- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ Commission file number 000-24905 BEACON CAPITAL PARTNERS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Maryland 04-3403281 - ------------------------------------------ ------------------------------------------ (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) One Federal Street, 26th Floor, Boston, Massachusetts 02110 - ------------------------------------------ ------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) 617-457-0400 - -------------------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Number of Common Shares outstanding at the latest practicable date, May 14, 1999: 20,973,932 shares, $.01 par value. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BEACON CAPITAL PARTNERS, INC. FORM 10-Q INDEX PAGE --------- Part I -- Financial Information Item 1. Consolidated Financial Statements..................................................... 1 Consolidated Balance Sheets--March 31, 1999 (Unaudited) and December 31, 1998....... 1 Consolidated Statements of Operations--Three Months Ended March 31, 1999 (Unaudited) and the period from January 21, 1998 (Inception) to March 31, 1998................ 2 Consolidated Statements of Cash Flows--Three Months Ended March 31, 1999 (Unaudited) and the period from January 21, 1998 (Inception) to March 31, 1998................ 3 Notes to Consolidated Financial Statements.......................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................ 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 13 Part II -- Other Information Item 1. Legal Proceedings..................................................................... 14 Item 2. Changes in Securities and Use of Proceeds............................................. 14 Item 3. Defaults Upon Senior Securities....................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders................................... 14 Item 5. Other Information..................................................................... 14 Item 6. Exhibits and Reports on Form 8-K...................................................... 14 PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements BEACON CAPITAL PARTNERS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) (NOTE 1) ASSETS Real Estate: Land................................................................................ $ 51,094 $ 51,094 Buildings, improvements and equipment............................................... 166,872 165,842 ----------- ------------ 217,966 216,936 Less accumulated depreciation....................................................... 3,256 2,168 ----------- ------------ 214,710 214,768 Deferred financing and leasing costs, net of accumulated amortization of $78 and $42, respectively........................................................................ 580 414 Cash and cash equivalents............................................................. 161,010 174,647 Restricted cash....................................................................... 328 697 Accounts receivable, net.............................................................. 1,629 2,464 Accrued rent receivable............................................................... 315 233 Other assets.......................................................................... 2,867 641 Investments in joint ventures and corporations........................................ 92,409 90,136 ----------- ------------ Total assets...................................................................... $ 473,848 $ 484,000 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable.............................................................. $ 21,476 $ 21,570 Accounts payable and accrued expenses............................................... 5,798 18,731 ----------- ------------ Total liabilities................................................................. 27,274 40,301 ----------- ------------ Commitments and contingencies......................................................... -- -- Minority interest in consolidated partnership......................................... 55,317 54,983 ----------- ------------ Stockholders' equity: Preferred stock; $.01 par value, 200,000,000 shares authorized, none issued or outstanding....................................................................... -- -- Excess stock; $.01 par value, 250,000,000 shares authorized, none issued or outstanding....................................................................... -- -- Common stock; $.01 par value, 500,000,000 shares authorized, 20,973,932 shares issued and outstanding............................................................ 210 210 Additional paid-in capital.......................................................... 389,520 389,520 Cumulative net income............................................................... 11,595 9,054 Cumulative dividends................................................................ (10,068) (10,068) ----------- ------------ Total stockholders' equity........................................................ 391,257 388,716 ----------- ------------ Total liabilities and stockholders' equity........................................ $ 473,848 $ 484,000 ----------- ------------ ----------- ------------ SEE ACCOMPANYING NOTES. 