<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[(check mark)] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
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 1-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Maryland 56-1871668
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
3100 Smoketree Court, Suite 600
Raleigh, N.C. 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
<S> <C>
Common stock, $.01 par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 (Check Mark) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. (Check Mark)
The aggregate market value of the shares of common stock held by
non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on March 1, 1996 was approximately $582,229,230. As of March 1, 1996,
there were 19,407,641 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting of Shareholders to be held April 30, 1996 are incorporated by reference
in Part III Items 10, 11, 12 and 13.
<PAGE>
HIGHWOODS PROPERTIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. FINANCIAL INFORMATION Page No.
<C> <S> <C>
PART I
1. Business................................................................................ 3
2. Properties.............................................................................. 9
3. Legal Proceedings....................................................................... 20
4. Submission of Matters to a Vote of Security Holders..................................... 20
X. Executive Officers of the Registrant.................................................... 20
PART II
5. Market for Registrant's Common Shares and Related Stockholder Matters................... 22
6. Selected Financial Data................................................................. 22
7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 24
8. Financial Statements and Supplementary Data............................................. 30
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 30
PART III
10. Directors and Executive Officers of the Registrant...................................... 31
11. Executive Compensation.................................................................. 31
12. Security Ownership of Certain Beneficial Owners and Management.......................... 33
13. Certain Relationships and Related Transactions.......................................... 33
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 35
</TABLE>
2
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PART I
ITEM 1. BUSINESS
General
Highwoods Properties, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") that began operations through
a predecessor in 1978. Originally founded to over-see the development, leasing
and management of the 201-acre Highwoods Office Center in Raleigh, North
Carolina, the Company has since evolved into one of the largest full service
real estate companies in the Southeastern United States. Historically, the
Company's real estate operations have been focused in the Raleigh-Durham, North
Carolina market, an area also known as the Research Triangle, one of the
nation's premier business centers. On June 14, 1994, the Company completed an
initial public offering of 8,510,000 shares of Common Stock in connection with
the reorganization of the Company's predecessor, whereby the Company succeeded
to the ownership of 36 suburban office buildings, four service center
properties, one warehouse facility and 94 acres of undeveloped land (the
"Formation Transaction"). As of December 31, 1995, the Company owned a portfolio
of 191 in-service office and industrial properties (the "Properties") and 203
acres of undeveloped land suitable for future development (the "Development
Land"). The Properties consist of 87 suburban office properties and 104
industrial properties (including 68 service centers) located in Raleigh-Durham,
Winston-Salem, Greensboro and Charlotte, North Carolina and Richmond, Virginia.
The Company currently conducts all of its business and owns all of its
assets through Highwoods/Forsyth Limited Partnership (the "Operating
Partnership") and its subsidiaries. The Company is the sole general partner and
also a limited partner of the Operating Partnership and currently holds
approximately 84% of the partnership interests ("Units"). The Company currently
provides management services for 23 properties owned by third parties,
comprising approximately 847,000 square feet, and exclusive leasing services
with respect to 29 third-party-owned properties, comprising approximately 1.7
million square feet. The Company conducts its third-party fee-based services
through two subsidiaries, Highwoods Services, Inc. and Forsyth Properties
Services, Inc. (the "Service Companies"), as well as through Forsyth-Carter
Brokerage of North Carolina, L.L.C., a joint venture with Carter-Oncor
International.
The Company's executive offices are located at 3100 Smoketree Court, Suite
600, Raleigh, North Carolina 27604, and its telephone number is (919) 872-4924.
The Company also maintains divisional offices at 380 Knollwood, Suite 430,
Winston-Salem, North Carolina 27103, telephone number (910) 631-9000 and 4405
Cox Road, Suite 220, Glen Allen, Virginia 23060, telephone number (804)
747-7800.
Business Objectives and Strategy of the Company
The Company seeks to maximize the total return to its stockholders (i)
through contractual increases in rental rates from existing leases, (ii) by
renewing or re-leasing space with expiring leases at higher effective rental
rates, (iii) by increasing occupancy levels in properties, (iv) by acquiring new
properties, (v) by developing new properties, including properties on the
Development Land, and (vi) by providing a complete line of real estate services
to the Company's tenants and to third parties. The Company believes that its
in-house development, acquisition, construction management, leasing, brokerage
and management services allow it to respond to many demands of its existing and
potential tenant base, and enable it to provide its tenants cost-effective
services such as build-to-suit construction and space modification, including
tenant improvements and expansions. In addition, the breadth of the Company's
capabilities and resources, particularly its in-house leasing and third-party
brokerage services, provides it with market information not generally available
and gives the Company increased access to development, acquisition and
management opportunities. The Company believes that the operating efficiencies
achieved through its fully integrated organization also provide a competitive
advantage in setting its lease rates and pricing its other services.
The Company's strategy is to focus its real estate activities in markets
where it believes its extensive local knowledge gives it a competitive advantage
over other real estate developers and operators with less local experience,
particularly with regard to site selection, market information and clients.
Through its 1995 business combinations with Forsyth Properties, Inc. and
Ross-Kreckman Management Corporation, the Company was able to diversify its
portfolio to include industrial properties and to expand its geographic
3
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focus beyond the Raleigh-Durham market to include Winston-Salem/Greensboro and
the Richmond, Virginia markets, while maintaining its localized approach to real
estate. The Company continued to diversify its portfolio with its acquisitions
in Charlotte, North Carolina. See "Recent Developments." In addition, the
Company has recently entered into a letter of intent to purchase a significant
portfolio in Nashville, Tennessee. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company's executive officers
have an average of approximately 18 years of experience in the real estate
industry almost exclusively in their local markets.
The Company seeks to acquire suburban office and industrial properties at
prices below replacement cost that offer attractive returns, including
acquisitions of underperforming, high-quality assets in situations offering
opportunities for the Company to improve such assets' operating performance. In
evaluating potential acquisition opportunities, the Company will continue to
rely on the extensive experience of its management and its research capabilities
in considering a number of factors, including: (i) whether the property is
strategically located, (ii) the construction quality and condition of the
property, (iii) the occupancy and demand of properties of a similar type in the
market and (iv) whether the property is able to generate returns at or above
levels of expected growth and appreciation in the property's value. (See "Recent
Developments" for a discussion of the Company's acquisition and development
activities during 1995.) The Company also believes that its 203 acres of
development land should provide it with a competitive advantage in its future
development activities.
The Company may from time to time acquire properties from property owners
through the exchange of Units in the Operating Partnership for the property
owner's equity in the acquired property. The Units received by these property
owners would be exchangeable into shares of Common Stock of the Company under
certain circumstances. In connection with the transactions, the Company may also
assume outstanding indebtedness associated with the acquired properties. The
Company believes that this acquisition method may permit the Company to acquire
properties at attractive prices from property owners wishing to enter into
tax-deferred transactions. Using the foregoing structure, the Company has
acquired 87 properties since its inception, comprising 4.9 million rentable
square feet. The acquisitions include the Forsyth, Research Commons, and Hock
properties, and a portion of the properties in the Bissell portfolio and the
Richmond expansion. See "Recent Developments."
The Company will also selectively seek opportunities for fee-producing
development, management and brokerage business with third-party owners through
the Service Companies and Forsyth-Carter Brokerage.
The Company is also committed to maintaining a capital structure that will
allow it to grow through development and acquisition opportunities. As part of
this commitment, the Company intends to operate with a ratio of debt to total
market capitalization below 40%. At March 1, 1996, the ratio of debt to total
market capitalization (based on a Common Stock price of $30 per share) is
approximately 21%. The Company believes that as a result of this debt level it
should be able to borrow funds at attractive rates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
4
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Recent Developments
Merger and Acquisition Activity
The following table summarizes the mergers and acquisitions completed
during the year ended December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Number of Rentable Initial
Property Location Properties Square Feet Cost
<S> <C> <C> <C> <C>
Forsyth Transaction Piedmont Triad/Charlotte 57 3,630,565 $ 169,900
Richmond Expansion Richmond 10 362,844 28,700
Research Commons Research Triangle 6 539,310 60,000
Creekstone Crossing Research Triangle 1 59,299 4,500
Bissell Portfolio Piedmont Triad/Charlotte 56 920,283 36,900
Hock Portfolio Research Triangle 5 274,604 21,200
Six Forks I & II Research Triangle 2 89,470 8,800
Cotton Research Triangle 1 40,035 2,400
Parkway Plaza Charlotte 6 440,134 37,500
Total 144 6,356,544 $ 369,900
</TABLE>
A significant portion of the Company's growth during 1995 resulted from its
expansion into new markets. The Company entered three new markets and
established two divisional offices as a result of the Forsyth Transaction and
the Richmond Expansion (both transactions defined below).
Forsyth Transaction
On February 23, 1995, the Company consummated a transaction with Forsyth
Properties, Inc. and its affiliates (collectively, "Forsyth"), pursuant to which
the Company and Forsyth combined their respective property portfolios,
management teams and business operations (the "Forsyth Transaction"). As part of
the Forsyth Transaction, the Company succeeded to the ownership of an additional
20 suburban office properties, 37 industrial properties and approximately 76
acres of development land located primarily in Winston-Salem and Greensboro,
North Carolina, an area known as the Piedmont Triad. The Forsyth-owned
properties totaled approximately 3.6 million square feet. As consideration for
the Forsyth Transaction, the Company assumed approximately $122.8 million of
indebtedness, paid approximately $6.0 million in cash to certain non-continuing
investors, and issued 904,478 Units in the Operating Partnership to certain
executive officers of Forsyth and certain holders of direct or indirect
interests in the Forsyth properties. In connection with the Forsyth Transaction,
the Company completed a second public offering of 5,640,000 shares of Common
Stock at $20.75 per share.
Richmond Expansion
On July 12, 1995, the Company acquired two suburban office properties
located in Innsbrook Office Center in Richmond, Virginia. The properties,
encompassing 97,672 rentable square feet, were purchased for the aggregate
purchase price of $8.3 million. The purchase price was paid through the
assumption of $7.9 million of indebtedness and cash of $0.4 million.
On September 1, 1995, the Company established a Richmond office upon the
completion of its acquisition of the Ross-Kreckman Management Corporation.
Furthermore, on September 20, 1995, and October 10, 1995, the Company completed
the acquisition of six suburban office properties and two service center
properties encompassing 265,172 square feet in the Innsbrook Office Center in
Richmond, Virginia. The purchase price for the properties totaled approximately
$20.4 million and was funded through the assumption of $5.7 million of
indebtedness, the issuance of 40,319 Units and the payment of $13.7 million in
cash.
The Company has entered into a contract with the original developer of the
Innsbrook Office Center to acquire 64 acres of development land in the park at a
fixed price of $10.2 million. In January, 1996, the Company acquired the first
10 acres of this land for an aggregate purchase price of $1.8 million in cash.
The Company will acquire the remaining 54 acres over a five-year period
commencing with the closing date.
5
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The consolidated transaction described above (the "Richmond Expansion")
encompasses 362,844 square feet and 64 acres of development land in eight
suburban office and two service center properties. The total cost, excluding the
64 acres of development land, was $28.7 million.
Research Commons
On February 10, 1995, the Company acquired six suburban office buildings
located within the confines of Research Triangle Park from the Research Commons
Group. The buildings are situated in an office park known as Research Commons,
contain approximately 538,000 rentable square feet. The Company also acquired
all of the Research Commons office park, which contains approximately 60 acres
of land, 10 of which is undeveloped but zoned for office and other commercial
development. As consideration for the Research Commons Acquisition, the Company
assumed approximately $26.2 million of indebtedness owed to a financial
institution, assumed a $5.0 million promissory note to Beaunit, an affiliate of
certain members of the Research Commons Group, and issued 1,390,179 Units in the
Operating Partnership to the Research Commons Group. In the event the buildings
at Research Commons meet certain operating results in the future, the Company
agreed to issue to the Research Commons Group up to an additional 40,000 Units.
The Company agreed to allow the current property manager of Research Commons,
Practical Management Inc., to continue to manage the properties following
consummation of the acquisition. The Company however, has the right to terminate
such arrangement upon 180 days notice.
Creekstone Crossing
On May 25, 1995, the Company acquired Creekstone Crossings, a 59,000-square
foot service center property adjacent to the Research Triangle Park in
Raleigh-Durham, North Carolina. Creekstone Crossings is located in the
Company-owned Creekstone Park development, which includes the Riverbirch
building and 22 acres of development land. The aggregate purchase price of $4.5
million was paid through the issuance of 4,640 Units and the assumption of
approximately $4.4 million of indebtedness, which was repaid at closing from a
draw under the Company's credit facility. Certain directors and officers of the
Company owned an interest in Creekstone Crossings.
Bissell Portfolio
On July 12, 1995, the Company acquired a 914,000-square foot industrial and
service center portfolio consisting of 47 buildings located in Greensboro and
nine buildings located in Charlotte, North Carolina (the "Bissell Portfolio").
As part of the acquisition, the Company initially acquired six acres of
development land and will acquire 20 additional acres over a five-year period.
The aggregate purchase price of approximately $38.7 million was paid through the
issuance of 81,716 Units, the assumption of $6.7 million of indebtedness, the
payment of $28.3 million in cash and a deferred payment of $1.6 million. The
$28.3 million cash payment was financed with a $12.3 million first mortgage loan
and a $16.0 million draw under the Company's credit facility. The deferred
payment will be payable in installments as the balance of the 20 acres of
development land are placed in service or five years from the closing, whichever
occurs first. The Bissell Portfolio contains 167,000 square feet of warehouse
space and 747,000 square feet of service center space.
Hock Portfolio
On July 20, 1995, the Company acquired a 275,000-square foot,
five-building, suburban office complex located in Durham, North Carolina (the
"Hock Portfolio").The aggregate purchase price of approximately $21.6 million
was paid through the issuance of 183,000 Units and the assumption of
approximately $17.0 million of indebtedness, which was repaid at closing through
a draw under the Company's credit facility. As part of the transaction, the
Company was granted certain development rights with respect to approximately 78
acres of development land adjacent to the Hock Portfolio.
Six Forks I & II
On November 23, 1995, the Company closed on the acquisition of two suburban
office properties (Six Forks I and II) encompassing 89,000 square feet. The
properties are located adjacent to the Company's Six Forks Center III property.
As consideration for the purchase, the Company paid $8.8 million in cash.
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Cotton Building
On December 5, 1995, the Company closed the 40,000 square-foot Cotton
Building for $2.3 million. The purchase price was funded through the issuance of
23,466 Units and the assumption of $1.7 million of indebtedness, which was
repaid simultaneously at closing.
Parkway Plaza
On December 19, 1995, the Company completed a $37.5 million acquisition of
Parkway Plaza located in Charlotte, North Carolina. The portfolio consists of
330,000 square feet of office space in four buildings and 110,000 square feet of
industrial space in a single building and is located in the I-77 Southwest
Charlotte submarket. The 110,000-square foot industrial property is 32% finished
office space. The purchase price was comprised of $32.6 million in cash and the
assumption of a $4.9 million, 9.75% mortgage with a maturity date of February 1,
1998. The buildings are situated on 40.2 acres. Of these 40.2 acres, 23.6 are on
a ground lease which expires in 2082 and includes a purchase option allowing the
Company to acquire the land at any time at 85% of the appraised value.
Development Activity
The following table summarizes the three development projects placed in
service during the year ended December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Number of Rentable Initial
Property Location Properties Square Feet Cost
<S> <C> <C> <C> <C>
Rexwoods IV Research Triangle 1 42,003 $ 4,300
Willow Oak Research Triangle 1 88,783 8,100
West Point 5 Piedmont Triad 1 25,200 1,200
Total or Average 3 155,986 $13,600
</TABLE>
The Company has six suburban office properties and one industrial property
under development totaling 718,300 square feet of office and industrial space.
The following table summarizes these development projects in process as of
December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Estimated
Rentable Budgeted Percent Completion
Office Properties Location Square Feet Cost Preleased Date
<S> <C> <C> <C> <C> <C>
Hewlett-Packard Piedmont Triad 18,000 $ 1,000 77% 1Q96
Global Software Research Triangle 92,700 7,500 76 1Q96
MSA Research Triangle 57,000 5,500 100 4Q96
Healthsource Research Triangle 180,000 15,300 100 4Q96
Shockoe Plaza Richmond 117,000 15,100 85 4Q96
Innsbrook Richmond 126,000 12,500 0 4Q96
Total or Weighted Average 590,700 $56,900 71%
<CAPTION>
Industrial Property
<S> <C> <C> <C> <C> <C>
Regency One Piedmont Triad 127,600 3,500 100% 1Q96
Total or Weighted
Averager 718,300 $60,400 76%
</TABLE>
Financing Activity
During the quarter ended March 31, 1995, the Company completed a 5,640,000
share public offering of Common Stock (including 640,000 shares issued pursuant
to the underwriters' over allotment option, the "Second Offering"). The net
proceeds of the offering totaled $109.8 million and were used primarily to
retire indebtedness assumed in connection with the Forsyth Transaction.
Also during the quarter ended March 31, 1995, the Company received the
proceeds from a $41 million, 20-year fixed rate (8.97%) mortgage loan. After 10
years the loan provides for a rate reset, with each party
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having the option at that time to put or call the loan, as the case may be. The
proceeds from the loan were used, together with the offering proceeds discussed
above, to fund the Forsyth Transaction.
During the quarter ended September 30, 1995, the Company completed a
4,774,989 share public offering of Common Stock (including 574,989 shares issued
pursuant to the underwriter's over allotment option, the "Third Offering"). The
net proceeds of the offering totaled $110.0 million and were used primarily to
retire amounts outstanding under the Company's credit facility, to fund the
Richmond Expansion, to fund the cost of the Company's various development
projects and to provide working capital.
Also, during the quarter ended September 30, 1995, the Company received the
proceeds from a $32 million, 20-year fixed rate (8.15%) mortgage loan. After 10
years the loan provides for a rate reset and a put/call option (as described
above). The proceeds from the loan were used to fund property acquisitions made
during the quarter.
In connection with the acquisition of the Bissell Portfolio, the Company
entered into a $12.2 million, 15-year variable rate (1.35% over 30 days LIBOR)
mortgage loan with a put/call option at the end of years five and ten.
In connection with the Company's 1995 acquisitions, the Company assumed 13
loans with an aggregate outstanding balance on the closing dates of $72.5
million and issued 2,676,000 Units valued at $57.3 million.
The Company has received a commitment from three commercial banks providing
for a $140.0 million unsecured credit facility. The unsecured credit facility,
which is expected to close March 31, 1996 subject to completion of final
documentation, will replace the current $80.0 million secured credit facility
and will have a maturity date of June 14, 1999.
Competition
The Properties compete for tenants with similar properties located in the
Company's markets primarily on the basis of location, rent charged, services
provided and the design and condition of the improvements. The Company also
competes with other REITs, financial institutions, pension funds, partnerships,
individual investors and others when attempting to acquire properties.
Employees
As of December 31, 1995, the Company employed 124 persons, as compared to
43 at December 31, 1994. The increase is primarily a result of the Company's
expansion into the Piedmont Triad and Richmond markets.
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ITEM 2. PROPERTIES
General
The following table sets forth certain information with respect to the
Company's properties at
December 31, 1995:
<TABLE>
<CAPTION>
Office Properties Industrial Properties Total
Number of Rentable Number of Rentable Number of Rentable
In-Service: Properties Square Feet Properties Square Feet Properties Square Feet
<S> <C> <C> <C> <C> <C> <C>
Research Triangle......................... 53 3,186,643 6 515,387 59 3,702,030
Piedmont Triad............................ 20 1,056,629 78 3,095,604 98 4,152,233
Charlotte................................. 6 387,348 17 491,652 23 879,000
Richmond.................................. 8 290,750 3 191,158 11 481,908
Total................................... 87 4,921,370 104 4,293,801 191 9,215,171
<CAPTION>
Under Development:
<S> <C> <C> <C> <C> <C> <C>
Research Triangle......................... 3 329,700 -- -- 3 329,700
Piedmont Triad............................ 1 18,000 1 127,600 2 145,600
Charlotte................................. -- -- -- -- -- --
Richmond.................................. 2 243,000 -- -- 2 243,000
Total................................... 6 590,700 1 127,600 7 718,300
<CAPTION>
Total:
<S> <C> <C> <C> <C> <C> <C>
Research Triangle......................... 56 3,516,343 6 515,387 62 4,031,730
Piedmont Triad............................ 21 1,074,629 79 3,223,204 100 4,297,833
Charlotte................................. 6 387,348 17 491,652 23 879,000
Richmond.................................. 10 533,750 3 191,158 13 724,908
Total................................... 93 5,512,070 105 4,421,401 198 9,933,471
</TABLE>
<TABLE>
<CAPTION>
Occupancy Rate of In-Service
Properties
Office Industrial Weighted
Properties Properties Average
<S> <C> <C> <C>
Research Triangle........................................................... 95% 89% 94%
Piedmont Triad.............................................................. 95 92 93
Charlotte................................................................... 93 87 90
Richmond.................................................................... 98 91 95
Weighted average.......................................................... 95% 91% 93%
</TABLE>
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Tenants
The Properties are leased to approximately 950 tenants, which engage in a
wide variety of businesses including computers, healthcare, telecommunications,
finance, insurance and electronics. The following table sets forth information
concerning the 20 largest tenants of the Properties as of December 31, 1995:
<TABLE>
<CAPTION>
Percent
of Total
Annualized
Number Annualized Rental
Tenant of Leases Rental Revenue (1) Revenue
<C> <S> <C> <C> <C>
1. Federal Government
Environmental Protection Agency........................... 4 $ 4,482,619 5.1%
U.S. Army and Marine Corps................................ 2 243,473 0.2
National Institute of Health Sciences..................... 1 165,394 0.2
Other..................................................... 2 77,427 0.1
Total.................................................. 9 $ 4,968,913 5.6%
2. IBM Corporation............................................. 3 3,549,603 4.0
3. First Citizens Bank & Trust................................. 7 2,766,733 3.1
4. Duke University............................................. 5 1,378,797 1.5
5. Sears, Roebuck & Company.................................... 4 1,364,841 1.5
6. Volvo....................................................... 3 1,342,728 1.5
7. Clintrials of North Carolina................................ 4 1,294,525 1.5
8. Virginia State Government................................... 2 1,194,000 1.3
9. Glaxo Wellcome.............................................. 3 1,193,100 1.3
10. Kaiser Foundation Health Plan............................... 3 1,082,798 1.2
11. Martin Marietta............................................. 5 1,077,163 1.2
12. Southern National Bank...................................... 2 1,071,889 1.2
13. EDS......................................................... 2 1,071,674 1.2
14. CompuChem Corporation (2)................................... 1 1,023,738 1.2
15. Maupin Taylor Ellis & Adams................................. 1 948,185 1.1
16. AT&T........................................................ 5 944,742 1.1
17. Qualex...................................................... 3 867,038 1.0
18. Broadband Technologies...................................... 1 849,968 1.0
19. Ericsson, Inc............................................... 3 848,673 1.0
20. Norwest Mortgage............................................ 1 831,563 0.9
Total....................................................... 67 $ 29,670,671 33.4%
</TABLE>
(1) Calculated by multiplying December 1995 rental revenue (base rent plus
operating pass throughs) times 12.
(2) CompuChem Corporation lease expires May 31, 1996.
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The following tables set forth certain information about the Company's
leasing activities for the year ended December 31, 1995 and for the period from
June 14, 1994 to December 31, 1994.
<TABLE>
<CAPTION>
1995 1994
Office Industrial Office Industrial
<S> <C> <C> <C> <C>
Net Effective Rents Related to Re-Leased Space:
Number of lease transactions (signed leases)............. 145 97 52 1
Rentable square footage leased........................... 655,546 586,748 111,379 25,600
Average per rentable square foot over the lease term:
Base rent.............................................. $ 15.39 $ 5.54 $ 15.94 $ 6.77
Tenant improvements.................................... (0.29) (0.06) (0.96) (0.14)
Leasing commissions.................................... (0.31) (0.12) (0.39) (0.06)
Rent concessions....................................... (0.01) -- (0.14) --
Effective rent......................................... $ 14.78 $ 5.36 $ 14.45 $ 6.57
Expense stop........................................... (4.36) (0.32) (4.28) --
Equivalent effective net rent.......................... $ 10.42 $ 5.04 $ 10.17 $ 6.57
Average term in years.................................... 4 3 4 5
Capital Expenditures Related to Re-leased Space:
Tenant Improvements:
Total dollars committed under signed leases............ $1,604,591 $ 115,097 $536,946 $ 17,920
Rentable square feet................................... 655,546 586,748 111,379 25,600
Per rentable square foot............................... $ 2.45 $ 0.20 $ 4.82 $ 0.70
Leasing Commissions:
Total dollars committed under signed leases............ $ 770,614 $ 169,929 $189,167 $ 7,680
Rentable square feet................................... 655,546 586,748 111,379 25,600
Per rentable square foot............................... $ 1.18 $ 0.29 $ 1.70 $ 0.30
Total:
Total dollars committed under signed leases............ $2,375,205 $ 285,026 $726,113 $ 25,600
Rentable square feet................................... 655,546 586,748 111,379 25,600
Per rentable square foot............................... $ 3.62 $ 0.49 $ 6.52 $ 1.00
Re-leased Space Activity:
Number of leases commenced during period................. 141 68 33 --
Rentable square feet..................................... 377,340 397,052 63,268 --
Average final rate with expense pass throughs............ $ 14.63 $ 5.41 $ 15.03 --
Average first year cash rental rate...................... $ 15.12 $ 6.02 $ 15.22 --
Percentage increase...................................... 3.35% 11.28% 1.3% --
</TABLE>
11
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of December 31, 1995, assuming no tenant exercises renewal options.
