PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
During the year ended December 31, 2004, common shares in treasury increased by $4.7 million, primarily related to an increase of $4.6 million attributable to 125,963 common shares surrendered as payment of the exercise price and statutory tax withholdings for certain share options exercised during the period and $129,000, representing forfeiture of 4,000 restricted share grants.
In connection with the acquisitions during the year ended December 31, 2004, we recorded other assets of $478,000, escrowed cash of $595,000 and assumed liabilities of approximately $2.8 million. As a result of property sales during the year ended December 31, 2004, we removed approximately $3.3 million, $601,000 and $237,000 of receivables, other assets and liabilities, respectively.
| (13) | | Related Party Transactions |
On March 28, 2001, Prentiss Properties Resources, Inc. was incorporated under the General Corporation Law of the State of Delaware to serve as a Taxable REIT Subsidiary and provide management services to our operating partnership. Our operating partnership held a 98% economic interest and 0% voting interest in Prentiss Properties Resources, Inc. Effective January 1, 2003, our operating partnership acquired the remaining 2% interest in Prentiss Properties Resources, Inc., for gross consideration of approximately $67,000. As a result, beginning January 1, 2003, the accounts of Prentiss Properties Resources, Inc. are consolidated with and into the accounts of our operating partnership.
Prentiss Properties Resources, Inc. and its subsidiaries incurred certain personnel and other overhead-related expenses on behalf of our operating partnership. In 2002, the year prior to consolidation the overhead related expenses totaled $4.6 million.
Our board of trustees is authorized to provide for the issuance of 100,000,000 common shares and 20,000,000 preferred shares in one or more series, to establish the number of shares in each series and to fix the designation, powers, preferences and rights of each such series and the qualifications, limitations or restrictions thereof.
As of December 31, 2004, 45,062,840 and 3,773,585 common shares and Series D Convertible Preferred Shares were issued and outstanding, respectively. Of the 45,062,840 common shares, 80,952 common shares were held pursuant to our Key Employee Share Option Plan and classified as common shares in treasury on our consolidated balance sheet. The Series D Convertible Preferred Shares are convertible at the holder’s option on a one-for-one basis into our common shares, subject to certain adjustments. Effective December 29, 2005, the Series D Convertible Preferred Shares become redeemable at our option.
At the operating partnership level, 46,397,771 common units were issued and outstanding at December 31, 2004. The units included 45,062,840 held by Prentiss Properties Trust and 1,334,931 held by limited partners of our operating partnership. The 1,334,931 common units are redeemable at the option of the holder for a like number of common shares, or at our option, the cash equivalent thereof and are accounted for as minority interest in operating partnership on our consolidated balance sheet.
| (15) | | Share Incentive Plans |
We have two separate share-based incentive compensation plans both of which are approved by our shareholders. The plans include (1) a trustees’ share incentive plan and (2) an employees’ share incentive plan. Under the plans, we are authorized to issue common shares or cash pursuant to awards granted in the form of (1) non-qualified share options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended; (2) restricted or non-restricted shares; (3) share appreciation rights; and (4) performance shares. Awards may be granted to selected employees and trustees of our company or an affiliate of our company.
F-30
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Trustees’ Plan
Under the trustees’ plan, we are authorized to issue awards with respect to a maximum of 550,000 shares. Annually on the first business day of July we grant to each independent trustee non-qualified share options to purchase 7,500 of our common shares. The options are 100% vested at grant and, therefore, expensed upon issuance. In 2004, we issued to the independent trustees, a total of 37,500 non-qualified share options.
On the first business day of each fiscal quarter, we issue to each independent trustee common shares having an aggregate value of $6,250, based on the per share fair market value of the common shares on the date of grant. The common shares are 100% vested at grant and, therefore, expensed upon issuance. A total of 3,655, 4,300 and 4,625 common shares were granted pursuant to the plan during the years ended December 31, 2004, 2003, and 2002, respectively.
At December 31, 2004, we had 229,925 common shares that remain available for future issuance under our trustees’ plan.
The Employees’ Plan
Under the employees’ plan, we are authorized to issue awards with respect to a maximum of 6,500,000 common shares. Awards may be granted to employees of our operating partnership or management service companies. No participant may be granted, in any calendar year, awards in the form of share options or share appreciation rights with respect to more than 390,000 common shares or restricted share awards for more than 50,000 common shares. We have broad discretion in determining the vesting terms and other terms applicable to awards granted under the plan.
The exercise price of each option granted during 2004 was equal to the per share fair market value of our common shares on the date of grant. Under the employees’ plan, during the years ended December 31, 2004, 2003 and 2002, we granted 240,650, 271,000 and 206,508 options which vest 33-1/3% per year on each anniversary of the date of grant, commencing with the first anniversary of the date of grant. In addition during 2004, 2003 and 2002 we issued 97,450, 93,250 and 30,600 restricted shares which vest 100% on the third anniversary of the date of grant.
At December 31, 2004, we had 1,775,119 common shares that remain available for future issuance under our employees’ plan.