1 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) THREE MONTHS ENDED FOR THE PERIOD MARCH 31, 1999 FROM ------------------- JANUARY 21, 1998 (UNAUDITED) (INCEPTION) TO MARCH 31, 1998 --------------- (NOTE 1) Revenues: Rental income............................................................ $ 5,162 $ -- Reimbursement of operating expenses and real estate taxes................ 802 -- Equity in earnings of joint venture...................................... 1,254 -- Interest income.......................................................... 1,986 576 Other income............................................................. 241 8 ------- ------- Total revenues......................................................... 9,445 584 ------- ------- Expenses: Property operating....................................................... 1,359 -- Real estate taxes........................................................ 1,063 -- General and administrative............................................... 2,582 968 Interest expense......................................................... 442 -- Depreciation and amortization............................................ 1,124 3 ------- ------- Total expenses......................................................... 6,570 971 ------- ------- Income (loss) before minority interest..................................... 2,875 (387) Minority interest in consolidated partnership.............................. (334) -- ------- ------- Net income (loss)...................................................... $ 2,541 $ (387) ------- ------- ------- ------- Income (loss) per common share--basic and diluted.......................... $ 0.12 $ (0.02) ------- ------- ------- ------- Weighted average number of common shares outstanding (in thousands)........ 20,974 17,361 ------- ------- ------- ------- SEE ACCOMPANYING NOTES. 2 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) THREE MONTHS ENDED FOR THE PERIOD MARCH 31, 1999 FROM ------------------- JANUARY 21, 1998 (UNAUDITED) (INCEPTION) TO MARCH 31, 1998 --------------- (NOTE 1) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................................ $ 2,541 $ (387) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation........................................................... 1,088 3 Amortization........................................................... 36 -- Equity in earnings of joint venture.................................... (1,254) -- Minority interest in consolidated partnership.......................... 334 -- Increase (decrease) in cash arising from changes in operating assets and liabilities: Restricted cash........................................................ 369 -- Accounts receivable.................................................... 835 -- Accrued rent receivable................................................ (82) -- Other assets........................................................... (1,128) (617) Accounts payable and accrued expenses.................................. (1,544) 1,387 -------- --------------- Net cash provided by operating activities............................ 1,195 386 -------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Real estate asset acquisitions and improvements.......................... (1,030) (44) Payment of deferred leasing costs........................................ (202) -- Acquisition deposits and deferred costs.................................. (1,098) (3,119) Investments in joint ventures and corporations........................... (1,019) -- -------- --------------- Net cash used in investing activities................................ (3,349) (3,163) -------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments on mortgage notes............................................. (94) -- Proceeds from loans payable--affiliate................................... -- 3,560 Sale of common stock..................................................... -- 345,800 Offering costs........................................................... -- (22,690) Distribution payment to minority interests............................... (1,321) -- Dividend payment to stockholders......................................... (10,068) -- -------- --------------- Net cash (used in) provided by financing activities.................. (11,483) 326,670 -------- --------------- Net (decrease) increase in cash and cash equivalents..................... (13,637) 323,893 Cash and cash equivalents, beginning of period........................... 174,647 -- -------- --------------- Cash and cash equivalents, end of period................................. $ 161,010 $ 323,893 -------- --------------- -------- --------------- SEE ACCOMPANYING NOTES. 3 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (DOLLARS IN THOUSANDS) (UNAUDITED) 1. BASIS OF PRESENTATION The financial statements of Beacon Capital Partners, Inc. ("BCP") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The balance sheet at December 31, 1998 and the statements of operations and cash flows for the period from January 21, 1998 (inception) to March 31, 1998 have been derived from the audited financial statements at that date or for that period but do not include all of the informtion and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in BCP's annual report on Form 10-K for the period ended December 31, 1998. 