Office Properties:
<TABLE>
<CAPTION>
Average
Annual
Total Percentage of Annual Rents Rental Rate Per Percentage of
Rentable Leased Square Footage Under Square Leased Rents
Year of Lease Number of Square Feet Represented by Expiring Foot for Represented by
Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Expiring Leases
<S> <C> <C> <C> <C> <C> <C>
1996 164 539,214 11.3% $ 7,379,537 $ 13.69 10.7%
1997 136 778,416 16.4 10,980,414 14.11 15.9
1998 116 798,789 16.8 11,554,107 14.46 16.7
1999 71 458,142 9.6 6,679,161 14.58 9.6
2000 98 686,510 14.4 9,882,161 14.39 14.3
2001 30 764,025 16.0 11,103,977 14.53 16.1
2002 16 253,829 5.3 4,189,429 16.50 6.0
2003 10 350,877 7.4 5,589,183 15.93 8.1
2004 6 71,182 1.5 972,833 13.67 1.4
2005 5 61,927 1.3 821,394 13.26 1.2
Thereafter -- -- -- -- -- --
Total or average 652 4,762,911 100.0% $69,152,196 $ 14.52 100.0%
</TABLE>
Industrial Properties:
<TABLE>
<CAPTION>
Average
Annual
Total Percentage of Annual Rents Rental Rate Per Percentage of
Rentable Leased Square Footage Under Square Leased Rents
Year of Lease Number of Square Feet Represented by Expiring Foot for Represented by
Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Expiring Leases
<S> <C> <C> <C> <C> <C> <C>
1996 202 1,673,969 44.4% $ 7,245,030 $ 4.33 36.6%
1997 81 533,990 14.2 2,732,089 5.12 13.8
1998 81 497,015 13.2 3,775,415 7.60 19.1
1999 31 282,453 7.5 1,950,285 6.90 9.8
2000 33 441,497 11.7 2,540,394 5.75 12.8
2001 6 46,809 1.2 416,299 8.89 2.1
2002 3 259,710 6.9 802,403 3.09 4.1
2003 2 5,875 0.1 54,071 9.20 0.3
2004 1 4,399 0.1 46,981 10.68 0.2
2005 5 27,082 0.7 242,289 8.95 1.2
Thereafter -- -- -- -- -- --
Total or average 445 3,772,799 100.0% $19,805,256 $ 5.25 100.0%
</TABLE>
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
12
<PAGE>
Table of Properties
The following table and the notes thereto set forth information regarding
the Properties:
<TABLE>
<CAPTION>
Percent Ceiling/
Rentable Occupied at Percent Clear
Building Year Square December 31, Office Height
Property Type (1) Built Feet 1995 (2) Finish (Feet)
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
Research Triangle Properties
<S> <C> <C> <C> <C> <C> <C>
Highwoods Office Center
Amica O 1983 20,708 100% 100% 8
Arrowood O 1979 58,743 100 100 8
Aspen O 1980 36,666 95 100 8
Birchwood O 1983 12,748 100 100 8
Cedar East O 1981 39,904 98 100 8
Cedar West O 1981 39,903 81 100 8
Cottonwood O 1983 40,150 100 100 8
Cypress O 1980 39,004 100 100 8
Dogwood O 1983 40,613 100 100 8
Hawthorn O 1987 63,797 100 100 9-12
Highwoods Tower O 1991 185,222 99 100 9
Holly O 1984 20,186 100 100 8
Ironwood O 1978 35,695 92 100 8
Kaiser O 1988 56,915 100 100 9
Laurel O 1982 39,382 100 100 9
Leatherwood O 1979 36,581 99 100 8
Smoketree Tower O 1984 151,703 72 100 9
Rexwoods Office Center
2500 Blue Ridge O 1982 61,864 100 100 8
Blue Ridge II O 1988 20,673 100 100 8
Rexwoods Center O 1990 41,686 100 100 9
Rexwoods II O 1993 20,845 100 100 9
Rexwoods III O 1992 42,484 100 100 9
Rexwoods IV O 1995 42,003 77 100 9
Triangle Business Center
Bldg. 2A S 1984 102,400 98 90 18
Bldg. 2B S 1984 32,000 100 50 18
Bldg. 3 S 1988 135,360 84 80 18
Bldg. 7 S 1986 126,728 78 95 12
Progress Center
Cape Fear O 1979 40,058 43 100 8
Catawba O 1980 37,456 100 100 8
CompuChem O 1980 105,540 100 100 8
North Park
4800 North Park O 1985 168,016 100 100 9
4900 North Park O 1984 32,002 94 100 9
5000 North Park O 1980 75,395 81 100 9-10
Creekstone Park
Creekstone Crossing S 1990 59,299 92 96 12
Riverbirch O 1987 59,971 100 100 8
Willow Oak O 1995 88,783 93 100 9
Research Commons (3)
EPA Administration O 1966 46,718 100 100 9
EPA Annex O 1966 145,875 100 50 9
4501 Bldg. O 1985 56,566 100 100 9
4401 Bldg. O 1987 115,526 84 93 9
4301 Bldg. O 1989 90,894 100 27 9
4201 Bldg. O 1991 83,731 100 100 9
Hock Portfolio
Fairfield I O 1987 50,540 92 100 9
Fairfield II O 1989 61,064 90 100 9
Qualex O 1985 67,000 100 100 9
4101 Roxboro O 1984 56,000 100 100 9
<CAPTION>
Tenants Leasing
25% or More
of Rentable
Square Feet at
Property December 31, 1995
<S> <C>
<S> <C>
Highwoods Office Center
Amica Amica Mutual Insurance Company
Arrowood First Citizens Bank & Trust
Aspen N/A
Birchwood Donohoe Construction Company,
Southlight, Inc.
Cedar East Amerimark Building Products
Cedar West N/A
Cottonwood First Citizens Bank & Trust
Cypress GSA-Army Recruiters
Dogwood First Citizens Bank & Trust
Hawthorn Carolina Telephone
Highwoods Tower Maupin, Taylor, Ellis & Adams
Holly Capital Associated Industries
Ironwood First Citizens Bank & Trust
Kaiser Kaiser Foundation
Laurel Microspace Communications, First
Citizens Bank & Trust
Leatherwood GAB North America, Inc.
Smoketree Tower N/A
Rexwoods Office Center
2500 Blue Ridge Rex Hospital, Inc.
Blue Ridge II McGladrey & Pullen
Rexwoods Center N/A
Rexwoods II Raleigh Neurology Clinic, Miller
Building Corporation
Rexwoods III Piedmont Olson Hensley, Inc.
Rexwoods IV N/A
Triangle Business Center
Bldg. 2A Harris Corporation, AAI Systems
Management, Inc.
Bldg. 2B International Paper
Bldg. 3 N/A
Bldg. 7 Broadband Technologies, Inc.
Progress Center
Cape Fear N/A
Catawba GSA -- EPA
CompuChem CompuChem
North Park
4800 North Park IBM-PC Division
4900 North Park N/A
5000 North Park N/A
Creekstone Park
Creekstone Crossing N/A
Riverbirch Digital Equipment Corporation,
Quintiles, Inc.
Willow Oak AT&T Corporation
Research Commons (3)
EPA Administration Environmental Protection Agency
EPA Annex Environmental Protection Agency
4501 Bldg. Martin Marietta
4401 Bldg. Ericsson
4301 Bldg. Glaxo Wellcome Inc.
4201 Bldg. Environmental Protection Agency
Hock Portfolio
Fairfield I Reliance
Fairfield II Qualex
Qualex Qualex
4101 Roxboro Duke -- Cardiology
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Percent Ceiling/
Rentable Occupied at Percent Clear
Building Year Square December 31, Office Height
Property Type (1) Built Feet 1995 (2) Finish (Feet)
<S> <C> <C> <C> <C> <C> <C>
4020 Roxboro O 1989 40,000 100% 100% 9
Other Research Triangle
Properties
Colony Corporate Center O 1985 53,324 100 100 8
Concourse O 1986 131,645 96 100 9
Expressway One Warehouse I 1990 59,600 100 5 24
Holiday Inn O 1984 30,000 100 100 10
Lake Plaza East O 1984 71,254 95 100 9
Phoenix O 1990 26,449 91 100 8
Six Forks Center I O 1982 33,867 95 100 9
Six Forks Center II O 1983 55,603 94 100 9
Six Forks Center III O 1987 60,662 99 100 9
South Square I O 1988 56,401 100 100 9
South Square II O 1989 58,793 100 100 9
Cotton Building O 1972 40,035 100 79 8-15
Total or Weighted Average of
Research Triangle Properties 3,702,030 94%
<CAPTION>
Tenants Leasing
25% or More
of Rentable
Square Feet at
Property December 31, 1995
<S> <C>
4020 Roxboro Duke -- Pediatrics
Duke -- Cardiology
Other Research Triangle
Properties
Colony Corporate Center Rust Environmental &
Infrastructure, Fujitsu
Concourse Clintrials
Expressway One Warehouse West's Durham Transfer & Storage
Holiday Inn Holiday Inns, Inc.
Lake Plaza East N/A
Phoenix N/A
Six Forks Center I Centura Bank
Six Forks Center II N/A
Six Forks Center III EDS
South Square I Blue Cross and Blue Shield
South Square II Coastal Healthcare Group, Inc.
Cotton Building Cotton Inc., Associated
Insurances Inc.
Total or Weighted Average of
Research Triangle Properties
</TABLE>
Piedmont Triad Properties
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Airpark East
Highland Industries S 1990 12,500 100 48 18
Service Center 1 S 1985 18,575 100 96 14
Service Center 2 S 1985 18,672 100 94 14
Service Center 3 S 1985 16,498 86 97 14
Service Center 4 S 1985 16,500 100 100 14
Copier Consultants S 1990 20,000 100 60 18
Service Court S 1990 12,600 76 100 16
Bldg. 01 O 1990 24,423 100 100 9
Bldg. 02 O 1986 23,827 100 100 9
Bldg. 03 O 1986 23,182 100 100 9
Bldg. A O 1986 56,272 70 100 9
Bldg. B O 1988 54,088 98 100 9
Bldg. C O 1990 134,893 100 100 9
Sears Cenfact O 1989 49,504 100 100 9
Warehouse 1 I 1985 64,000 100 21 21
Warehouse 2 I 1985 64,000 100 48 21
Warehouse 3 I 1986 57,600 100 8 21
Warehouse 4 I 1988 54,000 81 89 21
Airpark North
DC-1 I 1986 112,000 100 7 20
DC-2 I 1987 111,905 100 61 20
DC-3 I 1988 75,000 100 5 20
DC-4 I 1988 60,000 100 8 20
Airpark West
Airpark I O 1984 60,000 100 100 9
Airpark II O 1985 45,680 100 100 9
Airpark IV O 1985 22,612 100 100 9
Airpark V O 1985 21,923 100 100 9
Airpark VI O 1985 22,097 90 100 9
West Point Business Park
BMF Warehouse I 1986 240,000 100 3 32
WP-11 I 1988 89,600 100 8 24
WP-12 I 1988 89,600 100 4 30
WP-13 I 1988 89,600 100 2 20
WP-3 & 4 S 1988 18,059 100 54 15
<CAPTION>
Airpark East
<S> <C>
Highland Industries Highland Industries, Inc.
Service Center 1 Genetic Design
Service Center 2 Genetic Design
Service Center 3 ECPI
Service Center 4 Genetic Design
Copier Consultants Copier Consultants
Service Court Genetic Design
Bldg. 01 Health & Hygiene
Bldg. 02 United States Postal Service
Bldg. 03 Time Warner, Martin Marietta
Bldg. A N/A
Bldg. B Hewlett-Packard Co., United
States Postal Service
Bldg. C John Hancock
Sears Cenfact Sears Roebuck & Company
Warehouse 1 Guilford Business Forms, Inc.,
Safelite Glass Corp.
Warehouse 2 Volvo GM Heavy Truck Corp., State
Street Bank Realty
Warehouse 3 US Air Inc., Garlock, Inc.
Warehouse 4 First Data Resources, Inc.
Airpark North
DC-1 VSA, Inc.
DC-2 Sears Roebuck & Co., Summit Pet
Products Dist. Inc., Electric
South
DC-3 Fashions Outlet of America, Inc.
DC-4 RSVP Communications, Inc.
Airpark West
Airpark I Volvo GM Heavy Truck Corp.
Airpark II Mohawk Carpet Corporation (4)
Airpark IV Max Radio of Greensboro
Airpark V NCR Corporation
Airpark VI Brookstone College, Anacomp
West Point Business Park
BMF Warehouse Sara Lee Knit Products, Inc.
WP-11 Microfibres
WP-12 Norel Plastics, Sara Lee
WP-13 Sara Lee Knit Products, Inc.
WP-3 & 4 Tri-Communications, Inc., Royso
Safety, Inc.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Percent Ceiling/
Rentable Occupied at Percent Clear
Building Year Square December 31, Office Height
Property Type (1) Built Feet 1995 (2) Finish (Feet)
<S> <C> <C> <C> <C> <C> <C>
WP-5 S 1995 25,200 52% 20% 18
Fairchild Bldg. I 1990 89,000 100 20 30
LUWA Bahnson Bldg. O 1990 27,000 100 100 9
University Commercial Center
W-1 I 1983 44,400 100 1 24
W-2 I 1983 46,500 100 7 24
SR-1 S 1983 23,112 100 68 16
SR-2 01/02 S 1983 17,282 100 67 16
SR-3 S 1984 23,825 65 70 16
Bldg. 01/02 O 1983 9,993 40 100 9
Bldg. 03 O 1985 37,077 79 100 9
Bldg. 04 O 1986 34,470 60 100 9
Ivy Distribution Center (5) I 1930- 400,000 55 2 14-16
1980
Knollwood Office Center
370 Knollwood O 1994 90,315 100 100 9
380 Knollwood O 1990 164,141 98 100 9
Stoneleigh Business Park
7327 W. Friendly Ave. S 1987 11,180 100 59 11
7339 W. Friendly Ave. S 1989 11,784 100 59 11
7341 W. Friendly Ave. S 1988 21,048 100 36 12
7343 W. Friendly Ave. S 1988 13,463 100 36 12
7345 W. Friendly Ave. S 1988 12,300 100 36 12
7347 W. Friendly Ave. S 1988 17,978 100 36 12
7349 W. Friendly Ave. S 1988 9,840 100 36 12
7351 W. Friendly Ave. S 1988 19,723 100 36 12
7353 W. Friendly Ave. S 1988 22,826 100 36 12
7355 W. Friendly Ave. S 1988 13,296 100 36 12
Spring Garden Plaza
4000 Spring Garden St. S 1983 21,773 86 69 14
4002 Spring Garden St. S 1983 6,684 100 69 14
4004 Spring Garden St. S 1983 23,724 92 69 14
Pomona Center -- Phase I
7 Dundas Circle S 1986 14,760 91 55 12
8 Dundas Circle S 1986 16,488 100 55 12
9 Dundas Circle S 1986 9,972 100 55 12
Pomona Center -- Phase II
302 Pomona Dr. S 1987 16,488 94 55 12
304 Pomona Dr. S 1987 4,344 100 55 12
306 Pomona Dr. S 1987 9,840 63 55 12
308 Pomona Dr. S 1987 14,184 96 55 12
5 Dundas Circle S 1987 14,184 83 55 12
Westgate on Wendover -- Phase I
305 South Westgate Dr. S 1985 5,760 83 54 12
307 South Westgate Dr. S 1985 12,672 100 54 12
309 South Westgate Dr. S 1985 12,960 100 54 12
311 South Westgate Dr. S 1985 14,400 100 54 12
315 South Westgate Dr. S 1985 10,368 89 54 12
317 South Westgate Dr. S 1985 15,552 98 54 12
319 South Westgate Dr. S 1985 10,368 100 54 12
Westgate on Wendover -- Phase II
206 South Westgate Dr. S 1986 17,376 100 65 12
207 South Westgate Dr. S 1986 26,448 100 65 12
300 South Westgate Dr. S 1986 12,960 100 65 12
4600 Dundas Circle S 1985 11,922 100 65 12
4602 Dundas Circle S 1985 13,017 61 65 12
Radar Road
500 Radar Rd. I 1981 78,000 100 4 21
502 Radar Rd. I 1986 15,000 100 10 18
504 Radar Rd. I 1986 15,000 100 10 18
<CAPTION>
Tenants Leasing
25% or More
of Rentable
Square Feet at
Property December 31, 1995
<S> <C>
WP-5 N/A
Fairchild Bldg. Fairchild Industrial Products
LUWA Bahnson Bldg. Luwa Bahnson, Inc.
University Commercial Center
W-1 Lagenthal Corp.
W-2 Paper Supply Company
SR-1 N/A
SR-2 01/02 Decision Point Marketing
SR-3 Decision Point Marketing
Bldg. 01/02 N/A
Bldg. 03 N/A
Bldg. 04 N/A
Ivy Distribution Center (5) N/A
Knollwood Office Center
370 Knollwood Krispy Kreme, Prudential
Carolinas Realty
380 Knollwood N/A
Stoneleigh Business Park
7327 W. Friendly Ave. American Telecom, Salem Imaging
7339 W. Friendly Ave. IKEA, R.F. Micro Devices
7341 W. Friendly Ave. R.F. Micro Devices
7343 W. Friendly Ave. Executone
7345 W. Friendly Ave. Disston
7347 W. Friendly Ave. Law Engineering, Winship
7349 W. Friendly Ave. N/A
7351 W. Friendly Ave. General Transport, Burlington Air
Express
7353 W. Friendly Ave. Office Equipment, Windsor Door
7355 W. Friendly Ave. R.F. Micro Devices
Spring Garden Plaza
4000 Spring Garden St. N/A
4002 Spring Garden St. Jordan Graphics
4004 Spring Garden St. N/A
Pomona Center -- Phase I
7 Dundas Circle N/A
8 Dundas Circle N/A
9 Dundas Circle Netcom, Conservatop Corporation
Pomona Center -- Phase II
302 Pomona Dr.
304 Pomona Dr. Fortune Personnel Consultants
306 Pomona Dr. AEL Defense Corporation
308 Pomona Dr. Hering North America
5 Dundas Circle
Westgate on Wendover -- Phase I
305 South Westgate Dr. Alarmguard, The Computer Store
307 South Westgate Dr. Anders Lufvenholm
309 South Westgate Dr. Network Information, McRae
Graphics
311 South Westgate Dr. N/A
315 South Westgate Dr. N/A
317 South Westgate Dr. N/A
319 South Westgate Dr. N/A
Westgate on Wendover -- Phase II
206 South Westgate Dr. Home Care of the Central
Carolinas
207 South Westgate Dr. Health Equipment Services
300 South Westgate Dr. N/A
4600 Dundas Circle Oakwood Homes, Aquaterra, Inc.
4602 Dundas Circle Four Seasons Apparel
Radar Road
500 Radar Rd. Amoco Foam
502 Radar Rd. East Texas Distributing
504 Radar Rd. Triad International Maintenance,
Dayva Industries
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Percent Ceiling/
Rentable Occupied at Percent Clear
Building Year Square December 31, Office Height
Property Type (1) Built Feet 1995 (2) Finish (Feet)
<S> <C> <C> <C> <C> <C> <C>
506 Radar Rd. I 1986 15,000 100% 10% 18
Holden/85 Business Park
2616 Phoenix Dr. I 1985 31,894 100 32 10
2606 Phoenix Dr. -- 100 S 1989 15,000 100 32 10
2606 Phoenix Dr. -- 200 S 1989 15,000 100 32 10
2606 Phoenix Dr. -- 300 S 1989 7,380 83 32 10
2606 Phoenix Dr. -- 400 S 1989 12,300 90 32 10
2606 Phoenix Dr. -- 500 S 1989 15,180 100 32 10
2606 Phoenix Dr. -- 600 S 1989 18,540 90 32 10
Industrial Village
7906 Industrial Village Rd.
I 1985 15,000 100 15 18
7908 Industrial Village Rd.
I 1985 15,000 100 15 18
7910 Industrial Village Rd.
I 1985 15,000 100 15 18
Other Piedmont Triad Properties
6348 Burnt Poplar I 1990 125,000 100 4 20
6350 Burnt Poplar I 1992 57,600 100 3 20
Stratford O 1991 135,533 97 100 9
Chesapeake I 1993 250,000 100 3 28
3288 Robinhood O 1989 19,599 83 100 9
Total or Weighted Average of
Piedmont Triad Properties 4,152,233 93%
<CAPTION>
Tenants Leasing
25% or More
of Rentable
Square Feet at
Property December 31, 1995
<S> <C>
506 Radar Rd. Triad International Maintenance,
American Coatings
Holden/85 Business Park
2616 Phoenix Dr. Pliana, Inc.
2606 Phoenix Dr. -- 100 Piedmont Plastics, Rexham Corp.
2606 Phoenix Dr. -- 200 REHAU, Inc., Readervision, Inc.
2606 Phoenix Dr. -- 300 N/A
2606 Phoenix Dr. -- 400 Spectrum Financial Services
2606 Phoenix Dr. -- 500 The Record Exchange
2606 Phoenix Dr. -- 600 AT&T, Sumitomo Electrical
Industrial Village
7906 Industrial Village Rd.
Texas Aluminum
7908 Industrial Village Rd.
Bullock Distributors, Air Express
7910 Industrial Village Rd.
Wadkin North America, Inc.
Other Piedmont Triad Properties
6348 Burnt Poplar Sears Roebuck & Co.
6350 Burnt Poplar Industries for the Blind
Stratford Southern National Bank
Chesapeake Chesapeake Display & Packaging
3288 Robinhood N/A
Total or Weighted Average of
Piedmont Triad Properties
</TABLE>
Charlotte Properties
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Steele Creek Park
Bldg. A I 1989 42,500 100 19 21
Bldg. B I 1985 15,031 100 20 21
Bldg. E I 1985 39,300 57 13 21
Bldg. G-1 I 1989 22,500 44 11 21
Bldg. H I 1987 53,614 64 16 21
Bldg. K I 1985 19,400 100 25 21
Bldg. N I 1989 22,000 100 11 21
Highwoods/Forsyth Business Park
4101 Stuart Andrew Blvd. S 1984 12,185 100 60 16
4105 Stuart Andrew Blvd. S 1984 4,528 100 60 16
4109 Stuart Andrew Blvd. S 1984 15,212 100 60 16
4201 Stuart Andrew Blvd. S 1982 19,333 69 60 16
4205 Stuart Andrew Blvd. S 1982 23,401 91 60 16
4209 Stuart Andrew Blvd. S 1982 15,901 100 60 16
4215 Stuart Andrew Blvd. S 1982 23,372 95 60 16
4301 Stuart Andrew Blvd. S 1982 40,601 84 60 16
4321 Stuart Andrew Blvd. S 1982 12,774 100 60 16
Parkway Plaza
Building 1 O 1982 58,263 88 100 8
Building 2 O 1983 88,227 93 100 8
Building 3 O 1984 82,307 83 100 8
Building 7 (7) O 1985 60,722 100 100 8
Building 8 (7) O 1986 40,615 100 100 8
Building 9 (7) I 1984 110,000 100 32 26
Other Charlotte Properties
First Citizens O 1989 57,214 100 100 9
Total or Weighted Average of
Charlotte Properties 879,000 90%
<CAPTION>
Steele Creek Park
<S> <C>
Bldg. A Terrell Gear Drives, Inc.
Bldg. B Pumps Parts & Services Inc. (6)
Bldg. E Bradman-Lake Inc. (6), Aptech,
Inc.
Bldg. G-1 Safewaste Corp.
Bldg. H Sugravo Rallis Engraving
Bldg. K Aptech, Inc.
Bldg. N Marketing Assoc. International
Highwoods/Forsyth Business Park
4101 Stuart Andrew Blvd. N/A
4105 Stuart Andrew Blvd. Re-Directions, Transit & Level
Clinic, Bell/Sysco Food
4109 Stuart Andrew Blvd. N/A
4201 Stuart Andrew Blvd. N/A
4205 Stuart Andrew Blvd. N/A
4209 Stuart Andrew Blvd. N/A
4215 Stuart Andrew Blvd. Cleaning Services Group, Rodan,
Inc.
