<PAGE>
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, 1999
-----------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------
Commission file number 1-10660
------------------------------
Berkshire Realty Company, Inc.
- --------------------------------------------------------------------------------
Delaware 04-3086485
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
One Beacon Street, Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 646-2300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Real estate assets: (Note 2)
Multifamily apartment complexes, net of
accumulated depreciation $ 933,801,769 $ 919,486,703
Mortgage loans, net of purchase discounts 2,389,069 2,376,227
Land and construction-in-progress 15,510,750 10,974,377
Land held for future development 5,745,756 5,657,038
-------------- --------------
Total real estate assets 957,447,344 938,494,345
Cash and cash equivalents 15,957,023 12,366,880
Mortgage-backed securities, net ("MBS") 4,468,590 4,936,979
Note receivable 4,000,000 7,500,000
Escrows 15,810,742 16,305,255
Deferred charges and other assets 18,787,635 19,854,353
Workforce and other intangible assets,
net of accumulated amortization 6,773,714 9,449,030
-------------- --------------
Total assets $1,023,245,048 $1,008,906,842
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Credit agreement (Note 3) $ 173,100,000 $ 135,100,000
Construction loan (Note 3) 11,440,613 11,362,891
Mortgage notes payable (Note 3) 425,122,294 426,236,427
Tenant security deposits and prepaid rents 8,150,029 8,309,738
Accrued real estate taxes, insurance, other
liabilities and accounts payable 21,502,369 25,218,826
-------------- --------------
Total liabilities 639,315,305 606,227,882
-------------- --------------
Minority interest in operating partnership 65,656,537 69,661,451
Commitments and contingencies (Note 2) - -
Shareholders' equity:
Preferred stock ("Preferred Shares"),
$0.01 par value; 60,000,000 shares
authorized, 2,737,000 shares issued 27,370 27,370
Common stock ("Shares"), $0.01 par value;
140,000,000 Shares authorized and 37,234,088
and 37,219,897 Shares issued, respectively 372,341 372,199
Additional paid-in capital 366,136,378 375,186,299
Accumulated deficit (44,276,056) (38,550,284)
Loans receivable - officers (2,243,752) (2,275,000)
Less common stock in treasury, at cost
(506,497 Shares) (1,743,075) (1,743,075)
-------------- --------------
Total shareholders' equity 318,273,206 333,017,509
-------------- --------------
Total liabilities and shareholders' equity $1,023,245,048 $1,008,906,842
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
2
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Rental $48,815,071 $39,218,665
Interest from mortgage loan 83,428 84,162
Interest income from MBS 111,279 166,055
Management fees and reimbursements (Note 9) 797,505 951,804
Other interest income 475,197 594,212
----------- -----------
Total revenue 50,282,480 41,014,898
----------- -----------
Expenses:
Property operating 11,069,510 9,152,843
Repairs and maintenance 3,411,331 2,183,270
Real estate taxes 4,837,994 3,851,003
Property management operations 2,391,365 2,046,929
General and administrative 1,490,613 1,679,885
Interest (Note 3) 11,217,278 8,011,390
Costs associated with strategic
alternatives 3,048,373 -
Amortization of acquired workforce
and intangible assets 2,675,316 3,258,049
Depreciation and amortization 15,878,837 12,495,534
----------- -----------
Total expenses 56,020,617 42,678,903
----------- -----------
Loss from operations before joint
venture income, gain on sales of
assets and minority interest (5,738,137) (1,664,005)
Joint venture income - 51,948
Gain on sales of assets - 512,732
Minority interest in operating partnership 1,551,928 470,775
----------- ------------
Net loss (4,186,209) (628,550)
Income allocated to preferred shareholders (1,539,563) (1,539,563)
----------- -----------
Net loss allocated to common
shareholders $(5,725,772) $(2,168,113)
----------- -----------
----------- -----------
Earnings per common share (basic and diluted):
Net loss per common share $ (.16) $ (.06)
----------- -----------
----------- -----------
Weighted average shares 36,714,346 36,615,474
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
3
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Series 1997-A Convertible Additional Loans
Preferred Stock at par Common Stock at par Paid-in Accumulated Receivable-
Shares Amount Shares Amount Capital Deficit Officers
----------- ------ ---------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 2,737,000 $27,370 36,713,400 $372,199 $375,186,299 $(38,550,284) $(2,275,000)
Net loss - - - - - (4,186,209) -
Stock issuance costs - - - - (9,946) - -
Preferred dividends - - - - - (1,539,563) -
Conversion of Units
to Common Shares - - 14,191 142 101,456 - -
Stock purchase loans -
forgiveness - - - - - - 31,250
Adjustment for minority
interest ownership of
Operating Partnership - - - - (238,895) - -
Common dividends - - - - (8,902,538) - -
--------- ------- ---------- -------- ------------ ------------ -----------
Balance,
March 31, 1999 2,737,000 $27,370 36,727,591 $372,341 $366,136,376 $(44,276,056) $(2,243,750)
--------- ------- ---------- -------- ------------ ------------ -----------
--------- ------- ---------- -------- ------------ ------------ -----------
</TABLE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Treasury
Stock
at cost Total
<S> <C> <C>
Balance,
December 31, 1998 $(1,743,075) $333,017,509
Net loss - (4,186,209)
Stock issuance costs - (9,946)
Preferred dividends - (1,539,563)
Conversion of Units
to Common Shares - 101,598
Stock purchase loans -
forgiveness - 31,250
Adjustment for minority
interest ownership of
Operating Partnership - (238,895)
Common dividends - (8,902,538)
----------- ------------
Balance,
March 31, 1999 $(1,743,075) $318,273,206
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
4
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,186,209) $ (628,550)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 15,878,837 12,495,534
Amortization of intangible assets and costs
related to workforce acquired 2,675,316 3,258,049
Joint venture income - (51,948)
Distributions received from joint venture - 51,948
Gain on sales of assets - (512,732)
Stock purchase loan forgiveness 31,250 36,250
Amortization of purchase discounts (40,520) (37,742)
Minority interest in operating partnership (1,551,928) (470,775)
Amortization of deferred financing costs 415,723 345,748
Decrease in operating escrows
and other assets 1,102,888 1,064,456
Decrease in accrued real estate taxes,
insurance, other liabilities and accounts
payable (3,986,457) (1,870,816)
Increase (decrease) in tenant security
deposits, prepaid rents and escrows (159,709) 794,102
----------- -----------
Net cash provided by operating activities 10,179,191 14,473,524
----------- -----------
Cash flows from investing activities:
Cost to acquire properties (25,615,141) (72,555,603)
Proceeds from sale of properties - 14,918,614
Recurring capital expenditures (2,891,848) (1,145,496)
Rehabilitation and non-recurring
capital expenditures (1,638,518) (3,357,665)
Land acquisition and construction in progress (4,598,657) (4,539,943)
Distributions received from joint venture
in excess of earnings - 443,894
Distribution from sale of joint venture asset, net - 14,922,557
Principal collections on note receivable 3,500,000 -
Principal collections on MBS 474,452 551,387
Principal collections on mortgage loan 21,615 20,157
Escrow established at acquisition of properties - (249,418)
------------ ------------
Net cash used for investing activities (30,748,097) (50,991,516)
------------ ------------
</TABLE>
Continued
5
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Advances under credit agreement $38,000,000 $49,000,000
Advances under construction loan 77,722 3,305,306
Payment of financing costs (32,210) (1,440,378)
Costs associated with issuance of stock (9,946) (226,980)
Dividends to preferred shareholders (1,539,563) (1,539,563)
Principal payments on mortgage notes payable (1,114,133) (969,278)
Proceeds from the exercise of stock warrants - 6,402
Dividends to common shareholders (8,902,538) (8,521,390)
Distributions to minority unitholders (2,320,283) (1,658,586)
----------- ------------
Net cash provided by financing activities 24,159,049 37,955,533
----------- -------------
Net increase in cash and cash equivalents 3,590,143 1,437,541
Cash and cash equivalents, beginning of period 12,366,880 9,859,110
----------- ------------
Cash and cash equivalents, end of period $15,957,023 $ 11,296,651
----------- ------------
----------- ------------
Supplemental cash flow disclosure:
Cash paid for interest during period $11,164,074 $ 8,641,229
----------- ------------
----------- ------------
Interest capitalized during period $ 324,572 $ 419,722
----------- ------------
----------- ------------
Supplemental disclosure of non-cash financing and investing activities:
Property acquisitions $(25,615,141) $(113,473,162)
Debt assumed in property acquisitions - 24,238,044
Units issued for property acquisitions - 16,679,515
------------ ------------
Cash to acquire property $(25,615,141) $(72,555,603)
------------ ------------
------------ ------------
Conversion of Units to Shares $ 101,598 $ 377,233
------------ ------------
------------ ------------
Shares issued in satisfaction of note payable - 2,130,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
6
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Berkshire Realty Company, Inc. and Subsidiaries (the "Company") was
formed on April 26, 1990 as an equity real estate investment trust
("REIT") and commenced operations on June 27, 1991. The Company has an
infinite life; however, the Company's Restated Certificate of
Incorporation, as amended, requires the Company's Board of Directors (the
"Board") to prepare and submit on or before December 31, 1998, a Plan of
Liquidation (the "Plan") to the shareholders, together with the Board's
recommendation whether to adopt or reject the Plan. As a result, the
Company engaged two investment banking firms, Lazard Freres & Co. LLC and
Lehman Brothers Inc., to assist the Company in the exploration and
evaluation of strategic alternatives. These alternatives included (but
were not limited to) potential sale or merger of the Company or the
adoption of the Plan. The Company has filed preliminary proxy materials
with the Securities and Exchange Commission relating to the Plan, which
the Board of Directors has recommended the shareholders not approve.