2. ORGANIZATION Beacon Capital Partners, Inc. was incorporated on January 21, 1998 as a Massachusetts corporation (the "Formation"), and was initially capitalized through loans from the two founders of BCP, Messrs. Leventhal and Fortin. The loans were repaid in May 1998. BCP intends to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. BCP was established to conduct real estate investment and development activities and currently operates in one segment. On March 17, 1998, BCP was reincorporated as a Maryland corporation and on March 20, 1998 it completed an initial private offering (the "Original Offering") in accordance with Section 4(2) of the Securities Act. BCP initially issued 17,360,769 common shares with proceeds, net of expenses, of $323,110. In April, 1998, 3,613,163 additional shares were issued through the exercise of the underwriter's over-allotment, with proceeds, net of expenses, of $66,620. In connection with the reincorporation of BCP in Maryland, BCP established Beacon Capital Partners, L.P. (the "Operating Partnership"). BCP and the Operating Partnership are collectively referred to as the "Company". The Operating Partnership is a Delaware limited partnership. BCP is the sole general partner of, and, as of March 31, 1999, holds approximately 88% of the economic interest in the Operating Partnership. BCP holds an approximate 1% general partnership interest in the Operating Partnership and the balance is held as a limited partnership interest. The limited partnership interests not held by BCP are presented as minority interest in the accompanying consolidated financial statements. The term of the Operating Partnership commenced on March 16, 1998 and shall continue until January 1, 2056 or until such time as a Liquidating Event, as defined, has occurred. 3. INVESTMENTS IN JOINT VENTURES AND CORPORATIONS The investments in joint ventures and corporations represents the Company's interest in (i) a joint venture known as "Beacon/PW Kendall LLC", (ii) a joint venture with Mathilda Partners LLC ("Mathilda 4 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) 3. INVESTMENTS IN JOINT VENTURES AND CORPORATIONS (CONTINUED) Research Centre"), (iii) a joint venture with HA L.L.C. ("Millennium Tower"), and (iv) an investment in preferred stock of Cypress Communications, Inc. ("Cypress"). A reconciliation of the underlying net assets to the Company's carrying value of investments in joint ventures and corporations is as follows: MATHILDA CYPRESS BEACON/PW RESEARCH MILLENNIUM COMMUNICATIONS, KENDALL LLC CENTRE TOWER INC. TOTAL ----------- --------- ----------- ----------------- --------- BCP, L.P. equity interest (including accumulated earnings, net of distributions)............ $ 65,045 $ 17,383 $ 4,667 $ 87,095 Investments in preferred stock..................... $ 5,000 5,000 Other costs................. 41 61 153 59 314 ----------- --------- ----------- ------ --------- Carrying value of investments in joint ventures and corporations.............. $ 65,086 $ 17,444 $ 4,820 $ 5,059 $ 92,409 ----------- --------- ----------- ------ --------- ----------- --------- ----------- ------ --------- THE ATHENAEUM PORTFOLIO Beacon/PW Kendall LLC was formed on April 16, 1998 and is jointly owned by the Company and PW Acquisitions IX, LLC, an affiliate of PaineWebber. Initially each member made a $5,000 contribution and the Company provided a loan to the joint venture of approximately $117,000. The joint venture acquired The Athenaeum Portfolio, an eleven building, 970,000 square foot mixed-use portfolio located in Cambridge, Massachusetts. In August 1998, the Company and PW Acquisitions IX, LLC each made equity contributions of approximately $58,500, which were used to repay the Company's loan receivable. MATHILDA RESEARCH CENTRE On August 9, 1998, the Company entered into a joint venture with Mathilda Partners LLC, an affiliate of Menlo Equities, a California based developer, to develop two four-story Class A office/R&D buildings with surface parking, known as Mathilda Research Centre. The Company and Mathilda Partners LLC have agreed to fund 87.5% and 12.5% of the equity required, respectively. On November 4, 1998, the venture acquired a twelve-acre site on Mathilda Avenue in Sunnyvale, California, on which the venture plans to construct Mathilda Research Centre. The estimated cost of the 267,000 square foot development is approximately $57,000. In addition to funding approximately 35% of the development costs (including the acquisition of the land) from cash contributions, the venture intends to finance the balance with a construction loan from an institutional lender. 