4301 Stuart Andrew Blvd. Circle K
4321 Stuart Andrew Blvd. Communications Technology
Parkway Plaza
Building 1 BASF Corporation
Building 2 N/A
Building 3 N/A
Building 7 (7) Northwest Mortgage
Building 8 (7) Greenpoint Financial Corp.
Building 9 (7) Aegis Technologies
Other Charlotte Properties
First Citizens Volvo Car Finance, Inc.
Total or Weighted Average of
Charlotte Properties
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Percent Ceiling/
Rentable Occupied at Percent Clear
Building Year Square December 31, Office Height
Property Type (1) Built Feet 1995 (2) Finish (Feet)
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
Tenants Leasing
25% or More
of Rentable
Square Feet at
Property December 31, 1995
<S> <C>
</TABLE>
Richmond Properties
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Innsbrook Office Center
Market American O 1988 39,306 93% 100% 8
Proctor-Silex O 1986 58,366 100 100 8
Vantage Place I O 1987 15,334 90 100 8
Vantage Place II O 1987 14,223 87 100 8
Vantage Place III O 1988 14,615 100 100 8
Vantage Place IV O 1988 14,616 100 100 8
Vantage Point O 1990 63,867 98 100 16
Innsbrook Tech I S 1991 18,095 100 58 16
DEQ Technology Center S 1991 53,999 81 80 16
DEQ Office O 1991 70,423 100 100 8
Technology Park
Virginia Center S 1985 119,064 94 70 14
Total or Weighted Average of
Richmond Properties 481,908 95%
Total or Weighted Average of All
Properties 9,215,171 93%
<CAPTION>
Innsbrook Office Center
Market American Mark IV
Proctor-Silex Proctor-Silex, Inc.
Vantage Place I Rountrey and Associates
Vantage Place II Hastings-Tapley
Vantage Place III Stenrich Group, Inc.
Vantage Place IV Corvel Healthcare, Cemetary Mgmt.
Vantage Point EDS, Colonial Inc.
Innsbrook Tech I Air Specialists of VA, Hobbs &
Assoc.
DEQ Technology Center Virginia State Gov., First Health
DEQ Office Virginia State Gov.
Technology Park
Virginia Center N/A
Total or Weighted Average of
Richmond Properties
Total or Weighted Average of All
Properties
</TABLE>
(1) I = Industrial, S = Service Center and O = Office.
(2) Includes 29,000 rentable square feet leased but not occupied.
(3) Research Triangle Foundation of North Carolina, Inc. has a right of first
refusal option to purchase any property offered for sale within the confines
of the Research Triangle Park.
(4) Mohawk Corporation currently subleases its space to Volvo GM Heavy Truck
Corp.
(5) Ivy Distribution Center enables the Company to establish relationships with
potential tenants that need large blocks of affordable storage space,
frequently on a short-term basis. With the exception of 1989 when the
building was renovated to convert it from a manufacturing facility to a bulk
warehouse facility, Ivy Distribution Center has produced a positive cash
flow every year since its acquisition in 1978.
(6) These tenants have a first right of refusal option to purchase their
respective leased properties in the event the Company elects to sell any of
these properties pursuant to a bona fide third-party offer to purchase such
properties.
(7) Properties subject to ground lease expiring December 31, 2082. Company has
option to purchase land during the lease term at the greater of $35,000 per
acre or 85% of appraised value.
17
<PAGE>
Development Land
As of December 31, 1995, the Company owned approximately 203 acres of land
for development. The following table sets forth the location (business park),
acreage, build-out capacity and estimated construction costs with respect to the
development land (dollars in thousands):
<TABLE>
<CAPTION>
Estimated
Rentable Square Feet Construction
Business Park Location Acreage (Office) (Industrial) (Total) Costs
<S> <C> <C> <C> <C> <C> <C>
Capital Center................... Raleigh 15 165,000 -- 165,000 $ 14,250
Creekstone Park.................. Durham 16 186,000 -- 186,000 15,810
Highwoods Office Center North.... Raleigh 18 310,000 -- 310,000 26,350
Highwoods Office Center South.... Raleigh 45 525,000 -- 525,000 44,625
Research Commons................. RTP (1) 10 100,000 -- 100,000 8,500
Airpark East..................... Greensboro 13 57,000 50,000 107,000 5,020
Airpark North.................... Greensboro 10 20,000 -- 20,000 1,600
NationsFord Business Park........ Charlotte 15 -- 170,000 170,000 3,920
West Point Business
Park........................... Winston-Salem 35 -- 384,000 384,000 8,712
Airport Center Drive
(2)............................ Greensboro 20 241,000 -- 241,000 21,690
Highwoods/Forsyth
Park........................... Greensboro 6 -- 60,000 60,000 3,600
Total.......................... 203 1,604,000 664,000 2,268,000 $154,077
</TABLE>
(1) RTP = Research Triangle Park
(2) This land will be acquired in installments as it is placed in service or by
June 2000, whichever occurs first.
All of the Development Land is zoned and available for office or industrial
development and 166 acres have utility infrastructure already in place. The
Company believes that the cost of developing the Development Land could be
financed with the funds available from the Company's existing credit facility,
additional borrowings and offerings of equity securities. The Company believes
that its commercially zoned and unencumbered land in existing business parks
gives the Company an advantage in its future development activities over other
commercial real estate development companies in the Research Triangle, the
Piedmont Triad and Charlotte. Any future development, however, is dependent on
the demand for industrial or office space in the area, the availability of
favorable financing and other factors, and no assurance can be given that any
construction will take place on the Development Land. In addition, if
construction is undertaken on the Development Land, the Company will be subject
to the risks associated with construction activities, including the risk that
occupancy rates and rents at a newly completed property may not be sufficient to
make the property profitable, construction costs may exceed original estimates
and construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction expense.
Option Land
The Company has options to purchase or rights of first refusal to purchase,
lease or develop a total of 166 acres of undeveloped land (the "Option Land") at
locations adjacent to Properties in two existing business parks. The Company has
long-term rights of first refusal to purchase, lease or develop: (i) 147 acres
in the Expressway Commerce Center, which is targeted for development of
warehouses and service center facilities and (ii) 19 acres adjacent to
Creekstone Park, which is targeted for service center development. The Company
believes that its options to purchase and rights of first refusal to purchase
and develop the Option Land may provide a competitive advantage regarding its
future development activities in the Research Triangle. Such future development,
however, is dependent on the availability of favorable financing and other
factors, and no assurance can be given that any of the Option Land will be
purchased or developed by the Company. In connection with the acquisition of the
Hock Portfolio, the Company has obtained certain rights to purchase or develop
approximately 78 acres of land.
18
<PAGE>
Third-Party Purchase Options
Five of the Properties are subject to purchase options in favor of existing
tenants during the terms of their leases. Highland Industries, Inc. has the
option during the term of its lease to purchase the Highlands Building in
Airpark East for a purchase price of $1,034,000 during each of the first five
years of the lease term and, thereafter, at decreasing amounts through the tenth
year of the lease term when the price will be $926,000. Although the Company
believes that the option purchase price on the Highlands Building is currently
at or above the current fair market value of the subject property, no assurance
can be given that such price will be equal to the fair market value of such
property at the time the option is exercised. Marketing Associates
International, Inc. has an option to purchase the building it occupies in Steele
Creek Park for a purchase price of $900,000. On March 31, 1995, the option was
extended for one year upon payment of $25,000. The extension payments may be
applied to the purchase price which remains at $900,000 during the first
extension period and may be increased above $900,000 during the second extension
period based upon the percentage increase in the Consumer Price Index ("CPI").
Marketing Associates International, Inc. has notified the Company that it will
exercise its purchase option on March 31, 1996. Pump Parts & Services, Inc. has
an option to purchase the building it occupies in Steele Creek Park for a
purchase price of $37.37 per square foot ($561,708), subject to a minimum
increase in the per square foot purchase price of 5% per year. One of the
tenants of Rexwoods II has an option to purchase 33% of the property in December
1998 for cash at the then-current fair market value, as to be determined by an
independent appraiser. In addition, Glaxo Wellcome has the option to purchase
the 4301 Building at Research Commons from March 1997 to the earlier of the
lease termination or March 2003 for cash at the then-current fair market value
to be determined by an appraiser chosen by the Company, provided the terms of
such purchase are acceptable to the Company and Glaxo Wellcome.
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Principal Occupations and Other Directorships
<S> <C> <C>
O. Temple Sloan, Jr. 56 Director and Chairman of the Board of Directors. Mr. Sloan is a founder of the
predecessor of the Company and most recently served as its Secretary-Treasurer.
Mr. Sloan also serves as Chairman of General Parts, Inc., a nationwide
distributor of automobile replacement parts, which he founded. Mr. Sloan is Vice
Chairman of the Board of Trustees of Peace College and is a trustee of St.
Andrews College.
Ronald P. Gibson 51 Director, President and Chief Executive Officer. Mr. Gibson is a founder of the
Company and has served as its President since its incorporation in 1992 and as
managing partner of its predecessor since its formation in 1978. Mr. Gibson is a
member the Society of Industrial and Office Realtors and is a director of Capital
Associated Industries.
John L. Turner 49 Director, Vice Chairman of the Board of Directors and Chief Investment Officer.
Mr. Turner began his career in the real estate industry in 1969 and co-founded
Forsyth's predecessor in 1975. Mr. Turner is active in several Piedmont Triad
economic development and business recruiting organizations. Mr. Turner serves on
the University of North Carolina Board of Visitors and on the Winston-Salem Board
of Directors of NationsBank.
William T. Wilson, III 41 Director, Executive Vice President and President of the Company's Forsyth
Division. Mr. Wilson joined Forsyth in 1982 and served as its President from 1993
until its merger with the Company. Mr. Wilson serves on the Board of Directors of
Amos Cottage Rehabilitation Hospital, an affiliate of the Department of
Pediatrics of Bowman Gray School of Medicine, Old Salem, Inc. and Reynolda House,
Inc.
Thomas W. Adler 55 Director. Mr. Adler is Chairman and a Principal of Cleveland Real Estate
Partners, a fee-based real estate service company based in Cleveland, Ohio. Mr.
Adler helped create the Grubb and Ellis Institutional Investment Group and
previously served as its President. Mr. Adler served five years as a member of
the Executive Committee and Board of Governors of the National Association of
Real Estate Investment Trusts, and he was national president in 1990 of the
Society of Industrial and Office Realtors. Mr. Adler formerly served on the Board
of Directors of the National Association of Realtors and currently serves on the
Board of Governors of the American Society of Real Estate Counselors. He is an
active member of the Urban Land Institute.
William E. Graham 66 Director. Mr. Graham is a lawyer in private practice with the firm of Hunton &
Williams. Before joining Hunton & Williams on January 1, 1994, Mr. Graham was
Vice Chairman of Carolina Power & Light Company and had previously served as its
general counsel. Mr. Graham is a former member of the Board of Directors of
Carolina Power & Light Company and currently serves on the Raleigh Board of
Directors of NationsBank. He also serves on the Board of Directors of BB&T Mutual
Funds Group and is a former Director of Kaiser Foundation Health Plan of North
Carolina.
Robert L. Kirby 65 Director. Mr. Kirby is a self-employed management consultant. Before retiring
from the banking business in 1990, Mr. Kirby spent 34 years with NationsBank and
its predecessor, North Carolina National Bank. At the time of his retirement, he
was President and a member of the Board of Directors of NCNB National Bank of
Florida. Mr. Kirby is a member of the Boards of Directors of NationsBank of
Texas, N.A. and Cato Corporation.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Name Age Principal Occupations and Other Directorships
<S> <C> <C>
L. Glenn Orr, Jr. 55 Director. Mr. Orr is the Chairman, President and Chief Executive Officer of Orr
Management Co. He served as Chairman of the Board of Directors, President and
Chief Executive Officer of Southern National Corporation until its merger with
Branch Banking & Trust. Mr. Orr continues to be a director of the merged bank.
Mr. Orr, who previously served as President and Chief Executive Officer of
Forsyth Bank and Trust Co. and President of Community Bank in Greenville, S.C.,
is former President of the North Carolina Bankers Association. He is a trustee of
Wake Forest University and the University of North Carolina at Greensboro.
Stephen Timko 67 Director. Mr. Timko is a partner of JHPB Partners, a limited partner of the
Operating Partnership. He has served as Associate Vice President of Financial
Affairs for Temple University and Chief Financial Officer and Executive Vice
President of Finance and Administration for Beaunit Corporation. Mr. Timko
currently serves as Treasurer for Beaunit Corporation.
Edward J. Fritsch 37 Vice President, Secretary and President of the Company's Research Triangle
Division. Mr. Fritsch joined the Company in 1982 and currently serves as
President of the Company's Highwoods Division. Mr. Fritsch is a Certified
Property Manager.
Carman J. Liuzzo 35 Vice President, Chief Financial Officer and Treasurer. Mr. Liuzzo joined the
Company in 1994 and currently serves as Chief Financial Officer. Prior to joining
the Company, Mr. Liuzzo was Vice President and Chief Accounting Officer for
Boddie-Noell Enterprises, Inc. and Boddie-Noell Restaurant Properties, Inc. Mr.
Liuzzo is a certified public accountant.
</TABLE>
Employment Agreements
The Company's executive officers generally have employment agreements with
the Company with a three-year duration. Messrs. Gibson and Fritsch have
employment agreements through June 1997, and Messrs. Turner, Wilson and Liuzzo
have employment agreements through February 1998. Each contract includes
provisions restricting the officers from competing with the Company during
employment and, except in certain circumstances, for a limited period of time
after termination of employment. Each of the employment contracts provides for
severance payments in the event of termination by the Company without cause
equal to the officer's base salary for the later of one year from the date of
termination or the expiration of the three-year employment agreement.
21
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Stock has been traded on the NYSE under the symbol "HIW" since
the Company's initial public offering. The following table sets forth the
quarterly high and low sales prices per share reported on the NYSE for the
periods indicated and the distributions paid per share for each such period.
<TABLE>
<CAPTION>
Period or Quarter 1995 1994
Ended: High Low Distribution High Low Distribution
<S> <C> <C> <C> <C> <C> <C>
March 31............ $22.00 $19.88 $0.425 -- -- --(1)
June 30............. 25.50 21.25 0.45 $21.68 $19.68 0.075(2)
September 30........ 26.88 23.88 0.45 21.13 19.75 0.425
December 31......... 28.38 25.50 0.45 21.68 18.50 0.425
</TABLE>
(1) Prior to the Company's June 14, 1994, initial public stock offering.
(2) No distribution was paid during this period. The accrued distribution of
$0.075 per share was paid on November 16, 1994 at the time the Company paid
its initial distribution for the period from inception to September 30,
1994.
On March 1, 1996, the last reported sale price of the Common Stock on the
NYSE was $30.00 per share. On March 1, 1996, the Company had 516 stockholders of
record.
The Company intends to continue to pay regular quarterly distributions to
holders of shares of Common Stock and holders of Units. Although the Company
intends to maintain its current distribution rate, future distributions by the
Company will be at the discretion of the Board of Directors and will depend on
the actual funds from operations of the Company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant.
During the year ended 1995, the Company's distributions totalled
$25,348,000 of which $2,226,000 represented return of capital for financial
statement purposes. The minimum per share distribution required to maintain REIT
Status was approximately $1.55 per share in 1995 and $.48 per share in 1994.
The Company has instituted a Dividend Reinvestment and Stock Purchase Plan
under which holders of Common Stock may elect automatically to reinvest their
distributions in additional shares of Common Stock and may make optional cash
payments for additional shares of Common Stock. The Company may issue additional
shares of Common Stock or, with respect to reinvested distributions, repurchase
Common Stock in the open market for purposes of financing its obligations under
the Dividend Reinvestment and Stock Purchase Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for the Company as of December 31, 1995 and 1994, for the year ended December
31, 1995, and for the period from June 14, 1994 (commencement of operations) to
December 31, 1994. The following table also sets forth selected financial and
operating information on a historical basis for the Highwoods Group (the
predecessor to the Company) as of and for each of the years in the five-year
period ended December 31, 1993, and for the period from January 1, 1994, to June
13, 1994.
Due to the impact of the initial formation of the Company and the initial
public offering in 1994, the second and third offerings in 1995 and the
transactions more fully described in "Management's Discussion and
Analysis -- Overview and Background," the historical results of operations for
the years ended December 31, 1991, 1992, 1993 and 1994 may not be comparable to
the current period results of operations.
22
<PAGE>
The Company and the Highwoods Group
<TABLE>
<CAPTION>
Company
Year ended December 31,
Year Ended Highwoods
December 31, Group Year ended December 31,
1995 June 14, January 1,
1994 to 1994 to
December 31, June 13, Highwoods Group
1994 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share amounts)
Operating Data:
Total revenue............................... $ 73,522 $ 19,442 $ 6,648 $13,450 $12,532 $ 9,774
Rental property
operating expenses........................ 17,049(1) 5,110(1) 2,596(2) 6,248(2) 5,587(2) 4,467(2)
General and administrative.................. 2,737 810 280 589 694 690
Interest expense............................ 13,720 3,220 2,473 5,185 5,059 3,908
Depreciation and amortization............... 11,082 2,607 835 1,583 1,431 1,135
Income (loss) before minority interest...... 28,934 7,695 464 (155) (239) (426)
Minority interest........................... (4,937) (808) -- -- -- --
Income before extraordinary item............ 23,997 6,887 464 (155) (239) (426)
Extraordinary item-loss on early
extinguishment of debt.................... (875) (1,273) -- -- -- --
Net income (loss)........................... $ 23,122 $ 5,614 $ 464 $ (155) $ (239) $ (426)
Net income per
common share.............................. $ 1.49 $ .63
Balance Sheet Data
(at end of period):
Real estate, net of
accumulated depreciation.................. $ 593,066 $ 207,976 $ -- $51,590 $46,626 $44,554
Total assets................................ 621,134 224,777 -- 58,679 53,688 48,647
Total mortgages and
notes payable............................. 182,736 66,864 -- 64,347 60,279 56,455
Other Data:
Number of in-service properties............. 191 44 14 14 13 13
Total rentable square feet.................. 9,215,171 2,746,219 816,690 816,690 794,174 794,174
</TABLE>
(1) Rental property operating expenses include salaries, real estate taxes,
insurance, repairs and maintenance, property management, security and
utilities.
(2) Rental property operating expenses include salaries, real estate taxes,
insurance, repairs and maintenance, property management, security,
utilities, leasing, development, and construction expenses.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview and Background
The Highwoods Group (the predecessor to the Company) was comprised of 13
office properties and one warehouse facility (the "Highwoods-Owned Properties"),
94 acres of development land and the management, development and leasing
business of Highwoods Properties Company ("HPC"). On June 14, 1994, following
completion of the Company's initial public offering of 8,510,000 shares of
Common Stock at a price of $21.00 per share, the Company, through a business
combination involving entities under varying common ownership, succeeded to the
Highwoods-Owned Properties, HPC's real estate business and 27 additional office
properties owned by unaffiliated parties (such combination being referred to as
the "Formation Transaction"). The Company acquired three additional Properties
in 1994 after the Formation Transaction.
During the year ended December 31, 1995, the Company acquired 144
Properties encompassing 6,357,000 square feet at a initial cost of $369,900,000.
The following table summarizes the mergers and acquisitions completed during the
year ended December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Number of Rentable Initial
Property Location Properties Square Feet Cost
<S> <C> <C> <C> <C>
Forsyth Transaction Piedmont Triad/Charlotte 57 3,630,565 $169,900
Richmond Expansion Richmond 10 362,844 28,700
Research Commons Research Triangle 6 539,310 60,000
Creekstone Crossing Research Triangle 1 59,299 4,500
Bissell Portfolio Piedmont Triad/Charlotte 56 920,283 36,900
Hock Portfolio Research Triangle 5 274,604 21,200
Six Forks I & II Research Triangle 2 89,470 8,800
Cotton Research Triangle 1 40,035 2,400
Parkway Plaza Charlotte 6 440,134 37,500
Total 144 6,356,544 $369,900
</TABLE>
Minority interest in the Company represents the limited partnership
interest owned by various individuals and entities and not the Company in the
Operating Partnership, the entity that owns the Company's properties and through
which the Company, as the sole general partner, conducts substantially all of
its operations.
The combined financial statements of the Highwoods Group for the two years
ended December 31, 1993, include the accounts of the management, leasing and
development operations of HPC and the partnerships that owned 14 buildings and
two parcels of development land. The Highwoods Group's financial statements have
been presented on a combined basis because of the affiliated general partners
and common management of the Highwoods-Owned Properties. Given the effect of the
acquisitions discussed above, the results of the Highwoods Group for the period
from January 1, 1994, to June 13, 1994, and for the year ended December 31,
1993, are not comparable to the current operations of the Company.
This information should be read in conjunction with the accompanying
consolidated and combined financial statements and the related notes thereto.
The pro forma operating data for the year ended December 31, 1994 assumes
completion of the Initial Public Offering and the Formation Transaction as of
January 1, 1994. See Note 1 "Organization and Formation of the Company."
Results of Operations
Comparison of the Company 1995 to the Company Pro Forma 1994
For the year ended December 31, 1995 total revenues were comprised of
$71,217,000 of rental revenues and $2,305,000 of interest and other income. For
the year ended December 31, 1994 pro forma total
24
<PAGE>
revenues included $33,626,000 of rental revenues, $200,000 in distributions from
Highwoods Services, Inc. and $456,000 of interest income.
The $37,591,000 increase in rental income from pro forma 1994 to 1995 was
primarily attributable to the rental revenue derived from properties acquired
during 1995. Revenues from the Company's initial portfolio of 41 properties
increased by 2.1% over the comparable 1994 period. Vacancies in Smoketree Tower
and Cape Fear partially offset rental rate increases and occupancy gains in
other properties.
The increase in interest income from $465,000 in pro forma 1994 to
$2,305,000 in 1995 was due primarily to the increase in short-term investments
during the three month period following the Company's Third Offering in August
1995.
Rental property expenses represented 23.9% of rental revenues in 1995
compared to 28.8% for pro forma 1994. The decline in this ratio was a result of
increased operating efficiencies and the addition of revenues from industrial
properties in 1995. Industrial properties are generally leased on a "triple net"
basis with the tenant paying all operating costs.
General and administrative expenses increased from $1,134,000 or 3.3% of
total revenues for pro forma 1994 to $2,737,000 or 3.7% of total revenues for
1995. The increase in general and administrative expenses was a result of the
growth of the Company's operations into the Piedmont Triad and Richmond.
Interest expense increased from $5,604,000 for pro forma 1994 to
$13,720,000 for 1995. The increase in interest expense was a result of an
increased debt level during 1995 compared to 1994 as the Company financed a
portion of its 1995 acquisition activity through the use of debt financing.
Depreciation and amortization expense increased from $4,638,000 for pro
forma 1994 to $11,082,000 for 1995. The increase in depreciation and
amortization expense reflects the increase in real estate assets during 1995.
Net income before minority interest and extraordinary item equaled
$28,934,000 or $1.87 per share for 1995 compared to $13,229,000 or $1.47 per
share for pro forma 1994.
In connection with the repayment of indebtedness related to the Forsyth
Transaction, the Company incurred prepayment penalties of $1,047,000. This
amount was recorded as an extraordinary item and is presented in the
consolidated financial statement as ($875,000), net of the minority interest in
such loss.
Comparison of the Company Pro Forma 1994 to the Highwoods Group for the Year
Ended December 31, 199 3
For 1994, total revenue on a pro forma basis was $34,282,000 compared to
historical revenues of $13,450,000 for the Highwoods Group for the same period
of 1993. The net increase is primarily attributed to the addition of 27
additional office properties in connection with the initial public offering and
increased occupancy of the Highwoods Group offset by the decrease in non-rental
revenue (leasing, development and construction) due to the Company accounting
for its interest in Highwoods Realty Services, Inc. and Highwoods Leasing
Company under the cost method of accounting. Accordingly, on a pro forma basis,
total revenues will include only the distributions from such subsidiaries.
For 1994, rental property operating expenses total $9,677,000 and equaled
28.8% of rental revenues on a pro forma basis compared to $4,398,186 and 48.9%
of rental revenues for the Highwoods Group on a historical basis for the same
period of 1993. This decrease from historical to pro forma, as a percentage of
rental revenues, is due primarily to the operations of the Properties on a
combined, self-managed basis as compared to separate entities historically.
Major components of the decrease in rental operating expenses as a percentage of
rental revenues can be attributed to the provision of management and leasing
services by employees of the Company for which fees were paid historically.
For 1994 general and administrative expenses equaled $1,134,000 or 3.3% of
total revenues on a pro forma basis compared to $589,000 or 4.4% of total
revenues for 1993. Increased operating efficiencies in 1994 generated the
decrease in general and administrative expenses as a percentage of revenues.
For 1994, interest expense totaled $5,604,000 and equaled 16.3% of total
revenues on a pro forma basis compared to $5,185,000 and 38.6% of total revenues
on a historical basis for the Highwoods Group
25
<PAGE>
for the same period of 1993. This decrease from historical to pro forma, as a
percentage of total revenues, is due primarily to the Company's reduced leverage
as a result of the reduction of debt using proceeds from the initial public
offering.
