-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ofsk0t3jaSUkgLJvlqS2mTnnVCnCUjbtf4HJAs2g2IysWb7sz6n3x0tu1R2QQCqu DzqYlYWsPt8Tuol1mBCCyg== 0001047469-98-045226.txt : 19981230 0001047469-98-045226.hdr.sgml : 19981230 ACCESSION NUMBER: 0001047469-98-045226 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEACON CAPITAL PARTNERS INC CENTRAL INDEX KEY: 0001063893 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043340381 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: SEC FILE NUMBER: 333-56937 FILM NUMBER: 98776637 BUSINESS ADDRESS: STREET 1: ONE FEDERAL STREET, 26TH FL CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 04-3403281 MAIL ADDRESS: STREET 1: ONE FEDERAL STREET STREET 2: 26TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 POS AM 1 POS AM AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1998 REGISTRATION STATEMENT NO. 333-56937 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BEACON CAPITAL PARTNERS, INC. (Exact name of registrant as specified in its charter) MARYLAND 04-3403281 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
ONE FEDERAL STREET, 26TH FLOOR BOSTON, MASSACHUSETTS 02110 (617) 457-0400 (Address and Telephone Number of Principal Executive Offices) ALAN M. LEVENTHAL CHIEF EXECUTIVE OFFICER AND WILLIAM A. BONN, ESQ. GENERAL COUNSEL BEACON CAPITAL PARTNERS, INC. ONE FEDERAL STREET, 26TH FLOOR BOSTON, MASSACHUSETTS 02110 (617) 457-0400 (Name, Address and Telephone Number, Including Area Code, of Agent for Service) ------------------------------ COPY TO: GILBERT G. MENNA, P.C. KATHRYN I. MURTAGH, ESQ. GOODWIN, PROCTER & HOAR LLP BOSTON, MA 02109 (617) 570-1000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time after this registration statement becomes effective, as determined by the Registering Stockholder. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES NOR ACCEPT AN OFFER TO SELL UNTIL THE REGISTRATION STATEMENT IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS PROHIBITED. PROSPECTUS 20,394,843 SHARES BEACON CAPITAL PARTNERS, INC. COMMON STOCK Beacon Capital Partners, Inc. is a real estate investment trust that conducts real estate investment and development activities. This Prospectus relates to 20,394,843 shares of our Common Stock which may be sold by certain Selling Stockholders. We are registering these securities on behalf of the Selling Stockholders. We are not selling any of these securities and we will not receive any proceeds from the sale of these securities. The Selling Stockholders may sell these securities directly to purchasers or they may sell these securities to purchasers through agents, underwriters or dealers pursuant to this Prospectus. The Selling Stockholders will receive all of the proceeds from the sale of their securities and will pay all underwriting discounts, selling commissions and transfer taxes applicable to any sale. Registration of these securities does not necessarily mean that any Selling Stockholder with actually sell their securities. There is currently no market for our Common Stock and we do not currently plan to list our Common Stock on any exchange or Nasdaq. Our principal executive offices are located at One Federal Street, 26th Floor, Boston, Massachusetts 02110. Our telephone number is (617) 457-0400. ------------------------ INVESTING IN THESE SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE DATE OF THIS PROSPECTUS IS DECEMBER __, 1998. FORWARD-LOOKING STATEMENTS Statements in this Prospectus under the captions "Offering Summary," "Risk Factors," "Investment Strategies and Experience," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus are forward-looking statements. When we use the words "anticipate," "believe," "estimate," "expect" and other similar expressions in this Prospectus, they are generally intended to identify forward-looking statements. In connection with such forward-looking statements, you should consider that they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements. Factors that could cause our actual results, performances or achievements to differ materially from those expressed or implied by our forward-looking statements include, but are not limited to, the following: - international, national, regional and local economic and political conditions; - demographic changes; - industry trends; - competition; - changes in business strategy or development plans; - availability, terms and deployment of capital; - availability of qualified personnel; and - changes in, or the failure or inability to comply with, government regulation. We disclaim any obligation to update these factors or to publicly announce the result of any revisions to any of these forward-looking statements to reflect subsequent events or developments. i TABLE OF CONTENTS FORWARD-LOOKING STATEMENTS............................................................ i PROSPECTUS SUMMARY.................................................................... 1 The Company......................................................................... 1 Business Strategy................................................................... 1 Advantages of the Company Structure................................................. 2 The BCP Sister Corp. ............................................................... 2 Summary Risk Factors................................................................ 3 Relationships....................................................................... 4 The Offering........................................................................ 5 RISK FACTORS.......................................................................... 6 Economic and Business Risks......................................................... 6 Dependence on Key Personnel Whose Continued Service is Not Guaranteed............. 6 We May Not Successfully Implement Our Growth Strategy............................. 6 Availability of Capital......................................................... 6 Failure to Effectively Manage Rapid Growth...................................... 6 Portfolio Acquisition Risks..................................................... 6 Development or Redevelopment of Assets.......................................... 7 Conflicts of Interest Exist Between the Company and Others........................ 7 Conflicts Relating to the Operating Partnership................................. 7 Conflicts Relating to the BCP Sister Corporation................................ 8 Conflicts Relating to the Incentive Return...................................... 8 Policies With Respect to Conflicts of Interest.................................. 9 Leverage Can Reduce Income Available for Distribution to Stockholders............. 9 Risks Associated With Hedging Investments and Investments in Derivatives.......... 10 The Company's Insurance Will Not Cover All Losses................................. 10 Property Taxes Decrease Returns on Real Estate.................................... 11 Compliance with Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations May Be Costly............................................. 11 Adverse Effect on Results of Operations Due to Possible Environmental Liabilities...................................................................... 11 BCP Sister Corp. Will Have Separate Financing, Which May Not Be Available......... 12 Newly-Organized Corporation....................................................... 12 Investment Activity Risks........................................................... 12 Appropriate Investments May Not Be Available...................................... 12 Real Estate Is Illiquid and Value Is Dependent on Conditions Beyond the Company's Control.......................................................................... 