F-31
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
A summary of the status of our options as of December 31, 2004, 2003 and 2002 and the changes during the years ended on those dates is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| |
| | | # Shares of | | Weighted average | | # Shares of | | Weighted average | | # Shares of | | Weighted average |
| | | underlying options | | exercise price | | underlying options | | exercise price | | underlying options | | exercise price |
| |
| Outstanding at beginning of the year | | | 984,456 | | | $ | 26.45 | | | | 1,421,514 | | | $ | 24.93 | | | | 2,179,175 | | | $ | 23.65 | |
| Granted | | | 278,150 | | | $ | 34.10 | | | | 308,500 | | | $ | 26.73 | | | | 244,000 | | | $ | 28.43 | |
| Exercised | | | 612,020 | | | $ | 26.00 | | | | 745,558 | | | $ | 23.66 | | | | 997,661 | | | $ | 23.01 | |
| Forfeited | | | 3,335 | | | $ | 28.09 | | | | — | | | $ | — | | | | 4,000 | | | $ | 26.24 | |
| Expired | | | — | | | $ | — | | | | — | | | $ | — | | | | — | | | $ | — | |
| |
| Outstanding at end of year | | | 647,251 | | | $ | 30.11 | | | | 984,456 | | | $ | 26.45 | | | | 1,421,514 | | | $ | 24.93 | |
| Exercisable at end of year | | | 161,435 | | | $ | 29.19 | | | | 440,625 | | | $ | 26.62 | | | | 679,099 | | | $ | 25.23 | |
| |
| Weighted-average fair value of options granted during the year | | | | | | $ | 1.84 | | | | | | | $ | 0.88 | | | | | | | $ | 1.19 | |
The fair value of each share option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| |
| Expected term | | | 5.00 | | | | 5.00 | | | | 5.00 | |
| Expected dividend yield | | | 6.57 | % | | | 8.32 | % | | | 7.81 | % |
| Expected volatility | | | 16.90 | % | | | 15.28 | % | | | 13.64 | % |
| Risk-free interest rate | | | 3.13 | % | | | 3.01 | % | | | 4.27 | % |
The following table summarizes information about share options outstanding at December 31, 2004:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Options Outstanding | | | | | | Options Exercisable |
| | | | | | | | | | | Weighted average | | | | |
| Range of | | Number outstanding | | Weighted average | | remaining contr. | | Number exercisable | | Weighted average |
| exercise price | | at 12/31/04 | | exercise price | | life | | at 12/31/04 | | exercise price |
| |
| $15.00 to $20.00 | | | 5,000 | | | $ | 20.00 | | | | 1.8 | | | | 5,000 | | | $ | 20.00 | |
| $20.01 to $25.00 | | | 30,167 | | | $ | 24.08 | | | | 4.0 | | | | 30,167 | | | $ | 24.08 | |
| $25.01 to $30.00 | | | 303,934 | | | $ | 27.10 | | | | 7.8 | | | | 58,768 | | | $ | 28.73 | |
| $30.01 + | | | 308,150 | | | $ | 33.83 | | | | 9.1 | | | | 67,500 | | | $ | 32.56 | |
| |
| $15.00 + | | | 647,251 | | | $ | 30.11 | | | | 8.2 | | | | 161,435 | | | $ | 29.19 | |
| |
| (16) | | Employee Benefit Plans |
We have a 401(k) savings plan for our employees. Under the plan, as amended, employees, age 21 and older, are eligible to participate in the plan after they have completed one year and 1,000 hours of service. Participants are immediately vested in their contributions, matching contributions and earnings thereon.
We initially match 25% of an employees’ contribution, not to exceed 25% of 6% of each employee’s wages. Our cost of the initial match totaled approximately $289,000, $271,000 and $306,000 for the years ended December 31, 2004, 2003 and 2002, respectively. We may also elect, in any calendar year, to make a discretionary match to the plan. The amount paid pursuant to the discretionary match totaled approximately $0, $0 and $314,000 during the years ended December 31, 2004, 2003 and 2002, respectively.
F-32
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
We have registered 500,000 common shares in connection with a share purchase plan. The share purchase plan enables eligible employees to purchase shares, subject to certain restrictions, of the company at a 15% discount to fair market value. A total of 29,683, 32,065 and 39,766 common shares were issued, in accordance with the share purchase plan, during the years ended December 31, 2004, 2003, and 2002, respectively. At December 31, 2004, we have 181,566 shares available for future issuance.
During the year ended December 31, 2000, we adopted the Key Employee Share Option Plan. Pursuant to the plan, officers and other selected key employees of our operating partnership or management service companies who earn bonuses have the option of deferring the payment of such bonuses. Such deferred compensation may be used to purchase various mutual funds and/or our common shares. Pursuant to the participant’s election, we purchase shares on the open market and place them in a trust for the benefit of such participant. The trust may deliver to the participant shares or the fair market value of such shares beginning six months from the date they were placed in the trust. The purpose of the deferred compensation plan is to provide a vehicle for the payment of compensation otherwise payable to the participants, in a form that will provide incentives and rewards for meritorious performance and encourage the recipients’ continuance as our employees. During the 2000 plan year we provided a discount of 15% on the purchase price of our common shares purchased by participants in the plan. For each plan year thereafter, we did not provide a discount on our common shares. The mutual fund investments are carried at their market value of $2.8 million and included as investments in securities on our consolidated balance sheet. The plan holds 80,952 of our common shares which we purchased in the open market on behalf of the participants. These are included as common shares in treasury on our consolidated balance sheet at December 31, 2004. The fair value of the plan assets totaling $5.9 million are included as deferred compensation liability in accounts payable and other liabilities on our consolidated balance sheet at December 31, 2004. As a result of the change in the fair value of our investments in securities, we recorded unrealized gains of $191,000 and unrealized losses of $83,000 and $104,000 in other comprehensive income during the years ended December 31, 2004, 2003 and 2002, respectively.
As of February 12, 2003, we adopted two deferred compensation plans for our executive officers. The Executive Choice Share Deferral Plan for Executives allows our executive officers to elect to defer the receipt of shares issued upon the exercise of options pursuant to our 1996 Share Incentive Plan. In addition, the Executive Choice Share Deferral Plan allows our officers to defer receipt of restricted securities issued pursuant to our 1996 Share Incentive Plan and to defer receipt of our common shares received pursuant to our Key Employee Share Option Plan and our Share Purchase Plan. The Executive Choice Deferred Compensation Plan provides a means for our executive officers to defer receipt of salary and bonus and property other than our common shares received under the Key Employee Share Option Plan.
We also adopted two deferred compensation plans for our trustees, similar to those adopted for our executives. Under the Executive Choice Share Deferral Plan for Trustees, the independent members of our board of trustees may defer receipt of shares issued upon the exercise of options received under the Amended and Restated Trustees’ Share Incentive Plan. Under the Executive Choice Deferred Compensation Plan for Trustees, our independent trustees may defer other compensation received pursuant to service on our board of trustees.
For each of the deferred compensation plans described above, the executive’s or the trustee’s receipt of shares and other compensation is deferred by placing such shares or other compensation in an account, which is treated as an unfunded deferred compensation obligation of the company, and the employee or trustee does not receive the shares or other compensation until he elects to receive the shares or other compensation at a future date. Each of the plans described above is intended solely as a means of deferring gain that would otherwise be realized by our officers and trustees and is not intended to amend any other plan or program.
