SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 1-12926
BEACON PROPERTIES CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated in Maryland 04-3224258
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Rowes Wharf, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 617-330-1400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [checkmark] No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S.)229.405 of this chapter) is not contained herein,
and will not be contained to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the shares of common stock held by
non-affiliates as of March 24, 1997 was approximately $1,669.6 million.
The number of shares of common stock outstanding as of March 24, 1997 was
48,233,236.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the following documents have been incorporated by
reference into the 10-K Parts indicated:
Documents 10-K Parts
1. The 1997 Proxy Statement (The "1997 Proxy Statement") Part III
TABLE OF CONTENTS
Page No.
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 18
Item 13. Certain Relationships and Related Transactions 18
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 18
Item 1. Business
General
Beacon Properties Corporation was incorporated on March 4, 1994 as a
Maryland corporation, and commenced operations effective with the completion
of its initial public offering (the "Initial Offering") on May 26, 1994.
Beacon Properties Corporation, together with Beacon Properties, L.P. (the
"Operating Partnership") and their subsidiaries (the "Company"), was formed
to succeed to the office and commercial real estate business of The Beacon
Group (the "Predecessor"). The Predecessor was founded in 1946 by Norman
Leventhal and Robert Leventhal. Starting in the 1940's, the Predecessor
developed commercial building construction expertise by providing general
contracting services to projects in 20 states. The Predecessor began
developing for its own account in the 1960's. Also in the 1960's, the
Predecessor began to develop its property management business.
The Company's business is conducted principally through the Operating
Partnership, two subsidiary corporations and two subsidiary limited
partnerships. The Company conducts third-party management operations through
Beacon Property Management Corporation, a Delaware corporation (the
"Management Company") and conducts third-party tenant space design services
through Beacon Design Corporation, a Massachusetts corporation (the "Design
Company"). Beacon conducts management operations for wholly-owned properties
through Beacon Property Management, L.P. a Delaware limited partnership (the
"Management Partnership") and conducts tenant space design services for
wholly-owned properties through Beacon Design, L.P., a Delaware limited
partnership (the "Design Partnership").
At December 31, 1996, the Company owned or had an interest in a portfolio
of 104 Class A office properties and other commercial properties (each, a
"Property" and collectively, the "Properties") located in Atlanta, Boston,
Chicago, Los Angeles, San Francisco and Washington D.C., as well as
commercial real estate development, acquisition, leasing and management
businesses. Class A office properties generally are considered to be those
which have excellent locations and access, attract high quality tenants, are
well maintained and professionally managed, and achieve among the highest
rent, occupancy and tenant retention rates within their markets. The
Properties are comprised of approximately 15.8 million rentable square feet
in the aggregate and, as of December 31, 1996, were 96% leased with over
1,100 tenants. Through the Management Company, the Company manages
approximately 2.9 million square feet of commercial and office space owned by
third parties in various locations including Boston and Springfield,
Massachusetts and Chicago, Illinois. The Management Company employs
approximately 375 persons.
Recent Property Acquisitions
At December 31, 1996, the Company's portfolio consisted of 104 properties
totaling 15.8 million square feet compared to 26 properties totaling 6.7
million square feet at December 31, 1995 and 21 properties totaling 5.3
million square feet at December 31, 1994. Property acquisitions in 1996
included the following transactions:
On February 15, 1996, the Company acquired a 3.3 million square foot, 32
building portfolio located in suburban Atlanta, Georgia (the "Perimeter
Center Portfolio") for approximately $322.2 million in cash and approximately
$13.8 million of units of limited partnership interest in the Operating
Partnership ("Units").
During the second quarter of 1996, the Company and Equitable Life
Assurance Society of the United States, on behalf of its Prime Property Fund
("Equitable"), the Operating Partnership's partner in the Rowes Wharf
Property, acquired the remaining outstanding first mortgage indebtedness on
the Rowes Wharf Property for $16.7 million. The mortgage debt was acquired at
market value which was approximately 50% of face value.
On August 16, 1996, the Company acquired a portfolio of office properties,
comprised of seven properties, from New York Life Insurance Company (the "New
York Life Portfolio") for approximately $150 million. The New York Life
Portfolio consists of the AT&T Plaza located in Oak Brook, Illinois, the
five-building Tri-State International office park located in Lincolnshire,
Illinois and a property located at 1333 H Street in Washington, D.C.
1
On September 5, 1996, the Company acquired a portfolio of three office
buildings and a parcel of land suitable for development located in Fairfax
County, Virginia (the "Fairfax County Portfolio") for aggregate consideration
of $77 million consisting of assumption of approximately $55.5 million of
mortgage debt and the issuance of approximately $21.5 million of Units. The
Fairfax County Portfolio consists of the John Marshall I building, the E.J.
Randolph building, the Northridge I building and the John Marshall III parcel
of land.
On October 18, 1996, the Company acquired a portfolio of two office
buildings located in Rosslyn, Virginia (the "Rosslyn, Virginia Portfolio")
for aggregate consideration of approximately $99 million. The Rosslyn,
Virginia Portfolio consists of office buildings located at 1616 North Fort
Myer Drive and 1300 North 17th Street.
On November 15, 1996, the Company acquired a portfolio of nine office
properties located in Burlington (suburban Boston), Massachusetts (the "New
England Executive Park Portfolio") for aggregate consideration of
approximately $75 million. An additional $17 million is payable on November
30, 1998, contingent upon meeting conditions regarding occupancy or rental
income levels at the Property in 1998.
On November 21, 1996, the Company acquired the 10960 Wilshire Boulevard
Property located in Westwood, California for aggregate consideration of
approximately $133 million.
On November 21, 1996, the Company acquired The Riverview Building Property
located in Cambridge, Massachusetts for aggregate consideration of
approximately $45 million.
On December 20, 1996, the Company acquired the Shoreline Technology Park
and Lake Marriott Business Park located in suburban San Francisco for
aggregate consideration of approximately $183 million.
On December 27, 1996, the Company acquired the Presidents Plaza Property
located in Chicago, Illinois for aggregate consideration of approximately $38
million in cash and the issuance of approximately $39 million of Units.
Sale of Beacon Construction Company
In 1996, Beacon Construction Company, Inc. (the "Construction Company")
sold substantially all of its assets. The Construction Company's new business
plan involves the completion of certain contracts not transferred to the
purchaser and the liquidation of its remaining assets. The Company's decision
to effect the sale of the Construction Company was based upon the
determination that the general construction business was no longer an
integral part of its business.
Recent Financing Activities
Conversion of Credit Facility to Permanent Mortgage Debt: In January 1996,
the Company converted $55 million of its floating-rate credit facility (the
"Credit Facility") to permanent mortgage debt secured by the Wellesley Office
Park Properties. Additionally, in February 1996, the Company converted an
additional $60 million of the Credit Facility to permanent mortgage debt
secured by the Center Plaza Property. Both mortgages were provided by
Connecticut General Life Insurance Company ("CIGNA"). These mortgages are for
terms of seven years, bear interest at annual rates of 7.23%, and require
monthly installments of interest only during years one through three and
principal and interest during years four through seven based on a 27-year
amortization schedule.
Financing of Perimeter Center Portfolio Acquisition: The Company financed
the acquisition of the Perimeter Center Portfolio, in part, through a $260
million mortgage loan (the "PaineWebber Acquisition Loan") provided by
PaineWebber Real Estate Securities, Inc. and an approximately $13.8 million
private placement of Units. In March 1996, Metropolitan Life Insurance
Company ("Met Life") provided $218 million of mortgage financing on the
Perimeter Center Portfolio (the "Met Life Loan") to the Company. The Met Life
Loan bears interest at a rate of 7.08% fixed over the ten year term of the
loan. The Company used the proceeds of the Met Life Loan to repay, in part,
the PaineWebber Acquisition Loan and balances outstanding on the Credit
Facility.
Additional Offerings by the Company: In March 1996, the Company sold
7,036,000 shares of common stock, $.01 par value per share (the "Common
Stock") at an offering price of $26.25 per share and contributed the net
proceeds of approximately $173.8 million to the Operating Partnership in
exchange for a like number of Units. In August 1996, the Company sold
5,750,000 shares of Common Stock at an offering price of $25.75 per share and
contributed the net proceeds of approximately $139.4 million to the Operating
Partnership in exchange for a like number of Units. In November 1996, the
Company sold 13,723,000 shares of Common Stock at an offering
2
price of $30.75 per share. In addition, in December 1996, the Company sold an
additional 1,132,400 shares of Common Stock at an offering price of $33.465
per share to the underwriters of the November 1996 offering to cover a
portion of their short position resulting from over-allotments. The Company
contributed the net proceeds of approximately $436.7 million from the
November 1996 and December 1996 offerings to the Operating Partnership in
exchange for an aggregate of 14,855,400 Units. The Operating Partnership used
the net proceeds of these contributions to fund the acquisition of
properties.
Financing of Fairfax County Portfolio: On December 23, 1996, the Company
refinanced the $16.5 million mortgage loan on the Northridge I Property to a
$13.6 million mortgage loan with a 10-year term bearing interest at an annual
rate of 8.19%. This mortgage loan requires monthly installments of interest
only during years one and two and principal and interest during years three
through ten based on a 25-year amortization schedule.
On December 23, 1996, the Company also closed on a $15 million mortgage
loan on the E.J. Randolph Property, and used the net proceeds to pay down the
Credit Facility. On September 5, 1996, in connection with the acquisition of
the Property, the Company paid off a $18 million mortgage loan it assumed
using a draw on the Credit Facility.
Business Objectives
The Company pursues business objectives that emphasize (i) a property
management program focused on maintaining the quality of and demand for its
properties at a level that will support high occupancy rates and increasing
rental rates; (ii) the acquisition of high-quality commercial properties;
(iii) the development of new properties, as warranted by market conditions;
and (iv) the provision of real estate management services to third parties.
Acquisitions: The Company will seek to acquire additional properties that
it believes will produce favorable returns, either as acquired or after
value-added activities (such as improved management and leasing services and
renovations) by the Company. The Company intends to obtain capital for new
acquisitions through the use of the Credit Facility, as well as the issuance
of additional equity or corporate debt securities. The Company believes that
its commercial property development experience, its extensive business
relationships and its market research capabilities enable it to identify,
analyze and implement acquisition opportunities more effectively than
competitors without such capabilities. In addition, as part of its ongoing
business the Company periodically engages in discussions with public and
private real estate entities regarding possible portfolio or asset
acquisitions or business combinations.
Development: While current conditions in the Company's primary markets
favor the acquisition rather than the development of new properties, as
opportunities arise in the future, the Company intends to grow through the
development of new properties. In 1996, the Company commenced the expansion
of a building in the Wellesley Office Park Property and completed the
redevelopment of Crosby Corporate Center. The Company currently owns
developable land adjacent to the Crosby Corporate Center and the Fairfax
County Portfolio and has an option to purchase developable land adjacent to
the Perimeter Center Portfolio.
Management of the Properties: The Company seeks to maintain quality
standards for its properties that promote high occupancy rates and permit
increases in rental rates while reducing tenant turnover and controlling
operating expenses. The Company emphasizes high quality property management,
comprehensive energy-savings and cost control programs and comprehensive
preventive maintenance programs.
Third-Party Management: The Company manages approximately 2.9 million
square feet of commercial and office space owned by third parties in various
locations. The Company intends to selectively enter into management contracts
for office and commercial properties that are compatible with the Company's
objectives, portfolio, and reputation. The Company will conduct its
third-party management activities through the Management Company.
Environmental Matters
Some of the Properties are located in urban areas where fill or current or
historic industrial uses of the areas may have caused site contamination at
the Properties. Nonetheless, at this time, the Company does not anticipate
that regulatory authorities will require remediation of the Properties,
except as specified below.
Crosby Corporate Center: Site assessments have identified the presence of
petroleum in the groundwater near the former location of an underground
storage tank installed and used by a previous tenant. The state environmental
agency responsible for overseeing remediation of such contamination notified
the former tenant of the property that it is responsible for such
contamination. The former tenant has agreed to perform the necessary
investigation and
3
cleanup actions regarding such contamination, bear all costs associated with
such cleanup activities, and indemnify the Company for any costs or damages
it incurs in connection with such contamination. As the owner of the
Property, however, the Company could be held liable for the costs of such
activities if the former tenant fails to undertake such actions, although the
Company believes that such costs would have no material adverse effect on its
financial condition, results of operation and liquidity. The tenant has
received from the state regulatory agency and agreed to the conditions of a
Waiver Application Disposition which allows the tenant to assess and
remediate the contamination without having to obtain interim approvals from
the state agency during such activities.
South Station: Site assessments of South Station have identified the
presence of contaminants in the soil and groundwater in the train yard
adjacent to the South Station Property and the South Station Property is
assumed to be similarly contaminated. Under agreements between the Company
and the Massachusetts Bay Transportation Authority ("MBTA"), the MBTA, which
is the owner of the South Station Property, is obligated to bear the
liabilities associated with such environmental conditions on the Property and
to defend and indemnify the Operating Partnership for its costs arising from
such conditions. This indemnity does not alter the Company's liability as an
operator of the Property to parties other than the MBTA, although the Company
believes that such liability would have no material adverse effect on its
financial condition, results of operations and liquidity.
Fairfax County Portfolio: Chlorinated solvents, primarily trichloroethane
("TCE"), have been detected in groundwater samples collected from monitoring
wells located at the John Marshall III land (the "JM III Parcel"). Subsequent
investigations of the JM III Parcel by an environmental consultant retained
by the sellers of the Fairfax County Portfolio (the "Consultant") confirmed
the presence of chlorinated solvents in groundwater at the JM III Parcel and
on property adjacent to the JM III Parcel where an auto body repair shop is
located.
The sellers of the Fairfax County Portfolio reported the findings of
chlorinated solvent contamination on the JM III Parcel to the Virginia
Department of Environmental Quality. The Consultant has concluded that the
auto body repair shop is the probable source for the chlorinated solvent
contamination, has collected additional soil and groundwater samples and is
preparing a remediation plan for the site. Units valued at approximately $1
million were escrowed from the purchase price paid for the Fairfax County
Portfolio upon the closing of the acquisition. Under the terms of the escrow,
these Units will be released to the seller of the JM III Parcel periodically
upon performance of remediation pursuant to a remediation plan approved by
the Company. The escrow further provides that the Company may receive some or
all of the remaining escrowed Units upon certain conditions, including (i) if
remediation is required by law, in the event of an emergency threatened by
the contamination, (ii) if the seller defaults under the remediation
agreement or fails to obtain access to the likely source site or governmental
approvals, (iii) if the Company enters into a lease for space in a building
to be constructed on the JM III Parcel or (iv) if the seller fails to obtain
a closure certification from the Virginia Department of Environmental Quality
upon completion of remediation.
New England Executive Park Portfolio: Site assessments at the New England
Executive Park Portfolio have identified the presence of trichloroethylene in
the groundwater at one monitoring well on the northern perimeter of the
Property. The groundwater beneath the Property flows into an aquifer, which
supplies drinking water to the Town of Burlington. The concentrations that
have been discovered at the Property to date are slightly above the standards
established for trichloroethylene in areas contributing to drinking water
supplies and, as a result, must be reported to the Massachusetts Department
of Environmental Protection (the "DEP"). The owner of the property to the
north of the New England Executive Park Portfolio, which is upgradient of the
New England Executive Park Portfolio, has filed with the DEP indicating the
presence of trichloroethylene in the groundwater of such property. The former
owner of the New England Executive Park Portfolio filed with the DEP to
establish the Property's "Downgradient Property Status" under applicable
regulations, indicating that the Property is not a source of the
trichloroethylene contamination that has been identified. The DEP has stated
that this policy is not to require downgradient property owners to perform
remediation under these circumstances. In addition, the Town of Burlington
has allocated funds for, and is in the process of constructing, a groundwater
treatment facility at its drinking water supply that draws from the subject
aquifer. The Company has been advised that such treatment facility has the
capacity to treat any contaminants which may be derived from the groundwater
passing beneath the New England Executive Park Portfolio. The Town's water
treatment facility and the present policy of the DEP with respect to
downgradient property owners do not relieve the Company of potential
liability for the presence of the identified trichloroethylene, although the
Company does not believe that any such liability would have a material
adverse effect.