12 We Must Compete With Other Companies for Acquisitions............................. 13 We Must Be Able to Pay Off Our Financing.......................................... 13 Real Estate Investment Risks...................................................... 13 Risks Related to Investments in Mortgage Loans.................................... 14 Commercial Mortgage Loans May Involve a Risk of Loss............................ 14 Volatility of Values of Mortgaged Properties May Adversely Affect the Company's Mortgage Loans................................................................. 14 General Default Risks........................................................... 14 Our Multi-Sector Investment Strategy is More Complicated Than a Single Sector Investment Strategy............................................................. 15 Geographic Concentration of Assets................................................ 15 New Markets....................................................................... 16 Risks Involved in Acquisitions through Partnerships and Joint Ventures............ 16 Risks Involved in Acquisitions through Subsidiaries............................... 16 Foreign Real Properties Are Subject to Currency Conversion Risks and Uncertainty of Foreign Laws.................................................................. 17 Legal and Tax Risks................................................................. 17
ii Tax Risks......................................................................... 17 Adverse Impact of Future Legislation Regarding REITs.............................. 18 Aggregate Stock Ownership Limit May Restrict Business Combination Opportunities... 19 Foreign Investors Should Consider Tax Risks Under FIRPTA.......................... 19 Plans Should Consider ERISA Risks of Investing in Common Stock.................... 19 Changes in Management May Be Deterred............................................. 20 Board of Directors May Change Certain Policies Without Stockholder Consent........ 20 Loss of Investment Company Act Exemption Would Adversely Affect the Company....... 20 Limitation on Liability of Officers and Directors of the Company.................. 21 Other Risks......................................................................... 21 Risk that Market for Common Stock Will Not Develop................................ 21 THE COMPANY........................................................................... 22 Recent Acquisitions................................................................. 23 Investment in Cypress Communications, Inc........................................... 26 The Properties...................................................................... 27 Occupancy Rates, Base Rents and Net Effective Rents................................. 28 Lease Expirations--All Properties................................................... 29 Historical Operating Information.................................................... 33 Mortgage Indebtedness............................................................... 35 Management Compensation............................................................. 36 Directors and Executive Officers.................................................... 37 Other Professionals................................................................. 39 Board of Directors and Indemnification of Officers and Directors.................... 41 Long-Term Incentive Plan............................................................ 43 Stock Incentive Plan................................................................ 45 Employment Agreements; Covenants Not to Compete..................................... 46 Credit Facility..................................................................... 47 Available Information............................................................... 47 Certain Relationships; Conflicts of Interest........................................ 47 USE OF PROCEEDS....................................................................... 48 DISTRIBUTION POLICY................................................................... 48 INVESTMENT STRATEGIES AND EXPERIENCE.................................................. 49 Investment Strategies and Experience................................................ 49 Investment Management............................................................... 51 The BCP Sister Corp. ............................................................... 52 Policies with Respect to Certain Other Activities................................... 53 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 54 PRICE RANGE OF COMMON STOCK........................................................... 56 CAPITALIZATION........................................................................ 56 SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA............................ 57 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 58 DESCRIPTION OF SECURITIES............................................................. 62 General............................................................................. 62 Common Stock........................................................................ 62 Preferred Stock..................................................................... 62 Power to Issue Additional Shares of Common Stock and Preferred Stock................ 63 Dividend Reinvestment Plan.......................................................... 63 Transfer Agent and Registrar........................................................ 63 Transfer Restrictions............................................................... 63 Registration Rights................................................................. 65
iii CERTAIN PROVISIONS OF MARYLAND LAW AND OF BCP'S CHARTER AND BYLAWS............................................................ 67 Amendment of Charter and Bylaws..................................................... 67 Dissolution of the Company.......................................................... 67 Meetings of Stockholders............................................................ 67 The Board of Directors.............................................................. 67 Limitation of Liability and Indemnification......................................... 68 Indemnification Agreements.......................................................... 69 Business Combinations............................................................... 69 Control Share Acquisitions.......................................................... 70 COMMON STOCK AVAILABLE FOR FUTURE SALE................................................ 71 OPERATING PARTNERSHIP AGREEMENT....................................................... 72 Classes of Units.................................................................... 72 Management.......................................................................... 72 Removal of the General Partner; Transfer of the General Partner's Interest.......... 72 Amendments of the Operating Partnership Agreement................................... 73 Transfer of Units; Substitute Limited Partners...................................... 73 Redemption of OP Units.............................................................. 73 Operations.......................................................................... 74 Issuance of Additional Limited Partnership Interests................................ 74 Extraordinary Transactions.......................................................... 74 Exculpation and Indemnification of the General Partner.............................. 75 Tax Matters......................................................................... 75 FEDERAL INCOME TAX CONSIDERATIONS..................................................... 