<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 29, 1996
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 001-13100 56-1871668
(State or other jurisdiction of incorporation) (Commission File Number) (I.R.S. Employer
Identification Number)
3100 SMOKETREE COURT, SUITE 600 27604
RALEIGH, NC (Zip Code)
(address of principal executive office)
</TABLE>
Registrant's telephone number, including area code: (919) 872-4924
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
<TABLE>
<CAPTION>
PAGE
<S> <C>
ACQUIRED PROPERTIES
CROCKER REALTY TRUST, INC.
Financial Statements
Independent Auditors' Report......................................................................................... 4
Independent Auditors' Report......................................................................................... 5
Independent Auditors' Report......................................................................................... 6
Independent Auditors' Report......................................................................................... 7
Consolidated Balance Sheet of the Crocker Realty Trust, Inc. as of December 31, 1995 and Combined Balance Sheet of
the Predecessor Entities as of December 31, 1994.................................................................. 8
Consolidated Statement of Operations of the Crocker Realty Trust, Inc. for the year ended December 31, 1995 and
Combined Statements of Operations of the Predecessor Entities for the year ended December 31, 1994, and the period
from November 17, 1993 (Inception for AP Southeast Portfolio Partners, L.P.) to December 31, 1993 and the period
from October 28, 1993 (Inception for AP Fontaine III Partners, L.P.) to December 31, 1993......................... 10
Consolidated Statement of Stockholders' Equity of the Crocker Realty Trust, Inc. for the year ended December 31, 1995
and Combined Statements of Owners' Equity of the Predecessor Entities for the year ended December 31, 1994, and
the period from November 17, 1993 (Inception for AP Southeast Portfolio Partners, L.P.) to December 31, 1993 and
the period from October 28, 1993 (Inception for AP Fontaine III Partners, L.P.) to December 31, 1993.............. 11
Consolidated Statement of Cash Flows of the Crocker Realty Trust, Inc. for the year ended December 31, 1995 and
Combined Statements of Cash Flows of the Predecessor Entities for the year ended December 31, 1994, and the period
from November 17, 1993 (Inception for AP Southeast Portfolio Partners, L.P.) to December 31, 1993 and the period
from October 28, 1993 (Inception for AP Fontaine III Partners, L.P.) to December 31, 1993......................... 12
Notes to Consolidated and Combined Financial Statements.............................................................. 15
Consolidated Balance Sheets of the Crocker Realty Trust, Inc. as of March 31, 1996................................... 30
Consolidated Statements of Operations of the Crocker Realty Trust, Inc. for the three months ended March 31, 1996 and
1995.............................................................................................................. 32
Consolidated Statements of Cash Flows of the Crocker Realty Trust, Inc. for the three months ended March 31, 1996 and
1995.............................................................................................................. 33
Notes to Consolidated Financial Statements........................................................................... 35
CRT ACQUIRED PROPERTIES
Certain Properties Owned by Towermarc Corporation
Independent Auditors' Report......................................................................................... 40
Historical Summary of Gross Income and Direct Operating Expenses for the year ended December 31, 1995................ 41
Notes to Historical Summary of Gross Income and Direct Operating Expenses............................................ 42
CROCKER REALTY INVESTORS, INC.
Independent Auditors' Report......................................................................................... 48
Balance Sheets as of December 31, 1994 and 1993...................................................................... 49
Statements of Operations for the years ended December 31, 1994 and 1993.............................................. 51
Statements of Stockholders' Equity for the years ended December 31, 1994 and 1993.................................... 52
Statements of Cash Flows for the years ended December 31, 1994 and 1993.............................................. 53
Notes to Financial Statements........................................................................................ 55
CROCKER & SONS, INC.
Independent Auditors' Report......................................................................................... 64
Balance Sheet as of December 31, 1994................................................................................ 65
Statement of Operations for the year ended December 31, 1994......................................................... 66
Statement of Stockholders' Equity (Deficit) for the year ended December 31, 1994..................................... 67
Statement of Cash Flows for the year ended December 31, 1994......................................................... 68
Notes to Financial Statements........................................................................................ 69
</TABLE>
2
<PAGE>
<PAGE>
(b) Pro Forma Financial Information
<TABLE>
<CAPTION>
PAGE
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Pro Forma Condensed Combining Balance Sheet (unaudited) as of March 31, 1996........................................... 74
Notes to Pro Forma Condensed Combining Balance Sheet................................................................... 75
Pro Forma Condensed Combining Statement of Operations (unaudited) for the three months ended March 31, 1996............ 76
Notes to Pro Forma Condensed Combining Statement of Operations......................................................... 77
Pro Forma Condensed Combining Statement of Operations (unaudited) for the year ended December 31, 1995................. 79
Notes to Pro Forma Condensed Combining Statement of Operations......................................................... 80
</TABLE>
3
<PAGE>
(c) Exhibits
2.1(1) Stock Purchase Agreement among AP CRTI Holdings, L.P., AEW
Partners, L.P., Thomas J. Crocker, Barbara F. Crocker, Richard
S. Ackerman and Robert E. Onisko and Highwoods Properties, Inc.
and Cedar Acquisition Corporation, dated as of April 29, 1996.
(Incorporated by reference to Exhibit A of Schedule 13D of
Highwoods Properties, Inc., dated April 29, 1996.)
2.2(1) Agreement and Plan of Merger by and among Highwoods Properties,
Inc., Crocker Realty Trust, Inc. and Cedar Acquisition
Corporation, dated as of April 29, 1996. (Incorporated by
reference to Exhibit B of Schedule 13D of Highwoods Properties,
Inc., dated April 29, 1996.)
10.1(1) Amended and Restated Commitment Letter between NationsBank,
N.A. and Highwoods/Forsyth Limited Partnership, dated as of
May 7, 1996. (Incorporated by reference to Exhibit C of
Schedule 13D of Highwoods Properties, Inc., dated
April 29, 1996.)
23.1(1) Consent of KPMG Peat Marwick LLP
23.2(1) Consent of Deloitte & Touche LLP
23.3(1) Consent of Price Waterhouse LLP
23.4(1) Consent of Ernst & Young LLP
- -------------------
(1) Previously filed.
4
<PAGE>
KPMG Peat Marwick LLP
110 East Broward Boulevard Telephone 305 524 6000 Telefax 305 462 4836
Fort Lauderdale, FL 33301
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
Crocker Realty Trust, Inc.:
We have audited the accompanying consolidated balance sheet of Crocker
Realty Trust, Inc. as of December 31, 1995, the related consolidated
statements of operations, stockholders' equity and cash flows for the
year ended December 31, 1995. In connection with our audit, we also
have audited the financial statement schedule as listed in the accompanying
index as of and for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crocker
Realty Trust, Inc. at December 31, 1995, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
(Signature of KPMG Peat Marwick LLP)
Fort Lauderdale, Florida
March 4, 1996
5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Crocker Realty Trust, Inc.
We have audited the accompanying combined balance sheet of Southeast
Realty Corp., AP Southeast Portfolio Partners, L.P. and AP Fontaine III
Partners, L.P. (the "Predecessor Entities") as of December 31, 1994,
and the related combined statements of operations, owners' equity and
cash flows for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion
on the financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a resonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Predecessor Entities as
of December 31, 1994, and the combined results of their operations and
their cash flows for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
(Signature of Deloitte & Touche LLP)
Dallas, Texas
February 21, 1995
6
<PAGE>
Report of Independent Accountants
To the Partners of AP Southeast Portfolio Partners, LP.
In our opinion, the accompanying statements of income, of partner's capital
and of cash flows for the period from inception (November 17, 1993) through
December 31, 1993 of AP Southeast Portfolio Partners, L.P. present fairly,
in all material respects, the results of its operations and its cash flows
for the period from inception (November 17, 1993) through December 31, 1993
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted audit standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for the opinion expressed above. We have not audited the financial
statements of AP Southeast Portfolio Partners, L.P. for any period
subsequent to December 31, 1993.
(Signature of Price Waterhouse LLP)
PRICE WATERHOUSE LLP
Dallas, Texas
March 7, 1994
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Crocker Realty Trust, Inc.:
We have audited the accompanying statements of operations, owners' equity
and cash flows for the period from October 28, 1993 (date of inception)
to December 31, 1993 of AP Fontaine III Partners, L.P. These financial
statements are the responsibility of management. Our responsibility is
to express an opinion on the financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects of operations, owners' equity and cash flows of AP Fontaine
III Partners, L.P. for the period from October 28, 1993 (date of inception)
to December 31, 1993, in conformity with generally accepted accounting
principles.
(Signature of Deloitte & Touche LLP)
Dallas, Texas
February 10, 1995
8
<PAGE>
CROCKER REALTY TRUST, INC. (The Company) and
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( Predecessor Entities)
Consolidated Balance Sheet of the Company and
Combined Balance Sheet of the Predecessor Entities
(in thousands, except for share data)
<TABLE>
<CAPTION>
Predecessor
The Company Entities
Assets December 31, December 31,
1995 1994
<S> <C> <C>
Investment in real estate (note 3):
Rental properties, net of accumulated depreciation of $11,590 and
$5,279 at December 31, 1995 and 1994, respectively
$ 279,407 203,265
Land held for investment 11,159 -
Other assets:
Cash and cash equivalents (note 11) 5,719 132
Restricted cash (note 11) 9,007 10,318
Rents and expense reimbursements receivable, net of allowance for doubtful
accounts of $141 at December 31, 1995 (note 11)
969 818
Accounts receivable from managed properties 219 -
Deferred straight-line rents receivable 3,148 1,902
Deferred acquisition and offering costs (note 12) 2,156 556
Deferred loan costs, net of accumulated amortization of $1,312 and $750 at
December 31, 1995 and 1994, respectively (note 4)
3,821 4,114
Deferred leasing costs, net of accumulated amortization of $1,025 and $354
at December 31, 1995 and 1994, respectively
2,689 1,911
Prepaid expenses and other assets 666 195
Furniture, fixtures and equipment, net of accumulated depreciation
of $60 at December 31, 1995 451 -
Management contracts, net of accumulated amortization of $105 at
December 31, 1995 (note 9) 1,324 -
Goodwill, net of accumulated amortization of $165 at December 31,
1995 (note 9) 3,941 -
--------- -------
Total assets $ 324,676 223,211
======= =======
</TABLE>
(Continue)
9
<PAGE>
CROCKER REALTY TRUST, INC. (The Company) and
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( Predecessor Entities)
Consolidated Balance Sheet of the Company and
Combined Balance Sheet of the Predecessor Entities (Continued)
(in thousands, except for share data)
<TABLE>
<CAPTION>
Predecessor
The Company Entities
Liabilities and Stockholders' and Owners' Equity December 31, December 31,
1995 1994
<S> <C> <C>
Liabilities:
Notes payable (note 4) $ 181,873 160,000
Accounts payable and accrued expenses 2,121 1,702
Accrued interest expense (note 4) 361 1,111
Accrued real estate taxes 254 264
Accrued acquisition and offering costs (notes 9 and 12) 1,805 -
Due to affiliates (notes 5, 6, and 7) - 487
Rents paid in advance 679 1,001
Tenant security deposits 1,369 757
Deferred straight-line rents payable 156 -
Other liabilities, net (notes 4 and 10) 1,919 -
--------- ----
Total liabilities 190,537 165,322
------- -------
Stockholders' equity (notes 1,6, and 7):
Preferred stock, $.01 par value. Authorized and unissued
10,000,000 shares - -
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 23,362,492 shares and 12,528,859 shares
at December 31, 1995 and 1994, respectively
234 125
Additional paid-in capital 132,721 57,759
Retained earnings 1,184 -
________ ______
Total stockholders' equity 134,139 57,884
------- --------
Owners' equity (note 1) - 5
------- ------------
Commitments and contingencies (notes 3, 4, 6, 7, 9, 10, 11 and 12)
Total liabilities and stockholders' and owners' equity
$ 324,676 223,211
======= =======
</TABLE>
See accompanying notes to consolidated and combined financial statements.
10
<PAGE>
CROCKER REALTY TRUST, INC. (The Company) and
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( Predecessor Entities)
Consolidated Statement of Operations of the Company and
Combined Statements of Operations of the Predecessor Entities
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
The Company Predecessor Entities
--------------- --------------------------------------------------------
AP Southeast AP Fontaine
Portfolio III Partners,
Partners, L.P. L.P.
Period From Period From
November 17, October 28,
1993 1993
Year Ended Year Ended (Inception) to (Inception) to
December 31, December 31, Combined December 31, December 31,
1995 1994 1993 1993 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue (note 3):
Rental income and tenant reimbursements $ 42,489 37,047 3,813 3,809 4
Management fees - building, development
and construction 618 - - - -
Leasing commissions 152 - - - -
------------ ------ ----- ----- -----
43,259 37,047 3,813 3,809 4
----------- ------ ----- ----- ---
Expenses:
Rental property operating expenses 8,632 5,601 611 603 8
Real estate taxes and insurance 3,680 3,343 359 353 6
Management fees (note 5) 1,289 2,122 219 219 -
Amortization of deferred leasing costs 682 349 7 7 -
Depreciation and amortization of property
and equipment (note 3) 6,414 4,761 518 512 6
Amortization of goodwill and management
contracts (note 9) 270 - - - -
General and administrative expenses
(note 6) 2,813 505 135 135 -
-------------- -------- ------ ------ ------
23,780 16,681 1,849 1,829 20
---------- ------ ----- ----- --
Operating income (loss) 19,479 20,366 1,964 1,980 (16)
---------- ------ ----- ----- --
Other income (expense):
Interest and other income 883 318 155 155 -
Gain from sale of land (note 9) 124 - - - -
Interest expense (note 4) (16,212) (14,001) (1,563) (1,563) -
----------- ------ ----- ----- -------
Total other income (expense) (15,205) (13,683) (1,408) (1,408) -
----------- ------ ----- ----- -------
Income (loss) before extraordinary loss 4,274 6,683 556 572 (16)
Extraordinary loss on early extinguishment of
debt (note 4) (429) - - - -
------------- ------- ----- ----- -------
Net income (loss) $ 3,845 6,683 556 572 (16)
=========== ======= ====== === ==
Earnings per common share:
Income before extraordinary loss $ 0.31 N/A N/A N/A N/A
Extraordinary loss (0.03) N/A N/A N/A N/A
------------
Net income $ 0.28 N/A N/A N/A N/A
============
Weighted average number of shares outstanding 13,537,976 N/A N/A N/A N/A
==========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
11
<PAGE>
CROCKER REALTY TRUST, INC. (The Company) and
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( Predecessor Entities)
Consolidated Statement of Stockholders' Equity of The Company and
Combined Statements of Owners' Equity of the Predecessor Entities
(in thousands, except for shares issued)
<TABLE>
<CAPTION>
The Company Predecessor Entities
Stockholders' Equity Owners' Equity
-------------------------------------------------- ------------------------------------------
Common Stock Additional AP Southeast AP Fontaine
----------------------
Shares Paid-In Retained Portfolio III Partners,
Issued Amount Capital Earnings Total Partners, L.P. L.P. Combined
------ ------ ------- -------- ----- -------------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 28, 1993 (Inception) - $ - - - - - - -
November 17, 1993 (Inception) - - - - - 5,000 - 5,000
Contributions - - - - - 49,489 2,261 51,750
Net income - - - - - 572 (16) 556
--------- ---- ------ ----- ------ -------- ------ --------
December 31, 1993 - - - - - 55,061 2,245 57,306
====== =====
Contributions - - - - - 400
Distributions - - - - - (6,500)
Net income - - - - - 6,683
Issuance of common stock (note
1) 12,528,859 125 57,759 - 57,884 (57,884)
---------- --- ------ ----- ------ ------
December 31, 1994 12,528,859 125 57,759 - 57,884 5
Contributions (note 1) - - 1,769 - 1,769 -
Distributions (note 1) - - - (2,661) (2,661) -
Net income - - - 3,845 3,845 -
Issuances of common stock
(notes 1 and 9) 10,833,633 109 73,193 - 73,302 (5)
---------- --- -------- ----- ------ --------
December 31, 1995 23,362,492 $ 234 132,721 1,184 134,139 -
========== === ======= ===== ======= ===
</TABLE>
See accompanying notes to consolidated and combined financial statements.
12
<PAGE>
CROCKER REALTY TRUST, INC. (The Company) and
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( Predecessor Entities)
Consolidated Statement of Cash Flows of the Company and
Combined Statements of Cash Flows of the Predecessor Entities
(in thousands, except for shares issued)
<TABLE>
<CAPTION>
The Company Predecessor Entities
----------------- --------------------------------------------------------
AP Southeast AP Fontaine
Portfolio III Partners,
Partners, L.P. L.P.
Period From Period From
November 17, October 28,
1993 1993
Year Ended Year Ended (Inception) to(Inception) to
December 31, December 31, Combined December 31, December 31,
1995 1994 1993 1993 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,845 6,683 556 572 (16)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization of
property and equipment 6,414 4,761 518 512 6
Amortization of loan costs 737 667 84 84 -
Amortization of deferred leasing
costs 682 349 7 7 -
Amortization of organization costs 4 3 - - -
Amortization of goodwill and
management contracts 270 - - - -
Bad debt expense 141 150 - - -
Loss on early extinguishment of debt
429 - - - -
Gain on sale of land (124) - - - -
(Increase) decrease in operating
assets:
Deferred straight-line rents
receivable (1,257) (1,558) (344) (344) -
Rents and other receivables (68) (462) (455) (452) (3)
Prepaid expenses and other assets (277) 162 (344) (338) (6)
Increase (decrease) in operating liabilities:
Accounts payable and accrued
expenses (1,397) 192 1,440 1,433 7
Accrued interest expense (1,104) (386) 1,497 1,497 -
Accrued real estate taxes (506) (592) 805 793 12
Rents paid in advance (419) 765 236 236 -
Tenant security deposits 245 96 661 661 -
Deferred straight-line rents
payable 156 - - - -
------ ------ ----- ----- -
Total adjustments 3,926 4,147 4,105 4,089 16
----- ------- ----- ----- --
Net cash provided by
operating activities 7,771 10,830 4,661 4,661 -
----- ------ ----- ----- -
(continued)
</TABLE>
13
<PAGE>
CROCKER REALTY TRUST, INC. (The Company) and
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( Predecessor Entities)
Consolidated Statement of Cash Flows of the Company and
Combined Statements of Cash Flows of the Predecessor Entities, Continued
(in thousands, except for shares issued)
<TABLE>
<CAPTION>
The Company Predecessor Entities
--------------- --------------------------------------------------------
AP Southeast AP Fontaine
Portfolio III Partners,
Partners, L.P. L.P.