The increase in depreciation expense from $1,583,000 for the Highwoods
Group for 1993 to $4,638,000 for pro forma 1994 was due to the increase in real
estate assets during 1994 as the Company increased its portfolio from 14
properties to 30 properties.
For 1994, net income before minority interest would have been $13,229,000
on a pro forma basis compared to a loss of ($155,000) on a historical basis for
the Highwoods Group for the same period of 1993. Lower interest expense combined
with the operating efficiencies gained from operating the Properties on a
combined basis and the increased revenues of the Company were the primary
reasons for the increase in net income before minority interest from the
historical periods to the same periods on a pro forma basis.
Highwoods Group -- Comparison of 1993 to 1992
Revenue from rental operations for the Highwoods Group for 1993 increased
$800,000, or 10%, to $8,984,000, as compared to $8,184,000 for 1992.
Approximately $360,000 of the increase related to additional lease up of
Highwoods Tower, $165,000 resulted from the acquisition of the Leatherwood and
Ironwood properties and $110,000 resulted from the opening in October 1993 of
Rexwoods II. The balance of the increase, approximately $165,000, related to
improved occupancy in the remainder of the portfolio, including approximately
$100,000 in the Hawthorn building. Revenue from leasing, development, and
construction income for the Highwoods Group for 1993, increased $231,000, or 7%,
to $3,721,000, as compared to $3,490,000 for 1992. This increase was primarily
due to the new properties (Highwoods Tower and Rexwoods II) and related
construction income earned from the tenants occupying these properties.
Operating expenses (which include property, construction, maintenance,
leasing, depreciation, amortization, and marketing, general and administrative
expenses) increased $709,000, or 9%, to $8,421,000 for 1993, as compared to
$7,712,000 for 1992. This increase resulted primarily from an increase in
property operating expenses of $201,000, an increase in construction and
maintenance expense of $724,000, offset by a decrease in leasing expense of
$263,000 for 1993 as compared to 1992.
General and administrative expenses decreased $105,000 due to a reduction
in professional services, and interest expense increased $126,000 from
additional debt service on Rexwoods II for 1993 as compared to 1992.
Depreciation and amortization increased $152,000 from $1,431,000 for 1992 to
$1,583,000 for 1993. Depreciation expense on tenant improvements accounted for
$234,000 of the depreciation expense for 1993.
As a result of these changes in rental revenue and expenses, net loss
decreased $84,000, or 35%, to $155,000 in 1993, as compared to $239,000 in 1992.
Liquidity and Capital Resources
Statement of Cash Flows
The Company generated $43,169,000 in cash flows from operating activities
and $93,443,000 in cash flow from financing activities for the year ended
December 31, 1995. The Company utilized $136,032,000 of this cash flow to invest
in real property assets of $130,411,000 and cash payments to joint venture
partners of $6,593,000.
Capitalization
The Company's total indebtedness at December 31, 1995 totaled $182,736,000
and was comprised of $6,500,000 outstanding under the Company's current
$80,000,000 Credit Facility (the "Credit Facility"), $134,687,000 of
conventional fixed rate mortgage indebtedness with an average rate of 9.0%,
$36,549,000 outstanding under variable rate mortgages (see below for a
discussion of interest rate protection agreements) and a 9%, $5,000,000
unsecured note.
Based on the Company's total market capitalization of $836,328,000 at
December 31, 1995 (at the December 31, 1995, stock price of $28.25 and including
the conversion of the 3,731,000 Units of minority
26
<PAGE>
interest in the Operating Partnership), the Company's debt represented
approximately 22% of its total market capitalization.
The Company completed the following financing activities during year ended
December 31, 1995:
(Bullet) During the quarter ended March 31, 1995, the Company completed a
5,640,000 share public offering of Common Stock (including 640,000
shares issued pursuant to the underwriter's over allotment
option). The net proceeds of the offering totaled $109,800,000 and
were used primarily to retire indebtedness assumed in connection
with the Forsyth Transaction.
(Bullet) Also during the quarter ended March 31, 1995, the Company received
the proceeds from a $41,000,000, 20-year fixed rate (8.97%)
mortgage loan. After 10 years the loan provides for a rate reset,
with each party having the option at that time to put or call the
loan, as the case may be. The proceeds from the loan were used,
together with the public offering proceeds discussed above, to
fund the Forsyth Transaction.
(Bullet) During the quarter ended September 30, 1995, the Company completed
a 4,774,989 share public offering of Common Stock (including
574,989 shares issued pursuant to the underwriters' over allotment
option). The net proceeds of the public offering totaled
$110,000,000 and were used primarily to retire amounts outstanding
under the Company's Credit Facility, to fund the Richmond
Expansion, to fund the cost of various development projects and to
provide working capital.
(Bullet) Also, during the quarter ended September 30, 1995, the Company
received the proceeds from a $32,000,000, 20-year fixed rate
(8.15%) mortgage loan. After 10 years the loan provides for a rate
reset and a put/call option (as described above). The proceeds
from the loan were used to fund the property acquisitions made
during the quarter.
(Bullet) In connection with the acquisition of the Bissell Portfolio, the
Company entered into a $12,250,000, 15-year variable rate mortgage
loan with a put/call option at the end of years five and ten.
(Bullet) In connection with the Company's 1995 acquisitions, the Company
assumed 13 loans with an aggregate outstanding balance on the
various transaction closing dates of $72,500,000 and issued
2,676,000 Units valued at $57,300,000.
The Credit Facility requires monthly payments of interest only, with the
balance of all principal and accrued but unpaid interest due on June 14, 1999.
The Credit Facility bears interest at a floating rate equal to 150 basis points
over one-month LIBOR, subject to the interest rate protection agreement
described below. At December 31, 1995, one-month LIBOR was 5.9%. The Credit
Facility is secured by first mortgage liens on a portfolio of 22 Properties. The
Company has received a commitment from three commercial banks whereby they will
provide the Company with a $140,000,000 unsecured credit facility (the "New
Credit Facility"), which is expected to close March 31, 1996 subject to
completion of final documentation. The New Credit Facility will replace the
existing Credit Facility.
To protect the Company from increases in interest expense due to changes in
the variable rate, the Company: (i) purchased an interest rate cap limiting its
exposure to an increase in interest rates (one-month LIBOR plus 150 basis
points) to 7.0% with respect to the $80,000,000 Credit Facility, and (ii) in
connection with the $36,549,000 variable rate mortgages, entered into interest
rate swaps which limit its exposure to an increase in the interest rates to
7.24% with respect to the assumed indebtedness. The interest rate on all such
variable rate debt is adjusted at monthly intervals, subject to the Company's
interest rate protection program. Payments received from the counterparties
under the interest rate protection agreements were $385,000 and $25,000 for 1995
and 1994, respectively. The Company is exposed to certain losses in the event of
non-performance by the counterparties under the cap and swap arrangements. The
counterparties are major financial institutions and are expected to fully
perform under the agreements. However, if they were to default on their
obligations under the arrangements, the Company could be required to pay the
full rate under its Credit Facility and the variable rate mortgages, even if
such rate were in excess of the rate in the cap and swap agreements. In
addition, the Company may incur other variable rate indebtedness in the future.
Increases in interest rates on its indebtedness could increase the Company's
interest expense and could adversely affect the Company's cash flow and its
ability to pay expected distributions to stockholders.
27
<PAGE>
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures. In addition, construction management,
maintenance, leasing and management fees have provided sources of cash flow.
Management believes that the Company will have access to the capital resources
necessary to expand and develop its business. To the extent that the Company's
cash flow from operating activities is insufficient to finance its acquisition
costs and other capital expenditures, including development costs, the Company
expects to finance such activities through the New Credit Facility and other
debt and equity financing.
The Company presently has no plans for major capital improvements to the
existing properties, other than normal recurring non-revenue enhancing
expenditures. The Company expects to meet its short-term liquidity requirements
generally through its working capital and net cash provided by operating
activities along with the previously discussed Credit Facility. The Company
expects to meet certain of its financing requirements through long-term secured
and unsecured borrowings and the issuance of debt securities or additional
equity securities of the Company. In addition, the Company anticipates utilizing
the Credit Facility and New Credit Facility primarily to fund construction and
development activities. The Company does not intend to reserve funds to retire
existing mortgage indebtedness or indebtedness under the Credit Facility or New
Credit Facility upon maturity. Instead, the Company will seek to refinance such
debt at maturity or retire such debt through the issuance of additional equity
or debt securities. The Company anticipates that its available cash and cash
equivalents and cash flows from operating activities, together with cash
available from borrowings and other sources, will be adequate to meet the
capital and liquidity needs of the Company in both the short and long-term.
However, if these sources of funds are insufficient or unavailable, the
Company's ability to make the expected distributions discussed below may be
adversely affected.
In order to qualify as a REIT for Federal income tax purposes, the Company
is required to make distributions to its stockholders of at least 95% of REIT
taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring, non-
incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term investments. The following
factors will affect cash flows from operating activities and, accordingly,
influence the decisions of the Board of Directors regarding distributions: (i)
debt service requirements after taking into account the repayment and
restructuring of certain indebtedness; (ii) scheduled increases in base rents of
existing leases; (iii) changes in rents attributable to the renewal of existing
leases or replacement leases; (iv) changes in occupancy rates at existing
Properties and procurement of leases for newly acquired or developed properties;
and (v) operating expenses and capital replacement needs.
Pending Nashville Acquisition
On January 23, 1996, the Company entered into a letter of intent with
Nashville, Tennessee-based Eakin & Smith, Inc. and its affiliates ("Eakin &
Smith"), which outlined the principal terms in which the Company and Eakin &
Smith would combine their property portfolios, management teams and business
operations. Through the combination with Eakin & Smith, the Company will succeed
to the ownership of seven 96% leased in-service suburban office buildings
totaling 848,000 square feet, a 103,000-square-foot, 50% pre-leased suburban
office development project, 18 acres of development land and Eakin & Smith's
brokerage and property management operations. The aggregate purchase price,
assuming the completion of the in-process development project in December 1996,
is expected to total approximately $100,000,000 and is expected to be paid
through the issuance of approximately 1.1 million limited partnership units of
Highwoods/Forsyth Limited Partnership or shares of Common Stock, the assumption
of approximately $42 million of indebtedness and cash payments of approximately
$27 million. The aggregate purchase price includes deferred payments totaling
$1,500,000, which are attributable to Eakin & Smith's brokerage and property
management operations, that will be paid over a four-year period provided
certain annual operating measurements are achieved. The Company will fund the
cash payments with available capacity under its Credit Facility.
Consummation of the transaction is subject to the completion of due
diligence, the execution of a definitive contribution and exchange agreement,
the consent of certain lenders, the approval of the transaction by the partners
and shareholders of the contributing entities and certain other conditions.
Assuming satisfaction of these conditions, the transaction is expected to close
in March 1996.
28
<PAGE>
Possible Environmental Liabilities
All of the properties, except Burnt Poplar, have been subjected to Phase I
environmental reviews. These assessments have not revealed, nor is the Company
aware of, any environmental liability that the Company believes would have a
material adverse effect on the Company's results of operations, liquidity or
capital resources. This projection, however, could prove to be incorrect
depending on certain factors. For example, the Company's assessments may not
reveal all environmental liabilities or there may be material environmental
liabilities of which the Company is unaware. In addition, assumptions regarding
groundwork-flow and the existence of contamination are based on available
sampling data, and there are no assurances that the data is reliable in all
cases. Moreover, there can be no assurance 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, by the condition of land or operations in the vicinity of the
Properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
Compliance with the Americans with Disabilities Act
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations and commercial facilities are required to meet certain Federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers, and non-compliance could result in imposition of
fines by the U.S. government or an award of damages to private litigants.
Although the Company believes that the Properties are substantially in
compliance with these requirements, the Company may incur additional costs to
comply with the ADA. Although the Company believes that such costs will not have
a material adverse effect on the Company, if required changes involve a greater
expenditure than the Company currently anticipates, the Company's results of
operations, liquidity and capital resources could be adversely affected.
Funds From Operations and Cash Available for Distributions
The Company considers Funds from Operations ("FFO") to be a useful
financial performance measure of the operating performance of an equity REIT
because, together with net income and cash flows, FFO 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 GAAP and
FFO should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flows as a
measure of liquidity. Funds from Operations does not measure whether cash flow
is sufficient to fund all of the Operating Partnership's cash needs including
principal amortization, capital improvements and distributions to shareholders.
Funds from Operations does not represent cash flows from operating, investing or
financing activities as defined by GAAP. Further, FFO as disclosed by other
REITs may not be comparable to the Operating Partnership's calculation of FFO,
as described below.
Funds from Operations means net income (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. In March
1995, NAREIT issued a clarification of the definition of FFO. The clarification
provides that amortization of deferred financing costs and depreciation of
non-real estate assets are no longer to be added back to net income in arriving
at FFO. Cash available for distribution is defined as funds from operations
reduced by non-revenue enhancing capital expenditures for building improvements
and tenant improvements and lease commissions related to second generation
space.
Funds from operations and cash available for distributions should not be
considered as alternatives to net income as an indication of the Operating
Partnership's performance or to cash flows as a measure of liquidity.
29
<PAGE>
Funds from operations and cash available for distribution for the year
ended December 31, 1995 and for the period from June 14, 1994 to December 31,
1994 are summarized in the following table (in thousands):
<TABLE>
<CAPTION>
1995 1994
Current New Current New
Method Method Method Method
<S> <C> <C> <C> <C>
Income before minority interest and extraordinary item.............. $28,934 $28,934 $ 7,695 $ 7,695
Add (deduct):
Depreciation and amortization..................................... 11,082 11,082 2,607 2,607
Amortization of deferred financing costs.......................... 1,619 -- 738 --
Third-party service company cash flow............................. -- -- -- --
Rental income from straight-line rents............................ (1,519) -- (503) --
Funds from operations before minority interest................. 40,116 40,016 10,537 10,302
Cash Available for Distribution:
Add (deduct):
Rental income from straight-line rents............................ -- (1,519) -- (503)
Amortization of deferred financing costs.......................... -- 1,619 -- 738
Non-incremental revenue generating capital expenditures:
Building improvements paid..................................... (1,337) (1,337) (150) (150)
Second generation tenant improvements paid..................... (1,884) (1,884) (347) (347)
Second generation lease commissions paid....................... (1,228) (1,228) (180) (180)
Cash available for distribution.............................. $35,667 $35,667 $ 9,860 $ 9,860
Weighted average shares/units outstanding (1)....................... 18,697 18,697 9,991 9,991
Dividend payout ratio:
Funds from operations............................................. 81.5% 81.8% 87.7% 89.7%
Cash available from distribution.................................. 91.7% 91.7% 93.7% 93.7%
</TABLE>
(1) Assumes conversion of Units to shares of Common Stock.
Inflation
In the last five years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate in the Company's geographic
areas of operation. Most of the leases require the tenants to pay their pro rata
share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing the Company's exposure to increases in
operating expenses resulting from inflation. In addition, many of the leases are
for terms of less than seven years, which may enable the Company to replace
existing leases with new leases at a higher base if rents on the existing leases
are below the then-existing market rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Item 14(a)
and filed as part of this report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section under the heading "Election of Directors" of the Proxy
Statement for Annual Meeting of Stockholders to be held April 30, 1996 (the
"Proxy Statement") is incorporated herein by reference for information on
Directors of the Registrant. See ITEM X in Part I hereof for information
regarding executive officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
The Company pays its directors who are not officers of the Company fees for
their services as directors. Directors receive annual compensation of $10,000
plus a fee of $1,250 (plus out-of-pocket expenses) for attendance in person at
each meeting of the Board of Directors, $500 for each committee meeting attended
and $250 for each telephone meeting of the Board of Directors or of a committee.
In addition, upon becoming a director of the Company, each non-employee director
received options to purchase 10,000 shares of Common Stock at an exercise price
equal to the fair market value at the date of grant. These options vest in four
equal annual installments commencing on the first anniversary of the date of
grant. Officers of the Company who are directors are not paid any director fees.
Executive Compensation
The following table sets forth certain information concerning the
compensation of the chief executive officer and the four other most highly
compensated executive officers of the Company (the "Named Executive Officers")
for the year ended December 31, 1995 and for the period from June 14, 1994 (the
date of the IPO) to December 31, 1994:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation(2) All Other
Name and Principal Position Year Salary Bonus(1) Options(#) Compensation
<S> <C> <C> <C> <C> <C>
Ronald P. Gibson 1995 $ 173,397 $218,750 20,000 $ 2,310(3)
President and Chief Executive Officer.... 1994 $ 81,250 $105,169 40,000 $ 7,737(3)
John L. Turner 1995 $ 125,230 $119,531 45,000 $ 2,250(3)
Chief Investment Officer(4).............. 1994 -- -- -- --
William T. Wilson, III 1995 $ 111,651 $114,750 50,000 $ 2,025(3)
Executive Vice President and President of 1994 -- -- -- --
Forsyth Division(4)......................
Edward J. Fritsch 1995 $ 113,750 $105,000 10,000 $ 4,559(3)
Vice President, Secretary and President 1994 $ 43,481 $ 36,575 30,000 $ 3,838(3)
of Research Triangle Division............
Carman J. Liuzzo 1995 $ 99,167 $ 62,500 10,000 $ 1,511(3)
Vice President, Chief Financial Officer 1994 $ 41,347 $ 25,359 25,000 $25,000(5)
and Treasurer............................
</TABLE>
(1) Includes amounts earned in the indicated period which were paid in the
following year. Twenty percent of bonus is in the form of units of phantom
stock. Employees are credited with a specified number of units of phantom
stock equal to such number of shares of Common Stock as could be purchased
with 25% of the employee's cash bonus. Five years from the date of the
phantom stock grant, employees will receive the value of a share of Common
Stock for each unit of phantom stock. At the end of such five-year period,
phantom stock holders also receive the value of the dividends paid during
the period on the corresponding Common Stock assuming dividend reinvestment.
Payouts with respect to phantom stock grants may be made in shares of Common
Stock or cash or both. If an executive officer leaves the Company's employ
for any reason (other than death, disability or normal retirement) prior to
the end of the five-year period, all awards under the deferred compensation
plan will be forfeited.
31
<PAGE>
(2) These options will vest in four equal installments on the second, third,
fourth and fifth anniversaries of the date of grant. All 1995 amounts were
granted in 1996 but were earned in 1995 except that Messrs. Turner and
Wilson were each granted 45,000 options in 1995 in connection with the
Forsyth Transaction (see the table below captioned "Option Grants in 1995").
(3) Represents amounts contributed by the Company under the Salary Deferral and
Profit Sharing Plan.
(4) Messrs. Turner and Wilson became employees of the Company upon the
combination with Forsyth Partners in February 1995.
(5) Paid in connection with Mr. Liuzzo's relocation to Raleigh upon joining the
Company in June 1994.
The following table sets forth certain information with respect to options
granted in 1995 to the Named Executive Officers:
Option Grants in 1995
<TABLE>
<CAPTION>
Potential Realizable
Number of Percent of Value at Assumed Annual
Securities Total Options Rates of Stock Price
Underlying Granted to Exercise Appreciation for Option
Options Employees Price Expiration Term (2)
Name Granted(1) in 1995 Per Share Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Ronald P. Gibson......... -- -- -- -- -- --
John L. Turner........... 45,000 11.3% $ 20.75 February 2005 $ 587,230 $ 1,488,152
William T. Wilson, III... 45,000 11.3% $ 20.75 February 2005 $ 587,230 $ 1,488,152
Edward J. Fritsch........ -- -- -- -- -- --
Carman J. Liuzzo......... -- -- -- -- -- --
</TABLE>
(1) These options will vest in four equal installments on the second, third,
fourth and fifth anniversaries of the date of grant.
(2) Realizable values have been reduced by the per share option exercise price
that each optionee will be required to pay to the Company in order to
exercise the options.
The following table sets forth certain information with respect to options
held by the Named Executive Officers at year-end 1995:
1995 Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised in-the-Money
Unexercised Options at 1995 Year-End Options at 1995 Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable(1)
<S> <C> <C>
Ronald P. Gibson........ -- /40,000 -- /$290,000
John L. Turner.......... -- /45,000 -- /$337,500
William T. Wilson,
III..................... -- /45,000 -- /$337,500
Edward J. Fritsch....... -- /30,000 -- /$217,500
Carman J. Liuzzo........ -- /25,000 -- /$181,250
</TABLE>
(1) Based on a closing price of $28.25 per share of Common Stock on December 29,
1995.
Employment Contracts
Messrs. Gibson, Fritsch and Liuzzo entered into three-year employment
contracts with the Company in 1994, as did Messrs. Turner and Wilson in 1995.
These contracts provide for a minimum annual base salary at the rate of $150,000
for Mr. Gibson, $150,000 for Mr. Turner, $135,000 for Mr. Wilson, $85,000 for
Mr. Fritsch, and $86,000 for Mr. Liuzzo, which rate may be increased by the
Board of Directors. As of December 31, 1995, the annual base salary rate was
$175,000 for Mr. Gibson, $150,000 for Mr. Turner, $135,000 for Mr. Wilson,
$120,000 for Mr. Fritsch and $100,000 for Mr. Liuzzo. Each contract includes
32
<PAGE>
provisions restricting the officers from competing with the Company during
employment and, except in certain circumstances, for a limited period of time
after termination of employment. Each of the employment contracts provides for
severance payments in the event of termination by the Company without cause
equal to the officer's base salary at the rate then in effect for the later of
one year from the date of termination or three years from the contract date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section under the heading "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 10, 1995, the Operating Partnership acquired the six-building
Research Commons office center in exchange for Units and the assumption of
certain indebtedness. Mr. Timko, who is a director of the Company, was one of
the owners of Research Commons and indirectly received 262,215 Units as a result
of the transaction. Mr. Timko may also receive his share of up to 40,000
additional Units, which may be paid in the event the property meets certain
performance objectives. Pursuant to the terms of the Research Commons
acquisition agreements, if the rentals of the buildings at Research Commons meet
certain levels of financial performance, the prior owners of Research Commons
are entitled to receive an additional 40,000 Units, subject to increase for
accrued dividends from the date of the Company's purchase of Research Commons on
any such earn-out Units issued. Earn-out Units will be issued in the event the
leases for the 4301 building and the 4501 building at the Research Commons
office park are renewed; provided, however, that no earn-out Units are issuable
if expenditures related to such renewals exceed $440,000. As part of the
Research Commons acquisition, Mr. Timko was released from guarantees aggregating
approximately $6.3 million relating to indebtedness secured by Research Commons,
and the Company assumed a $5 million promissory note owed by the previous owners
of Research Commons (of which Mr. Timko was an affiliate) to Beaunit
Corporation, which is also affiliated with Mr. Timko.
On February 23, 1995, the Company and Forsyth Partners combined their
property portfolios, management teams and business operations. As part of the
combination with Forsyth Partners (the "Forsyth Transaction"), the Company
succeeded to the ownership of 58 commercial properties and the management,
brokerage, development, construction and related businesses of Forsyth Partners.
In connection with the Forsyth Transaction, Messrs. Turner and Wilson
contributed their interests in the assets of Forsyth Partners in exchange for
the following: Mr. Turner received 399,541 Units (including 43,692 Units in
exchange for a promissory note secured by Ivy Distribution Center, which was
acquired in the Forsyth Transaction); and Mr. Wilson received 258,204 Units.
Each of Messrs. Turner and Wilson also received warrants to acquire 35,000
shares of Common Stock at $21.00 per share and options to purchase 45,000 shares
of Common Stock at $20.75 per share, which options are exercisable in four equal
annual installments commencing on the second anniversary of the date of grant.
In addition, (i) Messrs. Turner and Wilson were released from guarantees
aggregating approximately $39.5 million relating to indebtedness secured by
properties contributed in the Forsyth Transaction, and (ii) the Operating
Partnership indemnified certain owners of Forsyth Partners, including Messrs.
Turner and Wilson, for any obligations that may arise under approximately $2.5
million of additional guarantees relating to indebtedness that was assumed by
the Company and was not released by the lender.
On May 25, 1995, the Company purchased Creekstone Crossing, a 59,000-square
foot service center (96% office finish) in Raleigh-Durham, North Carolina. The
aggregate purchase price was $4.5 million paid through the issuance of 4,640
Units in the Operating Partnership and the assumption of $4.4 million of
indebtedness. Messrs. Sloan (chairman of the Board of Directors), Gibson (chief
executive officer) and Fritsch (vice president) indirectly owned 16.5%, 4.9% and
1.3%, respectively, of the property prior to its sale to the Company.
33
<PAGE>
On December 4, 1995, the Company purchased the Cotton Building, a
40,000-square foot office building in Raleigh-Durham, North Carolina, for
approximately $2.3 million. The purchase price consisted of 23,466 Units (valued
at $25.50) and the assumption of $1.7 million of indebtedness. Mr. Sloan
indirectly owned 50% of the property at the time of its sale to the Company. The
property was valued using discount cash flow analysis and by a comparison to
other comparable building sale transactions. In accordance with the Company's
conflict of interest policies, the purchase price was approved by the Company's
independent directors.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 10-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements and schedules listed below are filed as part of
this annual report on the pages indicated.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Highwoods Properties, Inc.