76 Taxation of the Company............................................................. 76 Requirements for Qualification...................................................... 77 Impact of Future Legislation........................................................ 84 Failure to Qualify.................................................................. 84 Taxation of Taxable U.S. Stockholders............................................... 84 Taxation of Stockholders on the Disposition of the Common Stock..................... 86 Information Reporting Requirements and Backup Withholding........................... 86 Taxation of Tax-Exempt Stockholders................................................. 86 Taxation of Non-U.S. Stockholders................................................... 87 Other Tax Consequences.............................................................. 89 BCP Sister Corp..................................................................... 89 ERISA CONSIDERATIONS.................................................................. 90 The Treatment of the Company's Underlying Assets Under ERISA........................ 90 SELLING STOCKHOLDERS.................................................................. 91 PLAN OF DISTRIBUTION.................................................................. 104 LEGAL MATTERS......................................................................... 105 EXPERTS............................................................................... 105 AVAILABLE INFORMATION................................................................. 105 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES........................................... F-1
iv PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS A SUMMARY, IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON STOCK. THE COMPANY Beacon Capital Partners, Inc. ("we" or the "Company") is a real estate investment trust established to conduct real estate investment and development activities. We formed on January 21, 1998 as a Massachusetts corporation and reincorporated (through a merger) in Maryland on March 17, 1998. We intend to qualify as a real estate investment trust (a "REIT"). We are the sole General Partner of Beacon Capital Partners, L.P. (the "Operating Partnership"). Our senior management manages our day-to-day operations and those of the Operating Partnership. We currently own 25 operating properties, consisting of 42 buildings and approximately 3.3 million rentable square feet. We are also part of a joint venture that is developing a high-rise building in Seattle, Washington. In addition, we are part of another joint venture which holds a 12-acre site for development. All of the Common Stock offered by this Prospectus was initially sold as part of an offering (the "Original Offering") to NationsBanc Montgomery Securities LLC ("NationsBanc"). NationsBanc subsequently sold the shares they acquired to persons and institutions defined by the Securities Act of 1933 (the "Securities Act") as Qualified Institutional Buyers and Accredited Investors. The Common Stock being offered by this Prospectus is being offered by these purchasers, and their transferees, donees, or successors (collectively, the "Selling Stockholders"). We believe that we have developed an organization of investment and investment management professionals that is well-positioned to take advantage of today's real estate and capital markets environment. Our management team combines real estate, capital markets and corporate expertise, which we believe will uniquely position us to capitalize on market and industry trends in complex real estate-related transactions across product, geographic and industry lines. BUSINESS STRATEGY Our management's experience in the real estate industry drives our business strategy. As the capitalization of the real estate industry continues to evolve toward a publicly-held format, we believe that numerous investment opportunities will emerge that reflect several primary shifts in the real estate industry. These shifts include: - rapid recovery of real estate markets - extraordinary growth of the public capital markets for real estate companies - continued consolidation of the ownership of real estate - alignment of interests between investors and management - recognition of real estate companies as operating businesses These shifts have resulted in significant investment opportunities in real estate, including arbitrage between public and private market pricing. It is our belief that as the real estate industry continues to transform, there will be significant opportunities for our skilled and experienced management team. Initially, we expect to focus on opportunities in the office sector. As the real estate market cycle advances, we expect additional opportunities to emerge in non-office market sectors, including opportunities in the hotel, residential and industrial sectors. Increasingly, management expertise and creative real estate solutions will be required for successful real estate companies. Our management team has a proven track record in the office sector and other property types. Our strategy is to profitably purchase, develop and manage real estate. We will implement this strategy through our senior management, which has experience managing both public and private real estate companies. Eight of our nine senior managers have an average of over 20 1 years experience in the real estate industry. During this time, they have developed an ability to identify and capitalize on industry trends. They will apply these skills to capitalize on opportunities that emerge as the real estate industry continues to transform and mature. They have also developed an informal network of domestic and foreign institutional relationships in the real estate industry. They will attempt to use these relationships to help identify opportunities to implement our strategy. Our investments will target the following principal real estate areas (the "Real Estate-Related Assets"), although we cannot anticipate with any certainty the percentage of our investments that will be made in each category: - VALUE-ADDED REPOSITIONINGS AND DISCOUNTED PURCHASES--repositioning and recapitalization of under-utilized or poorly capitalized real property by purchasing the debt on such property. This includes investment in mortgage loans at a discount to the face value of the debt, or purchase of equity in the property at a discount to the property's replacement cost; - DEVELOPMENT AND RE-DEVELOPMENT--strategic ground-up development or re-development of existing properties that can benefit from repositioning; - MULTIPLE PROPERTY PORTFOLIOS--acquisition of portfolios of real property owned by financial institutions, corporations and other non-strategic owners of real estate, as well as liquidating closed-end commingled funds and other large holders of real estate portfolios; - JOINT VENTURES AND STRATEGIC PARTNERSHIPS-- formation of, or acquisition of interests in, joint ventures or strategic partnerships as a way to leverage both capital and management expertise; and - REAL ESTATE COMPANIES AND REAL ESTATE-RELATED BUSINESSES--investment in companies primarily engaged in the business of real estate ownership, real estate services or other real estate intensive operating businesses, as well as related companies that serve the changing needs of the real estate industry. Although we may also invest in other areas (the "Other Assets" and together with the Real Estate-Related Assets, the "Assets") that we believe may add value to the Company, we have no current plans to do so. If we make such investments, they will not be the principal focus of our investment strategy. We intend to conduct all of our investment activities