On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a
partnership formed by Chairman of the Board, Douglas Krupp, and
affiliates of Blackstone Real Estate Advisors and Whitehall Street Real
Estate Limited Partnership XI (an affiliate of Goldman, Sachs & Co.),
entered into a definitive merger agreement. The Company's Board of
Directors has approved the merger agreement based on a recommendation
from a special committee of the Board comprised of four independent
directors. Pursuant to the terms of the agreement, if the merger is
consummated, shareholders of Berkshire will receive $12.25 in cash per
share of common stock. Limited partners in BRI OP Limited Partnership
("Operating Partnership"), Berkshire's Operating Partnership, will be
able to elect to receive the same cash consideration per Operating
Partnership unit ("Unit") or become limited partners of the acquiring
partnership. The transaction must be approved by a majority of
shareholders. The transaction, if approved, is scheduled to close in the
fourth quarter of 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements reflect the consolidated financial position,
results of operations, changes in shareholders' equity and cash flows of
the Company, using the historical cost of assets, liabilities and results
of operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on
Form 10-Q pursuant to the Rules and Regulations of the Securities and
Exchange Commission. In the opinion of management, the disclosures
contained in this report are adequate to make the information presented
not misleading. See Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998 for additional information relevant to significant
accounting policies followed by the Company.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the
Company's financial position as of March 31, 1999 and the results of its
operations for the three months ended March 31, 1999 and 1998 and cash
flows for the three months ended March 31, 1999 and 1998.
The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results which may be expected for the
full year. See Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this report.
Continued
7
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. MULTIFAMILY AND RETAIL PROPERTY
As of March 31, 1999, the Company had investments in 82 apartment
communities in eight states totaling 24,387 units. The Company was also
engaged in the development of apartment communities and currently has 655
units under construction.
The following summarizes the carrying value of the Company's multifamily
apartment complexes (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Land $ 153,843 $ 151,282
Buildings and improvements 789,506 768,270
Appliances, carpeting and equipment 176,134 169,812
---------- ----------
Total multifamily property 1,119,483 1,089,364
Accumulated depreciation (185,681) (169,878)
---------- ----------
$ 933,802 $ 919,486
---------- ----------
---------- ----------
</TABLE>
ACQUISITIONS
On January 7, 1999, the Company acquired Granite Run Apartments, a
264-unit apartment community located in Baltimore, Maryland, for $25.6
million. The Company paid cash to acquire the property. Granite Run was
the second of four properties that the Company was contractually
obligated to acquire from Questar Builders, Inc.
The Company is obligated, upon satisfaction of certain conditions, to
acquire two additional newly-developed properties totaling 405 units for
an approximate cost of $58.9 million from Questar Builders, Inc. The
properties were in various stages of development as of March 31, 1999. It
is expected that the first property will be acquired in 1999 and the
remaining property will be acquired in 2000.
DEVELOPMENT
In December, 1997, the Company purchased a 60-acre parcel of land in
Atlanta, Georgia for approximately $5.8 million for the development of
Berkshires at Deerfield, a 478 unit apartment community. Construction
began in the third quarter of 1998. The total cost of the project to date
is approximately $8.3 million. Construction is expected to be completed
in October, 2000 at an estimated cost of $34.9 million.
On April 29, 1998, the Company acquired 12.6 acres located near Clemson,
South Carolina for approximately $571,000. Construction of Berkshire
Commons, a 177-unit student housing development, began in the third
quarter of 1998 on this site. The total cost of the project to date is
approximately $7.2 million. Construction is expected to be completed in
August, 1999 at an estimated cost of $14.1 million.
The Company also owns two other parcels of land located in Greenville,
South Carolina. Development plans are under consideration for these
sites.
Continued
8
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DEBT AGREEMENTS
As of March 31, 1999, the Company had a credit agreement with nine
participating commercial banks for a $180 million unsecured revolving
line of credit ("Credit Agreement"). The following summarizes the
Company's borrowings on the Credit Agreement as of March 31, 1999:
<TABLE>
<CAPTION>
Contract Contract Principal
Borrowings Start Date End Date Interest Rate Amount
---------- ---------- -------- ------------- ------
<S> <C> <C> <C> <C>
LIBOR contract 05/13/99 06/11/99 6.2062% $ 46,100,000
LIBOR contract 04/30/99 06/01/99 6.1750% 3,000,000
LIBOR contract 05/07/99 06/04/99 6.2062% 124,000,000
-----------
$173,100,000
-----------
-----------
</TABLE>
Subsequent to March 31, 1999, the Company borrowed the remaining $6.9
million on the credit agreement at an interest rate of 6.2062% with a
contract end date of June 11, 1999.
The Company has a construction loan commitment of $13.1 million with two
commercial banks to fund the completed development of Berkshires at
Crooked Creek ("Construction Loan"). The agreement requires monthly
interest payments at a variable rate set at 150 basis points over LIBOR.
The outstanding principal balance will be due June 30, 1999. It is the
Company's intention to extend this loan to December 31, 1999. As of March
31, 1999, the Company's borrowings on the Construction Loan totaled
$11,440,613 and had an interest rate of 6.4375% with a contract end date
of May 17, 1999.
5. EARNINGS PER SHARE
In accordance with Financial Accounting Standards Board Statement No. 128
("FAS 128"), "Earnings Per Share", the Company has presented basic and
diluted net income per share on the Consolidated Statements of
Operations. The net income and weighted average shares used in the
calculations are presented below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Earnings per common share (basic and diluted):
Net loss allocated to
common shareholders $(5,725,772) $(2,168,113)
---------- ----------
---------- ----------
Weighted average shares 36,714,346 36,615,474
---------- ----------
---------- ----------
</TABLE>
Continued
9
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
6. PRO-FORMA RESULTS (UNAUDITED)
The following unaudited pro-forma operating results for the Company have
been prepared as if the 1999 and 1998 property acquisitions, dispositions
and equity transactions had occurred on January 1, 1998. Unaudited
pro-forma financial information is presented for informational purposes
only and may not be indicative of what the actual results of operations
of the Company would have been had the events occurred as of January 1,
1998, nor does it purport to represent the results of operations for
future periods. (Dollars in thousands except per share amounts).