Period From Period From
November 17, October 28,
1993 1993
Year Ended Year Ended (Inception) to(Inception) to
December 31, December 31, Combined December 31, December 31,
1995 1994 1993 1993 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Net proceeds from sale of land $ 2,065 - - - -
Acquisition of rental properties and land (42,550) - (202,559) (200,298) (2,261)
Payments for building and tenant
improvements (4,574) (4,777) (1,208) (1,208) -
Payment of deferred leasing costs (1,473) (1,790) (476) (476) -
Payments for furniture, fixtures and
equipment (426) - - - -
Payment of deferred acquisition costs (997) - - - -
Cash received from acquisitions 896 - - - -
-------- ----- ------ ------ --
Net cash used in investing
activities (47,059) (6,567) (204,243) (201,982) (2,261)
------ ----- ------- ------- -----
Cash flows from financing activities:
Proceeds from issuances of common stock 66,883 - - - -
Net (increase) decrease in restricted cash 1,829 1,092 (6,410) (6,410) -
Borrowings under notes payable 482 - 160,000 160,000 -
Capital contributions 1,282 400 51,750 49,489 2,261
Repayment of note payable (20,000) - - - -
Dividends and Distributions (2,661) (6,500) - - -
Payment of offering and deferred offering
costs (2,940) - - - -
Payment of financing costs - (65) (4,801) (4,801) -
Payment of organization costs - - (15) (15) -
------ ----- --------- -------- --
Net cash provided by (used in)
financing activities 44,875 (5,073) 200,524 198,263 2,261
------ ----- ------- ------- -----
Net increase (decrease) in cash
and cash equivalents 5,587 (810) 942 942 -
Cash and cash equivalents at beginning of period 132 942 - - -
-------- -------- ------ ------ --
Cash and cash equivalents at end of period $ 5,719 132 942 942 -
======= ======= ======== ========= ==
Supplemental disclosures of cash flow
information:
Interest paid $ 16,580 13,702 - - -
====== ====== ====== ====== ==
(continued)
</TABLE>
14
<PAGE>
CROCKER REALTY TRUST, INC. (The Company) and
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( Predecessor Entities)
Consolidated Statement of Cash Flows of the Company and
Combined Statements of Cash Flows of the Predecessor Entities, Continued
Supplemental disclosure of noncash investing and financing activities:
During the six months ended June 30, 1995, the Company received a capital
contribution of the amount due to the Apollo Real Estate Investment Fund,
L.P. ("Apollo Fund") at December 31, 1994 ($487,000) and recorded it as
additional paid in capital.
During the six months ended June 30, 1995, the Company exchanged 62,500
shares of common stock for the shares of common stock of Options Corp. held
by the Apollo Fund, 1,110 shares of common stock for the outstanding shares
of common stock of Operating Corp. held by an affiliate of the Apollo Fund,
and 31 shares of common stock for the outstanding shares of common stock of
Fontaine Operating Corp. held by an affiliate of the Apollo Fund. In
addition, the Company issued 35,000 shares of common stock to Victor
Capital Group for its financial advisory services related to the merger
transactions.
On June 30, 1995, the Company issued 637,500 shares of common stock for all
of the outstanding common stock of CSI and CRMSI. In connection with the
acquisition, the Company succeeded to the interests in the assets of CSI
and CRMSI with a fair value of approximately $6.1 million and to the
liabilities of CSI and CRMSI of approximately $904,000.
On July 1, 1995, the Company issued 1,020,000 shares of common stock for
all of the outstanding common stock of CRI. In connection with the
acquisition, the Company succeeded to the interests of CRI in a portfolio
of three office properties with a fair value of approximately $48.1 million
and to all of the remaining assets of CRI with a fair value of
approximately $2.4 million and to the liabilities of CRI with a fair value
of approximately $45.4 million.
Details of the assets acquired, liabilities assumed, and common stock
issued in connection with acquisitions are as follows (in thousands):
<TABLE>
<CAPTION>
Acquisition
CRMSI CRI of Sabal
Merger Merger Properties Combined
<S> <C> <C> <C> <C>
Rental properties $ - (48,130) (29,736) (77,866)
Land held for investment - - (13,085) (13,085)
Restricted cash - (518) - (518)
Rents and expense reimbursements receivable - (99) (6) (105)
Accounts receivable from managed properties (875) - - (875)
Deferred loan costs - (713) (12) (725)
Prepaid expenses and other assets (9) (188) - (197)
Furniture, fixtures and equipment (87) - - (87)
Management contracts (1,429) - - (1,429)
Goodwill (3,702) - - (3,702)
Mortgage notes payable - 41,383 8 41,391
Accounts payable and accrued expenses 904 818 281 2,003
Accrued interest expense - 354 - 354
Accrued real estate taxes - 496 - 496
Rents paid in advance - 97 - 97
Tenant security deposits - 367 - 367
Other liabilities - 1,924 - 1,924
Common stock 6 10 - 16
Additional paid-in capital 5,195 5,092 - 10,287
----- ------- ------ ------
Net cash provided by (used in) acquisitions $ 3 893 (42,550) (41,654)
======== ======== ====== ======
</TABLE>
See accompanying notes to consolidated and combined financial statements.
15
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
(1) Organization and Formation Transactions
Crocker Realty Trust, Inc. (the "Company") was incorporated under the
Maryland General Corporation Law on September 21, 1994 under the name
of Southeast Realty Corp. On June 30, 1995, the Company changed its
name to Crocker Realty Trust, Inc. The Company was formed to succeed to
the interests of Apollo Real Estate Investment Fund, L.P. (the "Apollo
Fund") and its affiliates in AP Southeast Portfolio Partners, L.P. ("AP
Southeast Partnership") and AP Fontaine III Partners, L.P. ("Fontaine
Partnership"), (collectively, the "Predecessor Entities"), which
collectively include a portfolio of 47 office properties.
The Company intends to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
On December 31, 1994, the Apollo Fund transferred to the Company its
99% limited partnership interests in (i) AP Southeast Partnership, (ii)
AP-GP Southeast Portfolio Partners, L.P. ("AP Southeast GP"), which
holds a 1% general partnership interest in AP Southeast Partnership,
(iii) Fontaine Partnership, and (iv) AP-GP Fontaine III Partners, L.P.
("Fontaine GP"), which holds a 1% general partnership interest in
Fontaine Partnership (collectively, the "Limited Partnerships") in
exchange for 12,528,759 shares of common stock of the Company.
The Company is the sole limited partner of AP Southeast GP and the AP
Southeast Partnership. On June 27, 1995, pursuant to the Amended and
Restated Transfer Agreement, dated as of September 29, 1994, between
the Company and Southeast Portfolio Operating Corporation ("Operating
Corp."), the general partner of AP Southeast GP, Operating Corp. merged
with and into a wholly-owned subsidiary of the Company, Southeast
Realty GP Corp. ("GP Corp."), a Delaware corporation. As a result of
such merger, GP Corp. is the sole general partner of, and holds a 1%
general partnership interest in AP Southeast GP and the outstanding
shares of common stock of Operating Corp. held by an affiliate of the
Apollo Fund were exchanged for 1,110 shares of common stock of the
Company. AP Southeast GP is a Delaware limited partnership and the sole
general partner of the AP Southeast Partnership. The AP Southeast
Partnership is a Delaware limited partnership. All of the assets of
each of these entities are owned by each such entity and each such
entity is a separate entity with its own separate creditors which will
be entitled to be satisfied out of its assets prior to any value
therein becoming available to its equity holders.
The Company is the sole limited partner of Fontaine GP and the Fontaine
Partnership. On April 13, 1995, pursuant to the Amended and Restated
Transfer Agreement, dated as of September 29, 1994, between the Company
and Fontaine III Operating Corporation ("Fontaine III Operating
Corp."), the general partner of Fontaine GP, Fontaine III Operating
Corp., merged with and into a wholly-owned subsidiary of the Company,
Southeast Fontaine GP Corp. ("SF-GP Corp."), a Delaware corporation. As
a result of such merger, SF-GP Corp. is the sole general partner of,
and holds a 1% general partnership interest in Fontaine GP and the
outstanding shares of common stock of Fontaine Operating Corp. held by
an affiliate of the Apollo Fund were exchanged for 31 shares of common
stock of the Company. Fontaine GP is a Delaware limited partnership and
the sole general partner of the Fontaine Partnership.
The Fontaine Partnership is a Delaware limited partnership.
16
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
On March 29, 1995, pursuant to the Amended and Restated Transfer
Agreement, dated as of September 29, 1994, between the Company and
Options Corp., whose sole assets are the land options referred to
above, Southeast Options Operating Corporation ("Options Corp.") merged
with and into Southeast Realty Options Corp., a wholly-owned subsidiary
of the Company, and the shares of capital stock of Options Corp. held
by the Apollo Fund were exchanged for 62,500 shares of common stock of
the Company.
The Company has accounted for all of the foregoing acquisitions of the
Predecessor Entities at historical cost in a manner similar to that in
a pooling of interests accounting due to the above entities being under
the common control of the Apollo Fund and its affiliates. Accordingly,
the Company's consolidated and combined financial statements include
the restatement of the above entities' financial position, results of
operations and cash flows on a combined basis for the periods of
inception during 1993 to December 31, 1994. The consolidated and
combined financial information does not contain any material
adjustments to conform to the accounting policies used by the
Predecessor Entities to that of the Company. All intercompany
transactions have been eliminated.
On June 30, 1995, pursuant to an Agreement and Plan of Merger, dated as
of September 29, 1994, as amended (the "CRMSI Merger Agreement") among
the Company, SER Management, Inc. ("SER Management"), Crocker Realty
Management Services, Inc. ("CRMSI") and Crocker & Sons, Inc. ("CSI"),
CRMSI and CSI merged with an into SER Management, a wholly-owned
subsidiary of the Company (the "CRMSI Merger"). The outstanding shares
of CRMSI and CSI were exchanged for 637,500 shares of the Company's
common stock, of which 457,531 shares were issued to the Chairman of
the Board and Chief Executive Officer of the Company and his spouse,
149,974 shares were issued to the President and Chief Operating Officer
of the Company and 29,995 shares were issued to the Executive Vice
President and Chief Financial Officer of the Company.
As a result of the CRMSI Merger, the Company succeeded to the interests
of the property, asset and construction management business and leasing
and brokerage business of CRMSI and CSI and to their respective assets
and liabilities.
On July 1, 1995, pursuant to an Agreement and Plan of Merger, dated as
of September 29, 1994, as amended, (the "CRI Merger Agreement"), among
the Company, SER Acquisition, Inc. ("SER Acquisition") and Crocker
Realty Investors, Inc. ("CRI"), CRI merged with and into SER
Acquisition, a wholly-owned subsidiary of the Company (the "CRI
Merger"). Upon consummation of the CRI Merger; (i) the outstanding
shares of common stock of CRI were exchanged for 1,020,000 shares of
the Company's common stock, (ii) the 2,340,000 CRI public warrants each
entitling the holder thereof to purchase, during the four year period
ending January 21, 1998, one share of CRI common stock at $10.00 per
share (subject to adjustment), were assumed by the Company and entitle
the holders thereof to purchase shares of the Company's common stock at
the same price and on the same terms and conditions as set forth in the
CRI public warrants, and (iii) purchase options held by certain
individuals and GKN Securities Corp. (the underwriter of CRI's 1993
initial public offering) to purchase an aggregate of 210,292 shares of
CRI common stock at an exercise price of $7.85 per share of CRI common
stock and the warrant held by General Electric Capital Corporation (see
note 4) to purchase an aggregate of 160,000 shares of CRI common stock
at an exercise price of $10.00 per share of CRI common stock were
assumed by the Company and entitle the holders thereof to purchase
shares of the Company's common stock at the same price and on the same
terms and conditions as set forth in the instruments pursuant to which
such options and warrant were issued. On December 28, 1995, the Company
entered into an agreement to pay
17
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
$360,000 to certain individuals and GKN Securities Corp. for their
purchase options and other rights held by GKN Securities Corp. The
amount was accrued and charged to additional paid-in capital at
December 31, 1995 and was paid in January 1996.
As a result of the CRI Merger, the Company succeeded to the interests
of CRI in a portfolio of three office properties and to all of the
assets and liabilities of CRI.
Pursuant to the Amended and Restated Transfer Agreement, dated as of
September 29, 1994, between the Apollo Fund and the Company, as amended
("the Apollo Fund Transfer Agreement"), the Apollo Fund was entitled to
receive additional shares of the Company's common stock at a price of
$8.00 per share based on the excess Cash Balance (as defined in the
Apollo Fund Transfer Agreement), at June 30, 1995. These shares, which
totaled 259,261, were issued on December 19, 1995.
Distributions and contributions of $2.9 million each, previously
disclosed for the period from January 1, 1995 through June 30, 1995,
were rescinded.
The following condensed combining schedule of the Predecessor Entities
as of and for the year ended December 31, 1994 includes each entity
combined (in thousands):
<TABLE>
<CAPTION>
AP Crocker
Southeast Fontaine Realty Elimination Predecessor
Partnership Partnership Trust Entries Entities
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1994:
Total revenue $ 36,990 57 - - 37,047
Total expenses 16,430 251 - - 16,681
Total other income (expense) (13,685) 2 - - (13,683)
------- ------ ------ ------ --------
Net income (loss) 6,875 (192) - - 6,683
======= ===== ===== ====== =======
As of December 31, 1994:
Total assets $ 220,169 2,486 58,445 (57,889) 223,211
======= ===== ====== ====== =======
Total liabilities $ 164,733 33 556 - 165,322
======= ==== ===== ===== =======
</TABLE>
The combined financial statements of the Predecessor Entities have been
presented using the historical cost of those Predecessor Entities under
the common control of the Apollo Fund and its affiliates in a manner
similar to that in a pooling of interests accounting. No material
adjustments were required to conform the accounting policies of the
entities consolidated.
18
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
Commencing January 1, 1995, the financial statements of the
Company are consolidated and include all accounts of the
Company, its wholly-owned subsidiaries, and a controlled
subsidiary. The equity interests in the controlled subsidiary
not owned by the Company are immaterial. All significant
intercompany balances and transactions have been eliminated in
the consolidated financial statements.
(b) Real Estate Investments
Real estate investments are carried at cost, which is not in
excess of each property's estimated net realizable value. Cost
includes all costs directly related to the acquisition of each
property, including legal fees and commissions, and all costs
of making improvements to the acquired properties.
Depreciation on the building and improvements is computed
using the straight-line method over estimated useful lives.
Amortization of tenant improvements is computed using the
straight-line method over the initial lease terms of the
respective leases. Repairs and maintenance are charged to
expense as incurred.
(c) Offering Costs
Offering costs are comprised of legal, accounting, financial
advisory, printing, commissions and other costs incurred in
connection with the offering of securities on July 1, 1995 and
the private placement of common stock on December 28, 1995.
These costs totaling $3.9 million were charged to
shareholders' equity upon consummation of the offering and
private placement, $830,000 of which was accrued at December
31, 1995.
(d) Cash and Cash Equivalents and Restricted Cash
Cash and Cash Equivalents - Includes cash, time deposits,
money market accounts and all highly liquid investments with
original maturities of three months or less when purchased.
Restricted Cash - Principally is comprised of amounts held
directly or indirectly by Bankers Trust Company pursuant to
the terms of the AP Southeast Partnership Indenture (see note
4). Such amounts include $7.0 million which the Company has
deposited as additional security for the senior mortgage,
which will be disbursed to the Company for tenant lease-up
costs in the event the Company has insufficient cash to cover
such costs. Restricted cash also includes amounts escrowed for
real estate taxes pursuant to the terms of the GECC mortgage
notes payable (see note 4).
(e) Deferred Costs
Deferred loan costs incurred in connection with financing are
amortized using the interest method over the term of the loan.
Amortization of deferred loan costs is included in interest
expense in the accompanying consolidated and combined
financial statements. Deferred leasing costs are comprised
primarily of leasing commissions and are amortized on a
straight-line basis over the initial term of the respective
leases.
19
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
(f) Goodwill and Management Contracts
Goodwill and management contracts related to the acquisition
of CSI and CRMSI is being amortized over the anticipated
period of benefit, which ranges from five to twenty years, on
a straight-line basis. Goodwill related to the costs incurred
by the Company in excess of the fair value of the net assets
acquired from CRI is being amortized on a straight-line basis
over five years.
The Company periodically reevaluates the recoverability of its
intangible assets as well as their amortization periods to
determine whether an adjustment to the carrying value or a
revision to the estimated useful lives is appropriate. The
primary indicators of recoverability for the Company's
intangible assets are the current and forecasted operating
cash flows which pertain to a particular management agreement.
A management agreement that has a deficit in its cash flow
from the management of properties for a full fiscal year, in
light of the surrounding economic environment, is viewed by
the Company as a situation which could indicate impairment of
value. Taking into account the above factors, the Company
determines that an impairment loss has been triggered when the
future undiscounted cash flows associated with the intangible
asset does not exceed its current carrying amount and the
amount of the impairment loss to be recorded is the difference
between the current carrying amount and the future projected
undiscounted cash flows. The Company currently is not
experiencing a deficit in cash flows from the management of
properties. Based on the Company's policy, management believes
that there is no impairment of value related to the intangible
assets as of December 31, 1995.