in a manner consistent with maintaining our status as a REIT for United States federal income tax purposes. Other than these restrictions, we have no policy limiting our investment opportunities or amounts. We believe that we will have distinct advantages over other real estate investment companies because our management team has extensive experience in the acquisition, development, financing, management and disposition of Real Estate-Related Assets. As the capitalization of the real estate industry continues to evolve toward a publicly-held format, our management team believes that its prior success in managing a publicly-held REIT will provide us with an additional competitive advantage over other privately-held REITs and real estate investment funds. ADVANTAGES OF THE COMPANY STRUCTURE We believe that by managing our day-to-day operations internally, we will offer competitive advantages to our stockholders in comparison to externally managed REITs because of the alignment of interests between management and stockholders. We also believe that we have a competitive advantage over certain other real estate investment entities because we can use the Operating Partnership in potential acquisitions in ways that may provide certain tax benefits to sellers. THE BCP SISTER CORP. We anticipate that we may identify Real Estate-Related Assets that may be advantageous investments but which may be inappropriate for investment by a REIT. To permit stockholders to participate in the economic benefits that may be associated with these investments, we intend to use a structure often referred to as a "paper clip." This "paper clip" structure would involve distributing to our stockholders the equity interests of a 2 newly-organized BCP Sister Corp. that would not elect to qualify as a REIT and would make investments in certain non-qualifying REIT Assets. At the present time, we have not formed a BCP Sister Corp., nor do we have any current plans to do so. The BCP Sister Corp. is intended to function primarily as an operating company, in contrast to our principal focus on investment as a REIT in Real Estate-Related Assets. Our ability to fully use this structure may be adversely affected by future legislation. SUMMARY RISK FACTORS An investment in our Common Stock involves various risks. You should carefully consider the matters discussed under "Risk Factors." Such risks include, among others, the following: - We will rely on, and our success depends on, key personnel, including Alan M. Leventhal and Lionel P. Fortin. Losing their services could materially adversely affect us, - It may be difficult for us to effectively implement our acquisition strategy and manage our resulting growth. - We have a limited operating history and no established sources of financing. - Some of our investments will require significant management resources, will be illiquid, and may decrease in value because of changes in economic conditions. - There is currently no market for our Common Stock and we do not currently plan to list our Common Stock on an exchange or Nasdaq. - Our management may earn substantial compensation from certain incentive plans, which may substantially reduce cash available for distribution to stockholders. - We have a management incentive plan which bases rewards upon our performance over a specified period of time. Management's interest in their return under this incentive plan could conflict with stockholders' interests in shorter or longer investment periods. - We are subject to competition from numerous competitors which could affect our ability to effectively implement our acquisition strategy. - We intend to leverage our Assets, and could, under our current guidelines, borrow up to 60% of our total market capitalization, which can compound losses. Our organizational documents contain no limits on leveraging our Assets. - Our capital stock is subject to certain ownership limitations designed to ensure compliance with the REIT qualification requirements, including a prohibition on any one person from beneficially owning more than 9.8% of the outstanding stock, which could inhibit a change of control. - We may be subject to income tax at regular corporate rates if we fail to qualify as a REIT, which could substantially reduce the amount of cash available for distribution to stockholders. 3 RELATIONSHIPS The relationship among Beacon Capital Partners, Inc., Beacon Capital Partners, L.P., Beacon Capital Participation Plan and BCP Sister Corp. (if formed), and the equity ownership thereof is depicted in the picture shown below. [Chart describing the relationship of BCP, the Operating Partnership, Other Limited Partners, Beacon Capital Participation Plan, BCP Sister Corp. and the BCP Sister Corp. Operating Partnership (if formed)] - ------------------------ (1) We anticipate that at the time of formation of the BCP Sister Corp., the stockholders of the Company and the BCP Sister Corp. would be the same. However, the equity interests of the Company and the BCP Sister Corp. may be owned and transferred separately and independently of each other and, consequently, the stockholder constituency of each entity may change over time. 4 THE OFFERING The principal terms of our Common Stock are summarized below. For a more complete description, see "Description of Securities." The Selling Stockholders will receive all of the proceeds from any sales of the Common Stock offered by this Prospectus. We will not receive any proceeds from this Offering. Common Stock: Issuer............................ Beacon Capital Partners, Inc. Securities Offered (1)............ 20,394,843 shares of Common Stock Common Stock Outstanding.......... 20,973,932 shares Voting Rights..................... Each share of Common Stock has one vote. Listing........................... The Common Stock is not currently listed on any exchange or on any Nasdaq market. We do not currently plan to list the Common Stock. Trading........................... The Common Stock has been accepted for trading in the PORTAL Market. Stock Ownership Limits............ No single Stockholder may beneficially own more than 9.8% of the Common Stock.
- ------------------------ (1) This Offering of our Common Stock excludes 579,089 shares of Common Stock and shares underlying 225,201 Operating Partnership Units which the Company sold to Alan M. Leventhal and Lionel P. Fortin in connection with the formation of the Company. 5 RISK FACTORS An investment in our Common Stock involves various risks. You should carefully consider the following risk factors: ECONOMIC AND BUSINESS RISKS WE DEPEND ON KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED We believe that our success depends in large part upon the experience of Alan M. Leventhal, Lionel P. Fortin and other members of our senior management whose continued service is not guaranteed. We have executed employment and non-competition agreements with Messrs. Leventhal and Fortin, but we cannot guarantee that these agreements are judicially enforceable. If we lost the services of either Mr. Leventhal or Mr. Fortin, our operations may suffer. Until we found a qualified replacement, we would be less capable of: - obtaining real estate investment opportunities; - capitalizing upon relationships in the real estate industry; and - structuring and executing potential investments. We cannot assure you that we would replace Mr. Leventhal or Mr. Fortin with someone who has equivalent knowledge and experience. We may not be able to successfully recruit additional personnel. Any additional personnel we do recruit may not have the requisite skills, knowledge or experience necessary or desirable to enhance our incumbent management. In addition, we do not currently intend to maintain key-man life insurance on any