5 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) 3. INVESTMENTS IN JOINT VENTURES AND CORPORATIONS (CONTINUED) MILLENNIUM TOWER On September 1, 1998, the Company entered into a joint venture agreement with HA L.L.C., an affiliate of Martin Smith Real Estate Services, to develop a high-rise building in downtown Seattle, Washington, known as Millennium Tower. The Company and HA L.L.C. have agreed to fund 66 2/3% and 33 1/3% of the equity required, respectively. Land has been contributed to the joint venture by HA L.L.C. at an agreed value of $10,500, and the Company has agreed to fund the first $19,000 of cash requirements for the venture. The venture intends to finance the balance of development costs from a construction loan with an institutional lender. The estimated cost of the project is $71,000, including the value of the land. CYPRESS COMMUNICATIONS, INC. On September 30, 1998, the Company invested $5,000 to acquire preferred stock in Cypress Communications, Inc., representing a 13.5% fully diluted ownership position in such company. Dividends will be earned on the Company's investment as and when dividends are declared on the preferred stock or any other class of stock in Cypress Communications, Inc. The preferred stock will be treated preferentially upon a liquidation of Cypress, should a liquidation occur, and is held by both the Operating Partnership and Tenant Communications, Inc., a Massachusetts corporation ("Tenant Communications"). The voting common stock of Tenant Communications is controlled by Messrs. Leventhal and Fortin. The Operating Partnership owns 99% of the economic interests in Tenant Communications. 4. MORTGAGE NOTES PAYABLE The mortgage notes payable, collateralized by certain properties and assignment of leases total $21,476. The mortgage notes payable have fixed interest rates ranging from 7.75% to 9.25% and maturities ranging from December 1999 to October 2022. The net book value of the mortgaged assets is $60,752 at March 31, 1999. Cash paid for interest approximates $443 for the three months ended March 31, 1999. Future minimum principal payments due during the next five years and thereafter are as follows: 1999............................................... $ 1,809 2000............................................... 392 2001............................................... 426 2002............................................... 1,839 2003............................................... 440 Thereafter......................................... 16,570 --------- Total.............................................. $ 21,476 --------- --------- 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "believe", "expect", "anticipate", "intend", "estimate" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include the following: real estate investment considerations, such as the effect of economic and other conditions in the market area on cash flows and values; the ability to obtain third party shareholder approval for investment transactions; the need to renew leases or relet space upon the expiration of current leases, and the ability of a property to generate revenue sufficient to meet debt service payments and other operating expenses; risks associated with borrowing, such as the possibility that we will not have sufficient funds available to make principal payments on outstanding debt and outstanding debt may be refinanced at higher interest rates or otherwise on terms less favorable to the Company; the impact of pending or future litigation; variations in quarterly operating results; the risk that we and our third party property managers, tenants or vendors may experience unanticipated delays or expenses in achieving Year 2000 compliance; securities held for investment are subject to fluctuations in valuation based upon the performance of the underlying business and those risks and uncertainties contained elsewhere in this report and under the heading "Risk Factors" of our Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on June 16, 1998, as subsequently amended. The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the accompanying financial statements and notes thereto. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND THE PERIOD FROM JANUARY 21, 1998 (INCEPTION) TO MARCH 31, 1998. Our total revenues increased $8.8 million to $9.4 million for the three months ended March 31, 1999 as compared to $.6 million for the period January 21, 1998 (Inception) to March 31, 1998. The increase was due to Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio acquisitions rental income and reimbursement of operating expenses and real estate taxes of $5.2 million and $.8 million, respectively, The Athenaeum Portfolio equity earnings of $1.2 million, interest income of $1.4 million and other income of $.2 million. Revenues for The Athenaeum Portfolio were $7.7 million and expenses were $5.2 million for the quarter ended March 31, 1999. We recognize 50% of its net earnings. Interest income for the quarter ended March 31, 1999 increased $1.4 million over the period ending March 31, 1998, primarily the result of cash on hand being held for the full quarter in 1999 versus only a portion of the same period in 1998, due to the receipt of offering proceeds in March 1998. Our total expenses increased $5.6 million to $6.6 million for the three months ended March 31, 1999 as compared to $1 million for the period January 21, 1998 (Inception) to March 31, 1998. The increase was due to Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio acquisitions property operating expenses, real estate taxes and interest expense of $1.4 million, $1.1 million and $.4 million, respectively, additional general and administrative expenses of $1.6 million and depreciation and amortization expenses of $1.1 million. The minority interest in consolidated partnership represents the portion of the Operating Partnership that is not owned by the Company. 