(g) Organization Costs
Organization costs are amortized using the straight-line
method over five years.
(h) Revenue Recognition
Rental income adjusted for concessions and fixed escalations
is recognized for financial reporting purposes on a
straight-line basis over the initial term of each lease.
Deferred rent on each lease is recognized for the difference
between rental income calculated on the straight-line basis
and the rental payments actually required under the terms of
each lease. Any such amounts deemed uncollectible are reserved
in the period such a determination is made. For sales of real
estate, profit is recognized in full when the collectibility
of the sales price is reasonably assured and the earnings
process is virtually complete. When the sale does not meet the
requirements for recognition of income, profit is deferred
until such requirements are met.
(i) Earnings Per Share of Common Stock
Earnings per share of common stock for the Company for the
year ended December 31, 1995 has been computed by dividing
income before extraordinary item, the extraordinary item, and
net income by the weighted average number of shares of common
stock outstanding during the period (see note 1). Common stock
equivalents included in the computation represent shares
issuable upon assumed exercise of stock options and warrants
which would have a dilutive effect. All of the stock warrants
and the vast majority of the stock options were antidilutive.
The stock options which had a dilutive effect diluted the per
share amounts by less than 3% and were not considered in
computing the weighted average number of shares outstanding
during
20
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
the year ended December 31, 1995. Earnings per share
information is not presented for the Predecessor Entities for
the year ended December 31, 1994 or the periods of inception
during 1993 to December 31, 1993 as the Predecessor Entities
were partnerships.
(j) Income Taxes
The Company intends to qualify as a real estate investment
trust "REIT" under the provisions of the Internal Revenue Code
for 1995. Under these provisions, the Company is required to
distribute at least 95% of its taxable income to its
shareholders to maintain this qualification and not be subject
to federal income taxes for the portion of taxable income
distributed. As of December 31, 1995, the Company had not
distributed at least 95% of its taxable income to its
shareholders. The Company will elect under Internal Revenue
Code section 858 to declare a dividend in 1996 and take a
dividends paid deduction for it in 1995, in order for the
Company to effectively distribute at least 100% of its 1995
taxable income. After this section 858 dividend is paid, the
Company's effective distributions will equal or exceed the
Company's 1995 taxable income, and therefore no provision for
federal income taxes has been made. To maintain REIT
qualification, the Company must also satisfy tests concerning
the nature of its assets and income and meet certain
recordkeeping requirements.
The estimated taxable income for the year ended December 31,
1995, is approximately $3.5 million prior to the dividends
paid deduction. The difference between net income for
financial reporting purposes and taxable income is primarily
due to the recognition of rental income on a straight-line
basis for financial reporting purposes and differences in
depreciable lives of the rental properties and improvements
thereto. The differences between the tax basis and the
reported amounts of assets and liabilities is approximately
$3.0 million and $2.0 million less, respectively, compared to
financial reporting amounts.
(k) Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
(l) Reclassifications
The 1993 and 1994 financial statements have been reclassified
to conform to the current period presentation.
21
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
(3) Investments in Real Estate
Components of rental properties as of December 31, 1995 and 1994, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful
1995 1994 Lives
---- ---- -----
<S> <C> <C> <C>
Rental property land $ 54,493 42,375 -
Buildings and improvement 222,417 160,765 10 to 40 years
Tenant improvements 13,585 5,404 Life of lease
Construction in progress 502 - -
---------- -------
290,997 208,544
Accumulated depreciation (11,590) (5,279)
-------- ---------
$ 279,407 203,265
======= =======
</TABLE>
Forty-six of the Company's 61 rental properties with a net book value
of $199.0 million are pledged as security for the Company's $140.0
million mortgage note (see note 4). Three of the rental properties with
a net book value of $48.0 million are pledged as security for the
Company's two mortgage notes payable held by GECC (see note 4).
Space in the properties is leased to tenants under month-to-month
leases as well as operating leases with initial terms ranging from one
to twenty years. Leases provide for base rent plus reimbursement of
certain operating expenses.
Commitments to complete improvements on rental properties as they are
occupied total approximately $200,000 at December 31, 1995.
Future minimum rentals, excluding tenant reimbursements of operating
expenses, under noncancelable operating leases as of December 31, 1995
are (in thousands):
Year ending December 31:
1996 $ 42,554
1997 36,807
1998 30,180
1999 22,927
2000 16,441
Thereafter 32,412
--------
Total future minimum rentals $ 181,321
=======
As discussed in note 9, the Company acquired approximately 278 acres of
undeveloped land and simultaneously sold approximately 48 of such acres
for $2.1 million and recognized a gain on the sale of $124,000.
22
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
(4) Mortgage Notes Payables
Mortgage notes payable consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Mortgage note payable to Kidder Peabody Acceptance Corporation I
("KPAC"), with monthly payments of interest at 7.88% with all
principal due on January 31, 2001 and secured by 46 of the
Company's rental properties with a net book value of $199.0
million, as well as an assignment of rents and other items at the
properties
$ 140,000 140,000
Mortgage note payable to General Electric Capital Corporation ("GECC"),
as modified, with monthly payments of interest at GECC's Composite
Commercial Paper Rate plus 4.25% (10.08% at December 31, 1995)
with all principal due on April 27, 1999 and secured by three of
the Company's rental properties with a net book value of $48.0
million, as well as an assignment of rents and other items at the
properties.
30,500 -
Mortgage note payable to GECC with monthly payments of interest at
GECC's Composite Commercial Paper Rate plus 4.00% (9.83% at
December 31, 1995) with a maturity date of April 27, 1999 and
secured by the same three rental properties noted above as well as
an assignment of rents and other items at the properties
11,365 -
Unsecured note payable with monthly payments of interest at 11.50%.
This note was paid in full on December 28, 1995
- 20,000
Other 8 -
------------ ----
$ 181,873 160,000
======= =======
</TABLE>
Pursuant to an Indenture, dated March 1, 1994 (the "AP Southeast
Partnership Indenture"), amount AP Southeast Partnership, Bankers Trust
Company of California, N.A. and Bankers Trust Company, AP Southeast
Partnership issued a Mortgage Note in the principal amount of $140.0
million (the "Mortgage Note") to Kidder Peabody Acceptance Corporation
I ("KPAC"). The Mortgage Note bears interest at the rate of 7.88% per
annum and the entire $140.0 million principal balance is due on January
31, 2001. The Mortgage Note is secured by a blanket first mortgage lien
on all 46 of the AP Southeast Partnership properties. The Mortgage Note
is further secured by (i) a first priority assignment of all present
and future lease encumbering portions of the AP Southeast Partnership
properties, (ii) a security interest in any personal property owned by
AP Southeast Partnership and (iii) a collateral assignment of the
right, title and interest of AP Southeast Partnership in and rights to
all management agreements relating to the AP Southeast Partnership
properties.
23
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
The Mortgage Note is a limited recourse obligation of AP Southeast
Partnership as to which, in the event of a default under the Indenture
of the Mortgage, recourse may be had only against the specific AP
Southeast Partnership properties and other assets that have been
pledged as security thereof.
The Mortgage Note held by KPAC was then deposited into a Real Estate
Mortgage Investment Conduit ("REMIC") Trust, whose pass-through
certificates were sold to the public. This transaction had no material
impact on the financial position of the AP Southeast Partnership.
The AP Southeast Partnership also had an unsecured junior note
financing of $20.0 million which had a fixed rate of interest of 11.5%
and was repayable in full on February 15, 2019. The junior note was
subordinated to the Mortgage Note, was nonrecourse to the AP Southeast
Partnership and contained restrictive covenants regarding repayment and
property operations. The junior lender is an affiliate of a limited
partner of the Apollo Fund, the principal stockholder of the Company.
The junior note was paid off in full on December 28, 1995. An
extraordinary loss of $429,000 resulted from this transaction related
to the write-off of unamortized deferred loan costs.
The Company acquired two loans with General Electric Capital
Corporation ("GECC") in connection with the Company's acquisition of
Crocker Realty Investors, Inc. Both of the loans have floating interest
rates based on the GECC Composite Commercial Paper Rate, which was
5.83% at December 31, 1995. The first loan (as amended on April 27,
1994), which at December 31, 1995 had an outstanding principal balance
of $11.4 million and approximately $85,000 available to be drawn upon,
bears interest at the rate of 9.83% per annum (at December 31, 1995).
The second loan, which had an outstanding principal balance of $30.5
million at December 31, 1995, bears interest at the rate of 10.08% per
annum (at December 31, 1995). Both loans require monthly payments of
interest. The outstanding principal balance of the first loan is due at
maturity on April 27, 1999. The outstanding principal balance of the
second loan is payable in an amount equal to 50% of the annual cash
flow generated by the One Boca Place property after payment of interest
on the loan and tenant improvements and expenses on the One Boca Place
property for each calendar year subsequent to 1995. This payment is
limited to a maximum amount of $750,000 per year. All remaining unpaid
principal on the second loan is payable at maturity on April 27, 1999.
An additional interest amount of $115,000 and $1.6 million payable on
the first and second GECC loans noted above, respectively, is due upon
any prepayment (at GECC's option) or at the respective loan's maturity.
These additional interest amounts were included in the Company's
calculation of the fair value of debt acquired in the CRI Merger. The
difference between the amount calculated as the fair value of debt
acquired, including the additional interest amounts, and the
outstanding principal balance of the GECC loans at the date of the CRI
Merger, $1.9 million, was recorded as Other Liabilities and is
reflected as such in the financial statements. This amount is being
amortized using the interest method down to the actual amount of
additional interest payable of $1.7 million at the maturity date of the
loans, April 27, 1999.
In connection with the second GECC loan noted above, GECC was issued a
warrant that, after adjustments, currently entitles it to purchase
173,102 shares of the Company's common stock at an exercise price of
$9.24 per share. The warrant contains anti-dilutive provisions which
may result in an adjustment to the actual number of shares and exercise
price per share each time the Company issues more shares of common
stock. Upon any prepayment of the loan or at the loan's maturity
(whether by acceleration or otherwise), GECC will, at its option, be
entitled to exercise the warrant by making a payment of $1.6 million to
the Company.
24
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
(5) Transactions With Related Parties
Direct acquisition costs, which have been capitalized to land and
buildings, include fees paid in 1993 to Patriot American Asset
Management Corporation ("Patriot American") in the amount of
$1,996,000. Patriot American served as the asset manager for the AP
Southeast Partnership and Fontaine Partnership portfolios of properties
on an ongoing basis and served as property manager on certain of the
properties. Management fees for the years ended December 31, 1995 and
1994, and the periods of inception during 1993 to December 31, 1993,
include Patriot American asset management fees of $475,000, $1,072,000
and $100,000, respectively. Patriot American also provided asset
management services to the general partner of the Apollo Fund for other
unrelated investments. Additionally, the controlling investor of
Patriot American is also an investor as a limited partner in the
general partner of the Apollo Fund. Patriot American's contract was
terminated on June 30, 1995.
At December 31, 1994, the Company owed the Apollo Fund $487,000. During
the year ended December 31, 1995, this amount was forgiven by the
Apollo Fund and was recorded as additional paid-in capital by the
Company.
(6) Employment Agreements
The Company has entered into employment agreements, effective as of
July 1, 1995, with each of Messrs. Crocker, Ackerman and Onisko. The
agreements with Messrs. Crocker and Ackerman have five-year terms; the
agreement with Mr. Onisko has a three-year term. Under their respective
employment agreements, Mr. Crocker will serve as Chairman of the Board
and Chief Executive Officer, Mr. Ackerman will serve as President and
Chief Operating Officer and Mr. Onisko will serve as Executive Vice
President and Chief Financial Officer. The agreements provide for base
annual salaries of $275,000 for Mr. Crocker, $225,000 for Mr. Ackerman
and $150,000 for Mr. Onisko and bonuses, if any, in the sole discretion
of the Company's Board of Directors. As noted below, the Company has
granted non-qualified stock options to purchase 500,000 shares of
Common Stock to each of Messrs. Crocker and Ackerman, and non-qualified
stock options to purchase 50,000 shares of Common Stock to Mr. Onisko,
in each case pursuant to the Company's 1995 Stock Option Plan (see note
7). These options were granted upon consummation of the CRI Merger and
are exercisable at $10.00 per share as follows: (a) with respect to
options granted to Messrs. Crocker and Ackerman, (i) for 20% of the
shares covered thereby after the first anniversary of the date of
grant; (ii) for an additional 20% of the shares covered thereby on each
of the second, third and fourth anniversaries; and (iii) for the
balance after the fifth anniversary and (b) with respect to options
granted to Mr. Onisko, for 33 1/3% of the shares covered thereby on
each of the first, second and third anniversaries of the date of grant.
All of the options will expire on the tenth anniversary of the date of
grant.
(7) 1995 Stock Option Plan
The Company has adopted the 1995 Stock Option Plan (the "Stock Option
Plan"). The Stock Option Plan provides for the granting of
non-qualified stock options to purchase Common Stock to employees and,
as described below, non-employee directors of the Company. The Stock
Option Plan will be administered by the Compensation Committee or
another committee appointed from time to time by the Company's Board of
Directors. The Stock Option Plan will terminate in May 2005, unless
sooner terminated by the Company's Board of Directors.
25
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
A maximum of 1,275,000 shares of Common Stock (subject to adjustment
under certain circumstances) may be issued under the Stock Option Plan.
Under the terms of the Stock Option Plan, no person may be granted
options in any calendar year to purchase more than 500,000 shares of
Common Stock.
As of December 31, 1995, options to purchase an aggregate of 1,050,000
shares of Common Stock are outstanding to Messrs. Crocker, Ackerman and
Onisko, options to purchase 192,000 shares of Common Stock are
outstanding to other officers, and options to purchase an aggregate of
21,000 shares of Common Stock are outstanding to the seven non-employee
directors. The exercise price of the options granted to the officers
and directors is $10.00 and $8.00 per share, respectively. One-third of
the options of the non-employee directors become exercisable on the
date of grant and the balance will become exercisable in two equal
annual installments, beginning on the first anniversary of the date of
grant, and will have a term of ten years.
The Stock Option Plan provides that the option exercise price may not
be less than the fair market value of the shares of Common Stock on the
date of the grant of the option.
(8) Estimated Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, "Disclosures About Fair Value of Financial Instrments" (FAS 107).
The estimated fair value amounts have been determined by management of
the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair value amounts.
At December 31, 1995, the carrying amount and the fair value of the
Company's financial instruments, as determined under FAS 107, were as
follows (in thousands):
Carrying Estimated
Amount Fair Value
Senior mortgage financing notes $ 140,000 133,000
GECC note $ 30,500 (A) 32,200
GECC note $ 11,365 (A) 11,500
Other $ 8 8
(A) The $1.9 million difference between the amount calculated as
the fair value of debt acquired and the outstanding principle
balance of the GECC loans at the date of the CRI Merger was
recorded as Other Liabilities and is reflected as such in the
financial statements. (See note 4)
The estimated fair value of the notes was based upon current market
values for instruments with similar terms.
26
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
(9) Acquisitions and Private Placements
As a result of the July 1, 1995 CRI Merger and the June 30, 1995 CRMSI
Merger, the Company succeeded to the interests of Crocker Realty
Investors, Inc. ("CRI") in a portfolio of three office properties and
to the property, asset and construction management business and leasing
and brokerage business of CRMSI and CSI and to all of the assets and
liabilities of the respective entities.
The CRMSI Merger was accounted for under the purchase method of
accounting based on the estimated fair value of the assets acquired as
there was no established market for the Company's common stock prior to
the consummation of the CRMSI Merger. The assets acquired in the CRMSI
Merger are comprised primarily of building, construction and leasing
management agreements and leasing and brokerage operations. Of the
total estimated fair value of the assets acquired, approximately $1.4
million is classified as Management Contracts, and approximately $3.7
million is classified as Goodwill. The Company owns 100% of the issued
and outstanding non-voting preferred stock and 3% of the issued and
outstanding common stock of the leasing company which provides leasing
and brokerage services to properties not owned by the Company, CRT
Leasing, Inc., a Delaware corporation. CRT Leasing, Inc. has been
consolidated into the Company's financial statements. The non-voting
preferred stock generally is entitled to dividends equal to 95% of all
distributions of CRT Leasing, Inc. The portion of the estimated fair
value allocated to Management Contracts is being amortized over a
period of 5-10 years and the portion attributable to Goodwill is being
amortized over a period of 20 years.
The CRI Merger was accounted for under the purchase method of
accounting based on the estimated fair value of the assets and
liabilities acquired as there was no established market for the
Company's common stock prior to the consummation of the CRI Merger. The
assets acquired were comprised primarily of three office properties
with a combined appraised value of approximately $48.1 million
encumbered by approximately $41.4 million of variable interest rate
mortgage notes payable.
On December 28, 1995, the Company sold 8,818,231 shares of Common Stock
to AEW Partners, L.P., a pension fund advisor ("AEW"), in a private
placement transaction for $64.8 million (approximately $7.35 per
share). Additional shares may be issued to AEW in the event certain
purchase price adjustments are triggered. Management believes the
number of additional shares which may be issued to AEW will not be
material to the number of shares originally issued to AEW.
On December 29, 1995, the Company completed the acquisition of 11
buildings and approximately 278 acres of land within Sabal Park in
Tampa, Florida, from Sabal Corporation, a wholly owned subsidiary of
Stone and Webster Incorporated. The assets were acquired for an
aggregate cash consideration of $42.5 million. In a concurrent
transaction, the Company contracted to sell approximately 63 acres of
the land acquired from Sabal Corporation to Security Capital Industrial
Trust and sold approximately 48 of such acres on December 29, 1995 with
the sale of remaining land (consisting of two parcels) contingent upon
the resolution or satisfaction of certain conditions.