4
The Riverview Building: Site assessments performed at The Riverview
Building have identified the presence of oil in one soil sample taken at the
Property in an amount that slightly exceeds the concentration that requires
reporting to the DEP. Based on these site assessments, however, an
environmental consultant has advised the Company that applicable regulatory
requirements can be satisfied without the need to perform any remediation at
the Property. As the owner of the Property, the Company could be held liable
for costs associated with the contamination that has been identified,
although the Company does not believe that such costs would have a material
adverse effect.
5
Item 2. Properties
THE PROPERTIES
(dollars in thousands)
Mortgage
Percent Notes
Rentable Leased Cost at Payable at
Year Built/ Ownership Property Area in December 31, December 31, December 31,
Property Renovated Interest(1) Location Square Feet 1996 1996 1996
- ------------------ ------------ ----------- ------------ ------------ ------------- ---------------------------
Downtown Boston
Office Market
75-101 Federal
Street 1985-1988 51.6% Boston, MA 812,000 92% $ (2) $ (2)
One Post Office
Square 1981 50% Boston, MA 764,000 99% (2) (2)
Center Plaza 1966-1969 (3) Boston, MA 649,000 93% 81,823 60,000
150 Federal Street 1988 100% Boston, MA 530,000 99% 113,871 56,920(4)
Rowes Wharf 1987 45% Boston, MA 344,000 100% (2) (2)
Russia Wharf 1978-1982 100% Boston, MA 315,000 98% 18,089 (5)
Two Oliver
Street-147 Milk
Street 1982-1988 100% Boston, MA 271,000 97% 19,338 (5)
175 Federal Street 1977 100% Boston, MA 203,000 94% 29,105 12,970
South Station (6) 1988 100% Boston, MA 149,000 100% 22,348 --
------------ -------------
4,037,000 96%
------------ -------------
Greater Boston
Suburban Office
Market
Wellesley Office
Park (7) 1963-1984 100% Wellesley, MA 623,000 100% 97,805 55,000
Crosby Corporate
Center (8) 1996 100% Bedford, MA 336,000 88% 27,841 (5)
Westwood Business
Centre 1985 100% Westwood, MA 160,000 100% 12,331 (5)
New England
Executive Park
Portfolio (9) 1970-1985 100% Burlington, MA 817,000 98% 75,390 (5)
------------ -------------
1,936,000 97%
------------ -------------
Cambridge Office
Market
One Canal Park 1987 100% Cambridge, MA 100,000 100% 9,514 (5)
Ten Canal Park 1987 100% Cambridge, MA 110,000 92% 11,923 (5)
The Riverview
Building (10) 1985-1986 100% Cambridge, MA 263,000 100% 45,183 --
------------ -------------
473,000 98%
------------ -------------
North Central
Atlanta Office
Market
Perimeter Center
Portfolio (11). 1970-1989 100% Atlanta, GA 3,302,000 98% 343,014 218,000
------------ -------------
Arlington County,
Virginia Office
Market
The Polk and
Taylor Buildings 1970 10% Arlington, VA 890,000 100% (2) (2)
1300 North 17th
Street 1980 100% Rosslyn, VA 373,000 98% 54,776 (5)
1616 North Fort
Myer Drive 1974 100% Rosslyn, VA 293,000 99% 44,894 (5)
------------ -------------
1,556,000 99%
------------ -------------
Fairfax County,
Virginia Office
Market
John Marshall I 1981 100% McLean, VA 261,000 100% 34,134 20,722
E.J. Randolph 1983 100% McLean, VA 165,000 97% 23,146 15,000
Northridge I 1988 100% Herndon, VA 124,000 100% 21,216 13,600
------------ -------------
550,000 99%
------------ -------------
Washington, D.C.
Office Market
1333 H Street, Washington,
N.W. 1984(12) 100% D.C. 239,000 90% 53,438 (5)
------------ -------------
Suburban Chicago
Office Market
AT&T Plaza 1984 100% Oak Brook, IL 225,000 100% 35,115 (5)
Tri-State
International
(13) 1986 100% Lincolnshire, IL 548,000 74% 63,171 (5)
Presidents Plaza
(14) 1980-1982 100% Chicago, IL 791,000 90% 77,533
------------ -------------
1,564,000 86%
------------ -------------
6
The Properties
(dollars in thousands)
Mortgage
Percent Notes
Rentable Leased Cost at Payable at
Year Built/ Ownership Property Area in December 31, December 31, December 31,
Property Renovated Interest(1) Location Square Feet 1996 1996 1996
- ------------------ ------------ ----------- ------------ ------------ ------------- ---------------------------
West Los Angeles
Office Market
10960 Wilshire
Boulevard 1971-1992 100% Westwood, CA 544,000 89% $ 133,307 $ --
------------ -------------
Suburban
Philadelphia
Office Market
Westlakes Office
Park (15) 1988-1990 100% Berwyn, PA 444,000 98% 59,018 (5)
------------ -------------
San Francisco
Office Market
Shoreline
Technology Park Mountain
(16) 1985-1991 100% View, CA 727,000 100% 141,040 --
Lake Marriott
Business Park Santa Clara,
(17) 1981 100% CA 400,000 100% 43,167 --
------------ -------------
1,127,000 100%
------------ ------------- ---------------------------
Total Weighted
Average 15,772,000 96% $1,691,530 $452,212
============ ============= ===========================
(1) The Company holds, directly or indirectly, a general partner interest in
One Post Office Square, a general partner and limited partner interest
in Center Plaza and the Polk and Taylor Buildings and a limited partner
interest in Rowes Wharf Associates. The Company holds approximately 52%
of the common stock of BeaMetFed, Inc. ("BeaMetFed"), the entity that
holds the fee title to the 75-101 Federal Street Property. The Company
owns a 100% fee interest in the remaining Properties, with the exception
of South Station, in which it holds a ground leasehold interest.
(2) The Company uses the equity method of accounting for its investments in
the joint ventures or corporations which own these Properties.
(3) The Company holds a 1% general partner interest, a 75% limited partner
interest and an option to purchase the remaining 24% limited partner
interest in the partnership that owns the Center Plaza Property.
(4) This Property is comprised of two units. Unit A is collateral for a note
payable under the Credit Facility. Unit B is collateral for a mortgage
note payable in the amount of $56,920.
(5) These Properties are collateral for a note payable under the Credit
Facility.
(6) The Company owns a ground leasehold interest in the South Station
Property which expires in 2024 but may be extended, at the Company's
option, for two additional 15-year terms. Fee title to this Property is
owned by an unaffiliated third party. This Property was originally built
in the early 1900s and was fully rehabilitated in 1988. This Property
includes a significant retail component.
(7) The Wellesley Office Park consists of eight office buildings.
(8) The Crosby Corporate Center is a Property which consists of six office
buildings.
(9) The New England Executive Park Portfolio consists of nine of the
thirteen office buildings located in the New England Executive Park, the
remaining four of which are owner-occupied.
(10) The Riverview Building Property consists of two attached structures
connected by a four-story atrium. Riverview I, a six-story office
building, was constructed in 1909 and renovated in 1986. Riverview II,
an eighteen-story structure with parking on the first nine floors, was
constructed in 1985.
(11) The Perimeter Center Portfolio consists of 32 buildings and six ground
leases.
(12) Approximately 205,000 square feet of the 1333 H Street Property was
built in 1982. The remaining approximately 34,000 square feet was
renovated in 1982.
(13) The Tri-State International complex consists of five office buildings.
(14) Presidents Plaza consists of four office buildings.
(15) The Westlakes Office Park consists of four office buildings.
(16) Shoreline Technology Park consists of twelve office buildings.
(17) Lake Marriott Business Park consists of seven office buildings.
7
Item 3. Legal Proceedings
The following is a description of any material pending legal proceedings
to which the Company, the Operating Partnership or any of their subsidiaries
is a party or of which any of their properties is the subject. The Company
does not believe that the proceedings, individually, or in the aggregate will
have a material adverse effect on the Company's financial condition, results
of operations and liquidity.
Blaesing Granite: On January 11, 1989, Blaesing Granite Company, a
subcontractor, commenced a proceeding in the U.S. District Court for the
District of Massachusetts against the partnership which is the owner of the
75 State Street building in Boston, Massachusetts, and Turner Construction
Company, the general contractor for the construction of that project, for $14
million in compensation for additional work performed on the project. The
Construction Company has been named as an additional defendant in its
capacity as the construction representative for the owner. The owner, Turner
Construction Company, and the Construction Company have vigorously defended
this suit. The Company believes that this case is without merit, and that, in
the event of an adverse outcome, liability would rest with parties other than
the Construction Company.
Property Partnership Matters: A limited partner in the partnerships which
owned or had interests in One Post Office Square, Wellesley Office Park
Building Five and Wellesley Office Park Building Six rejected an offer of the
Company to enter into an option agreement under which he would sell his
interests in connection with the formation of the Operating Partnership for
Units and cash. On April 20, 1994, the partner commenced a lawsuit in Norfolk
Superior Court in Massachusetts against the Company and certain of its
affiliates, individually and in their capacity as general partners of those
partnerships, alleging that the general partners of the partnerships
mismanaged the Wellesley Office Park Building Five and Wellesley Office Park
Building Six properties and that the general partners and the Company acted
wrongfully in transferring the partnerships' interests to the Company at a
price less than their fair value. The lawsuit is brought by the partner
individually and as a derivative claim on behalf of the partnerships. The
allegations in the lawsuit includes claims of breach of fiduciary duty,
misrepresentation, conspiracy, and violation of a Massachusetts statute
prohibiting unfair and deceptive practices in trade or business. In addition
to compensatory damages, the partner seeks an accounting of profits and/or
rescission of the partnerships' agreement to transfer their interests in
these properties to the Company. By its nature, the rescission claim cannot be
quantified.
On September 20, 1994, the Superior Court granted the defendants' motion
to dismiss the claim brought for violation of the Massachusetts statute
prohibiting unfair and deceptive practices in trade or business. Thereafter,
the defendants moved to strike the claim for rescission asserted by the
partner. On January 27, 1995, the Court denied the defendants' Motion to
Strike. As a result, the rescission claims remain for adjudication by summary
judgment and/or at trial. Fact discovery has been completed in this matter
and a trial is anticipated in April 1997.
Rowes Wharf: On or about June 2, 1995, certain present or former employees
of a former tenant at 40 Rowes Wharf, Boston, Massachusetts commenced a suit
in the Massachusetts Superior Court for Suffolk County alleging that they
sustained injuries as a result of alleged exposure to indoor air pollutants
during the course of their employment by a tenant at 40 Rowes Wharf.
Plaintiffs claim that the Company negligently constructed the building and
that Rowes Wharf Associates negligently permitted the allegedly harmful
condition to exist. The Company and Rowes Wharf Associates filed an Answer to
plaintiffs' Complaint denying liability. In October, 1996, the claims of two
of the plaintiffs were dismissed pursuant to an agreement for judgment for no
monetary award. The Company is unable to quantify the claims of the plaintiffs.
Ruggles Center Joint Venture: Ruggles Center Joint Venture ("RCJV"), the
owner of the Registry of Motor Vehicles building (the "RMV Building") located
at Ruggles Center, Boston, Massachusetts (the "Ruggles Center Property"),
filed a Complaint in the Massachusetts Superior Court for Suffolk County on
February 5, 1996, against the Construction Company and its surety, Aetna
Casualty and Surety Company, alleging that the Construction Company is
responsible for certain alleged deficiencies in the fireproofing material in
the RMV Building and claiming damages for the costs of investigating and
correcting the deficiencies, lost rental income and other consequential
damages. That Complaint was not served. On April 22, 1996, an Amended
Complaint was served on the Construction Company. That Complaint names
Ruggles Center, LLC, the purported assignee of RCJV, as plaintiff and asserts
breach of contract, breach of warranty and negligence claims against the
Construction Company. Although neither the Complaint nor the Amended
Complaint quantify the claimed damages, RCJV had previously alleged in
correspondence that the alleged corrective work on the fireproofing would
cost approximately $1.7 Million, certain corrective work on the HVAC system
would cost an additional $1.3 Million, and RCJV had already spent
approximately $2.25 Million in investigation and planning the corrective
work.
8
The Construction Company filed its Answer denying the claims of Ruggles
Center, LLC on May 31, 1996. On the same date, the Construction Company filed
a Counterclaim and Third-Party Claim against RCJV and Ruggles Center, LLC to
recover in excess of $1.5 Million. On the same date, the Construction Company
filed Third-Party Complaints against the manufacturer of the fireproofing
material at the RMV Building, United States Mineral Products Company, d/b/a
Isolatek International ("Isolatek"), and the installer of the fireproofing
material at the RMV Building, H. Carr & Sons, Inc. ("Carr"). On August 26,
1996, Isolatek filed a Cross-Claim against the Construction Company asserting
claims of indemnity and contribution. The Construction Company filed an
Answer to Isolatek's Cross-Claim denying liability on September 9, 1996. On
September 19, 1996, Carr filed Counterclaims against the Construction Company
asserting claims of indemnity and contribution. The Construction Company
filed an Answer to Carr's Counterclaims denying liability on October 15,
1996.
In November 1996, the Bank of Boston foreclosed upon the Ruggles Center
property and purchased the property at the foreclosure auction for
approximately $15 Million.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Stockholders during the fourth
quarter of the year ended December 31, 1996.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock trades on the NYSE under the symbol "BCN." On
March 24, 1997, the reported closing sale price per share of Common Stock on
the NYSE was $35-1/4 and there were approximately 410 holders of record of the
Company's Common Stock. The following table sets forth the quarterly high and
low closing sales prices per share of the Common Stock reported on the NYSE
and the distributions paid by the Company with respect to each such period.
Quarter Ended High Low Distributions
------------- ---- --- -------------
June 30, 1994 (from May 20, 1994) $18 1/4 $17 1/8 $ .16(a)
September 30, 1994 $19 1/2 $17 3/4 $ .40
December 31, 1994 $19 $17 $ .40
March 31, 1995 $20 $17 1/2 $ .40
June 30, 1995 $21 1/8 $19 1/4 $ .42
September 30, 1995 $21 3/4 $19 7/8 $ .42
December 31, 1995 $23 $20 1/8 $ .42
March 31, 1996 $26 5/8 $22 5/8 $ .42
June 30, 1996 $26 1/4 $24 1/2 $.4625
September 30, 1996 $29 $24 3/4 $.4625
December 31, 1996 $36 5/8 $29 1/8 $.4625(b)
(a) The Company paid a distribution of $.16 per share of Common Stock on
August 25, 1994, for the period May 26, 1994 (the closing of the Initial
Offering) through June 30, 1994, which would be equivalent to a quarterly
distribution of $.40 and an annual distribution of $1.60 per share of
Common Stock.
(b) Paid February 28, 1997 to stockholders of record as of February 10, 1997.
Distributions for Federal Income Tax purposes totaled $1.24 and $1.765 in
1995 and 1996, respectively. The return of capital portion of these
distributions was $.17 and $.16 in 1995 and 1996, respectively.
In 1996, the Operating Partnership has issued Units in private placements
in reliance on an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") in the amounts and
for the consideration set forth below:
(bullet) In February 1996, the Operating Partnership issued 540,059 Units
(valued at approximately $13.8 million at the time of the
acquisition) to the sellers of the Perimeter Center Portfolio in
consideration of their interests in the Property.
9
(bullet) In connection with a public offering of the Company in March 1996
(the "March 1996 Offering"), the Operating Partnership issued
7,036,000 Units to the Company in exchange for the contribution
of the net proceeds (approximately $173.8 million) from the
Company's March 1996 Offering.
(bullet) In connection with a public offering of the Company in August
1996 (the "August 1996 Offering"), the Operating Partnership
issued 5,750,000 Units to the Company in exchange for the
contribution of the net proceeds (approximately $139.4 million)
from the Company's August 1996 Offering.
(bullet) In September 1996, the Operating Partnership issued an aggregate
of 833,820 Units (valued at approximately $21.5 million at the
time of acquisition) to the sellers of the Fairfax County
Portfolio in consideration for their interests in such
Properties.
(bullet) In connection with a public offering of the Company in November
1996 (the "November 1996 Offering"), the Operating Partnership
issued 13,723,000 Units to the Company in exchange for the
contribution of the net proceeds (approximately $398.9 million)
from the Company's November 1996 Offering.