7 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $161 million at March 31, 1999 as compared to $174.6 million at December 31, 1998. The decrease of $13.6 million was primarily the result of the payment of (i) the January 1999 dividend to stockholders and distribution to minority partners, (ii) Fort Point Place (a property currently under agreement, see "Investing Activities") deposit and acquisition costs, (iii) Technology Square redevelopment costs and (iv) investments in Mathilda Research Centre and Millennium Tower, all offset by cash flow from operations. SHORT AND LONG-TERM LIQUIDITY We have considered our short-term (up to 12 months) liquidity needs and the adequacy of expected liquidity sources to meet these needs. We believe that our principal short-term operating liquidity needs are to fund normal recurring expenses, debt service requirements and the minimum distribution required to maintain the Company's REIT qualification under the Internal Revenue Code of 1986, as amended. We believe that these needs will be funded from cash flows provided by operating activities. We believe our short-term investment liquidity needs are to fund current real estate investments, developments and redevelopments, as well as securities held for investment. We expect to fund these needs from cash on hand and through mortgages and other debt instruments. We expect to meet long-term (greater than 12 months) liquidity requirements for the costs of additional development, real estate and real estate related investments, scheduled debt maturities, major renovations, expansions and other non-recurring capital improvements through secured and unsecured indebtedness, joint ventures, the issuance of additional Operating Partnership units and equity securities and from current cash balances. FINANCING ACTIVITIES Millennium Tower, L.L.C., the joint venture formed to develop Millennium Tower, has secured a construction loan commitment in the amount of $45 million for the project development. INVESTING ACTIVITIES On August 9, 1998, we entered into a joint venture agreement with Mathilda Partners LLC, an affiliate of Menlo Equities (a California based developer). The venture plans to develop Mathilda Research Centre, two four-story Class A office/R&D buildings with surface parking in Sunnyvale, California. We agreed to fund $19.8 million of the development and, as of March 31, 1999, we invested approximately $17.4 million using proceeds from the Original Offering. On September 1, 1998 we entered into a joint venture agreement with HA L.L.C., an affiliate of Martin Smith Real Estate Services (a Seattle based real estate developer). The joint venture plans to develop Millennium Tower, a 19-story office and residential tower, in downtown Seattle, Washington. We agreed to fund $19 million of the development and, as of March 31, 1999, we invested approximately $4.8 million in the project using proceeds from the Original Offering. Effective as of February 28, 1999, the Company, along with Apollo Real Estate Advisors, L.P., Apollo Management, L.P., Thomas H. Lee Company and Strategic Real Estate Investments I, LLC (collectively, the "Investor Group"), entered into a Securities Purchase Agreement with Patriot American Hospitality, Inc. and Wyndham International, Inc. (collectively, "Wyndham") whereby the Investor Group agreed to invest up to $1 billion in Wyndham in exchange for preferred stock. Our commitment represents approximately 15% of the total commitment or a maximum of $150 million, which amount may be reduced to approximately $100 million following a rights offering to current Wyndham shareholders. The transaction, which requires the approval of Wyndham's shareholders, is expected to close in June, 1999. Wyndham may also accept an offer from a competing bidder and, if so, will be obligated to pay the Investor Group a 8 "break-up fee" ranging from $30 million to $50 million. In addition, the Investor Group is to be paid a commitment fee in the amount of $21 million, our portion of which may be taken by us as a reduction in our investment. On March 8, 1999, we entered into an agreement to purchase Fort Point Place, a four-building, 335,000 square foot office and warehouse property located in the Boston, Massachusetts Seaport District for $24.3 million. Title to the property will be held by us or one of our affiliates. CAPITALIZATION As of March 31, 1999, our total consolidated mortgage debt was approximately $21.5 million, and our total consolidated mortgage debt plus our proportionate share of total unconsolidated mortgage debt was approximately $55.8 million. Our current consolidated mortgage indebtedness has a weighted average rate of 8.2%, with maturities ranging from 1999 through 2022, and is secured by some of our properties. Our proportionate share of the current total unconsolidated mortgage debt on The Athenaeum Portfolio (in which we hold a 50% interest in the limited liability company that controls the two limited liability companies that hold title to this portfolio) is approximately $34.3 million with a rate of 8.485%. It has a stated maturity of 2027 and may be prepaid any time after January 2007. Prior to January, 2007 but after April, 1999, all or a portion of the loan may be defeased. In the event the loan is not paid in full in 2007, the interest rate changes to the greater of 13.485% or 5% over the applicable 20-year Treasury Rate. Assuming The Anthenaeum Portfolio loan has a 2007 maturity, our total consolidated and unconsolidated fixed rate mortgage debt has a weighted average rate of 8.4%. The following table, which includes both consolidated and unconsolidated mortgage debt, summarizes the scheduled amortization of principal and maturities of mortgage loans outstanding. SCHEDULED AMORTIZATION MATURITIES TOTAL ------------- ------------- ------------- (DOLLARS IN THOUSANDS) April 1, 1999 -- December 31, 1999................................... $ 482 $ 1,516 $ 1,998 2000................................................................. 