On January 12, 1996, the Company sold 1,875,000 shares of the Common
Stock to Fortis Benefits Insurance Company and its affiliate, Time
Insurance Company, in a private placement transaction for $15.0 million
($8.00 per share).
27
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
On January 16, 1996, the Company and certain of its subsidiaries
completed the acquisition of (i) nine office buildings located in
Memphis, Tennessee, and in Tampa and Jacksonville, Florida, (ii) four
parcels of land in Memphis and Tampa and (iii) management contracts for
an aggregate of approximately 700,000 square feet of space in Memphis
and Tampa, each from affiliates of Towermarc Corporation (see note 12).
The following unaudited pro forma consolidated results of operations
for the years ended December 31, 1995 and 1994 have been prepared
assuming the above transactions occurred at the beginning of each such
period, after giving effect to certain adjustments, including the
amortization of goodwill and management contracts. The following
unaudited pro forma consolidated results of operations is not
necessarily indicative of results of operations that would have
occurred had the transactions been made as of those dates or of results
that may occur in the future (dollars in thousands except per share
amounts):
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1994
---- ----
(unaudited)
<S> <C> <C>
Revenue $ 69,128 $ 67,083
============ ============
Net income $ 8,074 $ 9,348
============= =============
Net income per common share $ 0.30 $ 0.35
============== =============
Weighted average number of common shares outstanding 26,925,431 26,925,431
========== ==========
Pro forma net income is approximately $1,274,000 lower for the year
ended December 31, 1995 compared to the year ended December 31, 1994,
even though pro forma revenue (excluding interest and other income)
increased during the respective periods by approximately $2,045,000.
This is primarily due to decreases in sales commission and lease
termination fee revenue. A sales commission of $1,157,000 was earned
during the year ended December 31, 1994 on the sale of two third-party
owned properties. Lease termination fee revenue was approximately
$291,000 and $575,000 for the years ended December 31, 1995 and 1994.
(10) Commitments and Contingencies
Under the terms of the original purchase agreement pursuant to which AP
Southeast Partnership acquired its 46 properties from NationsBank of
North Carolina, N.A., in November 1993, AP Southeast Partnership is
obligated to pay a Deferred Contingent Purchase Price, as defined in
the AP Southeast Partnership purchase agreement. This contingent
payment, which will in no event exceed $4.4 million, is due on April 1,
1998, if the actual four-year cumulative cash flow for fiscal years
1994 to 1997 of the AP Southeast Partnership properties (as defined)
exceeds the projected four-year cash flow (as defined). Based on actual
results for 1994 and 1995 and estimates of future operations,
management does not believe that any Deferred Contingent Purchase Price
will be payable.
The Company is not currently involved in any material litigation, nor,
to its knowledge, is any material litigation currently threatened
against it or any of its properties, except for routine litigation
arising in the ordinary course of business, most of which is expected
to be covered by liability insurance. While the resolution of these
matters cannot be predicted with certainty, management believes that
the final outcome of such matters will not have a material adverse
effect on the financial position, results of operations or cash flows
of the Company.
28
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
Management believes that any costs associated with environmental risks
or compliance with applicable environmental laws or regulations to
which the Company may be subject would not have a material adverse
effect on the financial condition, results of operations or cash flows
of the Company.
A number of federal, state and local laws exist, such as the Americans
with Disabilities Act, which may require modifications to existing
buildings to improve, or restrict certain renovations, by requiring
access to such buildings by disabled persons. Additional legislation
may impose further requirements on owners with respect to access by
disabled persons. The costs of compliance with such laws may be
substantial and may reduce overall returns of the Company's
investments. The Company believes that all of its properties are in
substantial compliance with laws currently in effect, and will review
its properties, periodically, to determine continuing compliance with
existing laws and any additional laws that are hereafter promulgated.
(11) Concentrations of Credit Risk
The Company owns office properties located in seven different states in
the Southeast United States, including Alabama, Georgia, Florida, North
Carolina, South Carolina, Tennessee and Virginia. Financial instruments
that potentially subject the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and trade receivables.
As required under the terms of the AP Southeast Partnership Indenture
(see note 4), certain receipts arising from the operations of the
encumbered properties are required to be deposited in lockbox accounts
maintained at NationsBank, N.A. These amounts, which total
approximately $0.7 million and $0.8 million at December 31, 1995 and
1994, respectively, are swept periodically into trust accounts
maintained by the Indenture Trustee, Bankers Trust Company of
California, N.A. ("Trustee"). Funds held by the Trustee at both
December 31, 1995 and 1994 include $7 million deposited as additional
security for the senior mortgage note of which $6.5 million is
continually invested in corporate commercial paper with a maturity of
approximately 30 days and $0.5 million is continually maintained in one
of the Trustee's treasury money funds. All other funds deposited with
the Trustee, totaling approximately $0.6 million and $2.2 million at
December 31, 1995 and 1994, respectively, are also maintained in one of
the Trustee's treasury money funds. The carrying value of the
investments approximates fair market value because of the short
maturity of the investments and the Company believes that it is not
exposed to any significant risk on such investments. In accordance with
the AP Southeast Partnership Indenture, certain funds are transferred
monthly to the Company to fund operations and capital expenditures.
The Company places the vast majority of its cash and cash equivalents
with First Union National Bank, N.A. ("First Union"). Such amounts are
generally held in either noninterest bearing accounts or money market
accounts, and the total amount held by First Union at any given time
usually substantially exceeds the amounts that would be guaranteed by
agencies of the United States Government in the event that First Union
defaults.
The majority of available funds held in the Company's primary operating
account at First Union are invested nightly by First Union in reverse
purchase agreements. At December 31, 1995, the Company held $5.5
million of such securities under agreements to resell. Generally, the
maturity date of the Company's reverse repurchase agreements is the
next day of business. Due to the short-term nature of the agreements,
the Company does not take possession of the securities, which are
instead held at First Union from which it purchases the
29
<PAGE>
CROCKER REALTY TRUST, INC.
Notes to Consolidated and Combined Financial Statements
securities. The carrying value of the agreements approximates fair
market value because of the short maturity of the investments and the
Company believes that it is not exposed to any significant risk on such
investments.
Concentrations of credit risk with respect to trade receivables are
limited because of the large number of geographically diverse customers
which make up the Company's customer base, thus spreading the credit
risk. The carrying value of trade receivables approximates fair market
value because of the short maturity of the receivables and the Company
believes that it is not exposed to any significant risk on such
receivables.
(12) Subsequent Events
On January 12, 1996, the Company sold 1,875,000 shares of the Common
Stock to Fortis Benefits Insurance Company and its affiliate, Time
Insurance Company, in a private placement transaction for $15.0 million
($8.00 per share).
On January 16, 1996, the Company and certain of its subsidiaries
completed the acquisition of (i) nine office buildings located in
Memphis, Tennessee, and in Tampa and Jacksonville, Florida, (ii) four
parcels of land in Memphis and Tampa and (iii) management contracts for
an aggregate of approximately 700,000 square feet of space in Memphis
and Tampa, each from affiliates of Towermarc Corporation. The aggregate
consideration for the acquisitions was approximately $81.4 million and
was paid as follows: (i) $900,000 in cash; (ii) $67.2 million in the
form of assumption of indebtedness; and (iii) 1,687,939 shares of
common stock of the Company. Subsequent to the closing, the Company
paid down an aggregate of approximately $9.4 million of the debt
assumed.
The Company is currently developing an office building in Center Point
Office Park in Columbia, South Carolina. The total cost of the project
is expected to be approximately $7.6 million, which includes the
purchase of land for approximately $1.2 million and the construction of
an approximately 81,000 square foot office building. Pursuant to a
contract entered into with the builder, the construction costs are
fixed. The entire building has been leased to a single tenant.
The Company has entered into a contract to acquire eight acres of land
in Greenville, South Carolina, for $1.6 million. The Company believes
that it can develop 100,000 square feet of rentable space on this land.
30
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
</TABLE>
<TABLE>
<CAPTION>
ASSETS March 31,
1996
---------
<S> <C>
Investment in real estate:
Rental properties, net of accumulated depreciation of
$14,200 at March 31, 1996 $357,617
Office building under construction 2,137
Land held for investment 16,285
Other assets:
Cash and cash equivalents 6,404
Restricted cash 11,338
Rents and expense reimbursements receivable, net of
allowance for doubtful accounts of $111 at
March 31, 1996 1,267
Accounts receivable from managed properties 290
Deferred straight-line rents receivable 3,461
Deferred acquisition and offering costs 126
Deferred loan costs, net of accumulated amortization of
$1,593 at March 31, 1996 4,369
Deferred leasing costs, net of accumulated amortization of
$1,192 at March 31, 1996 3,087
Prepaid expenses and other assets 1,297
Furniture, fixtures and equipment, net of accumulated
depreciation of $97 at March 31, 1996 625
Management contracts, net of accumulated amortization
of $156 at March 31, 1996 1,272
Goodwill, net of accumulated amortization of $248
at March 31, 1996 3,859
--------
Total assets $413,434
========
</TABLE>
31
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
(in thousands, except for share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31,
1996
---------
<S> <C>
Liabilities:
Notes payable $239,502
Accounts payable and accrued expenses 3,627
Accrued interest expense 518
Accrued real estate taxes 1,519
Accrued acquisition and offering costs 772
Dividend payable 4,047
Rents paid in advance 1,160
Tenant security deposits 1,494
Deferred straight-line rents payable 223
Other liabilities 1,909
--------
Total liabilities 254,771
--------
Stockholders' equity:
Preferred stock, $.01 par value, Authorized and
unissued 10,000,000 shares -
Common stock, $.01 par value, Authorized 50,000,000
shares; issued and outstanding 26,981,087 shares
at March 31, 1996 270
Additional paid-in capita1 158,393
Retained earnings -
--------
Total stockholders' equity 158,663
--------
Total liabilities and stockholders' equity $413,434
========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
Rental income and tenant reimbursements $ 16,970 $ 9,161
Management fees-building, development and
construction 392 -
Leasing commissions 198 -
----------- -----------
17,560 9,161
----------- -----------
Expenses:
Rental property operating expenses 4,594 1,319
Real estate taxes andinsurance 1,601 821
Management fees 115 511
Amortization of deferred leasing costs 197 153
Depreciation and amortization of property and
equipment 2,663 1,312
Amortization of goodwill and management contracts 134 -
General and administrative expenses 1,480 279
Costs incurred for terminated offering 390 -
----------- -----------
11,174 4,395
----------- -----------
Operating income 6,386 4,766
----------- -----------
Other income (expense):
Interest and other income 300 238
Interest expense (5,055) (3,502)
----------- -----------
Total other income (expense) (4,755) (3,264)
----------- -----------
Net income $ 1,631 1,502
=========== ===========
Net income per share of common stock $ .06 $ 0.12
=========== ===========
Weighted average number of shares outstanding 26,429,113 12,530,942
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except for shares issued)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,631 1,502
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 2,663 1,312
Amortization of loan costs 272 171
Amortization of deferred leasing costs 197 153
Amortization of organization costs 1 1
Amortization of goodwill and management
contracts 134 -
Bad debt expense 2 -
Stock bonuses 231 -
(Increase) decrease in operating assets:
Deferred straight-line rents receivable (313) (320)
Rents and other receivables (386) 185
Prepaid expenses and other assets (632) (190)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 599 (708)
Accrued interest (81) -
Accrued real estate taxes 1,194 449
Accrued terminated offering costs 278 -
Rents paid in advance 482 (63)
Tenant security deposits 125 229
Deferred straight-line rents payable 67 -
------- ------
Total adjustments 4,833 1,219
------- ------
Net cash provided by operating
activities 6,464 2,721
------- ------
Cash flows from investing activities:
Acquisition of rental properties and land (1,724) -
Acquisition of land held for investment (1,648) -
Office building under construction (1,671) -
Payments for building and tenant improvements (905) (681)
Payment of deferred leasing costs (304) (396)
Payments for furniture, fixtures and equipment (85) -
Refund of deferred acquisition costs, net 36 -
------- ------
Net cash used in investing activities (6,301) (1,077)
------- ------
</TABLE>
(Continued)
34
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(In thousands, except for shares issued)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock $15,000 -
Net (increase) decrease in restricted cash (2,331) (1,074)
Payments under notes payable (9,609) -
Dividends paid (809) (500)
Payment of offering costs (791) -
Payment of financing costs (938) -
------- ------
Net cash provided by (used in) financing
activities 522 (1,574)
------- ------
Net increase in cash and cash equivalents 685 70
Cash and cash equivalents at beginning of period 5,719 132
------- ------
Cash and cash equivalents at end of period $ 6,404 202
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 4,864 3,333
======= ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended March 31, 1995, the Company exchanged 62,500
shares of common stock for the shares of common stock of Options Corp. held by
the Apollo Fund.
During the three months ended March 31, 1996, the Company issued 24,000 shares
of common stock which are fully-vested and 31,656 shares of common stock which
vest 100% in three years to certain officers of the Company.
On January 16, 1996, the Company issued 1,687,939 shares of common stock in
connection with the Towermarc acquisition. Details of assets acquired,
liabilities assumed and common stock issued in connection with the Towermarc
acquisition is as follows:
Rental properties $(79,208)
Land held for investment (3,460)
Deferred acquisition costs 1,713
Mortgage notes payable 67,237
Accrued interest expense 238
Accrued real estate taxes 71
Accrued acquisition costs (975)
Common stock 17
Additional paid-in capital 12,643
-------
Net cash used in acquisition (1,724)
=======
See accompanying notes to consolidated financial statements.
35
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND FORMATION TRANSACTIONS
Crocker Realty Trust, Inc. (the "Company") was incorporated under the Maryland
General Corporation Law on September 21, 1994 under the name of Southeast Realty
Corp. On June 30, 1995, the Company changed its name to Crocker Realty Trust,
Inc. The Company was formed to succeed to the interests of Apollo Real Estate
Investment Fund, L.P. (the "Apollo Fund") and its affiliates in AP Southeast
Portfolio Partners, L.P. ("AP Southeast Partnership"), AP-GP Southeast Portfolio
Partners, L.P., Southeast Portfolio Operating Corporation, AP Fontaine III
Partners, L.P., AP-GP Fontaine III Partners, L.P., Fontaine III Operating
Corporation and Southeast Options Operating Corporation (collectively, the
"Predecessor Entities"), which collectively include a portfolio of 47 office and
office/service properties and options to acquire up to five parcels of
undeveloped land adjacent to certain of such properties.
The Company accounted for the acquisitions of the interests of the Apollo Fund
and its affiliates at historical cost in a manner similar to that in a pooling
of interests accounting due to the above entities being under the common control
of the Apollo Fund and its affiliates.
On June 30, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended (the "CRMSI Merger Agreement") among the Company,
SER Management, Inc. ("SER Management"), Crocker Realty Management Services,
Inc. ("CRMSI") and Crocker & Sons, Inc. ("CSI"), CRMSI and CSI merged with and
into SER Management, a wholly-owned subsidiary of the Company (the "CRMSI
Merger"). The outstanding shares of CRMSI and CSI were exchanged for 637,500
shares of the Company's common stock, of which 457,531 shares were issued to the
Chairman of the Board and Chief Executive Officer of the Company and his spouse,
149,974 shares were issued to the President and Chief Operating Officer of the
Company and 29,995 shares were issued to the Executive Vice President and Chief
Financial Officer of the Company.
As a result of the CRMSI Merger, the Company succeeded to the interests of the
property, asset and construction management business and leasing and brokerage
business of CRMSI and CSI and to their respective assets and liabilities.
On July 1, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended, (the "CRI Merger Agreement"), among the Company,
SER Acquisition, inc. ("SER Acquisition") and Crocker Realty Investors, Inc.
("CRI"), CRI merged with and into SER Acquisition, a wholly-owned subsidiary of
the Company (the "CRI Merger"). Upon consummation of the CRI Merger; (i) the
outstanding shares of common stock of CRI were exchanged for 1,020,000 shares of
the Company's common stock, (ii) the 2,340,000 CRI public warrants each
entitling the holder thereof to purchase, during the four year period ending
January 21, 1998, one share of CRI common stock at $10.00 per share (subject to
adjustment), were assumed by the Company and entitle the holders thereof to
purchase shares of the Company's common stock at the same price and on the same
terms and conditions as set forth in the CRI public warrants, and (iii) purchase
options held by certain individuals and GKN Securities Corp. (the Underwriter of
CRI's 1993 initial public offering) to purchase an aggregate of 210,292 shares
of CRI common stock at an exercise price of $7.85 per share of CRI common stock
and the warrant held by General Electric Capital Corporation to purchase an
aggregate of 160,000 shares of CRI common stock at an exercise price of $10.00
per share
36
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of CRI common stock were assumed by the Company and entitle the holders thereof
to purchase shares of the Company's common stock at the same price and on the
same terms and conditions as set forth in the instruments pursuant to which such
options and warrant were issued. On December 28, 1995, the Company entered into
an agreement to pay $360,000 to certain individuals and GKN Securities Corp. for
their purchase options and other rights held by GKN Securities Corp. The amount
was accrued and charged to additional paid-in capital at December 31, 1995 and
was paid in January 1996.
As a result of the CRI Merger, the Company succeeded to the interests of CRI in
a portfolio of three office properties and to all of the assets and liabilities
of CRI.
(2) BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been prepared
by the Company without audit. The statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the Company's financial position as of
March 31, 1996 and December 31, 1995, and the results of its operations and cash
flows for the three months ended March 31, 1996 and 1995. These consolidated
financial statements should be read in conjunction with the 1995 financial
statements and notes thereto included in the Company's Form 10-K.
The consolidated results of operations for the three months ending March 31,
1996 and 1995 are not necessarily indicative of the results to be expected for
the full year.
Certain reclassifications have been made to the March 31, 1995 balances in order
to conform to the presentation used at March 31, 1996.