F-33
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
| (17) | | Commitments and Contingencies |
Legal Matters
We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. We believe that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.
Environmental Matters
We obtain environmental site assessments for all acquired properties prior to acquisition. The environmental site assessments have not revealed any environmental condition, liability or compliance concern that we believe may have a material adverse effect on our business, assets or results or operations, nor are we aware of any such condition, liability or concern. It is possible that the environmental site assessments relating to any one of our properties or properties to be acquired in the future do not reveal all environmental conditions, liabilities or compliance concerns or that there are material environmental conditions, liabilities or compliance concerns that arose after the related environmental site assessment report was completed, of which we are otherwise unaware.
Insurance
We have and will keep in force comprehensive insurance, including liability, fire, workers’ compensation, extended coverage, rental loss and, when available on reasonable commercial terms, flood, wind, earthquake and terrorism insurance, with policy specifications, limits, exclusions and deductibles customarily carried for similar properties. We currently maintain insurance to cover environmental conditions and business interruption if and when they occur. This policy covers both governmental and third-party claims associated with the covered environmental conditions. Our real property insurance policies exclude earthquake coverage for properties located within California. As a result, we maintain a separate $125 million blanket earthquake policy on the properties we own in Northern and Southern California. Our real property insurance policies exclude terrorism coverage. However, we maintain a separate $100 million blanket stand-alone terrorism policy on the properties we own. Certain types of losses, however, generally of a catastrophic nature, such as acts of war, are either uninsurable or the cost of obtaining insurance is so high that it is more prudent to accept the risk of loss. If more terrorists incidents occur, however, future insurance policies purchased by us may expressly exclude hostile acts, and it may become economically unfeasible to obtain insurance covering terrorist attacks. In the event of such terrorist acts or other catastrophic losses, we would expect our insurance premiums to increase thereafter, which may have an adverse impact on our cash flow. We believe that our properties as of the date of this filing are adequately insured in accordance with industry standards.
Financial Guarantees and Commitments
In connection with the disposition of a real estate property in May 2001, we entered into a financial guarantee with a maximum future potential payment of $1.4 million. The financial guarantee, provided to the third party purchaser, guaranteed payment of an amount not to exceed the $1.4 million potential maximum if certain tenants, as defined in the purchase and sale agreement, fail to extend either their leases beyond the maturities of their current in-place leases or to perform according to their in-place leases. An amount totaling $1.0 million was considered probable at the date of disposition and therefore, accrued during the year ended December 31, 2001. Pursuant to the financial guarantee, during the year ended December 31, 2003, we paid the anticipated $1.0 million to the third party purchaser.
As a condition of the purchase and sale and as security for our guarantee, we provided to the title company at closing, two irrevocable letters of credit, totaling $1.4 million, drawn on a financial institution and identifying the purchaser as beneficiary. One letter of credit totaling $1.0 million expired in 2003. The remaining balance on the second letter of credit totaling $189,000 at December 31, 2004 expires as follows:
| | | | | |
| (in thousands) | | Letters of Credit |
| |
| 2005 | | | 63 | |
| 2006 | | | 126 | |
| |
| | | $ | 189 | |
| |
F-34
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
| (18) | | Recently Issued Accounting Pronouncements |
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” In December 2003, the Financial Standards Board issued a revision to FASB Interpretation No. 46, FASB Interpretation No. 46(R). The Interpretation, as revised, requires consolidation of an entity by an enterprise if that enterprise will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both. An entity subject to this Interpretation is called a variable interest entity. The disclosure provisions of this Interpretation, as revised, are effective for financial statements issued after December 31, 2003. Per this Interpretation, as revised, a public entity, that is not a small business issuer, with a variable interest entity to which the provisions of the Interpretation have not been applied as of December 24, 2003, shall apply this Interpretation no later than the end of the first reporting period that ends after March 15, 2004. However, prior to the required application of this Interpretation, a public entity, that is not a small business issuer, shall apply this Interpretation to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003.
In November 2004, the EITF reached a consensus on an approach for evaluating whether the criteria in paragraph 42 of Statement 144 have been met for the purposes of classifying the results of operations of a component of an entity that either has been disposed of or is classified as held for sale as discontinued operations. The consensus was incorporated into Appendix A (03-13A) of Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations.”
The guidance should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. In accordance with the criteria prescribed in 03-13A, we evaluated our continuing involvement resulting from certain management agreements retained in relation to real estate sale transactions occurring during period and as a result of our evaluation determined that the results of operations from the sold properties should be classified within discontinued operations on our consolidated statements of income.
In December 2004, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” a revision to Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” The Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance.
The Statement which focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
The Statement, which is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 for public entities that do not file as small business issuers, will not have a material impact on our financial statements.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, “Accounting for Non-monetary Transactions.” The statement requires non-monetary exchanges to be accounted for at fair value, recognizing any gain or loss, if the transactions meet a commercial-substance criterion and fair value is determinable. The statement is effective for non-monetary transactions occurring in fiscal years beginning after June 15, 2005. We believe that the implementation of this standard will not have a material impact on our consolidated financial position or results of operations.
F-35
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(19) Segment Information
The table below presents information about income from continuing operations and segment assets used by our chief operating decision maker as of and for the years ended December 31, 2004, 2003, and 2002, respectively.
