Other Initial Properties.
Interests Transfer Those Properties, the transfer of
Properties which will be structured as
transfers to the Operating
Partnership of 89% of the capital
interests and 99% of the cash flow
and profit interests in the limited
partnership owning such Properties.
Lawrenceville Premises The Witmer Property located in
Lawrenceville, New Jersey
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<PAGE>
Legg Mason Legg Mason Wood Walker, Inc., the
Trust's financial advisor.
Management Company A newly-formed corporation
that is expected to perform
management and leasing operations
for the Properties.
Meeting The Annual Meeting of the
Shareholders of the Trust.
MGCL Maryland General Corporation Law
NEMLICO New England Mutual Life Insurance
Company.
Operating Partnership The Delaware limited partnership in
which the Trust will hold the
General Partnership Interest and
Class B and C Units, and which will
directly or indirectly hold title to
the Initial Properties.
Operating Partnership The Agreement of Limited Partnership
Agreement of the Operating Partnership.
Operating Partnership Expenses that will be borne by the
Expenses Operating Partnership if the SSI/TNC
Transaction is consummated.
Option Agreements Agreements pursuant to which the
Operating Partnership will be
entitled to acquire substantially
all of TNC's and the Other Owners'
ownership interests in the Option
Properties.
Option Properties Four office buildings that contain
an aggregate of approximately
159,000 rentable square feet which
the Operating Partnership will have
an option to purchase.
A-4
<PAGE>
Other Owners The Owners other than SSI and TNC.
Other Initial 11 office and industrial buildings
Properties to be owned by the Operating
Partnership that contain an
aggregate of approximately 424,000
rentable square feet.
Owners SSI, TNC and certain additional
persons who will transfer to the
Operating Partnership their
ownership interests in the Initial
Properties and grant to the
Operating Partnership options to
acquire the Option Properties.
Ownership Limit 4.16% in value of the outstanding
Shares.
Ownership Restrictions Less than 100 persons owning Shares
or the Trust being "closely held."
Partnerships Collectively, the Operating
Partnership and the Title Holding
Partnerships.
Preferential Return The annual preferential cumulative
return that the Trust will be
entitled to receive prior to a
Qualified Offering pursuant to its
ownership of the Class B Units.
Preferred Shares Preferred shares of beneficial
interest of the Trust.
Properties Collectively, the Initial Properties
and the Option Properties.
Proposals The matters upon which the
Shareholders will be asked to vote
at the Meeting.
Qualified Offering A public or private sale of equity
securities generating at least $35
million of net proceeds to the Trust
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
A-5
<PAGE>
least $5.50 (subject to adjustment
in the event of stock dividends,
stock splits or reverse stock
splits).
Qualified REIT A wholly-owned subsidiary of a REIT
Subsidiary that is treated for federal income
tax purposes as if its assets and
liabilities were those of the REIT.
Redemption Eligibility Any 20 consecutive trading-day
Date period, occurring after the second
anniversary of the Closing Date, for
which the average closing price of a
Common Share equals or exceeds $5.50
(subject to adjustment to reflect
stock splits, stock dividends and
reverse splits).
Registration Rights Agreement with each holder of Class
Agreement A Units, SSI, TNC and the RMO Trust
obligating the Trust to register
Common Shares issued or issuable to
such persons.
REIT A real estate investment trust as
defined in Section 856 of the Code.
Residual Interests The partnership interests in the
Interests Transfer Properties
not initially transferred to the
Operating Partnership.
RMO Richard M. Osborne
RMO Agreement The Agreement among RMO, the RMO
Trust and the Trust pursuant to
which RMO makes certain agreements
relating to the Common Shares owned
by the RMO Trust.
RMO Fund Turkey Vulture Fund XIII, Ltd.
RMO Trust The Richard M. Osborne Trust.
A-6
<PAGE>
Share Purchase The Share and Warrant Purchase
Agreement Agreement between SSI and the Trust
pursuant to which the Trust will
issue to SSI Common Shares and the
SSI Warrant.
Shareholders The holders of Shares of the Trust.
Shares Collectively, Common Shares and
Preferred Shares.
SSI Safeguard Scientifics, Inc., a
Pennsylvania corporation.
SSI Advances All amounts advanced or treated as
advanced by SSI to the Operating
Partnership pursuant to the
Distribution Support and Loan
Agreement between the Operating
Partnership and SSI (including
advances made by SSI pursuant to the
SSI Subsidy).
SSI Agreement The agreement between SSI and the
Trust pursuant to which SSI makes
certain agreements relating to the
Common Shares owned by it.
SSI Ownership Interest SSI's indirect ownership interest in
the Witmer Properties which is being
transferred to the Trust. Such
indirect ownership interest consists
of all of the general partnership
interest in the Witmer Partnership
and SSI's entire limited partnership
interest in the Witmer Partnership.
SSI Subsidy SSI's commitment to loan funds to
the Operating Partnership in the
event the Trust does not receive a
distribution of its entire
Preferential Return for a quarter to
fund the unpaid balance of such
Preferential Return, subject to
certain limitations.
SSI/TNC Transaction A transaction among the Trust, SSI
and TNC as more particularly
described in Proposal 1 of this
Proxy Statement.
A-7
<PAGE>
SSI Warrant The warrant exercisable for
775,000 Common Shares to be issued
by the Trust to SSI.
Title Holding The limited partnerships owning the
Partnerships Interests Transfer Properties.
Title Transfer Those Initial Properties, the
Properties transfer of which will be effected
by the transfer of fee title
thereto.
TNC The Nichols Company, a Pennsylvania
corporation.
TNC Executives Three individuals who are currently
executives of TNC who are expected
to become executive officers of the
Trust.
Trust Brandywine Realty Trust, a Maryland
real estate investment trust.
Units Units of partnership interests in
the Operating Partnership.
Witmer Limited Substantially all of the limited
Partnership Interests partnership interests in the
Witmer Partnership owned by TNC and
the Other Owners which will be
contributed to the Operating
Partnership.
Witmer Partnership The limited partnership formed to
borrow up to $32,211,600 million
from GECC and to own the Witmer
Properties.
Witmer Properties Eight office and industrial
buildings owned by the Witmer
Partnership that contain an
aggregate of approximately 536,000
rentable square feet.
A-8
<PAGE>
APPENDIX B
July 12, 1996
Board of Trustees
Brandywine Realty Trust
Suite 100
Two Greentree Centre
Marlton, NJ 08053
Members of the Board:
We are advised that Brandywine Realty Trust ("Brandywine" or
the "Trust") has entered into a Contribution Agreement relating to a transaction
(the "Transaction") in which the Trust: (i) will issue 775,000 common shares of
beneficial interest ("Common Shares"), and a warrant exercisable for an
additional 775,000 Common Shares at a per share exercise price of $6.50 to
Safeguard Scientifics, Inc. ("SSI") in exchange for $426,250 and SSI's ownership
interest in a limited partnership which owns eight office and industrial
buildings (the "Witmer Properties"); (ii) will form a limited partnership (the
"Operating Partnership") and obtain an ownership interest in an additional 11
office and industrial buildings (together with the Witmer Properties, the
"Initial Properties"); (iii) will contribute to the Operating Partnership its
entire general partnership interest in Brandywine Realty Partners ("BRP") in
exchange for additional partnership interests in the Operating Partnership; (iv)
will cause the Operating Partnership to enter into option agreements conferring
upon the Operating Partnership the option to acquire an additional four office
buildings; (v) will agree, subject to certain conditions, to redeem for cash or
Common Shares the limited partnership interests ("Units") in the Operating
Partnership; (vi) will issue non-transferable warrants exercisable for an
aggregate of 400,000 Common Shares at a per share exercise price of $6.50
(subject to customary antidilution adjustments) to individuals who are currently
employees of The Nichols Company ("TNC") and who are expected to become
employees of a subsidiary of the Trust; (vii) will issue non-transferable
warrants exercisable for an aggregate of 330,000 Common Shares at a per share
exercise price of $6.50 to the President and Chief Executive Officer of the
Trust and another executive of the Trust; and (viii) will expand the Board of
Trustees from five to seven and elect to the Board three individuals associated
with or designated by SSI and TNC, and one individual jointly designated by SSI,
TNC and the Trust, to fill the vacancies in the Board created by such expansion
and the decision of two current members of the Board not to stand for
re-election.
B-1
<PAGE>
You have asked our opinion as to the fairness, from a
financial point of view, to the holders of the Common Shares of the
consideration to be paid by the Trust in the Transaction.
For purposes of rendering this opinion, we have:
(i) reviewed the Letter of Intent and the related
exhibits and schedules;
(ii) reviewed a draft of the Contribution Agreement
dated July 3, 1996 among the Trust, SSI and TNC and the documents related
thereto;
(iii) reviewed a draft in substantially final form of
the Proxy Statement of the Trust to be filed with the Securities and Exchange
Commission;
(iv) reviewed the audited financial statements of
Brandywine for the years ended December 31, 1993, 1994 and 1995, the unaudited
financial statements of the Trust for the quarter ended March 31, 1996 and the
related unaudited pro forma consolidated financial statements for the year ended
December 31, 1995;
(v) reviewed the audited financial statements of the
Initial Properties and related management operations for the years ended
December 31, 1993, 1994 and 1995 and the unaudited financial statements of the
Initial Properties for the quarter ended March 31, 1996;
(vi) reviewed certain internal information, primarily
financial in nature, concerning the business and operations of Brandywine and
the Initial Properties;
(vii) reviewed certain publicly available information
concerning Brandywine;
(viii) reviewed cash flow forecasts of Brandywine and
the Initial Properties furnished to us by the senior management of Brandywine
and TNC;
(ix) reviewed certain publicly available financial
and stock market data with respect to operating statistics relating to selected
public companies that we deemed relevant to our inquiry;
(x) analyzed certain publicly available information
concerning the terms of selected merger and acquisition transactions that we
considered relevant to our inquiry;
B-2
<PAGE>
(xi) held meetings and discussions with certain
trustees, officers and employees of Brandywine, SSI and TNC concerning the
operations, financial condition and future prospects of the Trust and Operating
Partnership; and
(xii) conducted such other financial studies,
analyses and investigations and considered such other information as we deemed
appropriate.
In connection with our review, we have assumed and relied upon
the accuracy and completeness of all financial and other information supplied to
us by Brandywine and TNC or publicly available, and we have not independently
verified such information. We also have relied upon the management of Brandywine
and TNC as to the reasonableness and achievability of the financial projections
(and the assumptions and bases therefor) provided to us and, with your consent,
have assumed that such projections have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of management as
to the future operating performance of Brandywine. We have not been requested to
make, and have not made, a independent appraisal or evaluation of the assets,
properties, facilities or liabilities of Brandywine or TNC and we have not been
furnished with any such appraisal or evaluation. Further, this opinion is based
upon prevailing market conditions and other circumstances and conditions
existing on the date hereof.
It is understood that this letter is for the information of
Brandywine's Board of Trustees in their evaluation of the Transaction and our
opinion does not constitute a recommendation to any shareholder of the Company
as to how such shareholder should vote on the Transaction. This letter is not to
be quoted or referred to, in whole or in part, in any registration statement,
prospectus, or in any other document used in connection with the offering or
sale of securities, nor shall this letter be used for any other purposes,
without the prior written consent of Legg Mason Wood Walker, Incorporated;
provided that this opinion may be included in its entirety in any filing made by
Brandywine with the Securities and Exchange Commission with respect to the
Transaction and the transactions related thereto and as an appendix to
Brandywine's Proxy Statement furnished to Shareholders in connection with the
Transaction.
B-3
<PAGE>
Based upon and subject to the foregoing, we are of the opinion
that, as of the date hereof, the Transaction is fair to the stockholders of
Brandywine, from a financial point of view.
Very truly yours,
LEGG MASON WOOD WALKER,
INCORPORATED
By: /s/ Jeffrey Rogatz
-----------------------------
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<PAGE>
APPENDIX C
The Declaration of Trust of Brandywine Realty Trust (as
previously amended) is hereby amended as follows:
1. Section 6.1, captioned "Authorized Shares," is hereby
deleted in its entirety and replaced with the following new Section 6.1:
"Authorized Shares. The total number of shares of beneficial interest which the
Trust is authorized to issue is 80,000,000, of which 5,000,000 shares shall be
preferred shares, par value $.01 per share ("Preferred Shares"), and 75,000,000
shares shall be common shares, $.01 par value per share ("Common Shares")."
2. Paragraph (a) of Section 3.3, captioned "Certain Share
Issuances," is hereby deleted in its entirety, and Paragraphs (b), (c) and (d)
are relettered as Paragraphs (a), (b) and (c), respectively.
3. Paragraph (b) of Section 6.4, captioned "Mandatory
Distributions," is hereby deleted in its entirety.
4. A new Paragraph 3.2(o) is hereby added, which paragraph
shall read in its entirety as follows:
(o) Reverse Stock Splits. Upon the approval of not less than
80% of the Trustees, to cause the Shares of the Trust to be recapitalized or
consolidated by effectuating a reverse stock split of one or more series or
classes of Shares based upon a reverse stock split ratio (the "Ratio") approved
by not less than 80% of the Trustees, such that following the consummation of
such reverse stock split, each Share of the series or class(es) of Shares in
question will automatically, without vote of or other action by the
Shareholders, be deemed to be a fewer number of Shares computed in accordance
with such Ratio; and, if determined by the Trustees to be appropriate or
desirable, to cause any fractional Shares resulting therefrom to be canceled in
exchange for a cash payment equal to (x) with respect to Common Shares, the
"market value" of such Share determined in accordance with the provisions of
ss.3-601 et seq. of the Maryland General Corporation Law (computed for the
period ending on the business day prior to the effective date of such reverse
stock split), or for Shares other than Common Shares traded on the American
Stock Exchange, as determined by the Trustees in good faith, multiplied by (y)
the applicable fraction.
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<PAGE>
5. Paragraphs 3.2(o), (p), (q), (r), (s), (t), (u), (v), (w),
(x), (y), (z), (aa) and (ab) are relettered as Paragraphs 3.2(p), (q), (r), (s),
(t), (u), (v), (w), (x), (y), (z), (aa), (ab) and (ac) respectively.
6. Section 6.6, captioned "Restrictions on Ownership and
Transfer," is hereby deleted in its entirety and replaced with the following new
Sections 6.6, 6.7, 6.8 and 6.9:
SECTION 6.6 Restrictions on Ownership and Transfer: Exchange
For Excess Shares.
(a) Definitions. For the purposes of Sections 6.6,
6.7 and 6.8, the following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Shares either
directly or constructively through the application of Section 544 of the Code,
as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings. Accordingly, for purposes hereof, Beneficial Ownership shall be
calculated for any Person by dividing two numbers, (a) the number that is the
numerator being the sum of (i) such Person's ownership of outstanding Shares
plus (ii) the maximum number of Shares issuable upon the exercise or conversion
of outstanding warrants, preferred stock or other securities exercisable for or
convertible into Shares owned by such Person and (b) the number that is the
denominator being the sum of (i) all outstanding Shares plus (ii) the maximum
number of Shares issuable upon the exercise or conversion of outstanding
warrants, preferred stock or other securities exercisable for or convertible
into Shares owned by such Person; provided that the Board of Trustees shall
retain full authority to adopt such other approach to determining Beneficial
Ownership as it may deem appropriate. Notwithstanding the foregoing, for
purposes of determining compliance with this Section 6.6 by any Person to whom
the Trust issues an option or warrant (or any Shareholder of any such Person),
such option or warrant shall not be deemed to confer upon such Person Beneficial
Ownership or Constructive Ownership of the Shares issuable upon the exercise
thereof, and the Shares issuable upon the exercise thereof shall be excluded
from both the numerator and denominator of the foregoing calculation.
"Beneficiary" shall mean the beneficiary of the Special Trust
as determined pursuant to Section 6.8(e).
"Common Equity Shares" shall mean outstanding Shares
that are either Common Shares or Excess Common Shares.
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"Constructive Ownership" shall mean ownership of Shares either
directly or constructively through the application of Section 318(a) of the
Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive
Owner," "Constructively Owns" and "Constructively Owned" shall have the
correlative meanings. Accordingly, for purposes hereof, Constructive Ownership
shall be calculated for any Person by dividing two numbers, (a) the number that
is the numerator being the sum of (i) such Person's ownership of outstanding
Shares plus (ii) the maximum number of Shares issuable upon the exercise or
conversion of outstanding warrants, preferred stock or other securities
exercisable for or convertible into Shares owned by such Person and (b) the
number that is the denominator being the sum of (i) all outstanding Shares plus
(ii) the maximum number of Shares issuable upon the exercise or conversion of
outstanding warrants, preferred stock or other securities exercisable for or
convertible into Shares owned by such Person; provided that the Board of
Trustees shall retain full authority to adopt such other approach to determining
Constructive Ownership as it may deem appropriate. Notwithstanding the
foregoing, for purposes of determining compliance with Sections 6.6(b) and (c)
by any Person to whom the Trust issues an option or warrant (or any Shareholder
of any such Person), such option or warrant shall not be deemed to confer upon
such Person Beneficial Ownership or Constructive Ownership of the Shares
issuable upon the exercise thereof, and the Shares issuable upon the exercise
thereof shall be excluded from both the numerator and denominator of the
foregoing calculation.
"Event" shall have the meaning assigned to it in
Section 6.6(c).
"Excess Common Shares" shall mean Excess Shares that would,
under Section 6.8(e)(i), automatically be exchanged for Common Shares in the
event of a transfer of an interest in the Special Trust in which such Excess
Shares are held.
"Excess Preferred Shares" shall mean Excess Shares that would,
under Section 6.8(e)(i), automatically be exchanged for Preferred Shares in the
event of a transfer of an interest in the Special Trust in which such Excess
Shares are held.
"Excess Shares" shall mean, as applicable, Excess
Common Shares or Excess Preferred Shares.
"Exempt Parties" shall mean (i) (A) The Richard M. Osborne
Trust (the "Osborne Trust"), (B) Turkey Vulture Fund XIII, Ltd., (C) Richard M.
Osborne ("Osborne") and all of the members of Osborne's immediate family, as
such term is defined in Section 544(a)(2) of the Code and (D) any Section 544
Subsidiary
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of the entity or the individuals described in (A), (B) or (C), above (the
entities and individuals described in clauses (A), (B), (C) and (D) above being
collectively referred to herein as the "Osborne Affiliates"), (ii) Safeguard
Scientifics, Inc. and any Section 544 Subsidiary thereof (collectively, the "SSI
Affiliates") and (iii) The Nichols Company and any Section 544 Subsidiary
thereof (collectively, the "Nichols Affiliates"). The term "Exempt Party" shall
mean any of the foregoing.
"Market Price" shall mean the last reported sales price
reported on the American Stock Exchange of Shares on the trading day immediately
preceding the relevant date, or if the Shares are not then traded on the
American Stock Exchange, the last reported sales price of Shares on the trading
day immediately preceding the relevant date as reported on any exchange or
quotation system over which the Shares may be traded, or if the Shares are not
then traded over any exchange or quotation system, then the market price of the
Shares on the relevant date as determined in good faith by the Board of Trustees
of the Trust. The Market Price of the Common Shares shall be determined
separately from the Market Price of any outstanding class of Preferred Shares.
"Ownership Limit" shall mean 4.16% in value of the
outstanding Shares.
"Ownership Limitation Termination Date" shall mean the first
day after the date on which the Board of Trustees determines that it is no
longer in the best interests of the Trust to attempt to, or continue to, qualify
as a REIT.
"Permissible Ownership Threshold" shall mean as to the Osborne
Affiliates, the SSI Affiliates and The Nichols Affiliates, respectively, 33.33%,
35.25% and 9.25%; provided that, once an Exempt Party transfers Shares such that
such Exempt Party following such transfer Beneficially Owns and Constructively
Owns less in value than the Ownership Limit, then such Exempt Party's
Permissible Ownership Threshold shall equal the Ownership Limit; provided,
further, however, that the foregoing proviso shall not restrict SSI Affiliates
or Nichols Affiliates from acquiring Shares upon the redemption of Class A Units
issued to them by Brandywine Operating Partnership, L.P. if such acquisition
would not result in such SSI Affiliates or Nichols Affiliates exceeding the
applicable percentage (35.25% or 9.25%) specified above.
"Person" shall mean an individual, corporation, partnership,
limited liability company, estate, trust (including a trust qualified under
Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set
aside for or to be
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used exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity or any government or agency or
political subdivision thereof and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended,
but does not include an underwriter which participates in a public offering of
Shares for a period of 25 days following the purchase by such underwriter of
those Shares.
"Purported Beneficial Holder" shall mean, with respect to any
event other than a purported Transfer which results in Excess Shares, the person
for whom the Purported Record Holder of the Shares that were, pursuant to
Section 6.6(c), automatically exchanged for Excess Shares upon the occurrence of
such event held such Shares.
"Purported Beneficial Transferee" shall mean, with respect to
any purported Transfer which results in Excess Shares, the purported beneficial
transferee for whom the Purported Record Transferee would have acquired Shares,
if such Transfer had been valid under Section 6.6(b).
"Purported Record Holder" shall mean, with respect to any
event other than a purported Transfer which results in Excess Shares, the record
holder of the Shares that were, pursuant to Section 6.6(c), automatically
exchanged for Excess Shares upon the occurrence of such event.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, the record holder of the
Shares if such Transfer had been valid under Section 6.6(b).
"REIT" shall mean a real estate investment trust under Section
856 of the Code.
"Section 544 Subsidiary" of any individual or entity shall
mean any entity, over 50% of the ownership interest in which is owned, directly
or indirectly (applying the principles of Section 544 of the Code) by the
individual or entity in question.
"Special Trust" shall mean the trust created pursuant
to Section 6.8(a).