(3) INCOME TAXES
The Company qualifies as a real estate investment trust ("REIT") under the
provisions of the Internal Revenue Code. Under these provisions, the Company is
required to distribute at least 95% of its taxable income to its shareholders to
maintain this qualification and not be subject to federal income taxes for the
portion of taxable income distributed. To maintain REIT qualification, the
Company must also satisfy tests concerning the nature of its assets and income
and meet certain recordkeeping requirements.
37
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) ACQUISITIONS AND PRIVATE PLACEMENTS
As a result of the July 1, 1995 CRI Merger and the June 30, 1995 CRMSI Merger,
the Company succeeded to the interests of CRI in a portfolio of three office
properties and to the property, asset and construction management business and
leasing and brokerage business of CRSI and CSI and to all of the assets and
liabilities of the respective entities.
The CRMSI Merger was accounted for under the purchase method of accounting based
on the estimated fair value of the assets acquired as there was no established
market for the Company's common stock prior to the consummation of the CRMSI
Merger. The assets acquired in the CRMSI Merger are comprised primarily of
building, construction and leasing management agreements and leasing and
brokerage operations. Of the total estimated fair value of the assets acquired,
approximately $1.4 million was classified as Management Contracts, and
approximately $3.7 million was classified as Goodwill. The Company owns 100% of
the issued and outstanding non-voting preferred stock and 9.9% of the issued and
outstanding common stock of the leasing company, CRT Leasing, Inc., a Delaware
corporation, which provides leasing and brokerage services to properties not
owned by the Company. CRT Leasing, Inc. has been consolidated into the Company's
financial statements. The non-voting preferred stock generally is entitled to
dividends equal to 95% of all distributions of CRT Leasing, Inc. The portion of
the estimated fair value allocated to Management Contracts is being amortized
over a period of 5-10 years and the portion attributable to Goodwill is being
amortized over a period of 20 years.
The CRI Merger was accounted for under the purchase method of accounting based
on the estimated fair value of the assets and liabilities acquired as there was
no established market for the Company's common stock prior to the consummation
of the CRI Merger. The assets acquired were comprised primarily of three office
properties with a combined appraised value of approximately $48.1 million
encumbered by approximately $41.4 million of variable interest rate mortgage
notes payable.
On December 28, 1995, the Company sold 8,818,231 shares of Common Stock to AEW
Partners, L.P., a pension fund advisor ("AEW"), in a private placement
transaction for $64.8 million (approximately $7.35 per share). Additional shares
may be issued to AEW in the event certain purchase price adjustments are
triggered. Management believes the number of additional shares which may be
issued to AEW will not be material in relation to the number of shares
originally issued to AEW.
On December 29, 1995, the Company completed the acquisition of 11 buildings and
approximately 278 acres of land within Sabal Park in Tampa, Florida, from Sabal
Corporation, a wholly-owned subsidiary of Stone and Webster Incorporated. The
assets were acquired for an aggregate cash consideration of $42.5 million. In a
concurrent transaction, the Company contracted to sell approximately 63 acres of
the land acquired from Sabal Corporation to Security Capital Industrial Trust
and sold approximately 48 of such acres on December 29, 1995 with the sale of
remaining land (consisting of two parcels) contingent upon the resolution or
satisfaction of certain conditions.
38
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 12, 1996, the Company sold 1,875,000 shares of the Common Stock to
Fortis Benefits Insurance Company and its affiliate, Time Insurance Company, in
a private placement transaction for $15.0 million ($8.00 per share).
On January 16, 1996, the Company and certain of its subsidiaries completed the
acquisition of (i) nine office buildings located in Memphis, Tennessee, and in
Tampa and Jacksonville, Florida, (ii) four parcels of land in Memphis and Tampa
and (iii) management contracts for an aggregate of approximately 700,000 square
feet of space in Memphis and Tampa, each from affiliates of Towermarc
Corporation.
The following unaudited pro forma consolidated results of operations for the
three months ended March 31, 1996 and 1995 have been prepared assuming the above
transactions occurred at the beginning of each such period, after giving effect
to certain adjustments, including depreciation and amortization. The following
unaudited pro forma consolidated results of operations is not necessarily
indicative of results of operations that would have occurred had the
transactions been made as of those dates or of results that may occur in the
future (dollars in thousands except per share amounts):
March 31,
------------------------
1996 1995
----------- ----------
(unaudited)
Revenue $ 18,091 17,282
========== ==========
Net income $ 1,661 2,019
========== ==========
Net income per common share $ 0.06 0.07
========== ==========
Weighted average number of common shares outstanding 26,981,087 26,981,087
========== ==========
Pro forma net income for the three months ended March 31, 1996 is lower than the
respective period in 1995 primarily due to the incurrence of $390,000 of costs
for a secondary offering in the first quarter of 1996 which was terminated.
The Company has made other acquisitions during the first quarter of 1996 which
are not included in the above pro forma consolidated results of operations as
follows:
The Company is currently developing an office building in Center Point Office
Park in Columbia, South Carolina. The total cost of the project is expected to
be approximately $7.6 million, which includes the January 4, 1996 purchase of
land for approximately $1.2 million and the construction of an approximately
81,000 square foot office building. Pursuant to a contract entered into with the
builder, the construction costs are fixed. The building is expected to be
completed in the fourth quarter of 1996 and is approximately 50% pre-leased.
On March 27, 1996, the Company acquired eight acres of land in Greenville, South
Carolina, for 1.6 million. The Company believes that it can develop 100,000
square feet of rentable space on this land.
39
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) COMMITMENTS AND CONTINGENCIES
Under the terms of the original purchase agreement pursuant to which AP
Southeast Partnership acquired its 46 properties from NationsBank of North
Carolina, N.A., in November 1993, AP Southeast Partnership is obligated to pay a
Deferred Contingent Purchase Price, as defined in the AP Southeast Partnership
purchase agreement. This contingent payment, which will in no event exceed $4.4
million, is due on April 1, 1998, if the actual four-year cumulative cash flow
of the AP Southeast Partnership properties (as defined) exceeds the projected
four-year cash flow (as defined). Based on actual results to date and estimates
of future operations, management does not believe that any Deferred Contingent
Purchase Price will be payable.
The Company is not currently involved in any material litigation, nor, to its
knowledge, is any material litigation currently threatened against it or any of
its properties, except for routine litigation arising in the ordinary course of
business, most of which is expected to be covered by liability insurance. While
the resolution of these matters cannot be predicted with certainty, management
believes that the final outcome of such matters will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
Management believes that any costs associated with environmental risks or
compliance with applicable environmental laws or regulations to which the
Company may be subject would not have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
A number of federal, state and local laws exist, such as the Americans with
Disabilities Act, which may require modifications to existing buildings to
improve, or restrict certain renovations, by requiring access to such buildings
by disabled persons. Additional legislation may impose further requirements on
owners with respect to access by disabled persons. The costs of compliance with
such laws may be substantial and may reduce overall returns of the Company's
investments. The Company believes that all of its properties are in substantial
compliance with laws currently in effect, and will review its properties,
periodically, to determine continuing compliance with existing laws and any
additional laws that are hereafter promulgated.
(6) SUBSEQUENT EVENT
On April 29, 1996, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Highwoods Properties, Inc ("Highwoods"). As a result of
the Merger, the outstanding shares of common stock of the Company will be
converted into the right to receive $11.02 per share in cash, subject to certain
adjustments. The Merger is conditioned upon, among other things, approval by
holders of at least two-thirds of the outstanding Common Stock and the continued
qualification of the Company as a real estate investment trust. Holders of
approximately 83% of the Common Stock have entered into an agreement with
Highwoods pursuant to which such holders have agreed to vote in favor of the
Merger.
40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Crocker Realty Trust, Inc.:
We have audited the accompanying Historical Summary of Gross Income and
Direct Operating Expenses ("Historical Summary") for certain properties
owned by Towermarc Corporation (the "Properties") for the year ended
December 31, 1995. This Historical Summary is the responsibility of the
Properties' management. Our responsibility is to express an opinion on the
Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Historical Summary is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and dislosures in the Historical Summary.
An audit also includes assessing the basis of accounting used and
significant estimates made by management, as well as evaluating the overall
presentation of the Historical Summary. We believe that our audit provides
a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the Registration Statement on Form S-11 of Crocker Realty Trust,
as described in Note 1 and are not intended to be a complete presentation
of the Properties' revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly,
in all material respects, the gross income and direct operating expenses
described in Note 1 of the Properties for the period ended December 31,
1995, in conformity with generally accepted accounting principles.
(Signature of Ernst & Young LLP)
Boston, Massachusetts
February 26, 1996
41
<PAGE>
Historical Summary of Gross Income
And Direct Operating Expenses
For Certain Properties Owned by Towermarc Corporation
For the year ended December 31, 1995
Gross Income
Rental Income $11,510,000
Other Income 208,000
-----------
11,718,000
------------
Direct Operating Expenses
Rental Property Operating Expenses 2,919,000
Real Estate Taxes and Insurance 1,632,000
General and Administrative 82,000
-----------
4,633,000
-----------
Gross Income in excess of Direct Operating Expenses $ 7,085,000
===========
42
<PAGE>
Notes to Historical Summary of Gross Income
and Direct Operating Expenses
1. Basis of Presentation and Summary of Significant Accounting Policies:
The accompanying Historical Summary of Gross Income and Direct
Operating Expenses (the "Historical Summary") relate to the three office
buildings and one parcel of land located in Tampa, Florida, one office
building located in Jacksonville, Florida and five office buildings and
two parcels of land located in Memphis, Tennessee (collectively, the
"Properties"), all owned and operated by Towermarc Corporation. The
office buildings aggregate approximately 680,000 rentable square feet. On
January 16, 1996 Crocker Realty Trust Inc. acquired these properties
from Towermarc Corporation and from its subsidiaries and majority owned
partnerships.
Basis of Presentation
The accompanying Historical Summary has been prepared in accordance with the
applicable rules and regulations of the Securities and Exchange
Commission for the acquisition of real estate operations for inclusion
in the Registration Statement on Form S-11 of the acquirer, Crocker
Realty Trust, Inc. Accordingly, certain historical expenses which may not
be comparable to the expenses expected to be incurred in the proposed
future operations of the Properties have been excluded. Excluded
expenses consist of depreciation and amortization, interest expense and
certain professional and administrative costs not directly related to
future operations.
Revenue and Expense Recognition
The accompanying Historical Summary has been prepared on the accrual
basis of accounting. In accordance with industry practice the properties
may provide certain rent concessions for new tenants. These concessions
generally take the form of several months free or reduced rent. Income
from operating leases which provide for varying rents over the lease term is
recognized on a straight-line basis over the lease term. During the year
ended December 31, 1995 a reduction to rental income of approximately
$335,000 was recorded to recognize the property's rental income on a straight
line basis. Other income includes a $125,000 lease termination payment
received by the Properties in 1995.
The individual leases on these Properties are generally for a term
of at least three years and provide for operating expense, a real estate
tax escalations and in certain cases for increases in minimum rent. Minimum
future rentals under non-cancelable leases in effect at December 31, 1995,
with terms greater than one year, under which the Properties is the lessor,
are summarized as follows:
Year
_____
1996 $10,943,000
1997 9,828,000
1998 8,275,000
1999 5,821,000
2000 3,771,000
Thereafter 5,638,000
___________
$44,276,000
____________
43
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Crocker Realty Investors, Inc.:
We have audited the financial statements of Crocker Realty Investors, Inc. as of
December 31, 1994 and 1993, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crocker Realty Investors, Inc.
at December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
February 3, 1995
44
<PAGE>
CROCKER REALTY INVESTORS, INC.
Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
Assets 1994 1993
- ------ ---- ----
<S> <C> <C>
Investment in real estate:
Rental properties, net of accumulated depreciation of $1,336,366 and
$140,188 at December 31, 1994 and 1993, respectively (notes
3, 4 and 5) $ 46,390,687 15,796,247
Other assets:
Cash 653,623 24,579
Rents and expense reimbursements receivable, net of allowance for
doubtful accounts of $10,240 at December 31, 1994 (notes 3 and
4) 213,472 35,394
Deferred straight-line rents receivable (note 3) 328,923 74,185
Deposits, preacquisition and deferred merger costs (notes 3, 5 and
9) 321,204 604,000
Deferred loan costs, net of accumulated amortization of $161,992
and $16,324 at December 31, 1994 and 1993, respectively (note 4)
804,508 355,621
Deferred leasing costs, net of accumulated amortization of $38,678 and
$2,887 at December 31, 1994 and 1993, respectively (notes 3
and 5) 539,247 59,498
Prepaid expenses 194,510 49,498
Organization costs, net of accumulated amortization of $23,000 and
$19,020 at December 31, 1994 and 1993, respectively
34,500 46,000
Other assets 167,054 56,260
------------ -------------
Total assets $ 49,647,728 17,101,282
========== ==========
</TABLE>
45
<PAGE>
CROCKER REALTY INVESTORS, INC.
Balance Sheets (Continued)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1994 1993
------------------------------------ ---- ----
<S> <C> <C>
Liabilities:
Mortgage notes payable (note 4) $ 39,845,438 7,911,062
Accounts payable and accrued expenses 388,321 131,628
Accrued interest expense (note 4) 327,034 -
Accrued deferred merger costs 204,334 -
Due to affiliates (note 5) 339,326 140,268
Rents paid in advance 43,984 50,536
Deferred straight-line rent payable (note 3) 146,000 -
Tenant security deposits 384,935 149,754
Other liabilities (note 4) 238,678 4,477
------------ --------------
Total liabilities 41,918,050 8,387,725
---------- -----------
Stockholders' equity (notes 2, 4, 6, 7 and 9):
Common stock, $.001 par value. Authorized 10,000,000 shares;
issued and outstanding 1,020,000 shares at December 31, 1994
and 1993 1,020 1,020
Additional paid-in capital 8,909,735 8,909,735
Accumulated deficit (1,181,077) (197,198)
----------- ------------
Total stockholders' equity 7,729,678 8,713,557
----------- -----------
Commitments and contingencies (notes 3, 4, 5, 6, 7 and 9)
Total liabilities and stockholders' equity $ 49,647,728 17,101,282
========== ==========
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
CROCKER REALTY INVESTORS, INC.
Statements of Operations
For the years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Revenue (note 3):
Rental income $ 4,471,361 597,673
Common area maintenance reimbursement 2,613,357 256,541
Lease termination fee 100,000 -
---------- -----
7,184,718 854,214
Expenses:
Rental property operating expenses 2,229,056 351,279
Real estate taxes 706,583 86,924
Property management fees to related party (note 5)
345,610 36,374
Amortization of deferred leasing costs (note 5)
38,802 2,887
Depreciation and amortization of rental property
(note 3) 1,247,744 140,188
General and administrative expenses (notes 5 and 6)
639,430 432,431
Loss on tenant defaults 38,374 -
5,245,599 1,050,083
Operating income (loss) 1,939,119 (195,869)
--------- ----------
Other income (expense):
Interest and other income 36,093 142,505
Interest and amortization and accretion of loan
costs (note 4) (2,959,091) (143,834)
--------- ----------
Total other income (expense) (2,922,998) (1,329)
--------- ------------
Net loss $ (983,879) (197,198)
========== ==========
Net loss per share of common stock $ (0.96) (0.21)
============ ============
Weighted average number of shares outstanding 1,020,000 946,027
========= ==========
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
CROCKER REALTY INVESTORS, INC.
Statements of Stockholders' Equity
For the Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 20,000 $ 20 199,980 - 200,000
Issuance of common stock and common stock purchase warrants
at January 28, 1993 (note 2) 1,000,000 1,000 8,705,655 - 8,706,655
Issuance of common stock purchase warrants at
January 28, 1993 pursuant to employment
agreements (note 6) - - 4,000 - 4,000
Issuance of common stock purchase options at
January 28, 1993 (note 2) - - 100 - 100
Net loss - - - (197,198) (197,198)
-------- ----- -------- ------- ----------
Balance at December 31, 1993 1,020,000 1,020 8,909,735 (197,198) 8,713,557
Net loss - - - (983,879) (983,879)
-------- ----- -------- ---------- ----------
Balance at December 31, 1994 1,020,000 $ 1,020 8,909,735 (1,181,077) 7,729,678
========= ===== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
CROCKER REALTY INVESTORS, INC.