of our executive officers. See "The Company--Directors and Executive Officers" and "The Company--Management Compensation." WE MAY NOT SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY AVAILABILITY OF CAPITAL Our ability to implement our growth strategy depends on access to the capital necessary to invest in Assets. Since the Company formed recently, we have a limited operating history. Other than the proceeds we received in the original sale of our Common Stock to NationsBanc, we have no established sources of financing. If we fail to obtain the necessary capital, our ability to acquire Assets could suffer. We anticipate that we will need a bank or other institutional lender to supply a credit facility. At this time, we have not obtained a credit facility. FAILURE TO EFFECTIVELY MANAGE RAPID GROWTH To successfully implement our acquisition strategy, we must integrate the acquired Assets into our existing operations. As such, we must consolidate functions and integrate the departments, systems and procedures of the acquired Assets with our operations. Integration presents a significant challenge to us. If we fail to effectively integrate new Assets, our results of operations and financial condition could suffer. PORTFOLIO ACQUISITION RISKS We intend to acquire multiple Assets in a single transaction. This technique reduces acquisition expenses and provides us with operating leverage. However, portfolio acquisitions are more complex than single-property acquisitions. The risk that a multiple-property acquisition will not close is greater than in a single-property acquisition. In addition, the cost of a failed portfolio acquisition closing is greater than the cost of a failed single-property acquisition closing. If one of our portfolio acquisition closings failed, we would incur a charge against our earnings for the costs related to that failed acquisition. 6 Our portfolio acquisitions may result in the acquisition of Assets located in geographically dispersed markets that are geographically removed from our principal markets. This geographic diversity could strain our ability to manage such dispersed Assets. In addition, a seller may demand that we purchase a group of properties together despite one or more failing to meet our investment criteria. If this were to occur, we would attempt to either: - make a joint bid with another buyer; or - purchase the portfolio with the intent to subsequently dispose of those Assets which do not meet our investment criteria. This strategy presents two problems: - If we participate in a joint bid, the other buyer may default on its obligations and increase the risk that the acquisition may not close. - If we intend to dispose of Assets that we do not wish to own, there can be no assurance as to how quickly we could sell or exchange such Assets or the terms on which they could be sold or exchanged. DEVELOPMENT OR REDEVELOPMENT OF ASSETS We intend to develop and construct Real Estate-Related Assets in accordance with our development and underwriting policies. Risks associated with such development and construction activities include the risks that: (i) we may abandon development opportunities after expending resources to determine feasibility; (ii) construction costs may exceed original estimates; (iii) occupancy rates and rents at a newly completed property may not be sufficient to make the project profitable; (iv) financing may not be available on favorable terms; (v) construction and lease-up may not be completed on schedule and thus result in increased debt service expenses and construction costs; (vi) we may be unable to obtain (or be delayed in obtaining) all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations; (vii) since new projects require a substantial portion of management's time and attention, management may be significantly preoccupied with these new projects (regardless of whether or not they are ultimately successful); (viii) permanent financing may not be available or may only be available on unfavorable terms; and (ix) our losses may exceed our investment return if the project is unsuccessful. CONFLICTS OF INTEREST EXIST BETWEEN THE COMPANY AND OTHERS CONFLICTS RELATING TO THE OPERATING PARTNERSHIP The Company (as the General Partner of the Operating Partnership) will have fiduciary obligations to the limited partners of the Operating Partnership that may conflict with the interests of our stockholders. In addition, the limited partners will have the right to vote: - as a class on certain amendments to the Operating Partnership Agreement; and - individually to approve certain amendments that would adversely affect their rights. 7 The limited partners' voting rights may be exercised in a manner that conflicts with your interests if you should acquire shares of our Common Stock. Under the terms of the Operating Partnership Agreement, the General Partner (currently the Company) must obtain approval from the partners of the Operating Partnership to engage in certain transactions if, pursuant to the Massachusetts General Corporate Laws or our organizational documents, a transaction would require a vote of our stockholders. As such, approval of the stockholders and the partners would be necessary before certain transactions could be consummated. Partners' interest in approving any such transaction may or may not align with the stockholders' interest in approving the transaction. Thus, the partners may prevent consummation of a transaction which the stockholders believe is in their best interest. See "The Company--Certain Relationships; Conflict of Interest." CONFLICTS RELATING TO THE BCP SISTER CORP Certain of our officers and directors may also serve as officers or directors of the BCP Sister Corp. (if and when formed). This may create conflicting demands on the time of those officers and directors serving both the Company and the BCP Sister Corp. If (as expected) ownership of the BCP Sister Corp. and the Company ultimately differ, conflicts of interest may develop. We cannot assure you that conflicts between the Company and the BCP Sister Corp. will not arise concerning short-term or long-term business plans, investment strategy, geographic concentration or services provided. See "The Company--Certain Relationships; Conflicts of Interest." In addition, provisions in the BCP Sister Corp.'s formation documents are expected to: (i) enable the BCP Sister Corp. to enter into transactions with the Company to the extent deemed beneficial by their respective boards of directors; and (ii) generally prohibit the BCP Sister Corp. from engaging in activities or making investments appropriate for a REIT unless: - the Company is first given the opportunity to engage in the activity or make the investment; and - the Company elects to not engage in the activity or make the investment. We cannot assure you that any agreement will prevent conflicts between the Company and the BCP Sister Corp. regarding which person or entity may pursue potential business opportunities (if any). CONFLICTS RELATING TO THE INCENTIVE RETURN Our Long-Term Incentive Plan consists of a Convertible Unit issued to Beacon Capital Participation Plan on March 16, 1998. The Participation Plan is an entity owned and controlled by our management. Beacon Capital Participation Plan was established to receive the Convertible Unit of the Operating Partnership. Messrs. Leventhal and Fortin control and own equity interests in Beacon Capital Participation Plan and certain members of our senior management also hold minority interests in Beacon Capital Participation Plan. If we meet certain earnings goals, the Convertible Unit will convert into a number of Incentive Units of limited partnership interest in the Operating Partnership ("Incentive Units"). The earnings goals are measured at the end of the three-year period following the completion of the first calendar year following the closing of the Original Offering to NationsBanc. The value of the Incentive Units will be equal to the Incentive Return. The Incentive Return is calculated based on the growth of the Company's Funds from Operations above a specified benchmark (measured at the end of a specified period). Thus, management has an incentive to maximize growth during this period. However, management's interest in the return over this period may conflict with the interests of stockholders with shorter or longer investment goals. 