"Transfer" shall mean any issuance, sale, transfer, gift,
assignment, devise or other disposition of Shares or capital stock of any Person
(including (i) the granting of any
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option or entering into any agreement for the sale, transfer or other
disposition of Shares, (ii) the sale, transfer, exercise, assignment or other
disposition of any securities or rights convertible into or exchangeable for
Shares or (iii) the establishment of a put or the granting to a third party of a
call right with respect to Shares), whether voluntary or involuntary, whether of
record or beneficially and whether by operation of law or otherwise.
"Trustee" shall mean, for purposes of this Article VI only,
the Trust, as trustee for the Special Trust, and any successor trustee appointed
by the Trust.
(b) Restrictions on Ownership and Transfer.
(i) Except as provided in Section 6.6(k),
prior to the Ownership Limitation Termination Date, no Person (other than an
Exempt Party) shall Beneficially Own or Constructively Own any Shares to the
extent such ownership would exceed the Ownership Limit. In addition, except as
provided in Section 6.6(k), prior to the Ownership Limitation Termination Date,
no Exempt Party shall Beneficially Own or Constructively Own any Shares in
excess of the Permissible Ownership Threshold for such Exempt Party.
(ii) Except as provided in Section 6.6(k),
prior to the Ownership Limitation Termination Date, any Transfer that, if
effective, would result in any Person (other than an Exempt Party) Beneficially
Owning or Constructively Owning Shares in excess of the Ownership Limit shall be
void ab initio as to the Transfer of such Shares which would be otherwise
Beneficially Owned or Constructively Owned by such Person in excess of such
Ownership Limit; and the intended transferee shall acquire no rights in or to
such Shares.
(iii) Except as provided in Section 6.6(k),
prior to the Ownership Limitation Termination Date, any Transfer that, if
effective, would result in any Exempt Party Beneficially Owning or
Constructively Owning Shares in excess of the Permissible Ownership Threshold
for such Exempt Party shall be void ab initio as to the Transfer of such Shares
which would be otherwise Beneficially Owned or Constructively Owned by such
Exempt Party in excess of the Permissible Ownership Threshold for such Exempt
Party; and such Exempt Party shall acquire no rights in or to such Shares.
(iv) Prior to the Ownership Limitation
Termination Date, any Transfer that, if effective, would result in Shares being
beneficially owned by less than 100 Persons
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(determined without reference to any rules of attribution) shall be void ab
initio as to the Transfer of such Shares which would be otherwise beneficially
owned by the transferee; and the intended transferee shall acquire no rights in
such Shares.
(v) Prior to the Ownership Limitation
Termination Date, any Transfer that, if effective, would result in the Trust
being "closely held" within the meaning of Section 856(h) of the Code shall be
void ab initio as to the Transfer of the Shares which would cause the Trust to
be "closely held" within the meaning of Section 856(h) of the Code; and the
intended transferee shall acquire no rights in such Shares.
(vi) The Board of Trustees shall have the
authority to select the Ownership Limitation Termination Date.
(c) Exchange For Excess Stock.
(i) If, notwithstanding the other provisions
contained in this Section 6.6, at any time prior to the Ownership Limitation
Termination Date, there is a purported Transfer such that any Person (other than
an Exempt Party) would Beneficially Own or Constructively Own Shares in excess
of the Ownership Limit, then, except as otherwise provided in Section 6.6(k),
such number of Shares in excess of such Ownership Limit (rounded up to the
nearest whole Share) shall be automatically exchanged for an equal number of
shares of Excess Shares. Such exchange shall be effective as of the close of
business on the business day prior to the date of the Transfer.
(ii) If, notwithstanding the other
provisions contained in this Section 6.6, at any time prior to the Ownership
Limitation Termination Date, there is a purported Transfer such that an Exempt
Party would Beneficially Own or Constructively Own Shares in excess of the
applicable Permissible Ownership Threshold, then, except as otherwise provided
in Section 6.6(k), such number of Shares in excess of the applicable Permissible
Ownership Threshold (rounded up to the nearest whole Share) shall be
automatically exchanged for an equal number of Excess Shares. Such exchange
shall be effective as of the close of business on the business day prior to the
date of the Transfer.
(iii) If, notwithstanding the other
provisions contained in this Section 6.6, at any time prior to the Ownership
Limitation Termination Date, there is a purported Transfer which, if effective,
would cause the Trust to become "closely held" within the meaning of Section
856(h) of the Code, then the Shares being Transferred which would cause the
Trust to be "closely held" within the meaning of Section 856(h) of the Code
(rounded
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up to the nearest whole Share) shall be automatically exchanged for an equal
number of Excess Shares. Such exchange shall be effective as of the close of
business on the business day prior to the date of the Transfer.
(iv) If, notwithstanding the other
provisions contained in this Section 6.6, at any time prior to the Ownership
Limitation Termination Date, an event other than a purported Transfer (an
"Event") occurs which would (i) cause any Person (other than an Exempt Party) to
Beneficially Own or Constructively Own Shares in excess of the Ownership Limit,
or (ii) cause an Exempt Party to Beneficially Own or Constructively Own Shares
in excess of such Exempt Party's applicable Permissible Ownership Threshold,
then, except as otherwise provided in Section 6.6(k), Shares Beneficially Owned
or Constructively Owned by such Person or Exempt Party, as the case may be
(rounded up to the nearest whole Share), shall be automatically exchanged for an
equal number of Excess Shares to the extent necessary to eliminate such excess
ownership. Such exchange shall be effective as of the close of business on the
business day prior to the date of the Event. In determining which Shares are
exchanged, Shares directly held or Beneficially Owned by any Person who caused
the Event to occur shall be exchanged before any Shares not so held are
exchanged. Where several such Persons exist, the exchange shall be pro rata.
(d) Remedies For Breach. If the Board of Trustees or
its designee(s) shall at any time determine that a Transfer has taken place in
violation of Section 6.6(b) or that a Person intends to acquire or has attempted
to acquire beneficial ownership (determined without reference to any rules of
attribution) of any Shares that would result in Shares being beneficially owned
by less than 100 persons as contemplated by Section 6.6(b)(iv), or in Beneficial
Ownership or Constructive Ownership of any Shares in violation of Section
6.6(b), the Board of Trustees or its designees shall take such action as it
deems advisable to refuse to give effect to or to prevent such Transfer (or any
Transfer related to such intent), including, but not limited to, refusing to
give effect to such Transfer on the books of the Trust or instituting
proceedings to enjoin such Transfer; provided, however, that any Transfers or
attempted Transfers in violation of Sections 6.6(b)(ii), (iii), (iv) or (v)
shall automatically result in the exchange described in Section 6.6(c),
irrespective of any action (or non-action) by the Board of Trustees or its
designees.
(e) Notice of Ownership or Attempted Ownership in
Violation of Section 6.6(b). Any Person who acquires or attempts to acquire
Beneficial Ownership or Constructive Ownership of
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Shares in violation of Section 6.6(b) shall immediately give written notice to
the Trust of such acquisition or attempted acquisition and shall provide to the
Trust such other information as the Trust may request in order to determine the
effect, if any, of such acquisition or attempted acquisition on the Trust's
status as a REIT.
(f) Owners Required to Provide Information. Prior to
the Ownership Limitation Termination Date:
(i) every Beneficial Owner or Constructive
Owner of more than 4.0% in value of the outstanding Shares shall, within 30 days
after January 1 of each year, give written notice to the Trust stating the name
and address of such Beneficial Owner or Constructive Owner, the number of Shares
Beneficially Owned or Constructively Owned, and a description of how such Shares
are held. Each such Beneficial Owner or Constructive Owner shall provide to the
Trust such additional information as the Trust may request in order to determine
the effect, if any, of such Beneficial Ownership or Constructive Ownership on
the Trust's status as a REIT.
(ii) Each Person who is a Beneficial Owner
or Constructive Owner of Shares and each Person (including the shareholder of
record) who is holding Shares for a Beneficial Owner or Constructive Owner shall
provide to the Trust such information as the Trust may request in order to
determine the Trust's status as a REIT or to comply with regulations promulgated
under the REIT provisions of the Code.
(g) Remedies Not Limited. Nothing contained in this
Section 6.6 shall limit the authority of the Board of Trustees to take such
other action as it deems necessary or advisable to protect the Trust and the
interests of its Shareholders by preserving the Trust's REIT status.
(h) Ambiguity. In the case of an ambiguity in the
application of any of the provisions of this Article VI including any definition
contained in Section 6.6(a) and any ambiguity with respect to which Shares are
to be exchanged for Excess Shares in a given situation, the Board of Trustees
shall have the authority to determine the application of the provisions of this
Section 6.6 with respect to any situation based on the facts known to it.
(i) Increase in Ownership Limit. Subject to the
limitations provided in Section 6.6(j), the Board of Trustees may from time to
time increase the Ownership Limit.
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(j) Limitations on Modifications.
(i) The Ownership Limit may not be increased
if, after giving effect to such increase, five Beneficial Owners of Shares would
Beneficially Own, in the aggregate, more than 49.9% of the outstanding Shares.
(ii) Prior to an increase in the Ownership
Limit pursuant to Section 6.6(i), the Board of Trustees may require such
opinions of counsel or the Trust's tax accountants, affidavits, undertakings or
agreements as it may deem necessary or advisable in order to determine or ensure
the Trust's status as a REIT.
(k) Exceptions. The Board of Trustees, with a ruling
from the Internal Revenue Service or an opinion of counsel or the Trust's tax
accountants to the effect that such exemption will not result in the Trust being
"closely held" within the meaning of Section 856(h) of the Code, may exempt a
Person from the Ownership Limit or the Permissible Ownership Threshold, as the
case may be, if the Board of Trustees obtains such representations and
undertakings from such Person as the Board of Trustees may deem appropriate and
such Person agrees that any violation or attempted violation of any of such
representations or undertakings will result in, to the extent necessary or
otherwise deemed appropriate by the Board of Trustees, the exchange of Shares
held by such Person for Excess Shares in accordance with Section 6.6(c).
(l) American Stock Exchange Transactions. Nothing in
this Section 6.6 shall preclude the settlement of any transaction entered into
through the facilities of the American Stock Exchange, any successor exchange or
quotation system thereto, or any other exchange or quotation system over which
the Shares may be traded from time to time.
SECTION 6.7 Legend. (a) Each certificate for Common
Shares hereafter issued shall bear the following legend:
"The Common Shares represented by this certificate
are subject to restrictions on ownership and transfer for the
purpose of the Trust's maintenance of its status as a real
estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"). No Person may Beneficially Own
or Constructively Own Shares in excess of 4.16% in value (or
such greater percentage as may be determined by the Board of
Trustees) of the outstanding Shares of the Trust (unless such
Person is an Exempt Party). No Person who
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is an Exempt Party may Beneficially Own or Constructively Own
Shares in excess of the Permissible Ownership Threshold for
such Exempt Party. Any Person who attempts to Beneficially Own
or Constructively Own Shares in excess of the above
limitations must immediately notify the Trust. All capitalized
terms used in this legend have the meanings set forth in the
Declaration of Trust, a copy of which, including the
restrictions on ownership and transfer, will be sent without
charge to each Shareholder who so requests. If the
restrictions on ownership and transfer are violated, the
Common Shares represented hereby will be automatically
exchanged for Excess Shares which will be held in trust by the
Trust."
(b) Each certificate for Preferred Shares hereafter
issued shall bear the following legend:
"The Preferred Shares represented by this certificate
are subject to restrictions on ownership and transfer for the
purpose of the Trust's maintenance of its status as a real
estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"). No Person may Beneficially Own
or Constructively Own Shares in excess of 4.16% in value (or
such greater percentage as may be determined by the Board of
Trustees) of the outstanding Shares of the Trust (unless such
Person is an Exempt Party). No Person who is an Exempt Party
may Beneficially Own or Constructively Own Shares in excess of
the Permissible Ownership Threshold for such Exempt Party. Any
Person who attempts to Beneficially Own or Constructively Own
Shares in excess of the above limitations must immediately
notify the Trust. All capitalized terms used in this legend
have the meanings set forth in the Declaration of Trust, a
copy of which, including the restrictions on ownership and
transfer, will be sent without charge to each Shareholder who
so requests. If the restrictions on ownership and transfer are
violated, the Preferred Shares represented hereby will be
automatically exchanged for Excess Shares which will be held
in trust by the Trust."
SECTION 6.8 Excess Shares.
(a) Ownership in Trust. Upon any purported Transfer
or Event that results in an exchange of Shares for Excess Shares pursuant to
Section 6.6(c), such Excess Shares shall be deemed to have been transferred to
the Trust, as Trustee
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of a Special Trust for the exclusive benefit of the Beneficiary or Beneficiaries
to whom an interest in such Excess Shares may later be transferred pursuant to
Section 6.8(e). Excess Shares so held in trust shall be issued and outstanding
Shares of the Trust. The Purported Record Transferee or Purported Record Holder
shall have no rights in such Excess Shares except as and to the extent provided
in Section 6.8(e).
(b) Dividend Rights. Excess Shares shall not be
entitled to any dividends or distributions. Any dividend or distribution paid
prior to the discovery by the Trust that the Shares with respect to which the
dividend or distribution was made had been exchanged for Excess Shares shall be
repaid to the Trust upon demand.
(c) Rights Upon Liquidation. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of, or any
distribution of the assets of, the Trust, (i) subject to the preferential rights
of the Preferred Shares, if any, as may be determined by the Board of Trustees
pursuant to Section 6.3 and the preferential rights of the Excess Preferred
Shares, if any, each holder of Excess Common Shares shall be entitled to
receive, ratably with each other holder of Common Shares and Excess Common
Shares, that portion of the assets of the Trust available for distribution to
the holders of Common Shares or Excess Common Shares which bears the same
relation to the total amount of such assets of the Trust as the number of Excess
Common Shares held by such holder bears to the total number of Common Shares and
Excess Common Shares then outstanding and (ii) each holder of Excess Preferred
Shares shall be entitled to receive that portion of the assets of the Trust
which a holder of the Preferred Shares that were exchanged for such Excess
Preferred Shares would have been entitled to receive had such Preferred Shares
remained outstanding. The Trust, as holder of the Excess Shares in trust, or if
the Trust shall have been dissolved, any trustee appointed by the Trust prior to
its dissolution, shall distribute ratably to the Beneficiaries of the Special
Trust, when determined, any such assets received in respect of the Excess Shares
in any liquidation, dissolution or winding up of, or any distribution of the
assets of the Trust.
(d) Voting Rights. The holders of Excess Shares shall
not be entitled to vote on any matters (except as required by law).
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(e) Restrictions On Transfer: Designation of
Beneficiary.
(i) Excess Shares shall not be
transferrable. The Purported Record Transferee or Purported Record Holder may
freely designate a Beneficiary of an interest in the Special Trust (representing
the number of Excess Shares held by the Special Trust attributable to a
purported Transfer or Event that resulted in the Excess Shares) if (i) the
Excess Shares held in the Special Trust would not be Excess Shares in the hands
of such Beneficiary and (ii) the Purported Beneficial Transferee or Purported
Beneficial Holder does not receive a price, as determined on a Share-by-Share
basis, for designating such Beneficiary that reflects a price for such Excess
Shares that, (I) in the case of a Purported Beneficial Transferee, exceeds (x)
the price such Purported Beneficial Transferee paid for the Shares in the
purported Transfer that resulted in the exchanges of Shares for Excess Shares,
or (y) if the Purported Beneficial Transferee did not give value for such Shares
(having received such Shares pursuant to a gift, devise or other transaction),
the Market Price of such Shares on the date of the purported Transfer that
resulted in the exchange of Shares for Excess Shares or (II) in the case of a
Purported Beneficial Holder, exceeds the Market Price of the Shares that were
automatically exchanged for such Excess Shares on the date of such exchange.
Upon such a transfer of an interest in the Special Trust, the corresponding
shares of Excess Shares in the Special Trust shall be automatically exchanged
for an equal number of Common Shares or Preferred Shares (depending upon the
type of Shares that were originally exchanged for such Excess Shares) and such
Common Shares or Preferred Shares shall be transferred of record to the
transferee of the interest in the Special Trust if such Common Shares or
Preferred Shares would not be Excess Shares in the hands of such transferee.
Prior to any transfer of any interest in the Special Trust, the Purported Record
Transferee or Purported Record Holder, as the case may be, must give advance
notice to the Trust of the intended transfer and the Trust must have waived in
writing its purchase rights under Section 6.8(f).
(ii) Notwithstanding the foregoing, if a
Purported Beneficial Transferee or Purported Beneficial Holder receives a price
for designating a Beneficiary of an interest in the Special Trust that exceeds
the amounts allowable under Section 6.8(e)(i), such Purported Beneficial
Transferee or Purported Beneficial Holder shall pay, or cause such Beneficiary
to pay, such excess to the Trust.
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(f) Purchase Right in Excess Shares. Excess Shares
shall be deemed to have been offered for sale to the Trust, or its designee, at
a price per share equal to, (I) in the case of Excess Shares resulting from a
purported Transfer, the lesser of (i) the price per share in the transaction
that created such Excess Shares (or, in the case of a gift, devise or other
transaction, the Market Price at the time of such gift, devise or other
transaction) or (ii) the Market Price on the date the Trust, or its designee,
accepts such offer or (II) in the case of Excess Shares created by an Event, the
lesser of (i) the Market Price of the Shares originally exchanged for the Excess
Shares on the date of such exchange or (ii) the Market Price of such Shares on
the date the Trust, or its designee, accepts such offer. The Trust shall have
the right to accept such offer for a period of ninety (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 Trust does not receive a
notice of any such Transfer pursuant to Section 6.6(e).
SECTION 6.9 Severability; Agent for Trust. If any provision of
Section 6.6, 6.7 or 6.8 or any application of any such provision is determined
to be invalid by any federal or state court having jurisdiction over the issues,
the validity of the remaining provisions shall not be affected and other
applications of such provision shall be affected only to the extent necessary to
comply with the determination of such court. In any event, to the extent such
court holds the Purported Record Transferee to be the record and beneficial
owner of Shares which, had the provisions of Sections 6.6, 6.7 and 6.8 been
enforced, would have been exchanged for Excess Shares, such Purported Record
Transferee shall be deemed, at the option of the Trust, to have acted as agent
on behalf of the Trust in acquiring such transferred Shares and to hold such
Shares on behalf of the Trust.
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APPENDIX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A (Amendment 1)
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
----------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________________ to ____________________
Commission file number 1-9106
----------------------------
Brandywine Realty Trust
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 23-2413352
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer)
incorporation or organization Identification No.)
Two Greentree Centre, Suite 100, Marlton, New Jersey, 08053
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (609)797-0200
-------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------------- -------------------------
Shares of Beneficial Interest American Stock Exchange
(par value $0.01 per share)
-------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
-------------------------------------------------------------
(Title of class)
-------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $5,619,000 as of March 4, 1996. The aggregate market value has
been computed by reference to the closing price at which the stock was sold on
the American Stock Exchange on such date. A total of 1,856,200 Shares of
Beneficial Interest were outstanding as of March 4, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
TABLE OF CONTENTS
FORM 10-K
PART I Item
1. Business
Industry Segment
Competition
Geographic Analysis of Revenue
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for Shares and Related Shareholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
10. Trustees and Executive Officers
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners
and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
SIGNATURES OF REGISTRANT
INDEX TO EXHIBITS
<PAGE>
PART I
Item 1. Business
Brandywine Realty Trust (the "Trust"), a Maryland real estate investment trust,
was organized in 1986. The Trust's principal asset is its 70% general partner
interest in Brandywine Realty Partners ("Brandywine"), a Pennsylvania general
partnership which was formed in 1986 for the purpose of owning and operating
office and industrial real estate projects (the "Specified Projects"). The other
general partner of Brandywine is Brandywine Specified Property Investors Limited
Partnership, ("BSPI"), a Pennsylvania limited partnership which owns a 30%
interest in Brandywine. Effective January 1, 1994, the Trust was designated as
Brandywine's administrative partner and now has substantial control and
authority with respect to the business and affairs of Brandywine, including
complete discretion with respect to the sale or refinancing of any and all of
the Specified Projects, without having to obtain either the consent of BSPI or
BSPI's limited partners.
At December 31, 1995, the Trust's portfolio includes four Specified Projects.
See Item 8, Note 5 to the Financial Statements of the Trust for a discussion of
the terms of the mortgage loans on the Specified Projects.
As of December 31, 1995, the Trust had three full-time employees. Effective
February 1, 1995, the Trust 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 1995, the Trustees have considered, and expect to continue to consider,
potential acquisitions by the Trust of additional real estate and real
estate-related interests and potential third party equity and debt investments
in the Trust. At the current time the Trust is actively pursuing the potential
acquisition of additional real estate and evaluating third party equity and debt
investments in the Trust. The Trust's business plan contemplates a focus on
office and industrial projects in the greater Philadelphia, Pennsylvania area.
However, there can be no assurance that the Trust will make an acquisition of
additional real estate or real estate-related interests or that any such
acquisitions will produce satisfactory returns for the Trust. Similarly, there
can be no assurance that the Trust will consummate any third party equity or
debt investments in the Trust or that any investments that might be made in the
Trust would enable the Trust to generate greater returns for the Shareholders.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
On March 20, 1996, the Trust entered into a Letter of Intent (the "Letter") with
Safeguard Scientifics, Inc. ("SSI") and SSI's real estate affiliate, The Nichols
Company ("TNC"). As of this date, definitive documentation of such transaction
has not been negotiated. Accordingly, there can be no assurance that definitive
documentation will be executed or that the terms on which definitive documents
are completed will not differ from the terms summarized herein.
The Letter contemplates an approximately $4.36 million investment in the Trust
by SSI in the form of real estate interests and cash. The Trust will issue to
SSI 775,000 common shares ("Shares") at a per share price of $5.50 and six year
warrants exercisable for an additional 775,000 Shares at a per share exercise
price of $6.50. In exchange for the Shares and warrants, the Trust will receive
approximately $426,000 in cash and SSI's interest in a partnership with TNC and
its affiliates that own eight suburban office/industrial buildings aggregating
approximately 560,000 square feet. The Trust, SSI and TNC have valued the SSI
interest that the Trust is acquiring at approximately $3.9 million. In addition,
SSI, TNC and certain affiliates will contribute ten properties aggregating
approximately 394,000 square feet to a partnership with the Trust and the Trust
will enter into an option agreement with TNC and certain of its affiliates to
acquire an additional five properties aggregating approximately 189,000 square
feet. In total, the transaction involves 23 properties aggregating approximately
1.14 million square feet.