Statements of Cash Flows
For the years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (983,879) (197,198)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization of rental properties 1,247,744 140,188
Amortization and accretion of loan costs 390,869 16,324
Amortization of deferred leasing costs 38,802 2,887
Amortization of organization costs 11,500 19,020
Bad debt expense 14,535 -
Loss on tenant defaults 38,374 -
(Increase) decrease in operating assets:
Deferred straight-line rents receivable (261,216) (74,185)
Rents and expense reimbursements receivables (189,059) (35,394)
Deferred leasing costs (524,920) (62,385)
Prepaid expenses and other assets (255,806) (105,758)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 96,993 (58,196)
Accrued interest expense 327,034 -
Accrued deferred merger costs 204,334 -
Rents paid in advance (33,060) (60,231)
Tenant security deposits (21,944) 24,888
Deferred straight-line rent payable 146,000 -
Due to affiliates, net 222,038 -
------------ ------
Total adjustments 1,452,218 (192,842)
----------- ------------
Net cash provided by (used in) operating activities 468,339 (390,040)
------------ -----------
Cash flows from investing activities:
Acquisition of rental properties (29,735,895) (15,085,967)
Payments for building and tenant improvements (1,615,017) (420,534)
Purchase of securities held for sale - (5,085,546)
Proceeds from sales of securities held for sale - 5,085,546
Payment of deposits, pre-acquisition and deferred merger costs
(1,217,204) (604,000)
Refund of deposits 1,500,000 -
Net cash used in investing activities (31,068,116) (16,110,501)
---------- ----------
</TABLE>
49
<PAGE>
CROCKER REALTY INVESTORS, INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock, warrants and options, net of
$1,127,428 deducted for underwriting costs $ - 9,106,672
Proceeds from borrowing under mortgage notes payable 31,934,376 7,911,062
Offering costs - (262,477)
Loan fees (605,555) (371,945)
Due to affiliates, net (100,000) 84,043
------------ -------------
Net cash provided by financing activities 31,228,821 16,467,355
---------- ----------
Net increase (decrease) in cash 629,044 (33,186)
Cash at beginning of period 24,579 57,765
------------- -------------
Cash at end of period $ 653,623 24,579
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,241,188 123,033
=========== ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
The Company acquired certain rental properties in April 1994, October 1993
and June 1993. Assets and liabilities assumed in conjunction with these
acquisitions were as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Land $ 4,800,000 3,154,604
Building and improvements 25,379,228 12,361,297
Accounts payable and accrued expenses (159,700) (194,301)
Rents paid in advance (26,508) (110,767)
Security deposits (257,125) (124,866)
------------ ------------
Net cash used in acquisition of real estate $ 29,735,895 15,085,967
========== ==========
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
December 31, 1994 and 1993
(1) Summary of Significant Accounting Policies
(a) Organization
Crocker Realty Investors, Inc. ("CRI") was formed as a Delaware
corporation on September 30, 1992 with the intent of qualifying
as a real estate investment trust ("REIT") for Federal income
tax purposes. On December 31, 1992, Crocker Acquisition Company,
Inc. ("CAC"), a Florida corporation, was incorporated by the two
50% shareholders of CRI. CAC had an authorized capital stock
consisting of 10,000,000 shares of common stock with a par value
of $.001 per share. At the formation of CAC, each of the 50%
shareholders of CRI received one share of the common stock of
CAC. On December 31, 1992, CRI was merged into CAC with each of
the 50% shareholders of CRI receiving 9,999 shares of CAC common
stock in exchange for each of their 10,000 shares of CRI common
stock, at which time CRI ceased to exist. Simultaneously with
the merger, CAC changed its name to Crocker Realty Investors,
Inc. (the "Company"). The Company was organized to acquire
equity interests in office buildings, retail facilities or
mixed-use facilities located in the continental United States,
primarily in South Florida. The Company currently owns and
operates three rental properties located in Boca Raton, Florida.
The Company had no significant financial operations in 1992.
(b) Rental Property
Rental properties are carried at cost, which is not in excess of
each property's estimated net realizable value. Cost includes
all costs directly related to the acquisition of each property,
including legal fees and commissions, and all costs of making
improvements to the acquired properties. Depreciation on the
building and improvements is computed using the straight-line
method over estimated useful lives. Amortization of tenant
improvements is computed using the straight-line method over the
initial lease terms of the respective leases. Repairs and
maintenance are charged to expense as incurred.
(c) Offering Costs
Offering costs are comprised of legal, accounting, printing,
discounts, commissions and other costs incurred in connection
with the offering of securities. These costs totaling $1,523,345
were charged to shareholders' equity upon consummation of the
offering on January 28, 1993.
(d) Deferred Costs
Deferred loan costs incurred in connection with financing are
amortized using the interest method over the term of the loan.
Deferred leasing costs are comprised primarily of leasing
commissions and are amortized on a straight-line basis over the
initial term of the respective leases.
51
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
(e) Organizational Costs
Organization costs are amortized using the straight-line method
over five years.
(f) Revenue Recognition
Rental income adjusted for concessions and fixed escalations is
recognized for financial reporting purposes on a straight-line
basis over the initial term of each lease. Deferred rent on each
lease is recognized for the difference between rental income
calculated on the straight-line basis and the rental payments
actually required under the terms of each lease. Any such
amounts deemed uncollectible are reserved in the period such a
determination is made.
(g) Net Loss Per Share of Common Stock
Net loss per share of common stock is computed by dividing the
net loss by the weighted average number of shares of common
stock outstanding during the period. Stock option and warrants
had no effect on the calculation as their effect is
antidilutive.
(h) Income Taxes
The Company qualifies as a real estate investment trust "REIT"
under the provisions of the Internal Revenue Code. Under these
provisions, the Company is required to distribute at least 95%
of its taxable income to its shareholders to maintain this
qualification and not be subject to federal income taxes for the
portion of taxable income distributed. The Company did not have
taxable income during 1994 or 1993. To maintain REIT
qualification, the Company must also satisfy tests concerning
the nature of its assets and income and meet certain
recordkeeping requirements.
The estimated tax loss for the year ended December 31, 1994 is
approximately $1.8 million and was $310,000 for the year ended
December 31, 1993. The difference between net loss for financial
reporting purposes and tax loss is primarily due to the
recognition of rental income on a straight-line basis for
financial reporting purposes and differences in depreciable
lives of the rental properties and improvements thereto. The
differences between the tax basis and the reported amounts of
assets and liabilities is immaterial.
(i) Reclassifications
The 1993 financial statements have been reclassified to conform
to the current period presentation.
(2) Public Offering
The Company sold through a public offering, which was consummated on
January 28, 1993, 1,000,000 shares of Common Stock at an offering price
of $10 per share and 2,300,000 Warrants at a price of $.10 per Warrant.
Until the completion of the offering, the shares of the Common Stock
and the Warrants could only be purchased together on the basis of one
share of Common Stock and two Warrants (except for the Underwriter's
option to purchase
52
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
up to 150,000 shares of Common Stock and/or 300,000 Warrants, solely
for the purpose of covering over allotments). The Underwriter exercised
only its option to purchase 300,000 Warrants. Each Warrant entitles the
holder to purchase, during the four-year period commencing one year
after the date of the offering, one share of Common Stock at $10.00 per
share. Each Warrant can be exercised only if a registration statement
covering the shares of Common Stock issuable upon exercise of the
Warrant is current at the time of exercise and such shares of Common
Stock have been registered or are qualified under Federal and state law
or there is an exemption from such registration or qualification
requirements. The Underwriter received an underwriting discount equal
to $716,100 and it also received (1) an expense allowance on a
non-accountable basis equal to $306,900, (2) reimbursement for bona
fide due diligence expenses of $51,150, (3) options (at the aggregate
purchase price of $100) to purchase 100,000 shares of Common Stock at
an initial exercise price of $16.50 per share, subject to adjustment to
prevent dilution, for the four-year period commencing one year from the
date of the offering, (4) reimbursement of certain advertising and
mailing costs of $28,003, and (5) reimbursement of other costs equal to
$25,375. The Underwriter will also receive in certain circumstances a
Warrant solicitation fee equal to 5% of the exercise price for each
Warrant exercised.
(3) Rental Property
In 1994 and 1993, the Company purchased office buildings and associated
land located in Boca Raton, Florida, as follows:
<TABLE>
<CAPTION>
Crocker Financial
One Boca Place Crocker Square Plaza
------------------------ --------------------- ---------------------
<S> <C> <C> <C>
Date acquired April 27, 1994 October 14, 1993 June 28, 1993
Land $ 4,800,000 2,184,604 970,000
Building and improvements 25,379,228 8,600,000 3,761,297
---------- ----------- ---------
$ 30,179,228 10,784,604 4,731,297
========== ========== =========
</TABLE>
Components of rental properties are summarized as follows:
<TABLE>
<CAPTION>
December 31, Estimated
------------------------------------
1994 1993 Useful Lives
---- ---- ------------
<S> <C> <C> <C>
Land $ 7,954,604 3,154,604 -
Buildings 35,852,213 11,652,119 40 years
Parking lots 430,000 430,000 15 years
Building improvements 368,971 10,363 10 years
Tenant improvements 3,082,909 475,539 Life of lease
Equipment 4,702 - 3 years
Construction in progress 33,654 213,810 -
------------- ------------
47,727,053 15,936,435
Accumulated depreciation (1,336,366) (140,188)
----------- ------------
$ 46,390,687 15,796,247
========== ==========
</TABLE>
53
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
All rental properties are pledged as security for the Company's
mortgage notes payable (See note 4).
Space in the properties are leased to tenants under month-to-month
leases as well as operating leases with initial terms ranging from two
to twenty years. Leases provide for base rent plus reimbursement of
certain operating expenses.
Commitments to complete improvements on rental properties as they are
occupied totals approximately $364,000 at December 31, 1994.
Future minimum rentals, excluding tenant reimbursements of operating
expenses, under noncancelable operating leases as of December 31, 1994
are:
Year ending December 31:
1995 $ 5,355,000
1996 4,539,000
1997 3,377,000
1998 3,115,000
1999 2,340,000
Thereafter 3,967,000
-----------
Total future minimum
rentals $ 22,693,000
==========
(4) Mortgage Notes Payable
Mortgage notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1994 1993
---- ----
<S> <C> <C>
Mortgage note payable to General Electric Capital Corporation
("GECC"), as modified, with monthly payments of interest at GECC's
Composite Commercial Paper Rate plus 4.00% (9.34% and 7.19% at
December 31, 1994 and 1993, respectively) with all principal due
on April 27, 1999 and secured by all three of the Company's rental
properties as well as an assignment of rents and other items at
the properties
$ 9,345,438 7,911,062
Mortgage note payable to GECC with monthly payments of interest at
GECC's Composite Commercial Paper Rate plus 4.25% (9.59% at
December 31, 1994) with a maturity date of April 27, 1999 and
secured by all three of the Company's rental properties as well as
an assignment of rents and other items at the properties
30,500,000 -
$ 39,845,438 7,911,062
========== =========
</TABLE>
54
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
On October 13, 1993, the Company entered into a $10,302,000 credit
facility with GECC. This facility was modified on April 27, 1994,
which, among other changes, included an increase in the credit facility
to $11,564,500. $9,345,438 has been advanced as of December 31, 1994
and was used to finance the acquisition of the Crocker Square property
acquired as described in note 3, and to fund certain renovations and
tenant improvements to Crocker Square and Crocker Financial Plaza, as
well as to fund $242,763 in loan closing costs, and set up a $258,925
escrow for real estate taxes. The remaining undisbursed funds will be
advanced for specified purposes including payment for certain
additional renovations, tenant improvements, leasing costs, and the
payment of a $114,500 additional interest amount which is due upon any
prepayment of the loan, or at the loan's maturity date (whether by
acceleration or otherwise). The $114,500 held back will only be funded
in the event of a default by the Company. The additional interest
amount is being accrued using the interest method over the life of the
loan and is included in other liabilities on the balance sheet.
The mortgage note payable may be prepaid in whole, but not in part,
without penalty, at any time after April 27, 1995. Prior to that date,
a prepayment fee equal to 5% of the outstanding principal balance will
be charged in addition to the additional interest amount.
On April 27, 1994, the Company purchased the One Boca Place property as
described in note 3. The Company financed the entire purchase price
with a $32.1 million loan from GECC. $30.5 million was received at
closing and $1.6 million has been held back by GECC to fund the $1.6
million additional interest amount which is due upon prepayment of the
loan, or at the loan's maturity date (whether by acceleration or
otherwise). The $1.6 million held back will only be funded in the event
of a default by the Company. The additional interest amount is being
accrued using the interest method over the life of the loan and is
included in other liabilities in the balance sheet. In addition to
financing the acquisition, the $30.5 million received was used to fund
$489,787 of the $554,787 in loan closing costs, and set up a $259,084
escrow for real estate taxes. The proceeds of the loan were also used
to repay the $1.1 million outstanding principal amount due under a loan
made by Crocker & Sons, Inc., an affiliate of Thomas J. Crocker, in
connection with deposits made on the purchase price of the property.
The outstanding principal balance of the loan is payable in an amount
equal to 50% of the annual cash flow generated by the property after
payment of interest on the loan, and tenant improvements and expenses
at the property, for each calendar year subsequent to 1995. This
payment is limited to a maximum amount of $750,000 per year. All
remaining unpaid principal is payable at maturity on April 27, 1999.
The mortgage note payable may be prepaid in whole or in part, without
penalty, with a requirement that an initial prepayment be not less than
$12 million. Upon an initial prepayment, the additional interest amount
may be accelerated at GECC's sole option.
In connection with the $32.1 million loan, the Company issued to GECC a
warrant to purchase 160,000 shares of the common stock of the Company
at an exercise price of $10.00 per share, subject to adjustment (the
"Warrant"). Upon any prepayment of the loan, or at the loan's maturity
(whether by acceleration or otherwise), GECC will, at its option, be
entitled to exercise the Warrant by waiving the Company's obligation to
pay the $1.6 million additional interest amount. If the issuance of the
160,000 shares would cause GECC to own in excess of 9.8% of the
outstanding common stock of the Company, the Company would then issue
only a number of shares equal to 9.8% of the outstanding common stock
of the Company (giving effect to such issuance), and pay to GECC an
amount equal to the current market price
55
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
of the Company's common stock, as defined, multiplied by an amount
equal to the excess of 160,000 shares over the actual number of shares
issued.
(5) Related Party Transactions
On January 21, 1993, the Company entered into a one year property
management agreement with Crocker Realty Management Services, Inc.
("CRMS"), an affiliate of Thomas J. Crocker, Chairman and a stockholder
of the Company. CRMS also acts as exclusive leasing agent and
construction manager. CRMS is paid 5% of aggregate gross revenue for
each year for its property management services; 6% of aggregate fixed
annual rental of each lease procured by CRMS for the first five years
of a lease term and 4% for the next five years for each new lease and
lesser amounts for renewals; and 8% of tenant improvement and other
construction costs incurred by the Company for construction management
services. In addition, CRMS will be reimbursed for all out-of-pocket
expenses paid to third parties in connection with the rendition of
services and all salaries and other expenses of on-site personnel and
the allocable portion of salaries, other compensation and overhead of
personnel employed by the manager who perform any portion of services
contemplated under the agreement. CRMS is responsible for any co-broker
leasing commissions. The agreement is automatically extended for
successive one year periods unless terminated by either party upon
written notice at least 90 days prior to the expiration date. In
management's opinion, these fees are at rates not less favorable to the
Company than that available from unaffiliated third parties.
The Company has also retained affiliates of Thomas J. Crocker to
provide administrative support services necessary for the day-to-day
operations of the Company. The Company reimburses such affiliates for:
(a) the actual cost to the affiliates for goods, materials and services
used for and by the Company obtained from unaffiliated parties, (b)
administrative services necessary to the operation of the Company,
including secretarial, bookkeeping, data processing and other office
services, and (c) the services of certain personnel utilized by the
Company directly involved in the organization and business of the
Company, including persons who may be employees or officers of the
affiliates but not executive officers of the Company. The Company's
offices have been provided free of charge by Crocker & Sons, Inc., an
affiliate of Thomas J. Crocker. In the future, the Company may be
required to pay rent to such affiliate, at a rate not less favorable to
the Company than that available from unaffiliated third parties. On
October 1, 1994, Crocker and Sons, Inc. began allocating payroll costs
to the Company in accordance with item (c) above, and will continue to
allocate these costs on an ongoing basis.
56
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
The amounts earned by affiliated companies for the years ended December
31, 1994 and 1993 and amounts included in due to affiliates at December
31, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
Earned during year ended Due to affiliates at
December 31, December 31,
-------------------------------------------------------
1994 1993 1994 1993 Description
---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Crocker Realty
Management
Services, Inc. $ 345,610 36,374 50,608 15,467 Property management
122,697 22,569 42,771 19,701 Construction management
486,521 2,370 129,763 - Leasing commissions
Crocker & Sons, Inc. N/A N/A - 100,000 Purchase deposit
N/A N/A - 5,100 Out-of-pocket expenses
Building and tenant
N/A N/A 44,020 - improvements
28,014 - - - Interest and loan fees
72,164 - 72,164 - Payroll allocations
---------- ------ -------- -------
$ 1,055,006 61,313 339,326 140,268
========= ====== ======= =======
</TABLE>
As discussed in note 4, Crocker & Sons, Inc. provided $1,100,000 for
deposits made towards the purchase of a rental property acquired on
April 27, 1994. This loan was repaid after the acquisition, including
interest and loan fees.
(6) Employment Agreements
On the effective date of the public offering, the Company entered into
five-year employment agreements with Thomas J. Crocker, who serves as
Chairman of the Board and Chief Executive Officer, and Richard S.
Ackerman, who serves as President. Each of the officers are paid a base
annual salary of $25,000 and are entitled to incentive compensation in
an amount (not to exceed $150,000 for each in any fiscal year) equal to
a percentage of the amount of total dividends distributed to
stockholders during each fiscal year of the Company if such dividends
equal at least 9% of stockholders' invested capital. Such percentage
ranges between 3.5% and 9.5%, increasing gradually until the highest
percentage is reached when annual dividends distributed are at least
14% of stockholders' invested capital. The amount of dividends to be
distributed to stockholders will be determined by a majority of the
disinterested directors (including a majority of the independent
directors). Upon termination of Mr. Crocker's employment by the
Company, the Company must cease to conduct business under or use the
"Crocker" name, and any derivative thereof, and the logo associated
with Mr. Crocker's affiliates.
Upon consummation of the offering, the employment contracts also
obligated the Company: (a) to grant each of two executive officers
options to purchase 75,000 shares of the Common Stock, at an exercise
price of $10.00 per share, pursuant to the Company's 1993 Stock Option
Plan described further in note 7, and (b) to sell to each of two
executive officers, at a purchase price of $.10 per Warrant, Warrants
to purchase 20,000 shares of the Common
57
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
Stock at an exercise price of $10.00 per share exercisable during the
four-year period commencing one year after the effective date of the
offering. On January 28, 1993, the officers purchased the Warrants for
an aggregate purchase price of $4,000. On February 24, 1993, the
Company granted stock options to the executive officers as described
further in note 7.