669 -- 669 2001................................................................. 736 -- 736 2002................................................................. 751 1,426 2,177 2003................................................................. 808 -- 808 Thereafter........................................................... 6,261 43,155 49,416 ------------- ------------- ------------- Total............................................................ $ 9,707 $ 46,097 $ 55,804 ------------- ------------- ------------- ------------- ------------- ------------- FUNDS FROM OPERATIONS We believe that to facilitate a clear understanding of the operating results of the Company, Funds from Operations ("FFO") should be examined in conjunction with net income. The definition of FFO was clarified in the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") White Paper, adopted by the NAREIT Board of Governors in March 1995, as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. FFO should not be considered as a substitute 9 for net income, as an indication of the Company's performance, as a substitute for cash flow or as a measure of our liquidity. The following table presents the calculations of FFO: FOR THE PERIOD FROM THREE JANUARY 21, 1998 MONTHS ENDED (INCEPTION) MARCH 31, 1999 TO MARCH 31, 1998 -------------- ------------------- (UNAUDITED, DOLLARS IN THOUSANDS) Income (loss) before extraordinary items and before minority interest in consolidated partnership................................................... $ 2,875 $ (387) Add real estate related depreciation and amortization: Consolidated entities...................................................... 1,087 -- Joint venture entities..................................................... 512 -- ------- ------- Funds from operations before minority interest............................... 4,474 (387) Company share of consolidated partnership.................................... 88.40% 100% ------- ------- Company funds from operations................................................ $ 3,955 $ (387) ------- ------- ------- ------- Weighted average number of common shares outstanding (in thousands).......... 20,974 17,361 ------- ------- ------- ------- 10 PROPERTY INFORMATION The following chart sets forth the occupancy rate, expressed as a percentage, the average annual Base Rent (as defined below) and the average Net Effective Rent (as defined below) per square foot for each of our properties as of March 31, 1999. Base Rent is gross rent excluding payments by tenants on account of real estate tax and operating expense escalation charges. Net Effective Rent is Base Rent adjusted on a straight-line basis for contractual rent step-ups and free rent periods, plus tenant payments on account of real estate tax and operating expense escalation charges, less total operating expenses and real estate taxes. AVERAGE AVERAGE % BASE NET EFF PROPERTY TOTAL AREA LEASED RENT RENT - ------------------------------------------------------------------- ---------- ----------- --------- --------- CAMBRIDGE, MA: 215 First Street(1)................................................ 306,084 99% $ 20.11 $ 15.02 One Kendall Square Cinema(1)....................................... 31,641 100% 18.29 13.48 Buildings 100--500(1).............................................. 222,372 100% 25.94 19.50 Buildings 600/650/700(1)........................................... 236,661 97% 33.90 24.95 Buildings 1500 & 1700(1)........................................... 39,707 90% 16.07 11.56 Building 1400(1)................................................... 133,211 100% 27.23 19.68 ---------- --- --------- --------- Subtotal / Weighted Average.................................... 969,676 99% 25.57 18.93 ---------- --- --------- --------- 545 Technology Square (NNN)........................................ 144,123 100% 13.35 13.35 549 Technology Square.............................................. 40,377 35% 14.29 14.29 565 Technology Square.............................................. 201,816 30% 6.30 3.95 575 Technology Square.............................................. 165,208 69% 7.23 4.14 The Draper Building (NNN)(1)....................................... 474,817 100% 6.16 6.16 ---------- --- --------- --------- Subtotal / Weighted Average.................................... 1,026,341 79% 7.74 7.13 ---------- --- --------- --------- Subtotal / Weighted Average Cambridge, MA...................... 1,996,017 88% 17.40 13.52 ---------- --- --------- --------- SUBURBAN DALLAS, TX: OFFICE Bank One LBJ....................................................... 42,000 73% 13.53 7.53 Brandywine Place................................................... 66,237 99% 11.46 9.62 Crosspoint Atrium.................................................. 