The Letter further contemplates that approximately 1,243,000 units in the
partnership(s) owning the 18 properties (each of which units would be
convertible after two years and subject to satisfaction of certain conditions
into one Share) would be issued at closing on account of the agreed-upon net
equity in such properties, with each unit having a stated value of $5.50.
Additional units would be issued in the event that the debt encumbering certain
of such properties is refinanced at a discount. Additional units would also be
issued if the Trust were to exercise its option to acquire the additional five
properties.
4
<PAGE>
In addition to the property transactions, the Letter provides that SSI and TNC
would contribute their property management, development and leasing operations
to an affiliate of the Trust, and that Warren Musser, CEO of SSI, Walter
D'Allessio, CEO of Legg Mason Realty Services, and Anthony A. Nichols, Sr.,
President of TNC, would be added to the Trust's Board of Trustees. Following
completion of the transaction, Gerard H. Sweeney will continue as a Trustee and
as the Trust's President and Chief Executive Officer. The Letter contemplates
that three executives of TNC will enter into two-year employment agreements with
the Trust and will be granted warrants covering an aggregate of 400,000 Shares
at a per share exercise price of $6.50.
The Trust has engaged Legg Mason Wood Walker, Incorporated as its financial
advisor on this transaction.
The transaction contemplated by the Letter is subject to customary conditions,
including completion of due diligence, negotiation and execution of definitive
documentation, required third party approvals, receipt by the Board of Trustees
of a fairness opinion from its financial advisor and approval by the Trust's
shareholders. The transaction is also subject to a combined debt and equity
investment of approximately $1.3 million in the Trust by Richard M. Osborne, a
Trustee of the Trust, on pricing terms comparable to the terms on which SSI will
be acquiring its Shares. Proceeds of Mr. Osborne's investment would be used for
general trust purposes, including working capital. As of this date, the Trust
and Mr. Osborne have not entered into a binding agreement providing for an
investment by him in the Trust. Such investment will not be subject to
shareholder approval. The transaction with SSI and TNC is expected to be
submitted to the Trust's shareholders in mid-1996.
The transaction described above will involve risks customarily associated with
equity investments in real estate such as, for example: (i) the potential
adverse impact on future distributions if funds generated from operations are
insufficient to maintain the current level of distributions on the outstanding
Shares and additional Shares that will be issued; (ii) the reduction in the
level of control possessed by the current shareholders; (iii) the significant
concentration of ownership in a small number of shareholders and their
corresponding ability to influence the affairs of the Trust; (iv) the risk of
future vacancies in the properties; (v) the inability of the Trust to refinance
the indebtedness encumbering the properties at attractive rates; and (vi) the
need to obtain additional working capital to maintain and operate both the
additional properties and the Trust's current properties.
On March 20, 1996, the Trust entered into an agreement (the "Osborne Agreement")
with Richard M. Osborne ("RMO") and the Richard M. Osborne Trust (the "RMO
Trust" and collectively with RMO, the "Holders"). RMO is, as indicated above,
currently a Trustee of the Trust and is the sole trustee of the RMO Trust, which
RMO formed for estate planning purposes. The RMO Trust is currently the
beneficial owner of 538,800 Shares or approximately 29% of the Trust's
outstanding Shares.
In the Osborne Agreement, the Trust agreed, subject to certain conditions, to:
(i) nominate RMO for reelection to the Board of Trustees for as long as the
Holders are the beneficial owners of at least 10% of the outstanding Shares and
(ii) waive the statutory right of the Trust to redeem the Shares of the Holders,
whether now owned or hereafter acquired, for the fair value thereof. In the
Osborne Agreement, the Holders agreed, subject to certain conditions, to: (i)
limit their ownership of Shares and securities convertible into Shares to
approximately one-third of the outstanding Shares; (ii) refrain from engaging in
proxy solicitations in opposition to a majority of the Board of Trustees; (iii)
vote their Shares consistent with the recommendation of a majority of the Board
of Trustees on any matter submitted to a vote of shareholders other than on
matters involving a merger, consolidation or liquidation of the Trust or any
amendments to the Trust's Declaration of Trust which adversely affect the rights
of shareholders; (iv) dispose of their Shares only under certain circumstances;
and (v) not to pursue any action which may disqualify the Trust's REIT status.
The Osborne Agreement has a three year term but is subject to earlier
termination under certain circumstances, including upon completion of an equity
offering achieving certain targets.
The summary of the Osborne Agreement is qualified by reference to the full text
of the Osborne Agreement, a copy of which is included as an exhibit to this Form
10-K.
5
<PAGE>
Industry Segment
The Trust is currently engaged in a single industry segment -- investment in
office real estate projects. Space is leased in the Specified Projects to
approximately 70 tenants. The Specified Projects are primarily leased for office
purposes. During 1995, Parker, McCay & Criscuolo in Three Greentree Centre
represented 10% of the portfolio's total square footage and 10% of the
portfolio's total rental revenue and American Executive Center in One Greentree
Centre represented 7% of the portfolio's total square footage and 10% of the
portfolio's total rental revenue. Substantially all of the Trust's revenues are
derived from tenant rental revenue and tenant reimbursements of expenses of the
Specified Projects. The Trust's business is not seasonal.
Competition
The four Specified Projects held by the Trust 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. See
Item 2, "Properties," for a discussion of occupancy rates and other information
relevant to the competitive position of each of the Specified Projects.
Geographic Analysis of Revenue
The geographic breakdown of the Trust's gross revenue and square footage for
1995 is as follows:
<TABLE>
<CAPTION>
Gross Revenue Square Feet
----------------- --------------
<S> <C> <C>
Marlton, New Jersey (three properties in the
greater Philadelphia area) $2,557,000 181,137
Raleigh, North Carolina 1,026,000 73,415
----------------- --------------
Total rentals and tenant reimbursements 3,583,000 254,552
----------------- --------------
Other income 83,000
----------------- --------------
Total $3,666,000 254,552
================= ==============
</TABLE>
Item 2. Properties
At December 31, 1995, the Trust's four Specified Projects are office projects.
As of January 31, 1996, the overall occupancy rate of the Specified Projects was
approximately 97% as compared to 86% one year earlier. As of January 31, 1996,
existing leases totaling approximately 78,000 square feet, or 31% of the total
square feet, were scheduled to expire during 1996. However, subsequent to
January 31, 1996, two tenants renewed their leases, each for five year terms,
representing total space of approximately 13,000 square feet. In management's
opinion, the properties are adequately covered by insurance.
The principal provisions of the Trust's two major tenants are as follows:
<TABLE>
<CAPTION>
One Greentree Centre Three Greentree Centre
- ----------------------------- ----------------------------
<S> <C>
American Executive Center Parker McCay & Criscuolo
Inception date; February 1, 1983 Inception date; February 1, 1984
Rent per annum for the year ended Rent per annum for the year ended
December 31, 1995; $336,000 December 31, 1995; $363,000
Lease expires; January 31, 2007 Lease expires; May 31, 1999
Renewal options; One period of ten (10) years. Renewal options; Two successive five (5) year terms
</TABLE>
See Schedule III to the Trust's financial statements which provides a summary of
the properties. See Note 10 to the Trust's financial statements which provides a
schedule of lease expirations. The Specified Projects are described below.
6
<PAGE>
South New Jersey Office Projects -- Marlton, New Jersey
One Greentree Centre
One Greentree Centre is located at the northeast corner of Route 73 and
Greentree Road in Marlton, New Jersey. The project is a three-story, mid-rise
building consisting of approximately 56,000 square feet of net leasable area and
is situated, together with its sister building, Two Greentree Centre, on
approximately 8.3 acres of land. Exterior construction consists of brick and
dryvit with bronze tinted windows. The grounds surrounding One Greentree Centre
feature abundant landscaping and ample parking (4.4 spaces per 1,000 square
feet). Real estate taxes for the property for the year ended December 31, 1995
totaled $96,000. Occupancy of One Greentree Centre commenced in August 1982 and
was 91% as of January 31, 1996. As of January 31, 1996, existing leases totaling
approximately 13,000 square feet were scheduled to expire during 1996. However,
subsequent to January 31, 1996, a single tenant renewed 8,000 square feet for a
five year term.
The following table sets forth the occupancy rate and average annual base rent
per leased square foot of total leaseable square feet of One Greentree Centre
during the periods specified:
<TABLE>
<CAPTION>
One Greentree Centre
Occupancy and Rental Rates
Year Percentage leased Average Annual Effective Rental Rate
(At December 31) at Period End (1) Per Leased Square Foot (2) Total Annual Rental Revenue (3)
------------------ ------------------------------------ -------------------------------
<S> <C> <C> <C>
1995 91% $17.62 $908,000
1994 93% 15.78 853,000
1993 100% 15.17 835,000
1992 97% 14.84 738,000
1991 81% 15.75 763,000
</TABLE>
(1) Percentage leased is as of January 31, following December 31 period end for
all years presented.
(2) Calculated as total annual rental revenue divided by the average total
leased square feet, averaging period beginning and end leasing status.
(3) Represents rental revenue for financial reporting purposes which is
determined on a straight-line basis.
- ------------------------------------------------------------------------------
The following table shows scheduled lease expirations for leases in place at
December 31, 1995 for each of the next ten years beginning January 1, 1996
assuming none of the tenants exercises renewal options or termination rights, if
any:
<TABLE>
<CAPTION>
One Greentree Centre
Lease Expirations
Total Annual Base Percentage of Total
Leaseable Square Annual Base Rent Rent per Square Annual Base Rent
Year of Lease Number of Leases Feet Subject to Under Expiring Foot Under Represented by
Expiration Expiring Expiring Leases Leases Expiring Leases Expiring Leases
------------- ----------------- ----------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
1996 5 14,000 $107,000 $ 7.84 14.40%
1997 4 14,000 226,000 16.18 30.44%
1998 3 6,000 96,000 15.53 12.88%
1999 0 0 0 0.00 0.00%
2000 0 0 0 0.00 0.00%
2001 0 0 0 0.00 0.00%
2002 0 0 0 0.00 0.00%
2003 0 0 0 0.00 0.00%
2004 0 0 0 0.00 0.00%
2005 0 0 0 0.00 0.00%
2006 1 17,000 315,000 18.67 42.28%
======= ======== ========= ======= =======
13 51,000 $744,000 $14.68 100.00%
======= ======== ========= ======= =======
</TABLE>
The aggregate tax basis for federal income tax purposes of One Greentree Centre
is $7,436,000 as of December 31, 1995. Of this amount, approximately $751,000
represents land, $5,667,000 represents real property depreciated over a 19 year
life, approximately $617,000 represents real property depreciated over a 31-1/2
year life and the balance of approximately $401,000 represents real property
depreciated over a 40 year life.
7
<PAGE>
Two Greentree Centre
Two Greentree Centre is located at the northeast corner of Route 73 and
Greentree Road in Marlton, New Jersey. The project is a three-story, mid-rise
building consisting of approximately 56,000 square feet of net leasable area and
is situated, together with its sister building, One Greentree Centre, on
approximately 8.3 acres of land. Exterior construction consists of brick and
dryvit with bronze tinted windows. The grounds surrounding Two Greentree Centre
feature abundant landscaping and ample parking (4.3 spaces per 1,000 square
feet). Real estate taxes for the property for the year ended December 31, 1995
totaled $96,000. Occupancy of Two Greentree Centre commenced in July 1983 and
was 100% as of January 31, 1996. As of January 31, 1996, a single lease totaling
approximately 5,000 square feet was scheduled to expire during 1996. However,
subsequent to January 31, 1996, this lease was renewed for a three year term.
The following table sets forth the occupancy rate and average annual base rent
per leased square foot of total leaseable square feet of Two Greentree Centre
during the periods specified:
<TABLE>
<CAPTION>
Two Greentree Centre
Occupancy and Rental Rates
Year Percentage leased Average Annual Effective Rental Rate
(At December 31) at Period End (1) Per Leased Square Foot (2) Total Annual Rental Revenue (3)
------------------ ------------------------------------ -------------------------------
<S> <C> <C> <C>
1995 100% $13.60 $666,000
1994 75% 16.06 693,000
1993 79% 17.72 810,000
1992 84% 16.90 791,000
1991 83% 15.73 746,000
</TABLE>
(1) Percentage leased is as of January 31, following December 31 period end for
all years presented.
(2) Calculated as total annual rental revenue divided by the average total
leased square feet, averaging period beginning and end leasing status.
(3) Represents rental revenue for financial reporting purposes which is
determined on a straight-line basis.
The following table shows scheduled lease expirations for leases in place at
December 31, 1995 for each of the next ten years beginning January 1, 1996
assuming none of the tenants exercises renewal options or termination rights, if
any:
<TABLE>
<CAPTION>
Two Greentree Centre
Lease Expirations
Total Annual Base Percentage of Total
Leaseable Square Annual Base Rent Rent per Square Annual Base Rent
Year of Lease Number of Leases Feet Subject to Under Expiring Foot Under Represented by
Expiration Expiring Expiring Leases Leases Expiring Leases Expiring Leases
------------- ----------------- ----------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
1996 3 6,000 $ 17,000 $ 2.70 1.95%
1997 3 14,000 215,000 15.29 25.03%
1998 1 3,000 44,000 19.20 5,10%
1999 1 3,000 51,000 0.00 5.92%
2000 1 6,000 87,000 15.35 10.13%
2001 0 0 0 0.00 0.00%
2002 0 0 0 0.00 0.00%
2003 1 5,000 97,000 18.50 11.30%
2004 0 0 0 0.00 0.00%
2005 2 19,000 349,000 18.00 40.57%
2006 0 0 0 0.00 0.00%
======= ======== ========= ======= =======
12 56,000 $860,000 $15.34 100.00%
======= ======== ========= ======= =======
</TABLE>
The aggregate tax basis for federal income tax purposes of Two Greentree Centre
is $8,030,000 as of December 31, 1995. Of this amount, approximately $744,000
represents land, approximately $5,795,000 represents real property depreciated
over a 19 year life, approximately $594,000 represents real property depreciated
over a 31-1/2 year life and the balance of approximately $897,000 represents
real property depreciated over a 40 year life.
8
<PAGE>
Three Greentree Centre
Three Greentree Centre is located at the southwest corner of Route 73 and
Greentree Road in Marlton, New Jersey. The project is a four-story, mid-rise
building consisting of approximately 69,000 square feet of net leasable area, is
the third of five mid-rise buildings to occupy the Greentree Complex and is
situated on approximately 5.4 acres of land. Exterior construction consists of
brick and dryvit with bronze tinted windows. Interior amenities include a
two-story lobby with open staircase to second floor. The project also features
abundant landscaping and ample parking (5.2 spaces per 1,000 square feet). Real
estate taxes for the property for the year ended December 31, 1995 totaled
$139,000. Occupancy of Three Greentree Centre commenced in February 1984 and was
99% as of January 31, 1996. As of January 31, 1996, existing leases totaling
approximately 17,000 square feet were scheduled to expire during 1996.
The following table sets forth the occupancy rate and average annual base rent
per leased square foot of total leaseable square feet of Three Greentree Centre
during the periods specified:
<TABLE>
<CAPTION>
Three Greentree Centre
Occupancy and Rental Rates
Year Percentage leased Average Annual Effective Rental Rate
(At December 31) at Period End (1) Per Leased Square Foot (2) Total Annual Rental Revenue (3)
------------------ ------------------------------------ -------------------------------
<S> <C> <C> <C>
1995 99% $15.41 $920,000
1994 74% 15.71 943,000
1993 100% 17.12 1,151,000
1992 95% 17.32 1,164,000
1991 100% 17.07 1,178,000
</TABLE>
(1) Percentage leased is as of January 31, following December 31 period end for
all years presented.
(2) Calculated as total annual rental revenue divided by the average total
leased square feet, averaging period beginning and end leasing status.
(3) Represents rental revenue for financial reporting purposes which is
determined on a straight-line basis.
The following table shows scheduled lease expirations for leases in place at
December 31, 1995 for each of the next ten years beginning January 1, 1996
assuming none of the tenants exercises renewal options or termination rights, if
any:
<TABLE>
<CAPTION>
Three Greentree Centre
Lease Expirations
Total Annual Base Percentage of Total
Leaseable Square Annual Base Rent Rent per Square Annual Base Rent
Year of Lease Number of Leases Feet Subject to Under Expiring Foot Under Represented by
Expiration Expiring Expiring Leases Leases Expiring Leases Expiring Leases
------------- ----------------- ----------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
1996 4 17,000 $133,000 $ 7.80 13.50%
1997 1 13,000 227,000 17.48 23.05%
1998 0 0 0 0.00 0.00%
1999 0 0 0 0.00 0.00%
2000 2 12,000 218,000 17.83 22.22%
2001 1 26,000 406,000 15.66 41.23%
2002 0 0 0 0.00 0.00%
2003 0 0 0 0.00 0.00%
2004 0 0 0 0.00 0.00%
2005 0 0 0 0.00 0.00%
2006 0 0 0 0.00 0.00%
======= ======== ========= ======= =======
8 68,000 $984,000 $14.44 100.00%
======= ======== ========= ======= =======
</TABLE>
The aggregate tax basis for federal income tax purposes of Three Greentree
Centre is $10,170,000 as of December 31, 1995. Of this amount, approximately
$987,000 represents land, approximately $7,626,000 represents real property
depreciated over a 19 year life, approximately $423,000 represents real property
depreciated over a 31-1/2 year life and the balance of approximately $1,134,000
represents real property depreciated over a 40 year life.
9
<PAGE>
Raleigh Office Project -- Raleigh, North Carolina
Twin Forks
Twin Forks is a red brick five building complex located at Six Forks Road and
Lynn Road in Raleigh, North Carolina. The buildings in Twin Forks contain in the
aggregate approximately 73,000 square feet of net leasable space situated on
approximately 9.1 acres of land and provide a parking ratio of 4.0 spaces per
1,000 square feet. Real estate taxes for the property for the year ended
December 31, 1995 totaled $60,000. Occupancy of Twin Forks commenced in November
1982 and was 97% as of January 31, 1996. As of January 31, 1996, existing leases
totaling approximately 43,000 square feet were scheduled to expire during 1996.
The following table sets forth the occupancy rate and average annual base rent
per leased square foot of total leaseable square feet of Twin Forks Greentree
Centre during the periods specified:
<TABLE>
<CAPTION>
Twin Forks
Occupancy and Rental Rates
Year Percentage leased Average Annual Effective Rental Rate
(At December 31) at Period End (1) Per Leased Square Foot (2) Total Annual Rental Revenue (3)
------------------ ------------------------------------ -------------------------------
<S> <C> <C> <C>
1995 97% $14.23 $1,023,000
1994 100% 12.75 917,000
1993 97% 11.08 769,000
1992 93% 12.10 815,000
1991 92% 10.98 620,000
</TABLE>
(1) Percentage leased is as of January 31, following December 31 period end for
all years presented.
(2) Calculated as total annual rental revenue divided by the average total
leased square feet, averaging period beginning and end leasing status.
(3) Represents rental revenue for financial reporting purposes which is
determined on a straight-line basis.
- -------------------------------------------------------------------------------
The following table shows scheduled lease expirations for leases in place at
December 31, 1995 for each of the next ten years beginning January 1, 1996
assuming none of the tenants exercises renewal options or termination rights, if
any:
<TABLE>
<CAPTION>
Twin Forks
Lease Expirations
Total Annual Base Percentage of Total
Leaseable Square Annual Base Rent Rent per Square Annual Base Rent
Year of Lease Number of Leases Feet Subject to Under Expiring Foot Under Represented by
Expiration Expiring Expiring Leases Leases Expiring Leases Expiring Leases
------------- ----------------- ----------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
1996 21 43,000 $411,000 $ 9.60 51.66%
1997 12 19,000 264,000 13.61 33.12%
1998 3 3,000 44,000 13.96 5.58%
1999 3 6,000 77,000 13.59 9.64%
2000 0 0 0 0.00 0.00%
2001 0 0 0 0.00 0.00%
2002 0 0 0 0.00 0.00%
2003 0 0 0 0.00 0.00%
2004 0 0 0 0.00 0.00%
2005 0 0 0 0.00 0.00%
2006 1 0 0 0.00 0.00%
======= ======== ========= ======= =======
39 71,000 $796,000 $11.21 100.00%
======= ======== ========= ======= =======
</TABLE>
The aggregate tax basis for federal income tax purposes of Twin Forks is
$7,779,000 as of December 31, 1995. Of this amount, approximately $2,487,000
represents land, approximately $4,331,000 represents real property depreciated
over a 19 year life, approximately $537,000 represents real property depreciated
over a 31-1/2 year life and the balance of approximately $961,000 represents
real property depreciated over a 40 year life.
10
<PAGE>
Encumbrances on Specified Projects
At December 31, 1995, the principal amount of the nonrecourse mortgage loans
totaled $8,931,000. These loans were secured by first mortgages on the Specified
Projects. See Item 8, Note 5 to the Financial Statements of the Trust for a
discussion of the terms of the mortgages.