(bullet) In connection with a public offering of the Company in December
1996 (the "December 1996 Offering"), the Operating Partnership
issued 1,132,400 Units to the Company in exchange for the
contribution of the net proceeds (approximately $37.8 million)
from the Company's December 1996 Offering.
(bullet) In December 1996, the Operating Partnership issued 1,171,500
Units (valued at approximately $39.0 million at the time of
acquisition) to Metropolitan Life Insurance Company in
consideration for its interest in the Presidents Plaza Property.
(bullet) From time to time, the Company has issued pursuant to an effective
registration statement an aggregate of 101,431 shares of Common
Stock pursuant to its Dividend Reinvestment Plan. The Company has
contributed the proceeds (approximately $2.6 million) of these
sales to the Operating Partnership in consideration of an aggregate
of 101,431 Units.
(bullet) From time to time, the Company has issued pursuant to an effective
registration statement an aggregate of 97,827 shares of Common
Stock upon the exercise of stock options. The Company has
contributed the proceeds (approximately $1.7 million) of these
sales to the Operating Partnership in consideration of an aggregate
of 97,827 Units.
10
Item 6. Selected Financial Data
Predecessor
-----------------------------------------
Jan. 1,
(dollars in 1994
thousands, May 26, 1994 to
except per share Year Ended Year Ended to May 25, Year Ended Year Ended
amounts) Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 1994 Dec. 31, 1993 Dec. 31, 1992
- ------------------ -------------- -------------- -------------- ----------- -------------- --------------
Operating
Information:
Revenues:
Rental income $ 147,825 $ 71,050 $ 25,144 $ 5,776 $ 14,315 $ 11,406
Management fees 3,005 2,203 -- 1,521 3,533 3,331
Recoveries from
tenants 16,719 9,742 4,488 1,040 2,349 1,989
Mortgage interest
income 4,970 2,546 -- -- -- --
Other income 11,272 5,502 2,301 675 2,176 2,003
-------------- -------------- -------------- ----------- -------------- --------------
Total revenues 183,791 91,043 31,933 9,012 22,373 18,729
-------------- -------------- -------------- ----------- -------------- --------------
Expenses:
Property expenses 37,211 18,090 7,034 2,086 4,580 4,522
Real estate taxes 18,124 10,217 3,325 595 1,354 1,204
General and
administrative 19,331 9,755 3,122 1,399 4,357 4,658
Mortgage interest
expense 30,300 15,226 4,992 2,798 7,650 7,203
Interest--amortization
of financing
costs 2,084 1,370 617 373 192 138
Depreciation and
amortization 33,184 17,428 6,924 2,385 5,577 5,505
-------------- -------------- -------------- ----------- -------------- --------------
Total expenses 140,234 72,086 26,014 9,636 23,710 23,230
-------------- -------------- -------------- ----------- -------------- --------------
Income (loss) from
operations 43,557 18,957 5,919 (624) (1,337) (4,501)
Equity (loss) in
joint ventures and
corporations (1) 4,989 3,234 929 198 (5,953) (1,544)
-------------- -------------- -------------- ----------- -------------- --------------
Income (loss) from
continuing
operations 48,546 22,191 6,848 (426) (7,290) (6,045)
Discontinued
operations--
Construction
Company:
Income (loss)
from operations (2,609) (12) 477 102 440 136
Loss on sale (249) -- -- -- -- --
-------------- -------------- -------------- ----------- -------------- --------------
Income (loss)
before minority
interest 45,688 22,179 7,325 (324) (6,850) (5,909)
Minority interest
in loss of
combined
partnerships -- -- -- 931 1,539 2,656
Minority interest
in Operating
Partnership (5,988) (4,119) (1,670) -- -- --
-------------- -------------- -------------- ----------- -------------- --------------
Income (loss)
before
extraordinary
items 39,700 18,060 5,655 607 (5,311) (3,253)
Extraordinary
items, net of
minority interest (3,368) -- -- 8,898 1,554 --
-------------- -------------- -------------- ----------- -------------- --------------
Net income (loss)
(2) $ 36,332 $ 18,060 $ 5,655 $ 9,505 $ (3,757) $ (3,253)
============== ============== ============== =========== ============== ==============
Per share of
Common Stock data:
Income from
continuing
operations $ 1.41 $ 1.09 $ 0.45 -- --
Discontinued
operations--
Construction
Company:
Income (loss)
from operations (0.08) (0.00) 0.03 -- -- --
Loss on sale (0.01) -- -- -- -- --
Income before
extraordinary
items 1.32 1.09 0.48 -- -- --
Extraordinary
items (0.11) -- -- -- -- --
-------------- -------------- -------------- ----------- -------------- --------------
Net income $ 1.21 $ 1.09 $ 0.48 -- -- --
============== ============== ============== =========== ============== ==============
Cash dividends
declared $ 1.765 $ 1.24 $ 0.96 -- --
Cash dividends
paid $ 1.765 $ 1.64 $ 0.56 -- --
Weighted average
common shares
outstanding 29,932,327 16,525,245 11,816,380 -- --
Balance Sheet
Information:
Real estate before
accumulated
depreciation $ 1,691,530 $ 471,142 $ 400,419 $ 82,198 $ 81,220 $ 78,580
Total assets 1,779,412 534,797 400,861 77,470 85,497 93,327
Mortgage debt 452,212 70,536 90,936 69,240 87,091 86,610
Note Payable,
Credit Facility 153,000 130,500 130,300 -- -- --
Total liabilities 671,711 239,013 261,100 129,836 143,451 142,015
Total equity
(deficit) 999,150 258,822 102,038 (52,366) (57,954) (48,688)
(1) Including
deductions for
depreciation
and
amortization $ 4,033 $ 2,306 $ 3,013
(2) Company share
of Operating
Partnership 86.89% 81.31% 77.20%
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion should be read in conjunction with Beacon
Properties Corporation's (collectively with its subsidiaries, the "Company")
Consolidated Financial Statements and Notes thereto included elsewhere
herein. This Annual Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company's actual
results could differ materially from those set forth in the forward-looking
statements. Factors that could cause actual results to differ materially from
those set forth in the forward-looking statements include general economic
conditions, local real estate conditions, timely releasing of occupied square
footage upon expiration, interest rates, availability of equity and debt
financing and other risks detailed from time to time in the Company's filings
with the Securities and Exchange Commission.
The Company continued its growth and expansion in 1996 by investing
approximately $1.2 billion in real estate. The Company increased its
portfolio to 104 office properties and other commercial properties (each, a
"Property" and collectively, the "Properties") totaling 15.8 million square
feet while moving for the first time into Atlanta, Georgia; Chicago,
Illinois; Los Angeles and San Francisco, California and reinforcing its
presence in Boston, Massachusetts and Washington, D.C.
The 1996 acquisitions were facilitated by three successful public
offerings of the Company's common stock, $.01 par value per share (the
"Common Stock"). In all, the Company issued 27.6 million shares of Common
Stock in 1996 and raised nearly $800 million in gross proceeds. The Company
contributed the net proceeds of these offerings to Beacon Properties, L.P.
(the "Operating Partnership") in exchange for units of limited partnership
interest in the Operating Partnership ("Units"). The Operating Partnership
also issued approximately 2.6 million Units in connection with the
acquisition of the following: a 3.3 million square foot, 32 building
portfolio located in suburban Atlanta, Georgia (the "Perimeter Center
Portfolio"), a portfolio of three office buildings and a parcel of land
suitable for development located in Fairfax County, Virginia (the "Fairfax
County Portfolio") and the Presidents Plaza Property located in Chicago,
Illinois.
In 1996, Beacon Construction Company, Inc. (the "Construction Company")
sold substantially all of its assets. The Construction Company's new business
plan involves the completion of certain contracts not transferred to the
purchaser and the liquidation of its remaining assets. The Company's decision
to affect the sale of the Construction Company was based upon the
determination that the general construction business was no longer an
integral part of its business. Construction contracts on Properties owned by
the Company represented only 6%, 8% and 7% of the Construction Company's
total revenues in 1996, 1995 and 1994, respectively.
As a result of the significant acquisitions by the Company and its use of
the equity method of accounting for the Construction Company, Beacon Property
Management Corporation (the "Management Company") and Beacon Design
Corporation, the operating results of the Company and The Beacon Group (the
"Predecessor") are not directly comparable.
Results of Operations
For discussion purposes, the results of operations for the year ended
December 31, 1994 combine the operating results of the Predecessor for the
period January 1, 1994 to May 25, 1994 and the operating results of the
Company for the period May 26, 1994 to December 31, 1994.
The Company's gross revenues increased by 102% from 1995 to 1996 and 122%
from 1994 to 1995. The growth in gross revenues was primarily the result of
the acquisition of 78 Properties comprising 9.1 million square feet in 1996,
5 Properties comprising 1.4 million square feet in 1995, and 6 Properties
comprising 0.9 million square feet in 1994.
The acquisition properties increased revenues from rental operations,
which includes rental income, recoveries from tenants and other income, by
$81.7 million from 1995 to 1996 and $47.2 million from 1994 to 1995. The
remaining balance of the increase was primarily due to increases in occupancy
and rental rates, completion of the
12
redevelopment and achievement of 88% occupancy at the Crosby Corporate Center
in 1996 and interest income earned on cash reserves.
The impact of the straight-line rent adjustment increased consolidated
revenues for the Company by $6.6 million in 1996, $3.7 million in 1995 and
$1.9 million for the period May 26, 1994 to December 31, 1994. The impact of
the straight-line rent adjustment increased the Company's equity in net
income of property joint ventures and corporations by $0.1 million in 1996,
$0.2 million in 1995 and $0.3 million for the period May 26, 1994 to December
31, 1994.
Management fees were $3.0 million in 1996, $2.2 million in 1995 and $1.5
million in 1994. The increase from 1995 to 1996 of $0.8 million was the
result of the management contract for 75-101 Federal Street, a Property in
the which the Company purchased an approximate 52% interest in September
1995. The increase from 1994 to 1995 of $0.7 million was the result of Beacon
Property Management, L.P., a fully consolidated entity, managing the joint
venture properties effective January 1, 1995. In 1994, the Management
Company, an entity accounted for under the equity method, managed the joint
venture and unrelated third-party properties. The Predecessor reported the
results of operations of the management of joint venture and unrelated
third-party properties in revenues and expenses in its combined financial
statements.
Mortgage interest income for 1996 was $5.0 million and $2.5 million for
1995. The increase of $2.5 million was the result of the Company's
acquisition of the remaining portions of the outstanding first mortgage
indebtedness on the Rowes Wharf Property in 1996 and a full year of interest
income in 1996 from those portions of the Rowes Wharf debt purchased in 1995.
If the Company had owned all of its share of the Rowes Wharf debt for the
full year in 1996, mortgage interest income would have been $5.6 million.
The acquisition properties increased property expenses, real estate taxes
and depreciation and amortization by $37.2 million from 1995 to 1996 and
$24.0 million from 1994 to 1995. The remaining balance of the increase in
these line items was primarily due to additional operating expenses as a
result of an increase in occupancy and the completion of the redevelopment
and achievement of 88% occupancy at the Crosby Corporate Center in 1996.
General and administrative expenses were $19.3 million in 1996, $9.8
million in 1995 and $4.5 million in 1994. The acquisition properties
increased general and administrative expenses by $3.7 million from 1995 to
1996 and $3.8 million from 1994 to 1995. The remaining balance of the
increase was primarily due to an increase in corporate management and
administrative costs with the largest increase in payroll expense of $2.2
million and rent expense of $1.0 million. The increase in corporate
management and administrative costs was the result of the growth of the
Company's portfolio of properties and the opening of the first regional
office in Atlanta in 1996. General and administrative expenses as a
percentage of total revenue were 10.5% in 1996, 10.7% in 1995 and 11.0% in
1994.
Mortgage interest expense was $30.3 million in 1996, $15.2 million in 1995
and $7.8 million in 1994. The increase of $15.1 million from 1995 to 1996 was
primarily the result of debt incurred or assumed in connection with the
acquisition of the Perimeter Center Portfolio and the Fairfax County
Portfolio. Interest expense associated with the mortgage debt placed on the
Wellesley Office Park and Center Plaza Properties in 1996 was offset by a
reduction of interest expense on the Company's floating-rate credit facility
(the "Credit Facility") as a result of the mortgage proceeds being used to
pay down the balance of the Credit Facility. The increase of $7.4 million
from 1994 to 1995 was primarily due to the interest on the Credit Facility
and debt assumed in connection with the acquisition of the 150 Federal Street
Property and the remaining joint venture interest in the 175 Federal Street
Property offset by the decrease in interest expense as a result of the
discharge of mortgage debt in connection with the formation of the Company.
The weighted average balance outstanding on the Credit Facility was $42.3
million for 1996, $99.7 million for 1995 and $50.4 million for the period May
26, 1994 to December 31, 1994.
Interest-amortization of financing costs was $2.1 million in 1996, $1.4
million in 1995 and $1.0 million in 1994. The increase of $0.7 million from
1995 to 1996 was primarily the result of the amortization of financing costs
associated with the Credit Facility and the mortgage debt on the Wellesley
Office Park Properties, the Center Plaza Property and the Perimeter Center
Portfolio. The increase of $0.4 million from 1994 to 1995 was primarily the
result of the amortization of financing costs associated with the Credit
Facility offset by the write-off of financing costs by the Predecessor as a
result of the discharge of mortgage debt in connection with the formation of
the Company.
13
Equity in net income of joint ventures and corporations was $5.0 million
in 1996, $3.2 million in 1995 and $1.1 million in 1994. The increase of $1.8
million from 1995 to 1996 was primarily the result of the acquisition of the
equity investment in 75-101 Federal Street in September 1995. The increase of
$2.1 million from 1994 to 1995 was primarily attributable to the Company
acquiring the Center Plaza Property's debt, a controlling interest and fully
consolidating the Property effective December 1, 1994. Increases in equity in
net income of One Post Office Square and Polk and Taylor, as well as a new
equity investment in 75-101 Federal Street, were offset by the decrease in
equity in net income from Wellesley Office Park Building Six, 175 Federal
Street and the Management Company.
Discontinued operations from the Construction Company resulted in a $2.6
million loss in 1996, a $0.1 million loss in 1995 and $0.6 million income in
1994. The increase in loss of $2.5 million from 1995 to 1996 was primarily
the result of several significant subcontractors working on construction
contracts in Atlanta seeking bankruptcy and not completing their work. As a
result, the Construction Company was forced to complete the projects using
additional contractors which increased the total costs of the projects.
In December 1996, substantially all of the assets of the Construction
Company were sold to Skanska AB, a Swedish construction firm. In connection
with the sale, the Company recorded its share of the loss of $0.2 million.
As a result of transactions resulting in the formation of the Company (the
"Formation Transactions"), no minority interest in the combined partnerships
was recorded after May 25, 1994, resulting in a decrease compared to 1994 in
minority interest in loss of combined partnerships.
Extraordinary items, net of minority interest, were a $3.4 million loss in
1996 and an $8.9 million gain in 1994. In 1996, an extraordinary item, net of
minority interest, of $1.9 million was recorded in connection with the
write-off of fees and costs to acquire a $260 million mortgage loan provided
by Paine Webber Real Estate Securities, Inc. used to acquire the Perimeter
Center Portfolio (the "Paine Webber Acquisition Loan"). The Paine Webber
Acquisition Loan was repaid in March 1996 approximately three years prior to
its maturity. Also in 1996, an extraordinary item, net of minority interest,
of $1.5 million was recorded in connection with the write-off of fees and
costs of the Credit Facility which was substantially modified in June 1996.
The extraordinary gain in 1994 related to the settlement of mortgage debt by
the Predecessor on the Wellesley Office Park Buildings One to Five and Seven
as a condition of transfer prior to the Formation Transactions.
Liquidity and Capital Resources
Net cash provided by operating activities totaled $91.7 million in 1996,
$32.5 million in 1995 and $12.6 million in 1994. The increase in the periods
was primarily attributable to the incremental increase in cash flow from
operations provided by the acquisition properties as well as an increase in
security deposits and prepaid rents.
Net cash used by investing activities totaled $1,097.8 million in 1996,
$145.8 million in 1995 and $235.8 million in 1994. The increase from 1995 to
1996 was the result of the acquisition of Properties and the redevelopment of
the Crosby Corporate Center and Wellesley Office Park Building Eight in 1996.