8 The Long-Term Incentive Plan was designed to align the interests of our management with the interests of our stockholders by having members of senior management purchase an equity interest in the Beacon Capital Participation Plan. However, we cannot assure you that conflicts will not arise between management's interests and stockholders' interests. See "The Company--Long-Term Incentive Plan." POLICIES WITH RESPECT TO CONFLICTS OF INTEREST We intend to adopt policies designed to eliminate or minimize conflicts of interest. One such policy would require that all transactions in which officers or directors have a conflicting interest must be approved by a majority of our Independent Directors. However, we cannot assure you that any policy will successfully minimize or eliminate conflicts of interest. If our policies fail, decisions could be made that do not fully reflect the stockholders' interests. LEVERAGE CAN REDUCE INCOME AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS We intend to leverage our Assets by borrowings through bank credit facilities, mortgage loans on real estate and other borrowings. At this time, our outstanding indebtedness only consists of mortgage indebtedness. See "The Properties and Pending Acquisitions--Mortgage Indebtedness." Our return on investments and cash available for distribution to stockholders might suffer by changes in market conditions which cause the cost of the financing to exceed the income from the asset. At this time, we have no variable rate financing. However, if we obtained such financing in the future and did not engage in a successful hedging strategy, an increase in the interest rate payable on such financing could cause higher debt payments and could materially adversely affect liquidity and results from operations. Leverage creates an opportunity for increased returns on equity, but also creates risks. For example, debt service payments can reduce the net income available for distributions to stockholders. We cannot assure you that we will be able to meet our debt service obligations and, to the extent that we cannot, we may lose some or all of our Assets to foreclosure or sale to satisfy our debt obligations. Interest rate changes can affect our income by affecting: - the spread between the income on our Assets and interest-bearing liabilities; - the value of our interest-earning Assets; and - our ability to realize gains from the sale of Assets. We have adopted guidelines to maintain a debt to total market capitalization ratio not in excess of 60%. This policy enables us to incur additional indebtedness as our stock price increases even though there has not necessarily been a corresponding increase in our ability to service our indebtedness. For purposes of this policy, our debt to market capitalization ratio is calculated as: - our proportionate share of total consolidated and unconsolidated debt as a percentage of the sum of the market value of outstanding shares of our capital stock and our units in the Operating Partnership; plus - our proportionate share of total consolidated and unconsolidated debt. Our Charter and Bylaws do not limit the amount of indebtedness we can incur. Accordingly, our Board of Directors could alter or eliminate this policy. They would do so, for example, if it were necessary for us to continue to qualify as a REIT. See "Certain Provisions of Maryland Law and of BCP's Charter and Bylaws" and "Risk Factors--Legal and Tax Risks--Board of Directors May Change Certain Policies Without Stockholder Consent." 9 RISKS ASSOCIATED WITH HEDGING INVESTMENTS AND INVESTMENTS IN DERIVATIVES Interest rate changes may adversely affect our investments. Interest rates are highly sensitive to many factors, including: - governmental, monetary and tax policies; - domestic and international economic and political considerations; and - other factors beyond our control. We may employ a hedging strategy to limit the effects of interest rate changes on our operations, including engaging in interest rate swaps, caps, floors and other interest rate exchange contracts. Our use of these types of derivatives to hedge our Assets and liabilities carries certain risks, such as: - losses on a hedge position may reduce the funds available for distribution to stockholders; and - losses on a hedge position may exceed the amount invested in such instruments. We have no formal policy with respect to hedging investments or investments in derivatives. There is no perfect hedge for any investment, and a hedge may not perform its intended use of offsetting losses on an investment. Moreover, we are exposed to the risk that the counter parties with whom we trade may stop making markets and quoting prices in such instruments. If this happened, we would be unable to enter into an offsetting transaction with respect to an open position. Any losses incurred may be amplified if the hedging vehicle moves more or less than the price movement of the asset being hedged. We cannot assure you of a correlation between price movements in a hedging vehicle and an asset being hedged. This presents the risk that both the hedging vehicle and the hedged asset may decline in value at the same time. In addition, if a party to a hedging transaction defaults, we may only have contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreement related to the transaction. Our profitability may be adversely affected during any period as a result of changing interest rates or due to losses incurred in hedging transactions. This could possibly result in a material adverse impact on our liquidity and results from operations. For a discussion of the treatment of income from hedging investments under the REIT qualification requirements of the Internal Revenue Code of 1986, as amended (the "Code"), see "Federal Income Tax Considerations--Requirements for Qualification--Income Tests." THE COMPANY'S INSURANCE WILL NOT COVER ALL LOSSES We intend to maintain comprehensive insurance on each of our Assets. This coverage includes liability and fire and extended coverage, in amounts sufficient to permit the replacement of the Assets in the event of a total loss, subject to applicable deductibles. We will endeavor to obtain coverage of the type and in the amount customarily obtained by owners of similar properties. However, certain losses are generally uninsurable or not economically insurable: - catastrophic losses such as fire, flood and hurricane; - economic conditions such as inflation; - legal conditions such as changes in building codes and ordinances; - environmental considerations; or - other conditions or considerations which may make it infeasible to use insurance proceeds to replace an asset if it is damaged or destroyed. Under such circumstances, the insurance proceeds we received might not be adequate to restore our economic position with respect to the affected asset. 10 PROPERTY TAXES DECREASE RETURNS ON REAL ESTATE Each of our Assets will be subject to real and (in some instances) personal property taxes. The real and personal property taxes on our Assets may increase or decrease as property tax rates change or as the Assets are assessed or reassessed by taxing authorities. If property taxes on our investments increase, our cash available for distribution to our stockholders would be adversely affected. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN GOVERNMENTAL RULES AND REGULATIONS MAY BE COSTLY Under the Americans with Disabilities Act of 1990 (the "ADA"), all public properties are required to meet certain federal requirements related to access and use by disabled persons. Properties we acquire may not be in compliance with the ADA. If a property is not in compliance with the ADA, we will be required to make modifications to such property to bring it into compliance. If we fail to comply, we face the possibility of an imposition of fines or an award of damages to private litigants. In addition, we could face changes in governmental rules and regulations or enforcement policies affecting the use and operation of the properties, including changes to building codes and fire and life-safety codes. If we were required to make substantial modifications to our properties to comply with the ADA or other changes in governmental rules and regulations, our ability to make expected distributions to stockholders could be adversely affected. ADVERSE EFFECT ON RESULTS OF OPERATIONS DUE TO POSSIBLE ENVIRONMENTAL LIABILITIES Our operating costs may be affected by the obligation to pay for the cost of complying with existing and future environmental laws, ordinances and regulations. Assets with environmental problems could materially impair the value such Assets. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable (often regardless of knowledge or responsibility) for the costs of removal or remediation of hazardous or toxic substances releases at its property. These costs could be substantial. The presence of such substances (or the failure to properly remediate the contamination) may materially and adversely affect the owner's ability to borrow against, sell or rent the affected property. Persons who arrange for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. In addition, certain environmental laws and common law principles impose liability for releases of hazardous materials into the environment, including asbestos-containing materials ("ACMs"). These laws may impose liability for release of ACMs and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs or other hazardous materials. In connection with our ownership and operation of certain Assets, we may potentially be liable for such costs. Environmental laws may also impose restrictions on the use or transfer of property and on the manner in which a business is operated. These restrictions may require expenditures. We may be liable for any such costs in connection with certain of our Assets. In addition, the cost of defending against claims of liability or remediating contaminated property and the cost of complying with such environmental laws could materially adversely affect our results of operations and financial condition. 11 In connection with the acquisition of Real Estate-Related Assets, we intend to obtain Phase I environmental site assessments ("ESAs") prepared by qualified independent environmental engineers. The purpose of ESAs is to identify potential sources of contamination for which the Assets may be responsible and to assess the status of environmental regulatory compliance. It is possible, however, that these ESAs will not reveal all environmental liabilities or that such Assets may be subject to material environmental liabilities of which we are unaware. BCP SISTER CORP. WILL HAVE SEPARATE FINANCING, WHICH MAY NOT BE AVAILABLE We anticipate that the BCP Sister Corp. (if and when formed) will obtain its own financing, separate from that of the Company. We cannot assure you that such financing will be readily available or (if available) that it will be on terms acceptable to the BCP Sister Corp. In addition, to the extent that the BCP Sister Corp. should default under such financing, we cannot assure you that it would be able to obtain sufficient financing to cure such default. We also cannot ascertain the full impact of such default on the Company. NEWLY-ORGANIZED CORPORATION We formed on January 21, 1998 and re-incorporated (through a merger) in Maryland on March 17, 1998. Consequently, we have a limited operating history and do not yet have any established sources of financing. We depend upon the experience and expertise of our senior management in administering our day-to-day operations. We cannot assure you that our management will be able to implement successfully the strategies which we intend to pursue. In addition, as a newly-organized company, our policies and procedures are subject to change over time. See "The Company--Directors and Executive Officers" and "--Risks Related to Growth Strategy." INVESTMENT ACTIVITY RISKS APPROPRIATE INVESTMENTS MAY NOT BE AVAILABLE Although we may invest in Other Assets as opportunities arise, we intend to focus primarily on acquiring Real Estate-Related Assets consistent with our investment strategy. We cannot assure you that: - we will identify Assets that meet our investment criteria; - we will be successful in acquiring any Assets that may be identified; or - acquired Assets will produce a return on our investment. We will have broad authority to invest in Assets consistent with our investment strategy. We may invest in highly-leveraged Assets, which may increase the likelihood of a loss of our Assets through foreclosure. No assurance can be made that our decisions in this regard will result in a profit for the Company. Investment in real estate is a highly-competitive business and the acquisition of Assets is often based on competitive bidding. Consequently, our inability to identify appropriate Assets may have an adverse effect on our results of operations and hinder our growth rate. REAL ESTATE IS ILLIQUID AND VALUE IS DEPENDENT ON CONDITIONS BEYOND THE COMPANY'S CONTROL We expect to invest in Assets which may be subject to varying degrees of risk generally incident to the ownership of real property. Real estate investments are relatively illiquid. Our ability to vary investments in response to changes in economic and other conditions will be limited. We cannot assure you that the fair market value of any Assets we acquire will not decrease in the future. The underlying value of our Assets, our income and our ability to make distributions to stockholders are dependent upon our ability to operate 12 our Assets in a manner sufficient to maintain or increase revenue in excess of operating expenses and debt service. Our revenue may be adversely affected by the following: - adverse changes in national or local economic conditions; - competition from other properties offering the same or similar services; - changes in interest rates and in the availability, cost and terms of mortgage funds; - impact of present or future environmental legislation and compliance with environmental laws; - ongoing need for capital improvements (particularly in older structures); - changes in real estate tax rates and other operating expenses; - adverse changes in governmental rules and fiscal policies; - civil unrest; - acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses); - acts of war; - adverse changes in zoning laws; and - other factors which are beyond our control either in whole or in part. WE MUST COMPETE WITH OTHER COMPANIES FOR ACQUISITIONS We intend to invest in real estate industry sectors which are highly competitive. We may compete for Assets with entities which have substantially greater economic and personnel resources than the Company and better relationships with sellers of assets, lenders and others. These entities may also generally be able to accept more risk than we can prudently manage. Competition may generally reduce the number of suitable prospective assets offered to us and increase the bargaining power of property owners seeking to sell, thereby increasing prices. WE MUST BE ABLE TO PAY OFF OUR FINANCING We are subject to the risks normally associated with debt financing. This includes the risk that our cash flow will be insufficient to meet required debt service. In addition, we may be unable to refinance our existing indebtedness. If we do refinance, the terms of the financing may not be as favorable as the existing indebtedness terms. REAL ESTATE INVESTMENT RISKS Real property investments have varying degrees of risks. Our cash flow and ability to make distributions to stockholders will be adversely affected if our Assets do not generate revenues sufficient to meet operating expenses, including debt service and capital expenditures. An asset's revenues and value may be adversely affected by the following: - the general economic climate; - the local economic climate; - local real estate conditions; - the ability of the owner to provide adequate management, maintenance and insurance; and - increased operating costs. 