Item 3. Legal Proceedings
Neither the Trust nor Brandywine was a party to any material pending legal
proceedings as of December 31, 1995, or as of the date of this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
11
<PAGE>
PART II
Item 5. Market for Shares and Related Shareholder Matters
The Trust's shares are traded on the American Stock Exchange, Inc. under the
symbol "BDN". As of March 4, 1996, there were approximately 370 holders of
record of the Trust's Shares of Beneficial Interest and the Trust estimates that
there were approximately 1,000 beneficial owners of such Shares. Distributions
declared for each quarter in 1995 and 1994 are identified below along with the
high and low sale prices of the Trust's shares for each fiscal quarter for the
past eight quarters:
Stock Price Stock Price Distributions
High Low Declared
----------- ----------- -------------
First Quarter 1995 $ 4-1/2 $ 3-7/8 $ 0.40
Second Quarter 1995 $ 3-3/4 $ 3-9/16 $ 0.05
Third Quarter 1995 $ 3-7/8 $ 3-5/8 $ 0.05
Fourth Quarter 1995 $ 3-3/4 $ 3-3/8 $ 0.05
First Quarter 1994 $ 3-13/16 $ 1-5/8 $ 0.04
Second Quarter 1994 $ 4-1/4 $ 3-1/8 $ 0.05
Third Quarter 1994 $ 6 $ 3-15/16 $ 0.73
Fourth Quarter 1994 $ 4-1/2 $ 3-5/8 $ 0.75
Item 6. Selected Financial Data
Brandywine Realty Trust (dollars in thousands except per share date)
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993 1992 1991
---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total operating revenue (a) $3,666 $ 4,192 $ - $ - $ -
Income from acquisitioin of limited partner
interests in Brandywine Specfied Property
Investors Limited Partnership $ - $ - $ 2,469 $ - $ -
Provision for loss on real estate investments $ - $ (5,400) $ - $ - $ (6,700)
Gain on sales of real estate investments $ - $ 1,410 $ - $ - $ -
Extraordinary item: gain on
extinguishment of debt $ - $ 7,998 $ - $ - $ -
Net income (loss) $ (824) $ 7,567(c) $ 2,468 $ (1) $ (6,705)
Net income (loss) per share $ (0.44) $ 3.74 $ 1.33 $ - $ (3.61)
Cash distributions $ 1,021 $ 2,914 $ - $ - $ -
Cash distributions per share $ 0.55 $ 1.57 $ - $ - $ -
Total assets $ 17,105 $ 17,873 $ 4,604 $ 2,123 $ 2,128
Mortgage notes payable $ 8,931 $ 6,899 $ - $ - $ -
Other Data:
Funds from operations (b) $ 578 $ (706)(c) $ 2,467 $ - $ -
Cash flows from operating activities $ 497 $ (628) $ - $ - $ -
Cash flows from investing activities $ (701) $ 9,559 $ 2,469 $ - $ -
Cash flows from financing activities $ (722) $ (9,635) $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
(a) Prior to 1994, the Trust accounted for its investment in Brandywine
using the equity method of accounting and accordingly, received no
operating revenue from its investment in Brandywine for the years ended
December 31, 1993, 1992 and 1991, respectively.
(b) Funds from Operations is defined as net income (loss) excluding
extraordinary items, gains and losses from sales of property, plus
depreciation and amortization and other non-cash charges and similar
adjustments for unconsolidated subsidiaries. Management generally
considers Funds from Operations to be a useful financial performance
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 Trust'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 Trust's cash flow 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 Trust's calculation of Funds from Operations.
(c) Funds from operations and net income in 1994 include the payment
of $1,114,000 from escrowed cash reserves of all future Additional
Interest (as defined in Item 8, Note 5 to the Financial Statements of
the Trust) to the mortgage lender on December 28, 1994.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Year ended December 31, 1995 vs. December 31, 1994
For the year ended December 31, 1995, the Trust's consolidated net loss was
($824,000) or ($0.44) per share as compared to consolidated net income of
$7,567,000 or $3.74 per share for the year ended December 31, 1994.
Primarily, as a result of the sales of three of the Specified Projects during
1994, rental revenues decreased by $576,000 or 14% and property operating
expenses decreased by $494,000 or 24% for the year ended December 31, 1995, as
compared to the year ended December 31, 1994. When comparing 1995 to 1994
results within these same categories for the four remaining Specified Projects,
rental revenues increased by $130,000 or 4% primarily due to improved overall
occupancy levels and property operating expenses decreased by $72,000 or 4%
primarily due to reduced management fees as a result of the Trust assuming
management of three of the four Specified Projects effective February 1, 1995.
For the year ended December 31, 1995, as compared to the year ended December 31,
1994, depreciation and amortization expense remained relatively constant,
primarily due to the write off of deferred loan fees totaling $354,000 resulting
from the April 21, 1995 refinancing of the Specified Projects' mortgage loans
and the termination of the $26 million commitment which the Trust had obtained
during 1994. Interest expense decreased by $1,169,000 or 60% due to the overall
reduced interest expense associated with the new mortgage loans obtained upon
the April 1995 refinancing. Administrative expense decreased by $152,000 or 18%
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 Specified Projects to the then
estimated net realizable value. Such writedown was recorded as a provision for
loss on real estate investments in the Trust's 1994 financial statements. For
the year ended December 31, 1995, no such writedown was required to be recorded.
As discussed below, the Trust's net income for 1994 was primarily attributable
to extraordinary gain upon the extinguishment of debt and gain resulting from
property sales, offset in part by the December 1994 payment of all future
Additional Interest to the then mortgage lender. The term "Additional Interest"
is defined in Note 5 to the Trust's financial statements included in Item 8.
At January 31, 1996, the overall occupancy level of the four Specified Projects
was 97% as compared to 86% at January 31, 1995.
Year ended December 31, 1994 vs. December 31, 1993
Historical:
For the year ended December 31, 1994, the Trust's consolidated net income was
$7,567,000 or $3.74 per share as compared to net income of $2,468,000 or $1.33
per share for the year ended December 31, 1993. The Trust's net income for 1994
was attributable to an extraordinary gain of $7,998,000 upon extinguishment of
debt resulting from the January 1994 refinancing of the Specified Projects
coupled with a $1,410,000 gain resulting from the sales of three Specified
Projects during 1994, offset primarily by the $1,114,000 payment of all future
Additional Interest to the then mortgage lender in December 1994 and the non
cash expense of depreciation and amortization. The Trust's 1993 income was
primarily attributable to the settlements which the Trust obtained with two of
the limited partners of BSPI whereby the Trust received $2,469,000 in cash.
Comparison to Consolidated Pro Forma 1993:
For the year ended December 31, 1994, the Trust's consolidated net income was
$7,567,000 or $3.74 per share as compared to consolidated pro forma net income
of $2,468,000 or $ 1.33 per share for the year ended December 31, 1993.
Significant components of these 1994 and 1993 net income amounts are discussed
above.
14
<PAGE>
When comparing consolidated 1994 results to consolidated pro forma 1993 results,
for the year ended December 31, 1994, rental revenue decreased by $1,292,000 or
24% due primarily to the sales of three Specified Projects coupled with lower
aggregate occupancy during 1994 in three of the remaining four Specified
Projects. Other income decreased by $73,000 or 69% as escrowed cash reserves
were held with the then mortgage lender in a non interest bearing account.
Interest expense decreased by 18% primarily as a result of the January 1994
refinancing of the mortgage loans offset, in part, by the $1,114,000 payment of
Additional Interest to the then mortgage lender in December 1994. Depreciation
and amortization and operating expenses decreased by $1,357,000 or 28% due
primarily to the sales of the three Specified Projects during 1994. In addition,
approximately $70,000 in savings was realized as a result of a successful tax
appeal for the Lincoln Centre project and an additional savings of $70,000 was
realized as a result of management's renegotiation of the property management
contracts for each of the Specified Projects. Administrative expenses decreased
by $219,000 or 21% primarily due to decreased professional fees attributable to
1993 foreclosure litigation, bankruptcy investigation and 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 Specified Projects to the then
estimated net realizable value. Such writedown was recorded as a provision for
loss on real estate investments in the Trust's 1994 financial statements. For
the year ended December 31, 1993, no such writedown was required to be recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Trust's primary asset is its 70% general partner interest in Brandywine
which owns and operates the Specified Projects. The Trust's principal source of
liquidity consists of the distributions it receives from the operation of the
Specified Projects.
As of December 31, 1995, the Trust's consolidated cash balances were $840,000 as
compared to $1,766,000 as of December 31, 1994. In addition, at December 31,
1995, escrowed cash balances totaled $1,155,000 as compared to $1,114,000 at
December 31, 1994. The escrowed cash balances at December 31, 1995 were
comprised of $1,076,000 held by the Trust's mortgage lender to provide for
capital improvements, tenant improvements and leasing commissions associated
with the Specified Projects and $79,000 held by the lender to provide for real
estate tax payments with respect to the Specified Projects.
During 1995, the Trust paid $2,227,000 in distributions to shareholders,
including $1,299,000 in respect of dividends declared in 1994 and paid during
1995. Net cash provided by operating activities for this same period totaled
$497,000. On April 21, 1995, the Trust refinanced the then existing $6,899,000
mortgage note, borrowing $9,000,000 under mortgage loans which provide for a
fixed rate of interest, initially set at 8.75%, and which are
cross-collateralized by the Specified Projects. In connection with the
refinancing, the Trust paid $250,000 in associated transaction costs and
increased mortgage lender escrowed cash balances for the year by approximately
$41,000. Tenant improvements and leasing commissions during 1995 relative to the
Specified Projects were paid from lender escrow funds and totaled $660,000.
During 1995, the Trustees have considered, and expect to continue to consider,
potential acquisitions by the Trust of additional real estate and real
estate-related interests and potential third party equity and debt investments
in the Trust. At the current time the Trust is actively pursuing the potential
acquisition of additional real estate and evaluating third party equity and debt
investments in the Trust. The Trust's business plan contemplates a focus on
office and industrial projects in the greater Philadelphia, Pennsylvania area.
However, there can be no assurance that the Trust will make an acquisition of
additional real estate or real estate-related interests or that any such
acquisitions will produce satisfactory returns for the Trust. Similarly, there
can be no assurance that the Trust will consummate any third party equity or
debt investments in the Trust or that any investments that might be made in the
Trust would enable the Trust to generate greater returns for the Shareholders.
See Item 1 "Business" for a discussion of the transaction that the Trust is
presently negotiating pursuant to the terms of the Letter.
During 1995, the Trust paid $221,000 and accrued $136,000 in costs associated
with its pursuit of potential acquisitions of additional real estate and third
party equity investments. Such costs are included in deferred costs on the
Trust's balance sheet as of December 31, 1995. Further, in connection with these
efforts, as of December 31, 1995, the Trust had deposited $95,000 with an
unrelated party. Such deposit is included in other assets on the balance sheet
as of December 31, 1995.
15
<PAGE>
During 1995, the Trust declared distributions as follows:
<TABLE>
<CAPTION>
Declaration Date Record Date Payment Date Amount Per Share
- ---------------- ----------- ------------ ----------------
<S> <C> <C> <C>
April 19, 1995 May 11, 1995 May 17, 1995 $0.05
April 21, 1995 May 11, 1995 May 17, 1995 $0.35
July 11, 1995 July 26, 1995 July 31, 1995 $0.05
October 11, 1995 October 26, 1995 October 31, 1995 $0.05
December 29, 1995 January 26, 1996 January 30, 1996 $0.05
</TABLE>
For the period January 1, 1995 through April 21, 1995, the Trust paid the then
mortgage lender total interest based on a weighted average rate of 10.3% on the
outstanding principal loan balance. For the period April 21, 1995 through
December 31, 1995, the Trust paid its current mortgage lender total interest
based on a weighted average rate of 8.7% on the outstanding principal loan
balances.
The Trust believes that current cash reserves are sufficient, and that operation
of the Specified Projects will provide sufficient cash flows, to continue
operations throughout 1996 and, to the extent foreseeable, in the years to
follow.
The Trust believes that it qualifies for federal income tax purposes as a real
estate investment trust and intends to remain so qualified.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index
BRANDYWINE REALTY TRUST
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1995 and
December 31, 1994
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 and Statement of Operations for the
Year Ended December 31, 1993
Unaudited Pro Forma Consolidated Statement of Operations
for the Year ended December 31, 1993 (Not Covered by
Report of Independent Public Accountants)
Consolidated Statements of Beneficiaries' Equity
for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, and 1994 and Statement of Cash Flows for the
Year Ended December 31, 1993
Unaudited Pro Forma Consolidated Statement of Cash Flows
for the Year Ended December 31, 1993 (Not Covered by
Report of Independent Public Accountants)
Notes to Financial Statements
BRANDYWINE REALTY PARTNERS
Report of Independent Public Accountants
Balance Sheet as of December 31, 1993
Statement of Operations for the Year Ended December 31, 1993
Statement of Partners' Equity (Deficit) for the Year Ended
December 31, 1993
Statement of Cash Flows for the Year Ended December 31, 1993
Notes to Financial Statements
17
<PAGE>
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, 1995 and 1994, 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 Trust'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, 1995 and 1994, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule III is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not a required part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 4, 1996 (except with respect
to the matter discussed in Note 11,
as to which the date is March 20, 1996)
18
<PAGE>
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
as of December 31, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1995 1994
---------------- ---------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS
Operating properties, at adjusted cost $ 21,823 $ 21,335
Accumulated depreciation (8,114) (7,387)
---------------- ---------------
13,709 13,948
CASH AND CASH EQUIVALENTS 840 1,766
ESCROWED CASH 1,155 1,114
DEFERRED COSTS net of accumulated amortiza-
tion of $507 in 1995 and $519 in 1994 1,027 813
ACCOUNTS RECEIVABLE 261 207
OTHER ASSETS 113 25
---------------- ---------------
Total assets $ 17,105 $ 17,873
================ ===============
LIABILITIES AND BENEFICIARIES' EQUITY
MORTGAGE NOTES PAYABLE $ 8,931 $ 6,899
ACCRUED MORTGAGE INTEREST 33 57
TENANT SECURITY DEPOSITS AND DEFERRED
RENTS 250 207
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 454 222
DISTRIBUTIONS PAYABLE 93 1,299
---------------- ---------------
Total liabilities 9,761 8,684
---------------- ---------------
MINORITY INTEREST -- --
COMMITMENTS AND CONTINGENCIES
BENEFICIARIES' EQUITY
Shares of beneficial interest, $0.01 par value,
5,000,000 preferred shares, authorized,
none outstanding; 15,000,000 common shares
authorized, 1,856,200 shares issued and
outstanding 19 19
Additional paid-in capital 16,772 16,772
Cumulative deficit (3,086) (2,262)
Cumulative distributions (6,361) (5,340)
---------------- ---------------
Total beneficiaries' equity 7,344 9,189
---------------- ---------------
Total liabilities and beneficiaries' equity $ 17,105 $ 17,873
================ ===============
</TABLE>
The accompanying notes and the financial statements of
Brandywine Realty Partners are an integral part of these statements.
19
<PAGE>
BRANDYWINE REALTY TRUST
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
(in thousands, except per share information)
<TABLE>
<CAPTION>
Pro Forma
Consolidated Consolidated Historical Consolidated
1995 1994 1993 1993
------------ -------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Rents and tenant reimbursements $ 3,583 $ 4,159 $ -- $ 5,451
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 83 33 25 106
----------- -------------- ------------- ------------
Total revenue 3,666 4,192 3,062 8,026
----------- -------------- ------------- ------------
EXPENSES:
Interest 793 1,962 -- 2,400
Depreciation and amortization 1,402 1,370 1 1,949
Utilities 531 607 -- 762
Real estate taxes 391 498 -- 721
Maintenance 586 783 -- 910
Management fee 47 144 -- 264
Other operating expenses 53 70 -- 223
Administrative expenses 682 834 593 1,053
Provision for loss on real estate investments -- 5,400 -- --
----------- -------------- ------------- ------------
Total expenses 4,485 11,668 594 8,282
----------- -------------- ------------- ------------
(LOSS) INCOME BEFORE GAIN ON SALES OF REAL ESTATE
INVESTMENTS, MINORITY INTEREST AND EXTRORDINARY ITEM (819) (7,476) 2468 (256)
GAIN ON SALES OF REAL ESTATE INVESTMENTS -- 1,410 -- --
MINORITY INTEREST IN INCOME (LOSS) OF BRANDYWINE REALTY PARTNERS 5 (5,635) -- (2,724)
----------- -------------- ------------- ------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (824) (431) 2,468 2,468
EXTRAORDINARY ITEM: GAIN ON EXTINGUISHMENT OF DEBT
(NET OF $20,109 ALLOCATED TO MINORITY INTEREST) -- 7,998 -- --
----------- -------------- ------------- ------------
NET INCOME (LOSS) $ (824) $ 7,567 $ 2,468 $ 2,468
=========== ============== ============= ============
PER SHARE DATA:
Earnings per share of beneficial interest
Primary
(Loss) income before extraordinary item $ (0.44) $ (0.21) $ 1.33 $ 1.33
Extraordinary item 0.00 3.95 0.00 0.00
----------- -------------- ------------- ------------
Net income $ (0.44) $ 3.74 $ 1.33 $ 1.33
=========== ============== ============= ============
Distributions declared $ 0.55 $ 1.57 $ 0.00 $ 0.00
=========== ============== ============= ============
Weighted average number of shares outstanding
including share equivalents 1,874,372 2,022,981 1,856,200 1,856,200
=========== ============== ============= ============
</TABLE>
The accompanying notes and the financial statements of
Brandywine Realty Partners are an integral part of these statements.
20
<PAGE>
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Common
Shares of Capital
Beneficial Par In Excess Cumulative Cumulative
Interest Value of Par Value Deficit Distributions
--------------- -------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993 1,856,200 $ 19 $ 16,772 $ (12,297) $ (2,426)
Net income -- -- -- 2,468 --
-------------- ------------- ---------------- ----------------- ---------------
BALANCE, December 31, 1993 1,856,200 19 16,772 (9,829) (2,426)
Net income -- -- -- 7,567 --
Distributions ($1.57 per share) -- -- -- -- (2,914)
-------------- ------------- ---------------- ----------------- ---------------
BALANCE, December 31, 1994 1,856,200 19 16,772 (2,262) (5,340)
Net loss -- -- -- (824) --
Distributions ($0.55 per share) -- -- -- -- (1,021)
-------------- ------------- ---------------- ----------------- ---------------
BALANCE, December 31, 1995 1,856,200 $ 19 $ 16,772 $ (3,086) $ (6,361)
============== ============== ================ ================= ===============
</TABLE>
The accompanying notes and the financial statements of
Brandywine Realty Partners are an integral part of these statements.
21
<PAGE>
BRANDYWINE REALTY TRUST
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Consolidated Consolidated Historical Consolidated
1995 1994 1993 1993
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
NET (LOSS) INCOME $ (824) $ 7,567 $ 2,468 $ 2,468
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 5 (5,635) -- (2,724)
Income from acquisitions of limited partner interests in
Brandywine Specified Property Investors Limited Partnership -- -- (2,469) (2,469)
Depreciation and amortization 1,402 1,370 1 1,949
Provision for loss on real estate investments -- 5,400 -- --
Changes in assets and liabilities
(Increase) decrease in accounts receivable (54) 483 -- (140)
Decrease (increase) in other assets 13 (194) (13) 166
(Decrease) increase in other liabilities (45) (211) 13 81
---------- ----------- ----------- ----------
Net cash provided by (used in) operating activities 497 (628) -- (669)
---------- ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from Brandywine Realty Partners -- 2,110
Capital expenditures and leasing commissions paid (660) (493) -- (620)
Increase in escrowed cash (41) (1,114) -- --
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 (701) 9,559 2,469 1,849
---------- ----------- ----------- ----------
</TABLE>
(Continued)
22
<PAGE>
BRANDYWINE REALTY TRUST
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
(in thousands)
(Continued)
<TABLE>
<CAPTION>
Pro Forma
Consolidated Consolidated Historical Consolidated
1995 1994 1993 1993
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to shareholders (2,227) (1,615) -- --
Minority Partner contributions -- 49 -- 51
Minority Partner distributions (5) (7) -- (34)
Proceeds from new mortgage loan 9,000 10,000 -- --
Repayment of mortgage notes payable (6,968) (16,301) -- --
Costs associated with refinancing transactions (250) (1,604) -- --
Costs associated with new ventures and financing commitments (221) (100) -- --
Refundable deposit associated potential financing commitments (95) -- -- --
Tenant security deposits and other financing activities 44 (57) -- 175
---------- ----------- ----------- ----------
Net cash (used in) provided by financing activities (722) (9,635) -- 192
---------- ----------- ----------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (926) (704) 2,469 1,372
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,766 2,470 1 3,208
---------- ----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 840 $ 1,766 $ 2,470 $ 4,580
========== =========== =========== ==========
</TABLE>
The accompanying notes and the financial statements of
Brandywine Realty Partners are an integral part of these statements.
23
<PAGE>
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND NATURE OF OPERATIONS:
Brandywine Realty Trust (the "Trust"), was formed on February 26, 1986 as a real
estate investment trust. On July 31, 1986, the Trust sold through an initial
public offering 1,856,200 shares of beneficial interest, the net proceeds of
which were $17,168,000. On July 31, 1986, the Trust 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:
% Ownership
-----------
Brandywine Realty Trust,
a Maryland real estate investment trust 70%
Brandywine Specified Property
Investors Limited Partnership ("BSPI"), a
Pennsylvania limited partnership 30%
--------
100%
At December 31, 1995, the Trust'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.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
Since the Trust gained control of Brandywine during 1994, the Trust consolidates
the accounts of Brandywine with the Trust 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.
24
<PAGE>
Capitalization of Costs
The Trust has capitalized as deferred costs certain expenditures related to the
financing and leasing of the Specified Projects. Capitalized loan fees are being
amortized over the six-year term of the loan and leasing commissions are being
amortized over the term of the related leases.
As of December 31, 1995, the Trust had paid $221,000 and had accrued $136,000 in
costs associated with its pursuit of potential acquisitions of additional real
estate and third party equity and debt investments. Such costs are included in
deferred costs on the Trust's balance sheet as of December 31, 1995. Further, in
connection with these efforts, as of December 31, 1995, the Trust had deposited
$95,000 with an unrelated party. Such deposit is included in other assets on the
balance sheet as of December 31, 1995.