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------
March 31, March 31,
1999 1998
---------- -----------
<S> <C> <C>
Revenue $50,333 $47,730
Expenses including depreciation $56,420 $50,925
------- -------
Net loss allocated to
common shareholders $(6,087) $(3,195)
------- -------
------- -------
Net loss per weighted
average common share $(.17) $(.09)
------- -------
------- -------
</TABLE>
7. SEGMENT REPORTING
The Company has adopted Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information", which establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and require that those enterprises report
selected information about operating segments in interim reports issued
to shareholders.
The Company operates and develops apartment communities in Florida, Texas
and the Mid-Atlantic and Southeast regions of the United States which
generated rental income through the leasing of apartment units. The
Company separately evaluates the performance of each of its apartment
communities. However, because each of the apartment communities has
similar economic characteristics, facilities, services and tenants, the
apartment communities have been aggregated into a single real estate
segment.
The Company evaluates performance based upon net operating income ("NOI")
from the combined properties in the segment. NOI is defined by the
Company as rental revenue less property operating expenses, including
repairs and maintenance and real estate taxes. Accordingly, NOI excludes
non-property revenue and expenses included in the determination of net
income. NOI for the combined properties in the segment for the three
month periods ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Rental Revenue
Multifamily $48,815,071 $39,155,663
Retail (a) - 63,002
----------- -----------
Total 48,815,071 39,218,665
Operating Expenses
Multifamily 19,318,835 15,088,892
Retail (a) - 98,224
----------- -----------
Total 19,318,835 15,187,116
----------- -----------
Net Operating Income $29,496,236 $24,031,549
----------- -----------
----------- -----------
</TABLE>
10
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
7. SEGMENT REPORTING - Continued
The following is a reconciliation of net operating income to loss from
operations before joint venture income, gain on sale of assets and
minority interest:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Net operating income $ 29,496,236 $24,031,549
Revenue:
Management fees and
reimbursements 797,505 951,804
Interest 669,904 844,429
Expenses:
Depreciation and
amortization (18,554,153) (15,753,583)
General and
administrative (1,490,613) (1,679,885)
Property management
operations (2,391,365) (2,046,929)
Interest (11,217,278) (8,011,390)
Costs associated with
strategic alternatives (3,048,373) -
------------ ------------
Loss from operations
before joint venture
income, gain on sales
of assets and
minority interest $ (5,738,137) $ (1,664,005)
------------ ------------
------------ ------------
</TABLE>
(a) The Company completed the liquidation of the retail portfolio in 1998.
8. SUBSEQUENT EVENTS
On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a
partnership formed by Chairman of the Board, Douglas Krupp, and
affiliates of Blackstone Real Estate Advisors and Whitehall Street Real
Estate Limited Partnership XI (an affiliate of Goldman, Sachs & Co.),
entered into a definitive merger agreement. The Company's Board of
Directors has approved the merger agreement based on a recommendation
from a special committee of the Board comprised of four independent
directors. Pursuant to the terms of the agreement, if the merger is
consummated, shareholders of Berkshire will receive $12.25 in cash per
share of common stock. Limited partners in Berkshire's Operating
Partnership will be able to elect to receive the same cash consideration
per Unit or become limited partners of the acquiring partnership. The
transaction must be approved by a majority of shareholders. The
transaction, if approved, is scheduled to close in the fourth quarter of
1999.
11
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A. OVERVIEW:
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere
herein and the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998. Capitalized terms used herein and not otherwise
defined have the meanings ascribed to them in the Notes to the
Consolidated Financial Statements included elsewhere herein.
The Company is a real estate investment trust ("REIT") whose operations
consist primarily of the acquisition, renovation, rehabilitation,
development and operation of apartment communities located in Florida,
Texas, the Mid-Atlantic and Southeast regions of the United States. As of
March 31, 1999, the Company owned 82 apartment communities consisting of
24,387 units. The Company has commenced construction on 655 multifamily
units and owns two parcels of land for future development. The Company
has also contracted to acquire two additional newly-developed properties
from an affiliate of Questar Builders, Inc. totaling 405 units. The
Company also entered into a Development Acquisition Agreement with
Questar Builders, Inc. which grants the Company an exclusive right to
acquire all apartment projects developed in the Mid-Atlantic Region by
such affiliates which meet the Company's acquisition and development
criteria.
COMPANY STRATEGY:
Since the organization of the Company in 1990, the Company's Certificate
of Incorporation, as amended, has required the Board of Directors to
submit a Plan of Liquidation (the "Plan") to the stockholders prior to
the end of 1998, together with the Board's recommendation whether to
adopt or reject the Plan. As a result, the Company engaged two investment
banking firms to assist in the exploration and evaluation of strategic
alternatives. Among others, these alternatives included the potential
sale or merger of the Company or the adoption of a Plan of Liquidation.
The Company has filed preliminary proxy materials with the Securities and
Exchange Commission relating to the Plan, which the Board of Directors
has recommended the shareholders not approve. In addition, the Company
also adopted severance and retention programs and amended certain
employment agreements designed to encourage the continued employment of
key personnel during the exploration and evaluation of these
alternatives.
On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a
partnership formed by Chairman of the Board, Douglas Krupp, and
affiliates of Blackstone Real Estate Advisors and Whitehall Street Real
Estate Limited Partnership XI (an affiliate of Goldman, Sachs & Co.),
entered into a definitive merger agreement. The Company's Board of
Directors has approved the merger agreement based on a recommendation
from a special committee of the Board comprised of four independent
directors. Pursuant to the terms of the agreement, if the merger is
consummated, shareholders of Berkshire will receive $12.25 in cash per
share of common stock. Limited partners in Berkshire's Operating
Partnership can elect to receive the same cash consideration per OP Unit
or become limited partners of the acquiring partnership. The transaction
must be approved by a majority of shareholders. The transaction, if
approved, is scheduled to close in the fourth quarter of 1999.
UPREIT REORGANIZATION:
The Company reorganized as an Umbrella Partnership ("UPREIT") on May 1,
1995 when the Company contributed substantially all of its assets subject
to all liabilities to BRI OP Limited Partnership. The Company, in its
capacity as the Special Limited Partner and through its ownership of
Berkshire Apartments, Inc. as General Partner, holds 79.19% of the
Operating Partnership interests as of March 31, 1999. The purpose of
becoming an UPREIT was to allow the Company to offer Units in the
Operating Partnership in exchange for assets from tax-motivated sellers.
Under certain circumstances, the exchange of Units for a seller's assets
will defer the tax liability
12
<PAGE>
associated with the sale. This UPREIT structure allows the Company to use
Units instead of stock or cash to acquire properties, which provides an
advantage over non-UPREIT entities.
ADVISOR TRANSACTION:
Until early 1996, the Company was advised by Berkshire Realty Advisors
("Advisor"), an affiliate of certain directors and officers of the
Company. The Board of Directors determined that it was in the best
interest of the shareholders to become self-advised. As a self-advised
REIT, the administration of the Company as well as strategic investment
decision-making responsibilities are performed by senior management
employed by the Company.
Therefore, on February 28, 1996, the Board, acting on the recommendation
of a Special Committee comprised of the independent members of the Board
("Independent Directors"), approved the acquisition of the Advisor, via
contribution of the workforce and other assets of the Advisor, in
exchange for 1.3 million Units which were valued at $13 million (the
"Advisor Transaction"). The acquisition price together with related
costs, was recorded as an intangible asset associated with the workforce
acquired. The contribution was completed on March 1, 1996. As of that
date, all charges and expenses associated with the Advisory Services
Agreement ceased and the Company became a self-advised REIT.
In conjunction with the Advisor Transaction, additional Units, up to a
total of $7.2 million in value, may be issued to the former Advisor
during a six year period if certain share price benchmarks are achieved.