220,212 96% 13.03 7.17 Forest Abrams Place................................................ 68,827 89% 12.39 6.86 6500 Greenville Avenue............................................. 114,600 91% 13.15 7.30 Northcreek Place II................................................ 163,303 93% 14.73 8.58 One Glen Lakes..................................................... 166,272 93% 15.89 10.05 ---------- --- --------- --------- Subtotal / Weighted Average.................................... 841,451 92% 13.78 8.23 ---------- --- --------- --------- R&D / INDUSTRIAL Park North Business Center......................................... 36,885 88% 5.72 4.81 Plaza at Walnut Hill............................................... 88,280 95% 7.34 4.63 Richardson Business Center......................................... 66,300 100% 4.42 4.27 Richardson Commerce Centre......................................... 60,517 100% 6.90 5.57 Sherman Tech....................................................... 16,176 100% 7.05 4.96 T I Business Park.................................................. 96,902 85% 6.16 5.17 Venture Drive Tech Center.......................................... 128,322 100% 4.80 3.62 ---------- --- --------- --------- Subtotal / Weighted Average.................................... 493,382 95% 5.85 4.54 ---------- --- --------- --------- Subtotal / Weighted Average Suburban Dallas, TX................ 1,334,833 93% 10.80 6.84 ---------- --- --------- --------- Total / Weighted Average Properties............................ 3,330,850 90% $ 14.67 $ 10.76 ---------- --- --------- --------- ---------- --- --------- --------- (1) Currently being offered for sale, see "Recent Developments." 11 The following table sets forth Lease Expirations (in square feet) for the portfolio of properties that we owned or had an interest in as of March 31, 1999. SQUARE % OF SQUARE ANNUAL % ANNUAL # OF FEET (1) FEET (2) RENT (3) RENT (4) TENANTS (5) ---------- --------------- ----------- ---------- ------------- (DOLLARS IN THOUSANDS) April 1, 1999 -- December 31, 1999............... 593,778 17.8% $ 8,726 17.7% 90 2000............................................. 448,275 13.5% 6,608 13.4% 92 2001............................................. 314,131 9.4% 4,767 9.6% 76 2002............................................. 312,020 9.4% 5,944 12.0% 59 2003............................................. 439,663 13.2% 7,838 15.9% 51 Thereafter....................................... 906,470 27.2% 15,481 31.4% 44 ---------- --- ----------- ---------- --- Total........................................ 3,014,337 90.5% $ 49,364 100.0% 412 ---------- --- ----------- ---------- --- ---------- --- ----------- ---------- --- - ------------------------ (1) Total area in square feet covered by such leases. (2) Percentage of total square feet of company portfolio. (3) Annualized expiring base rental income represented by such leases in the year of expiration plus the current tenant payments on account of operating expense and real estate tax escalation charges. (4) Calculated as annual rent divided by the total annual rent. (5) The number of tenants whose leases will expire. RECENT DEVELOPMENTS We are planning to establish a new investment fund and raise $250 million under the name Beacon Capital Strategic Partners, L.P. Beacon Capital Partners, L.P. plans to invest $50 million in the fund. In April of 1999, we announced that we have offered for sale a portfolio of properties located in Cambridge, Massachusetts. See "Property Information." The portfolio, known as The Cambridge Technology Portfolio, consists of the entire Athenaeum Portfolio and The Draper Building. The offering price is approximately $286 million. YEAR 2000 READINESS DISCLOSURE The Year 2000 compliance issue concerns the inability of computer systems to accurately calculate, store or use a date after 1999. The inability of a computer to properly process dates after 1999 could result in system failures or miscalculations. Such failures in our computers could lead to disruptions in our activities and operations. If we fail, or our significant tenants or vendors fail, to make necessary modifications and conversions on a timely basis to remedy these problems, the Year 2000 issue could have a material adverse effect on the Company and its results of operations or financial position. We believe that our competitors face similar risks in regard to Year 2000. We are managing our Year 2000 initiative to minimize any adverse effect on our business operations. We have established a Year 2000 committee to address Year 2000 concerns. The Year 2000 committee has implemented a Year 2000 initiative with the following phases: (i) introducing Year 2000 awareness; (ii) identifying our systems with potential Year 2000 issues; (iii) assessing and budgeting Year 2000 compliance costs; (iv) remediation; (v) testing; (vi) contacting material third parties to assess their Year 2000 compliance; and (vii) developing a contingency plan in case our Year 2000 initiative is not successful. We have completed phases (i), (ii) and (iii) of our Year 2000 initiative. We have reviewed our corporate computer operations that consist of recent releases of network systems, accounting, property management and desktop applications. All such systems were installed in 1998. We have contacted the 12 vendors for these systems for assurance that the systems