Depreciation and Amortization
Depreciation is computed using the straight-line method. Estimated useful lives
are 30 years for buildings and improvements and five years for personal
property. Amortization of tenant improvements is provided over the shorter of
the lease term or the life of the assets.
Investment in Brandywine
Until January 1994, the Trust 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):
December 31, 1994
-----------------
Total sssets $ 39,994
Total revenue $ 5,532
Net loss $ (2,156)
Allocated incime from Brandywine $ 568
Federal Income Taxes
The Trust 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, 1995, 1994 and 1993,
totaled $(652,000), $0 and ($926,000), respectively. In 1995 and 1994 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 Trust 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 Trust's ordinary income and (b) 95% of the Trust's capital gain
net income (which was zero in each year since the Trust's inception) for the
year exceeds cash distributions during the year and certain taxes paid by the
Trust, if any. No excise tax was incurred in 1995, 1994 or 1993.
Total assets of the Trust for tax purposes amounted to $12,497,000 and
$15,348,000, respectively as of December 31, 1995 and 1994 as compared to total
assets for financial reporting purposes which amounted to $17,105,000 and
$17,873,000, respectively.
25
<PAGE>
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:
1996 $ 32,000
1997 36,000
1998 29,000
1999 35,000
2000 36,000
2001 and thereafter 2,000
-----
Total $170,000
========
During 1995, Parker, McCay & Criscuolo represented 10% of the Trust's total
rental revenue and American Executive Center represented 10% of the Trust's
total rental revenue. No tenant represented 10% or more of the Trust's rental
revenue in 1994 and 1993.
Reclassifications
Certain 1994 and 1993 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 1,874,372 in 1995, 2,022,981 in 1994 and 1,856,200 in
1993. Earnings per share for 1995 and 1994 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, 1995 and
December 31, 1994, respectively, for the fully diluted earnings per share
calculation. No such options have been exercised as of December 31, 1995. 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, 1995 and 1994, cash and cash equivalents totaling $840,000 and
$1,766,000, respectively included tenant escrow deposits of $198,000 and
$155,000, 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.
26
<PAGE>
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 Trust 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 Trust
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.
This statement is effective for the Trust's financial statements in 1996.
Management does not anticipate that the effect of adopting this statement will
be material to the Trust'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 Trust's
shareholders as distributions totaling $0.73 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 Trust, 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
Trust's shareholders of record as of January 24, 1995. Such distribution totaled
$0.65 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.
Year Ended December 31, 1994 (unaudited in thousands)
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
=========
27
<PAGE>
Pro forma earnings per share:
Pro forma loss before extraordinary item $( 0.81)
Pro forma extraordinary item 3.95
---------
Pro forma net income per share $ 3.14
=========
5. MORTGAGE NOTES PAYABLE:
On April 21, 1995, the Trust 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 Trust 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:
1996 $ 107,000
1997 111,000
1998 122,000
1999 134,000
2000 147,000
2001 8,310,000
-----------
$ 8,931,000
===========
The loan is generally nonrecourse to the Trust 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 Trust 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 Trust 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 Trust. The capital escrow account held by
the lender does not constitute additional collateral for the mortgage loans. At
December 31, 1995, the principal balance of the loans totaled $8,931,000 and the
capital and real estate tax escrow accounts totaled $1,155,000.
28
<PAGE>
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 Trust 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 Trust.
During 1994, in connection with the sales of Academy Downs and Iron Run, the
Trust 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 Trust 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 Trust
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 Trust'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 Trust granted the mortgage lender an option,
exercisable for the greater of 375,000 Shares of Beneficial Interest or 15% of
the outstanding Shares, which amount was subject to reduction to the extent of
certain Additional Interest paid to the lender in connection with a sale or
refinancing of a Specified Project. As a result of the sales of Academy Downs
and Iron Run and the related payments of principal and Additional Interest to
the lender, the number of Shares underlying the option was reduced from 375,000
to 274,000. The option, priced at $1.875 per Share, was exercisable only upon
the new lender's release of its right to receive Additional Interest, from and
after the date of such exercise. As a result of the mortgage lender receiving
$1,114,000 as prepayment of Additional Interest on December 28, 1994, this
option was terminated.
During 1994, the Trust 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, 1995 and 1994, mortgage interest paid
totaled $784,000 and $3,056,000 respectively. On a pro forma consolidated basis
(unaudited), mortgage interest paid for the year ended December 31, 1993 totaled
$2,230,000.
29
<PAGE>
6. MINORITY INTEREST AND BENEFICIARIES' EQUITY:
Minority Interest
Under the terms of the Brandywine Partnership Agreement, the methods followed
for 1995, 1994, and 1993 regarding 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 Trust.
In connection with the January 1994 refinancing of the Specified
Projects in order to obtain the requisite approvals for the
refinancing, the Trust 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 Trust 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 Trust'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 Trust and the Trust was designated as Brandywine's new
administrative partner. Further, the Trust'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 Trust contributed cash of $2,466,000 to Brandywine. This
contribution increased the Trust'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 Trust as a first preference upon
capital events related to the Specified Projects. At December 31, 1995
and 1994, the Trust's Unrecovered Capital totaled $17,817,000 and
$18,467,000, 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 Trust and BSPI, for reimbursement of
administrative expenses; and second to the Trust, 98% of remaining cash
flow; and to BSPI, 2% of remaining cash flow. Distributions from
capital events are due first to the Trust, up to its Unrecovered
Capital as defined in the Brandywine Partnership Agreement.
Brandywine made cash distributions in 1993, first to the Trust, in an
amount equal to the Trust'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 1995 and 1994, for financial reporting purposes, income is first
allocated to the Trust 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 Trust.
During 1993, in accordance with the Brandywine Partnership Agreement,
net income (losses) from operations were allocated as follows:
30
<PAGE>
o First, income to the Trust and BSPI in an amount equal to cash
distributions made to such partner;
o Second, losses to Brandywine National in an amount equal to 1%
of Brandywine's gross rental income;
o 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, 1995 and 1994, the Trust declared distributions
totaling $0.55 and $1.57 per share, respectively. The Trust determined that 100%
of 1995 distributions or $0.55 per share represented a return of capital to the
recipient. Further, the Trust determined that 45% of 1994 distributions or $0.70
per share represented a return of capital while the remaining 55% of 1994
distributions or $0.87 per share represented ordinary income to the recipient.
No distributions were declared by the Trust during 1993.
7. 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
Trust covering 140,000 common shares of beneficial interest. The plan includes
options exercisable for 100,000 shares at an exercise price of $6.50. Of the
remaining 40,000 shares subject to options, options covering 20,000 shares
vested on August 8, 1995 and options covering 20,000 shares vest on August 8,
1996. The exercise price of the 40,000 options was set at $3.80. The per share
exercise price of the options covering all 140,000 shares is subject to
reduction as proceeds from the sale of, or refinancing of debt secured by, any
Specified Projects are distributed by the Trust 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
$4.77 and $2.07, 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 1995 and 1994 there were no options exercised, canceled or
expired.
8. INCOME FROM ACQUISITION OF LIMITED PARTNER INTERESTS IN BSPI:
During 1993, the Trust 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 Trust 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 Trust 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 Trust
also received from BSPI the right to setoff any future claims (direct or
indirect) between the Trust and BSPI, including the Trust'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
Trust having received the right of setoff.
Effective January 1, 1994, the Trust 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 Trust's 25.83% interest
in BSPI was transferred to a subsidiary of BSPI's general partner and retired.
9. 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.
31
<PAGE>
Effective February 1, 1995, the Trust 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 period
January 1, 1995 through January 31, 1995 and the years 1994 and 1993, 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 $10,000, $187,000
and $219,000 in 1995, 1994 and 1993, 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
Trust. In 1995 and 1994, these amounts totaled $4,000 and $70,000, respectively.
Through the period January 1, 1995 through January 31, 1995, and for the years
1994 and 1993, 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 1995, 1994 and 1993 amounted to $47,000, $56,000
and $28,000, 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 Trust. In 1995 and 1994, these amounts totaled $19,000
and $22,000, respectively.
During 1994 and 1993 certain administrative and management functions for the
Trust were performed by a related party. During 1993 and continuing through
August 8, 1994, the Trust reimbursed the related party up to $100,000 per year
for certain administrative expenses directly attributable to the Trust. Such
reimbursements amounted to $75,000 in 1994, and $100,000 in 1993.
10. OPERATING LEASES:
The Trust 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:
Year Amount
---- ------
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
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 $66,000, $47,000 and $148,000 in 1995, 1994, and
1993, respectively.
11. SUBSEQUENT EVENT:
On March 20, 1996, the Trust entered into a letter of intent with Safeguard
Scientifics, Inc. ("SSI") and SSI's real estate affiliate, The Nichols Company
("TNC"). The Trust intends to form an investment partnership with SSI and TNC to
acquire, for cash and equity interests, 18 properties currently owned by SSI,
TNC and their affiliates. The proposed transaction is subject to customary
conditions, including negotiation and execution of definitive documentation, due
diligence and approval by the Trust's shareholders.
32
<PAGE>
12. SUMMARY OF INTERIM RESULTS (UNAUDITED):
The following is a summary of unaudited interim financial information for the
Trust for the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Three Months Ended
(in thousands, except per share information)
--------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1995
----
<S> <C> <C> <C> <C>
Operating revenue $ 927 $ 879 $ 885 $ 975
Net loss $ (70) $ (370)(a) $ (152) $ (232)(b)
Net loss per share $ (0.04) $ (0.20)(a) $ (0.08) $ (0.12)(b)
1994
----
Operating revenue $ 1,279 $ 1,092 $ 1,026 $ 795
Provision for loss on real estate investments $ 5,400(c) -- -- --
Gain on sales of real estate investments --(d) -- $ 1,116(f) $ 294(h)
Extraordinary gain on extinguishment of debt $ 7,998(e) -- -- --
Net income (loss) $ 7,998(e) $ (188) $ 839(f) $ (1,082)(g)(h)
Net income (loss) per share $ 3.95(e) $ (0.09) $ 0.41(f) $ (0.53)(g)(h)
</TABLE>
(a) During the second quarter of 1995, the Trust's net loss includes the
write-off of deferred loan fees totaling $254,000 or $0.14 per share as a result
of the Trust's April 21, 1995 refinancing (see Note 5).
(b) During the fourth quarter of 1995, the Trust's net loss includes the
write-off of deferred costs totaling $100,000 or $0.05 per share as a result of
the termination of the Trust's $26 million commitment (see Note 5).
(c) During the first quarter of 1994, the Trust 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).
(d) During the first quarter of 1994, the Trust sold the Lincoln Centre project
for a net sales price equal to its adjusted carrying value (see Note 4).
(e) During the first quarter of 1994, the Trust extinguished mortgage
indebtedness totaling approximately $43 million resulting, after costs and
allocation to Minority Interest, in extraordinary gain to the Trust of
$7,998,000 or $3.95 per share (see Note 3). Such extraordinary gain is included
in the Trust's net income for the first quarter of 1994.
(f) During the third quarter of 1994, the Trust sold the Academy Downs project
resulting in a net gain of $1,116,000 or $0.55 per share (see Note 4). Such gain
is included in the Trust's net income for the third quarter of 1994.
(g) During the fourth quarter of 1994, the Trust paid its then mortgage lender
$1,114,000 or $0.55 per share, which amount represented the prepayment of
Additional Interest and is included in the Trust's net loss for the fourth
quarter of 1994 (see Note 5).
(h) During the fourth quarter of 1994, the Trust sold the Iron Run project
resulting in a net gain of $294,000 or $0.15 per share (see Note 4). Such gain
is included in the Trust's net loss for the fourth quarter of 1994.
33
<PAGE>
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34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Brandywine Realty Partners:
We have audited the accompanying balance sheet of Brandywine Realty Partners (a
Pennsylvania general partnership) as of December 31, 1993, and the related
statements of operations, partner's equity (deficit) and cash flows for the year
ended December 31, 1993. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements 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 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Brandywine Realty Partners as
of December 31, 1993, and the results of its operations and its cash flows for
the year ended December 31, 1993, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 25, 1994
35
<PAGE>
BRANDYWINE REALTY PARTNERS
BALANCE SHEET
December 31, 1993
(in thousands)
ASSETS
REAL ESTATE INVESTMENTS:
Operating properties, at adjusted cost $ 48,822
Accumulated depreciation (12,493)
------------------
36,329
CASH AND CASH EQUIVALENTS 1,460
RESTRICTED CASH 651
ACCOUNTS RECEIVABLE AND OTHER ASSETS 911
DEFERRED COSTS, net of accumulated
amortization of $1,684 643
------------------
Total assets $ 39,994
==================
LIABILITIES AND PARTNERS' DEFICIT
MORTGAGE NOTES PAYABLE $ 40,446
ACCRUED MORTGAGE INTEREST AND
PENALITIES 2,480
TENANT SECURITY DEPOSITS AND
DEFERRED RENTS 308
ACCOUNTS PAYABLE 378
ACCRUED EXPENSES AND OTHER LIABILITIES 111
------------------
Total liabilities $ 43,723
PARTNERS' DEFICIT (3,729)
------------------
Total liabilities and partners' deficit $ 39,994
==================
The accompanying notes and the financial statements of
Brandywine Realty Trust are an integral part of this statement.
36
<PAGE>
BRANDYWINE REALTY PARTNERS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
1993
------------
REVENUE:
Rents $ 4,932
Tenant reimbursements 519
Other income 81
-------------
Total revenue 5,532
-------------
EXPENSES:
Interest 2,400
Depreciation and amortization 1,948
Utilities 762
Real estate taxes 721
Maintenance 910
Management fees 264
Other operating expenses 223
Administrative expenses 460
-------------
Total expenses $ 7,688
-------------
NET LOSS $ (2,156)
=============
The accompanying notes and the financial statements of
Brandywine Realty Trust are an integral part of this statement.
37
<PAGE>
BRANDYWINE REALTY PARTNERS
STATEMENT OF PARTNERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
<TABLE>
<CAPTION>
Brandywine
Specified
Property
Brandywine Investors Brandywine
Realty Limited National
Trust Partnership Corporation Total
----------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
EQUITY (DEFICIT)
January 1, 1993 $ 10,787 $ (11,758) $ (51) $ (1,022)
Contributions -- -- 51 51
Net income (loss) 568 (2,675) (49) (2,155)
Distributions (568) (34) -- (603)
----------- -------------- ------------ --------------
EQUITY (DEFICIT)
December 31, 1993 $ 10,787 $ (14,467) $ (49) $ (3,729)
=========== ============== ============ ==============
</TABLE>
The accompanying notes and the financial statements of
Brandywine Realty Trust are an integral part of this statement.
38
<PAGE>
BRANDYWINE REALTY PARTNERS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
1993
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Rent receipts $ 5,540
Interest received 96
Rental expenses paid (3,048)
Mortgage interest paid (2,230)
General and administrative expenses paid (459)
---------------
Net cash used in operating activities (101)
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (463)
Leasing commissions (157)
---------------
Net cash used in investing activities (620)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partner contributions 51
Partner distributions (602)
Deposits and other financing activities 175
---------------
Net cash used in financing activities (376)
---------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,097)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,208
---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,111
===============
(Continued)
39
<PAGE>
BRANDYWINE REALTY PARTNERS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
(Continued)
Reconciliation of net loss to net cash
used in operating activities
1993
--------------
NET LOSS $ (2,156)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization 1,948
Decrease in other assets 39
Increase in other liabilities 68
--------------
NET CASH USED IN OPERATING ACTIVITIES $ (101)
==============
The accompanying notes and the financial statements of
Brandywine Realty Trust are an integral part of this statement.
40
<PAGE>
BRANDYWINE REALTY PARTNERS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1993
1. ORGANIZATION AND NATURE OF BUSINESS:
Brandywine Realty Partners ("Brandywine" or "the Partnership") was formed as of
April 2, 1986. Brandywine's general partners initially contributed an aggregate
of $17,058,000 in equity. As of December 31, 1993, such partners and their
percentage ownership were as follows:
% Ownership
Brandywine Realty Trust, formerly
Linpro Specified Properties (the "Trust"),
a Maryland real estate investment trust 68%
Brandywine Specified Property
Investors Limited Partnership, formerly
Linpro Specified Property Investors
Limited Partnership ("BSPI"), a
Pennsylvania limited partnership 30%
Brandywine National Corporation, formerly
Linpro National Corporation ("Brandywine
National"), a Pennsylvania corporation
formed by principals of Linpro Entities 2%
-----
100%
Brandywine was formed to acquire, operate and ultimately sell office and
industrial properties ("Specified Projects"). On June 26, 1986, Brandywine
commenced operations and by July 31, 1986 completed its acquisition of the
Specified Projects from related Linpro Entities at a total cost of $63,845,000.
On January 31, 1994, Brandywine refinanced the Specified Projects. In connection
with this refinancing, Brandywine National, the original 2% administrative
partner of Brandywine, transferred its interest in Brandywine to the Trust which
was designated as the new administrative partner of Brandywine.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
Brandywine's accounting records are maintained on the modified cash basis.
Adjusting entries have been made to present the accompanying financial
statements on the accrual basis of accounting in accordance with generally
accepted accounting principles.
Capitalization of Costs
Brandywine's policy is to capitalize all costs related to the improvement or
replacement of fixed assets. Maintenance and repairs are charged to expense as
incurred.
Brandywine has capitalized as deferred costs certain expenditures related to the
organization of the Partnership and the financing and leasing of the Specified
Projects. Organization costs have been fully amortized over five years.
Capitalized loan fees are being amortized over the ten year terms of the loans
and leasing commissions are being amortized over the term of the related leases.
41
<PAGE>
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.
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, 1993 cash and cash equivalents totaling $2,111,000 included tenant
escrow deposits of $261,000.
Federal Income Taxes
No Federal or state income taxes are payable by Brandywine and none have been
provided in the accompanying financial statements. The partners are to include
their respective share of Partnership profits and losses in their individual tax
returns.
Brandywine's taxable net loss for the year ended December 31, 1993 exceeded its
net loss for financial reporting purposes by approximately $569,000, due
principally to differences in the methods used to calculate depreciation for
Federal income tax and financial reporting purposes.
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 sheet with
accounts receivable and other assets reflects such rental income due as follows:
1994 $116,000
1995 212,000
1996 199,000
1997 125,000
1998 16,000
---------
$668,000
Significant Tenants
No tenant represented more than 10% of Brandywine's rental revenue in 1993.
3. REAL ESTATE INVESTMENTS:
Real estate investments are carried at the lower of adjusted cost or estimated
net realizable value. Management has historically evaluated net realizable value
by comparing their estimate of current market value to the outstanding balance
of nonrecourse debt. As of December 31, 1993, the carrying value of the real
estate investments of Brandywine was $36,329,000, as compared to the outstanding
nonrecourse mortgage loans, including accrued interest and penalties, totaling
$42,926,000. Due to the ongoing mortgage restructuring discussions as of
December 31, 1993, and the determination that Brandywine was not exposed to any
economic loss, no adjustment to the carrying value of the real estate
investments was made as of December 31, 1993.
On January 31, 1994, the outstanding mortgage indebtedness totaling
approximately $43 million was extinguished in exchange for the payment of $14
million resulting in an extraordinary gain of approximately $28 million in the
first quarter of 1994. The consummation of this transaction resulted in
management's determination that the carrying value of the Specified Projects
exceeded the estimated net realizable value based in part, upon the new
nonrecourse mortgage loan of $10 million. Management estimated the net
realizable value of Brandywine's real estate investments to be $22 million for
the seven Specified Projects basing its estimate primarily upon third-party
appraisals (reviewing each appraisal in relation to the current real estate
market) and the new mortgage financing. In the first quarter of 1994, a
writedown of approximately $5 million was recorded to adjust further the
carrying value of the Specified Projects to estimated net realizable value.
42
<PAGE>
On February 28, 1994, Brandywine sold the Lincoln Centre project for a net sales
price equal to its adjusted carrying value of approximately $2,400,000.
4. MORTGAGE NOTES PAYABLE:
The mortgage notes payable at December 31, 1993 were cross-collateralized by the
Specific Projects. These mortgages were nonrecourse and were scheduled to mature
on June 30, 1996, at which time all principal and unpaid accrued interest would
have been due. Each of the notes bore interest at specified rates over the
three-month London Interbank Offered Rate (LIBOR), adjusted quarterly. At
December 31, 1993, the note rate was 5.375%. Under the mortgage loan documents,
monthly payments of interest, principal, and unpaid deferred interest were due
based on a 30-year amortization schedule. Management, since the first quarter of
1992, had ceased required mortgage loan debt service in excess of the net cash
flow from operations of the Specified Projects, resulting in total cash payments
to Brandywine's former mortgage lender which were insufficient to meet the
mortgage loan terms.
On January 31, 1994, management refinanced the mortgages of the Specified
Projects, borrowing $10 million under a nonrecourse mortgage loan. The then new
$10 million mortgage loan provided for a term of sixty months, with minimum
interest 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. The initial rate of interest was set at 7.48%. The mortgage loan was
nonrecourse and was secured by first mortgages on the Specified Projects.
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 below 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) were subject to a $1
million aggregate minimum payment.
In addition, the Trust granted the then new lender an option, exercisable for
the greater of 375,000 Trust shares or 15% of outstanding Trust shares, which
amount was to be reduced to the extent of Additional Interest paid pursuant to
(ii) and (iii) above. The option, priced at $1.875 per share, was exercisable
only upon the new lender's release of its right to receive Additional Interest
described above, from and after the date of such exercise.
Brandywine was also required to escrow cash reserves as additional security for
the repayment of the mortgage loan in a non-interest bearing account held by the
new lender.
5. OPERATING LEASES:
Brandywine leases its properties to tenants under operating leases with various
expiration dates extending to the year 2001. During 1994, leases covering 84,620
square feet or approximately 15.5% of the net leasable space were scheduled to
expire for all the Specified Projects. Excluding Lincoln Centre, leases covering
81,364 square feet or approximately 17.4% of the remaining net leasable space
were scheduled to expire during 1994. Gross minimum future rentals on
noncancelable leases for all Specified Projects excluding the Lincoln Centre
property, at December 31, 1993 were:
43
<PAGE>
Year Amount
---- ------
1994 $4,123,000
1995 3,261,000
1996 1,864,000
1997 975,000
1998 279,000
1999 and thereafter 818,000
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. These tenant reimbursements, excluding Lincoln Centre, amounted
to $479,000 in 1993.