The decrease from 1994 to 1995 was primarily a result of the Company's May
1994 initial public offering (the "Initial Offering") whereby the Company
acquired its initial portfolio of 15 Properties totaling 4.4 million square
feet.
Net cash provided by financing activities totaled $1,037.7 million in
1996, $102.6 million in 1995 and $236.7 million in 1994. The increase from
1995 to 1996 was primarily due to an increase in proceeds from public stock
offerings of the Company and the closing of mortgage debt on certain
Properties. The decrease from 1994 to 1995 was primarily attributable to
repayments on the Credit Facility in 1995.
Cash and cash equivalents were $36.1 million at December 31, 1996 compared
to $4.5 million at December 31, 1995. The increase was primarily the result
of proceeds from 1996 public stock offerings of the Company in excess of the
funds utilized for the 1996 acquisitions and the redevelopment of the Crosby
Corporate Center and Wellesley Office Park Building Eight.
Investing Activities
On February 15, 1996, the Company acquired the Perimeter Center Portfolio
for approximately $322.2 million in cash and approximately $13.8 million of
Units.
14
During the second quarter of 1996, the Company and Equitable Life
Assurance Society of the United States, on behalf of its Prime Property Fund
("Equitable"), the Company's partner in the Rowes Wharf Property, acquired
the remaining portion of the outstanding first mortgage indebtedness on the
Rowes Wharf Property that had been held by a bank lending group for $16.7
million. The mortgage debt was acquired at market value which was
approximately 50% of the face value.
On August 16, 1996, the Company acquired a portfolio of office properties,
comprised of seven properties, from New York Life Insurance Company (the "New
York Life Portfolio") for approximately $150 million. The New York Life
Portfolio consists of the AT&T Plaza located in Oak Brook, Illinois, the
five-building Tri-State International office park located in Lincolnshire,
Illinois and a property located at 1333 H Street in Washington, D.C.
On September 5, 1996, the Company acquired the Fairfax County Portfolio
for aggregate consideration of $77 million consisting of assumption of
mortgage debt of approximately $55.5 million and the issuance of
approximately $21.5 million of Units. The Fairfax County Portfolio consists
of the John Marshall I building, the E.J. Randolph building, the Northridge I
building and the JM III Parcel.
On October 18, 1996, the Company acquired a portfolio of two office
buildings located in Rosslyn, Virginia (the "Rosslyn, Virginia Portfolio")
for aggregate consideration of approximately $99 million. The Rosslyn,
Virginia Portfolio consists of office buildings located at 1616 North Fort
Myer Drive and 1300 North 17th Street.
On November 15, 1996, the Company acquired a portfolio of nine office
properties located in Burlington (suburban Boston), Massachusetts (the "New
England Executive Park Portfolio") for aggregate consideration of
approximately $75 million. An additional $17 million payment is payable on
November 30, 1998, contingent upon meeting conditions regarding occupancy or
rental income levels at the Property in 1998.
On November 21, 1996, the Company acquired the 10960 Wilshire Boulevard
Property located in Westwood, California for aggregate consideration of
approximately $133 million.
On November 21, 1996, the Company acquired The Riverview Building located
in Cambridge, Massachusetts for aggregate consideration of approximately $45
million.
On December 20, 1996, the Company acquired the Shoreline Technology Park
and Lake Marriott Business Park located in suburban San Francisco for
aggregate consideration of approximately $183.0 million.
On December 27, 1996, the Company acquired the Presidents Plaza Property
located in Chicago, Illinois for aggregate consideration of approximately
$38.0 million in cash and the issuance of approximately $39.0 million of
Units.
Financing Activities
On January 9, 1996, the Company converted $55 million of the Credit
Facility to permanent mortgage debt secured by the Wellesley Office Park
Properties.
On February 9, 1996, the Company converted $60 million of the Credit
Facility to permanent mortgage debt secured by the Center Plaza Property.
On February 15, 1996, the Company acquired the Perimeter Center Portfolio
using the proceeds of the $260 million Paine Webber Acquisition Loan and the
issuance of approximately $13.8 million of Units, with the balance funded
from the Credit Facility.
In March 1996, the Company sold 7,036,000 shares of Common Stock to the
public at $26.25 per share and contributed the approximately $173.8 million
net proceeds to the Operating Partnership in exchange for 7,036,000 Units.
The net proceeds of the offering were used to repay a portion of the Paine
Webber Acquisition Loan.
On March 15, 1996, the Company closed on a $218 mortgage loan (the
"MetLife Loan") provided by Metropolitan Life Insurance Company ("Met Life").
The proceeds of the MetLife Loan were used to repay the remaining portion of
the Paine Webber Acquisition Loan and the outstanding balance of the Credit
Facility.
In August 1996, the Company sold 5,750,000 shares of Common Stock to the
public at $25.75 per share and contributed the approximately $139.4 million
net proceeds to the Operating Partnership in exchange for 5,750,000 Units.
The net proceeds of the offering were used to purchase the New York Life
Portfolio.
15
In November 1996, the Company sold 13,723,000 shares of Common Stock to
the public at $30.75 per share. In addition, in December 1996, the Company
sold an additional 1,132,400 shares of Common Stock at an offering price of
$33.465 per share to the underwriters of the November 1996 offering to cover
a portion of their short position resulting from over-allotments. The Company
contributed the approximately $436.7 million net proceeds to the Operating
Partnership in exchange for 14,855,400 Units. The net proceeds of these
offerings were used to purchase the various fourth quarter acquisitions with
the balance added to cash reserves.
On December 23, 1996, the Company refinanced the $16.5 million mortgage
loan on the Northridge I Property to a $13.6 million mortgage loan with a
10-year term bearing interest at an annual rate of 8.19%. This mortgage loan
requires monthly installments of interest only in years one and two and
principal and interest during years three through ten based on a 25-year
amortization schedule.
On December 23, 1996, the Company also closed on a $15.0 million mortgage
loan on the E.J. Randolph Property, and used the net proceeds to pay down the
Credit Facility. On September 5, 1996, the Company paid off an $18.0 mortgage
loan it assumed in connection with the acquisition of this Property using a
draw on the Credit Facility.
On January 28, 1997, the Company declared a dividend of $.4625 per common
share payable on February 28, 1997 to stockholders of record on February 10,
1997.
Capitalization
At December 31, 1996, the Company's total consolidated debt was
approximately $605.2 million, and its total consolidated debt plus its
proportionate share of total unconsolidated debt (other than the Rowes Wharf
Property debt in which the Company is a limited partner) was approximately
$698.8 million. At December 31, 1996, the Company's outstanding consolidated
debt consisted of approximately $153.0 million under the Credit Facility and
approximately $452.2 million of fixed rate mortgage indebtedness with a
weighted average rate of 7.22%, collateralized by Properties owned 100% by
the Company. The Company's proportionate share of its current total
unconsolidated debt (excluding the Rowes Wharf Property debt) consists of
approximately $46.6 million on the One Post Office Square Property (in which
the Company has a 50% general partner interest) and approximately $46.4
million on the 75-101 Federal Street Property (in which the Company owns
approximately 52% of the common stock of a private REIT that owns the
Property). The weighted average rate of the Company's unconsolidated fixed
rate mortgage indebtedness is 7.47%. The weighted average rate of the
Company's consolidated and unconsolidated fixed rate mortgage indebtedness is
7.27% and the weighted average maturity is nearly 7 years.
Based on the Company's total market capitalization of $2,690.3 million at
December 31, 1996 (at the December 31, 1996 closing stock price of $36.625
and including the 6,273,928 Units of minority interest in the Operating
Partnership and the Company's consolidated and proportionate share of total
unconsolidated debt), the Company's consolidated debt plus its proportionate
share of total unconsolidated debt (other than the Rowes Wharf Property debt)
represented approximately 26% of its total market capitalization.
In June 1996, the Company substantially modified the terms of the Credit
Facility. Additionally, in July 1996, the maximum loan amount available under
the Credit Facility was increased to $300 million. The new Credit Facility
matures in June 1999. The Company has an interest rate protection agreement
through May 1997 with respect to $135 million of the Credit Facility, which
provides for offsetting payments to the Company in the event that 90-day
LIBOR exceeds 9.47% per annum. Effective May 1997 through May 1999, the
Company has an interest rate protection agreement with respect to $137.5
million of the Credit Facility, which provides for offsetting payments to the
Company in the event that 90-day LIBOR exceeds 8.75% per annum. This interest
rate protection arrangement may be applied during any four quarters in the
period from May 1997 to May 1999.
The Company utilizes the Credit Facility primarily to finance acquisitions
of additional properties, although up to $30 million may be used for working
capital purposes and $2.5 million is reserved under certain circumstances for
capital expenditures. The Credit Facility is a recourse obligation of the
Operating Partnership, is guaranteed by Company and is secured by
cross-collateralized mortgages and assignments of rents on 29 of the
Properties. The Company's ability to borrow under the Credit Facility is
subject to the Company's compliance with a number of customary financial and
other covenants on an ongoing basis, including loan-to-value ratio against
the secured borrowing base not to exceed 60%, debt service coverage ratio of
1.5x for the secured borrowing base and 2.0x
16
for the Company as a whole, a leverage ratio not to exceed 55%, with the
ability to increase leverage to 66.67% for up to six months at a time,
limitations on additional indebtedness and stockholders distributions, and a
minimum net worth requirement. At December 31, 1996, the Company had the
ability to borrow an additional $127.5 million under the Credit Facility.
The Company has considered its short-term (up to 12 months) liquidity
needs and the adequacy of expected liquidity sources to meet these needs. The
Company believes that its principal short-term liquidity needs are to fund
normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualifications under the
Internal Revenue Code of 1986, as amended. The Company believes that these
needs will be fully funded from cash flows provided by operating activities.
The Company expects to meet long-term (greater than 12 months) liquidity
requirements for the costs of development, property acquisitions, scheduled
debt maturities, major renovations, expansions and other non- recurring
capital improvements through long-term secured and unsecured indebtedness and
the issuance of additional Units and equity securities. The Company may
finance the redevelopment or acquisition of additional properties by using
its Credit Facility.
Rental revenues, operating expense reimbursement income from tenants, and
income from the management and design companies are the Company's principal
sources to pay its operating expenses, debt service and recurring capital
expenditures. The Company seeks to increase income from existing Properties
by maintaining quality standards for its Properties that promote high
occupancy rates and permit increases in rental rates while reducing tenant
turnover and controlling operating expenses. Consequently, the Company
believes its revenues will continue to provide the necessary funds for its
operating expenses, debt service and recurring capital expenditures.
During the year ended December 31, 1996, the Company paid quarterly
dividends totaling $1.765 per common share, and intends to continue paying
dividends quarterly. The Company expects to use cash flows from operating
activities to fund dividends to stockholders.
Principal sources of funds for acquisitions are expected to include income
from operations, proceeds of offerings, amounts available under the Credit
Facility, long-term secured and unsecured indebtedness and sale of real
estate. In addition to funds from the above sources, properties or interests
therein may also be acquired by the issuance of Units.
Environmental Matters
The Company believes, based on their internal reviews, environmental site
assessments performed by consultants, existing plans to mitigate and monitor the
sites and financial commitments of certain prior owners and tenants, that the
future costs relating to environmental remediation and compliance will not have
a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
Inflation
Most of the Company's leases require tenants to pay increases in operating
expenses, including common area charges and real estate taxes, thereby
reducing the risk to the Company of the adverse effects of inflation. Leases
also vary in term from three years to 15 years, further reducing the risk to
the Company of the adverse effects of inflation.
17
Item 8. Financial Statements and Supplementary Information
See "Index to Financial Statements" on page F-1 of this Form 10-K.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 10. Directors and Officers
The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the captions
"Information Regarding Nominees and Directors."
Item 11. Executive Compensation
The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the caption "Executive
Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the caption "Principal
and Management Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the caption "Certain
Relationships and Related Transactions."
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules
See "Index to Financial Statements" on page F-1 of this Form 10-K.
(b) Exhibits
Exhibit No. Description
- ----------- -----------
3.1(1) Articles of Incorporation of the Company, as amended.
3.2(2) Amended and Restated Bylaws of the Company.
3.3(2) First Amendment to Amended and Restated Bylaws of the Company.
9.1(3) Voting Trust Agreement between Edwin N. Sidman and Paula L. Sidman.
10.1 Amended and Restated Agreement of Limited Partnership of Beacon Properties, L.P.,
as amended.
10.2(4) Amended and Restated 1994 Stock Option and Incentive Plan.
10.3(1) Employment and Non-Competition Agreement between the Company and Alan M.
Leventhal.
10.4(1) Form of Employment and Non-Competition Agreement between the Company and each of
Edwin N. Sidman and Norman B. Leventhal.
10.5(1) Form of Indemnification Agreement between the Company and each of its directors
and executive officers.
10.6(1) Registration Rights Agreement among the Company, Richard L. Friedman and John L.
Hall, II dated May 26, 1994.
10.7(1) Registration Rights Agreement Among the Company and certain partners of Beacon
Properties, L.P. dated May 26, 1994.
10.8(5) Registration Rights Agreement Among the Company, Wellesley Office Realty Corp. and
Federal 175 Realty Corp. dated October 27, 1994.
10.9(7) Registration Rights Agreement between the Company and TMPC, L.P. dated February
15, 1996.
10.10 Registration Rights Agreement among the Company and the Fairfax County Portfolio
contributors dated September 5, 1996.
18
Exhibit No. Description
- ----------- -----------
10.11 Registration Rights Agreement between the Company and Metropolitan Life Insurance
Company dated December 27, 1996.
10.12(3) Office/Retail Unit Lease, dated as of July 25, 1985 between Boston Redevelopment
Authority as Landlord and Rowes Wharf Associates as Tenant for the Office/Retail
Unit in the Condominium at Rowes Wharf, Boston, Massachusetts, as amended by a
First Amendment to Ground Lease, dated as of June 11, 1987.
10.13(3) Lease Agreement, dated as of January 28, 1988, between Massachusetts Bay
Transportation Authority, as Landlord and Beacon South Station Associates, L.P. as
Tenant, as amended by a Lease Modification Agreement dated as of September 30,
1988, and a Second Amendment to Lease dated as of August 1, 1989.
10.14(6) Option Agreement (Second Tier Noteholders Loan) by and between CP Holding Corp. as
Trustee of the Note Holding Trust under Indenture of Trust dated as of November
30, 1994 and Beacon Properties, L.P.
10.15(6) Option Agreement (Limited Partnership Interest) by and between CP Holding Corp. as
Trustee of the Partnership Holding Trust under Indenture of Trust dated November
30, 1994 and Beacon Properties, L.P.
10.16(7) Agreement of Purchase and Sale by and between Metropolitan Life Insurance Company
and Beacon Properties, L.P. dated December 19, 1995.
10.17(7) Contribution Agreement by and among Taylor & Mathis Enterprises, L.P., Taylor &
Mathis LTD., Taylor & Mathis/South Terraces, LTD. and Beacon Properties, L.P.
dated December 19, 1995.
10.18(7) Addendum to Contribution Agreement by and among Taylor & Mathis Enterprises, L.P.,
Taylor & Mathis, LTD., Taylor & Mathis/South Terraces, LTD and Beacon Properties,
L.P. dated December 19, 1995.
10.19(8) Option Agreement dated March 18, 1996 among John Marshall Associates Limited
Partnership, Greensboro Associates Limited Partnership, Woodland-Northridge I
Limited Partnership, Pimpernell Estates Limited Partnership, Goodridge Drive
Associates Limited Partnership and Beacon Properties, L.P.
10.20(8) First Amendment to Option Agreement dated May 17, 1996 among John Marshall
Associates Limited Partnership, Greensboro Associates Limited Partnership,
Woodland-Northridge I Limited Partnership, Pimpernell Estates Limited Partnership,
Goodridge Drive Associates Limited Partnership and Beacon Properties, L.P.
10.21(8) Second Amendment to Option Agreement dated May 31, 1996 among John Marshall
Associates Limited Partnership, Greensboro Associates Limited Partnership,
Woodland-Northridge I Limited Partnership, Pimpernell Estates Limited Partnership,
Goodridge Drive Associates Limited Partnership and Beacon Properties, L.P.