Report of Independent Auditors........................................................................... 39
Consolidated Balance Sheets as of December 31, 1995 and 1994............................................. 40
Consolidated Statements of Operations for the Year Ended December 31, 1995 and for the Period from June
14, 1994 (commencement of operations) to December 31, 1994............................................ 41
Consolidated Statement of Stockholders' Equity for the Period from June 14, 1994 (commencement of
operations) to December 31, 1995...................................................................... 42
Consolidated Statement of Cash Flows for the Year Ended December 31, 1995 and for the Period from June
14, 1994 (commencement of operations) to December 31, 1994............................................ 43
Notes to Consolidated Financial Statements............................................................... 45
Schedule III -- Real Estate and Accumulated Depreciation................................................. 57
Highwoods Group
Report of Independent Auditors........................................................................... 63
Combined Balance Sheets as of December 31, 1993 and 1992................................................. 64
Combined Statements of Operations for the period from January 1, 1994 to June 13, 1994 and for the years
ended December 31, 1993, 1992, and 1991............................................................... 65
Combined Statements of Owners' Deficit for the years ended December 31, 1993, 1992 and 1991.............. 66
Combined Statements of Cash Flows for the period from January 1, 1994 to June 13, 1994 and for the years
ended December 31, 1993, 1992 and 1991................................................................ 67
Notes to Combined Financial Statements................................................................... 68
Schedule III-Real Estate and Accumulated Depreciation.................................................... 72
</TABLE>
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C> <C> <C> <C>
2.1(1) -- Master Agreement of Merger and Acquisition dated January 9, 1995 by and among
Highwoods Realty Limited Partnership, Forsyth Partners Holdings, Inc., Forsyth
Partners Brokerage, Inc., John L. Turner, William T. Wilson, III, John E. Reece
II, H. Jack Leister and the partnerships and corporations listed therein (list
of omitted schedules included)
2.2(1) -- Agreement pursuant to Item 601(b)(2) of Regulation S-K
2.3(2) -- Omnibus Option Agreement by and among Highwoods Realty Limited Partnership and
the Grantors named therein dated March 24, 1994
3.1(2) -- Amended and Restated Articles of Incorporation of the Company
3.2(2) -- Amended and Restated Bylaws of the Company
4.1(2) -- Specimen of certificate representing shares of Common Stock
10.1(2) -- Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
10.2(5) -- Form of Registration Rights and Lockup Agreement among the Company and the
Holders named therein, which the Company and all Unit holders have signed to
date
10.3(2) -- Articles of Incorporation of Highwoods Services, Inc.
10.4(2) -- Bylaws of Highwoods Services, Inc.
10.5(3) -- Articles of Incorporation of Forsyth Properties Services, Inc.
10.6(3) -- Bylaws of Forsyth Properties Services, Inc.
10.7(4)(5) -- Amended and Restated 1994 Stock Option Plan
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C> <C> <C> <C>
10.8(a)(1)(4) -- Employment Agreement between the Company and the Operating Partnership and
Ronald P. Gibson
10.8(b)(1)(4) -- Employment Agreement between the Company and the Operating Partnership and
Edward J. Fritsch
10.8(c)(3)(4) -- Employment Agreement between the Company and the Operating Partnership and
Carman J. Liuzzo
10.8(d)(3)(4) -- Employment Agreement between the Company and the Operating Partnership and John
L. Turner
10.8(e)(3)(4) -- Employment Agreement between the Company and the Operating Partnership and
William T. Wilson, III
10.9(2) -- Option Agreement dated February 24, 1994 between State of California Public
Employees' Retirement System and Highwoods Properties Company relating to
acquisition of the CalPERS Properties
10.10(2) -- First Amendment to Option Agreement dated May 1994 between The State of
California Public Employees' Retirement System and Highwoods Properties Company
10.11(2) -- Option Agreement dated March 31, 1994 among Duke University; Ralph W. Mullins,
Jr.; Daniel C. Austin; M&A Investment Company; Quail Professional Center II;
Quail Corners Office Building, Ltd. and A&M Investment Company and Highwoods
Properties Company relating to acquisition of the Austin Mullins Properties (the
North Park Properties) and the Option Land adjacent thereto
10.12(2) -- Form of Right of First Refusal between The Nelson Company and Highwoods Realty
Limited Partnership relating to the Option Land in Creekstone Park
10.13(2) -- Form of Option to Purchase between Rex Drive Associates and Highwoods Properties
Company relating to Option Land in the Rexwoods Office Center
10.14(2) -- Form of Agreement for Sale of Partnership Interests among Rexwoods II
Associates, Highwoods Realty Limited Partnership and the Sellers named therein
relating to the purchase of Rexwoods II
10.15(2) -- Form of Agreement for Sale of Partnership Interests among Expressway One
Partnership, Highwoods Realty Limited Partnership and the Sellers named therein
relating to the purchase of Expressway One
10.16(2) -- Form of Agreement for Sale of Partnership Interests among Riverbirch Associates,
Highwoods Realty Limited Partnership and the Sellers named therein relating to
the purchase of Riverbirch
10.17(2) -- Form of Agreement for Sale of Partnership Interests among The Nelson Company,
Highwoods Realty Limited Partnership and the Sellers named therein relating to
the purchase of Development Land in Creekstone Park
10.18(2) -- Form of Agreement for Sale of Partnership Interests among Blue Ridge II
Associates, Highwoods Realty Limited Partnership and the Sellers named therein
relating to the purchase of Blue Ridge II
10.19(2) -- Form of Agreement for Sale of Partnership Interests among Progress Center II
Partnership, Highwoods Realty Limited Partnership and the Sellers named therein
relating to the purchase of CompuChem
10.20(2) -- Form of Agreement for Sale of Partnership Interests among Laser Associates,
Highwoods Realty Limited Partnership and the Sellers named therein relating to
the purchase of Rexwoods Center
10.21(2) -- Form of Agreement for Sale of Partnership Interests among Rexwoods III
Associates, Limited Partnership, Highwoods Realty Limited Partnership and the
Sellers named therein relating to the purchase of Rexwoods III
10.22(2) -- Form of Right of First Refusal between Expressway One Partnership and Highwoods
Realty Limited Partnership relating to Option Land in Expressway Commerce Center
10.23(1) -- Form of Supplemental Representations, Warranties and Agreements executed by
Stanley O. Kelley to Highwoods Realty Limited Partnership related to the
transfer of Ivy Distribution Center
10.24(1) -- Omnibus Option Agreement dated January 3, 1995 by and among Highwoods Realty
Limited Partnership and the Grantors named therein related to the sale of
interests in 370 and 380 Knollwood, Ivy Distribution Center and Chesapeake
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C> <C> <C> <C>
10.25(1) -- Omnibus Option Agreement dated January 3, 1995 by and among Highwoods Realty
Limited Partnership and the Grantors named therein related to the sale of
interests in 370 and 380 Knollwood and Ivy Distribution Center
10.26(1) -- Omnibus Option Agreement dated January 3, 1995 by and between Highwoods Realty
Limited Partnership and Stanley O. Kelley related to the sale of interests in
Ivy Distribution Center
10.27(1) -- Omnibus Option Agreement dated January 3, 1995 by and between Highwoods Realty
Limited Partnership and A.T. Williams Oil Company related to the sale of
interests in 3288 Robinhood
10.28(1) -- Omnibus Option Agreement dated January 4, 1995 by and between Highwoods Realty
Limited Partnership and James F. Marshall related to the sale of interests in
Airpart East, Airpark West, Airpark North, West Point Business Park, Steele
Creek Park, Woodlawn Plaza, and 370 and 380 Knollwood
10.29(1) -- Omnibus Option Agreement dated January 6, 1995 by and among Highwoods Realty
Limited Partnership and the Grantors named therein related to the sale of
interests in Airpark East, Airpark West, Airpark North, West Point Business
Park, Steele Creek Park, 370 and 380 Knollwood, Chesapeake, Woodlawn Plaza,
University Commercial Center, 3288 Robinhood, the NationsFord Development Land,
and the ownership interests in FP Brokerage Partnership, FP Development, FP
Construction and FPI
10.30(1) -- Omnibus Option Agreement dated January 6, 1995 by and between Highwoods Realty
Limited Partnership and William T. Wilson, III related to the sale of interests
in Airpark East, Airpark West, Airpark North, West Point Business Park, Steele
Creek Park, 370 and 380 Knollwood, Chesapeake, Woodlawn Plaza, University
Commercial Center, 3288 Robinhood, the NationsFord Development Land, and the
ownership interests in FP Brokerage Partnership, FP Development, FP Construction
and FPI
10.30(1) -- Omnibus Option Agreement dated January 6, 1995 by and between Highwoods Realty
Limited Partnership and John L. Turner related to the sale of interests in
Airpark East, Airpark West, Airpark North, Ivy Distribution Center, West Point
Business Park, Steele Creek Park, Chesapeake, Woodlawn Plaza, the NationsFord
Development Land, 3288 Robinhood, 370 and 380 Knollwood, University Commercial
Center and the ownership interests in Forsyth Partners Brokerage Partnership, FP
Development, FP Construction and FPI
10.31(1) -- Omnibus Option Agreement dated January 3, 1995 by and between Highwoods Realty
Limited Partnership and Forsyth Partners Brokerage, Inc. related to the sale of
assets to Highwoods Realty Limited Partnership
10.32(1) -- Omnibus Option Agreement dated January 6, 1995 by and among Highwoods Realty
Limited Partnership and the Grantors named therein relating to the sale of
interests in 370 and 380 Knollwood, West Point Business Park, Woodlawn Plaza and
Chesapeake and the ownership interest in FP Development
10.33(1) -- Real Estate Purchase and Sale agreement dated August 4, 1994 between Petula
Associates, Ltd. and Forsyth Partners Holding, Inc. with amendment dated
December 2, 1994, related to the purchase of interests in Airpark West, Airpark
East, Airpark North, University Commercial Center, and Steele Creek Park, which
agreement will be assigned to Highwoods Realty Limited Partnership
10.34(a)(1) -- Option Agreement dated July 31, 1994 between Burnt Poplar Associates Limited
Partnership and Forsyth Partners Holdings, Inc. related to the acquisition of
Burnt Poplar, which agreement will be assigned to Highwoods Realty Limited
Partnership
10.34(b)(1) -- Indemnification Agreement dated September 26, 1994 between Burnt Poplar
Associates Limited Partnership and Forsyth Partners Holdings, Inc. related to
the acquisition of Burnt Poplar, which agreement will be assigned to Highwoods
Realty Limited Partnership
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C> <C> <C> <C>
10.35(1) -- Contract of Sale and Purchase dated December 2, 1994 between Stratford
Properties Joint Venture and Forsyth Partners Holdings, Inc., with amendment
dated December 30, 1994, related to the acquisition of Stratford, which
agreement will be assigned to Highwoods Realty Limited Partnership
10.36(1) -- Contribution and Exchange Agreement dated January 10, 1995 between 4501
Alexander Associates and Highwoods Realty Limited Partnership related to the
acquisition of Research Commons
10.37(1) -- Contribution and Exchange Agreement dated January 10, 1995 between JHPB Partners
and Highwoods Realty Limited Partnership related to the acquisition of Research
Commons
10.38(5) -- Contribution and Exchange Agreement by and among the Operating Partnership, R-K
Properties 3, L.P. and the Partners listed therein, dated as of July 18, 1995,
relating to acquisition of Vantage Point
10.39(5) -- Purchase and Sale Agreement by and between the Operating Partnership and R-K
Properties 5, L.P., dated as of July 18, 1995, relating to the acquisition of
Innsbrook Tech I Center
10.40(5) -- Purchase and Sale Agreement by and between the Operating Partnership and R-K
Properties 1, L.P., dated as of July 18, 1995, relating to the acquisition of
Vantage Place II
10.41(5) -- Purchase and Sale Agreement by and between the Operating Partnership and R-K
Properties 2, L.P., dated as of July 18, 1995, relating to the acquisition of
Vantage Place IV
10.42(5) -- Asset Purchase Agreement between Ross-Kreckman Management Corporation and
Highwoods Services, dated as of July 5, 1995
10.43(5) -- Contribution and Exchange Agreement by and among the Operating Partnership,
Vantage Associates I, L.P. and the Partners listed therein, dated as of July 18,
1995, relating to the acquisition of Vantage Place I
10.44(5) -- Contribution and Exchange Agreement by and among the Operating Partnership,
Vantage Associates II, L.P. and the Partners listed therein, dated as of July
18, 1995, relating to the acquisition of Vantage Place III
10.45(5) -- Agreement for Contribution and Exchange of Partnership Interests by and among
the Operating Partnership, Creekstone Associates I and the Contributors named
therein, dated as of May 11, 1995, relating to the acquisition of Creekstone
Crossing
10.46(5) -- Ground Lease Agreement by and between Landlord and Seven Parkway Plaza dated as
of July 23, 1985, relating to Parkway Plaza Building 7
10.47(5) -- Ground Lease Agreement by and between Landlord and Eight Parkway Plaza dated as
of July 31, 1986, relating to Parkway Plaza Building 8
10.48(5) -- Ground Lease Agreement by and between Landlord and Nine Parkway Plaza dated as
of April 29, 1984, relating to Parkway Plaza Building 9
10.49(5) -- Contribution and Exchange of the Cotton Building between SJ Company and the
Operating Partnership dated December 4, 1995
10.50(1) -- Form of warrant issued to Messrs. Turner, Wilson and Reece
10.51(1) -- Operating Agreement of Forsyth/Carter Brokerage of North Carolina, L.L.C.
(included in Exhibit 2.1)
21.1(1) -- Schedule of Subsidiaries of the Company
</TABLE>
(1) Previously filed on Form S-11, File No. 33-88364, and incorporated herein by
reference.
(2) Previously filed on Form S-11, File No. 33-76952, and incorporated herein by
reference.
(3) A form of this document was previously filed. Copy of executed document
filed on Company's Annual Report on Form 10-K for the year ended December
31, 1995.
(4) Management contract or compensatory plan.
(5) Previously filed on Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
The Company will provide copies of any exhibit, upon written request, at a
cost of $.05 per page.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 1995.
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HIGHWOODS PROPERTIES, INC.
We have audited the accompanying consolidated balance sheets of Highwoods
Properties, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1995 and for the period from June 14, 1994 (commencement of
operations) to December 31, 1994. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our 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 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 Highwoods
Properties, Inc. at December 31, 1995 and 1994, and the consolidated results of
its operations and cash flows for the year ended December 31, 1995 and for the
period from June 14, 1994 (commencement of operations) to December 31, 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
the financial statement schedule when considered in relation to the basic
financial statements taken as a whole presents fairly in all material respects
the information required to be set forth therein.
ERNST & YOUNG LLP
Raleigh, North Carolina
February 2, 1996,
except note 11 as to which the date is
April 29, 1996
39
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(In thousands, except per share amount)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Assets
Real estate assets, at cost:
Land................................................................................... $106,955 $ 34,484
Buildings and improvements............................................................. 491,581 183,572
Development in process................................................................. 15,508 643
Furniture, fixtures and equipment...................................................... 1,288 967
615,332 219,666
Less -- accumulated depreciation....................................................... (22,266) (11,690)
Net real estate assets................................................................. 593,066 207,976
Cash and cash equivalents................................................................ 6,838 6,258
Accounts and notes receivable............................................................ 6,338 496
Notes receivable from service subsidiaries............................................... 1,274 620
Accrued straight line rents receivable................................................... 3,407 1,888
Other assets:
Deferred leasing costs................................................................. 4,253 2,139
Deferred financing costs and interest rate caps........................................ 8,268 6,796
Prepaid expenses and other............................................................. 1,521 330
14,042 9,265
Less -- accumulated amortization....................................................... (3,831) (1,726)
10,211 7,539
$621,134 $224,777
Liabilities and stockholders' equity
Mortgages and notes payable.............................................................. $182,736 $ 66,864
Accounts payable, accrued expenses and other liabilities................................. 11,052 5,717
Total liabilities...................................................................... 193,788 72,581
Minority interest........................................................................ 73,536 15,981
Stockholders' equity:
Common stock, $.01 par value, authorized 100,000,000 shares;
issued and outstanding 19,404,411 at December 31, 1995 and 8,986,910 at December 31,
1994................................................................................... 194 90
Additional paid-in capital............................................................... 355,248 135,531
Retained earnings (distributions in excess of net earnings).............................. (1,632) 594
Total stockholders' equity............................................................. 353,810 136,215
$621,134 $224,777
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
For the Year Ended December 31, 1995 and
for the Period from June 14, 1994 (commencement of operations) to December 31,
1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revenue:
Rental income............................................................................ $71,217 $19,011
Distributions from service and leasing subsidiaries...................................... -- 100
Interest and other income................................................................ 2,305 331
Total revenue.............................................................................. 73,522 19,442
Operating expenses:
Rental property.......................................................................... 17,049 5,110
Depreciation and amortization............................................................ 11,082 2,607
Interest expense:
Contractual........................................................................... 12,101 2,482
Amortization of deferred financing costs and interest rate cap........................ 1,619 738
13,720 3,220
General and administrative............................................................... 2,737 810
Income before minority interest and extraordinary item................................ 28,934 7,695
Minority interest.......................................................................... (4,937) (808)
Income before extraordinary item...................................................... 23,997 6,887
Extraordinary item -- loss on early extinguishment of debt................................. (875) (1,273)
Net income............................................................................ $23,122 $ 5,614
Net income per common share:
Income before extraordinary item......................................................... $ 1.55 $ 0.77
Extraordinary item -- loss on early extinguishment of debt............................... (.06) (0.14)
Net income............................................................................... $ 1.49 $ 0.63
Weighted average shares outstanding...................................................... 15,487 8,936
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statement of Stockholders' Equity
(In thousands)
For the Year Ended December 31, 1995 and
for the Period from June 14, 1994 (commencement of operations) to December 31,
1994
<TABLE>
<CAPTION>
Retained
Earnings
(Distributions
Common Additional in Excess of
Stock Paid-In-Capital Net Earnings) Total
<S> <C> <C> <C> <C>
Balance at June 14, 1994 (commencement of operations).... $-- $ 1 $-- $ 1
Issuance of 8,986,190 shares of common stock............. 90 164,324 164,414
Charge to reflect carryover of historical basis of
accounting and recognition of minority interest in
Operational Partnership for continuing investors....... -- (28,794) -- (28,794)
Distributions paid....................................... -- -- (5,020) (5,020)
Net income............................................... -- -- 5,614 5,614
Balance at December 31, 1994............................. 90 135,531 594 136,215
Issuance of 10,418,221 shares of common stock............ 104 219,717 -- 219,821
Distributions paid....................................... -- -- (25,348) (25,348)
Net income............................................... -- -- 23,122 23,122
Balance at December 31, 1995............................. $194 $ 355,248 $ (1,632) $353,810
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statement of Cash Flows of the Company
(In thousands)
For the Year Ended December 31, 1995 and
for the Period from June 14, 1994 (commencement of operations) to December 31,
1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Operating activities:
Net income............................................................................... $ 23,122 $ 5,614
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.......................................................... 12,701 3,345
Loss on early extinguishment of debt................................................... 875 1,273
Minority interest...................................................................... 4,937 808
Changes in operating assets and liabilities:
Accounts receivable................................................................. (1,561) (321)
Prepaid expenses and other assets................................................... (173) (521)
Accrued straight line rents receivable.............................................. (1,519) (503)
Accounts payable, accrued expenses and other liabilities............................ 4,787 3,455
Net cash provided by operating activities......................................... 43,169 13,150
Investing activities:
Proceeds from disposition of real estate assets.......................................... 2,200 --
Additions to real estate assets.......................................................... (130,411) (99,208)
Other assets and notes receivable........................................................ (1,777) (620)
Cash from contributed net assets......................................................... 549 2,088
Cash paid in exchange for partnership net assets......................................... (6,593) (9,623)
Net cash used in investing activities............................................... (136,032) (107,363)
Financing activities:
Distributions paid....................................................................... (29,845) (5,020)
Net proceeds from the sale of common stock............................................... 219,821 164,413
Payment of prepayment penalties and loan costs........................................... (1,046) (1,025)
Borrowings on credit facility............................................................ 50,800 62,700
Repayment of credit facility............................................................. (87,000) (20,000)
Proceeds from mortgages and notes payable................................................ 90,250 --
Repayment of mortgages................................................................... (148,907) (93,947)
Payment of deferred financing costs...................................................... (630) (6,650)
Net cash provided by financing activities........................................... 93,443 100,471
Net increase in cash and cash equivalents................................................ 580 6,258
Cash and cash equivalents at beginning of the period..................................... 6,258 --
Cash and cash equivalents at end of the period........................................... $ 6,838 $ 6,258
Supplemental disclosure of cash flow information:
Cash paid for interest................................................................... $ 11,965 $ 2,073
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statement of Cash Flows of the Company -- Continued
(In thousands)
For the Year Ended December 31, 1995 and
for the Period from June 14, 1994 (commencement of operations) to December 31,
1994
<TABLE>
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities
The following summarizes the net assets contributed by the Unit holders of the Operating
Partnership or assets acquired subject to mortgages and notes payable:
<CAPTION>
1995 1994
<S> <C> <C>
Assets:
Real estate assets, net................................................................... $260,883 $51,614
Cash and cash equivalents................................................................. 549 2,088
Deferred rent receivable.................................................................. -- 1,385
Tenant leasing costs, net................................................................. -- 1,188
Deferred financing costs, net............................................................. 842 488
Accounts receivable and other............................................................. 6,290 174
Total assets............................................................................ 268,564 56,937
Liabilities:
Mortgages payable......................................................................... 210,728 63,947
Accounts payable, accrued expenses and other liabilities.................................. 549 2,262
Total liabilities....................................................................... 268,564 66,209
Net assets (liabilities)............................................................. $ 57,287 $(9,272)
In connection with the above transactions, the Company made additional cash payments to certain
partners in exchange for their partnership net assets in the amounts of $9,623,000 in 1994 and
$6,593,000 in 1995. These transactions were accounted for using the purchase method of accounting.
Further in connection with these transactions, the Company received cash payments at closing to
fund the payment of certain accrued liabilities such as property taxes.
Additionally, in connection with the formation of the Company additional debt of $54,164,000 was
assumed and Units valued at $4,199,000 were issued during the
period from June 14, 1994, to December 31, 1994.
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Formation of the Company
Highwoods Properties, Inc. (the "Company") is a self-administered and self
managed real estate investment trust (REIT) which operates in the Southeastern
United States. The Company's assets include 87 suburban office properties, 104
industrial properties and 203 acres of undeveloped land suitable for future
development.
The Company was incorporated in Maryland in February 1994 and is the
successor to the operations of the Highwoods Group. On June 14, 1994, the
Company commenced operations upon completion of a public offering of 7,400,000
shares of $.01 par value Common Stock (plus 1,110,000 shares subsequently issued
pursuant to the underwriters' over-allotment option, the "Initial Public
Offering"). The Initial Public Offering price was $21 per share resulting in
gross offering proceeds of $178,710,000. Proceeds to the Company, net of
underwriters' discount, an advisory fee and total offering expenses, were
$164,481,300.
The following transactions (the "Formation Transactions") occurred in
connection with the Initial Public Offering:
(Bullet) Through the merger of Highwoods Properties Company ("HPC") into
the Company certain investors received 476,190 shares of
restricted Common Stock in exchange for their holdings in HPC.
(Bullet) The Company consummated various purchase agreements to acquire
certain interests in 41 properties, including 27 properties which
were not owned by the Highwoods Group prior to the Initial Public
Offering.
For the 14 properties previously owned by the Highwoods Group,
negative net assets of approximately $9,272,000 were contributed
to the Operating Partnership at their historical cost.
Approximately, $8,400,000 was distributed to the non-continuing
partners of the Highwoods Group for their partnership interest in
the 14 properties. For the 27 properties not owned by the
Highwoods Group, the Company issued approximately $4,200,000 of
Units, assumed $54,164,000 of debt and paid $82,129,000 in cash.
These 27 properties were recorded at their purchase price using
the purchase method of accounting.
(Bullet) The Company became the sole general partner of Highwoods/Forsyth
Limited Partnership, formerly Highwoods Realty Limited Partnership
(the "Operating Partnership"), by contributing its ownership
interests in the 41 properties and its third-party fee business
and all but $10,400,000 of the net proceeds of the Initial Public
Offering in exchange for an approximate 88.3% interest in the
Operating Partnership.
(Bullet) The Operating Partnership executed various option and purchase
agreements whereby it paid approximately $81,352,000 in cash,
issued 1,054,664 units in the Operating Partnership ("Units") and
assumed approximately $118,111,000 of indebtedness in exchange for
fee simple interests in the 41 properties and the development
land.