6. PARTNERS' EQUITY (DEFICIT):
Under the terms of the Brandywine Partnership Agreement, the methods followed
for 1993 regarding contributions and distributions and allocations of income
(loss), were as follows:
Cash Distributions
Brandywine made cash distributions in 1993, first to the Trust, an amount equal
to the Trust's administrative expenses, and second to BSPI, an amount equal to
BSPI's administrative expenses. During 1993, no other cash distributions were
made.
Effective January 1, 1994, distributions of cash flow from operations are due
first to the Trust and BSPI, for reimbursement of administrative expenses;
second to the Trust, 98% of remaining cash flow; and third to BSPI, 2% of
remaining cash flow. Distributions from capital events are due first to the
Trust, up to its Unrecovered Capital as defined in the Brandywine Partnership
Agreement.
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 Trust.
Effective January 1, 1994, in order to obtain the requisite approvals for the
refinancing of the Specified Projects, Brandywine and the Trust achieved a
settlement (the "BSPI Settlement") of the deficit restoration obligations
contingently owed by BSPI to Brandywine, which settlement, as of March 30, 1994,
was approved by holders of 93% of BSPI's limited partner units. Under the terms
of the BSPI Settlement, Brandywine and the Trust 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, the Trust'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 Trust and the Trust was
designated as Brandywine's new administrative partner. Further, the Trust's
25.83% interest in BSPI was transferred to a subsidiary of BSPI's general
partner and retired.
Subsequent to December 31, 1993, in order to provide the cash necessary to
complete the January 31, 1994 refinancing of the Specified Projects, the Trust
contributed cash of $2,466,000 to Brandywine. This total contribution increased
the Trust'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 Trust as
a first preference upon capital events related to the Specified Projects.
Allocation of Net Income (Losses) from Operations
During 1993, in accordance with the Brandywine Partnership Agreement, net income
(losses) from operations were allocated as follows:
44
<PAGE>
o First, income to the Trust and BSPI in an amount equal to cash
distributions made to such partner;
o Second, losses to Brandywine National in an amount equal to 1% of
Brandywine's gross rental income;
o 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);
Effective January 1, 1994, for financial reporting purposes, income is first
allocated to the Trust 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, if any, are expected to be allocated to the
Trust.
7. RELATED-PARTY TRANSACTIONS:
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, provided
that such commission, in combination with any commissions due a third-party
broker does not exceed 2% of such sales price. In 1988, a related party received
from Brandywine a promissory note in the amount of $103,000 for payment of its
commission due from the sale of Greentree Square Shopping Center. The note bore
interest at a rate of 9% per annum, compounded annually.
During 1993, 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% rental income (excluding tenant reimbursements), which is reflected
as management fees in the accompanying statements of operations. The property
managers also receive reimbursements of certain direct costs attributable to the
operation of the Specified Projects. Such reimbursements amounted to $154,000 in
1993.
During 1993, 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 amounted to $28,000.
45
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There are no matters which are required to be reported under Item 9.
46
<PAGE>
PART III
Item 10. Trustees and Executive Officers
Trustees
The individuals who were serving as the Trustees at December 31, 1995, and
certain information about them, are set forth below:
Joseph L. Carboni (age 58) was elected a Trustee on May 14, 1991 and Chairman of
the Board on October 11, 1994. Mr. Carboni is the President of JLC Associates,
Inc., a commercial and real estate consulting firm. Prior to 1990, Mr. Carboni
was a Senior Vice President of BNE Realty Credit Corporation.
Garry P. Jerome (age 45) has been a Trustee since the formation of the Trust in
1986 and is the managing director in the Philadelphia office of Wm. M. Mercer,
Incorporated. Prior to July 1, 1988, Mr. Jerome was a partner in the law firm of
Pepper, Hamilton & Scheetz. Wm. M. Mercer, Incorporated provides employee
benefits consulting services to certain Linpro Entities (See Item 13). Fees
payable in connection with such services in 1995 were less than 5% of the gross
revenues of Wm. M. Mercer, Incorporated in 1995.
Dennis J. O'Leary (age 48) was elected a Trustee on February 10, 1993 and is
Senior Vice President - Taxes of Reliance Group Holdings, Inc. Reliance
Insurance Company, an indirectly wholly-owned subsidiary of Reliance Group
Holdings, Inc., provides or provided insurance services to Brandywine, the
Trust, Brandywine National and Brandywine Enterprises during 1995. Fees payable
in connection with the services rendered in 1995 were less than 5% of the gross
revenues of Reliance Insurance Company during 1995. On January 31, 1996, Mr.
O'Leary resigned as a Trustee of the Trust.
Peter P. DiLullo (age 45) was elected a Trustee on February 24, 1994 and is
Executive Vice President and Chief Operating Officer of LCOR, Incorporated and
The Linpro Company. Mr. DiLullo is a partner in various Linpro Entities (See
Item 13). Prior to 1989, Mr. DiLullo was the Chief Financial Officer of The
Linpro Company. Mr. DiLullo also served as Vice President - Finance of the Trust
from November 9, 1989 through February 23, 1994. From March 13, 1986 until his
election as Vice President - Finance, Mr. DiLullo served as a Trustee of the
Trust.
On February 9, 1996, the number of Trustees was expanded to five. The two
individuals elected, and certain information about them, are set forth below:
Richard M. Osborne (age 50) 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 sole Trustee of the Richard M. Osborne Trust, which, as of January
31, 1996, had acquired 538,800 or 29% of the outstanding Common Shares of the
Trust. Mr. Osborne also serves as a director for Great Lakes Bank, Mentor, Ohio.
Gerard H. Sweeney (age 39) was elected a Trustee on February 9, 1996. As
discussed below, Mr. Sweeney serves as President and Chief Executive Officer of
the Trust.
Each of the above Trustees, except Mr. O'Leary as noted above, has been elected
to hold office for a term expiring at the next annual meeting of the
shareholders of the Trust to be held in 1996.
Management and Executive Officers
Gerard H. Sweeney (age 39) was elected by the Trustees as President and Chief
Executive Officer of the Trust on August 8, 1994. From November 9, 1989 until
August 8, 1994, Mr. Sweeney had served upon his election by the Trustees as
President of the Trust. Prior to August 8, 1994, Mr. Sweeney was Vice President
of LCOR, Incorporated. Mr. Sweeney is a partner in various Linpro Entities.
Prior to April 23, 1992, Mr. Sweeney was Financial Vice President of The Linpro
Company. Mr. Sweeney served as Vice President - Finance of the Trust from March
13, 1986 until his election to serve as President of the Trust.
47
<PAGE>
Francine M. Haulenbeek (age 39) was elected by the Trustees as Vice President -
Finance and Secretary of the Trust on October 12, 1994 to serve until her
resignation or removal by the Trustees. Ms. Haulenbeek is the President of
Francine M. Haulenbeek & Company, a certified public accounting firm. From
February 13, 1991 until January 8, 1993, Ms. Haulenbeek had served as
Secretary-Treasurer of the Trust. From April 1992 through January 8, 1993, Ms.
Haulenbeek was an employee of LCOR, Incorporated. Prior to April 23, 1992, Ms.
Haulenbeek was Assistant Financial Vice President of The Linpro Company.
48
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Trust's officers, Trustees and persons who own more than 10% of the Trust's
Shares to file reports of ownership and changes in ownership with the Securities
and Exchange Commission and the American Stock Exchange. Officers, Trustees and
greater than 10% shareholders are required by regulation to furnish the Trust
with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Trust, or
written representations that no Annual Statements of Beneficial Ownership of
Securities on Form 5 were required, the Trust believes that during the fiscal
year ended December 31, 1995, all Section 16(a) filing requirements applicable
to its officers, Trustees and greater than 10% Shareholders were complied with.
Item 11. Executive Compensation
Executive Management Compensation
Cash and Non-Cash Compensation Paid to Certain Executive Officers
The following table sets forth, for the year ended December 31, 1995,
compensation information with respect to the Trust's President and Chief
Executive Officer. No information is included in the tables set forth in this
Item 11 in respect of Ms. Haulenbeek. Effective on October 1, 1994, the Trust
entered into an employment agreement with Ms. Haulenbeek. The term of the
agreement is effective through April 15, 1996 and under the agreement Ms.
Haulenbeek is entitled to receive an annual salary of up to $100,000. Ms.
Haulenbeek's annual 1995 salary totaled $93,000. Ms. Haulenbeek has not been
granted any options or other equity awards in the Trust.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Long -Term Compensation
Name and Principal Securities underlying
Position Year Salary Options/SAR's (#)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gerard H. Sweeney 1995 $130,000 (1) -0- (1)
President and Chief 1994 $55,000 (1) (2) $140,000 (1)
Executive Officer 1993 (2) -0-
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
(1) On August 8, 1994, the Trust entered into an employment agreement
with Mr. Sweeney. The term of the employment agreement is one year and
will continue thereafter until either party provides notice to the
other of its election to terminate the agreement. Under the employment
agreement, Mr. Sweeney is entitled to receive an annual salary of
$130,000. In addition, under the employment agreement, the Trust
granted Mr. Sweeney options to purchase 40,000 Common Shares at a per
share exercise price of $3.80 and options to purchase 100,000 Common
Shares at a per share exercise price of $6.50. The per share exercise
price of the options is subject to reduction as proceeds from the sale
of, or refinancing of debt secured by, Specified Projects are
distributed by the Trust to holders of the Trust's Shares 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
has been reduced to $2.07 (in respect of the options for 40,000 Shares)
49
<PAGE>
and to $4.77 (in respect to the options for 100,000 Shares) as a result
of distributions to shareholders from proceeds of the sale of two
Specified Projects during 1994 and the April 1995 refinancing of the
mortgage loan. In the event the employment of Mr. Sweeney is terminated
without cause, or in the event Mr. Sweeney terminates his employment
under certain circumstances, in either case following a change in
control of the Trust, the Trust will be obligated to pay Mr. Sweeney,
as severance, up to 150% of his base salary less the value of certain
unexercisable options on the date of termination.
(2) Prior to August 8, 1994, the date on which Mr. Sweeney became
employed by the Trust, under an employment agreement, his salary and
bonus were paid to him by LCOR, Incorporated. In February 1994, the
Trust paid LCOR, Incorporated $110,000, and LCOR, Incorporated in turn
used $60,000 of this amount to pay Mr. Sweeney a bonus in recognition
of his contribution to the restructuring by the Trust of its debt in
January 1994 and its sale of the Lincoln Centre Project in February
1994.
In February 1994, the Trust paid LCOR, Incorporated $110,000, which LCOR,
Incorporated in turn used to pay each of Messrs. Sweeney, then President of the
Trust, Madere, then Trustee of the Trust, and DiLullo, then Trustee and
Vice-President - Finance and Treasurer of the Trust, $60,000, $30,000 and
$20,000, respectively, as a bonus in recognition of his contribution to the
Trust's restructuring of its debt in January 1994 and its sale of the Lincoln
Centre Project in February 1994.
Stock Options Granted to Executive Officer During Last Fiscal Year
No options were awarded by the Trust to executive officers of the Trust during
1995.
Stock Options Held by Certain Executive Officer at December 31, 1995
The following table sets forth certain information regarding options for the
purchase of the Trust's Shares that were exercised and/or held by the Trust's
President and Chief Executive Officer at December 31, 1995. No other executive
officer of the Trust held options for the purchase of the Trust's Shares at any
time during 1995.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED
DECEMBER 31, 1995 AND FY 1995-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the Money
Shares Value Options/SARs at FY- Options/SARs at FY-
Acquired on Realized End (#) Exercisable/ End ($) Exercisable/
Name Exercise (#) ($) Unexercisable (1) Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gerard H. Sweeney...... N/A N/A 120,000 / 20,000 $30,000 / $30,000
President and Chief
Executive Officer
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) All figures represent options.
Compensation of Trustees
In 1995, the Trust paid each of Messrs. Carboni, DiLullo, Jerome and O'Leary
(former Trustee who resigned as of January 31, 1996) a fee of $5,000 per year
for his services as a Trustee plus $500 for each meeting of the Trustees or of a
committee of the Trustees attended in person. In 1995, the Trust paid Mr.
Carboni $7,917, each of Messrs. DiLullo and Jerome $7,417 and Mr. O'Leary $6,417
for their services and attendance at meetings during 1995. The Trust also
reimburses the Trustees for their expenses incurred in connection with their
duties as Trustees.
50
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 15, 1996, certain information
with respect to each person who is the beneficial owner of more than 5% of the
Shares, each person who is a Trustee and certain officers of the Trust:
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial % of Class
Name and Address of Ownership as of as of
Title of Class Beneficial Owner February 15, 1996 (1) February 15, 1996
-------------- ---------------- ---------------------- -----------------
<S> <C> <C> <C>
Shares of Joseph L. Carboni 500 less than 1%
Beneficial JLC Associates
Interest 212 Haddon Avenue
Westmont, NJ 08108
Shares of Peter P. DiLullo 66,500 (2)(3) 3.6%
Beneficial LCOR, Incorporated
Interest 300 Berwyn Park, Suite 115
Berwyn, PA 19312
Shares of Garry P. Jerome 937 less than 1%
Beneficial William M. Mercer, Inc.
Interest 1515 Market Street, Suite 400
Philadelphia, PA 19102
Shares of Richard M. Osborne Trust 538,800 29.0%
Beneficial Richard M. Osborne, Trustee
Interest OSAIR, Inc.
P.O. Box 1020
7001 Center Street
Mentor, OH 44061
Shares of Richard M. Osborne (4) (4)
Beneficial OSAIR, Inc.
Interest 7001 Center Street
Mentor, OH 44061
Shares of Gerard H. Sweeney 120,800 (5) 6.1%
Beneficial Brandywine Realty Trust
Interest Two Greentree Centre
Marlton, NJ 08053
Shares of Francine M. Haulenbeek - -
Beneficial Brandywine Realty Trust
Interest Two Greentree Centre
Marlton, NJ 08053
Shares of All Trustees and Executive Officers
Beneficial as a Group 727,537 36.8%
Interest ======= =====
</TABLE>
- ----------------------------------------
(1) Unless otherwise indicated, beneficial owners of such Shares have sole
voting and investment power.
(2) Includes 20,000 Shares owned by Brandywine Property Enterprises, Inc. of
which Mr. DiLullo is Vice President and 16.66% owner, with respect to which
Shares Mr. DiLullo disclaims beneficial ownership.
51
<PAGE>
(3) Consists of 46,500 Shares held by a trust of which Mr. DiLullo is a
trustee.
(4) Mr. Osborne is the sole Trustee of the Richard M. Osborne Trust which, as
of February 15, 1996, holds 538,800 or 29% of the outstanding common Shares
of the Trust.
(5) Includes options exercisable for 120,000 Shares. See Item 11. Executive
Compensation. Executive Management Compensation.
Item 13. Certain Relationships and Related Transactions
Approximately 40 individual partners operating through more than 350 different
limited partnerships, joint ventures and corporations (collectively, the "Linpro
Entities") were originally doing business under the name "The Linpro Company".
Central administrative and management functions for The Linpro Entities are
currently conducted by LCOR, Incorporated. Since its formation and through
February 1, 1995, the Trust directly and, through its investment in Brandywine,
indirectly entered into several transactions with Linpro Entities, as described
below.
Investment in Brandywine Realty Partners
The Trust was formed in 1986 to acquire a 68% general partner interest in
Brandywine. Brandywine was formed at the same time to acquire from Linpro
Entities the eight original Specified Projects located in Colorado, New Jersey,
North Carolina and Pennsylvania. One of these projects was sold in 1988 and
three others were sold in 1994, in each case to an unrelated party.
The original partners of Brandywine, from its inception in 1986 through January
1994, were the Trust, Brandywine National, which was formed by certain
principals of Linpro Entities to act as the Administrative Partner of
Brandywine, with a 2% general partner interest, and BSPI with a 30% general
partner interest. Brandywine Property Enterprises, Inc. ("Brandywine
Enterprises"), a Linpro Entity, acts as the sole general partner of BSPI.
In connection with the refinancing of the Specified Projects in January 1994, in
order to obtain the requisite approvals for the refinancing, the Trust and
Brandywine achieved a settlement of certain deficit restoration obligations
contingently owed by BSPI to Brandywine. Under the terms of the settlement, the
Trust 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 Trust's participation in
Brandywine's net cash flow was increased to 98% and BSPI waived certain voting
rights in Brandywine. Further, Brandywine National transferred its interest in
Brandywine to the Trust and the Trust was designated as Brandywine's new
administrative partner.
The Trust and BSPI, as general partners of Brandywine, are entitled, pursuant to
the Brandywine Partnership Agreement, to certain distributions from Brandywine.
Brandywine Enterprises as the general partner of BSPI, is entitled to certain
distributions from BSPI.
The principal purpose of Brandywine is to engage in the business of owning,
leasing, operating and ultimately selling the Specified Projects for the benefit
of the Trust and BSPI. Generally, all decisions relating to the administrative
and day-to-day operations of Brandywine, and all decisions required or permitted
to be made by Brandywine as a participant in any legal entity in which it has an
interest, were made through January 1994 by Brandywine National in its capacity
as Administrative Partner, or its designee. However, pursuant to the Brandywine
Partnership Agreement, through January 1994 certain decisions affecting
Brandywine required the unanimous consent of the partners, including decisions
relating to the acquisition of real estate other than the Specified Projects,
the refinancing of the Specified Projects or the entry into certain other
indebtedness by Brandywine and, in some instances, the sale of the Specified
Projects. Additionally, the approval of at least 70% in interest of the Partners
was required for certain other actions, including (i) the approval of
Brandywine's annual budget, (ii) making certain expenditures in excess of
budgeted amounts, (iii) the settlement of condemnation cases or insured casualty
losses or claims asserted against Brandywine in excess of specified amounts,
(iv) the entry into, amendment or termination of a lease in excess of one-third
of the net leasable area of a Specified Project or which requires the approval
of Brandywine pursuant to the terms of the management agreement and (v) the
entry into, amendment, renewal or extension of a contract between Brandywine and
Brandywine National or an affiliate of Brandywine National.
52
<PAGE>
When the Trust was designated as the Administrative Partner of Brandywine, the
Trust received substantially complete control with respect to the business and
affairs of Brandywine, including complete discretion with respect to the sale or
refinancing of the Specified Projects, without the need to obtain the consent of
BSPI or BSPI's limited partners. However, the Trust must obtain BSPI's consent
in order to, among other things, (i) amend the Brandywine Partnership Agreement
to require additional capital contributions by BSPI or to revise any cash or
property distributions or tax allocations due BSPI, or (ii) acquire any real
estate investments in the name of Brandywine in addition to the Specified
Projects. The Trust, however, may, in its discretion, make future real estate
investments in its own name.
Settlement with BSPI
As part of the settlement with BSPI in connection with the January 1994
refinancing, the Trust's 25.83% limited partner interest in BSPI was transferred
to a subsidiary of Brandywine Enterprises and later retired. The Trust also
agreed to indemnify Brandywine Enterprises against potential liability in
connection with the foregoing transactions up to a maximum of $300,000 and
transferred to Brandywine Enterprises certain rights to receive distributions
relating to the contingent deficit restoration obligations.
Trust Administration
Administrative and management functions for the Trust were performed by LCOR,
Incorporated through August 8, 1994. Beginning in 1993 and continuing through
August 8, 1994, the Trust reimbursed LCOR, Incorporated up to $100,000 per year
for certain administrative expenses directly attributable to the Trust,
consisting, in part, of a portion of the salaries for certain personnel provided
by LCOR, Incorporated. During 1994, this reimbursement totaled $75,000. During
1995, no such reimbursement was made.
During August of 1994, the Trust hired two full-time employees and, as of
December 31, 1995, has three full-time employees. Effective February 1, 1995,
the Trust 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.
Brandywine Property Management
In connection with the acquisition of each Specified Project in 1986, Brandywine
entered into management agreements with Linpro Entities engaged in the property
management business pursuant to which the property manager provides leasing and
property management services. During 1994, six of the then seven remaining
Specified Projects (including Lincoln Centre and Iron Run) were operated under a
management agreement with a Linpro Entity and one of the Specified Projects 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 currently held Specified Projects were operated under an agreement with a
Linpro entity and one of the Specified Projects 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 Specified Projects and are paid a
management fee monthly in arrears equal to 5% of the rental income of the
Specified Projects. 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 Specified Projects 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 the defined commission structure representing
administrative costs, which costs would otherwise have been borne by the Trust.
Such amount absorbed by LCOR Incorporated representing administrative costs,
which would otherwise have been borne by the Trust, totaled $23,000 in 1995 and
$92,000 in 1994.
53
<PAGE>
Trustee and Officer Interests in Related Parties
Mr. DiLullo, a Trustee of the Trust as of December 31, 1995, is a partner in or
an officer of, or has direct or indirect ownership interests in, certain Linpro
Entities as follows: Brandywine Property Enterprises, Inc. (16.66%) and the
Property Manager of One, Two and Three Greentree Centres through January 31,
1995 (8.0%). Management fees paid to the Property Manager of One, Two and Three
Greentree Centres totaled $10,000 in 1995.
Mr. Sweeney, the President and Chief Executive Officer of the Trust as of
December 31, 1995, was a partner in or an officer of, or had direct or indirect
ownership interests in, certain Linpro Entities as follows: Brandywine Property
Enterprises, Inc., through January 1, 1995 and the Property Manager of One, Two
and Three Greentree Centres through January 31, 1995 (7.0%).