For the Year Ended and As of December 31, 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Corporate | | | |
| | | Mid- | | | | | | | | | Northern | | | Southern | | | Total | | | not allocable | | Consolidated | |
| (in thousands) | | Atlantic | | | Midwest | | | Southwest | | | California | | | California | | | segments | | | to segments | | total | |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Rental income | | $ | 93,873 | | | $ | 3 | | | $ | 126,141 | | | $ | 36,623 | | | $ | 39,492 | | | $ | 296,132 | | | $ | — | | | $ | 296,132 | |
| Service business and other income | | | 3,713 | | | | 992 | | | | 3,071 | | | | 2,862 | | | | 982 | | | | 11,620 | | | | 2,244 | | | | 13,864 | |
| |
| Total revenues | | | 97,586 | | | | 995 | | | | 129,212 | | | | 39,485 | | | | 40,474 | | | | 307,752 | | | | 2,244 | | | | 309,996 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property operating and maintenance | | | 21,687 | | | | (941 | ) | | | 37,006 | | | | 10,766 | | | | 8,459 | | | | 76,977 | | | | — | | | | 76,977 | |
| Real estate taxes | | | 7,580 | | | | — | | | | 13,461 | | | | 3,110 | | | | 3,068 | | | | 27,219 | | | | — | | | | 27,219 | |
| General & administrative and personnel costs | | | 419 | | | | 257 | | | | 278 | | | | 159 | | | | (14 | ) | | | 1,099 | | | | 10,704 | | | | 11,803 | |
| Expenses of service business | | | 2,496 | | | | 1,110 | | | | 2,077 | | | | 1,716 | | | | 1,429 | | | | 8,828 | | | | 1,170 | | | | 9,998 | |
| Depreciation and amortization | | | 21,029 | | | | 15 | | | | 34,124 | | | | 6,716 | | | | 13,463 | | | | 75,347 | | | | 360 | | | | 75,707 | |
| |
| Total expenses | | | 53,211 | | | | 441 | | | | 86,946 | | | | 22,467 | | | | 26,405 | | | | 189,470 | | | | 12,234 | | | | 201,704 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | |
| Interest expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 61,032 | | | | 61,032 | |
| Amortization of deferred financing costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,330 | | | | 2,330 | |
| Income from continuing operations before equity in income of unconsolidated joint ventures, loss on investments in securities, impairment and minority interests | | | 44,375 | | | | 554 | | | | 42,266 | | | | 17,018 | | | | 14,069 | | | | 118,282 | | | | (73,352 | ) | | | 44,930 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in income of unconsolidated joint ventures | | | (100 | ) | | | — | | | | 2,529 | | | | — | | | | — | | | | 2,429 | | | | — | | | | 2,429 | |
| Loss on investments in securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (420 | ) | | | (420 | ) |
| Loss from impairment of mortgage loan | | | (2,900 | ) | | | | | | | | | | | | | | | | | | | (2,900 | ) | | | — | | | | (2,900 | ) |
| Minority interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,002 | ) | | | (2,002 | ) |
| |
| Income from continuing operations | | $ | 41,375 | | | $ | 554 | | | $ | 44,795 | | | $ | 17,018 | | | $ | 14,069 | | | $ | 117,811 | | | $ | (75,774 | ) | | $ | 42,037 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Additions to long-lived assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Development/redevelopment | | $ | 108 | | | $ | 2,565 | | | $ | 310 | | | $ | 691 | | | $ | 11,673 | | | $ | 15,347 | | | $ | — | | | $ | 15,347 | |
| Purchase of real estate | | | — | | | | 32,590 | | | | 123,336 | | | | 100,491 | | | | 32,821 | | | | 289,238 | | | | — | | | | 289,238 | |
| Capital expenditures for in-service properties | | | 9,797 | | | | 13,946 | | | | 17,756 | | | | 7,418 | | | | 5,479 | | | | 54,396 | | | | — | | | | 54,396 | |
| |
| Total additions | | $ | 9,905 | | | $ | 49,101 | | | $ | 141,402 | | | $ | 108,600 | | | $ | 49,973 | | | $ | 358,981 | | | $ | — | | | $ | 358,981 | |
| |
| Investment balance in equity method investees | | $ | 8,726 | | | $ | — | | | $ | 4,217 | | | $ | — | | | $ | — | | | $ | 12,943 | | | $ | — | | | $ | 12,943 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Total assets | | $ | 605,355 | | | $ | 437,173 | | | $ | 698,093 | | | $ | 282,059 | | | $ | 276,907 | | | $ | 2,299,587 | | | $ | 33,952 | | | $ | 2,333,539 | |
| |
F-36
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the Year Ended and As of December 31, 2003
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate | | |
| | | Mid- | | | | | | | | | | Northern | | Southern | | Total | | not allocable | | Consolidated |
| (in thousands) | | Atlantic | | Midwest | | Southwest | | California | | California | | segments | | to segments | | total |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Rental income | | $ | 89,226 | | | $ | 50 | | | $ | 105,760 | | | $ | 32,562 | | | $ | 30,530 | | | $ | 258,128 | | | $ | — | | | $ | 258,128 | |
| Service business and other income | | | 3,967 | | | | 2,079 | | | | 2,457 | | | | 2,500 | | | | 991 | | | | 11,994 | | | | 4,755 | | | | 16,749 | |
| |
| Total revenues | | | 93,193 | | | | 2,129 | | | | 108,217 | | | | 35,062 | | | | 31,521 | | | | 270,122 | | | | 4,755 | | | | 274,877 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property operating and maintenance | | | 19,329 | | | | 709 | | | | 31,195 | | | | 10,141 | | | | 5,346 | | | | 66,720 | | | | — | | | | 66,720 | |
| Real estate taxes | | | 6,733 | | | | — | | | | 10,649 | | | | 2,626 | | | | 2,252 | | | | 22,260 | | | | — | | | | 22,260 | |
| General & administrative and personnel costs | | | 447 | | | | 276 | | | | 274 | | | | 146 | | | | 148 | | | | 1,291 | | | | 9,697 | | | | 10,988 | |
| Expenses of service business | | | 2,691 | | | | 1,457 | | | | 1,812 | | | | 1,501 | | | | 1,308 | | | | 8,769 | | | | 1,744 | | | | 10,513 | |
| Depreciation and amortization | | | 18,528 | | | | 16 | | | | 26,039 | | | | 4,747 | | | | 7,954 | | | | 57,284 | | | | 194 | | | | 57,478 | |
| |
| Total operating expenses | | | 47,728 | | | | 2,458 | | | | 69,969 | | | | 19,161 | | | | 17,008 | | | | 156,324 | | | | 11,635 | | | | 167,959 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 60,478 | | | | 60,478 | |
| Amortization of deferred financing costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,284 | | | | 2,284 | |