(7) Stock Options
In 1993, the Company established a key employee stock option plan
reserving 250,000 shares of common stock for sale to key employees at
an option price that shall not be less than fair market value at the
time the option is granted. The options will expire not more than ten
years from the date of the grant. Pursuant to employment contracts, on
February 24, 1993, the Company granted an option to purchase up to
75,000 shares of the Common Stock to each of two executive officers and
an option to purchase up to 10,000 shares of the Common Stock to the
Treasurer. On November 19, 1993, the Board of Directors granted an
option to purchase up to 45,000 shares of common stock to each of the
two executive officers. All options are exercisable at $10.00 per share
as follows: (i) for one-third of the shares covered thereby after the
first anniversary of the date of grant; (ii) for an additional
one-third of the shares covered thereby after the second anniversary,
and (iii) for the balance after the third anniversary. On January 28,
1993, the Company also granted an option to purchase 100,000 shares of
Common Stock at $16.50 per share to the Underwriter as described in
note 2. As a result of the Company issuing Warrants to GECC as
described in note 4, the Underwriter's option exercise price and the
number of shares underlying the option have been adjusted in accordance
with provisions of the option to $7.85 per share and 210,292 shares,
respectively.
(8) Condensed Pro Forma Financial Information
On April 27, 1994, the Company purchased One Boca Place for $30,179,228
paid for with cash from proceeds from a mortgage note payable. On
October 14, 1993, the Company purchased Crocker Square for $10,784,604
paid for with cash from proceeds of the offering and proceeds from a
mortgage note payable. On June 28, 1993, the Company purchased Crocker
Financial Plaza for $4,731,297 paid in cash from proceeds of the
offering.
The following unaudited pro forma summary presents the condensed
results of operations as if the 1994 acquisition and 1993 acquisitions
and initial public offering had occurred as of January 1, 1993, and
does not purport to be indicative of what would have occurred had the
58
<PAGE>
CROCKER REALTY INVESTORS, INC.
Notes to Financial Statements
1994 acquisition and 1993 acquisitions and initial public offering
actually occurred as of January 1, 1993, or of results which may occur
in the future.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1994 1993
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 8,670,000 7,240,000
========= =========
Net loss $ (1,360,000) (1,150,000)
========= =========
Net loss per common share $ (1.33) (1.13)
============ ============
Weighted average number of common shares outstanding 1,020,000 1,020,000
========= =========
</TABLE>
(9) Proposed Merger
On September 29, 1994, the Company and Southeast Realty Corp., a newly
formed Maryland corporation, entered into an agreement (the "Merger
Agreement") pursuant to which, among other transactions, the Company
will be merged into a wholly-owned subsidiary of Southeast Realty Corp.
(the "Merger"). Upon the effectiveness of the Merger, Southeast Realty
Corp. will own 50 properties. Contemporaneously with the Merger,
Crocker Realty Management Services, Inc. and Crocker & Sons, Inc.,
companies which are controlled by Thomas J. Crocker, will be merged
with a subsidiary of Southeast Realty Corp. The Merger Agreement
provided for a due diligence period which expired on October 30, 1994.
The consummation of the Merger is subject to various conditions,
including, among other conditions, the approval of a majority of the
outstanding shares of the Company, the representations and warranties
of the parties shall be accurate in all material respects, no
governmental entity or Federal or State court shall have issued any
injunction or other order which restrains or prohibits the consummation
of the Merger, all authorizations, waivers and consents required to be
obtained in order to consummate the Merger shall have been obtained,
and the number of shareholders dissenting to the Merger shall not
exceed a specified number. The Merger Agreement may be terminated at
any time by the mutual written consent of the parties or upon the
occurrence of certain events. If the Merger is not consummated, the
parties will not have liability to each other unless such failure to
consummate is a result of a willful misrepresentation or breach of
warranty or covenant contained in the Merger Agreement. The amount of
damages recoverable by the non-breaching party is limited.
As of December 31, 1994, the Company has incurred costs related to the
Merger of approximately $310,000, net of reimbursements received from
an affiliate of the proposed merger entity of approximately $147,000.
Upon consummation of the Merger Agreement, all deferred merger costs
will be expensed. Under certain circumstances, if the Merger does not
take place, the Company will be required to repay the $147,000 in the
form of shares of the Company's common stock based upon the lesser of
the stock's trading price on the date of termination or $8.00 per
share.
Upon consummation of the Merger Agreement, the employment agreements
and stock options described in notes 6 and 7, respectively, will be
terminated, and new employment agreements and stock option plans will
be implemented by the new entity.
59
<PAGE>
Independent Auditors' Report
The Stockholder
Crocker & Sons, Inc.:
We have audited the accompanying balance sheet of Crocker & Sons, Inc. as of
December 31, 1994, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crocker & Sons, Inc. as of
December 31, 1994, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
February 23, 1995
60
<PAGE>
CROCKER & SONS, INC.
Balance Sheet
December 31, 1994
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash $ 8,271
Management fees receivable (note 4) 113,966
Development fee receivable from affiliate of stockholder (note 4)
63,000
Reimbursable costs (note 7) 88,390
Due from employees and stockholder 3,195
Due from affiliates of stockholder, net (note 4) 45,881
Prepaid insurance 20,412
--------
Total current assets 343,115
Property and equipment (note 3) 428,795
Less accumulated depreciation (352,718)
76,077
Total assets $ 419,192
=======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses 65,085
Accrued payroll and payroll taxes 2,733
Other liabilities 14,486
--------
Total current liabilities 82,304
Stockholders' equity (notes 6 and 7):
Common stock, $1 par value. Authorized, issued and outstanding
7,500 shares 7,500
Additional paid-in capital 329,388
Total stockholders' equity 336,888
Total liabilities and stockholders' equity $ 419,192
=======
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
CROCKER & SONS, INC.
Statement of Operations
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Revenues (note 4):
Management fees - buildings:
Related parties $ 695,214
Unrelated party 217,774
Management fees - development and construction:
Related parties 315,651
Other:
Related parties 177,245
Unrelated party 19,949
Total revenues 1,425,833
Expenses:
Payroll and related costs 2,147,368
General and administrative (note 4) 309,941
Depreciation 29,075
Professional fees 103,745
Communications 66,596
Less: Allocation of costs to affiliate related to management
activities (note 4) (72,164)
Less: Allocation of costs to affiliate related to leasing and
building management activities (note 4) (811,208)
----------
Total expenses 1,773,353
Operating loss (347,520)
Other income:
Interest income 69,693
Sales commission (note 4) 1,157,437
Miscellaneous income 215,243
----------
Total other income 1,442,373
Net income $ 1,094,853
=========
Pro forma data (unaudited - see notes 2 and 5):
Historical net income 1,094,853
Provision for pro forma income taxes 104,488
Pro forma net income $ 990,365
==========
Pro forma net income per common share $ 465.62
==========
Weighted average number of shares outstanding 2,127
============
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
CROCKER & SONS, INC.
Statement of Stockholders' Equity (Deficit)
For the year ended December 31, 1994
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993
100 $ 100 1,050,992 (1,065,375) (14,283)
Issuance of stock to
majority stockholder 4,994 4,994 (4,994) - -
Proceeds from issuance of
stock to officers
2,406 2,406 255,594 - 258,000
Distribution to majority
stockholder - - (972,204) (29,478) (1,001,682)
Net income - - - 1,094,853 1,094,853
----- ----- -------- --------- ---------
Balance at December 31, 1994
7,500 $ 7,500 329,388 - 336,888
===== ===== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
CROCKER & SONS, INC.
Statement of Cash Flows
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Cash flow from operating activities:
Net income $ 1,094,853
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 29,075
(Increase) decrease in operating assets:
Management fees receivable (17,403)
Development fee receivable (63,000)
Reimbursable costs (88,390)
Due from employees and stockholder 9,400
Prepaid insurance 9,677
Utility deposits 81,250
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 12,968
Accrued payroll and payroll taxes (3,993)
Other liabilities (940)
-------------
Total adjustments (31,356)
Net cash provided by operating activities 1,063,497
---------
Cash flows from investing activities:
Purchase of property and equipment (40,482)
Net cash used in investing activities (40,482)
-----------
Cash flows from financing activities:
Due to/from affiliates of stockholder, net (292,991)
Proceeds from issuance of stock 258,000
Distribution to majority stockholder (1,001,682)
---------
Net cash used in financing activities (1,036,673)
---------
Net decrease in cash (13,658)
Cash at beginning of year 21,929
Cash at end of year $ 8,271
============
</TABLE>
See accompanying notes to financial statements.
64
<PAGE>
CROCKER & SONS, INC.
Notes to Financial Statements
December 31, 1994
(1) Business
Crocker & Sons, Inc. (the "Company") is a real estate management company
that provides sales promotion, operations, administration, accounting
and collection services. Prior to September 22, 1994, Thomas J. Crocker
was the Company's sole stockholder. As of December 31, 1994, Mr.
Crocker is the majority stockholder (see note 6 below).
The Company was formed in 1989 when Thomas J. Crocker purchased the
assets of WJC & Sons, Inc.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
Management fee revenue is recognized when earned in accordance with the
terms of each respective management agreement.
(b) Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment has been provided on the straight-line method based upon
estimated useful lives as follows:
Equipment 5 years
Furniture and fixtures 5 years
Automobiles 5 years
(c) Income Taxes
The Company is a subchapter "S" corporation. As such, the stockholder
is personally responsible for any income tax expense on the Company's
taxable income. Accordingly, the statements do not include any provision
for income taxes which are the responsibility of the stockholder.
(d) Pro Forma Income Tax Provision
Under the terms of a proposed merger, the leasing operations of Crocker
& Sons, Inc. will be transferred to an entity which is expected to be
taxable as a C Corporation under the Internal Revenue Code. The
remaining operations will be merged into a subsidiary of a proposed real
estate investment trust, which is expected to qualify as such under the
Internal Revenue Code and thus will not be subject to Federal income tax
to the extent it distributes all of its taxable income to shareholders
and meets certain other requirements.
The pro forma tax provision has been calculated as if the leasing
operations of Crocker & Sons, Inc. are part of a separate wholly-owned
entity which is subject to taxation as a C Corporation. Such
presentation included the assumption that taxable net operating losses
of the leasing operations would be carried forward to offset taxable
income generated through December 31, 1994.
65
<PAGE>
CROCKER & SONS, INC.
Notes to Financial Statements
The pro forma net income per share is based on the average number of
common shares outstanding as shown in the Statement of Operations.
(3) Property and Equipment
A summary of property and equipment as of December 31, 1994 is as
follows:
Equipment $ 351,733
Furniture and fixtures 70,241
Automobiles 6,821
---------
$ 428,795
=========
(4) Related Party and Significant Customer Transactions
Substantially all of the Company's management fee revenue is earned from
properties owned by or affiliated with Thomas J. Crocker or his father,
from the development, construction and management of a property known as
Mizner Park, in which Thomas J. Crocker has a minority ownership
interest and which is majority-owned by Teachers Insurance and Annuity,
from the development and management of a property known as the Arbors
Office Park, in which Thomas J. Crocker has a minority ownership
interest and which is majority-owned by an affiliate of The State
Teachers Retirement System of Ohio, and from the management of other
properties owned by Teachers Insurance and Annuity.
Building management fees generally range from 1% to 5% of gross receipts
collected by the property being managed. Development management fees
are generally an agreed-upon amount with the property owner.
Construction management fees are generally 8% of the total job cost.
At the end of 1991, Crocker Realty Management Services, Inc. ("CRMSI"),
an affiliate of the stockholder, was established to act as the leasing
agent for properties managed by the Company. CRMSI has no employees and
the Company allocates costs to CRMSI for the use of its personnel and
services in connection with these leasing activities. The Company also
allocates costs to CRMSI related to building management of buildings
owned by Crocker Realty Investors, Inc. The allocation of costs is
based on revenues earned by CRMSI.
66
<PAGE>
The Company had transactions with related parties and significant
building owners as follows:
<TABLE>
<CAPTION>
Related Party
------------------------------------- Teachers
Mizner Arbors Insurance
Affiliates Park Office Park Total and Annuity
---------- ------ ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Building management fees $ 260,251 312,030 122,933 695,214 217,774
Development and construc-
tion management fees - 226,382 89,269 315,651 -
Other 5,645 28,195 143,405 177,245 19,949
As of December 31, 1994:
Management fee receivable 74,803 36,624 - 111,427 2,539
Development fee receivable - 63,000 - 63,000 -
Net due to/from affiliates
of stockholder 45,881 - - 45,881 -
</TABLE>
On February 17, 1994, the Company received a commission of $1,157,437
for the sale of two buildings owned by The State Teachers Retirement
System of Ohio which were managed by the Company prior to the sale.
Building, development and construction management fee revenue from these
buildings for the year ended December 31, 1994 totaled approximately
$34,000.
On May 16, 1994, the Company ceased managing several buildings owned by
Teachers Insurance and Annuity containing a total of approximately
606,000 rentable square feet. Building, development and construction
management fee revenue and allocation of costs related to leasing
activities earned from these buildings for the year ended December 31,
1994, totaled approximately $321,000.
On March 9, 1994, the Company began managing a building containing
approximately 315,000 rentable square feet, owned by an affiliate of the
stockholder. On April 27, 1994, the Company began allocating costs to
Crocker Realty Management Services, Inc., which began managing a
building containing approximately 280,000 rentable square feet, which is
owned by a company in which the stockholder is an officer. Building
management fee revenue and allocation of costs related to leasing and
building management activities from these buildings totaled
approximately $427,000 for the year ended December 31, 1994.
Starting on October 1, 1994, the Company began allocating certain
payroll costs to Crocker Realty Investors Inc. ("CRI") relating to
services of certain personnel utilized by CRI directly involved in the
organization and business of CRI, excluding executive officers of CRI.
67
<PAGE>
CROCKER & SONS, INC.
Notes to Financial Statements
(5) Pro Forma Income Taxes
The pro forma income tax expense attributable to earnings from the
leasing operations, as described in note 2(d), for the year ended
December 31, 1994 differs from the amounts computed by applying the U.S.
Federal tax rate of 34 percent to pro forma pretax earnings from the
leasing operations as a result of the following:
Computed "expected" tax expense for the Company $372,250
Effect of assumed 100% distribution of real estate
investment trust taxable income, for the non-
leasing operations of the Company, to its
shareholders (5,157)
State income taxes, net of Federal income tax benefit 39,193
Benefit of operating loss carry-forwards of the
leasing operations (301,798)
----------
Pro forma income tax expense $ 104,488
==========
The pro forma income tax calculated above was prepared in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
(6) Stockholders' Equity
On September 22, 1994, the Company issued 7,400 shares of stock. 4,994
of these shares were issued to Thomas J. Crocker with no corresponding
contribution. Additional paid-in capital of $4,994 representing the par
value of the common stock was transferred to the common stock account.
The remaining 2,406 shares were issued to two officers of the Company in
exchange for $258,000.
Prior to the issuance of the above-mentioned shares of stock, the
Company paid a stockholder distribution to Thomas J. Crocker of
$1,001,682 or approximately $10,017 per share.
(7) Proposed Merger
On September 29, 1994, the Company and Southeast Realty Corp., a newly
formed Maryland corporation ("Southeast Realty"), entered into an
agreement (the "Merger Agreement") pursuant to which, among other
transactions, the Company and Crocker Realty Management Services, Inc.
("CRMSI") will be merged into a wholly-owned subsidiary of Southeast
Realty. Upon consummation of the Merger, the shareholders of the
Company and CRMSI will receive, in the aggregate, 637,500 shares of
Southeast Realty's common stock, representing approximately 4.5% of the
outstanding shares of Southeast Realty's common stock. The consummation
of the Merger is subject to various conditions including, the
satisfaction or waiver of the conditions to consummation of a merger
("the CRI Merger") of Crocker Realty Investors, Inc. ("CRI") with and
into a wholly-owned subsidiary of Southeast
68
<PAGE>
CROCKER & SONS, INC.
Notes to Financial Statements
Realty, pursuant to a merger agreement between CRI and Southeast Realty.
The CRI Merger requires the approval of the holders of a majority of the
outstanding shares of Crocker Realty Investors, Inc. Upon consummation of
the mergers, Southeast Realty will own interests in 50 office properties.
The Merger Agreement provides for Southeast Realty to reimburse the
Company for all expenses and costs of the Company, in assuming the
management and accounting of the 50 properties, which are incurred prior
to the closing date of the merger. Subsequent to December 31, 1994, the
Company was reimbursed $88,390 of such costs incurred during the year
ended December 31, 1994. This amount has been reflected in these
financial statements as reimbursable costs as of December 31, 1994.
69
<PAGE>
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET (UNAUDITED)
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CROCKER EAKIN & SMITH PRO FORMA
HISTORICAL (A) REALTY TRUST (B) TRANSACTION ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate assets, net....................... $602,276 $376,039 $91,911(c) $ 155,299(g) $1,225,525
Cash and cash equivalents..................... 8,383 17,742 26,125
Accounts and notes receivables................ 7,861 1,557 9,418
Accrued straight line rent receivable......... 3,807 3,461 7,268
Other assets.................................. 10,317 14,635 (5,131)(h) 19,821
$632,644 $413,434 $91,911 $ 150,168 $1,288,157
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable................... $196,718 $239,502 $63,680(d) 308,831(i) $ 808,731
Accounts payable, accrued expenses and
other....................................... 9,977 15,269 25,246
Total liabilities............................. 206,695 254,771 63,680 308,831 833,977
Minority interest............................. 73,440 14,772(e) 88,212
Stockholders' equity:
Common stock................................ 194 270 5(f) (270)(j) 199
Additional paid in capital.................. 355,248 158,393 13,454(f) (158,393)(j) 368,702
Distributions in excess of net earnings..... (2,933) (2,933)
Total stockholders' equity.................... 352,509 158,663 13,459 (158,663) 365,968
$632,644 $413,434 $91,911 $ 150,168 $1,288,157
</TABLE>
70
<PAGE>
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINING BALANCE SHEET (UNAUDITED)
MARCH 31, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combining balance sheet is
presented as if the following transactions had been consummated on March 31,
1996: (a) the completion of the Eakin & Smith Transaction and (b) the completion
of the proposed Crocker Realty Trust stock purchase and merger (the "Crocker
Transaction").