54
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Documents filed as part of this report:
(A) Financial Statements
(1) Financial Statements --See Index in Item 8
(2) Financial Statement Schedule
(a) III--Real Estate and Accumulated
Depreciation--December 31, 1995
Note:Schedules not included have been omitted because they are not
applicable or are not required or the required information is
reported in the financial statements or notes thereto.
(B) Reports on Form 8-K: The Trust filed a report on Form 8-K dated January 19,
1996 regarding the purchase of 538,800 Common Shares of the Trust or
approximately 29% of the outstanding Common Shares by the Richard M.
Osborne Trust of which Richard M. Osborne is the sole trustee.
(C) Exhibits:
The exhibits filed as part of this report are listed in the Index to Exhibits
located on pages 59 and 60 hereof.
55
<PAGE>
SCHEDULE III
BRANDYWINE REALTY TRUST
Real Estate and Accumulated Depreciation - December 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
Initial Cost Net
--------------------------------- Improvements
Buildings (Retirements)
Encumbrances and Since
Property at December 31, Improvements Acquisition
Description 1995 Land (2) (3)
----------- --------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Twin Forks $ 2,729(1) $ 2,442 3,950 $ (532)
Office
Raleigh, NC
One Greentree (1) 710 5,515 (1,562)
Office
Marlton, NJ
Two Greentree (1) 694 5,686 (1,496)
Office
Marlton, NJ
Three Greentree (1) 858 7,573 (2,015)
Office
Marlton, NJ
---------- ---------- -------- --------
$ 8,391(1) $ 4,704 22,724 (5,605)
========== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at Which Carried
December 31, 1995 Accumulated
-------------------------------------------- Depreciation
Buildings at
Property and Total December 31, Date of Date Depreciable
Description Land Improvements (4) (5) & (6) 1995 (7) Construction Acquired Life
----------- --------- ------------ ------------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Twin Forks $ 2,194 $ 3,666 $ 5,860 $ 1,736 1982 1986 30 years
Office
Raleigh, NC
One Greentree 345 4,318 4,663 1,848 1982 1986 30 years
Office
Marlton, NJ
Two Greentree 264 4,620 4,884 1,886 1983 1986 30 years
Office
Marlton, NJ
Three Greentree 323 6,093 6,416 2,644 1984 1986 30 years
Office
Marlton, NJ
-------- --------- --------- ---------
$ 3,126 $ 18,697 $21,823 $ 8,114
======== ========= ========= =========
</TABLE>
56
<PAGE>
Notes to Schedule III
(1) At December 31, 1995, the two mortgage loans total $2,729,000 and
$6,202,000, respectively. The loans are cross-collateralized and are
secured by first mortgages on each of the Specified Projects.
(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 on Schedule III were acquired in
1986 for cash, subject to certain encumbrances which encumbrances were
retired 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):
Real Estate
Investments
-----------
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
===========
(7) Reconciliation of Accumulated Depreciation:
The following table reconciles the accumulated depreciation from January 1,
1995 to December 31, 1995 (in thousands):
Real Estate
Investments
-----------
Balance at beginning of year $ 7,387
Additions during period:
Depreciation expense 869
Deletions during period:
Sales --
Retirements (142)
-----------
Balance at end of year $ 8,114
57
<PAGE>
BRANDYWINE REALTY TRUST
SIGNATURES OF REGISTRANT
Pursuant to the requirements of Section 13 of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
BRANDYWINE REALTY TRUST
By: /s/ Gerard H. Sweeney
------------------------------------
Gerard H. Sweeney, President
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerard H. Sweeney President, Chief Executive Officer March 25, 1996
- ----------------------------- and Trustee
(Gerard H. Sweeney) (Principal Executive Officer)
/s/ Francine M. Haulenbeek Vice President - Finance and Secretary March 25, 1996
- ---------------------------- (Principal Financial
(Francine M. Haulenbeek) and Accounting Officer)
/s/ Joseph L. Carboni* Trustee and Chairman of the Board March 25, 1996
- ------------------------------
(Joseph L. Carboni)
/s/ Peter P. DiLullo* Trustee March 25, 1996
- ---------------------------------
(Peter P. DiLullo)
/s/ Garry P. Jerome* Trustee March 25, 1996
- -------------------------------
(Garry P. Jerome)
/s/ Richard M. Osborne* Trustee March 25, 1996
- -----------------------------
(Richard M. Osborne)
*By: /s/ Gerard H. Sweeney
----------------------------
Gerard H. Sweeney, Pursuant to
Power of Attorney on file with the
Commission
</TABLE>
58
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page this
Number Description Filing
- ------- ----------- ----------
<S> <C> <C>
*** 3.1 Amended and Restated Declaration of Trust of the Trust
*** 3.2 Amended and Restated By-laws of the Trust
+ 4.1 Form of Share Certificates
* 10.01 Form of Brandywine Partnership Agreement
* 10.02 Form of Original Management Agreement (for
Specified Projects acquired indirectly)
* 10.03 Form of Original Management Agreement (for
Specified Projects acquired directly)
* 10.09 Form of Specified Project Partnership Agreement
* 10.11 Forms of Original Mortgage Loan Agreements and Certain Related
Documents
* 10.12 Form of Dividend Reinvestment Agreement
**10.17 Promissory Note and Certain Related Documents -
January 1994 Refinancing
**10.18 Indemnity Agreement - January 1994 Refinancing
**10.19 Option Agreement - January 1994 Refinancing
**10.20 Settlement Agreement with Mutual Release (among the
Trust, Brandywine, BSPI, Brandywine National,
Brandywine Enterprises and the BSPI limited partners)
**10.21 Amendment to Brandywine Partnership Agreement
**10.22 Mutual Settlement and Release (among the Trust, Brandywine,
BSPI, Brandywine National and Brandywine Enterprises)
**10.23 Purchase Agreement and Certain Related Documents (relating to the
Trust's acquisition of an interest in BSPI)
**10.24 Purchase Agreement and Certain Related Documents (relating to the
Trust's acquisition of an interest in BSPI)
**10.25 Purchase and Sale Agreement and Certain Related Documents (relating
to sale of Trust's interest in BSPI)
**10.26 Purchase and Sale Agreement (relating to sale of Lincoln Centre)
+ 10.27 Purchase and Sale Agreement (relating to sale of Academy Downs)
</TABLE>
59
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page this
Number Description Filing
- ------- ----------- ----------
<S> <C> <C>
+ 10.28 Purchase and Sale Agreement (relating to sale of Iron Run)
+ 10.29 Employment Agreement of Executive Officer ++
+ 10.30 Employment Agreement of Officer ++
+++10.31 Secured Promissory Notes, Security Agreements and Assignments of
Leases and Rents - April 1995 refinancing
+++10.32 Indemnity Agreement - April 1995 refinancing
+++10.33 Escrow Agreement - April 1995 refinancing
10.34 Agreement among the Trust, Richard M. Osborne and the 65-69
Richard M. Osborne Trust
24 Powers of Attorney 61-64
</TABLE>
- ---------------
*Previously filed as an exhibit (with the same exhibit number) to the Trust's
Registration statement on Form S-11 (File No. 33-4175) and is incorporated by
reference as an exhibit to this report.
**Previously filed as an exhibit (with the same exhibit number) to the Trust's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and
incorporated by reference as an exhibit to this report.
***Previously filed as an exhibit (with the same exhibit number) to the Trust's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and
incorporated by reference as an exhibit to this report.
+Previously filed as an exhibit (with the same exhibit number) to the Trust's
Form 10-K for the fiscal year ended December 31, 1994 and incorporated by
reference as an exhibit to this report.
++Compensatory Arrangement.
+++Previously filed as an exhibit (with the same exhibit number) to the Trust's
Form 8-K dated April 21, 1995 and incorporated by reference as an exhibit to
this report.
- ----------
The Trust will furnish to any shareholder, upon written request, copies of any
exhibit incorporated by reference, for a fee of $0.20 per page, to cover the
cost of furnishing the exhibits. Written requests should be directed to:
Brandywine Realty Trust
Attn: Ms. Valerie Collins
Two Greentree Centre, Suite 100
Marlton NJ 08053
60
<PAGE>
APPENDIX E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
__x__ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996
or
_____ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ___________________
Commission file number 1-9106
-----------------------
Brandywine Realty Trust
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 23-2413352
- ---------------------- ---------------------------------------
(State of Organization) (I.R.S. Employer Identification Number)
Two Greentree Centre, Suite 100, Marlton, New Jersey 08053
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(609) 797-0200
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [ ]
A total of 1,856,200 Shares of Beneficial Interest were outstanding as of May 7,
1996.
<PAGE>
BRANDYWINE REALTY TRUST
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
Consolidated Balance Sheets as of March 31, 1996 (unaudited)
and December 31, 1995
Consolidated Statements of Operations for the three months
ended March 31, 1996 and March 31, 1995 (unaudited)
Consolidated Statements of Cash Flow for the three months
ended March 31, 1996 and March 31, 1995 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities -- Not applicable
Item 3. Defaults Upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -
Not applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1: Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
REAL ESTATE INVESTMENTS
Operating properties, at adjusted cost $ 21,511 $ 21,823
Accumulated depreciation (7,741) (8,114)
---------- ---------
13,770 13,709
CASH AND CASH EQUIVALENTS 701 840
ESCROWED CASH 760 1,155
DEFERRED COSTS net of accumulated amortiza-
tion of $476 in 1996 and $507 in 1995 1,336 1,027
ACCOUNTS RECEIVABLE AND OTHER ASSETS 390 374
---------- ---------
Total assets $ 16,957 $ 17,105
========== =========
LIABILITIES AND BENEFICIARIES' EQUITY
MORTGAGE NOTE PAYABLE $ 8,905 8,931
ACCRUED MORTGAGE INTEREST 70 60
TENANT SECURITY DEPOSITS AND DEFERRED
RENTS 236 250
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 392 427
DISTRIBUTIONS PAYABLE - 93
---------- -------
Total liabilities 9,603 9,761
---------- -------
MINORITY INTEREST - -
COMMITMENTS AND CONTINGENCIES
BENEFICIARIES' EQUITY
Shares of beneficial interest, $0.01 par value,
5,000,000 preferred shares, authorized,
none outstanding; 15,000,000 common shares
authorized, 1,856,200 shares issued and
outstanding 19 19
Additional paid-in capital 16,772 16,772
Cumulative deficit (3,076) (3,086)
Cumulative distributions (6,361) (6,361)
---------- ---------
Total beneficiaries' equity 7,354 7,344
---------- ---------
Total liabilities and beneficiaries' equity $ 16,957 $ 17,105
========== =========
</TABLE>
The accompanying notes and management's discussion and analysis of financial
condition and results of operations are an integral part of these statements.
3
<PAGE>
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUE:
Rents and tenant reimbursements $ 1,007 $ 907
Other income 38 20
----------- ----------
Total revenue 1,045 927
EXPENSES:
Interest 207 176
Depreciation and amortization 242 282
Utilities 133 130
Real estate taxes 99 97
Maintenance 207 137
Other operating expenses 23 28
Administrative expenses 122 147
--------- ----------
Total expenses 1,033 997
INCOME (LOSS) BEFORE MINORITY INTEREST 12 (70)
MINORITY INTEREST IN INCOME (LOSS) OF
BRANDYWINE REALTY PARTNERS 2 -
----------- ----------
NET INCOME (LOSS) $ 10 $ (70)
=========== ==========
PER SHARE DATA:
Earnings per share of beneficial interest
Primary
Net income (loss) $ 0.01 $ (0.04)
=========== ==========
Distributions declared $ 0.00 $ 0.00
=========== ==========
Weighted average number of shares outstanding
including share equivalents 1,876,944 1,872,724
=========== ==========
</TABLE>
The accompanying notes and management's discussion and analysis of financial
condition and results of operations are an integral part of these statements.
4
<PAGE>
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 10 $ (70)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Minority interest in income of Brandywine Realty Partners 2 -
Depreciation and amortization 242 282
Changes in assets and liabilities
Decrease (increase) in accounts receivable (20) $ 33
Decrease (increase) other assets 6 12
(Decrease) increase in other liabilities (44) (31)
------- ---------
Net cash provided by operating activities 196 226
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and leasing commissions paid (439) (192)
Decrease in escrowed cash 395 192
------- ---------
Net cash used in investing activities (44) -
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to shareholders (93) (1,299)
Minority Partner distributions (2) -
Repayment of mortgage notes payable (26) -
Costs associated with new ventures (179) -
Deposit associated with refinancing commitment - (318)
Tenant security deposits and other financing activities 9 (10)
------- ---------
Net cash used in financing activities (291) (1,627)
------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (139) (1,401)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 840 1,766
------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 701 $ 365
======= =========
</TABLE>
The accompanying notes and management's discussion and analysis of financial
condition and and results of operations are an integral part of these
statements.
5
<PAGE>
BRANDYWINE REALTY TRUST
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
Brandywine Realty Trust (the "Trust"), was formed on February 26, 1986 as a real
estate investment trust. On July 31, 1986, the Trust sold through an initial
public offering 1,856,200 shares of beneficial interest, the net proceeds of
which were $17,168,000. On July 31, 1986, the Trust acquired a 68% general
partner interest in Brandywine Realty Partners ("Brandywine"), at a total cost
of $16,787,000. As of March 31, 1996, the partners of Brandywine and their
percentage ownership were as follows:
% Ownership
-----------
Brandywine Realty Trust,
a Maryland real estate investment trust 70%
Brandywine Specified Property
Investors Limited Partnership ("BSPI"), a
Pennsylvania limited partnership 30%
---
100%
===
At March 31, 1996, the Trust's portfolio was comprised of four commercial real
estate projects ("the Specified Projects"). The Specified Projects are leased
for office purposes. As of March 31, 1996 and December 31, 1995, the overall
occupancy rate of the Specified Projects was constant at 97%. As of March 31,
1996, existing leases totaling 60,000 square feet or 24% of the total square
feet, were scheduled to expire during the remaining nine months of 1996.
The Specified Projects 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 March 20, 1996, the Trust entered into a letter of intent with Safeguard
Scientifics, Inc. ("SSI") and SSI's real estate affiliate, The Nichols Company
("TNC"). The Trust intends to form an investment partnership with SSI and TNC to
acquire, for cash and equity interests, 19 properties currently owned by SSI,
TNC and their affiliates. The proposed transaction is subject to customary
conditions, including negotiation and execution of definitive documentation, due
diligence and approval by the Trust's shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
The financial statements have been prepared by the Trust 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 Trust believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of the Trust, all adjustments necessary
to present fairly the financial position of the Trust as of March 31, 1996, and
the results of its operations and its cash flows for the three months ended
March 31, 1996 and 1995 have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
For further information, refer to the Trust's consolidated financial statements
and footnotes thereto included in The Annual report on Form 10-K for the year
ended December 31, 1995.
6
<PAGE>
Principles of Consolidation
- ---------------------------
The Trust consolidates the accounts of Brandywine with the Trust and reflects
the BSPI investment as Minority Interest. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Capitalization of Costs
- -----------------------
As of March 31, 1996, the Trust had incurred $648,000 in costs associated with
its pursuit of potential acquisitions of additional real estate and third party
equity and debt investments. Such costs are included in deferred costs on the
Trust's balance sheets as of March 31, 1996 and December 31, 1995 totaling
$648,000 and $357,000, respectively. Further, in connection with these efforts
as of March 31, 1996 and December 31, 1995, the Trust had deposited $95,000 with
an unrelated party. Such deposit is included in other assets on the balance
sheets as of March 31, 1996 and December 31, 1995.
During the first quarter of 1996, the Trust retired fully amortized deferred
assets totaling $75,000.
Net Income (Loss) Per Share
- ---------------------------
Net income (loss) per share is calculated based upon the weighted average shares
outstanding which were 1,876,944 in 1996 and 1,872,724 in 1995. Earnings per
share for 1996 and 1995 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 March 31, 1996 and March
31, 1995, respectively, for the fully diluted earnings per share calculation. No
such options have been exercised as of March 31, 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
March 31, 1996 and December 31, 1995, cash and cash equivalents totaling
$701,000 and $840,000, respectively included tenant escrow deposits of $207,000
and $198,000, respectively.
Reclassifications
- -----------------
Certain 1995 amounts have been reclassified to conform to the current year
presentation.
3. REAL ESTATE INVESTMENTS:
------------------------
Real estate investments are carried at the lower of adjusted cost or estimated
net realizable value. During the first quarter of 1996, the Trust retired fully
depreciated assets totaling $575,000.
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 requires that long-lived
assets to be held and used by the Trust 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 Trust
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
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 Trust adopted
this statement. The effect of adopting this statement was not material to the
Trust's financial position or results of operations.
7
<PAGE>
4. MORTGAGE NOTE PAYABLE:
----------------------
On April 21, 1995, the Trust 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 is 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.
The loan is generally nonrecourse to the Trust as to interest and principal,
except, among other factors, 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.
The lender is entitled to hold escrow cash reserves for real estate taxes and
capital requirements. 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 Trust. The capital escrow account held by the lender does
not constitute additional collateral for the mortgage loans. At March 31, 1996
and December 31, 1995, the principal balance of the loans totaled $8,905,000 and
$8,931,000, respectively, and the capital and real estate tax escrow accounts
totaled $760,000 an $1,155,000, respectively.
5. BENEFICIARIES' EQUITY:
----------------------
For the year ended December 31, 1995, the Trust declared distributions totaling
$0.55 per share. Subsequent to March 31, 1996, on May 1, 1996, the Trust
declared a distribution of $0.06 per share payable on May 15, 1996 to
shareholders of record as of May 10, 1996.
6. 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
Trust covering 140,000 common shares of beneficial interest. The plan includes
options exercisable for 100,000 shares at an exercise price of $6.50. Of the
remaining 40,000 shares subject to options, options covering 20,000 shares
vested on August 8, 1995 and options covering 20,000 shares vest on August 8,
1996. The exercise price of the 40,000 options was set at $3.80. The per share
exercise price of the options covering all 140,000 shares is subject to
reduction as proceeds from the sale of, or refinancing of debt secured by, any
Specified Projects are distributed by the Trust 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
$4.77 and $2.07, respectively, as a result of distributions to shareholders from
proceeds of 1994 property sales and the April 21, 1995 mortgage refinancing.
During the three months ended March 31, 1996 and the year ended December 31,
1995, there were no options exercised, canceled or expired.
On January 1, 1996, the Trust 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 Trust has adopted the pro forma method of disclosure as
described above.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The Trust's consolidated net income for the period from January 1, 1996 to March
31, 1996 was $10,000 or $0.01 per share as compared to a consolidated net loss
of ($70,000) or ($0.04) per share for the period January 1, 1995 to March 31,
1995.
The Trust's funds from operations for the three months ended March 31, 1996
totaled $244,000 or $0.13 per share. The Trust has adopted the new definition of
funds from operations under current industry practice. The new definition of
funds from operations is calculated as net income(loss) adjusted for
depreciation expense attributable to real property and amortization expense
attributable to capitalized leasing costs and tenant allowances and
improvements. The old definition of funds from operations is calculated as net
income excluding extraordinary items, gains and losses from sales of property,
plus depreciation and amortization and other non-cash charges and similar
adjustments for unconsolidated subsidiaries. All prior periods have been
adjusted to reflect the change to the new definition. The following table
identifies the calculation of funds from operations (in thousands):
Three months Three months Three months
ended ended ended
March 31, March 31, March 31,
1996 1995 1995
(new (new (as previously
definition) definition) reported)
----------- ---------------- -------------
Net income (loss) $ 10 $(70) $(70)
Add back:
Depreciation expense
attributable to real
property 202 232 232
Amortization expense
attributable to
capitalized leasing
costs and tenant
allowances and
improvements 32 33 33
Amortization expense
attributable to
capitalized loan costs - - 17
----- ---- ----
Funds From Operations $ 244 $195 $212
===== ==== ====
In comparing 1996 to 1995, rental revenue increased by $100,000 or 11% primarily
due to improved overall occupancy levels of the Specified Projects. Depreciation
and amortization expenses for 1996 decreased by $40,000 or 14% as compared to
1995 primarily as a result of longer terms attributable to new leases obtained
over the last year. Operating expenses of the Specified Projects increased by
$70,000 or 18% primarily due to snow removal and related costs incurred during
the winter of the first quarter of 1996. Administrative expenses decreased by
$25,000 or 17% primarily due to management's continued focus on reducing costs.
As of March 31, 1996 and December 31, 1995, the overall occupancy level of the
Specified Projects was 97%. During the first quarter of 1996, 2,000 square feet
of new leases and 35,000 square feet of renewals were obtained representing 14%
of the total space in the Specified Projects. Further, approximately 2,000
square feet or 1% of the total space in the Specified Projects was vacated. As
of March 31, 1996, approximately 60,000 square feet or 24% of the total space in
the Specified Projects represents leases expiring on or before December 31,
1996.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Trust's primary asset is its 70% general partner interest in Brandywine
which owns and operates the Specified Projects. The Trust's principal source of
liquidity consists of the distributions it receives from the operation of the
Specified Projects.
As of March 31, 1996, the Trust's consolidated cash balances were $701,000 as
compared to $840,000 as of December 31, 1995. In addition, escrowed cash
balances at March 31, 1996 and December 31, 1995 totaled $760,000 and
$1,155,000, respectively.
During the first three months of 1996, net cash provided by operating activities
totaled $196,000. Costs paid in connection with the Trust's pursuit of potential
acquisitions of additional real estate and third party equity and debt
investments totaled $179,000 for the first quarter of 1996. Additionally, during
this same period, the Trust paid $93,000 in distributions to shareholders, which
distributions were declared by the Trust in 1995. Tenant improvements and
leasing commissions paid during the first three months of 1996 relative to the
Specified Projects were paid from lender escrow funds and totaled $439,000. For
the first three months of 1996, the net decrease in lender escrow funds amounted
to $395,000.