| Income from continuing operations before equity in income of unconsolidated joint ventures and minority interests | | | 45,465 | | | | (329 | ) | | | 38,248 | | | | 15,901 | | | | 14,513 | | | | 113,798 | | | | (69,642 | ) | | | 44,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in income of unconsolidated joint ventures | | | 261 | | | | — | | | | 2,294 | | | | — | | | | — | | | | 2,555 | | | | — | | | | 2,555 | |
| Minority interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (9,796 | ) | | | (9,796 | ) |
| |
| Income from continuing operations | | $ | 45,726 | | | $ | (329 | ) | | $ | 40,542 | | | $ | 15,901 | | | $ | 14,513 | | | $ | 116,353 | | | $ | (79,438 | ) | | $ | 36,915 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Additions to long-lived assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Development/redevelopment | | $ | 1,292 | | | $ | 4,375 | | | $ | 4,865 | | | $ | 4 | | | $ | 106 | | | $ | 10,642 | | | $ | — | | | $ | 10,642 | |
| Purchase of real estate | | | 52,158 | | | | 31,375 | | | | 28,052 | | | | 6,062 | | | | 67,086 | | | | 184,733 | | | | — | | | | 184,733 | |
| Capital expenditures for in-service properties | | | 8,056 | | | | 6,359 | | | | 13,173 | | | | 4,377 | | | | 3,271 | | | | 35,236 | | | | — | | | | 35,236 | |
| |
| Total additions | | $ | 61,506 | | | $ | 42,109 | | | $ | 46,090 | | | $ | 10,443 | | | $ | 70,463 | | | $ | 230,611 | | | $ | — | | | $ | 230,611 | |
| |
| Investment balance in equity method investees | | $ | 9,226 | | | $ | — | | | $ | 3,882 | | | $ | — | | | $ | — | | | $ | 13,108 | | | $ | — | | | $ | 13,108 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Total assets | | $ | 619,207 | | | $ | 412,769 | | | $ | 638,170 | | | $ | 252,098 | | | $ | 244,004 | | | $ | 2,166,248 | | | $ | 32,845 | | | $ | 2,199,093 | |
| |
F-37
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the Year Ended and As of December 31, 2002
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate | | |
| | | | | | | | | | | | | | | Northern | | Southern | | Total | | not allocable | | Consolidated |
| (in thousands) | | Mid-Atlantic | | Midwest | | Southwest | | California | | California | | segments | | to segments | | total |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Rental income | | $ | 81,284 | | | $ | 39 | | | $ | 102,256 | | | $ | 33,486 | | | $ | 28,808 | | | $ | 245,873 | | | $ | — | | | $ | 245,873 | |
| Service business and other income | | | 424 | | | | 16 | | | | 1,034 | | | | 274 | | | | (59 | ) | | | 1,689 | | | | 2,676 | | | | 4,365 | |
| |
| Total revenues | | | 81,708 | | | | 55 | | | | 103,290 | | | | 33,760 | | | | 28,749 | | | | 247,562 | | | | 2,676 | | | | 250,238 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property operating and maintenance | | | 18,143 | | | | 583 | | | | 27,216 | | | | 10,420 | | | | 5,404 | | | | 61,766 | | | | — | | | | 61,766 | |
| Real estate taxes | | | 6,201 | | | | — | | | | 13,855 | | | | 2,607 | | | | 2,233 | | | | 24,896 | | | | — | | | | 24,896 | |
| General & administrative and personnel costs | | | 425 | | | | 302 | | | | 379 | | | | 358 | | | | 171 | | | | 1,635 | | | | 8,726 | | | | 10,361 | |
| Depreciation and amortization | | | 14,585 | | | | — | | | | 22,693 | | | | 4,321 | | | | 7,075 | | | | 48,674 | | | | 86 | | | | 48,760 | |
| |
| Total expenses | | | 39,354 | | | | 885 | | | | 64,143 | | | | 17,706 | | | | 14,883 | | | | 136,971 | | | | 8,812 | | | | 145,783 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 56,618 | | | | 56,618 | |
| Amortization of deferred financing costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,832 | | | | 1,832 | |
| Income from continuing operations before equity in income of unconsolidated joint ventures and unconsolidated subsidiaries and minority interests | | | 42,354 | | | | (830 | ) | | | 39,147 | | | | 16,054 | | | | 13,866 | | | | 110,591 | | | | (64,586 | ) | | | 46,005 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in income of unconsolidated joint ventures and unconsolidated subsidiaries | | | 1,875 | | | | 1,007 | | | | 2,282 | | | | (386 | ) | | | (146 | ) | | | 4,632 | | | | (1,478 | ) | | | 3,154 | |
| Minority interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (9,812 | ) | | | (9,812 | ) |
| |
| Income from continuing operations | | $ | 44,229 | | | $ | 177 | | | $ | 41,429 | | | $ | 15,668 | | | $ | 13,720 | | | $ | 115,223 | | | $ | (75,876 | ) | | $ | 39,347 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Additions to long-lived assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Development/redevelopment | | $ | 8,081 | | | $ | 10,977 | | | $ | 4,172 | | | $ | 108 | | | $ | 2,956 | | | $ | 26,294 | | | $ | — | | | $ | 26,294 | |
| Purchase of real estate | | | 55,152 | | | | — | | | | 107,475 | | | | — | | | | 10,597 | | | | 173,224 | | | | — | | | | 173,224 | |
| Capital expenditures for in-service properties | | | 4,313 | | | | 2,329 | | | | 13,296 | | | | 4,215 | | | | 3,034 | | | | 27,187 | | | | — | | | | 27,187 | |
| |
| Total additions | | $ | 67,546 | | | $ | 13,306 | | | $ | 124,943 | | | $ | 4,323 | | | $ | 16,587 | | | $ | 226,705 | | | $ | — | | | $ | 226,705 | |
| |
| Investment balance in equity method investees | | $ | 9,763 | | | $ | — | | | $ | 3,914 | | | $ | — | | | $ | — | | | $ | 13,677 | | | $ | 6,299 | | | $ | 19,976 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Total assets | | $ | 617,295 | | | $ | 383,559 | | | $ | 639,416 | | | $ | 267,050 | | | $ | 180,379 | | | $ | 2,087,699 | | | $ | 34,590 | | | $ | 2,122,289 | |
| |
F-38
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(20) Discontinued Operations
In accordance with Statement of Financial Accounting Standards No. 144, (“SFAS 144”) “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective for financial statements issued for fiscal years beginning after December 15, 2001, income and gain/(loss) for real estate properties sold and real estate properties held for sale are to be reflected in the consolidated statements of income as discontinued operations.