As of March 31, 1999, 209,091 additional Units have been issued as a
result of achieving the $11.00 and $12.00 share price benchmarks. The
value of the issued Units was recorded on the consolidated statements of
operations as additional costs associated with the Advisor Transaction.
PROPERTY MANAGER TRANSACTION:
On February 13, 1997, a Special Committee of the Board of Directors
comprised of the Independent Directors approved the acquisition of the
workforce and other assets of an affiliate which provided multifamily
property management services to the Company (the "Property Manager"). The
Property Manager was contributed on February 28, 1997 in exchange for 1.7
million Units or approximately $17.6 million (the "Property Manager
Transaction").
On the date of the transaction, the Property Manager managed 57 apartment
communities, including 35 assets then owned by the Company, and employed
approximately 85 professionals, excluding site employees. As a result of
this transaction, the Company was no longer required to pay management
fees and reimbursements for the management operations of its multifamily
portfolio. In addition, the Company receives management fees and
reimbursements of certain expenses associated with the third-party
management contracts primarily with partnerships affiliated with certain
directors and officers of the Company.
The value of the Units issued was recorded on the balance sheet as an
intangible asset associated with the acquisition of a workforce and
third-party property management contracts.
B. RESULTS OF OPERATIONS:
The results of operations from period to period are impacted by
acquisition and disposition activity within the portfolio. Comparisons
will be made with respect to the overall portfolio and same-store
properties. The Company defines same-store apartment communities as those
assets that were owned and operated in each of the two most recent years.
The following analysis compares the results of operations for the three
month periods ended March 31, 1999 and 1998.
NET LOSS for the three months ended March 31, 1999 increased
approximately $3.6 million compared to the same period in 1998 as a
result of an increase in loss from operations of $4.1 million and a
decrease in gain on sales of assets of $513,000 which was offset by an
increase in the loss allocation to minority interest of $1.1 million.
13
<PAGE>
B. RESULTS OF OPERATIONS: - Continued
INCOME AND EXPENSES:
RENTAL INCOME AND PROPERTY OPERATING EXPENSES, including repairs and
maintenance and real estate taxes, increased for the three month period
ended March 31, 1999 in proportion to the increase in weighted average
apartment units. Rental revenue for the three month period ended March
31, 1999 increased $9.6 million or 24%, over the prior year period, and
property operating expenses increased $4.1 million or 27%, for the same
period. Average apartment units increased 23% for the three month period
ended March 31, 1999 over the prior year.
Detail of the Company's apartment unit growth for the three months ended
March 31 is set forth below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Apartments Units:
Beginning of period 24,123 18,773
Acquired 264 2,760
Sold - -
Completed development units - -
------ ------
End of period 24,387 21,533
------ ------
------ ------
Weighted average apartment units 24,369 19,876
for period
Percent increase over same period 23% 58%
of prior year
</TABLE>
MANAGEMENT FEES AND REIMBURSEMENTS decreased $154,000 for the three month
period ended March 31, 1999 when compared to the same period in 1998 due
to a reduction in the number of third party management contracts as a
result of sales by third party owners.
PROPERTY MANAGEMENT OPERATIONS increased $355,000 for the three months
ended March 31, 1999 compared to the same period in 1998 as a result of
increased operating costs in the Mid-Atlantic and Texas regions due to
growth in the number of properties in those regions and severance
payments incurred as a result of a reduction in administrative personnel
located in the national operating headquarters.
GENERAL AND ADMINISTRATIVE EXPENSES, decreased $246,000 for the three
month period ended March 31, 1999 compared to the same period in 1998
primarily due to decreased employee salaries, benefits, administrative
and office related expenses resulting from reductions in administrative
and executive personnel located in the Boston and Baltimore offices,
respectively.
INTEREST EXPENSE
Interest expense has increased for the three month period ended March 31,
1999 compared to the same period in 1998 primarily from increased average
borrowings. The following is an analysis of weighted average debt
outstanding and interest rates for the three months ended March 31
(dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Weighted Average
Debt Outstanding
Fixed Rate $413,594 $379,597
Variable Rate 190,325 76,788
-------- --------
Total $603,919 $456,385
-------- --------
-------- --------
Weighted Average
Interest Rates
Fixed Rate 7.84% 7.87%
Variable Rate 6.29% 6.85%
</TABLE>
14
<PAGE>
B. RESULTS OF OPERATIONS: - Continued
Weighted average fixed rate debt increased approximately $148 million for
the three months ended March 31, 1999 compared to the same period in 1998
primarily due to increased weighted average borrowings on the credit
agreement to fund rehabilitations and renovations on the newly acquired
multifamily communities.
COSTS ASSOCIATED WITH STRATEGIC ALTERNATIVES represents appraisal costs,
investment banking fees, legal, accounting and consulting fees related to
the Company's preparation of a Plan of Liquidation and evaluation of
other strategic alternatives. See Note 1 to the Consolidated Financial
Statements for additional information.
AMORTIZATION OF ACQUIRED WORKFORCE AND INTANGIBLE ASSETS associated with
the Advisor Transaction in 1996 and Property Manager Transaction in 1997
decreased $583,000 for the three month period ended March 31, 1999 when
compared to the same period in 1998 as the costs related to the Advisor
Transaction were fully amortized by February of 1999.
DEPRECIATION AND AMORTIZATION increased for the three month period ended
March 31, 1999 compared to the same period in 1998 due to an increased
property asset base.
GAIN ON SALES OF ASSETS for the three month period ended March 31, 1998
resulted from the sales of three retail assets in 1998. There were no
sales in the first quarter of 1999.
C. FUNDS FROM OPERATIONS (FFO):
Management and industry analysts generally consider Funds from Operations
("FFO"), to be an appropriate measure of the performance of an equity
REIT, along with net income and cash flows from operating activities,
financing activities and investing activities. The Company's FFO is
presented to assist investors in analyzing the Company's ongoing
operating cash flows which support dividends and recurring capital
expenditures. However, FFO should not be considered by the reader as a
substitute to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company
believes that in order to facilitate a clear understanding of the
operating results of the Company, FFO should be analyzed in conjunction
with net income (loss) as presented in the Consolidated Financial
Statements and information presented elsewhere. FFO is determined in
accordance with a resolution adopted by the Board of Governors of the
National Association of Real Estate Investment Trusts ("NAREIT"), and is
defined as net income (loss) (computed in accordance with generally
accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization
on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. The methodology used by the Company when
calculating FFO may differ from that of other equity REIT's and,
therefore, may not be comparable to such other REIT's. In addition, FFO
does not represent amounts available for management's discretionary use
for needed capital replacement or expansion, debt service obligations or
other commitments.
15
<PAGE>
C. FUNDS FROM OPERATIONS (FFO): - Continued
The following table presents the Company's FFO for the periods ended
March 31:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Loss from operations before
joint venture income,
gain on sales of assets,
and minority interest $(5,738,137) $(1,664,005)
Joint venture net operating
income - 75,565
Amortization of
intangible assets 2,675,316 3,258,049
Non-recurring charges 3,048,373 -
Depreciation 15,804,008 12,449,700
Income allocated to
preferred shareholders (1,539,563) (1,539,563)
----------- -----------
Funds from Operations $14,249,997 $12,579,746
----------- -----------
----------- -----------
Cash flows provided by (used for):
Operating activities 10,179,191 14,473,524
Investing activities (30,748,097) (50,991,516)
Financing activities 24,159,049 37,955,533
</TABLE>
SAME-STORE MULTIFAMILY COMMUNITIES
The Net Operating Income ("NOI") of the 65 same-store communities aggregating
18,773 units which are considered same-store is summarized below (dollars in
thousands).