During 1996, the Trust declared distributions as follows:
Declaration Date Record Date Payment Date Amount per Share
---------------- ----------- ------------ ----------------
May 1, 1996 May 10, 1996 May 15, 1996 $ 0.06
The Trustees have considered, and expect to continue to consider, potential
acquisitions by the Trust of additional real estate and real estate-related
interests and potential third party equity and debt investments in the Trust. At
the current time the Trust is actively pursuing the potential acquisition of
additional real estate and evaluating third party equity and debt investments in
the Trust. The Trust's business plan contemplates a focus on office and
industrial projects in the greater Philadelphia, Pennsylvania area. However,
there can be no assurance that the Trust will make an acquisition of additional
real estate or real estate-related interests or that any such acquisitions will
produce satisfactory returns for the Trust. Similarly, there can be no assurance
that the Trust will consummate any third party equity or debt investments in the
Trust or that any investments that might be made in the Trust would enable the
Trust to generate greater returns for the Shareholders.
As previously disclosed, on March 20, 1996, the Trust entered into a letter of
intent with Safeguard Scientifics, Inc. ("SSI") and SSI's real estate affiliate,
the Nichols Company ("TNC"). The Trust intends to form an investment partnership
with SSI and TNC to acquire, for cash and equity interests, 19 properties
currently owned by SSI, TNC and their affiliates. The proposed transaction is
subject to customary conditions, including negotiation and execution of
definitive documentation, due diligence and approval by the Trust's
shareholders.
The Trust believes that it qualifies for federal income tax purposes as a real
estate investment trust and intends to remain so qualified.
10
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
-----------------
Neither the Trust nor Brandywine is a party to any material pending legal
proceedings as of March 31, 1996 nor as of the date of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits: None
Reports on Form 8-K: None
11
<PAGE>
BRANDYWINE REALTY TRUST
SIGNATURES OF REGISTRANT
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BRANDYWINE REALTY TRUST
(Registrant)
Date: May 13, 1996 By: /s/ Gerard H. Sweeney
----------------------------------------
Gerard H. Sweeney, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1996 By: /s/ Francine M. Haulenbeek
-----------------------------------------
Francine M. Haulenbeek,
Vice President - Finance
and Secretary
(Principal Financial and Accounting Officer)
12
<PAGE>
Appendix F
INITIAL PROPERTIES
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and Owners of the
Initial Properties:
We have audited the accompanying combined balance sheets of the Initial
Properties, a nonlegal entity more fully described in Note 1, as of December 31,
1995 and 1994, 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 Initial
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 Initial
Properties 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.
/s/ ARTHUR ANDERSEN LLP
-------------------------------------
Philadelphia, Pa.,
April 12, 1996
<PAGE>
INITIAL PROPERTIES
------------------
COMBINED BALANCE SHEETS (NOTE 1)
--------------------------------
(In thousands)
<TABLE>
<CAPTION>
December 31
------------------------------------ March 31,
1995 1994 1996
(Unaudited)
<S> <C> <C> <C>
ASSETS:
Real estate investments (Note 2)-
Operating properties, at cost $ 78,190 $ 75,577 $ 79,088
Less- Accumulated depreciation (21,669) (17,858) (22,609)
-------------- --------------- ---------------
56,521 57,719 56,479
Cash (Note 2) 773 438 601
Escrowed cash (Note 2) 519 504 782
Accounts receivable 253 386 532
Accrued rental income (Notes 2 and 6) 902 1,313 860
Deferred costs, net (Note 2) 1,884 1,526 2,194
Prepaid expenses and other assets 400 393 217
-------------- --------------- ---------------
$ 61,252 $ 62,279 $ 61,665
============== =============== ===============
LIABILITIES AND OWNERS' DEFICIT:
Mortgage notes payable (Note 3) $ 63,259 $ 70,515 $ 63,281
Accrued interest payable 599 1,124 617
Tenant security deposits and other
liabilities (Note 2) 947 729 2,030
-------------- --------------- ---------------
64,805 72,368 65,928
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
OWNERS' DEFICIT (3,553) (10,089) (4,263)
-------------- --------------- ---------------
$ 61,252 $ 62,279 $ 61,665
============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
INITIAL PROPERTIES
------------------
COMBINED STATEMENTS OF OPERATIONS (NOTE 1)
------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
For the
Three-Month
For the Year Ended Period Ended
December 31 March 31
-------------------------------------- ---------------------
1995 1994 1993 1996 1995
----------- ----------- ----------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE (Note 4):
Base rents (Notes 2 and 6) $ 7,829 $ 8,050 $ 7,955 $ 1,886 $ 2,003
Tenant reimbursements 2,895 3,130 2,754 933 683
Management operations (Note 2) 617 946 976 161 208
Other income 3 46 2 1 --
----------- ----------- ----------- ----------- ----------
Total revenue 11,344 12,172 11,687 2,981 2,894
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Interest (Note 3) 5,855 5,915 5,807 1,308 1,502
Depreciation and amortization
(Note 2) 4,336 3,618 3,568 1,042 947
Real estate taxes 968 1,076 1,107 262 251
Building operating costs 2,456 2,719 2,073 942 574
Selling, general and
administrative (Note 5) 906 1,220 1,328 227 230
Provision for loss on real estate
investments (Note 2) 202 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses 14,723 14,548 13,883 3,781 3,504
----------- ----------- ----------- ----------- -----------
LOSS BEFORE
EXTRAORDINARY ITEMS (3,379) (2,376) (2,196) (800) (610)
EXTRAORDINARY ITEMS--
GAIN ON RESTRUCTURING
OF DEBT (Note 3) 5,559 614 -- -- --
----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) $ 2,180 $ (1,762) $ (2,196) $ (800) $ (610)
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INITIAL PROPERTIES
------------------
COMBINED STATEMENTS OF OWNERS' DEFICIT (NOTE 1)
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993,
-----------------------------------------------------
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
-----------------------------------------------------
(In thousands)
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 123
Distributions (33)
Net loss (800)
-----------
BALANCE AT MARCH 31, 1996 (Unaudited) $ (4,263)
===========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INITIAL PROPERTIES
------------------
COMBINED STATEMENTS OF CASH FLOWS (NOTE 1)
------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
For the
Three-Month
For the Year Ended Period Ended
December 31 March 31
------------------------------------------------------------
1995 1994 1993 1996 1995
--------- --------- --------- --------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,180 $ (1,762) $ (2,196) $ (800) $ (610)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Extraordinary gain on extinguishment
of debt (5,559) (614) -- -- --
Depreciation and amortization 4,336 3,618 3,568 1,042 947
Provision for loss on real estate
investments 202 -- -- -- --
Changes in assets and liabilities-
(Increase) decrease in-
Accounts receivable 133 (14) (248) (279) 64
Accrued rental income 411 458 (72) 42 100
Prepaid expenses and other assets (7) 427 (52) 183 76
Increase (decrease) in-
Accrued interest payable (525) 253 422 18 9
Tenant security deposits and
other liabilities 218 (204) 22 1,083 80
--------- --------- --------- --------- ---------
Net cash provided by
operating activities 1,389 2,162 1,444 1,289 666
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and leasing
commissions paid (2,774) (1,802) (908) (1,302) (212)
(Increase) decrease in escrowed cash (15) 87 (575) (263) (178)
--------- --------- --------- --------- ---------
Net cash used in
investing activities (2,789) (1,715) (1,483) (1,565) (390)
--------- --------- --------- --------- ---------
</TABLE>
(Continued)
F-5
<PAGE>
INITIAL PROPERTIES
------------------
COMBINED STATEMENTS OF CASH FLOWS (NOTE 1)
------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
For the
Three-Month
For the Year Ended Period Ended
December 31 March 31
--------------------------------- ----------------------
1995 1994 1993 1996 1995
--------- --------- --------- --------- -------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions $ 4,356 $ 64 $ 752 $ 123 $ 194
Distributions -- (766) -- (33) --
Repayments on mortgage notes payable (1,899) (874) (1,038) (153) (278)
Borrowings on mortgage notes payable -- 1,200 414 175 --
Costs associated with financing (721) (160) 17 (8) (20)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 1,735 (536) 145 104 (104)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 335 (89) 106 (172) 172
CASH, BEGINNING OF PERIOD 438 527 421 773 438
--------- --------- --------- --------- ---------
CASH, END OF PERIOD $ 773 $ 438 $ 527 $ 601 $ 610
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 6,254 $ 5,763 $ 5,411 $ 1,290 $ 1,366
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
INITIAL PROPERTIES
------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
DECEMBER 31, 1995, 1994 AND 1993
--------------------------------
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:
- -------------------------------------------
Property Square Footage
------------------------------------------ --------------
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*
---------------------------------------------------
*Included in the "Witmer Partnership"
Safeguard Scientifics, Inc. ("Safeguard") Properties:
- -----------------------------------------------------
Property Square Footage
------------------------------------------ --------------
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
The Initial Properties listed above have common management and were developed by
an affiliated ownership group referred to collectively as "Nichols Safeguard."
F-7
<PAGE>
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 Initial 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 interentity
accounts have been eliminated to reflect the combined results.
The combined financial statements as of March 31, 1996, and for the three months
ended March 31, 1996 and 1995, 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, 1995 and 1994, and March 31, 1996, follows (in
thousands):
December 31
------------------------- March 31,
1995 1994 1996
----------- ------------ -----------
Land $ 9,275 $ 8,975 $ 9,275
Buildings 53,761 52,263 53,761
Tenant improvements 15,107 14,299 16,005
Furniture, fixtures and equipment 47 40 47
----------- ------------ ------------
78,190 75,577 79,088
Accumulated depreciation (21,669) (17,858) (22,609)
----------- ------------ ------------
$ 56,521 $ 57,719 $ 56,479
=========== =========== ===========
F-8
<PAGE>
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:
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
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 $(408,000) and $1,072,000 at December 31, 1995 and
1994, respectively.
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 Initial 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.
F-9
<PAGE>
Deferred Costs
- --------------
Fees and costs associated with lease originations 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, 1995 and 1994, and March 31,
1996, deferred costs include the following (in thousands):
December 31
-------------------------- March 31,
1995 1994 1996
---------- ---------- -----------
Deferred financing costs $ 1,009 $ 349 $ 1,017
Deferred leasing costs 2,770 2,957 3,175
---------- ---------- -----------
3,779 3,306 4,192
Less- Accumulated amortization 1,895 1,780 1,998
---------- ---------- -----------
$ 1,884 $ 1,526 $ 2,194
========== ========== ===========
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.
Tenant Security Deposits
- ------------------------
Cash consists of demand accounts and money market accounts. At December 31, 1995
and 1994, and March 31, 1996, cash includes unrestricted tenant security
deposits of $350,000, $270,000, and $352,000, respectively.
F-10
<PAGE>
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, respectively, 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, 1995, 1994 and 1993, were
8.6%, 8.0% and 8.2%, respectively. Weighted average interest rates for the three
months ended March 31, 1996 and 1995, were 8.2% 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 March 31, 1996, $175,000 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 three months ended March 31, 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 three months ended March 31, 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.
F-11
<PAGE>
Mortgage notes are due between January 1997 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 approximate current market rates. The
annual maturities of the mortgage notes payable as of December 31, 1995, are as
follows (in thousands):
Recourse Nonrecourse Total
------------- ------------- -------------
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
============= ============= =============
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 1995, 1994 and 1993,
additional interest expense recorded as a result of cash flow participation by
lenders totaled $61,000, $201,000 and $0, respectively. For the three months
ended March 31, 1996 and 1995, additional interest expense totaled $0 and
$47,000, 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 $171,000, $420,000 and $359,000,
respectively, for the years ended December 31, 1995, 1994 and 1993, and are
included in management operations.
Nichols Safeguard occupied approximately 28,000 square feet of the properties
during 1995, 1994 and 1993. 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, 1995, 1994 and 1993, were $246,000,
$260,000 and $230,000, respectively. Base rents from these affiliated
partnerships for the three months ended March 31, 1996 and 1995, were $56,000
and $65,000, 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 1995, 1994 and 1993,
respectively.
F-12
<PAGE>
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.
Future minimum rentals on noncancelable tenant leases at December 31, 1995,
excluding tenant reimbursements for increases in operating expenses are as
follows (in thousands):
Decrease
Rental in Accrued Minimum
Payments Due Rental Income Rental Income
----------- ------------- -------------
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
=========== ============= =============
During 1995, 1994 and 1993, no tenants individually accounted for more than 10%
of rental revenue.
7. COMMITMENTS AND CONTINGENCIES:
------------------------------
Nichols and Safeguard have entered into a letter of intent agreement with the
Trust to transfer ownership of the Initial Properties to an operating
partnership controlled by the Trust.
F-13
<PAGE>
APPENDIX G
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 21, 1996
BRANDYWINE REALTY TRUST
-----------------------
(Exact name of registrant as specified in its charter)
MARYLAND 1-9106 23-2413352
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation or Organization) file number) Identification Number)
Two Greentree Centre, Suite 100, Marlton, New Jersey 08053
(Address of principal executive offices)
(609) 797-0200
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
On June 21, 1996, an entity controlled by Richard M. Osborne,
Turkey Vulture Fund XIII, Ltd. (the "RMO Fund"), made an investment in
Brandywine Realty Trust (the "Trust") in the aggregate amount of $1,329,806 (the
"Aggregate Investment"). $337,513 of the Aggregate Investment was made in
exchange for 59, 949 units (each consisting of one common share of beneficial
interest, par value $.01 per share ("Common Stock"), and one warrant exercisable
for six years for an additional share of Common Stock at an initial exercise
price of $6.50), and the balance was made in the form of a loan (the "Loan")
that will be subject to prepayment, under certain circumstances, through the
issuance by the Trust of additional units. Proceeds of the investment (including
proceeds attributable to exercise of warrants included within units) will be
used by the Trust for working capital purposes and, if the Trust acquires
additional real estate, may be used to make a partial payment of the purchase
price.
The Trust has been advised that Mr. Osborne has sole authority
to vote and dispose of the Common Stock owned by the RMO Fund. Mr. Osborne,
through the RMO Fund and the Richard M. Osborne Trust (of which Mr. Osborne is
sole trustee) currently owns beneficially 658,698 shares of Common Stock
(including 59,949 shares issuable upon exercise of warrants included within the
above-referenced units), or approximately 33.3% of the outstanding shares of
Common Stock as of the date hereof.
The principal sum outstanding from time to time under the Loan
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 Trust 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 Trust will
be required to prepay principal plus accrued interest on the Loan by delivering
to the RMO Fund additional units at $5.63 per unit, each units comprised of one
share of Common Stock and an additional six-year warrant exercisable for an
additional share of Common Stock with an initial exercise price of $6.50.
The Trust has agreed to provide the RMO Fund with registration
rights covering the shares of Common Stock issued and issuable as part of its
investment. The registration rights agreement (the "Registration Rights
Agreement") will be entered into by the Trust, the RMO Fund, Safeguard
Scientifics, Inc. ("SSI") and The Nichols Company ("TNC") at the time of the
closing of the proposed transaction among the Trust, SSI and TNC (the "SSI/TNC
Transaction"). If the SSI/TNC Transaction is not consummated, the Trust will
provide registration rights to the RMO Fund on substantially similar terms to
those that would have been provided in the form of Registration Rights Agreement
attached hereto as Exhibit 99.4.
-2-
<PAGE>
The Registration Rights Agreement will provide that, at the
request of certain holders of registerable securities, including the RMO Fund
("Registrable Securities"), the Trust will, at its expense, register up to two
underwritten distributions of Registrable Securities and provide for an annual
shelf registration of such Registrable Securities for sale at the market through
brokers' transactions and thereafter with marketmakers; provided, however, that
the Trust will not be obligated to pay the expenses of an underwritten offering
during the first twelve months after the closing date of the SSI/TNC
Transaction. The holders of Registrable Securities will also be entitled to
"piggyback" on the registrations of the Trust's Common Stock. In connection with
the registrations, the Trust and the selling shareholders will mutually
indemnify each other against certain liabilities, including liabilities under
federal securities laws.
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits.
(c) Exhibits
99.1 Loan and Securities Purchase Agreement, dated June 21, 1996,
between the RMO Fund and the Trust.
99.2 Promissory Note, dated June 21, 1996, in the original
principal amount of $992,293 issued by the Trust to the RMO
Fund.
99.3 Warrant to purchase 59,949 shares of Common Stock dated June
21, 1996, issued by the Trust to the RMO Fund.
99.4 Form of Registration Rights Agreement.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
BRANDYWINE REALTY TRUST
Date: June 21, 1996 By: /s/ Gerard H. Sweeney
---------------------
Title: President and Chief
Executive Officer
-4-
<PAGE>
Appendix H
BRANDYWINE REALTY TRUST
LIBERTYVIEW BUILDING
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE>
ARTHUR ANDERSEN LLP
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.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Philadelphia, Pa.,
June 14, 1996
<PAGE>
LIBERTYVIEW BUILDING
--------------------
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
------------------------------------------
(Notes 1 and 2)
---------------
For the
For the Three-Month
Year Ended Period Ended
December 31, March 31,
1995 1996
(unaudited)
-------------- --------------
REVENUE:
Base rents (Note 2) $ 1,119,000 $ 300,000
Tenant reimbursements 535,000 122,000
-------------- --------------
Total revenue 1,654,000 422,000
-------------- --------------
CERTAIN EXPENSES:
Maintenance 277,000 71,000
Utilities 215,000 59,000
Real estate taxes 274,000 74,000
Other operating expenses 32,000 8,000
-------------- --------------
Total certain expenses 798,000 212,000
-------------- --------------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 856,000 $ 210,000
============== ==============
The accompanying notes are an integral part of these statements.
<PAGE>
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 books 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 Property--that may not be
comparable to the expenses expected to be incurred by the Trust.
2. OPERATING LEASES:
-----------------
Base rents presented for the year ended December 31, 1995 and the three month
period ended March 31, 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 three month period
ended March 31, 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:
HIP Health Plan of NJ $ 462,000
Shapiro and Kreisman $ 185,000
In September 1995, LibertyView Building entered into a 60-month lease agreement
with Sleepcare, a related party to the seller, of which $18,000 and $14,000 of
base rents for the year ended December 31, 1995 and the three-month period ended
March 31, 1996, respectively, is included in the statements of revenue and
certain expenses.
<PAGE>
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:
1996 $ 1,205,000
1997 1,177,000
1998 1,118,000
1999 1,118,000
2000 950,000
Thereafter 4,440,000
Certain leases also include provisions requiring tenants to reimburse management
costs and other overhead up to stipulated amounts.
<PAGE>
[FORM OF PROXY CARD]
BRANDYWINE REALTY TRUST
Proxy Solicited On Behalf Of The Board of Trustees
The undersigned, revoking all previous proxies, hereby appoints Joseph
L. Carboni and Gerard H. Sweeney, and each of them acting individually, as the
attorney and proxy of the undersigned, with full power of substitution, to vote,
as indicated below and in their discretion upon such other matters as may
properly come before the meeting, all shares which the undersigned would be
entitled to vote at the Annual Meeting of the Shareholders of the Brandywine
Realty Trust to be held on August 22, 1996, and at any adjournment or
postponement thereof.
1. The approval of the SSI/TNC Transaction:
For Against Abstain
2. The approval and adoption of the amendment to the Declaration of Trust to
increase the number of authorized Common Shares from 15,000,000 to
75,000,000:
For Against Abstain
3. The approval and adoption of the amendment to the Declaration of Trust to
eliminate the restriction in Section 3.3(a) on Share issuances below "book
value":
For Against Abstain
4. The approval and adoption of the amendment to the Declaration of Trust to
confirm the authority of the Trustees to effectuate reverse stock splits:
For Against Abstain
5. The approval and adoption of the amendment to the Declaration of Trust to
eliminate the distribution requirement contained in Section 6.4(b):
For Against Abstain
6. The approval and adoption of the amendment to the Declaration of Trust to
substitute a new provision limiting Share ownership:
For Against Abstain
<PAGE>
7. The approval of restoration of voting rights on the Common Shares
beneficially owned by Richard M. Osborne which do not have voting rights:
For Against Abstain
8. Election of Trustees:
FOR the nominees listed below WITHHOLD AUTHORITY to vote for
the nominees listed below
EXCEPTIONS
Nominees: For a one-year term extending until the 1997 Annual Meeting and the
election and qualification of his successor: Joseph L. Carboni,
Richard M. Osborne and Gerard H. Sweeney
(Instruction: To withhold authority to vote for any nominee, mark the
"Exceptions" box and write that nominee's name in the space provided below.)
Please date and sign your Proxy on this side and return it
promptly.
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES. UNLESS
OTHERWISE SPECIFIED, THE SHARES WILL BE VOTED "FOR" THE APPROVAL OF THE SSI/TNC
TRANSACTION, "FOR" THE ADOPTION OF EACH OF THE DECLARATION AMENDMENTS, "FOR"
RESTORATION OF VOTING RIGHTS ON THOSE COMMON SHARES BENEFICIALLY OWNED BY
RICHARD M. OSBORNE WHICH DO NOT HAVE VOTING RIGHTS AND "FOR" THE ELECTION OF
THE NOMINEES FOR TRUSTEE LISTED ON THE REVERSE SIDE HEREOF. THIS PROXY ALSO
DELEGATES DISCRETIONARY AUTHORITY WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY
PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL
MEETING AND PROXY STATEMENT.
Date:_____________________________, 1996
----------------------------------------------
Signature of Shareholder
----------------------------------------------
Signature of Shareholder
NOTE: PLEASE SIGN THIS PROXY EXACTLY
AS NAME(S) APPEAR ON YOUR STOCK
CERTIFICATE. WHEN SIGNING AS
ATTORNEY-IN-FACT, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN,
PLEASE ADD YOUR TITLE AS SUCH, AND
IF SIGNER IS A CORPORATION, PLEASE
SIGN WITH FULL CORPORATE NAME BY A
DULY AUTHORIZED OFFICER OR OFFICERS
AND AFFIX THE CORPORATE SEAL. WHERE
STOCK IS ISSUED IN THE NAME OF TWO
(2) OR MORE PERSONS, ALL SUCH
PERSONS SHOULD SIGN.