During the quarter ended September 30, 2005, the Company reclassified certain properties to assets held for sale and in compliance with SFAS 144 has reported revenue and expenses from the reclassification of these properties as discontinued operations for each period presented in its quarterly report for the quarter ended September 30, 2005 (including the comparable period of the prior year). Under SEC requirements, the same reclassification as discontinued operations required by SFAS 144 following the reclassification of these properties is required for previously issued annual financial statements for each of the three years shown in the Company’s last annual report on Form 10-K, if those financials are incorporated by reference in subsequent filings with the SEC made under the Securities Act of 1933, as amended, even though those financial statements relate to periods prior to the date of the reclassification. This reclassification has no effect on the Company’s reported net income.
During the year ended December 31, 2004, we sold 4 industrial buildings containing approximately 91,000 net rentable square feet and 8 office buildings containing approximately 1.2 million net rentable square feet. During the year ended December 31, 2003, we sold 11 office buildings containing approximately 983,000 net rentable square feet. During the year ended December 31, 2002, we sold 7 industrial buildings containing approximately 875,000 net rentable square feet and 3 office buildings containing approximately 194,000 net rentable square feet.
Concurrent with the disposition of 7 of the 8 office buildings sold during the year ended December 31, 2004, we entered into management agreements under which we would perform management duties for a fee. We evaluated our continuing involvement resulting from the management agreements pursuant to the criteria outlined in EITF 03-13A, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations,” and as a result of our evaluation determined that neither the continuing cash inflows nor cash outflows are significant and thus, the properties should be classified within discontinued operations on our consolidated statements of income.
Below is a summary of our combined results of operations from the properties disposed of or held for sale included in discontinued operations during the periods presented.
| | | | | | | | | | | | | |
| | | | | | | Year Ended | | |
| Discontinued Operations | | | | | | December 31, | | |
| (in thousands) | | 2004 | | 2003 | | 2002 |
| Rental income | | $ | 74,730 | | | $ | 89,754 | | | $ | 110,381 | |
| Property revenues | | | 74,730 | | | | 89,754 | | | | 110,381 | |
| Interest and Other Income | | | 64 | | | | 67 | | | | 21 | |
| |
| Total Revenues | | | 74,794 | | | | 89,821 | | | | 110,402 | |
| |
| | | | | | | | | | | | | |
| Property operating and maintenance | | | 18,750 | | | | 25,255 | | | | 28,945 | |
| Real estate taxes | | | 14,188 | | | | 12,652 | | | | 15,567 | |
| Depreciation and amortization | | | 20,281 | | | | 22,778 | | | | 24,697 | |
| Property expenses | | | 53,219 | | | | 60,685 | | | | 69,209 | |
| | | | | | | | | | | | | |
| Interest expense | | | (7,987 | ) | | | (9,336 | ) | | | (10,463 | ) |
| Amortization on deferred financing | | | (13 | ) | | | — | | | | — | |
| Loss on impairment of real estate | | | — | | | | (1,792 | ) | | | (2,855 | ) |
| | | | | | | | | | | | | |
| Income from discontinued operations | | $ | 13,575 | | | $ | 18,008 | | | $ | 27,875 | |
| | | | | | | | | | | | | |
| Gain/(loss) from disposition of discontinued operations | | | 11,957 | | | | (4,457 | ) | | | 8,430 | |
| Loss from debt defeasance related to sale of real estate | | | (5,316 | ) | | | — | | | | — | |
| Minority interest related to discontinued operations | | | (1,052 | ) | | | (484 | ) | | | (1,371 | ) |
| |
| Total Discontinued Operations | | $ | 19,164 | | | $ | 13,067 | | | $ | 34,934 | |
| |
F-39
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(21) Selected Quarterly Financial Data (Unaudited)
The following schedule is a summary of the quarterly results of operations for the years ended December 31, 2004, 2003 and 2002:
| | | | | | | | | | | | | | | | | | | | | |
| | | (amounts in thousands, except per share data) |
| | | First | | Second | | Third | | Fourth | | |
| | | Quarter | | Quarter | | Quarter | | Quarter | | Total |
| Year ended December 31, 2004 | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 73,649 | | | $ | 75,938 | | | $ | 79,247 | | | $ | 81,162 | | | $ | 309,996 | |
| Income from continuing operations | | $ | 11,800 | | | $ | 11,303 | | | $ | 10,852 | | | $ | 8,082 | | | $ | 42,037 | |
| Net income | | $ | 16,999 | | | $ | 18,792 | | | $ | 12,554 | | | $ | 14,078 | | | $ | 62,423 | |
| Net income per common share-basic | | $ | 0.31 | | | $ | 0.38 | | | $ | 0.23 | | | $ | 0.27 | | | $ | 1.18 | |
| Net income per common share-diluted | | $ | 0.30 | | | $ | 0.37 | | | $ | 0.23 | | | $ | 0.27 | | | $ | 1.18 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2003 | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 66,257 | | | $ | 67,980 | | | $ | 68,589 | | | $ | 72,051 | | | $ | 274,877 | |
| Income from continuing operations | | $ | 8,481 | | | $ | 8,307 | | | $ | 9,891 | | | $ | 10,236 | | | $ | 36,915 | |
| Net income | | $ | 15,510 | | | $ | 8,512 | | | $ | 14,218 | | | $ | 21,177 | | | $ | 59,417 | |
| Net income per common share-basic | | $ | 0.34 | | | $ | 0.16 | | | $ | 0.30 | | | $ | 0.45 | | | $ | 1.27 | |
| Net income per common share-diluted | | $ | 0.34 | | | $ | 0.16 | | | $ | 0.30 | | | $ | 0.45 | | | $ | 1.27 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2002 | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 59,043 | | | $ | 62,981 | | | $ | 62,581 | | | $ | 65,633 | | | $ | 250,238 | |
| Income from continuing operations | | $ | 10,824 | | | $ | 8,597 | | | $ | 10,195 | | | $ | 9,731 | | | $ | 39,347 | |
| Net income | | $ | 18,220 | | | $ | 17,341 | | | $ | 22,894 | | | $ | 15,826 | | | $ | 74,281 | |
| Net income per common share-basic | | $ | 0.43 | | | $ | 0.40 | | | $ | 0.53 | | | $ | 0.35 | | | $ | 1.72 | |
| Net income per common share-diluted | | $ | 0.43 | | | $ | 0.39 | | | $ | 0.53 | | | $ | 0.35 | | | $ | 1.71 | |