(Bullet) The Operating Partnership contributed the third-party management
and development business and the third-party leasing business to
Highwoods Services, Inc. (formerly Highwoods Realty Services, Inc.
and Highwoods Leasing Company) in exchange for 100% of each
company's non-voting common stock and 1% of their voting common
stock.
Generally one year after issuance (the "lock-up period"), the Operating
Partnership is obligated to redeem each Unit at the request of the holder
thereof for cash equal to the fair market value of one share of the Company's
Common Stock at the time of such redemption, provided that the Company at its
option may elect to acquire any such Unit presented for redemption for one share
of Common Stock. When a Unit
45
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
holder redeems a Unit for a share of Common Stock or cash, the minority interest
will be reduced and the Company's share in the Operating Partnership will be
increased. The Company's units are not redeemable for cash. At December 31,
1995, the one-year lock-up period had expired with respect to 1,054,664 of the
3,732,412 Units issued.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and the Operating Partnership. The Company's investments in Highwoods Services,
Inc. and Forsyth Properties Services, Inc. (the "Service Companies") are
accounted for on the cost basis. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
The Company is a real estate investment trust ("REIT") under Section 856
through 860 of the Internal Revenue Code of 1986, as amended.
Minority interest in the Company represents the limited partnership
interest in the Operating Partnership owned by various individuals and entities
and not the Company. This minority interest relates to holders of Units. Per
share information is calculated using the weighted average number of shares
outstanding.
The extraordinary loss represents the write-off of loan origination fees
and prepayment penalties paid on the early extinguishment of debt and is shown
net of the minority interest's share in the loss.
Real Estate Assets
Real estate assets are stated at the lower of cost or net realizable value.
All capitalizable costs related to the improvement or replacement of commercial
real estate properties are capitalized. Depreciation is computed by the
straight-line method over the estimated useful life of 40 years for buildings
and improvements and 5 to 7 years for furniture and equipment. Tenant
improvements are amortized over the life of the respective leases, using the
straight-line method.
The Company reviews each property for any evidence of possible impairment
of carrying value based on estimated future cash flows. Based on this analysis,
as of December 31, 1995 and 1994 the carrying value of all properties is below
their estimated net realizable values.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted the Statement in
the first quarter of 1996 and the adoption did not have any material effect.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Revenue Recognition
Minimum rental income is recognized on a straight-line basis over the term
of the lease. Unpaid rents are included in accounts receivable. Certain lease
agreements contain provisions which provide reimbursement of real estate taxes,
insurance, advertising and certain common area maintenance (CAM) costs. These
additional rents are recorded on the accrual basis. All rent and other
receivables from tenants are due from commercial building tenants located in the
properties.
46
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
Deferred Lease Fees and Loan Costs
Lease fees, concessions and loan costs are capitalized at cost and
amortized over the life of the related lease or loan term, respectively.
Income Taxes
The Company is a real estate investment trust ("REIT") for federal income
tax purposes. A corporate REIT is a legal entity that holds real estate
interests, and through distributions to stockholders, is permitted to reduce or
avoid the payment of Federal income taxes at the corporate level. To maintain
qualification as a REIT, the Company must distribute to stockholders at least
95% of REIT taxable income.
No provision has been made for income taxes because the Company qualified
as a real estate investment trust, distributed the necessary amount of taxable
income and, therefore, incurred no income tax expense during the period.
Concentration of Credit Risk
Management of the Company performs ongoing credit evaluations of its
tenants. The properties are leased to approximately 950 tenants, in four
georgraphic locations, which engage in a wide variety of businesses. There is no
dependence upon any single tenant.
Interest Rate Risk Management
The Company enters into various interest rate swaps and caps in managing
its interest rate risk. Payments to or from the counterparties are recorded as
adjustments to interest expense. The Company has designated these instruments as
hedges against existing liabilities and accordingly utilizes hedge accounting.
The Company would not realize a material loss as of December 31, 1995 in
the event of non-performance by any one counterparty. The Company has entered
into transactions with financial institution counterparties with a credit rating
of Aa3 or better. Additionally, the Company limits the amount of credit exposure
with any one institution.
Stock Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants. In accordance
with the FASB's issuance of FAS No. 123 "Accounting for Stock Based
Compensation" the Company will elect to provide the required footnote
disclosures in 1996.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
47
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. MORTGAGES AND NOTES PAYABLE
Mortgages and notes payable consisted of the following at December 31, 1995
and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Conventional fixed rate mortgages payable (a.).................... $134,687 $24,164
Variable rate mortgages payable (b.).............................. 36,549 --
9% fixed rate unsecured note payable.............................. 5,000 --
Revolving credit facility (c.).................................... 6,500 42,700
Total........................................................... $182,736 $66,864
</TABLE>
(a.) Conventional fixed rate mortgages payable includes 19 loans at
December 31, 1995, and seven loans at December 31, 1994. The loans were secured
by real estate assets with an aggregate undepreciated cost of approximately
$226,000,000 at December 31, 1995. Interest rates on fixed rate mortgages
payable range from 7.0% to 13.0% with a weighted average rate of 8.80% at
December 31, 1995.
(b.) Variable rate mortgages payable includes three loans at December 31,
1995. The loans were secured by real estate assets with an aggregate
undepreciated cost of approximately $75,000,000 at December 31, 1995. Interest
rates on variable rate mortgages payable range from 1.35% to 1.50% above the
30-day London Interbank Offered Rate ("LIBOR"). At December 31, 1995, 30-day
LIBOR was 5.9%.
The Company has entered into two interest rate swap agreements with
financial institutions to effectively fix the interest rates on the variable
rate mortgages payable at a rate of 7.24%. At December 31, 1995, the notional
amounts of the interest rate swaps equaled the outstanding balance of the
mortgages payable. The swaps expire in June 1999 and July 2000 upon the maturity
of the respective mortgage agreements. The cost basis of the interest rate swaps
was $670,000 at December 31, 1995.
(c.) The Company has a revolving credit facility in the amount of
$80,000,000 from two participating banks. The credit facility bears interest at
1.50% above 30-day LIBOR and matures on June 13, 1999. The terms of the credit
facility require the Company to pay a commitment fee equal to .25% on the unused
portion of the credit facility and include certain restrictive covenants which
limit, among other things, dividend payments and additional indebtedness and
which requires compliance with certain financial ratios and measurements. At
December 31, 1995, the Company was in compliance with the terms of the credit
facility. The credit facility is secured by real estate assets with an aggregate
undepreciated cost of approximately $133,000,000 at December 31, 1995.
To limit increases in interest expense due to changes in 30-day LIBOR, the
Company used $6,170,000 of the proceeds from the Initial Public Offering to
purchase a five-year, $80,000,000 interest rate protection agreement. The
interest rate protection agreement limits the Company's exposure to 30-day LIBOR
of 5.5% (7.0% with the 1.50% spread). The initial premium paid to acquire the
interest rate protection agreement is being amortized as an increase to interest
expense over the five-year term of the agreement. Payments received from the
counterparties under the interest rate protection agreements were $385,000 in
1995 and $25,000 in 1994 and were recorded in the contractual interest expense
in the income statement. At December 31, 1995 the effective interest rate on the
credit facility was 7%.
(d.) The aggregate maturities of the mortgages and notes payable are as
follows (in thousands):
<TABLE>
<S> <C>
1996.................................................. $ 4,137
1997.................................................. 25,135
1998.................................................. 7,301
1999.................................................. 38,719
2000.................................................. 39,084
Thereafter............................................ 68,360
$182,736
</TABLE>
48
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. MORTGAGES AND NOTES PAYABLE -- Continued
During 1995 and 1994, the total interest costs incurred on mortgages and
notes payable was $12,608,000 and $2,499,000, respectively. Capitalized interest
during 1995 and 1994 was $507,000 and $17,000, respectively.
3. MANAGEMENT COMPENSATION PROGRAM
The Company has established an incentive compensation plan for executive
officers of the Company. The plan provides for payment of a cash bonus to
participating officers and employees if certain Company performance objectives
are achieved. The amount of the bonus to participating officers and employees is
based on a formula determined for each employee by the Compensation Committee,
but may not exceed 100% of base salary. All bonuses may be subject to adjustment
to reflect individual performance as measured by specific qualitative criteria
to be approved by the Compensation Committee. Bonuses are accrued in the year
earned and included in accrued expenses in the Consolidated Balance Sheet.
In addition, as an incentive to retain top management, the Company has
established a deferred compensation plan which provides for phantom stock
awards. Under the deferred compensation plan, phantom stock or stock
appreciation rights equal in value to 25% of the yearly cash bonus may be set
aside in an incentive pool, with payment after five years. If an employee leaves
the Company for any reason (other than death, disability or normal retirement)
prior to the end of the five-year period, all awards under the deferred
compensation plan will be forfeited.
4. 401(k) SAVINGS PLAN
The Company has a 401(k) savings plan covering substantially all employees
who meet certain age and employment criteria. The Company matches the first 6%
of compensation deferred at the rate of 50% of employee contributions. During
the year ended December 31, 1995, the Company contributed $51,000 to the Plan.
Administrative expenses are paid by the Company.
5. RENTAL INCOME
The Company's real estate assets are leased to tenants under operating
leases that expire over the next ten years. The minimum rental amounts under the
leases are generally either subject to scheduled fixed increases or adjustments
based on the Consumer Price Index. Generally, the leases also require that the
tenants reimburse the Company for increases in certain costs above their base
year costs.
Expected future minimum rents to be received over the next five years and
thereafter from tenants for leases in effect at December 31, 1995, are as
follows (in thousands):
<TABLE>
<S> <C>
1996.......................................................................... $ 81,765
1997.......................................................................... 66,760
1998.......................................................................... 50,863
1999.......................................................................... 39,594
2000.......................................................................... 27,134
Thereafter.................................................................... 28,685
$294,801
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company makes advances to Highwoods Services, Inc. and Forsyth
Properties Services, Inc. for working capital purposes. These advances bear
interest at a rate of 7% per annum and totaled $1,274,000 at December 31, 1995,
and $620,000 at December 31, 1994. The Company recorded interest income from
49
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. RELATED PARTY TRANSACTIONS -- Continued
these advances of $43,000 and $15,000 for the year ended December 31, 1995, and
for the period from June 14, 1994, to December 31, 1994.
During the year ended December 31, 1995, the Company acquired two
properties encompassing 99,334 square feet at an aggregate purchase price of
$6,850,000 from partnerships in which certain officers and directors owned a
majority interest. These transactions were accounted for using the purchase
method of accounting and their operating results are included in the Statements
of Income from their acquisition dates.
7. DISTRIBUTIONS
Distributions paid were $1.75 per share for the year ended December 31,
1995, and $.50 per share for the period from June 14, 1994, to December 31,
1994.
For federal income tax purposes, the following table summarizes the
estimated taxability of distributions paid:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Per Share:
Ordinary income............................................. $1.63 $.50
Capital gains............................................... -- --
Return of capital........................................... .12 --
Total.................................................... $1.75 $.50
</TABLE>
The Company's tax return for the year ended December 31, 1995, has not been
filed, and the taxability information for 1995 is based upon the best available
data. The Company's tax returns have not been examined by the Internal Revenue
Service, and therefore the taxability of distributions is subject to change.
On January 30, 1996, the Board of Directors declared a distribution of $.45
per share payable on February 21, 1996, to shareholders of record on February 9,
1996.
8. COMMITMENTS AND CONTINGENCIES
Lease:
Two of the properties located in Parkway Plaza development are subject to a
land lease expiring December 31, 2082. Rental payments are to be adjusted yearly
based on the consumer price index. The Company has the option to purchase the
leased land during the lease term at the greater of 85% of appraised value or
$35,000 per acre. The obligation for future minimum lease payments is as follows
(in thousands):
<TABLE>
<S> <C>
1996................................................................ $ 97
1997................................................................ 97
1998................................................................ 97
1999................................................................ 97
2000................................................................ 97
Thereafter.......................................................... 7,981
$8,466
</TABLE>
Litigation:
The Company is a party to a variety of legal proceedings arising in the
ordinary course of its business. These matters are generally covered by
insurance. All of these matters, taken together, are not expected to
50
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. COMMITMENTS AND CONTINGENCIES -- Continued
have a material adverse effect on the accompanying consolidated financial
statements notwithstanding possible insurance recovery.
Stock Options:
As of December 31, 1995, 1,400,000 shares of the Company's authorized
Common Stock had been reserved for issuance upon the exercise of options granted
under the Amended and Restated 1994 Stock Option Plan. For the Company's
executive and senior officers and non-independent directors, the options will
vest in four equal installments on the second, third, fourth, and fifth
anniversaries of the date of grant. For other employees and independent
directors, the options will vest in four equal installments on the first,
second, third and fourth anniversaries of the date of grant.
Options outstanding for the year ended December 31, 1995, and for the
period from June 14, 1994 to December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
<S> <C> <C>
Granted at Initial Public Offering......................... 326,000 $21.00
Granted.................................................. -- --
Canceled................................................. -- --
Shares under Option at December 31, 1994................... 326,000 $21.00
Granted.................................................. 400,000 $20.75-$25.00
Exercised................................................ (8,000) $21.00
Canceled................................................. (22,500) $21.00
Shares under Option at December 31, 1995................... 695,500 $20.75-$25.00
Exercisable at December 31, 1995........................... 48,000 $21.00
Available for Grant at December 31, 1995................... 704,500
</TABLE>
Warrants:
In connection with the Forsyth Transaction, the Company issued warrants to
certain officers and directors of the Company to purchase 100,000 shares of the
Company's Common Stock at $21 per share.
Contracts:
The Company has entered into construction contracts totaling $39,173,000 at
December 31, 1995. The amounts remaining on these contracts as of December 31,
1995, totaled $26,548,000.
The Company has entered into a contract under which it is committed to
acquire 64 acres of land over a five-year period for an aggregate purchase price
of approximately $10,172,000. The seller has the option to elect to receive the
purchase price in either cash or Units valued at $26.67.
The Company has also entered into a contract under which it is committed to
acquire 18 acres of land on or before August 1, 1998, for an aggregate purchase
price of approximately $2,032,000.
Environmental Matters:
All of the Company's properties, except for Burnt Poplar, have been
subjected to Phase I environmental reviews. Such reviews have not revealed, nor
is management aware of, any environmental liability that management believes
would have a material adverse effect on the accompanying consolidated financial
statements.
51
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair values were determined by
management using available market information and appropriate valuation
methodologies. Considerable judgment is necessary to interpret market data and
develop estimated fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that the Company could realize upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value. The carrying amounts and estimated fair value of the
Company's financial instruments at December 31, 1995, were as follows (in
thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
<S> <C> <C>
Cash and cash equivalents............................ $ 6,838 $ 6,838
Accounts and notes receivable........................ $ 7,612 $ 7,612
Mortgages and notes payable.......................... $182,735 $186,709
Interest rate swap agreements........................ $ 670 $ (464)
Interest rate cap.................................... $ 4,267 $ 1,311
</TABLE>
The fair values for the Company's fixed rate mortgages and notes payable
were estimated using discounted cash flow analysis, based on the Company's
estimated incremental borrowing rate at December 31, 1995, for similar types of
borrowing arrangements. The carrying amounts of the Company's variable rate
borrowings approximate fair value.
The fair values of the Company's interest rate swap and interest rate cap
agreements represent the estimated amount the Company would receive or pay to
terminate or replace the financial instruments at current market rates.
Disclosures about the fair value of financial instruments are based on
relevant information available to the Company at December 31, 1995. Although
management is not aware of any factors that would have a material effect on the
fair value amounts reported herein, such amounts have not been revalued since
that date and current estimates of fair value may significantly differ from the
amounts presented.
10. MERGERS AND ACQUISITIONS
Through mergers and acquisitions during 1995, the Company increased its
portfolio of office and industrial space by 6,357,000 square feet at an
aggregate cost of $369,900,000. Additionally, during 1995 the Company completed
its second and third public offerings of common stock. These transactions were
accounted for using the purchase method of accounting and their operating
results are included in the Consolidated Statements of Operations from their
acquisition dates.
During 1994, the Company completed its Initial Public Offering, the
Formation Transactions and acquired 207,000 square feet of office and industrial
space at an aggregate cost of $15,000,000.
Unaudited pro forma results of operations for the years ended December 31,
1995 and 1994 are set forth below. For 1995, such pro forma results assume (i)
the acquisition of 5,727,706 square feet of office and industrial space at a
total cost of $354,200,000 and (ii) the second and third public offerings
occurred at the beginning of the year. For 1994, such pro forma results assume
(i) the 1994 acquisition of 5,727,706 square feet of office and industrial space
at a total cost of $354,200,000, and (ii) the initial, second and third
offerings and the Formation Transactions occurred at the beginning of the year.
The proceeds from the second and third offering were used to reduce outstanding
indebtedness for working capital purposes. Pro forma interest expense was
calculated based upon the indebtedness outstanding after debt repayment and
using the effective rate on such indebtedness. In 1994 and 1995, Operating
Partnership Units totaling 200,000 and 2,677,748, respectively were issued in
connection with various mergers and acquisitions. These Units were recorded at
their market value upon the closing date of the transaction.
52
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. MERGERS AND ACQUISITIONS -- Continued
<TABLE>
<CAPTION>
Pro Forma Year Ended Pro Forma Year Ended
December 31, 1995 December 31, 1994
<S> <C> <C>
(in thousands, except per share amounts)
Revenues..................... $ 90,592 $ 83,541
Net Income................... $ 29,764 $ 24,168
Net Income per Share......... $ 1.54 $ 1.25
</TABLE>
The pro forma information is not necessarily indicative of what the
Company's results of operations would have been if the transactions had occurred
at the beginning of each period presented. Additionally, the pro forma
information does not purport to be indicative of the Company's results of
operations for future periods.
11. SUBSEQUENT EVENTS
Credit Facility
On March 26, 1996, the Operating Partnership closed on a $140,000,000
unsecured credit facility (the "New Credit Facility") which replaces the
existing $80 million line. The balance outstanding at March 31, 1996 is
$21,500,000 The New Credit Facility is with three commercial banks and has an
initial interest rate of LIBOR +1.50% which will adjust based on the Operating
Partnership's senior unsecured credit rating to a range of LIBOR +1.00% to LIBOR
+1.75%. The Company will continue to utilize the $80,000,000 interest rate
protection agreement to limit its exposure to increases in 30-day LIBOR.
Nashville Transaction
On April 1, 1996, the Company and the Operating Partnership completed a
merger with Eakin & Smith and its affiliates ("Eakin & Smith") combining their
property portfolios, management teams and business operations. The merger will
be accounted for using the purchase method of accounting. Through the
combination, the Company succeeded to the ownership of seven suburban office
buildings totaling 848,000 square feet, a 103,000-square-foot suburban office
development project, 18 acres of development land and Eakin & Smith's brokerage
and property management operations. All the properties and development land are
located in Nashville, Tennessee. At March 31, 1996, the properties acquired in
the transaction were 97% leased.
The aggregate purchase price, assuming the completion of the in-process
development project, was approximately $98.5 million payable through the
issuance of 537,138 limited partnership units of the Operating Partnership and
489,421 shares of Common Stock, the assumption of $37 million of indebtedness
(with a weighted average fixed rate of 8.0%), and cash payments of approximately
$33 million. The aggregate purchase price excludes deferred payments of up to
54,056 shares of Common Stock, which are attributable to Eakin & Smith's
brokerage and property management operation. A total payment of 13,514 shares of
Common Stock will be paid to the three principals of Eakin & Smith, Inc. for
each of the first four 12-month periods following the combination in which
third-party service revenue attributable to the Eakin & Smith brokerage and
property management operations exceeds $2,000,000.
As part of the combination, the three principals of Eakin & Smith, Inc.
received options to purchase 105,000 shares of common stock at $27.50 per share.
Such options vest in four equal annual installments beginning with the second
anniversary of the date of grant. Such principals also received warrants to
purchase 150,000 shares of Common Stock for $28.00 per share.
Pending Acquisition of Crocker Realty Trust, Inc.
On April 29, 1996, the Company and the Operating Partnership entered into
an Agreement and Plan of Merger (the "Merger Agreement") with Crocker Realty
Trust, Inc. ("Crocker"). Under the terms of the Merger Agreement, Cedar
Acquisition Corporation ("Cedar"), a newly formed subsidiary of the Company,
53
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. SUBSEQUENT EVENTS -- Continued
will merge into Crocker with the Company becoming the sole shareholder of
Crocker. The Company intends to contribute the shares of common stock of Crocker
to the Operating Partnership in exchange for limited partnership interests
therein. As a result, Crocker would become a subsidiary of the Operating
Partnership. As a result of the Merger, the Operating Partnership will acquire
58 suburban office properties and 12 service center properties (the "Crocker
Properties") located in 15 Southeastern markets in Florida, North Carolina,
South Carolina, Tennessee, Georgia, Virginia and Alabama. The Crocker Properties
encompass 5.7 million rentable square feet and, at March 31, 1996, were 95%
leased.
Under the terms of the Merger Agreement, the Company will acquire all of
the outstanding capital stock of Crocker in exchange for a cash payment of
$11.02 per share, subject to certain adjustments. Based on Crocker's 26,981,087
shares of outstanding capital stock at May 31, 1996, the purchase price will
total approximately $297 million. In addition, the Company will cash out certain
existing options and warrants to purchase Crocker common stock for an estimated
$4.2 million and assume approximately $240 million of Crocker's currently
outstanding indebtedness, having a weighted average interest rate of 8.6%. In
connection with the Merger, the Company has also entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with AP CRTI Holdings, L. P. (an
affiliate of Apollo Real Estate Advisors), AEW Partners, L.P. (an investment
partnership advised by Aldrich Eastman Waltch), and Crocker's three senior
executives (Thomas J. Crocker, Richard S. Ackerman and Robert E. Onisko), who
together own approximately 83% of Crocker's outstanding common stock
(collectively, the "Crocker Selling Shareholders"), which obligates such
shareholders to sell their shares to the Company at a cash price of $11.02,
subject to the same adjustments as required under the Merger Agreement. The
approximately $247 million purchase price of such shares is part of the total
approximately $297 million purchase price for all of Crocker's outstanding
shares. The Merger Agreement and the Stock Purchase Agreement may be terminated
by the respective parties only in certain limited circumstances. In addition,
under the terms of the Merger Agreement, certain specified assets and
liabilities of Crocker will not be acquired by the Company.
In connection with the Merger, the Company obtained a commitment from
NationsBank and First Union National Bank of North Carolina for a $250 million
revolving line of credit (the "Revolving Loan"). The Revolving Loan will replace
the Credit Facility and will be used together with the proceeds from the
Offering to fund the Merger.
The Revolving Loan will be unsecured for the first nine months and will
bear interest at a rate of LIBOR plus 150 basis points. After the initial
nine-month period, the Revolving Loan will either convert to a secured loan with
a maturity date two years from its closing date or to an unsecured loan maturing
on July 31, 1999. The Revolving Loan will remain unsecured if the Company
generates at least $300 million of net proceeds from equity offerings (including
the proceeds from this Offering) during the initial nine-month period and meets
certain covenants, including covenants relating to debt ratios, tangible net
worth and interest coverage.
If the Revolving Loan remains unsecured after the initial nine-month
period, it would have an interest rate that ranged from LIBOR plus 100 basis
points to LIBOR plus 175 basis points based on the Company's senior unsecured
credit rating. If the loan converts to a secured facility, the Company will be
required to pledge assets at least equal in value to 60% of the outstanding
amount of the Revolving Loan and the interest rate will equal LIBOR plus 175
basis points.
54
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data for the year ended December 31, 1995, and
for the period from June 14, 1994, to December 31, 1994, is as follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
For the period from June 14, 1994 to December 31, 1994*
First Quarter Second Quarter Third Quarter Fourth Quarter Total
<S> <C> <C> <C> <C> <C>
Revenues............................ $ -- $ 1,482 $ 8,810 $ 9,150 $19,442
Income before minority interest and
extraordinary item................ -- 534 3,652 3,509 7,695
Minority interest................... -- (56) (384) (368) (808)
Extraordinary item.................. -- (1,273) -- -- (1,273)
Net (loss) income................... $ -- $ (795) $ 3,268 $ 3,141 $ 5,614
Per Share:
Income before extraordinary
item........................... $ -- $ 0.06 $ 0.36 $ 0.35 $ 0.77
Net (loss) income................. $ -- $ (0.09) $ 0.36 $ 0.35 $ 0.63
<CAPTION>
For the year ended December 31, 1995*
First Quarter Second Quarter Third Quarter Fourth Quarter Total
<S> <C> <C> <C> <C> <C>
Revenues............................ $12,846 $ 17,518 $20,560 $ 22,598 $73,522
Income before minority interest and
extraordinary item................ 4,879 6,829 7,939 9,287 28,934
Minority interest................... (800) (1,270) (1,381) (1,486) (4,937)
Extraordinary item.................. (875) -- -- -- (875)
Net income.......................... $ 3,204 $ 5,559 $ 6,558 $ 7,801 $23,122
Per Share:
Income before extraordinary
item........................... $ 0.36 $ 0.39 $ 0.39 $ 0.40 $ 1.55
Net income........................ $ 0.29 $ 0.39 $ 0.39 $ 0.40 $ 1.49
</TABLE>
* The total of the four quarterly amounts for net income per share do not equal
the total for the year due to the use of a weighted average to compute the
average number of shares outstanding.