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
1999 1998 % Change
------- ------- --------
<S> <C> <C> <C>
Revenue $37,989 $36,448 4.2%
Expenses 15,034 14,612 2.9%
------- -------
Net operating income $22,955 $21,836 5.1%
------- -------
------- -------
Average monthly rent $698 $677
per unit
Average physical 95.4% 94.4%
occupancy
</TABLE>
NOI for the same-store communities increased 5.1% for the three months
ended March 31, 1999 compared to the same period in 1998. Growth in
same-store multifamily revenue was 4.2% for the three months ended March
31, 1999 compared to the prior year period. Rent increases accounted for
3.1% of the increase and the remaining revenue gain was generated from
increased occupancy.
16
<PAGE>
D. LIQUIDITY AND CAPITAL RESOURCES:
The Company's net cash provided by operating activities decreased $4.3
million for the three month period ended March 31, 1999 when compared to
the same period in 1998 due to the costs associated with strategic
alternatives of $3.0 million and the decrease in accrued expenses and
other liabilities of $3.9 million. These decreases in operating cash flow
were partially offset by the increased net operating income due to the
increased weighted average apartment units in 1999 and increased net
operating income generated by same-store multifamily communities of 5.1%.
Net cash used for investing activities decreased $20.2 million for the
three month period ended March 31, 1999 when compared to the same period
in 1998. The decrease was due to a decrease in acquisitions of $46.9
million in 1999 and principal collections on the note receivable of $3.5
million. These were offset by decreased proceeds from sale of properties
of $14.9 million and decreased distributions from joint venture assets of
$15.4 million.
Net cash provided by financing activities decreased $13.8 million due to
reduced borrowings under the credit agreement and construction loan of
$14.2 million.
Cash flows from operations, debt financing and sales of assets are the
primary sources of liquidity employed by the Company. In addition, in
1997, the Company raised additional capital through a private placement
of preferred stock and a public offering of common stock, the proceeds of
which were used to acquire multifamily properties and to pay down
variable rate debt. Operating cash flows are earmarked for the payment of
dividends as well as capital expenditures of a recurring nature. Debt
financing, proceeds from asset sales and equity offerings have been used
to finance the acquisition, renovation, rehabilitation and development of
apartment communities.
In each of the previous three years, the Company has paid between 81% and
86% of FFO in dividends, retaining the rest for recurring capital
expenditures and working capital. On May 13, 1999, the Board approved a
dividend of $.25 per share of common stock payable on August 15, 1999 to
the shareholders of record on August 1, 1999.
The Company has a policy to maintain leverage at or below 50% of the
reasonably estimated value of assets. By employing moderate leverage
ratios, the Company expects it can continue to generate sufficient cash
flows to operate its business as well as sustain dividends to
shareholders.
The Company conservatively manages both interest rate risk and maturity
risk. Through the use of a swap, the Company has hedged interest rate
risk on $40 million of its outstanding variable rate debt as of March 31,
1999. Additionally, the Company has spread its maturities on long-term
debt and has weighted average maturities of approximately 14 years.
The Company has adequate sources of liquidity to meet its current cash
flow requirements, including dividends and debt service. In order to fund
ongoing renovation, rehabilitation and development activities, the
Company has at its disposal unadvanced commitments under the construction
loan, and, if necessary, could generate net proceeds from the sale of
mortgage-backed securities or certain real estate assets.
17
<PAGE>
E. BUSINESS CONDITIONS/RISKS:
The Company believes that favorable economic conditions exist in
substantially all of its real estate markets. For the Company's
same-store apartment communities, physical occupancy was 97.3% as of
March 31, 1999 which generally represents current market occupancies. In
addition, the Company has generated competitive rental rates at its
properties. The Company expects to produce consistent performance from
its real estate assets; however, no assurances can be made in this
regard.
The Company's real estate investments are subject to some seasonal
fluctuations resulting from changes in utility consumption and seasonal
maintenance expenditures. Future performance of the Company may be
impacted by unpredictable factors which include general and local
economic and real estate market conditions, variable interest rates,
environmental concerns, energy costs, government regulations and federal
and state income tax laws. The requirements for compliance with federal,
state and local regulations to date have not had an adverse effect on the
Company's operations, and no adverse effects are anticipated in the
future.
The merger agreement the Company has entered into contains certain
restrictions on the conduct of the Company's business during the term of
the agreement.
The Company is also involved in certain legal actions and claims in the
ordinary course of its business. It is the opinion of management and its
legal counsel that such litigation and claims should be resolved without
any material effect on the Company's financial position.
F. YEAR 2000
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after
1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all
companies and all organizations. The Company has conducted an assessment
of its core internal and external computer information systems and has
taken the further necessary steps to understand the nature and extent of
the work required to make its systems Year 2000 compliant in those
situations in which the Company is required to do so.
In this regard, the Company began a computer systems project in 1997 to
significantly upgrade its existing hardware and software. The Company
completed the testing and conversion of the financial accounting and
property operating systems in February, 1998. As a result, the Company
has generated operating efficiencies and believes it has remedied the
programming issues associated with the Year 2000. The Company incurred
hardware costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to complete the
upgrade and prepare for the Year 2000. The Company's cost of the systems
conversion was approximately $600,000 and has been capitalized and is
being amortized over five years.
The Company is currently in the process of identifying, evaluating and
remedying its Year 2000 compliance issues with respect to its
non-financial systems, such as computer controlled elevators, security
and heating, ventilating and air conditioning systems. The Company has
completed its Year 2000 compliance initiatives at some of its properties
and is in the process of completing these initiatives at others. Based on
its identification and assessment efforts to date, the Company believes
that certain of the computer equipment and software it currently uses
will require modification or replacement. However, the Company does not
believe that the future efforts to achieve its Year 2000 compliance
initiatives will result in any material cost to the Company or
significantly interrupt services or operations.
The Company is in the process of evaluating the potential adverse impact
that could result from the failure of significant third-party service
providers and vendors to be Year 2000 compliant. No estimate can be made
at this time as to the impact of the readiness of such third parties.
However, if any of the third-party service providers or vendors ceases to
conduct business due to Year 2000 related problems, the Company
18
<PAGE>
F. YEAR 2000 - Continued
expects to be able to contract with alternate providers without
experiencing any material adverse effect on the Company's financial
condition and results of operations.
The most reasonably likely worst case scenario that could affect the
Company's operating results and financial condition would be a power
failure resulting in an interruption in utilities services (i.e.
electricity, natural gas, telephone and water) provided by third-party
vendors to the Company and its residents, affecting a substantial number
of the geographic regions in which the Company's properties are located.
Additionally, despite the Company's current efforts to be Year 2000
compliant, elevators, security and heating, ventilating and air
conditioning systems may read incorrect dates and operate according to
incorrect schedules. Although such scenarios would be disruptive to
residents, they are not business critical and would not have a material
adverse effect on the Company's operating results or financial condition.
Accordingly, management does not believe that the Year 2000 problems will
have a material adverse effect on the Company's financial condition or
results of operations. Such belief is based on our analysis of the risks
to the Company related to its potential Year 2000 problems and its
assessment of the Year 2000 problems of our third party service
providers. In any event, the Company expects to perform an analysis of
the operational problems and costs (including loss of revenues) that
would be reasonably likely to result, in a worst case scenario, from the
failure by the Company and certain third party service providers to
achieve Year 2000 compliance on a timely basis. To date, a contingency
plan has not been developed for dealing with the most reasonably likely
worst case scenario, however, the Company plans to complete such analysis
and contingency planning.
G. RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 131 ("FAS 131")
"Disclosures about Segments of an Enterprise and Related Information"
establishes standards for disclosing measures for profit or loss and
total assets for each reportable segment. FAS 131 is effective for fiscal
years beginning after December 15, 1997. Financial Accounting Standards
Board Statement No. 132 ("FAS 132") "Employers' Capital Disclosures about
Pensions and Other Postretirement Benefits" is effective for fiscal years
beginning after December 15, 1997, although earlier application is
encouraged. FAS 132 establishes standards related to the disclosure
requirements for pensions and other postretirement benefits. Financial
Accounting Standards Board Statement No. 133 ("FAS 133") "Accounting for
Derivatives" is effective for fiscal years beginning after June 15, 1999.