(22) Income Taxes
We have elected to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, commencing with our taxable year ended December 31, 1996. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our adjusted taxable income to our shareholders. It is our current intention to adhere to these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate level federal income tax on taxable income we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
F-40
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Reconciliation between GAAP Net Income and Taxable Income
The following is a reconciliation of GAAP net income to taxable income for the years ended December 31, 2004, 2003 and 2002:
| | | | | | | | | | | | | |
| (in thousands) | | 2004 | | 2003 | | 2002 |
| GAAP net income | | $ | 62,423 | | | $ | 59,417 | | | $ | 74,281 | |
| GAAP loss (net income) of taxable subsidiaries included above | | | (1,397 | ) | | | (883 | ) | | | (651 | ) |
| |
| GAAP net income from REIT operations | | | 61,026 | | | | 58,534 | | | | 73,630 | |
| |
GAAP to tax adjustments:(1) | | | | | | | | | | | | |
| Depreciation and amortization | | | 25,200 | | | | 18,897 | | | | 14,495 | |
Gains and losses from capital transactions(2) | | | (11,946 | ) | | | (4,783 | ) | | | (296 | ) |
| Straight-line rent adjustment, net of rents received in advance | | | (7,476 | ) | | | (7,948 | ) | | | (7,177 | ) |
| Capitalized operating expenses and interest cost related to development projects | | | (5,822 | ) | | | (182 | ) | | | (3,017 | ) |
| Interest income | | | 484 | | | | 482 | | | | 481 | |
| Compensation expense | | | (2,162 | ) | | | (665 | ) | | | (4,542 | ) |
| Other differences, net | | | (103 | ) | | | 648 | | | | 3,502 | |
| |
| Total GAAP to tax adjustments | | | (1,825 | ) | | | 6,449 | | | | 3,446 | |
| |
| |
Adjusted taxable income subject to distribution requirement(3) | | $ | 59,201 | | | $ | 64,983 | | | $ | 77,076 | |
| |
| | |
| (1) | | All adjustments to GAAP net income from REIT operations are net of amounts attributable to minority interest. |
| |
| (2) | | Represents the GAAP to tax difference for gains and losses including tax-deferred gain on transactions qualifying under Section 1031 of the Internal Revenue Code. |
| |
| (3) | | The distribution requirement was 90% in each of the years ended December 31, 2004, 2003 and 2002. |
Characterization of Distributions
The classification of distributions presented below is determined out of our earnings and profits as defined by Section 316 of the Internal Revenue Code, which differs from federal taxable income.
The following table characterizes distributions paid per common share for the years ended December 31, 2004, 2003, and 2002:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2004 | | 2003 | | 2002 |
| Ordinary income | | $ | 1.213 | | | | 54.15 | % | | $ | 1.426 | | | | 63.66 | % | | $ | 1.788 | | | | 80.73 | % |
| Return of capital | | $ | 1.027 | | | | 45.85 | % | | $ | 0.814 | | | | 36.34 | % | | $ | 0.427 | | | | 19.27 | % |
| Capital gains | | $ | 0.00 | | | | 0.00 | % | | $ | 0.00 | | | | 0.00 | % | | $ | 0.00 | | | | 0.00 | % |
| |
| | | $ | 2.240 | | | | | | | $ | 2.240 | | | | | | | $ | 2.215 | | | | | |
| |
F-41
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Prentiss Properties Resources, Inc. was incorporated in March 2001 to serve as a Taxable REIT Subsidiary and provide management and other services to our operating partnership and third-party clients. The management services business serves a broad base of clients, including major financial institutions and pension funds, large corporate users, real estate advisory firms and real estate investment groups. Prentiss Properties Resources, Inc. had a deferred tax liability totaling approximately $550,000 at December 31, 2004 as detailed below:
| | | | | |
| (in thousands) | | Dr./(Cr.) |
| Bad Debt Reserve | | $ | 218 | |
| Accrued employee liabilities | | | 28 | |
| Accrued depreciation & amortization | | | (149 | ) |
| Loss from partnership interests | | | (559 | ) |
| other miscellaneous tax benefits | | | 6 | |
| State Tax reserve | | | (94 | ) |
| | | | | |
| |
| Total deferred tax liability | | $ | (550 | ) |
| |
(23) Pro Forma
The following unaudited pro forma consolidated statements of income are presented as if all of the properties acquired between January 1, 2004 and December 31, 2004 had occurred January 1, 2004 and 2003.
These pro forma consolidated statements of income should be read in conjunction with our historical consolidated financial statements and notes thereto for the year ended December 31, 2004, included in this Form 10-K. The pro forma consolidated statements of income are not necessarily indicative of what actual results would have been had the acquisitions actually occurred on January 1, 2004 and 2003 nor purport to represent our operations for future periods.
| | | | | | | | | |
| | | For the Years Ended |
| Pro Forma | | December 31, |
| (in thousands) | | 2004 | | 2003 |
| Total revenue | | $ | 325,158 | | | $ | 313,539 | |
| | | | | | | | | |
| Income applicable to common shareholders before discontinued operations | | $ | 31,255 | | | $ | 40,078 | |
| | | | | | | | | |
| Net income applicable to common shareholders | | $ | 50,419 | | | $ | 53,145 | |
| | | | | | | | | |
| Basic earnings per share: | | | | | | | | |
| Income applicable to common shareholders before discontinued operations | | $ | 0.71 | | | $ | 1.00 | |
| Net income applicable to common shareholders | | $ | 1.14 | | | $ | 1.33 | |
| Weighted average number of common shares outstanding | | | 44,330 | | | | 40,068 | |
| Diluted earnings per share: | | | | | | | | |
| Income applicable to common shareholders before discontinued operations | | $ | 0.70 | | | $ | 0.99 | |
| Net income applicable to common shareholders | | $ | 1.13 | | | $ | 1.32 | |
| Weighted average number of common shares and common share equivalents outstanding | | | 44,529 | | | | 40,270 | |
F-42
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statements of income are presented as if all of the properties acquired between January 1, 2003 and December 31, 2003 had occurred January 1, 2003 and 2002.