are Year 2000 compliant. We have begun working on phase (iv) and have identified some minor Year 2000 issues that require remediation. Currently, we are awaiting the software updates from application vendors. All corporate and property financial records are maintained on our corporate accounting system which is Year 2000 compliant. We anticipate that all of our corporate software and hardware systems will be Year 2000 compliant by the end of June, 1999 and will be ready for the testing phase (v). We have not incurred any material costs to address our Year 2000 compliance issue. We do not currently expect that the costs incurred in connection with the initiative will have a material adverse impact on our results of operations or financial position. We have also been working extensively on phase (vi) of our Year 2000 initiative. Included in the contractual obligations of the third party managers who operate our properties is an undertaking to work with us on our Year 2000 initiative. Our Year 2000 committee has regular communications with our third party managers to determine their Year 2000 compliance status. From this ongoing process, based upon information received to date, we currently believe that our third party managers have taken appropriate steps in regards to Year 2000 compliance with respect to the building systems and the systems of the properties' tenants and vendors. We have the right to approve all lease agreements and have reviewed our standard lease form to address Year 2000 compliance issues. The inability of the Company, or our tenants or vendors, to be Year 2000 compliant could lead to declining occupancy rates, higher operating expenses and other adverse effects which are not quantifiable at this time. The failure of any of these parties to be Year 2000 compliant could have a material adverse effect on our results of operations or financial position. We are currently evaluating the need to have a contingency plan in place in the event we, or our third party property managers, tenants or vendors, do not successfully address Year 2000 compliance issues. We expect to complete our Year 2000 initiative by the end of the third quarter of 1999, including the development of a contingency plan, if needed. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by management as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. The effect of interest rate fluctuations historically has been small relative to other factors affecting operating results, such as rental rates and occupancy. The following table summarizes our debt obligations outstanding as of March 31, 1999. This information should be read in conjunction with Note 4 to the consolidated financial statements. EXPECTED MATURITY DATE 4/1/99- 12/31/99 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE ----------- --------- --------- --------- --------- ----------- --------- ----------- (DOLLARS IN THOUSANDS) Liabilities Long-Term Debt: Fixed Rate........................ $ 1,809 $ 392 $ 426 $ 1,839 $ 440 $ 16,570 $ 21,476 $ 21,476 Weighted Average Interest Rate.... 8.2% 8.2% 8.2% 8.1% 8.1% 8.6% 8.2% 13 BEACON CAPITAL PARTNERS, INC. PART II -- OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) 3.1 Articles of Incorporation.(1) 3.2 Certificate of Correction to Articles of Incorporation.(1) 3.3 Amended and Restated By-laws.(1) 3.4 Agreement of Limited Partnership of Beacon Capital Partners, L.P.(2) 3.5 First Amendment to Agreement of Limited Partnership.(2) 10.1 Employment and Non-Competition Agreement for Alan M. Leventhal.(1) 10.2 Employment and Non-Competition Agreement for Lionel P. Fortin.(1) 10.3 Beacon Capital Partners 1998 Stock Option and Incentive Plan.(1) 10.4 Form of Indemnification Agreement between the Registrant and its directors and executive officers.(1) 10.5 Purchase and Sale Contract between Eastern Properties Master LLC and the Registrant.(1) 10.6 Contract of Sale for Bank One Building.(2) 10.7 Contract of Sale for 6500 Greenville Building.(2) 10.8 Contract of Sale for North Creek II Building.(2) 10.9 Contract of Sale for One Glen Lakes Building.(2) 10.10 Contract of Sale for Crosspoint Atrium Building.(2) 10.11 Contract of Sale for Brandywine Place Building.(2) 10.12 Contract of Sale for Forest Abrams Building.(2) 10.13 Contract of Sale for Sherman Tech Building.(2) 10.14 Contract of Sale for Venture Tech Building.(2) 10.15 Contract of Sale for Plaza at Walnut Building.(2) 10.16 Contract of Sale for Richardson BC Building.(2) 10.17 Contract of Sale for Park North SC Building.(2) 10.18 Contract of Sale for TI Business Center.(2) 10.19 Contract of Sale for Richardson CC Building.(2) 10.20 Contribution Agreement by and between Luddite Associates and Beacon Capital Partners, L.P. 27. Financial Data Schedule. (b) None. 14 - ------------------------ (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-11 (SEC File No. 333-56937) filed with the Commission on June 16, 1998. (2) Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the Company's Registration Statement on Form S-11 (SEC File No. 333-56937) filed with the Commission on August 21, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BEACON CAPITAL PARTNERS, INC. /s/ RANDY J. PARKER ------------------------------------------ Randy J. Parker Chief Financial Officer (Authorized Officer and May 14, 1999 Principal Accounting Officer) 15