FAS 133 establishes standards related to the accounting and disclosure
requirements of derivative financial instruments.
The Company implemented FAS 131 and FAS 132 in 1998 and will adopt FAS
133 in the year 2000.
H. FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, estimates
or plans. There are a number of factors that could cause the Company's
actual results to differ materially from those indicated by such
forward-looking statements. These factors include the matters set forth
under the caption "Risk Factors" in the Company's Registration Statement
on Form S-3, which was filed with the Securities and Exchange Commission
on May 7, 1999, and which matters are incorporated herein by reference.
Any statements contained in such filing shall be deemed to be superseded
or modified for purposes of the Form 10-Q to the extent that a statement
contained herein modifies or supersedes such statement. In light of the
significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded
as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
19
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------
Item 1. Legal proceedings
Response: None
Item 2. Change in securities
Response: None
Item 3. Defaults upon senior securities
Response: None
Item 4. Submission of matters to a vote of security holders
Response: None
Item 5. Other information
Response: None
Item 6. Exhibits and reports on Form 8-K:
EXHIBITS:
27.1 Financial Data Schedule - March 31, 1999 +
99.1 Documents incorporated by reference - "Risk Factors"
from pages 4 through 14 of the Company's Registration
Statement on Form S-3, which was filed with the SEC on
May 7, 1999, setting forth the information under the
caption "Risk Factors" +
REPORTS ON FORM 8-K
On April 15, 1999, the Company filed a Current Report on Form
8-K, dated April 13, 1999, announcing that the Company had
entered into a definitive merger agreement with Berkshire Realty
Holdings L.P.
On March 5, 1999, the Company filed a Current Report on Form 8-K,
dated March 4, 1999, announcing that the Company had received
several offers to acquire the Company.
+ Filed herein.
20
<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, thereunto duly authorized.
BERKSHIRE REALTY COMPANY, INC.
------------------------------
(Registrant)
BY: /S/ MARIANNE PRITCHARD
-------------------------------------
Marianne Pritchard, Executive Vice
President and Chief Financial Officer
of Berkshire Realty Company, Inc.
(Principal Financial Officer)
BY: /S/ DAVID F. MARSHALL
-------------------------------------
David F. Marshall, President,
Chief Executive Officer and Director
of Berkshire Realty Company, Inc.
DATE: May 17, 1999
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Berkshire
Realty Company's Financial Statements for the year ended March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,957,023
<SECURITIES> 10,857,659<F1>
<RECEIVABLES> 15,810,742<F2>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,561,349<F3>
<PP&E> 955,058,275<F4>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,023,245,048
<CURRENT-LIABILITIES> 29,652,398
<BONDS> 609,662,907<F5>
65,656,537<F6>
0
<COMMON> 322,260,033<F7>
<OTHER-SE> (3,986,827)<F8>
<TOTAL-LIABILITY-AND-EQUITY> 1,023,245,048
<SALES> 0
<TOTAL-REVENUES> 50,282,480<F9>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 44,803,339<F10>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,217,278
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,738,137)
<DISCONTINUED> 1,551,928<F11>
<EXTRAORDINARY> 0
<CHANGES> (1,539,563)<F12>
<NET-INCOME> (5,725,772)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
<FN>
<F1>Includeds MBS securities, Mortgage loans and Notes receivable.
<F2>Includes escrows held.
<F3>Includes Intangible Asset and Workforce acquired of 6,773,714 and other assets
of 18,787,635.
<F4>Includes properties held less depreciation.
<F5>Includes Credit Agreements, Mortgages payable and Construction loan.
<F6>Includes Minority Interest.
<F7>Includes Preferred Stock, Common Stock, Additional Paid-In Capital and
Accumulated deficit.
<F8>Includes Loan receivable to Officer and Treasury Stock.
<F9>Includes all revenue of the Company.
<F10>Includes all expenses of the Company.
<F11>Includes Minority Interest income.
<F12>Includes income allocated to preferred shareholders.
</FN>
</TABLE>
<PAGE>
Exhibit 99.1
RISK FACTORS
An investment in our common stock involves various risks. You should carefully
consider the following risks and the other information in this prospectus before
deciding to convert your units.
TAX CONSEQUENCES OF EXCHANGE OF UNITS - YOU MAY INCUR TAX IF YOU CONVERT YOUR
UNITS.
If you decide to convert your units, you will be taxed as if you had sold the
units. You will have taxable income equal to the amount of cash you receive or
the value of the stock you receive, as the case may be, plus the amount of any
BRI Partnership liabilities allocable to your units at the time you sell them.
You may recognize more gain or have to pay more tax than the amount of cash or
the value of the stock you receive from the sale. If you sell some or all of the
stock you receive to raise money to pay the tax, the market price of the stock
may have declined from the time when you converted your units.
CHANGE IN INVESTMENT UPON REDEMPTION OF UNITS - IF YOU CONVERT YOUR UNITS, YOU
WILL HAVE A DIFFERENT KIND OF INVESTMENT.
If you convert some or all of your units, BRI Partnership will decide whether
you receive cash or stock. If you receive cash, you will have no interest in
Berkshire or BRI Partnership, except to the extent that you retain units, which
means:
- You will not benefit from any future increases in the value of
Berkshire's stock.
- You will not receive any future distributions from Berkshire or BRI
Partnership.
If you receive stock, you will become a shareholder of Berkshire rather than a
partner in BRI Partnership.
DEVELOPMENT AND ACQUISITION
WE ACQUIRE NEW PROPERTIES FROM TIME TO TIME, AND THOSE ACQUISITIONS MAY REDUCE
THE VALUE OF YOUR INVESTMENT.
Berkshire regularly considers acquiring additional apartment communities.
Acquisitions involve several risks, including the following:
-1-
<PAGE>
- Acquired properties may not perform as well as Berkshire expected
before acquiring them.
- Improvements to the properties may cost more than Berkshire had
estimated.
- The costs of evaluating properties that are not acquired cannot be
recovered.
- Berkshire has acquired properties by issuing units and has had to
agree with the sellers not to sell the properties or refinance the
debt on them for various periods of time. These restrictions may keep
us from taking actions that would otherwise be in the best interests
of the shareholders. Berkshire may in the future acquire apartment
communities for units and may have to agree to similar restrictions.
WE DEVELOP NEW APARTMENT COMMUNITIES FROM TIME TO TIME, AND THESE ACTIVITIES MAY
REDUCE THE VALUE OF YOUR INVESTMENT.
Berkshire plans to continue developing new apartment communities as
opportunities arise in the future. Development and construction activities
entail a number of risks, including the following:
- We may abandon a project after spending time and money determining its
feasibility.
- Construction costs may exceed the original estimates.
- The revenue from a new project may not be enough to make it
profitable.
- Berkshire may not be able to obtain financing on favorable terms for
development of a property.
- We may not complete construction and lease up on schedule, resulting
in increased costs.
- Berkshire may not be able to obtain, or may be delayed in obtaining,
necessary governmental permits.
- Even successful projects require a substantial portion of management's
time and attention.
-2-
<PAGE>
WE ARE REQUIRED TO SUBMIT TO SHAREHOLDERS A VOTE REGARDING
LIQUIDATION.
Our charter requires the Board of Directors to prepare and submit to
shareholders a proposal to liquidate Berkshire's assets and distribute the net
proceeds to the shareholders. We have filed preliminary proxy materials with the
SEC relating to this proposal. Berkshire will adopt the liquidation proposal
only if shareholders holding a majority of the shares then outstanding approve
it. If Berkshire were liquidated, you might receive proceeds that were less than
the value of the stock at the time you converted your units. Submitting this
proposal to shareholders will cause us to incur costs associated with the
shareholder solicitation regardless of the outcome of the vote.