These pro forma consolidated statements of income should be read in conjunction with our historical consolidated financial statements and notes thereto for the year ended December 31, 2004, included in this Form 10-K. The pro forma consolidated statements of income are not necessarily indicative of what actual results would have been had the acquisitions actually occurred as of January 1, 2003 and 2002 nor does it purport to represent our operations for future periods.
| | | | | | | | | |
| | | For the Years Ended |
| Pro Forma | | December 31, |
| (in thousands) | | 2003 | | 2002 |
| Total revenue | | $ | 287,116 | | | $ | 270,057 | |
| | | | | | | | | |
| Income applicable to common shareholders before discontinued operations | | $ | 38,536 | | | $ | 31,510 | |
| | | | | | | | | |
| Net income applicable to common shareholders | | $ | 51,603 | | | $ | 66,444 | |
| | | | | | | | | |
| Basic earnings per share: | | | | | | | | |
| Income applicable to common shareholders before discontinued operations | | $ | 0.96 | | | $ | 0.82 | |
| Net income applicable to common shareholders | | $ | 1.29 | | | $ | 1.73 | |
| Weighted average number of common shares outstanding | | | 40,068 | | | | 38,409 | |
| Diluted earnings per share: | | | | | | | | |
| Income applicable to common shareholders before discontinued operations | | $ | 0.96 | | | $ | 0.82 | |
| Net income applicable to common shareholders | | $ | 1.28 | | | $ | 1.72 | |
| Weighted average number of common shares and common share equivalents outstanding | | | 40,270 | | | | 38,649 | |
F-43
(24) Subsequent Events
On January 13, 2005, Prentiss Office Investors, L.P. completed a five-year interest rate swap agreement in a notional amount of $20.0 million. The interest rate swap effectively locks 30-day LIBOR at 4.00% on $20.0 million of our variable rate borrowings. The interest rate swap is effective February 1, 2005 and matures February 1, 2010.
On February 14, 2005, Prentiss Office Investors, L.P., which is owned 51% by our operating partnership and its affiliates and 49% by Stichting Pensioenfonds ABP, acquired from an unrelated third party, a two building office complex with approximately 197,000 net rentable square feet. The properties are located in Herndon, Virginia and were acquired for gross proceeds of $51.5 million. Each partner contributed their pro rata share of the purchase price to Prentiss Office Investors, L.P. for the acquisition. Amounts contributed from the operating partnership were funded with proceeds from our revolving credit facility.
On March 10, 2005, we entered into a Purchase Agreement pursuant to which a trust, which was formed by us on February 24, 2005 (the “Trust”), will issue $26,250,000 and $25,000,000 of trust preferred equity securities (the “Capital Securities”) to each of Taberna Preferred Funding I, Ltd. and Merrill Lynch International, respectively in a private placement pursuant to an applicable exemption from registration. The transactions contemplated by the Purchase Agreement will occur on or before March 15, 2005. The Capital Securities will mature on March 30, 2035 (all dates listed in this summary assume a closing date of March 15, 2005), but may be redeemed at our option beginning on March 30, 2010. The Capital Securities will require quarterly distributions by the Trust to the holders of the Capital Securities, at a variable rate which will reset quarterly at the LIBOR rate plus 1.25%. Distributions will be cumulative and will accrue from the date of original issuance but may be deferred by us for up to 20 consecutive quarterly periods.
The proceeds of the Capital Securities received by the Trust, along with proceeds of $1,586,000 received by the Trust from the issuance of common securities (the “Common Securities”) by the Trust to Prentiss Properties Limited, Inc., a company subsidiary, will be used to purchase $52,836,000 of junior subordinated notes (the “Notes”), to be issued by Prentiss Properties Acquisition Partners, L.P. pursuant to an indenture (the “Indenture”) to be entered into, as of the closing date provided above, between Prentiss Properties Acquisition Partners, L.P. and JPMorgan Chase Bank, N.A., as trustee.
The Notes will mature on March 30, 2035, but we may redeem the Notes, in whole or in part, beginning on March 30, 2010 in accordance with the provisions of the Indenture. The Notes bear a variable rate which will reset quarterly at the LIBOR rate plus 1.25%. Interest is cumulative and will accrue from the date of original issuance but may be deferred by us for up to 20 consecutive quarterly periods.
(25) Other Events
The Company is revising its historical financial statements in connection with its application of SFAS No. 144. During the quarter ended September 30, 2005, the Company classified certain properties as held for sale and in compliance with SFAS No. 144, the Company has reported revenue and expenses as income from discontinued operations presented in its quarterly report filed for the quarter ended September 30, 2005 (including the comparable period of the prior year). However, the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to the Company required that the Company reclassify the reported revenue, expenses from these properties as income from discontinued operations in its financial statements for the period presented in its annual financial statements for each of the three years presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, if those financials are incorporated by reference in a registration statement to be filed with the SEC under the Securities Act of 1933, as amended, even though those financial statements relate to a period prior to the transactions giving rise to the reclassification.
This reclassification as discontinued operations has no effect on the Company’s reported net income available to common shareholders as reported in prior SEC filings. Instead, they present the revenue and expenses relating to properties sold and held for sale as a single line item titled discontinued operations, rather than presenting the revenues and expenses along with the Company’s other results of operations. In addition to financial statements themselves, certain disclosures contained in Note 2, Note 19, Note 20, Note 21 and Note 23, relating to the revisions made in connection with the application of SFAS No. 144, have been modified to reflect the effects of these reclassifications.
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