55
<PAGE>
HIGHWOODS PROPERTIES, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Cost Gross Amount at Which
Capitalized
Initial Cost Subsequent Carried at Close of
Building & to Period Building & Total Accumulated
Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Highwoods Office Center
Amica (3) $ 289 $ 1,544 $ 42 $ 289 $ 1,586 $ 1,875 $ 61
Arrowwood -- 955 3,406 212 955 3,618 4,573 139
Aspen (3) 560 2,104 56 560 2,160 2,720 91
Birchwood (3) 201 911 -- 201 911 1,112 43
Cedar East (3) 563 2,498 58 563 2,556 3,119 106
Cedar West (3) 563 2,487 94 563 2,581 3,144 101
Cottonwood (3) 609 3,253 15 609 3,268 3,877 127
Cypress (3) 567 1,747 26 567 1,773 2,340 84
Dogwood 2,633 766 2,790 -- 766 2,790 3,556 108
Hawthorn (3) 904 3,782 -- 904 3,782 4,686 1,487
Highwoods Tower (3) 203 16,948 -- 203 16,948 17,151 2,035
Holly -- 300 1,170 -- 300 1,170 1,470 45
Ironwood (3) 319 1,276 99 319 1,375 1,694 82
Kaiser (3) 133 3,625 -- 133 3,625 3,758 978
Laurel (3) 884 2,537 4 884 2,541 3,425 98
Leatherwood -- 213 851 98 213 949 1,162 52
Smoketree Tower (3) 2,353 11,922 723 2,353 12,645 14,998 475
Rexwoods Office Center
2500 Blue Ridge (3) 722 4,552 33 722 4,585 5,307 177
Blue Ridge II 1,445 434 -- 1,450 462 1,422 1,884 333
Rexwoods Center (2) 775 -- 3,771 878 3,668 4,546 648
Rexwoods II (3) 355 -- 1,822 362 1,815 2,177 100
Rexwoods III 3,320 886 -- 2,863 919 2,830 3,749 328
Rexwoods IV (3) 586 -- 3,434 586 3,434 4,020 58
Triangle Business Center
Bldg. 2A (2) 377 4,004 303 377 4,307 4,684 193
Bldg. 2B (2) 118 1,225 -- 118 1,225 1,343 47
Bldg. 3 (2) 409 5,349 300 409 5,649 6,058 290
Bldg. 7 (2) 414 6,301 (72) 414 6,229 6,643 240
Progress Center
Cape Fear -- 131 -- 1,895 131 1,895 2,026 928
Catawba -- 125 -- 1,650 125 1,650 1,775 912
CompuChem -- 269 -- 6,598 289 6,578 6,867 1,726
North Park
4800 North Park 10,847 2,678 17,673 109 2,678 17,782 20,460 689
4900 North Park 1,567 770 1,989 11 770 2,000 2,770 77
5000 North Park (3) 1,010 4,697 560 1,010 5,257 6,267 203
Creekstone Park
Creekstone Crossing -- 728 3,891 16 728 3,907 4,635 61
Riverbirch (3) 448 -- 4,137 469 4,116 4,585 813
Willow Oak -- 458 4,685 343 458 5,028 5,486 21
Research Commons
EPA Annex/Administration (5) 1,609 10,920 51 1,609 10,971 12,580 390
4501 Bldg. (5) 748 4,448 653 748 5,101 5,849 184
4401 Bldg. (5) 1,822 8,929 3,575 1,822 12,504 14,326 554
4301 Bldg. (5) 1,094 7,425 -- 1,094 7,425 8,519 132
4201 Bldg. (5) 1,466 7,715 2,305 1,466 10,020 11,486 417
Hock Portfollo
Fairfield I -- 805 3,227 21 805 3,248 4,053 37
<CAPTION>
Date of Date
Description Construction Acquired
<S> <C> <C>
Highwoods Office Center
Amica 1983 1994
Arrowwood 1979 1994
Aspen 1980 1994
Birchwood 1983 1994
Cedar East 1981 1994
Cedar West 1981 1994
Cottonwood 1983 1994
Cypress 1980 1994
Dogwood 1983 1994
Hawthorn 1987 1994
Highwoods Tower 1991 1994
Holly 1984 1994
Ironwood 1978 1994
Kaiser 1988 1994
Laurel 1982 1994
Leatherwood 1979 1994
Smoketree Tower 1984 1994
Rexwoods Office Center
2500 Blue Ridge 1982 1994
Blue Ridge II 1988 1994
Rexwoods Center 1990 1994
Rexwoods II 1993 1994
Rexwoods III 1992 1994
Rexwoods IV 1994 1994
Triangle Business Center
Bldg. 2A 1984 1994
Bldg. 2B 1984 1994
Bldg. 3 1988 1994
Bldg. 7 1988 1994
Progress Center
Cape Fear 1980 1994
Catawba 1980 1994
CompuChem 1980 1994
North Park
4800 North Park 1985 1994
4900 North Park 1984 1994
5000 North Park 1980 1994
Creekstone Park
Creekstone Crossing 1990 1995
Riverbirch 1987 1994
Willow Oak 1995 1995
Research Commons
EPA Annex/Administration 1966 1995
4501 Bldg. 1985 1995
4401 Bldg. 1987 1995
4301 Bldg. 1989 1995
4201 Bldg. 1991 1995
Hock Portfollo
Fairfield I 1987 1995
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Cost Gross Amount at Which
Capitalized
Initial Cost Subsequent Carried at Close of
Building & to Period Building & Total Accumulated
Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fairfield II -- 910 3,647 19 910 3,666 4,576 42
Qualex -- 879 3,522 -- 879 3,522 4,401 40
4101 Roxboro -- 1,059 4,243 10 1,059 4,253 5,312 49
4020 Roxboro -- 675 2,708 8 675 2,716 3,391 31
Other Research Triangle
Properties
Colony Corporate Center (3) 613 3,296 62 613 3,358 3,971 134
Concourse (3) 986 12,069 185 986 12,254 13,240 477
Cotton Building -- 460 1,844 -- 460 1,844 2,304 2
Expressway One Warehouse 1,650 242 -- 1,836 246 1,832 2,078 248
Holiday Inn 2,464 867 2,748 75 867 2,823 3,690 106
Lake Plaza East (3) 856 4,893 126 856 5,019 5,875 217
Phoenix -- 394 2,019 11 394 2,030 2,424 53
Six Forks Center I -- 666 2,688 -- 666 2,688 3,354 8
Six Forks Center II -- 1,086 4,370 8 1,086 4,378 5,464 14
Six Forks Center III -- 862 4,444 91 862 4,535 5,397 144
South Square I (2) 606 3,785 152 606 3,937 4,543 157
South Square II (3) 525 4,742 106 525 4,848 5,373 187
Airpark East
Highland Industries (6) 175 699 -- 175 699 874 15
Service Center 1 (6) 275 1,099 46 275 1,145 1,420 24
Service Center 2 (6) 222 889 -- 222 889 1,111 19
Service Center 3 (6) 304 1,214 -- 304 1,214 1,518 27
Service Center 4 (6) 224 898 -- 224 898 1,122 20
Copier Consultants (6) 252 1,008 -- 252 1,008 1,260 22
Service Court (6) 194 774 1 194 775 969 17
Bldg. 01 (6) 377 1,510 8 377 1,518 1,895 34
Bldg. 02 (6) 461 1,842 1 461 1,843 2,304 40
Bldg. 03 (6) 321 1,283 41 321 1,324 1,645 33
Bldg. A (6) 541 2,913 60 541 2,973 3,514 66
Bldg. B (6) 779 3,200 43 779 3,243 4,022 73
Bldg. C (6) 2,384 9,535 35 2,384 9,570 11,954 214
Sears Cenfact 4,561 861 3,446 6 861 3,452 4,313 75
Warehouse 1 (6) 384 1,535 -- 384 1,535 1,919 34
Warehouse 2 (6) 372 1,488 -- 372 1,488 1,860 33
Warehouse 3 (6) 370 1,480 2 370 1,482 1,852 32
Warehouse 4 (6) 657 2,628 1 657 2,629 3,286 57
Airpark North
DC-1 (6) 723 2,891 15 723 2,906 3,629 64
DC-2 (6) 1,094 4,375 42 1,094 4,417 5,511 97
DC-3 (6) 378 1,511 -- 378 1,511 1,889 33
DC-4 (6) 377 1,508 1 377 1,509 1,886 33
Airpark West
Airpark I (2) 954 3,817 5 954 3,822 4,776 84
Airpark II (2) 887 3,536 7 887 3,543 4,430 79
Airpark IV (2) 226 903 37 226 940 1,166 22
Airpark V (2) 242 966 6 242 972 1,214 22
Airpark VI (2) 326 1,308 61 326 1,369 1,695 34
West Point Business Park
BMF Warehouse (7) 795 3,181 -- 795 3,181 3,976 70
WP-11 (7) 393 1,570 22 393 1,592 1,985 35
WP-12 (7) 382 1,531 22 382 1,553 1,935 34
WP-13 (7) 297 1,192 22 297 1,214 1,511 27
WP-3 & 4 (7) 120 480 -- 120 480 600 11
WP-5 -- 178 590 136 178 726 904 5
Fairchild Bldg. (7) 640 2,577 -- 640 2,577 3,217 56
LUWA Bahnson Bldg. (7) 346 1,384 1 346 1,385 1,731 30
<CAPTION>
Date of Date
Description Construction Acquired
<S> <C> <C>
Fairfield II 1989 1995
Qualex 1985 1995
4101 Roxboro 1984 1995
4020 Roxboro 1989 1995
Other Research Triangle
Properties
Colony Corporate Center 1985 1994
Concourse 1986 1994
Cotton Building 1972 1995
Expressway One Warehouse 1990 1994
Holiday Inn 1984 1994
Lake Plaza East 1984 1994
Phoenix 1990 1994
Six Forks Center I 1982 1995
Six Forks Center II 1983 1995
Six Forks Center III 1987 1994
South Square I 1988 1994
South Square II 1989 1994
Airpark East
Highland Industries 1990 1995
Service Center 1 1985 1995
Service Center 2 1985 1995
Service Center 3 1985 1995
Service Center 4 1985 1995
Copier Consultants 1990 1995
Service Court 1990 1995
Bldg. 01 1990 1995
Bldg. 02 1986 1995
Bldg. 03 1986 1995
Bldg. A 1986 1995
Bldg. B 1988 1995
Bldg. C 1990 1995
Sears Cenfact 1989 1995
Warehouse 1 1985 1995
Warehouse 2 1985 1995
Warehouse 3 1986 1995
Warehouse 4 1988 1995
Airpark North
DC-1 1986 1995
DC-2 1987 1995
DC-3 1988 1995
DC-4 1988 1995
Airpark West
Airpark I 1984 1995
Airpark II 1985 1995
Airpark IV 1985 1995
Airpark V 1985 1995
Airpark VI 1985 1995
West Point Business Park
BMF Warehouse 1986 1995
WP-11 1988 1995
WP-12 1988 1995
WP-13 1988 1995
WP-3 & 4 1988 1995
WP-5 1995 1995
Fairchild Bldg. 1990 1995
LUWA Bahnson Bldg. 1990 1995
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Cost Gross Amount at Which
Capitalized
Initial Cost Subsequent Carried at Close of
Building & to Period Building & Total Accumulated
Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
University Commercial
Center
W-1 -- 203 812 -- 203 812 1,015 18
W-2 -- 196 786 -- 196 786 982 17
SR-1 -- 276 1,155 6 276 1,161 1,437 26
SR-2 01/02 -- 215 859 90 215 949 1,164 26
SR-3 -- 167 668 -- 167 668 835 15
Bldg. 01/02 -- 26 102 13 26 115 141 3
Bldg. 03 -- 429 1,771 3 429 1,774 2,203 39
Bldg. 04 -- 514 2,058 6 514 2,064 2,578 46
Ivy Distribution Center -- 452 1,812 67 452 1,879 2,331 42
Knollwood Office Center
370 Knollwood (6) 1,819 7,451 444 1,819 7,895 9,714 192
380 Knollwood (6) 2,977 11,912 163 2,977 12,075 15,052 272
Stoneleigh Business Park
7327 W. Friendly Ave. -- 60 441 6 60 447 507 5
7339 W. Friendly Ave. -- 63 465 8 63 473 536 6
7341 W. Friendly Ave. (1) 113 831 11 113 842 955 10
7343 W. Friendly Ave. (1) 72 531 7 72 538 610 6
7345 W. Friendly Ave. (1) 66 485 6 66 491 557 6
7347 W. Friendly Ave. (1) 97 709 9 97 718 815 8
7349 W. Friendly Ave. (1) 53 388 5 53 393 446 4
7351 W. Friendly Ave. (1) 106 778 11 106 789 895 9
7353 W. Friendly Ave. (1) 123 901 12 123 913 1,036 10
7355 W. Friendly Ave. (1) 72 525 7 72 532 604 6
Spring Garden Plaza
4000 Spring Garden St. -- 127 933 7 127 940 1,067 11
4002 Spring Garden St. -- 39 290 2 39 292 331 3
4004 Spring Garden St. -- 139 1,019 8 139 1,027 1,166 12
Pomona Center-Phase I
7 Dundas Circle (1) 75 552 -- 75 552 627 6
8 Dundas Circle (1) 84 617 -- 84 617 701 7
9 Dundas Circle (1) 51 373 -- 51 373 424 4
Pomona Center-Phase II
302 Pomona Dr. (1) 84 617 -- 84 617 701 7
304 Pomona Dr. (1) 22 163 -- 22 163 185 2
306 Pomona Dr. (1) 50 368 -- 50 368 418 4
308 Pomona Dr. (1) 72 531 -- 72 531 603 6
5 Dundas Circle (1) 72 531 -- 72 531 603 6
Westgate on Wendover-Phase
I
305 South Westgate Dr. (4) 30 220 1 30 221 251 3
307 South Westgate Dr. (4) 66 485 4 66 489 555 6
309 South Westgate Dr. (4) 68 496 3 68 499 567 6
311 South Westgate Dr. (4) 75 551 4 75 555 630 6
315 South Westgate Dr. (4) 54 396 2 54 398 452 5
317 South Westgate Dr. (4) 81 597 3 81 600 681 7
319 South Westgate Dr. (4) 54 396 2 54 398 452 5
Westgate on Wendover-Phase
II
206 South Westgate Dr. (1) 91 664 4 91 668 759 8
207 South Westgate Dr. (1) 138 1,012 6 138 1,018 1,156 12
300 South Westgate Dr. (1) 68 496 3 68 499 567 6
4600 Dundas Circle (1) 62 456 19 62 475 537 5
4602 Dundas Circle (1) 68 498 -- 68 498 566 6
Radar Road
500 Radar Rd. (1) 202 1,484 -- 202 1,484 1,686 17
502 Radar Rd. (1) 39 285 -- 39 285 324 3
<CAPTION>
Date of Date
Description Construction Acquired
<S> <C> <C>
University Commercial
Center
W-1 1983 1995
W-2 1983 1995
SR-1 1983 1995
SR-2 01/02 1983 1995
SR-3 1984 1995
Bldg. 01/02 1983 1995
Bldg. 03 1985 1995
Bldg. 04 1986 1995
1930-
Ivy Distribution Center 1980 1995
Knollwood Office Center
370 Knollwood 1994 1995
380 Knollwood 1990 1995
Stoneleigh Business Park
7327 W. Friendly Ave. 1987 1995
7339 W. Friendly Ave. 1989 1995
7341 W. Friendly Ave. 1988 1995
7343 W. Friendly Ave. 1988 1995
7345 W. Friendly Ave. 1988 1995
7347 W. Friendly Ave. 1988 1995
7349 W. Friendly Ave. 1988 1995
7351 W. Friendly Ave. 1988 1995
7353 W. Friendly Ave. 1988 1995
7355 W. Friendly Ave. 1988 1995
Spring Garden Plaza
4000 Spring Garden St. 1983 1995
4002 Spring Garden St. 1983 1995
4004 Spring Garden St. 1983 1995
Pomona Center-Phase I
7 Dundas Circle 1986 1995
8 Dundas Circle 1986 1995
9 Dundas Circle 1986 1995
Pomona Center-Phase II
302 Pomona Dr. 1987 1995
304 Pomona Dr. 1987 1995
306 Pomona Dr. 1987 1995
308 Pomona Dr. 1987 1995
5 Dundas Circle 1987 1995
Westgate on Wendover-Phase
I
305 South Westgate Dr. 1985 1995
307 South Westgate Dr. 1985 1995
309 South Westgate Dr. 1985 1995
311 South Westgate Dr. 1985 1995
315 South Westgate Dr. 1985 1995
317 South Westgate Dr. 1985 1995
319 South Westgate Dr. 1985 1995
Westgate on Wendover-Phase
II
206 South Westgate Dr. 1986 1995
207 South Westgate Dr. 1986 1995
300 South Westgate Dr. 1986 1995
4600 Dundas Circle 1985 1995
4602 Dundas Circle 1985 1995
Radar Road
500 Radar Rd. 1981 1995
502 Radar Rd. 1986 1995
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Cost Gross Amount at Which
Capitalized
Initial Cost Subsequent Carried at Close of
Building & to Period Building & Total Accumulated
Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
504 Radar Rd. (1) 39 285 -- 39 285 324 3
506 Radar Rd. (1) 39 285 -- 39 285 324 3
Holden/85 Business Park
2616 Phoenix Dr. (1) 135 990 -- 135 990 1,125 11
2606 Phoenix Dr. -- 100 (1) 63 466 -- 63 466 529 5
2606 Phoenix Dr. -- 200 (1) 63 466 -- 63 466 529 5
2606 Phoenix Dr. -- 300 (1) 31 229 -- 31 229 260 3
2606 Phoenix Dr. -- 400 (1) 52 382 2 52 384 436 5
2606 Phoenix Dr. -- 500 (1) 64 471 5 64 476 540 6
2606 Phoenix Dr. -- 600 (1) 78 575 -- 78 575 653 7
Industrial Village
7906 Industrial Village
Rd. (1) 62 455 5 62 460 522 5
7908 Industrial Village
Rd. (1) 62 455 5 62 460 522 5
7910 Industrial Village
Rd. (1) 62 455 5 62 460 522 5
Other Piedmont Triad
Properties
6348 Burnt Poplar -- 721 2,883 7 721 2,890 3,611 63
6350 Burnt Poplar -- 339 1,365 5 339 1,370 1,709 30
Stratford (3) 2,777 11,459 -- 2,777 11,459 14,236 252
Chesapeake (2) 1,236 4,944 -- 1,236 4,944 6,180 108
3288 Robinhood 1,172 290 1,159 24 290 1,183 1,473 28
Steele Creek Park
Bldg. A (2) 499 1,998 7 499 2,005 2,504 44
Bldg. B (2) 110 441 -- 110 441 551 10
Bldg. E (2) 188 824 85 188 909 1,097 16
Bldg. G-1 (2) 196 783 20 196 803 999 18
Bldg. H (2) 169 677 72 169 749 918 30
Bldg. K (2) 148 592 -- 148 592 740 13
Bldg. N (2) 199 722 -- 199 722 921 17
Highwoods/Forsyth Business
Park
4101 Stuart Andrew Blvd. (1) 70 510 2 70 512 582 6
4105 Stuart Andrew Blvd. (1) 26 189 1 26 190 216 2
4109 Stuart Andrew Blvd. (1) 87 636 4 87 640 727 7
4201 Stuart Andrew Blvd. (1) 110 809 4 110 813 923 9
4205 Stuart Andrew Blvd. (1) 134 979 8 134 987 1,121 11
4209 Stuart Andrew Blvd. (1) 91 665 3 91 668 759 8
4215 Stuart Andrew Blvd. (1) 133 978 9 133 987 1,120 11
4301 Stuart Andrew Blvd. (1) 232 1,702 11 232 1,713 1,945 20
4321 Stuart Andrew Blvd. (1) 73 534 3 73 537 610 6
Parkway Plaza
Building 1 -- 1,110 4,741 -- 1,110 4,741 5,851 4
Building 2 -- 1,694 6,777 -- 1,694 6,777 8,471 5
Building 3 -- 1,570 6,282 -- 1,570 6,282 7,852 5
Building 7 -- -- 4,648 -- -- 4,648 4,648 4
Building 8 -- -- 4,698 -- -- 4,698 4,698 4
Building 9 4,865 -- 6,008 -- -- 6,008 6,008 5
Other Charlotte Properties
First Citizens (3) 647 5,528 30 647 5,558 6,205 218
<CAPTION>
Date of Date
Description Construction Acquired
<S> <C> <C>
504 Radar Rd. 1986 1995
506 Radar Rd. 1986 1995
Holden/85 Business Park
2616 Phoenix Dr. 1985 1995
2606 Phoenix Dr. -- 100 1989 1995
2606 Phoenix Dr. -- 200 1989 1995
2606 Phoenix Dr. -- 300 1989 1995
2606 Phoenix Dr. -- 400 1989 1995
2606 Phoenix Dr. -- 500 1989 1995
2606 Phoenix Dr. -- 600 1989 1995
Industrial Village
7906 Industrial Village
Rd. 1985 1995
7908 Industrial Village
Rd. 1985 1995
7910 Industrial Village
Rd. 1985 1995
Other Piedmont Triad
Properties
6348 Burnt Poplar 1990 1995
6350 Burnt Poplar 1992 1995
Stratford 1991 1995
Chesapeake 1993 1995
3288 Robinhood 1989 1995
Steele Creek Park
Bldg. A 1989 1995
Bldg. B 1985 1995
Bldg. E 1985 1995
Bldg. G-1 1989 1995
Bldg. H 1987 1995
Bldg. K 1985 1995
Bldg. N 1989 1995
Highwoods/Forsyth Business
Park
4101 Stuart Andrew Blvd. 1984 1995
4105 Stuart Andrew Blvd. 1984 1995
4109 Stuart Andrew Blvd. 1984 1995
4201 Stuart Andrew Blvd. 1982 1995
4205 Stuart Andrew Blvd. 1982 1995
4209 Stuart Andrew Blvd. 1982 1995
4215 Stuart Andrew Blvd. 1982 1995
4301 Stuart Andrew Blvd. 1982 1995
4321 Stuart Andrew Blvd. 1982 1995
Parkway Plaza
Building 1 1982 1995
Building 2 1983 1995
Building 3 1984 1995
Building 7 1985 1995
Building 8 1986 1995
Building 9 1984 1995
Other Charlotte Properties
First Citizens 1989 1994
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Cost Gross Amount at Which
Capitalized
Initial Cost Subsequent Carried at Close of
Building & to Period Building & Total Accumulated
Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Innsbrook Office Center
Markel American (8) 585 2,347 81 585 2,428 3,013 34
Proctor-Silex (8) 1,086 4,344 -- 1,086 4,344 5,430 50
Vantage Place I -- 235 940 1 235 941 1,176 7
Vantage Place II -- 203 811 2 203 813 1,016 6
Vantage Place III -- 218 873 2 218 875 1,093 6
Vantage Place IV -- 233 931 2 233 933 1,166 7
Vantage Point 4,493 1,089 4,354 51 1,089 4,405 5,494 32
Innsbrook Tech I 1,181 264 1,058 -- 264 1,058 1,322 8
DEQ Technology Center -- 541 2,166 -- 541 2,166 2,707 11
DEQ Office -- 1,324 5,305 -- 1,324 5,305 6,629 28
Technology Park
Virginia Center -- 1,438 5,858 -- 1,438 5,858 7,296 157
Development Projects
Global Software -- 465 -- 58 465 58 523 --
MSA -- 717 -- 9 717 9 726 --
Healthsource -- 1,294 -- 1 1,294 1 1,295 --
Highwoods Health Club -- 142 555 -- 142 555 697 --
Regency One -- 554 -- -- 554 -- 554 --
Development Land
Capital Center -- 851 -- -- 851 -- 851 --
Creekstone Park -- 1,255 -- (453)(9) 802 -- 802 --
Highwoods Office Center
North -- 1,555 49 (450) 10) 1,105 49 1,154 10
Highwoods Office Center
South -- 2,518 -- -- 2,518 -- 2,518 --
Research Commons -- 1,349 -- -- 1,349 -- 1,349 --
Airpark East -- 1,932 -- -- 1.932 1,932
Airpark North -- 804 -- -- 804 -- 804 --
NationsFord Business
Park -- 1,206 -- -- 1,206 -- 1,206 --
West Point Business Park -- 1,759 -- -- 1,759 -- 1,759 --
Airport Center Drive 1,600 1,600 -- -- 1,600 -- 1,600 --
$41,798 $ 107,642 $449,766 $ 41,128 $ 106,955 $491,581 $ 598,536 $21,452
<CAPTION>
Date of Date
Description Construction Acquired
<S> <C> <C>
Innsbrook Office Center
Markel American 1988 1995
Proctor-Silex 1986 1995
Vantage Place I 1987 1995
Vantage Place II 1987 1995
Vantage Place III 1988 1995
Vantage Place IV 1988 1995
Vantage Point 1990 1995
Innsbrook Tech I 1991 1995
DEQ Technology Center 1991 1995
DEQ Office 1991 1995
Technology Park
Virginia Center 1985 1994
Development Projects
Global Software N/A
MSA N/A N/A
Healthsource N/A N/A
Highwoods Health Club N/A N/A
Regency One N/A N/A
Development Land
Capital Center N/A 1995
Creekstone Park N/A 1994
Highwoods Office Center
North N/A 1994
Highwoods Office Center
South N/A 1994
Research Commons N/A 1995
Airpark East N/A 1995
Airpark North N/A 1995
NationsFord Business
Park N/A 1995
West Point Business Park N/A 1995
Airport Center Drive N/A 1995
N/A N/A
</TABLE>
(1) These assets are pledged as collateral for a $12,067,000 first mortgage
loan.