THE INDUSTRY WE OPERATE IN HAS RISKS THAT MAY CAUSE YOUR INVESTMENT TO DECLINE
IN VALUE.
Owning real estate involves a variety of risks, including the risks described
below:
REALIZING A PROFIT FROM OWNING APARTMENT COMMUNITIES DEPENDS ON MANY FACTORS.
Berkshire invests in apartment communities and therefore is subject to the
various risks generally related to owning and developing real property. The
value of Berkshire's apartment communities and our ability to distribute cash to
shareholders will depend on how well we operate and develop our properties.
These are some of the things that may adversely affect our results:
- Changes in national and local economic conditions, such as oversupply
of apartment units or reduction in demand for apartment units in our
markets.
- The attractiveness of our apartments to tenants.
- Changes in interest rates and the availability, cost and terms of
mortgage financings.
- The ongoing need for capital improvements in our properties,
particularly in older structures.
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- Changes in real estate tax rates and other operating expenses.
- Changes in governmental rules and fiscal policies and changes in
zoning laws.
- Civil unrest, acts of God, including natural disasters which may
result in uninsured losses, acts of war and other factors beyond our
control.
OUR BUSINESS DEPENDS ON THE PERFORMANCE OF FOUR MARKETS.
We have made almost all of our investments in Florida, Texas and the
Mid-Atlantic and Southeastern United States. Therefore, Berkshire's results will
depend to a great extent on the economic conditions in these markets as well as
the market for apartment communities generally.
REGULATIONS MAY CAUSE OUR COSTS TO INCREASE OR LIMIT OUR ABILITY TO INCREASE OUR
REVENUE.
Many federal, state and local zoning, subdivision, planning, building,
environmental and other land use laws and regulations govern real estate. These
laws and regulations may place significant restrictions on our ability to
develop or improve our real estate. Even unintentional violations of these laws
and regulations by us or by our tenants may force us to take corrective action
or pay substantial penalties. In particular, various laws and regulations may
restrict the amount and process by which we may raise rents, as well as our
right to convert a property to other uses, such as condominiums or cooperatives.
WE MAY LOSE SOME OF OUR PROPERTY TO CASUALTIES OR TAKINGS.
Conditions existing on real property may result in injury to people. BRI
Partnership may incur liability as a result of such injuries. Such liability may
be uninsurable in some circumstances or may exceed the limits of insurance
maintained at typical amounts for the type and conditions of the property. In
addition, our properties may suffer loss in value due to causalities such as
fire or hurricanes. These losses may be uninsurable in some circumstances or may
exceed the limits of insurance maintained at typical amounts for the type and
condition of the property. Should an uninsured loss occur, Berkshire could lose
both its investment in and anticipated profits and cash flow from a property.
Real estate may also be taken, in whole or in part, by public authorities for
public purposes in eminent domain proceedings. Awards resulting from such
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proceedings may not adequately compensate Berkshire for the value lost.
WE MAY NOT BE ABLE TO SELL OUR ASSETS AT THE OPTIMAL TIME.
Real estate investments are relatively illiquid. Our ability to vary our
portfolio in response to changes in economic and other conditions will therefore
be limited. If we must sell an investment, we may not be able to sell the
investment in the time period we desire or at a price that will recoup or exceed
the amount of our cost for the investment.
OUR EXPENSES MAY INCREASE, RESULTING IN A DECREASE OF THE FUNDS AVAILABLE TO PAY
DIVIDENDS TO SHAREHOLDERS.
BRI Partnership must pay the expenses associated with operating its apartment
communities. These expenses include:
- cleaning
- electricity
- heating, ventilation and air conditioning
- elevator repair and maintenance
- insurance and administrative costs
- other general costs associated with security, landscaping, repairs and
maintenance
If these expenses increase, the local rental market may limit the extent to
which we may increase rents to meet these increased operating expenses without
decreasing occupancy rates. If these operating expenses increase faster than
rental rates, our results of operations, financial condition and ability to pay
distributions to shareholders could be adversely affected.
WE MAY INCUR COSTS IF WE DO NOT COMPLY WITH THE FAIR HOUSING AMENDMENTS ACT AND
AMERICANS WITH DISABILITIES ACT.
The Fair Housing Amendments Act imposes requirements related to access by
physically handicapped persons on multifamily properties first occupied after
March 13, 1991 or for which construction permits were obtained after June 15,
1990. If Berkshire does not comply with this statute, we might have to pay fines
to the United States government or damages to private litigants.
All of our properties must comply with the Americans with Disabilities Act to
the extent such properties are "public accommodations" or
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"commercial facilities," as defined by this statute. The law requires that
facilities, including leasing offices, open to the general public be made
accessible to people with disabilities. Individual apartment units are not
considered public accommodations for these purposes . Compliance with this law's
requirements could require removal of access barriers and other capital
improvements to the public areas of Berkshire's properties. Noncompliance could
result in imposition of fines by the United States government or an award of
damages to private litigants. If any changes to our properties subsequently are
required that involve material expenditures, our results of operation, financial
condition and ability to make expected distributions to shareholders could be
adversely affected.
OUR JOINT VENTURE PARTNERS MAY HAVE DIFFERENT INTERESTS THAN WE DO, RESULTING IN
A LOSS OF VALUE OF SOME OF OUR PROPERTIES OR AN INABILITY TO TAKE ADVANTAGE OF
FAVORABLE OPPORTUNITIES.
Any of our investments in a joint venture partnership which owns property may
involve risks which would not be present in a direct investment in real estate.
For example, our joint venture partner may experience financial difficulties and
may at any time have economic or business interests or goals which are
inconsistent with our business interests and goals or contrary to our policies
or objectives. Our partner might take actions that would subject the property
owned by the joint venture to liabilities in excess of those contemplated by the
terms of the joint venture agreement. In addition, we might reach an impasse
with our partner since either party may disagree with a proposed transaction
involving the property owned by the joint venture and impede any proposed
action.
FINANCINGS
WE MAY NOT BE ABLE TO MAKE THE REQUIRED PAYMENTS ON OUR DEBT.
As of March 31, 1999, we had approximately $609,663,000 of total debt.
Payments of principal and interest on mortgage borrowings may leave us with
insufficient cash resources to operate our apartment communities or pay
distributions required to be paid in order for us to maintain our qualification
as a REIT.
If we cannot make payments on a loan secured by a mortgage, the lender could
foreclose on the property securing the loan. If this happens, Berkshire will
lose the income from the property and any value the property had. Even if a loan
is nonrecourse, the lender might
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have the right to recover deficiencies arising from fraud, environmental
liabilities or other circumstances. Foreclosure could also create taxable income
without producing any cash, thereby reducing our cash available for distribution
and hindering our ability to meet the tax requirements for a REIT.
In connection with acquiring 39 properties in exchange for units, we
agreed to maintain prescribed levels of nonrecourse debt on these properties.
The purpose of these agreements was to minimize the tax consequences of the
acquisitions to the unit recipients. If we do not maintain the required level of
debt, we would be in default under these agreements and could be liable to the
holders of the units.
WE MAY NOT BE ABLE TO REFINANCE OUR DEBT WHEN IT COMES DUE.
When any of our debt secured by real property comes due, we will have to
refinance the debt or sell the property that secures the debt. If the interest
rate on the new debt is higher than the rate on the old debt, our costs will
increase. Our ability to refinance any of this debt and the terms on which we
might refinance will depend upon economic conditions in general and specifically
on conditions in the capital markets. We cannot guarantee that we could
refinance or repay any of these mortgage loans at maturity.
WE DO NOT HAVE A LIMIT ON HOW MUCH DEBT WE CAN INCUR.
We currently have a policy of incurring debt only if upon such incurrence the
ratio of Berkshire's debt to the value of its assets would be 50% or less.
Although we have adopted this policy, Berkshire's governing documents contain no
limitation on the amount of indebtedness Berkshire may incur. Accordingly, the
Board of Directors could alter or eliminate this policy and would do so, for
example, if it were necessary for Berkshire to continue to qualify as a REIT.