10.22(8) Third Amendment to Option Agreement dated June 21, 1996 among John Marshall
Associates Limited Partnership, Greensboro Associates Limited Partnership,
Woodland-Northridge I Limited Partnership, Pimpernell Estates Limited Partnership,
Goodridge Drive Associates Limited Partnership and Beacon Properties, L.P.
10.23(8) Sale and Purchase Agreement between New York Life Insurance Company and Beacon
Properties, L.P., dated as of July 19, 1996.
10.24(9) Purchase and Sale Agreement between LaSalle Fund II and Beacon Properties, L.P.
dated as of September 20, 1996.
10.25(9) First Amendment to Purchase and Sale Agreement between LaSalle Fund II and Beacon
Properties, L.P., dated as of October 2, 1996.
10.26(9) Purchase and Sale Contract between New England Executive Park Limited Partnership,
et al and Beacon Properties, L.P. dated as of November 1, 1996.
10.27(9) Agreement of Purchase and Sale and Joint Escrow Instructions between 10960
Property Corporation and Beacon Properties, L.P. dated October 3, 1996.
10.28(10) Contract of Sale between WRC Properties, Inc. and Beacon Properties, L.P. dated as
of December 19, 1996.
19
Exhibit No. Description
- ----------- -----------
10.29(10) Sale and Contribution Agreement between Metropolitan Life Insurance Company and
Beacon Properties, L.P., dated as of November 20, 1996, including Exhibit T to
Sales and Contribution Agreement.
10.30(11) Restated Revolving Credit Agreement among Beacon Properties, L.P., Beacon
Properties Corporation and the First National Bank of Boston, dated June 27, 1996.
10.31(11) Amendment No. 1 to the Restated Revolving Credit Agreement among Beacon
Properties, L.P., Beacon Properties Corporation and the First National Bank of
Boston, dated July 18, 1996.
10.32 Loan Agreement between Beacon Properties, L.P. and Metropolitan Life Insurance
Company, dated March 15, 1996.
10.33 Mortgage, Security Agreement and Fixture Filing by Wellesley Holding, L.P., Wellesley Holding II,
L.P. and Beacon Properties, L.P. to Connecticut General Life Insurance Company, dated January 8, 1996.
10.34 Mortgage, Security Agreement and Fixture Filing by Center Plaza Associates Limited Partnership to
Connecticut General Life Insurance Company, dated February 9, 1996.
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
- ---------------
(1) Filed as part of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1994 and incorporated herein by reference.
(2) Filed as part of the Company's Registration Statement on Form S-3 (File
No. 333-17237) and incorporated herein by reference.
(3) Filed as part of the Company's Registration Statement on Form S-11 (File
No. 33-76316) and incorporated herein by reference.
(4) Filed as part of the Company's Registration Statement on Form S-8 (File
No. 333-10417) and incorporated herein by reference.
(5) Filed as part of the Company's Registration Statement on Form S-11 (File
No. 33-88606) and incorporated herein by reference.
(6) Filed as part of the Company's Current Report on Form 8-K dated December
1, 1994 and incorporated herein by reference.
(7) Filed as part of the Company's Current Report on Form 8-K dated February
15, 1996 and incorporated herein by reference.
(8) Filed as part of the Company's Current Report on Form 8-K dated July 23,
1996 and incorporated herein by reference.
(9) Filed as part of the Company's Current Report on Form 8-K dated October
18, 1996 and incorporated herein by reference.
(10) Filed as part of the Company's Current Report on Form 8-K dated December
20, 1996 and incorporated herein by reference.
(11) Filed as part of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996 and incorporated herein by reference.
(c) Reports on Form 8-K
A Report on Form 8-K dated October 18, 1996 (as amended by Form 8-K/A-1,
8-K/A-2 and 8-K/A-3) was filed which included information regarding Items 2,
5 and 7. Included in Item 7 were financial statements, pro forma information
and exhibits. The Form 8-K was filed in connection with the Company's
acquisitions of the Rosslyn, Virginia Portfolio, New England Executive Park
Portfolio, The Riverview Building and 10960 Wilshire Boulevard.
A Report on Form 8-K dated December 18, 1996 was filed which included
information regarding Item 5. The Form 8-K was filed in connection with the
execution of an Underwriting Agreement of 1,132,400 shares of common stock in
December 1996.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Beacon Properties Corporation
By: /s/ Robert J. Perriello
------------------------------------------
Robert J. Perriello, Senior Vice President
and Chief Financial Officer
Dated: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
---------------------------------------------------------------------- --------------
/s/ Alan M. Leventhal
Alan M. Leventhal President, Chief Executive Officer, and
Director (Principal Executive Officer) March 21, 1997
/s/ Edwin N. Sidman
Edwin N. Sidman Chairman of the Board of Directors March 21, 1997
/s/ Lionel P. Fortin
Lionel P. Fortin Executive Vice President, Chief Operating
Officer and Director March 21, 1997
/s/ Robert J. Perriello
Robert J. Perriello Senior Vice President and Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer) March 21, 1997
/s/ Norman B. Leventhal
Norman B. Leventhal Director March 21, 1997
/s/ Graham O. Harrison
Graham O. Harrison Director March 21, 1997
/s/ William F. McCall, Jr.
William F. McCall, Jr. Director March 21, 1997
Steven Shulman Director March 21, 1997
/s/ Scott M. Sperling
Scott M. Sperling Director March 21, 1997
/s/ Dale F. Frey
Dale F. Frey Director March 21, 1997
21
BEACON PROPERTIES CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page(s)
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to
December 31, 1994 and for the Predecessor for the period
January 1, 1994 to May 25, 1994 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to
December 31, 1994 and for the Predecessor for the period
January 1, 1994 to May 25, 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to
December 31, 1994 and for the Predecessor for the period
January 1, 1994 to May 25, 1994 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-23
Report of Independent Accountants on Financial Statement Schedules F-24 to F-29
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Beacon Properties Corporation:
We have audited the consolidated balance sheets of Beacon Properties
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, partners' capital and cash flows for the years
ended December 31, 1996 and 1995 and the period May 26, 1994 to December 31,
1994. We have also audited the combined statement of operations, owners'
equity and cash flows of the Predecessor, more fully described in Note 1, for
the period January 1, 1994 to May 25, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Beacon Properties Corporation as of December 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994,
and the combined results of operations and cash flows of the Predecessor for
the period January 1, 1994 to May 25, 1994 in conformity with generally
accepted accounting principles.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
January 28, 1997
F-2
BEACON PROPERTIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
December 31,
-------------------------
1996 1995
------------- -----------
ASSETS
Real estate:
Land $ 213,858 $ 43,077
Buildings, improvements and equipment 1,477,672 428,065
------------- -----------
1,691,530 471,142
Less accumulated depreciation 97,535 66,571
------------- -----------
1,593,995 404,571
Deferred financing and leasing costs, net of accumulated amortization of $16,370
and $14,509 17,321 9,486
Cash and cash equivalents 36,086 4,501
Restricted cash 2,599 2,764
Accounts receivable 11,609 6,128
Accrued rent 13,065 6,493
Prepaid expenses and other assets 1,093 8,060
Mortgage notes receivable 51,491 34,778
Investments in and advance to joint ventures and corporations 52,153 58,016
------------- -----------
Total assets $1,779,412 $534,797
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable 452,212 70,536
Note payable, Credit Facility 153,000 130,500
Accounts payable, accrued expenses and other liabilities 41,764 14,022
Investment in joint venture 24,735 23,955
------------- -----------
Total liabilities 671,711 239,013
------------- -----------
Commitments and contingencies -- --
Minority interest in Operating Partnership 108,551 36,962
------------- -----------
Stockholders' equity:
Common stock, $.01 par value, authorized 100,000,000 shares, issued and
outstanding 48,116,480 and 20,215,822 shares 481 202
Additional paid-in capital 1,022,110 267,727
Cumulative net income 60,047 23,715
Cumulative dividends (83,488) (32,822)
------------- -----------
Total stockholders' equity 999,150 258,822
------------- -----------
Total liabilities and stockholders' equity $1,779,412 $534,797
============= ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Predecessor
----------------
For the Period For the Period
Year Ended Year Ended May 26, 1994 to January 1, 1994
Dec. 31, 1996 Dec. 31, 1995 December 31, 1994 to May 25, 1994
---------------- ---------------- ------------------ ----------------
Revenues:
Rental income $ 147,825 $ 71,050 $ 25,144 $5,776
Management fees 3,005 2,203 -- 1,521
Recoveries from tenants 16,719 9,742 4,488 1,040
Mortgage interest income 4,970 2,546 -- --
Other income 11,272 5,502 2,301 675
---------------- ---------------- ------------------ ----------------
Total revenues 183,791 91,043 31,933 9,012
---------------- ---------------- ------------------ ----------------
Expenses:
Property expenses 37,211 18,090 7,034 2,086
Real estate taxes 18,124 10,217 3,325 595
General and administrative 19,331 9,755 3,122 1,399
Mortgage interest expense 30,300 15,226 4,992 2,798
Interest--amortization of financing
costs 2,084 1,370 617 373
Depreciation and amortization 33,184 17,428 6,924 2,385
---------------- ---------------- ------------------ ----------------
Total expenses 140,234 72,086 26,014 9,636
---------------- ---------------- ------------------ ----------------
Income (loss) from operations 43,557 18,957 5,919 (624)
Equity in net income of joint
ventures and corporations 4,989 3,234 929 198
---------------- ---------------- ------------------ ----------------
Income (loss) from continuing
operations 48,546 22,191 6,848 (426)
Discontinued
operations--Construction Company:
Income (loss) from operations (2,609) (12) 477 102
Loss on sale (249) -- -- --
---------------- ---------------- ------------------ ----------------
Income (loss) before minority
interest 45,688 22,179 7,325 (324)
Minority interest in loss of
combined partnerships -- -- -- 931
Minority interest in Operating
Partnership (5,988) (4,119) (1,670) --
---------------- ---------------- ------------------ ----------------
Income before extraordinary items 39,700 18,060 5,655 607
Extraordinary items, net of minority
interest (3,368) -- -- 8,898
---------------- ---------------- ------------------ ----------------
Net income $ 36,332 $ 18,060 $ 5,655 $9,505
================ ================ ================== ================
Income before extraordinary items
per common share $ 1.32 $ 1.09 $ .48 --
Extraordinary items per common share (0.11) -- -- --
---------------- ---------------- ------------------ ----------------
Net income per common share $ 1.21 $ 1.09 $ .48 --
================ ================ ================== ================
Weighted average common shares
outstanding 29,932,327 16,525,245 11,816,380 --
================ ================ ================== ================
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share amounts)
Stockholders' Equity Predecessor
--------------------------------------------------------------- ------------
Common Stock
----------------------
Additional Owners'
Shares Paid-in Cumulative Cumulative Equity
Issued Amount Capital Net Income Dividends (Deficit)
------------- --------------------- ------------- ------------ ------------
Balance at December 31, 1993 $(57,954)
Net income from January 1, 1994
to May 25, 1994 9,505
Contributions and other, net of
distributions from January 1,
1994 to May 25, 1994 1,083
Issuance of stock for cash--
May 26, 1994--Initial Offering 11,117,850 $111 $ 173,341 --
Issuance of stock in connection
with purchase of minority
interests 698,530 7 11,868 --
Charge to reflect carryover of
historical basis of accounting
and recognition of minority
interest in Operating
Partnership for continuing
investors -- -- (77,600) 47,366
Net income from May 26, 1994 to
December 31, 1994 -- -- -- $ 5,655 --
Dividends declared ($0.96 per
share) -- -- -- -- $(11,344) --
------------- --------------------- ------------- ------------ ------------
Balance at December 31, 1994 11,816,380 118 107,609 5,655 (11,344) --
Issuance of stock 8,341,050 84 159,236 -- -- --
Issuance of stock under dividend
reinvestment and share purchase
plan 25,437 -- 492 -- -- --
Issuance of stock by exercise of
options 12,367 -- 216 -- -- --
Issuance of stock in exchange
for Operating Partnership unit
redemptions 20,588 -- 174 -- -- --
Net income -- -- -- 18,060 -- --
Dividends declared ($1.24 per
share) -- -- -- -- (21,478) --
------------- --------------------- ------------- ------------ ------------
Balance at December 31, 1995 20,215,822 202 267,727 23,715 (32,822) --
Issuance of stock 27,641,400 276 749,589 -- -- --
Issuance of stock under dividend
reinvestment and share purchase
plan 101,431 1 2,647 -- -- --
Issuance of stock by exercise of
options 97,827 1 1,662 -- -- --
Issuance of stock in exchange
for Operating Partnership unit
redemptions 60,000 1 485 -- -- --
Net income -- -- -- 36,332 -- --
Dividends declared ($1.765 per
share) -- -- -- -- (50,666) --
------------- --------------------- ------------- ------------ ------------
Balance at December 31, 1996 48,116,480 $481 $1,022,110 $ 60,047 $(83,488) $ --
============= ===================== ============= ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except per share amounts)
Predecessor
----------------
For the Period For the Period
Year Ended Year Ended May 26, 1994 to January 1, 1994
Dec. 31, 1996 Dec. 31, 1995 December 31, 1994 to May 25, 1994
---------------- ---------------- ------------------ ----------------
Cash flows from operating
activities:
Net income $ 36,332 $ 18,060 $ 5,655 $ 9,505
---------------- ---------------- ------------------ ----------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in accrued rent (6,572) (3,741) (915) (1,181)
Depreciation, amortization and
interest--
amortization of financing costs 35,268 18,798 7,541 2,848
Equity in net income of joint
ventures and corporations (2,131) (3,222) (469) (201)
Minority interest in loss of
combined partnerships -- -- -- (1,519)
Minority interest in Operating
Partnership 5,988 4,119 1,670 --
Extraordinary items 3,368 -- -- (8,898)
Deferred interest -- -- -- 367
Increase in accounts receivable (5,481) (1,746) (3,385) (376)
(Increase) decrease in prepaid
expenses and other assets (333) (82) 2,388 (1,940)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities 25,243 332 (107) 1,636
---------------- ---------------- ------------------ ----------------
Total adjustments 55,350 14,458 6,723 (9,264)
---------------- ---------------- ------------------ ----------------
Net cash provided by operating
activities 91,682 32,518 12,378 241
---------------- ---------------- ------------------ ----------------
Cash flows from investing
activities:
Property additions (1,088,775) (67,610) (204,582) (978)
Payment of deferred leasing costs (6,157) (2,646) (1,010) (124)
Decrease (increase) in prepaid
expenses and other assets 5,000 (5,000) -- --
Purchase of minority interests -- -- (11,688) --
Investments in joint ventures -- -- (15,802) --
Distributions from joint ventures 8,727 3,692 1,637 --
Investments in and advance to
corporations -- (41,471) (5,800) --
Cash from contributed assets -- -- 6,978 --
Restricted cash from contributed
assets -- -- 420 --
Purchase of mortgage notes
receivable (16,713) (34,778) -- --
Decrease (increase) in restricted
cash 165 2,063 (4,827) --
---------------- ---------------- ------------------ ----------------
Net cash used by investing
activities (1,097,753) (145,750) (234,674) (1,102)
---------------- ---------------- ------------------ ----------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
(dollars in thousands, except per share amounts)
Predecessor
----------------
For the Period For the Period
Year Ended Year Ended May 26, 1994 to January 1, 1994
Dec. 31, 1996 Dec. 31, 1995 December 31, 1994 to May 25, 1994
---------------- ---------------- ------------------ ----------------
Cash flows from financing
activities:
Proceeds from offerings $ 754,778 $ 160,028 $173,452 $ --
Owners' contributions -- -- -- 412
Owners' distributions -- -- -- (4,329)
Borrowings on Credit Facility 468,000 124,700 130,300 --
Borrowings on mortgage notes 608,000 -- -- 874
Repayments on Credit Facility (445,500) (124,500) -- --
Repayments on mortgage notes (281,814) (20,400) (49,677) (460)
Advances (repayments of) amounts
due to affiliates -- -- (5,355) 2,800
Payment of deferred financing costs (9,811) (2,457) (2,852) (13)
Decrease (increase) in prepaid
expenses and other assets 2,300 (2,300) -- --
Distributions paid to minority
interests (7,631) (6,230) (1,858) --
Dividends paid to stockholders (50,666) (26,205) (6,617) --
---------------- ---------------- ------------------ ----------------
Net cash provided (used) by
financing activities 1,037,656 102,636 237,393 (716)
---------------- ---------------- ------------------ ----------------
Net increase (decrease) in cash and
cash equivalents 31,585 (10,596) 15,097 (1,577)
Cash and cash equivalents, beginning
of period 4,501 15,097 -- 6,150
---------------- ---------------- ------------------ ----------------
Cash and cash equivalents, end of
period $ 36,086 $ 4,501 $ 15,097 $ 4,573
================ ================ ================== ================
Supplemental disclosures:
Cash paid during the period for
interest $ 28,777 $ 14,738 $ 5,278 $ 2,811
Noncash activities:
Acquisition of interests in
properties -- -- 22,721 --
Increase in minority interest as a
result of acquisition of
interests in properties 74,226 -- 9,200 --
Liabilities assumed in connection
with contributions and
acquisitions of properties 55,529 861 93,518 --
Dividends declared to stockholders -- -- 4,727 --
Distributions declared to minority
interest -- -- 1,524 --
Receivable from equity investment 781 1,057 -- --
Redemption of Operating Partnership
units for common stock 486 174 -- --
Common stock issued in connection
with purchase of minority
interests -- -- 11,875 --
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. Organization, Offerings and Acquisitions:
Beacon Properties Corporation (the "Company") was incorporated on March 4,
1994 as a Maryland corporation, and commenced operations effective with the
completion of its initial offering on May 26, 1994. The Company qualifies as
a real estate investment trust under the Internal Revenue Code of 1986, as
amended. Concurrent with the initial offering, the Company contributed its
interests in two properties and the net proceeds of the offering which
approximated $173.5 million in exchange for an approximate 78% interest in
Beacon Properties, L.P., (the "Operating Partnership"), which became the
successor entity to The Beacon Group (the "Predecessor").