The acquisitions have been or will be accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities assumed have
been or will be recorded at their estimated fair values which may be subject to
further refinement, including appraisals and other analyses. Management does not
expect that the final allocation of the purchase prices for the above
acquisitions will differ materially from the preliminary allocations.
This unaudited pro forma condensed combining balance sheet should be read
in conjunction with the pro forma condensed combining statement of operations of
the Company, the consolidated financial statements and related notes of the
Company included in its Annual Report on Form 10-K, the unaudited financial
statements and related notes of the Company included in its Quarterly Report on
Form 10-Q, and the financial statements and related notes of the acquired
properties.
The pro forma condensed combining balance sheet is unaudited and is not
necessarily indicative of what the actual financial position would have been had
the aforementioned transactions actually occurred on March 31, 1996 nor does it
purport to represent the future financial position of the Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
(a.) Represents the Company's historical balance sheet contained in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(b.) Represents the historical balance sheet of Crocker Realty Trust as of
March 31, 1996.
(c.) Represents the initial purchase price of $91,610,000 for the seven
in-service suburban office properties totaling 848,000 square feet, the 103,000
square foot suburban development project, 18 acres of development land and Eakin
and Smith's brokerage and property management operations plus closing costs of
approximately $300,000.
(d.) Represents the assumption of $37,027,000 of mortgage indebtedness at
an average rate of 8.0% and borrowings on the Company's Credit Facility of
$26,653,000 to fund the cash component of the Eakin & Smith Transaction.
(e.) Represents the issuance of 537,137 Units of Highwoods/Forsyth Limited
Partnership valued at the April 1, 1996 closing price of the Company's Common
Stock of $27.50 to the sellers in connection with the Eakin & Smith Transaction.
(f.) Represents the issuance of 489,421 shares of Common Stock valued at
the April 1, 1996 closing price of $27.50 to the sellers in connection with the
Eakin & Smith Transaction.
(g.) Represents the adjustment to record the real estate assets of Crocker
Realty Trust at their fair values.
(h.) Represents the elimination of the management contract and goodwill
assets included in the Crocker Realty Trust historical balance sheet.
(i.) Represents the funding of the cash purchase price for the outstanding
common stock of Crocker Realty Trust (26,981,087 shares outstanding at $11.02
per share or $297,331,000) and the expenses of the Crocker Realty Trust
Transaction ($11,500,000). The total cash requirement of $308,831,000 is assumed
to be funded from the draws under the Company's credit and interim facility.
(j.) Represents the elimination of the common stock and additional paid in
capital amounts included in the Crocker Realty Trust historical balance sheet.
71
<PAGE>
<PAGE>
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CROCKER TRANSACTION
EAKIN & SMITH CROCKER PRE-ACQUISITION PRO FORMA
HISTORICAL(A) TRANSACTION(B) HISTORICAL(C) RESULTS(D) ADJUSTMENTS
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental property................... $23,385 $3,000 $16,970 $ 520 $ 300(e)
Other income...................... 372 964 890 12 (563)(f)
23,757 3,964 17,860 532 (263)
OPERATING EXPENSES:
Rental property................... 6,154 957 6,310 179 (615)(g)
Leasing, development and
construction.................... -- 452 -- --
Depreciation and amortization..... 3,716 526 2,722 108 (317)(h)
Interest expense:
Contractual..................... 3,542 739 5,055 215 5,875(i)
Amortization of deferred
financing costs.............. 409 272 --
3,951 739 5,327 215 5,875
General and administrative........ 934 153 1,870 (1,673)(j)
Income before minority interest... 9,002 1,137 1,631 30 (3,533)
Minority interest................. (1,571) 108(k)
Net income........................ $ 7,431 $1,137 $ 1,631 $ 30 $(3,425)
Net income per share.............. $ 0.38
Weighted average shares........... 19,406
<CAPTION>
PRO FORMA
<S> <C>
REVENUE:
Rental property................... $44,175
Other income...................... 1,675
45,850
OPERATING EXPENSES:
Rental property................... 12,985
Leasing, development and
construction.................... 452
Depreciation and amortization..... 6,755
Interest expense:
Contractual..................... 15,426
Amortization of deferred
financing costs.............. 681
16,107
General and administrative........ 1,284
Income before minority interest... 8,267
Minority interest................. (1,463)
Net income........................ $ 6,804
Net income per share.............. $ 0.34
Weighted average shares........... 19,897
</TABLE>
72
<PAGE>
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combining statement of
operations is presented as if the following transactions had been consummated on
January 1, 1995: (a) the completion of the Eakin & Smith Transaction and (b) the
completion of the proposed Crocker Realty Trust stock purchase and merger (the
"Crocker Transaction").
This unaudited pro forma condensed combining statement of operations should
be read in conjunction with the pro forma condensed combining balance sheet of
the Company, the consolidated financial statements and related notes of the
Company included in its Annual Report on Form 10-K, the unaudited financial
statements and related notes of the Company included in its Quarterly Report on
Form 10-Q, and the financial statements and related notes of the acquired
properties.
The pro forma condensed combining statement of operations does not reflect
approximately $5,000,000 of non-recurring expenses which the Company expects to
incur in connection with the Crocker Transaction.
The pro forma condensed combining statement of operations is unaudited and
is not necessarily indicative of what the Company's actual results would have
been had the aforementioned transactions actually occurred on January 1, 1995
nor does it purport to represent the future operating results of the Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF
OPERATIONS
(a.) Represents the Company's historical statement of operations contained
in its Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(b.) Reflects the historical statement of operations of Eakin & Smith for
the quarter ended March 31, 1996.
(c.) Represents the historical statement of operations of Crocker Realty
Trust contained in its Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
(d.) Reflects the historical operations of the Towermarc properties,
adjusted on a pro forma basis for interest and depreciation expense, for the
period of time during 1996 prior to their acquisition by Crocker Realty Trust.
(e.) Reflects incremental rental income from a lease agreement entered into
in connection with the Crocker Transaction.
(f.) Reflects the elimination of certain third-party leasing and property
management income of Crocker Realty Trust not retained by the Company.
(g.) Reflects the net adjustment to rental property expenses to eliminate
the costs related to certain assets (primarily land held for development) which
will be distributed to the current shareholders of Crocker Realty Trust
($200,000) and for certain other property operating costs which are expected to
be eliminated upon the completion of the Crocker Transaction ($415,000).
(h.) Represents the net adjustment to depreciation expense based upon an
assumed allocation of the purchase price to land, buildings, furniture fixtures
and equipment, and development in process and building depreciation computed on
a straight-line basis using an estimated life of 40 years for buildings and 7
years for furniture, fixtures and equipment as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction............................................ $ (73)
Crocker Transaction.................................................. (244)
Total.............................................................. $(317)
</TABLE>
73
<PAGE>
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS -- CONTINUED
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF
OPERATIONS -- Continued
(i.) Represents the net adjustment to interest expense to reflect interest
costs on borrowings under the Company's Credit Facility at an assumed rate of
7.0% (capped interest rate of 30-day LIBOR of 5.50% plus 1.50%) and to allow for
a full quarter of interest expense on the debt assumed in the Eakin & Smith and
Crocker Transactions, is as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction........................................... $ 468
Crocker Transaction................................................. 5,407
Total............................................................. $5,875
</TABLE>
(j.) Represents the net adjustment to general and administrative expense to
reflect the estimated incremental costs to the Company of operating a Nashville
division and to reflect the elimination of certain costs (primarily executive
salaries, administrative costs, the expenses incurred to generate third-party
revenue and the expenses to operate the public entitiy) of Crocker Realty Trust
not expected to be incurred by the Company as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction.......................................... $ 47
Crocker Transaction................................................ (1,720)
Total............................................................ $(1,673)
</TABLE>
(k.) Represents the net adjustment to minority interest to reflect the pro
forma minority interest percentage of 17.7%.
74
<PAGE>
<PAGE>
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED
FORSYTH COMPANY
PROPERTIES PRE-CROCKER
RESEARCH AND EAKIN & CROCKER
COMMONS AND EAKIN & SMITH TRANSACTION
SECOND OTHER THIRD SMITH TRANSACTIONS CROCKER
HISTORICAL (A) OFFERING (B) ACQUISITIONS (C) OFFERING (D) PRO FORMA (E) HISTORICAL (F)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Revenue:
Rental
property........ $ 71,217 $4,362 $ 12,658 $ -- $88,237 $ 9,222 $ 42,489
Other income..... 2,305 50 -- -- 2,355 3,125 1,777
73,522 4,412 12,658 -- 90,592 12,347 44,266
OPERATING
EXPENSES:
Rental
property........ 17,049 923 3,368 135 21,475 2,977 13,601
Leasing,
development and
construction.... -- -- -- -- -- 583 --
Depreciation and
amortization.... 11,082 985 1,883 -- 13,950 1,956 6,772
Interest expense:
Contractual..... 12,101 888 3,586 (1,598) 14,977 2,161 16,212
Amortization of
deferred
financing
costs.......... 1,619 46 -- -- 1,665 -- 594
13,720 934 3,586 (1,598) 16,642 2,161 16,806
General and
administrative... 2,737 83 -- 98 2,918 763 2,813
Income before
minority
interest....... 28,934 1,487 3,821 1,365 35,607 3,907 4,274
Minority
interest........ (4,937) (384) -- (376) (5,697) -- --
Income before
extraordinary
item........... $ 23,997 $1,103 $ 3,821 $ 989 $29,910 $ 3,907 $ 4,274
Income per share
before
extraordinary
item........... $ 1.55
Weighed average
shares......... 15,487
<CAPTION>
PRE-
ACQUISITION PRO FORMA PRO
RESULTS (G) ADJUSTMENTS FORMA
<S> <C> <C> <C>
REVENUE:
Revenue:
Rental
property........ $23,985 $ 1,200(h) $ 165,133
Other income..... 2,380 (2,628)(i) 7,009
26,365 (1,428) 172,142
OPERATING
EXPENSES:
Rental
property........ 9,619 (2,030)(j) 45,642
Leasing,
development and
construction.... -- -- 583
Depreciation and
amortization.... 4,881 (972)(k) 26,587
Interest expense:
Contractual..... 5,689 24,282(l) 63,321
Amortization of
deferred
financing
costs.......... -- -- 2,259
5,689 24,282 65,580
General and
administrative... 2,376 (4,652)(m) 4,218
Income before
minority
interest....... 3,800 (18,056) 29,532
Minority
interest........ -- 470(n) (5,227)
Income before
extraordinary
item........... $ 3,800 $ (17,517) $ 24,305
Income per share
before
extraordinary
item........... $ 1.22
Weighed average
shares......... 19,897
</TABLE>
75
<PAGE>
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combining statement of
operations is presented as if the following transactions had been consummated on
January 1, 1995:
(a.) the acquisition of 57 properties, 76 acres of development land
and the business operations of Forsyth Properties, Inc. and its
affiliates (the "Forsyth Transaction"),
(b.) the acquisition of six properties (the "Research Commons
Properties") and 60 acres of development land located in the
Research Commons office park (the "Research Commons
Acquisition"),
(c.) the issuance of 5,640,000 shares of Common Stock of the Company
at a price of $20.75 per share issued in connection with the
Forsyth Transaction (the "Second Offering"),
(d.) the acquisition of 56 properties and six acres of development
land (the "Bissell Portfolio") located in Greensboro, North
Carolina and Charlotte, North Carolina, the acquisition of five
properties (the "Hock Portfolio") located in Durham, North
Carolina, the acquisition of six properties (the "Parkway Plaza
Portfolio") located in Charlotte, North Carolina, the acquisition
of two properties (the "Initial Innsbrook Portfolio") located in
Richmond, Virginia, the acquisition of six properties (the
"Ross-Kreckman Portfolio") located in Richmond, Virginia, the
acquisition of two properties (the "DEQ Property") located in
Richmond, Virginia and the acquisition of 62 acres of development
land (the "DEQ Land") located in Richmond, Virginia
(collectively, the "Other Acquisitions"),
(e.) the issuance of 4,974,989 shares of Common Stock of the Company
at a price of $24.50 per share (the "Third Offering"),
(f.) the completion of the Eakin and Smith Transaction, and
(g.) the completion of the proposed Crocker Realty Trust stock purchase
and merger (the "Crocker Transaction").
This unaudited pro forma condensed combining statement of operations should
be read in conjunction with the pro forma condensed combining balance sheet of
the Company, the consolidated financial statements and related notes of the
Company included in its Annual Report on Form 10-K, the unaudited financial
statements and related notes of the Company included in its Quarterly Report on
Form 10-Q, and the financial statements and related notes of the acquired
properties.
The pro forma condensed combining statement of operations does not reflect
approximately $5,000,000 of non-recurring expenses which the Company expects to
incur in connection with the Crocker Transaction.
The pro forma condensed combining statement of operations is unaudited and
is not necessarily indicative of what the Company's actual results would have
been had the aforementioned transactions actually occurred on January 1, 1995
nor does it purport to represent the future operating results of the Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF
OPERATIONS
(a.) Represents the Company's historical statement of operations contained
in its Annual Report on Form 10-K for the year ended December 31,
1995.
(b.) Reflects the Second Offering and the historical operations of the
Forsyth Properties and Research Commons Properties, adjusted on a pro
forma basis for interest and depreciation expense, for the period of
time during 1995 prior to their acquisition by the Company.
(c.) Reflects the historical operations of the Other Acquisitions, adjusted
on a pro forma basis for interest and depreciation expense, for the
period of time during 1995 prior to their acquisition by the Company.
76
<PAGE>
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS -- CONTINUED
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF
OPERATIONS -- Continued
(d.) Reflects the reduction in interest expense associated with the
repayment of certain debt and the addition of certain incremental
rental property and general and administrative expenses as a result of
the Bissell and Ross-Kreckman Portfolio acquisitions.
(e.) Reflects the historical statement of operations of Eakin & Smith for
the year ended December 31, 1995.
(f.) Represents the historical statement of operations of Crocker Realty
Trust contained in its Annual Report on Form 10-K for the year ended
December 31, 1995.
(g.) Reflects the historical operations of CRI, CSI, CRMSI, the Sabal
properties and the Towermarc properties, adjusted on a pro forma basis
for interest and depreciation expense, for the period of time during
1995 prior to their acquisition by the Crocker Realty Trust. The
separate financial statements of Sabal are not included herein as
Sabal does not meet the significance tests for separate financial
statement presentation.
(h.) Reflects incremental rental income from a lease agreement entered into
in connection with the Crocker Transaction.
(i.) Reflects the elimination of certain third-party leasing and property
management income of Crocker Realty Trust not retained by the Company.
(j.) Reflects the net adjustment to rental property expenses to eliminate
the costs related to certain assets (primarily land held for
development) which will be distributed to current shareholders of
Crocker Realty Trust ($800,000) and for certain other property
operating costs which are expected to be eliminated upon the
completion of the Crocker Transaction ($1,230,000).
(k.) Represents the net adjustment to depreciation expense based upon an
assumed allocation of the purchase price to land, buildings,
furniture, fixtures and equipment and development in process and
building depreciation computed on a straight-line basis using an
estimated life of 40 years for buildings and 7 years for furniture,
fixtures and equipment as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction........................................................ $(145)
Crocker Transaction.............................................................. (827)
Total.......................................................................... $(972)
</TABLE>
(l.) Represents the net adjustment to interest expense to reflect interest
costs on borrowings under the Company's Credit Facility and interim
facility at an assumed rate of 7.0% (capped interest rate of 30-day
LIBOR of 5.50% plus 1.50%) and to allow for a full year of interest
expense on the debt assumed at the Eakin & Smith and Crocker
Transactions, is as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction...................................................... $ 2,667
Crocker Transaction............................................................ 21,615
Total........................................................................ $24,282
</TABLE>
(m.) Represents the net adjustment to general and administrative expense to
reflect the estimated incremental costs to the Company of operating a
Nashville division and to reflect the elimination of certain costs
(primarily executive salaries, administrative costs, the expenses
incurred to generate third-party revenue and the expenses to operate
the public entitiy) of Crocker Realty Trust not expected to be
incurred by the Company as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction...................................................... $ 37
Crocker Transaction............................................................ (4,689)
Total........................................................................ $(4,652)
</TABLE>
(n.) Represents the net adjustment to minority interest to reflect the pro
forma minority interest percentage of 17.7%.
77
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHWOODS PROPERTIES, INC.
/s/ Carman J. Liuzzo
Carman J. Liuzzo
Vice President and Chief Financial Officer
Date: June 18, 1996
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
2.1(1) Stock Purchase Agreement among AP CRTI Holdings, L.P., AEW
Partners, L.P., Thomas J. Crocker, Barbara F. Crocker, Richard
S. Ackerman and Robert E. Onisko and Highwoods Properties, Inc.
and Cedar Acquisition Corporation, dated as of April 29, 1996.
(Incorporated by reference to Exhibit A of Schedule 13D of
Highwoods Properties, Inc., dated April 29, 1996.)
2.2(1) Agreement and Plan of Merger by and among Highwoods Properties,
Inc., Crocker Realty Trust, Inc. and Cedar Acquisition
Corporation, dated as of April 29, 1996. (Incorporated by
reference to Exhibit B of Schedule 13D of Highwoods Properties,
Inc., dated April 29, 1996.)
10.1(1) Amended and Restated Commitment Letter between NationsBank,
N.A. and Highwoods/Forsyth Limited Partnership, dated as of
May 7, 1996. (Incorporated by reference to Exhibit C of
Schedule 13D of Highwoods Properties, Inc., dated
April 29, 1996.)
23.1(1) Consent of KPMG Peat Marwick LLP
23.2(1) Consent of Deloitte & Touche LLP
23.3(1) Consent of Price Waterhouse LLP
23.4(1) Consent of Ernst & Young LLP
- -------------------
(1) Previously filed.