THE INTEREST RATES OF OUR CREDIT FACILITY MAY INCREASE, WHICH WOULD RESULT IN A
REDUCTION OF FUNDS AVAILABLE TO PAY DIVIDENDS TO SHAREHOLDERS.
Outstanding advances under our credit facility bears interest at a variable
rate. As of March 31, 1999, this credit facility had an outstanding balance
of $173,100,000. We may incur additional variable rate indebtedness in the
future. Accordingly, increases in interest rates could increase Berkshire's
interest expense, which could adversely affect Berkshire's results of
operations, financial condition and ability to pay
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expected distributions to shareholders. An increase in interest expense could
also cause us to be in default under our credit facilities.
POTENTIAL ENVIRONMENTAL LIABILITY - OUR PROPERTIES MAY HAVE
ENVIRONMENTAL CONTAMINATION, WHICH COULD REDUCE THE VALUE OF YOUR
INVESTMENT.
Various federal, state and local environmental laws, ordinances and regulations
subject property owners or operators to liability for the costs of removal or
remediation of some hazardous or toxic substances on the property. These laws
often impose liability without regard to whether the owner or operator knew of,
or was responsible for, the presence of the hazardous or toxic substances. The
presence of, or the failure to properly remediate, such substances may adversely
affect our ability to sell or rent the property or to borrow using the property
as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at a disposal or treatment facility, whether or not such facility is
owned or operated by such person. Third parties may seek recovery from owners or
operators of such properties or persons who arranged for the disposal or
treatment of hazardous or toxic substances. Therefore, owners and operators are
potentially liable for removal or remediation costs, as well as other related
costs, including governmental fines and injuries to persons and property,
related to such facilities.
ANTI-TAKEOVER PROVISIONS - BECAUSE OUR GOVERNING DOCUMENTS CONTAIN PROVISIONS
THAT MAY INHIBIT A TAKEOVER OF BERKSHIRE, YOU MAY NOT HAVE THE OPPORTUNITY TO
REALIZE A PREMIUM ON YOUR INVESTMENT.
Our charter places restrictions on the accumulation of shares in excess of 9.8%
of the number of outstanding shares of common stock, subject to exceptions
permitted with the approval of the Board of Directors to allow (1) underwritten
offerings, or (2) the sale of equity securities in circumstances where the Board
of Directors determines Berkshire's REIT federal tax status will not be
jeopardized. This ownership limitation may:
- discourage a change in control of Berkshire.
- deter tender offers for the common stock, which offers may be
advantageous to shareholders.
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- limit the opportunity for shareholders to receive a premium for their
shares of common stock that might otherwise exist.
Under Berkshire's charter, the election of directors is staggered such that
approximately one-third of the directors are elected to three-year terms each
year. This provision may discourage a change in control of Berkshire. In
addition, the governing documents require a supermajority vote to amend those
portions of the governing documents which concern:
- the definition of "supermajority".
- the requirements for amending the governing documents.
- the requirements regarding excess share ownership.
- the actions which require a supermajority vote.
- the requirements regarding business combinations.
Additional provisions of the governing documents restrict the shareholders'
ability to nominate candidates for election as directors and to alter, amend and
adopt provisions inconsistent with, or to repeal some provisions of, the
governing documents. In addition, Berkshire is subject to Section 203 of the
Delaware General Corporation Law, which restricts business combinations between
Berkshire and its shareholders.
Any of the provisions discussed above may have the effect of delaying, deferring
or preventing a transaction or change in control of Berkshire that might involve
a premium price for the shares of common stock or that otherwise might be in the
best interest of our shareholders.
Berkshire has an authorized class of 60,000,000 shares of preferred stock.
Currently Berkshire has approximately 2.7 million shares of its 1997 Series-A
Preferred Stock outstanding. The Board of Directors may issue the remaining 57.3
million shares on such terms and with such rights, preferences and designations
as the Board may determine. Issuance of such preferred stock, depending on its
rights, preferences, and designations, may have the effect of delaying,
deterring, or preventing a change in control of Berkshire.
OUR GOVERNING DOCUMENTS CONTAIN NO RESTRICTIONS ON THE TYPES OF INVESTMENTS WE
MAY MAKE, WHICH MAY RESULT IN A
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PORTFOLIO SIGNIFICANTLY DIFFERENT FROM THE ONE IN EXISTENCE AT THE TIME YOU
ELECT TO CONVERT YOUR UNITS.
Berkshire's Board of Directors may change its investment policies without a vote
of the shareholders. Consequently, shareholders will have no direct control over
the kinds of investments Berkshire makes.
TAX
WE MAY FAIL TO QUALIFY AS A REIT, WHICH WOULD RESULT IN A REDUCTION OF FUNDS
AVAILABLE TO DISTRIBUTE TO SHAREHOLDERS.
To maintain our status as a REIT, we must continually meet specified criteria
concerning, among other things, our common stock ownership, the nature of our
assets, the sources of our income and the amount of distributions we make to
shareholders.
If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to shareholders in computing our taxable income and would be taxed
on our income at regular corporate tax rates. If our status as a REIT were
terminated, we might not be able to elect to be treated as a REIT for the
following five-year period. Therefore, if we lose our REIT status, the funds
available for distribution to you would be reduced substantially for each of the
years involved.
BECAUSE THE TAX LAWS REQUIRE US TO DISTRIBUTE MOST OF OUR TAXABLE INCOME, WE MAY
HAVE TO BORROW ADDITIONAL FUNDS OR FORGO OTHER USES OF OUR CAPITAL.
To qualify as a REIT, we generally are required each year to distribute to our
shareholders at least 95% of our taxable income, excluding any net capital gain.
In addition, Berkshire is subject to a 4% nondeductible excise tax on the
amount, if any, by which distributions paid by it with respect to any calendar
year are less than the sum of:
- 85% of its ordinary income for that year,
- 95% of its capital gain net income for that year, and
- 100% of its undistributed taxable income from prior years.
We may have to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. The requirement to
distribute a substantial portion of our net taxable income
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could cause us to distribute amounts that otherwise would be spent on future
acquisitions, capital expenditures or repayment of debt. In that event, we might
have to borrow funds or sell assets to fund the costs of such items.
IF BRI PARTNERSHIP FAILS TO QUALIFY AS A PARTNERSHIP, WE WILL HAVE LESS CASH
AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS.
We have not requested, and do not expect to request, a ruling from the Internal
Revenue Service that BRI Partnership and each of its noncorporate operating
subsidiaries will be classified as partnerships for federal income tax purposes.
If the agency were to successfully challenge the tax status of BRI Partnership
or any noncorporate operating subsidiary as a partnership for federal income tax
purposes, BRI Partnership or the noncorporate subsidiary would be taxed as a
corporation. If that happened, Berkshire would likely cease to qualify as a REIT
for a variety of reasons. Furthermore, the imposition of a corporate income tax
on BRI Partnership would reduce substantially the amount of cash available for
distribution from BRI Partnership to Berkshire and its shareholders.
CHANGES IN TAX LAW MAY AFFECT THE VALUE OF OUR ASSETS AND YOUR INVESTMENT.
The current federal income tax treatment of an investment in Berkshire may be
modified, prospectively or retroactively, by legislative, judicial or
administrative action at any time. In addition to any direct effects which such
changes might have, such changes might also indirectly affect the market value
of all real estate investments and, consequently, our ability to realize our
business objectives.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. Any statements that are not statements of historical fact may be
forward-looking statements. Words such as "believes," "may," "anticipates,"
"plans," "expects," "intends," "estimates" and similar expressions are intended
to identify forward-looking statements. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus. The risk factors noted in the section titled
"Risk Factors" and other factors noted throughout this prospectus, including
risks and uncertainties, could cause our actual results to differ materially
from those indicated by any forward-looking statement.
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