The Company was formed to continue and expand the commercial real estate
development, construction, acquisition, leasing, design and management
business of the Predecessor. Prior to the initial offering, the Predecessor
was comprised of interests in 13 office properties and entities which
provided design, leasing, development and construction services to each of
the properties and unrelated third parties.
During 1995, the Company completed three offerings totaling 8,341,050 shares
of common stock. The net proceeds from these offerings totaling $159.3
million were used primarily to retire indebtedness incurred to acquire new
properties and to acquire additional properties.
During 1996, the Company completed three offerings totaling 27,641,400 shares
of common stock. The net proceeds from these offerings totaling $749.9
million were used primarily to acquire additional properties.
The following schedule summarizes the Company's interest in the properties as
a result of its initial and subsequent offerings, and the related acquisition
of properties and partnership interests. All properties have been
consolidated by the Company and its Predecessor unless otherwise indicated in
the notes:
Date Rentable Ownership
Acquired by Area in Interest at Accounting
the Company Square Feet 12/31/96 Method Notes
------------- ------------- --------------------------
Properties:
Wellesley Office Park--Buildings 1-8, Wellesley, MA (A) 623,000 100% (E)
Crosby Corporate Center, Bedford, MA (B) 336,000 100%
South Station, Boston, MA (B) 149,000 100%
175 Federal Street, Boston, MA (B) 203,000 100% (E)
One Post Office Square, Boston, MA (B) 764,000 50% (D)
Center Plaza, Boston, MA (B) 649,000 100%
Rowes Wharf, Boston, MA (B) 344,000 45% (F)
150 Federal Street, Boston, MA (B) 530,000 100%
Polk and Taylor Buildings, Arlington, VA (B) 890,000 10% (G)
One Canal Park, Cambridge, MA 6/10/94 100,000 100%
Westwood Business Centre, Westwood, MA 6/10/94 160,000 100%
Russia Wharf, Boston, MA 8/10/94 315,000 100%
Westlakes Office Park--Buildings 1-3 and 5, Berwyn,
PA (C) 444,000 100%
75-101 Federal Street, Boston, MA 9/29/95 812,000 52% (H)
Two Oliver Street and 147 Milk Street, Boston, MA 10/6/95 271,000 100%
Ten Canal Park, Cambridge, MA 12/21/95 110,000 100%
Perimeter Center, Atlanta, GA 2/15/96 3,302,000 100%
1333 H Street, N.W., Washington, D.C. 8/16/96 239,000 100%
AT&T Plaza, Oak Brook, IL 8/16/96 225,000 100%
Tri-State International, Lincolnshire, IL 8/16/96 548,000 100%
John Marshall I, McLean, VA 9/5/96 261,000 100%
E.J. Randolph, McLean, VA 9/5/96 165,000 100%
Continued
F-8
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
Date Rentable Ownership
Acquired by Area in Interest at Accounting
the Company Square Feet 12/31/96 Method Notes
------------- ------------- --------------------------
Northridge I, Herndon, VA 9/5/96 124,000 100%
1300 North 17th Street, Rosslyn, VA 10/18/96 373,000 100%
1616 North Fort Myer Drive, Rosslyn, VA 10/18/96 293,000 100%
New England Executive Park, Burlington, MA 11/15/96 817,000 100%
The Riverview Building, Cambridge, MA 11/21/96 263,000 100%
10960 Wilshire Boulevard, Westwood, CA 11/21/96 544,000 100%
Shoreline Technology Park, Mountain View, CA 12/20/96 727,000 100%
Lake Marriott Business Park, Santa Clara, CA 12/20/96 400,000 100%
Presidents Plaza, Chicago, IL 12/27/96 791,000 100%
-------------
15,772,000
=============
Service Entities:
Beacon Construction Company, Inc. (B) 99% (I)
Beacon Property Management, L.P. (B) 100%
Beacon Property Management Corporation (B) 99% (I)
Beacon Design Corporation (B) 99% (I)
Beacon Design, L.P. (B) 100%
(A) Wellesley Building 8 was acquired May 4, 1995. Interests in the remaining
Wellesley Buildings were contributed as part of the initial public
offering.
(B) Interests in this property or company were contributed or acquired as
part of the initial public offering.
(C) Westlakes Buildings 1, 3 and 5 were acquired October 21, 1994. Westlakes
Building 2 was acquired July 26, 1995.
(D) The Company is a general partner in the joint venture which owns the
property and utilizes the equity method of accounting for its investment.
(E) On October 28, 1994, the Company acquired the remaining interest in the
175 Federal Street and Wellesley 6 Joint Ventures which owned these
properties. Prior to the acquisition of the remaining interest, the
Company and its Predecessor used the equity method of accounting for its
investments.
(F) The Company owns an indirect limited partner interest and utilizes the
equity method of accounting for its investment.
(G) The Company owns a 1% general partner interest and a 9% limited partner
interest and utilizes the equity method of accounting for its investment.
(H) The Company is a shareholder in the corporation (private REIT) which owns
the property and utilizes the equity method of accounting for its
investment.
(I) The Company used the cost method of accounting for its investments in
these subsidiaries prior to 1995. The Company currently uses the equity
method of accounting for its investments. (See Note 2).
2. Summary of Significant Accounting Policies:
Business
The Company is a self-managed and self-administered real estate investment
trust (a "REIT") which currently has interests in a portfolio of 104 Class A
office properties and other commercial properties containing approximately
15.8 million rentable square feet located in Boston, Atlanta, Chicago, Los
Angeles, Philadelphia, San Francisco, and Washington, D.C.
The Company also owns and operates commercial real estate development,
acquisition, leasing, design and management businesses. The Company manages
approximately 2.9 million square feet of commercial and office space owned by
third parties in various locations, including Boston, Waltham, and
Springfield, Massachusetts and Chicago, Illinois.
F-9
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
Principles of Consolidation
The accompanying financial statements of the Company have been prepared on
a consolidated basis which include all the accounts of the Company, its
majority owned Operating Partnership and its subsidiaries. All significant
intercompany balances and transactions have been eliminated. The Company's
consolidated financial statements reflect the properties acquired at their
historical basis of accounting to the extent of the acquisition of interests
from the Predecessors' owners who continued on as investors. The remaining
interests acquired from the Predecessors' owners have been accounted for as a
purchase and the excess of the purchase price over the related historical
cost basis was allocated to real estate. The consolidated financial
statements of the Company include, along with the contributed properties of
the Predecessor, significant acquisitions of properties and ownership
interests subsequent to the initial public offering; consequently, the
operating results of the Company are not directly comparable to the
Predecessor.
The accompanying financial statements of the Predecessor have been
presented on a combined basis which include all of the contributed properties
and the management, leasing, and design entities.
Real Estate
Buildings and improvements are recorded at cost and are depreciated on the
straight-line and declining balance methods over their estimated useful lives
of nineteen to forty years and fifteen to twenty years, respectively. The
cost of buildings and improvements includes the purchase price of the
property or interests in property, legal fees, acquisition costs, interest,
property taxes and other costs incurred during the period of construction.
The Company capitalized interest costs of $1.0 million in 1996, $0.1 million
in 1995, and $0 in 1994. In accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, the Company periodically reviews its
properties to determine if its carrying costs will be recovered from future
operating cash flows. In cases where the Company does not expect to recover
its carrying costs, the Company would recognize an impairment loss. No such
losses have been recognized to date.
Tenant improvements are depreciated over the terms of the related leases.
Furniture, fixtures and equipment are depreciated using straight-line and
declining balance methods over their expected useful lives of five to seven
years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations or betterments which extend the economic
useful life of the assets are capitalized.
Deferred Financing and Leasing Costs
Deferred financing costs include fees and costs incurred to obtain
long-term financings, and are amortized over the terms of the respective
loans on a basis which approximates the interest method. Deferred leasing
costs incurred in the successful negotiation of leases, including brokerage,
legal and other costs, have been deferred and are being amortized on a
straight-line basis over the terms of the respective leases.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid assets with original
maturities of three months or less from the date of purchase. The majority of
the Company's cash and cash equivalents are held at major commercial banks.
The Company has not experienced any losses to date on its invested cash. The
carrying value of the cash and cash equivalents approximate market.
Restricted Cash
Restricted cash consists of cash held in escrow as required by lenders to
satisfy real estate taxes and tenant improvement costs.
F-10
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
Investments in and Advance to Joint Ventures and Corporations
The Company and Predecessor use the equity method of accounting for their
earnings in property joint ventures and corporations which it does not
control. Losses in excess of investments are not recorded where the Company
or the Predecessor is a limited partner and has not guaranteed nor intends to
provide any future financial support to the respective properties.
The Company utilized the cost method in 1994 for its earnings from service
corporations. In 1995, the Company adopted the accounting prescribed in
Emerging Issues Task Force Issue 95-6 "Accounting by a Real Estate Investment
Trust for an Investment in a Service Corporation" and utilized the equity
method for its investment in and earnings of service corporations. The effect
of this change on 1994 results was not material and such amounts have been
reclassified to conform to the 1995 presentation.
Mortgage Notes Receivable
Discounts from the principal balance on mortgage notes receivable, net of
acquisition costs, are amortized as interest income over the term of the
related notes using the effective yield method, based on management's
evaluation of the current facts and circumstances and the ultimate ability to
collect the principal balance of such notes.
Offering Costs
Underwriting commissions and offering costs incurred in connection with
the initial and subsequent offerings have been reflected as a reduction of
additional paid-in capital.
Revenue Recognition
Base rental income is reported on a straight-line basis over the terms of
the respective leases. The impact of the straight-line rent adjustment
increased revenues for the Company by $6.6 million, $3.7 million and $0.9
million and increased the Company's equity in net income of property joint
ventures and corporations by $0.1 million, $0.2 million and $0.3 million for
the years ended December 31, 1996 and 1995 and the period May 26, 1994 to
December 31, 1994, respectively. Construction income of the Predecessor was
recognized on the percentage-of-completion method on the basis of costs
incurred and expected to be incurred. Management fees are recognized when
they are earned.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue
Code commencing with its taxable period ended December 31, 1994. As a result,
the Company will generally not be subject to federal income tax on its
taxable income at corporate rates to the extent it distributes annually at
least 95% of its taxable income to its shareholders and complies with certain
other requirements. Accordingly, no provision has been made for federal
income taxes in the accompanying consolidated financial statements. Certain
subsidiaries are subject to federal and state income tax on their taxable
income at regular corporate rates.
The Predecessor was not a legal entity subject to income taxes. No federal
or state income taxes were applicable to the entities that managed and owned
the properties; accordingly, none have been provided in the accompanying
combined financial statements.
Interest Rate Protection Agreements
The Company has entered into interest rate protection agreements to reduce
the impact of certain changes in interest rates on its variable rate debt.
These agreements are accounted for as a hedge. Amounts paid for the
agreements are amortized over the lives of the agreements on a basis which
approximates the interest method.
F-11
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
Payments under interest rate swap agreements are recognized as adjustments to
interest expense when incurred. The Company's policy is to write-off
unamortized amounts paid under interest rate protection agreements, when the
related debt is paid off or there is a termination of the agreements prior to
their maturity. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate protection
agreements. However, the Company does not anticipate nonperformance by the
counterparties.
Per Share Data
The assumed exercise of outstanding share options, using the treasury
stock method, is not dilutive and, therefore, such amounts are not presented
(see Note 9). The income tax status of dividends declared during the years
ended December 31, 1996 and 1995 and the period May 26, 1994 to December 31,
1994 are as follows:
1996 1995 1994
---- ---- ----
Ordinary income 91% 87% 66%
Return of capital 9% 13% 34%
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
Reclassifications
Certain prior year balances have been reclassed to conform with current
year presentation.
3. Accounts Receivable:
December 31,
--------------------
1996 1995
--------- ---------
Tenants $ 5,072 $2,137
Other 4,228 1,006
Affiliates 3,683 3,322
Allowance for uncollectible amounts (1,374) (337)
--------- ---------
Total $11,609 $6,128
========= =========
4. Mortgage Notes Receivable:
The Company acquired a fifty percent interest in certain mortgage notes
collateralized by property owned by a joint venture in which the Company has
an indirect interest. The terms of the notes require interest-only payments
at 8.71% quarterly on a principal balance of approximately $63.0 million and
are due on April 1, 1999. The term may be extended for up to three years
under certain conditions. The Company also has an option to purchase from an
affiliate other mortgages collateralized by the same property.