(2) These assets are pledged as collateral for a $31,834,000 first mortgage
loan.
(3) These assets are pledged as collateral for an $80,000,000 credit facility.
(4) These assets are pledged as collateral for a $6,669,000 first mortgage loan.
(5) These assets are pledged as collateral for a $24,481,000 first mortgage
loan.
(6) These assets are pledged as collateral for a $40,659,000 first mortgage
loan.
(7) These assets are pledged as collateral for an $8,733,000 first mortgage
loan.
(8) These assets are pledged as collateral for a $4,995,000 first mortgage loan.
(9) Reflects land transferred to the Willow Oak Property.
(10) Reflects land transferred to the Global Property.
(11) The aggregate cost for Federal Income Tax purposes was approximately
$509,000,000.
(12) Depreciation is computed using economic lives ranging from 5 to 40 years.
61
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTE TO SCHEDULE III
(in thousands)
As of December 31, 1995 and 1994
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Real Estate:
Balance at beginning of year........................................................ $ 218,699 $ 61,656
Additions:
Acquisitions and development..................................................... 365,130 154,946
Improvements..................................................................... 16,806 2,097
Cost of real estate sold............................................................ (2,099) --
Balance at close of year (a).......................................................... $ 598,536 $218,699
Accumulated Depreciation:
Balance at beginning of year........................................................ $ 11,003 $ 8,679
Depreciation expense................................................................ 10,483 2,324
Real estate sold.................................................................... (34) --
Balance at close of year (b)........................................................ $ 21,452 $ 11,003
</TABLE>
(a) Reconciliation of total cost to balance sheet caption at December 31, 1995
and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Total per schedule III $598,536 $218,699
Construction in progress exclusive
of land of $3,172 included in
Schedule III 15,508 --
Furniture, fixtures and equipment 1,288 967
Total real estate assets at cost $615,332 $219,666
</TABLE>
(b) Reconciliation of total accumulated depreciation to balance sheet caption at
December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Total per schedule III $21,452 $11,003
Accumulated depreciation -- furniture, fixtures and equipment 814 687
Total accumulated depreciation $22,266 $11,690
</TABLE>
62
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
HIGHWOODS PROPERTIES, INC.
We have audited the accompanying combined balance sheets of the Highwoods
Group as of December 31, 1993 and 1992, and the related combined statements of
operations, owners' deficit, and cash flows for the period from January 1, 1994
to June 13, 1994 and for each of the three years in the period ended December
31, 1993. We have also audited the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Highwoods Group's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Highwoods Group
at December 31, 1993 and 1992, and the combined results of operations and cash
flows for the period from January 1, 1994 to June 13, 1994 and for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedule when considered in relation to the basic financial statements taken as
a whole presents fairly in all material respects the information required to be
set forth therein.
ERNST & YOUNG LLP
Raleigh, North Carolina
January 10, 1995
63
<PAGE>
HIGHWOODS GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
Assets
Rental properties, at cost:
Land............................................................................ $ 9,488,616 $ 8,602,272
Buildings and improvements...................................................... 50,141,219 44,876,022
Equipment....................................................................... 924,782 791,357
60,554,617 54,269,651
Less accumulated depreciation................................................... (8,649,712) (7,390,178)
Rental property, net......................................................... 51,904,905 46,879,473
Cash and cash equivalents......................................................... 865,647 2,363,204
Restricted cash................................................................... 928,773 462,545
Rents and other receivables from tenants (net of allowance of $20,000 in December
1993 and $19,000 in December 1992).............................................. 1,314,983 706,682
Accounts receivable from related parties.......................................... 156,942 199,562
Accrued straight line rents receivable............................................ 1,624,535 1,357,433
Deferred offering costs and prepaids.............................................. 180,604 25,549
Other assets:
Deferred lease fees and loan costs.............................................. 2,838,182 2,505,724
Less accumulated amortization................................................... (1,136,059) (812,279)
1,702,123 1,693,445
Total assets...................................................................... $58,678,512 $53,687,893
Liabilities and owners' deficit
Mortgages and notes payable including $159,362 to related parties at December 31,
1993 and $262,552 at December 31, 1992.......................................... $64,346,580 $60,279,344
Accrued expenses and accounts payable............................................. 2,226,879 1,034,212
Accounts payable to related parties............................................... 81,833 197,747
Total liabilities................................................................. 66,655,292 61,511,303
Owners' deficit................................................................... (7,976,780) (7,823,410)
Commitments (Notes 3, 5 and 7)....................................................
Total liabilities and owners' deficit............................................. $58,678,512 $53,687,893
</TABLE>
See accompanying notes.
64
<PAGE>
HIGHWOODS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 1, 1994
to Year ended December 31,
June 13, 1994 1993 1992 1991
<S> <C> <C> <C> <C>
Revenue:
Rental income....................................... $ 4,953,444 $ 8,983,623 $ 8,184,195 $ 5,636,933
Leasing, Development and Construction Income........ 1,267,725 3,721,407 3,490,283 3,039,210
Other income........................................ 427,300 745,173 857,512 1,097,842
Total revenue......................................... 6,648,469 13,450,203 12,531,990 9,773,985
Expenses:
Property operating expenses......................... 2,246,830 4,398,186 4,197,621 3,123,351
Leasing, Development and Construction Expenses...... 349,677 1,849,778 1,388,629 1,343,955
Interest............................................ 2,472,609 5,184,781 5,058,973 3,907,894
Depreciation and amortization....................... 834,622 1,583,314 1,431,455 1,134,657
Marketing, general and administrative............... 280,777 589,257 693,892 690,283
Total expenses........................................ 6,184,515 13,605,316 12,770,570 10,200,140
Net income (loss)..................................... $ 463,954 $ (155,113) $ (238,580) $ (426,155)
</TABLE>
See accompanying notes.
65
<PAGE>
HIGHWOODS GROUP
COMBINED STATEMENTS OF OWNERS' DEFICIT
<TABLE>
<CAPTION>
Owners'
Deficit
<S> <C>
Balance at January 1, 1991......................................................................... $(7,670,302)
Owners' distributions............................................................................ (1,794,472)
Owners' contributions............................................................................ 706,209
Net loss for the year ended December 31, 1991.................................................... (426,155)
Balance at December 31, 1991....................................................................... (9,184,720)
Owners' distributions............................................................................ (1,437,427)
Owners' contributions............................................................................ 3,037,317
Net loss for the year ended December 31, 1992.................................................... (238,580)
Balance at December 31, 1992....................................................................... (7,823,410)
Owners' distributions............................................................................ (1,043,944)
Owners' contributions............................................................................ 1,045,687
Net loss for the year ended December 31, 1993.................................................... (155,113)
Balance at December 31, 1993....................................................................... (7,976,780)
Owners' distributions............................................................................ (1,759,220)
Net income for the period from January 1, 1994 to June 13, 1994.................................. 463,954
Balance at June 13, 1994........................................................................... $(9,272,046)
</TABLE>
See accompanying notes.
66
<PAGE>
HIGHWOODS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 1, 1994
to Year ended December 31,
June 13, 1994 1993 1992 1991
<S> <C> <C> <C> <C>
Operating activities
Net income (loss)......................................... $ 463,954 $ (155,113) $ (238,580) $ (426,155)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 834,622 1,583,314 1,431,455 1,134,657
Changes in operating assets and liabilities:
Rents and other receivables from tenants.............. 1,100,324 (608,301) (133,796) (136,346)
Deferred lease fees and loan costs.................... 26,150 (332,458) (923,681) (594,547)
Accounts receivable from related parties.............. -- 42,620 (28,788) (109,486)
Deferred offering costs and prepaids.................. 181,303 (155,055) (3,218) (7,957)
Tenant security deposits.............................. 7,682 (5,660) (22,067) 6,862
Accrued straight line rents receivable................ 238,707 (267,102) (380,279) (283,812)
Accrued expenses and accounts payable................. (53,828) 1,198,327 (111,059) 342,158
Accounts payable to related parties................... -- (115,914) (11,395) 209,142
Net cash provided by (used in) operating activities....... 2,798,914 1,184,658 (421,408) 134,516
Investing activities
Changes in restricted cash................................ 834,717 (466,228) (462,545) --
Purchases of, and improvements to, rental properties...... (346,978) (6,284,966) (3,220,404) (16,140,703)
Net cash provided by (used in) investing activities....... 487,739 (6,751,194) (3,682,949) (16,140,703)
Financing activities
Proceeds from borrowings.................................. -- 4,918,424 27,168,946 19,550,834
Principal payments on notes payable....................... (398,724) (851,188) (23,344,668) (2,061,674)
Distributions to partners................................. (1,759,220) (1,043,944) (1,437,427) (1,794,472)
Capital contributions from partners....................... -- 1,045,687 3,037,317 706,209
Net cash (used in) provided by financing activities....... (2,157,944) 4,068,979 5,424,168 16,400,897
Net increase (decrease) in cash and cash equivalents...... 1,128,709 (1,497,557) 1,319,811 394,710
Cash and cash equivalents at beginning of year............ 865,647 2,363,204 1,043,393 648,683
Cash and cash equivalents at end of year.................. $ 1,994,356 $ 865,647 $ 2,363,204 $ 1,043,393
Supplemental disclosures of cash flow information
Cash paid during the year for interest (net of interest
capitalized of $-0-, $15,772, $-0-, and $487,173, for
the period from January 1, 1994 to June 13, 1994 and for
the years ended December 31, 1993, 1992, and 1991,
respectively)........................................... $ 2,410,237 $ 5,098,233 $ 5,147,855 $ 3,745,068
</TABLE>
See accompanying notes.
67
<PAGE>
HIGHWOODS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Highwoods Group is engaged in the ownership, management, operation,
leasing and development of commercial real estate properties. The Highwoods
Group owns and operates fourteen buildings located in the Research Triangle Park
region of North Carolina.
Principles of Combination
The Highwoods Group is not a legal entity but rather a combination of
commercial real estate properties that are organized as general partnerships and
are under common control, and an affiliated real estate management company, the
Highwoods Properties Company ("HPC"). HPC provides property management services
to the properties. All significant intercompany transactions and balances have
been eliminated in the combination.
As discussed in Note 7, on June 14, 1994, the Highwoods Group intended to
transfer its properties and property management operation to a real estate
investment trust (REIT), Highwoods Properties, Inc.
Rental Property
Rental properties are stated at the lower of cost or net realizable value.
All capitalizable costs related to the improvement or replacement of commercial
real estate properties are capitalized. Depreciation is computed by the
straight-line method over the estimated useful life of 40 years for buildings
and improvements and five to seven years for furniture and equipment. Tenant
improvements are amortized over the life of respective leases, using the
straight-line method.
Cash Equivalents
The Highwoods Group considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Revenue Recognition
Minimum rental income is recognized on a straight-line basis over the term
of the lease, and due and unpaid rents are included in rents and other
receivables from tenants in the accompanying balance sheet. Certain lease
agreements contain provisions which provide reimbursement of real estate taxes,
insurance and certain common area maintenance (CAM) costs. These additional
rents are recorded on the accrual basis. All rent and other receivables from
tenants are due from commercial building tenants located in the properties.
Lease fee income is recognized 50% when the lease is signed and 50% when the
tenant takes occupancy.
Deferred Lease Fees and Loan Costs
Lease fees and concessions and loan costs are capitalized at cost and
amortized over the life of the related lease or loan.
Other Income
Other income consists primarily of management fees generated by HPC from
providing property management services to third parties and interest income.
Income Taxes
No provision has been made for income taxes because the commercial real
estate properties are owned by partnerships whose partners are required to
include their respective share of profits or losses in their individual tax
returns.
68
<PAGE>
HIGHWOODS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
HPC elected to be taxed for federal and state income tax purposes as an
S-Corporation under provisions of the Internal Revenue Code. Consequently
income, losses and credits are passed through directly to the shareholders,
rather than being taxed at the corporate level. This election was effective as
of January 1, 1993. Previously, HPC operated as a general partnership.
2. MORTGAGES AND NOTES PAYABLE
Mortgages Payable
Conventional mortgages payable are comprised of 20 loans at December 31,
1993 and 17 loans at December 31, 1992, each of which is collateralized by a
building and related land included in real estate assets. The mortgages payable
are generally due in monthly installments of interest and principal and mature
at various dates through 2011. Interest rates on fixed rate mortgages payable
aggregating $41,138,812 and $38,469,318 at December 31, 1993 and 1992,
respectively, range from 7% to 9.875% (averaging 8.77% at December 31, 1993).
Interest rates on variable rate mortgages payable aggregating $22,720,011 and
$21,023,907 at December 31, 1993 and 1992, respectively, range from the prime
rate (6.0% at December 31, 1993) to 1.5% above the prime rate.
Unsecured Notes Payable
Unsecured notes payable are comprised of four loans at December 31, 1993,
and six loans at December 31, 1992. The notes payable are generally due in
monthly installments of interest and principal and mature at various dates
through 2000. Interest rates on fixed rate notes payable aggregating $328,395
and $523,567 at December 31, 1993 and 1992 respectively, range from 6% to 11%
(averaging 8.31% at December 31, 1993). Interest rates on variable rate notes
payable aggregating $159,362 and $262,552 (of which all is due to related
parties) at December 31, 1993 and 1992 respectively, range from the prime rate
(6.0% at December 31, 1993) to 1.5% above the prime rate.
Combined aggregate principal maturities of mortgages and notes payable at
December 31, 1993 are as follows:
<TABLE>
<S> <C>
1994...................................................................... $18,435,354
1995...................................................................... 1,132,936
1996...................................................................... 782,363
1997...................................................................... 846,760
1998...................................................................... 8,350,738
Thereafter................................................................ 34,798,429
$64,346,580
</TABLE>
All of the properties are pledged as collateral for the mortgages payable.
In connection with the procurement of mortgages on completed buildings, the
lenders require a holdback of a portion of the loan proceeds to provide for
tenant fit-ups in the buildings. These proceeds are then drawn as fit-up
expenses are incurred. Such hold back amounts are included in restricted cash in
the consolidated balance sheet. (1993 -- $928,773; 1992 -- $462,545).
69
<PAGE>
HIGHWOODS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
3. LEASES
The Highwoods Group leases automobiles, and office space under various
operating leases. Total rent expense for these leases was $69,900, $148,000,
$162,000 and $163,000 for the period from January 1, 1994 to June 13, 1994 and
for the years ended December 31, 1993, 1992 and 1991, respectively. As of June
13, 1994, the Company did not have contractual leases in place with remaining
terms of one year or more.
4. MANAGEMENT COMPENSATION PROGRAM
In 1989, HPC adopted two bonus plans for four members of management. The
first plan provides for approximately 15.5% of the net income of HPC for each
fiscal year to be divided among the managers, based on performance, and paid in
the first quarter following the end of the fiscal year. The second plan provides
that 25% of all profits of HPC in excess of $700,000 for each fiscal year be
contributed to a pool for the same four members of management, based on
established percentages. Amounts contributed under the plan are paid to the
employees ratably over a three-year period. These bonuses are discretionary and
approved by the partners annually. If any of the employees under the plan are
terminated or leave HPC for any reason, that employee forfeits rights to receive
payout of the unpaid portion in their bonus account. Compensation expense
related to the bonus plan was $212,060, $147,703, and $225,146 for the years
ended December 31, 1993, 1992 and 1991 respectively. There was no expense
incurred for the period from January 1, through June 13, 1994.
5. RENTAL INCOME
The Highwoods Group's developed property is being leased to tenants under
operating leases that expire over the next ten years. The minimum rental amounts
under the leases are either subject to scheduled fixed increases or adjustments
based on the Consumer Price Index. Generally, the leases also require that the
tenants reimburse the Highwoods Group for increases in certain costs above their
base year costs.
Expected future minimum rents to be received over the next five years and
thereafter from related party and other tenants for leases in effect at December
31, 1993 are as follows:
<TABLE>
<CAPTION>
Related Other
Party Tenants Total
<S> <C> <C> <C>
1994................................................................. $ 78,589 $ 9,371,140 $ 9,449,729
1995................................................................. 78,589 8,943,983 9,022,572
1996................................................................. 78,589 7,684,132 7,762,721
1997................................................................. 6,549 6,223,503 6,230,052
1998................................................................. -- 5,149,191 5,149,191
Thereafter........................................................... -- 10,335,729 10,335,729
$242,316 $47,707,678 $47,949,994
</TABLE>
Two major tenants represented 11% and 10% of the Highwoods Group's total
rental income for the year ended December 31, 1993.
6. RELATED PARTY TRANSACTIONS
There are several business relationships with related parties which involve
management, leasing and maintenance fees for buildings, as well as advancing
money in the ordinary course of business to other entities whose principal
owners are partners in HPC. Total fees received from related parties for the
period from January 1, 1994 to June 13, 1994 and for the years ended December
31, 1993, 1992 and 1991 were $10,989, $494,000, $516,000 and $330,000,
respectively.
70
<PAGE>
HIGHWOODS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
6. RELATED PARTY TRANSACTIONS -- Continued
Other related party transactions include leasing fees paid to an affiliated
business of $2,267, $12,100, $6,300 and $56,000 for the period from January 1,
1994 to June 13, 1994 and during 1993, 1992 and 1991, respectively, partners'
management fees of $-0- for the period from January 1, 1994 to June 13, 1994
$30,000 in each of 1993, 1992 and 1991 and rent paid to an affiliated business
of $9,900, $34,000, $38,000 and $39,000 for the period from January 1, 1994 to
June 13, 1994 and in 1993, 1992, and 1991, respectively. During 1992, the
Highwoods Group purchased a vehicle from a related company for approximately
$21,000.
The amount of land purchased from related parties for the years ended
December 31, 1993 and 1991 was $142,284 and $888,854 respectively.
7. SUBSEQUENT EVENT
On June 14, 1994, the Highwoods Group transferred all of its assets and
liabilities to Highwoods Realty Limited Partnership in connection with Highwoods
Properties, Inc.'s initial public offering of common stock.
71
<PAGE>
HIGHWOODS GROUP
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
<TABLE>
<CAPTION>
Cost Capitalized Gross Amount at Which
Initial Cost Subsequent to Carried at Close of
Buildings & Acquisition Buildings & Period Buildings &
Description Encumbrance Land Improvements Land Improvements Land Improvements Total (A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Blue Ridge
II $ 1,686,036 $ 433,556 -- -- $ 1,323,291 $ 433,556 $ 1,323,291 $ 1,756,847
Cape
Fear/Catawba 3,010,488 256,322 -- -- 3,258,258 256,322 3,258,258 3,514,580
CompuChem 7,220,423 268,866 -- -- 6,097,552 268,866 6,097,552 6,366,418
Expressway
One 1,794,970 241,583 -- -- 1,724,973 241,583 1,724,973 1,966,556
Hawthorn 5,035,976 904,437 -- -- 3,767,097 904,437 3,767,097 4,671,534
Highwoods
North 1,851,720 1,554,732 -- -- 48,892 1,554,732 48,892 1,603,624
Highwoods
South 4,057,240 2,746,136 -- $(249,225) -- 2,496,911 -- 2,496,911
Highwoods
Tower 17,000,000 203,419 -- -- 16,574,375 203,419 16,574,375 16,777,794
Ironwood/
Leatherwood 2,802,433 531,609 $2,126,435 -- 68,611 531,609 2,195,046 2,726,655
Kaiser 5,035,976 133,126 -- -- 3,564,301 133,126 3,564,301 3,697,427
Rexwoods II 1,599,416 354,735 -- -- 1,773,567 354,735 1,773,567 2,128,302
Rexwoods III 3,572,377 885,598 -- -- 2,709,598 885,598 2,709,598 3,595,196
Rexwoods
Center 4,452,026 775,408 -- -- 3,243,234 775,408 3,243,234 4,018,642
Riverbirch 4,739,742 448,314 -- -- 3,861,035 448,314 3,861,035 4,309,349
$63,858,823 $ 9,737,841 $2,126,435 $(249,225) $48,014,784 $ 9,488,616 $50,141,219 $ 59,629,835
<CAPTION>
Life on
Which
Accumulated Date of Depreciation
Description Depreciation Construction is Computed
<S> <C> <C> <C>
Blue Ridge
II $ 262,871 1988 5-40 yrs.
Cape
Fear/Catawba 1,660,012 1980 5-40 yrs.
CompuChem 1,402,874 1980 5-40 yrs.
Expressway
One 156,031 1990 5-40 yrs.
Hawthorn 1,298,151 1987 5-40 yrs.
Highwoods
North 7,566 1983 5-40 yrs.
Highwoods
South -- 1983 N/A
Highwoods
Tower 1,181,907 1991 5-40 yrs.
Ironwood/
Leatherwood 8,355 (B) 5-40 yrs.
Kaiser 798,539 1988 5-40 yrs.
Rexwoods II 9,615 1993 5-40 yrs.
Rexwoods III 188,277 1992 5-40 yrs.
Rexwoods
Center 468,538 1990 5-40 yrs.
Riverbirch 597,156 1987 5-40 yrs.
$8,039,892
</TABLE>
(A) The aggregate cost for Federal Income Tax purposes was approximately
$59,629,835.
(B) The property was acquired in 1993.
72
<PAGE>
<PAGE>
HIGHWOODS GROUP
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
June 13, 1994
The changes in the Highwoods Group for the period from January 1, 1994 to
June 13, 1994 and for the three years ended December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Period from
January 1, 1994 to
June 13, 1994 1993 1992 1991
<S> <C> <C> <C> <C>
Real estate balance at beginning of period.... $ 59,629,835 $ 53,478,294 $50,324,176 $34,218,255
Properties developed (1)...................... -- 2,128,302 686,918 15,680,331
Properties acquired........................... -- 2,658,044 -- --
Improvements.................................. 2,025,410 1,365,195 2,479,315 686,376
Disposals..................................... -- -- (12,115) (260,786)
Balance at end of period...................... $ 61,655,245 $ 59,629,835 $53,478,294 $50,324,176
</TABLE>
(1) Land was acquired from related parties for $142,284 in 1993 and $888,854 in
1991.
The changes in accumulated depreciation for the period from January 1, 1994
to June 13, 1994 and for the three years ending December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
Period from
January 1, 1994 to
June 13, 1994 1993 1992 1991
<S> <C> <C> <C> <C>
Balance at beginning of period.................... $8,039,892 $ 6,852,176 $5,769,702 $4,928,759
Depreciation for period......................... 639,541 1,187,716 1,082,474 851,566
Disposals....................................... -- -- -- (10,623)
Balance at end of period.......................... $8,679,433 $ 8,039,892 $6,852,176 $5,769,702
</TABLE>
73
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Raleigh, State of
North Carolina, on June 3, 1996.
HIGHWOODS PROPERTIES, INC.
By: /s/ RONALD P. GIBSON
Ronald P. Gibson, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ O. TEMPLE SLOAN, JR. Chairman of the Board of Directors June 3, 1996
O. Temple Sloan, Jr.
/s/ RONALD P. GIBSON President, Chief Executive Officer and June 3, 1996
Director
Ronald P. Gibson
/s/ JOHN L. TURNER Vice Chairman of the Board June 3, 1996
John L. Turner
/s/ WILLIAM T. WILSON III Executive Vice President and Director June 3, 1996
William T. Wilson III
/s/ WILLIAM E. GRAHAM Director June 3, 1996
William E. Graham
/s/ THOMAS W. ADLER Director June 3, 1996
Thomas W. Adler
/s/ ROBERT L. KIRBY Director June 3, 1996
Robert L. Kirby
/s/ STEPHEN TIMKO Director June 3, 1996
Stephen Timko
/s/ L. GLENN ORR, JR. Director June 3, 1996
L. Glenn Orr, Jr.
/s/ CARMAN J. LIUZZO Chief Financial Officer (Principal June 3, 1996
Financial Officer and Principal
Carman J. Liuzzo Accounting Officer)
</TABLE>
74
<PAGE>