F-12
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
5. Investments in and Advance to Joint Ventures and Corporations:
The following is summarized financial information for the property joint
ventures and corporation:
December 31,
-------------------------
1996 1995
------------ ------------
Balance sheets:
Real estate, net $ 410,207 $ 419,096
Other assets 51,669 55,714
------------ ------------
Total assets $461,876 $474,810
============ ============
Mortgage notes payable 377,754 380,827
Loans and notes payable 72,136 68,606
Other liabilities 13,040 14,072
Partners' and shareholders' equity (deficiency) (1,054) 11,305
------------ ------------
Total liabilities and equity (deficiency) $461,876 $474,810
============ ============
Predecessor
---------------
May 26, 1994 to Jan. 1, 1994 to
1996 1995 Dec. 31, 1994 May 25, 1994
----------- -------------------------- ---------------
Summary of operations:
Rentals $117,283 $ 91,048 $ 59,983 $ 38,386
Other income 3,453 3,861 5,717 2,941
Operating expenses (61,086) (49,472) (34,688) (22,632)
Mortgage interest expense (28,712) (23,232) (16,261) (13,432)
Depreciation and amortization (18,592) (14,537) (11,427) (8,228)
----------- -------------------------- ---------------
Net income (loss) $ 12,346 $ 7,668 $ 3,324 $ (2,965)
=========== ========================== ===============
A reconciliation of interests in the underlying net assets to the
Company's carrying value of property investments in joint ventures and
corporation is as follows:
December 31,
----------------------
1996 1995
----------- ----------
Partners' and shareholders' equity (deficiency), as above $(1,054) $11,305
Deficits of other partners and shareholders 23,532 13,259
----------- ----------
Company's share of equity 22,478 24,564
Excess of cost of investments over the net book value of underlying net
assets, net of amortization and accumulated amortization of $122 and
$75, respectively 1,310 1,357
----------- ----------
Carrying value of property investments in joint ventures and corporation $23,788 $25,921
=========== ==========
F-13
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
The following is summarized financial information for the service
corporations:
December 31,
---------------------
1996 1995
-------------------
Balance sheets:
Equipment, net $ 1,806 $ 715
Other assets 34,155 29,560
-------------------
Total assets $35,961 $30,275
===================
Other liabilities 37,360 27,124
Shareholders' equity (deficiency) (1,399) 3,151
-------------------
Total liabilities and equity (deficiency) $35,961 $30,275
===================
May 26, 1994 to
1996 1995 Dec. 31, 1994
------------ ------------ ---------------
Summary of operations:
Construction income $ 140,903 $ 108,913 $ 52,429
Consulting and management fees 2,537 7,576 4,848
Interest and other income 266 383 184
Construction, consulting and management fee costs (141,167) (110,835) (52,388)
General and administrative expense (5,121) (4,880) (3,564)
Depreciation and amortization (584) (336) (186)
Minority interest in net income of joint venture (52) (130) (90)
Interest expense to stockholder -- (650) --
------------ ------------ ---------------
Net income (loss) $ (3,218) $ 41 $ 1,233
============ ============ ===============
A reconciliation of the underlying net assets to the Company's carrying
value of investments in and advance to service corporations is as follows:
December 31,
-----------------------
1996 1995
----------- -----------
Shareholders' equity (deficiency), as above $ (1,399) $ 3,151
Less equity (deficiency) of other shareholders (29) 11
----------- -----------
Company's share of equity (deficiency) (1,370) 3,140
Advance 5,000 5,000
----------- -----------
Carrying value of investments in and advance to service corporations 3,630 8,140
Carrying value of property investments in joint ventures and corporation,
as above 23,788 25,921
----------- -----------
Total $ 27,418 $ 34,061
=========== ===========
Per consolidated balance sheet:
Investments in and advance to joint ventures and corporations $ 52,153 $ 58,016
Investment in joint venture (24,735) (23,955)
----------- -----------
Total $ 27,418 $ 34,061
=========== ===========
F-14
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
6. Mortgage Notes Payable:
The mortgage notes payable, collateralized by the certain properties and
assignment of leases, are as follows:
December 31,
----------------------
1996 1995
----------- ----------
Mortgage notes with fixed interest at:
8.00% maturing July 1, 1998 $ 12,970 $13,236
6.67% maturing November 1, 1998 56,920 57,300
7.23% maturing February 1, 2003 55,000 --
7.23% maturing March 1, 2003 60,000 --
7.08% maturing March 31, 2006 218,000 --
8.19% maturing January 1, 2007 15,000 --
8.19% maturing January 1, 2007 13,600 --
8.38% maturing December 1, 2008 20,722 --
----------- ----------
Total mortgage notes payable $452,212 $70,536
=========== ==========
The Company's restricted cash consists of cash required by these mortgages
to be held in escrow for capital expenditures and/or real estate taxes.
Scheduled maturities of mortgage notes payable are as follows:
1997 $ 2,127
1998 72,611
1999 6,602
2000 7,608
2001 8,171
Thereafter 355,093
--------
Total $452,212
========
The Company computes the fair value of its mortgage notes payable based
upon the discounted cash flows at a discount rate that approximates the
Company's effective borrowing rate and the Company has determined that the
fair value of its mortgage notes approximates their carrying value.
In March 1996, the Company repaid a debt and recorded an extraordinary
item of $1.9 million, net of minority interest, in connection with the
write-off of fees and costs to acquire the debt. The extraordinary item
during the period January 1, 1994 through May 25, 1994 represents the gains
resulting from the settlement of certain mortgage notes payable. As the
prepayments were a condition to transfering the assets to the Company, these
items were recorded by the Predecessor entity.
7. Note Payable, Credit Facility:
The Company has a three-year, $300 million revolving credit facility (the
"Credit Facility"). The Credit Facility matures in June 1999 and is secured
by cross-collateralized mortgages and assignment of rents on certain
properties.
Outstanding balances under the Credit Facility bear interest, at the
Company's option, at either (i) the higher of (x) Bank of Boston's base
interest rate and (y) one-half of one percent (1/2%) above the overnight
federal funds effective rate or (ii) the Eurodollar rate plus 175 basis
points. The Company has an interest rate protection agreement through May
1997 with respect to $135 million of the Credit Facility, which provides for
offsetting payments to the Company in the event that 90-day LIBOR exceeds
9.47% per annum. Effective May 1997 through May 1999, the Company has an
interest rate protection agreement with respect to $137.5 million of the
Credit Facility, which provides for offsetting
F-15
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
payments to the Company in the event that 90-day LIBOR exceeds 8.75% per
annum. This interest rate protection arrangement may be applied during any
four quarters in the period from May 1997 to May 1999.
The outstanding balance of the Credit Facility at December 31, 1996 was
$153.0 million. The weighted average amount outstanding during the years
ended December 31, 1996 and 1995 and the period May 26, 1994 to December 31,
1994 was $42.3 million, $99.7 million and $50.4 million, respectively. The
weighted average interest rate on amounts outstanding during the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994
was approximately 7.78%, 8.25% and 7.57%, respectively. The applicable
interest rate under the Credit Facility at December 31, 1996 was 8.25%.
Based upon the Credit Facility's variable interest rate and the Company's
determination of the fair value of its interest rate agreement based upon the
quoted market prices of similar instruments, the Company has determined that
the fair value of these instruments approximate their carrying value.
As a result of the substantial modification of the terms of the Credit
Facility in June 1996, the Company recorded an extraordinary item of $1.5
million, net of minority interest, in connection with the write-off of fees
and costs relating to the prior Credit Facility.
8. Accounts Payable, Accrued Expenses and Other Liabilities:
December 31,
--------------------
1996 1995
--------- ---------
Accounts payable and accrued expenses $29,904 $ 8,092
Deferred liability 4,912 1,164
Affiliates 1,258 2,952
Other liabilities 504 647
Security deposits 5,186 1,167
--------- ---------
Total $41,764 $14,022
========= =========
9. Stockholders' Equity:
Stock Option Plans
During 1994, the Company adopted the 1994 Stock Option Plan, which
initially reserved 1,102,080 shares of common stock. In May, 1996 the 1994
Stock Option Plan was amended to reserve an additional 1,621,485 shares of
common stock. The 1994 Stock Option Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee") and officers and
certain other employees of the Company are eligible to participate.
Non-employee Directors of the Company are eligible to receive stock options
under the 1994 Stock Option Plan on a limited basis.
The 1994 Stock Option Plan authorizes (i) the grant of stock options that
qualify as incentive stock options under Section 422 of the Code ("ISOs"),
(ii) the grant of stock options that do not so qualify ("NQSOs"), (iii) the
grant of stock options in lieu of cash for Directors' fees and employee
bonuses, (iv) grants of shares of common stock contingent on the attainment
of performance goals or subject to other restrictions, and (v) grants of
shares of common stock in lieu of cash compensation. The exercise price of
stock options will be determined by the Committee, but may not be less than
100% of the fair market value of the shares of Common Stock on the date of
grant in the case of ISOs. However, in the case of grants of NQSOs granted in
lieu of cash for Directors' fees and employee bonuses, the exercise price may
not be less than 50% of the fair market value of the shares of common stock
on the date of grant. NQSOs granted under the 1994 Stock Option Plan may, if
approved by the Committee, accrue annually a dividend equivalent right which
will entitle the option-holder to receive additional shares of common stock
upon the exercise of the option. The Company has reserved 29,425 shares of
common stock for issuance under the 1994 Stock Option Plan. Options issued
vest at such time or times as determined by the
F-16
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
Committee except for options issued to independent directors which vest on
the date of grant. All options have a term of ten years from the grant date.
In October 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"), which provides for the granting of options to purchase up to an
aggregate of 750,000 shares of common stock to all employees other than the
senior executive officers of the Company. The Company has reserved 168,500
shares of common stock for issuance under the 1996 Option Plan. The term of
each option is fixed by the Committee. The Committee also determines at what
time or times each option becomes vested and exercisable and, subject to the
terms of the Plan, the period of time, if any, after death, disability, or
termination of employment during which options may be exercised. The
Committee may accelerate the exercisability of any option at any time.
Changes in options outstanding under the 1994 and 1996 plans during the
period were as follows:
Option Price
---------------
Number
Of Shares Per Share
Under Option Average
--------------- ---------------
Granted at Initial Offering 630,250 $17.00
Granted May-December 1994 27,500 18.16
Canceled May-December 1994 (15,750) 17.00
--------------- ---------------
Shares under Option at December 31, 1994 642,000 17.05
Exercised--1995 (12,367) 17.46
Granted--1995 414,000 20.14
Canceled--1995 (9,662) 17.00
--------------- ---------------
Shares under Option at December 31, 1995 1,033,971 18.28
Exercised--1996 (97,827) 17.00
Granted--1996 2,236,550 28.72
Canceled--1996 (7,248) 19.16
--------------- ---------------
Shares under option at December 31, 1996 3,165,446 25.69
=============== ===============
Options available for grant at beginning of year 55,826 --
Options available for grant at end of year 197,925 --
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans. Financial Accounting Standards
Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")
was issued in 1995 and, if fully adopted, changes the methods for recognition of
cost on plans similar to those of the Company. Adoption of SFAS 123 is optional;
however, had compensation cost for the Company's 1996 grants for stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
income, net income applicable to common shareholders, and net income per common
share would approximate the pro forma amounts below:
1996 1995
-------------------
Net income:
As reported $36,332 $18,060
Pro forma 35,530 18,007
Net income per common share:
As reported 1.21 1.09
Pro forma 1.19 1.09
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
F-17
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
The fair value of each option granted under SFAS 123, estimated on the
date of grant using the Black-Scholes option-pricing model, is $3.38 for 1996
and $2.04 for 1995. The following table presents the annualized weighted-
average values of the significant assumptions used to estimate the fair
values of the options:
1996 1995
------- --------
Risk-free interest rate 6.22% 5.45%
Expected life in years 6.0 6.0
Expected volatility 16.6% 16.1%
Expected dividend yield 6.0% 6.0%
The following table summarizes information about options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
- ---------------------------------------------------- ---------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Contractual Life Price at 12/31/96 Price
------------------ -------------- ---------------------------- -------------- ------------
$12.0625 - $15.0000 2,614 9.48 $13.4150 2,576 $ 13.4230
17.0000 - 17.0000 497,396 7.38 17.0000 300,998 17.0000
17.1875 - 18.3125 22,936 7.54 18.1680 20,437 18.1580
20.1250 - 20.1250 395,000 8.92 20.1250 136,685 20.1250
20.3750 - 25.8750 426,000 9.28 24.9049 26,000 22.4807
26.0000 - 26.7500 35,000 9.49 26.2142 15,000 26.0000
29.6250 - 29.6250 1,779,500 9.85 29.6250 0 0.0000
31.0000 - 31.0000 1,000 9.89 31.0000 0 0.0000
31.5000 - 31.5000 1,000 9.90 31.5000 0 0.0000
32.2500 - 32.2500 5,000 9.94 32.2500 0 0.0000
-------------- ---------------------------- -------------- ------------
12.0625 - 32.2500 3,165,446 9.25 $25.6915 501,696 $18.4333
============== ============================ ============== ============
Stock Purchase Plan
In 1995, the Company instituted a dividend reinvestment and stock purchase
plan for holders of the Company's stock. The plan permits shareholders to
automatically reinvest their cash dividends or invest limited amounts of cash
payments in newly issued shares or open market purchases of the Company's
common stock. At December 31, 1996 and 1995, there were 373,132 and 474,563
shares reserved for issuance under the dividend reinvestment and stock
purchase plan.
10. Transactions with Affiliates:
Predecessor
---------------
May 26, 1994 to Jan. 1, 1994 to
1996 1995 Dec. 31, 1994 May 25, 1994
-------- -------- --------------- ---------------
Management, design and construction fees and
interest income $9,176 $ 5,640 $1,809
Administrative salaries and expenses -- -- 469
Construction costs 8,352 11,108 $241 --
In 1995, the Company entered into an agreement to lease its corporate
offices from a joint venture in which the Company has an indirect interest.
It previously subleased corporate office space from another affiliate. Rental
expense related to these arrangements was $1.3 million, $0.3 million and $0.1
million for the years ended December 31, 1996 and 1995 and the period from
May 26, 1994 to December 31, 1994, respectively.
F-18
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
Future minimum rental payments at December 31, 1996 for the Company's
corporate offices are $1.3 million for 1997, $1.4 million for 1998 through
2001, and $1.0 million for 2002.
11. Minority Interests:
Minority Interest in Operating Partnership
Minority interest in the Operating Partnership relates to the portion
which is not owned by the Company and, at December 31, 1996, amounted to
11.5%.
In conjunction with the formation of the Company persons contributing
interests in properties to the Operating Partnership elected to receive
either common stock of the Company or interests in the Operating Partnership
("Units"). Each Unit may be redeemed for either one share of common stock or,
at the option of the Company, cash equal to the fair market value of a share
of common stock at the time of the redemption. When a unitholder redeems a
Unit for a share of common stock or cash, minority interest is reduced and
the Company's investment in the Operating Partnership is increased. At
December 31, 1996 and 1995, 6,273,928 and 3,788,549 units were outstanding,
respectively.
Minority Interest in Combined Partnerships
This amount presented in the financial statements of the Predecessor
represents the losses of the properties in excess of capital of owners, who
will continue to hold their respective economic interest in the combined
partnerships, and are capable of funding their share of future capital calls.
12. Commitments and Contingencies:
Pension Plan
The Company participates in a defined-benefit pension plan with some of
its affiliates. This plan covers substantially all full-time non-union
employees. The Company's portion of pension expense for the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994
was $0.2 million, $0.1 million, and $0.1 million, respectively. The
Predecessor's comparable allocated portion of pension expense amounted to
$0.1 million for the period January 1, 1994 to May 25, 1994.
401K Plan
The eligible employees of the Company participate in a contributory
savings plan with some of its affiliates. Under the plan, the Company may
match contributions made by eligible employees based on a percentage of the
employee's salary. The Company matches 25% of contributions up to 3% of such
employee's salary (up to $30,000). The matching amount may be changed from
time to time by the Board of Directors. Expenses under this Plan for 1995,
1994 and 1993 were not material.
Contingencies
The Company is subject to various legal proceedings and claims that arose
in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will
not have a material adverse effect on the financial position, results of
operations or liquidity of the Company.
Lease
The South Station property is subject to a ground lease expiring in 2024.
The lease provides for two 15-year extension options. Under certain
conditions, the lessor reserves the right to terminate the lease at the end
of the initial term or at the end of the first extension period and pay the
lessee an amount based on a formula payment
F-19
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
of fair value. The minimum rents in connection with the lease are
substantially based on percentage rent until 1997. The Company is obligated
to provide loans to the lessor under certain conditions subject to a maximum
of $0.9 million. As of December 31, 1996, no such loans were outstanding.
Environmental
A former tenant of Crosby Corporate Center has agreed to perform the
necessary investigation and cleanup actions regarding remediation of possible
contamination, bear all costs associated with such cleanup activities and
indemnify the Company for any costs or damages it incurs in connection with
such contamination. As the owner of the property, however, the Company could
be held liable for the costs of such activities if the former tenant fails to
undertake such actions.
As a lessee of certain property, the Company has received an indemnity
from the owner to the extent the Company is assessed costs relating to
environmental cleanup.
Site assessments at the New England Executive Park have identified
contamination in the groundwater at a monitoring well which flows into an
aquifer, which supplies drinking water to the Town of Burlington. The Town of
Burlington has allocated funds for, and is in the process of constructing, a
groundwater treatment facility at its drinking water supply that draws from
the subject aquifer. The Company has been advised that such treatment
facility has the capacity to treat any contaminants which may be derived from
the groundwater passing beneath the New England Executive Park.
Based on site assessments performed at The Riverview Building which have
identified the presence of oil that slightly exceeds the concentration that
requires reporting to the Massachusetts Department of Environmental
Protection, an environmental consultant has advised the Company that
applicable regulatory requirements can be satisfied without the need to
perform any remediation at the property.
In connection with the acquisition of the John Marshall land, the sellers
have reported the findings of contamination to the Virginia Department of
Environmental Quality and have retained an environmental consultant to
prepare a remediation plan. Units valued at approximately $1.0 million were
escrowed from the purchase price to be released to the seller upon
performance of remediation pursuant to a remediation plan approved by the
Company. The escrow further provides that the Company may receive some or all
of the remaining escrowed Units upon certain conditions.
The Company does not believe that any costs, if incurred, in connection
with these environmental matters would have a material adverse effect on the
financial position, results of operations, or liquidity of the Company.
Other
The Company guarantees the surety bonds of an affiliate in an amount up to
$5.0 million.
The Company has an obligation to pay $17.0 million in connection with the
acquisition of real estate upon the achievement of conditions regarding
occupancy or rental income levels.
In connection with certain real estate acquired with Operating Partnership
Units the Company has agreed to maintain certain aspects of the related
financing and not to dispose of the real estate for 10 years. If the Company
should choose to modify the financing or dispose of the real estate within this
time period it may be required to make payments to the sellers.
13. Segment Information:
The Predecessor operated principally in three segments: rental operations,
property management, and construction. Revenues for the management segment
include management revenues earned from the rental operations segment which
are subsequently eliminated in consolidation.
Income (loss) from operations consists of total revenues less total
expenses excluding the effects of the following items: equity in net income
(loss) of joint ventures, minority interest in loss of combined partnerships
and extraordinary gain.
F-20
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
Rental Management Construction Elimination Total
---------------------- --------------- -------------- ----------
January 1, 1994--May 25, 1994
Revenues $ 7,610 $1,766 $24,238 $(364) $33,250
Income (Loss) from Operations (1,848) 1,260 102 (36) (522)
Identifiable Assets 63,335 283 14,141 (289) 77,470
Depreciation and Amortization 2,383 2 91 -- 2,476
Capital Expenditures 837 -- 141 -- 978
14. Future Minimum Rents:
Future minimum rentals to be received under noncancelable tenant leases in
effect at December 31, 1996 are as follows:
1997 $ 188,032
1998 175,732
1999 170,086
2000 143,288
2001 113,718
Thereafter 370,698
----------
Total $1,161,554
==========
15. Geographic Concentration:
The Company owns properties with a total cost at December 31, 1996 as
follows:
Downtown Boston $ 284,574
Suburban Boston 279,987
Suburban Atlanta 343,014
Suburban Philadelphia 59,018
Suburban Virginia 178,166
Suburban Los Angeles 133,307
Suburban San Francisco 184,207
Suburban Chicago 175,819
Downtown Washington 53,438
----------
Total $1,691,530
==========
F-21
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
16. Selected Quarterly Financial Information: (unaudited)
The following schedule is a summary of the quarterly results of operations
for the years ended December 31, 1996 and 1995 and the period May 26, 1994 to
December 31, 1994:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- -----------
Year Ended December 31, 1996
Revenue $33,668 $41,438 $46,602 $62,082 $183,791
Income from continuing operations 6,899 10,053 11,603 15,002 43,557
Discontinued operations--Construction Company:
Loss from operations (407) (663) (841) (698) (2,609)
Loss on sale -- -- -- (249) (249)
Extraordinary items, net of minority interest (1,726) (1,642) -- -- (3,368)
Net income 4,994 7,550 10,524 13,265 36,332
Net income per common share 0.23 0.28 0.34 0.34 1.21
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ----------
Year Ended December 31, 1995
Revenue $20,801 $22,124 $23,595 $24,523 $91,043
Income from continuing operations 3,498 4,620 5,510 5,329 18,957
Discontinued operations--Construction
Company:
Loss from operations -- -- (12) -- (12)
Net income 3,081 4,151 5,088 5,740 18,060
Net income per common share 0.25 0.26 0.29 0.28 1.09
Second Third Fourth
Period Quarter Quarter Total
-------- --------- --------- ----------
May 26, 1994--December 31, 1994
Revenue $3,997 $11,387 $16,549 $31,933
Income from continuing operations 784 1,578 3,557 5,919
Discontinued operations--Construction Company:
Income from operations 42 165 270 477
Net income 826 1,826 3,003 5,655
Net income per common share 0.07 0.15 0.26 0.48
17. Pro Forma Results: (unaudited)
The following unaudited pro forma operating results for the Company have
been prepared as if capital contributions and property acquisitions during
1995 and 1996 had occurred on January 1, 1995. Unaudited pro forma financial
information is presented for informational purposes only and may not be
indicative of what the actual results of operations of the Company would have
been had the events occurred as of January 1, 1995, nor does it purport to
represent the results of operations for future periods. Pro forma results
have not been presented for 1994 as the Company operations did not commence
until May 26, 1994.
F-22
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(dollars in thousands, except per share amounts)
December 31,
-----------------------
1996 1995
----------- -----------
Revenues $299,147 $266,882
Income before extraordinary items 74,845 69,894
Net income 71,416 69,894
Net income per common share 1.48 1.45
18. Discontinued Operations:
On December 31, 1996, certain assets of the Construction Company were
sold. These assets included fixed assets, general construction contracts in
progress, and the receivables and payables related to these contracts. All
employees were transferred to the buyer who is expected to complete all
outstanding construction work for projects not purchased as part of the sale.
19. Subsequent Events:
Declaration of Dividend
On January 28, 1997, the Company declared a quarterly dividend of $0.4625
per common share, payable on February 28, 1997 to shareholders of record on
February 10, 1997.
F-23
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
Beacon Properties Corporation:
Our report on the consolidated financial statements of Beacon Properties
Corporation is included on page F-1 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related
financial statement schedules listed in the Item 14(a) of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
January 28, 1997
F-24
Schedule III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(dollars in thousands)
Initial Cost
---------------------------
Buildings and
Description Encumbrances Land Improvements
- ----------- ------------ ----------- ---------------
Commercial Property:
Wellesley Office Park--Buildings 1-8--Wellesley, MA $ 55,000 $ 9,110 $ 75,829
Crosby Corporate Center--Bedford, MA --(1) 978 10,478
South Station--Boston, MA -- -- 21,487
175 Federal St.--Boston, MA 12,970 1,404 24,505
Center Plaza--Boston, MA 60,000 7,301 65,712
150 Federal St.--Boston, MA 56,920(2) 11,265 101,280
One Canal Park--Cambridge, MA --(1) 931 8,444
Ten Canal Park--Cambridge, MA --(1) 1,179 10,609
Two Oliver Street--Boston, MA --(1) 1,796 16,166
Westwood Business Centre--Westwood, MA --(1) 1,159 10,498
Russia Wharf--Boston, MA --(1) 1,442 12,974
Westlakes Office Park--Buildings 1, 2, 3 and 5--Berwyn,
PA --(1) 6,335 46,267
Perimeter Center--Atlanta, GA 218,000 46,438 292,305
AT&T Plaza--Oak Brook, IL --(1) 3,510 31,587
Tri-State International--Lincolnshire, IL --(1) 6,222 55,999
1333H Street, N.W.--Washington, D.C. --(1) 5,337 48,033
E.J. Randolph--McLean, VA 15,000 3,590 19,520
John Marshall I--McLean, VA 20,722 5,996 27,991
Northridge I--Herndon, VA 13,600 1,911 19,264
1300 North 17th Street--Rosslyn, VA --(1) 8,007 46,758
1616 North Fort Myer Drive--Rosslyn, VA --(1) 6,156 38,651
New England Executive Park--Burlington, MA --(1) 7,067 68,259
10960 Wilshire Boulevard--Westwood, CA -- 11,200 122,039
The Riverview Building--Cambridge, MA -- 4,513 40,616
Shoreline Technology Park--Mountain View, CA -- 39,547 101,444
Lake Marriott Business Park--Santa Clara, CA -- 12,032 31,128
Presidents Plaza--Chicago, IL -- 7,750 69,752
--------------- ----------- ---------------
$ 452,212 $212,176 $1,417,595
=============== =========== ===============
F-25
Schedule III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION--Continued
December 31, 1996
(dollars in thousands)
Cost Capitalized
Subsequent Gross Amount at Which
to Acquisition Carried at Close of Period
----------------------- -----------------------------------------
Buildings Buildings
and and
Description Land Improvements Land Improvements Total
- ----------- -------- -------------- ----------- --------------- ------------
Commercial Property:
Wellesley Office Park--Buildings 1-8--
Wellesley, MA -- $12,866 $ 9,110 $ 88,695 $ 97,805
Crosby Corporate Center--Bedford, MA $1,505 14,880 2,483 25,358 27,841
South Station--Boston, MA -- 861 -- 22,348 22,348
175 Federal St.--Boston, MA -- 3,196 1,404 27,701 29,105
Center Plaza--Boston, MA -- 8,810 7,301 74,522 81,823
150 Federal St.--Boston, MA -- 1,326 11,265 102,606 113,871
One Canal Park--Cambridge, MA -- 139 931 8,583 9,514
Ten Canal Park--Cambridge, MA -- 135 1,179 10,744 11,923
Two Oliver Street--Boston, MA -- 1,376 1,796 17,542 19,338
Westwood Business Centre--Westwood, MA -- 674 1,159 11,172 12,331
Russia Wharf--Boston, MA 177 3,496 1,619 16,470 18,089
Westlakes Office Park--Buildings 1, 2, 3
and 5--Berwyn, PA -- 6,416 6,335 52,683 59,018
Perimeter Center--Atlanta, GA -- 4,271 46,438 296,576 343,014
AT&T Plaza--Oak Brook, IL -- 18 3,510 31,605 35,115
Tri-State International--Lincolnshire, IL -- 950 6,222 56,949 63,171
1333H Street, N.W.--Washington, D.C. -- 68 5,337 48,101 53,438
E.J. Randolph--McLean, VA -- 36 3,590 19,556 23,146
John Marshall I--McLean, VA -- 147 5,996 28,138 34,134
Northridge I--Herndon, VA -- 41 1,911 19,305 21,216
1300 North 17th Street--Rosslyn, VA -- 11 8,007 46,769 54,776
1616 North Fort Myer Drive--Rosslyn, VA -- 87 6,156 38,738 44,894
New England Executive Park--Burlington, MA -- 64 7,067 68,323 75,390
10960 Wilshire Boulevard--Westwood, CA -- 68 11,200 122,107 133,307
The Riverview Building--Cambridge, MA -- 54 4,513 40,670 45,183
Shoreline Technology Park--Mountain View, CA -- 49 39,547 101,493 141,040
Lake Marriott Business Park--Santa Clara, CA -- 7 12,032 31,135 43,167
Presidents Plaza--Chicago, IL -- 31 7,750 69,783 77,533
--------- ------------- ----------- --------------- ------------
$1,682 $60,077 $213,858 $1,477,672 $1,691,530
========= ============= =========== =============== ============
F-26
Schedule III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION--Continued
December 31, 1996
(dollars in thousands)
Life on Which
Depreciation
in Latest
Date of Income
Accumulated Construction/ Date Statements
Description Depreciation Renovation Acquired is Computed
- ----------- --------------- --------------- --------------- ---------------
Commercial Property:
Wellesley Office Park--Buildings 1-8--
Wellesley, MA $33,913 1963-1984 1994/1995 (3)
Crosby Corporate Center--Bedford, MA 6,702 1981 5/26/94 (3)
South Station--Boston, MA 13,434 1988 5/26/94 (3)
175 Federal St.--Boston, MA 7,258 1977 10/28/94 (3)
Center Plaza--Boston, MA 5,884 1966-1969 12/01/94 (3)
150 Federal St.--Boston, MA 8,961 1988 5/26/94 (3)
One Canal Park--Cambridge, MA 770 1987 6/10/94 (3)
Ten Canal Park--Cambridge, MA 386 1987 12/20/95 (3)
Two Oliver Street--Boston, MA 783 1982-1988 10/06/95 (3)
Westwood Business Centre--Westwood, MA 1,083 1985 6/10/94 (3)
Russia Wharf--Boston, MA 1,453 1978-1982 8/10/94 (3)
Westlakes Office Park--Buildings 1, 2, 3
and 5--Berwyn, PA 3,931 1988-1990 7/95 & 10/94 (3)
Perimeter Center--Atlanta, GA 8,822 1970-1989 2/15/96 (3)
AT&T Plaza--Oak Brook, IL 395 1984 8/16/96 (3)
Tri-State International--Lincolnshire, IL 710 1986 8/16/96 (3)
1333H Street, N.W.--Washington, D.C. 601 1984 8/16/96 (3)
E.J. Randolph--McLean, VA 217 1983 9/05/96 (3)
John Marshall I--McLean, VA 306 1981 9/05/96 (3)
Northridge I--Herndon, VA 214 1988 9/05/96 (3)
1300 North 17th Street--Rosslyn, VA 325 1980 10/18/96 (3)
1616 North Fort Myer Drive--Rosslyn, VA 271 1974 10/18/96 (3)
New England Executive Park--Burlington, MA 291 1970-1985 11/15/96 (3)
10960 Wilshire Boulevard--Westwood, CA 439 1971-1992 11/21/96 (3)
The Riverview Building--Cambridge, MA 170 1985-1986 11/21/96 (3)
Shoreline Technology Park--Mountain View, CA 141 1985-1991 12/20/96 (3)
Lake Marriott Business Park--Santa Clara, CA 43 1981 12/20/96 (3)
Presidents Plaza--Chicago, IL 32 1980-1982 12/27/96 (3)
-------
$97,535
=======
(1) These properties are collateral for a Note Payable under the Credit
Facility. The outstanding balance under the Note at December 31, 1996 is
$153,000.
(2) This property is comprised of two Units. Unit A is collateral for a Note
Payable under the Credit Facility. Unit B is collateral for a Mortgage
Note Payable in the amount of $56,920.
(3) Buildings and improvements--19 to 40 years; Personal property--5 to 10
years; tenant improvements--over the terms of the related leases.
F-27
Schedule III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION--Continued
December 31, 1996
(dollars in thousands)
Depreciation of building and improvements and personal property is
calculated over the following estimated useful lives, using straight line and
declining balance methods:
Buildings and improvements--19 to 40 years
Tenant Improvements--over the terms of the related leases
Personal property--5 to 10 years
The aggregate cost for federal income tax purposes was approximately
$1,390.3 million at December 31, 1996.
The changes in total real estate assets for the years ended December 31,
1996 and 1995, the period May 26, 1994 to to December 31, 1994 and the period
January 1, 1994 to May 25, 1994 are as follows:
Company Predecessor
------------------------------------------ ---------------
May 26, 1994 Jan. 1, 1994
to to
1996 1995 Dec. 31, 1994 May 25, 1994
------------- ----------- ---------------- ---------------
Balance, beginning of period $ 471,142 $400,419 $207,013* $81,220
Acquisitions, Construction Costs and
Improvements 1,220,388 70,723 193,406 978
------------- ----------- ---------------- ---------------
Balance, end of period $1,691,530 $471,142 $ 400,419 $82,198
============= =========== ================ ===============
* Represents initial acquisition cost of properties in the formation of the
Company.
The changes in accumulated depreciation for the years ended December 31,
1996 and 1995, the period May 26, 1994 to to December 31, 1994 and the period
January 1, 1994 to May 25, 1994 are as follows:
Company Predecessor
------------------------------------- ---------------
May 26, 1994 Jan. 1, 1994
to to
1996 1995 Dec. 31, 1994 May 25, 1994
--------- --------- ---------------- ---------------
Balance, beginning of period $66,571 $51,115 $45,044** $37,167
Depreciation for period 30,964 15,456 6,071 2,055
--------- --------- ---------------- ---------------
Balance, end of period $97,535 $66,571 $ 51,115 $39,222
========= ========= ================ ===============
** Balance reflects prior accumulated depreciation carried over due to
accounting for formation acquisitions as poolings of interests.
F-28
Schedule IV
BEACON PROPERTIES CORPORATION
MORTGAGE LOANS ON REAL ESTATE
December 31, 1996
(dollars in thousands)
Principal
Amount of
Final Periodic Face Carrying Loans Subject to
Interest Maturity Payment Prior Amount of Amount of Delinquent Principal
Commercial Property Rate Date Term Liens Mortgages Mortgages (1) or Interest
- --------------------- --------- ------------------------- ------ ------------ -------------- ---------------------
Rowes Wharf
Boston, MA 8.71% 4/1/99 Interest-only -- $63,000 $51,491 --
(1) The aggregate cost of the Company's mortgage loans for federal income tax
purposes was $51,491 at December 31, 1996.
Reconciliation of Mortgage Loans on real estate for the year ended
December 31:
1996
----------
Balance at beginning of year $34,778
Additions during period:
Acquisition of mortgage loans 16,713
Deductions during period:
Principal collections --
----------
Balance at end of year $51,491
==========
F-29