13 Certain significant expenditures associated with an equity investment are generally not reduced when circumstances cause a reduction in income from the investment. These include mortgage payments, real estate taxes, or insurance and maintenance costs. In addition, we face numerous competitors for development and acquisitions of properties which may have greater resources than the Company. RISKS RELATED TO INVESTMENTS IN MORTGAGE LOANS Mortgage loan investments have certain risks that other types of investment do not, including without limitation the following: COMMERCIAL MORTGAGE LOANS MAY INVOLVE A RISK OF LOSS Commercial mortgage loans have a high degree of risk because of a variety of factors, including: - the loans are dependent for repayment on successful operation of the mortgaged property and any tenant businesses operating on the property; - the loans are usually non-recourse to the borrower; - the loans have terms that include amortization schedules longer than stated maturity. - the loan terms provide for balloon payments at stated maturity rather than periodic principal payments; and - the value of the property underlying the loan can be affected significantly by the supply and demand in the market for that type of property. VOLATILITY OF VALUES OF MORTGAGED PROPERTIES MAY AFFECT ADVERSELY THE COMPANY'S MORTGAGE LOANS Commercial real estate values and the net operating income derived from the property are subject to volatility and may be affected adversely by a number of factors, including, but not limited to: - national, regional and local economic conditions; - local real estate conditions; - changed or continued weakness in specific industry segments; - general public perceptions of the safety, convenience, services and attractiveness of the property; - willingness and ability of the property's owner to: (i) provide capable management, (ii) provide adequate maintenance, (iii) make capital expenditures and improvements, and (iv) provide leasing concessions; - construction quality, age and design; and - increases in operating expenses (such as energy costs). GENERAL DEFAULT RISKS With respect to our investments in mortgage loans, we face the risks of borrower defaults, bankruptcies, fraud and special hazard losses (which are not covered by standard hazard insurance). If a borrower defaults, we bear a risk of loss of principal to the extent that the value of the collateral is less than the amount due on the mortgage loan. In addition, failure to receive interest payments because of borrower 14 default could have a materially adverse effect on our cash flow from operations. If a borrower declares bankruptcy, we face the following risks: - the bankruptcy court determines the value of the underlying collateral at the time of bankruptcy; - the bankruptcy trustee may avoid the lien securing the mortgage loan; and - the debtor-in-possession may avoid the lien securing the mortgage loan to the extent the lien is unenforceable under state law. If we have to foreclose a mortgage, the process can be expensive and lengthy. These costs could adversely affect our anticipated return on the foreclosed mortgage loan. OUR MULTI-SECTOR INVESTMENT STRATEGY IS MORE COMPLICATED THAN A SINGLE-SECTOR INVESTMENT STRATEGY Our current strategy is to acquire Assets in a variety of real estate product-types within a variety of geographic locations. Initially we will emphasis office Assets. Accordingly, we will be required to maintain expertise, relationships and market knowledge across a broad range of product-types and geographic regions. In addition, we face market conditions that affect each such product-type in the various markets, including such factors as: - local economic climate; - business layoffs; - industry slowdowns; - changing demographics; and - local supply and demand issues affecting each such market. Our multi-sector approach could require more management time, staff support and expense than a company focused upon a single product-type in fewer jurisdictions than contemplated by the Company. GEOGRAPHIC CONCENTRATION OF ASSETS The economic performance and value of our Assets are subject to all of the risks incident to the ownership and operation of real estate. These include the risks normally associated with changes in national, regional and local economic and market conditions. Such conditions can affect tenants' ability to make rental payments. Our Assets are located in four markets--East Cambridge, Massachusetts; Sunnydale, California; Dallas, Texas; and Seattle, Washington. We have no limits on becoming more geographically concentrated. Local real estate market conditions may include a large supply of competing space and competition for tenants, including competition based on: - rental rates; - attractiveness; - location of property; and - quality of maintenance, insurance and management services. Other factors may adversely affect the performance and value of an asset, including: - changes in laws and governmental regulations (including those governing usage, zoning and taxes); - changes in interest rates; and 15 - availability of financing. If the Assets do not generate sufficient income to meet operating expenses, our income and ability to make distributions to stockholders may be adversely affected. NEW MARKETS Although our management has historical experience with Real Estate-Related Assets and other Assets and investments in a variety of geographic areas of the country, our expertise in those markets may not assist us in new markets. In such event, we may be exposed to risks associated with: - lack of market knowledge and understanding of the local economy; - inability to access land and property acquisition opportunities; - inability to obtain construction tradespeople; - sudden adverse shifts in supply and demand factors; and - unfamiliarity with local governmental procedures. RISKS INVOLVED IN ACQUISITIONS THROUGH PARTNERSHIPS AND JOINT VENTURES Instead of purchasing properties directly, we may invest as a partner or a co-venturer. Partnership or joint venture investments may involve risks not otherwise present, including: - our partner or co-venturer might become bankrupt; - our partner or co-venturer might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals; and - our partner or co-venturer may be in a position to take action: (i) contrary to our instructions or requests; or (ii) contrary to our policies or objectives, including our policy with respect to maintaining our qualification as a REIT. These investments may also have the potential risk of impasse on decisions because neither we nor our partner co-venturer would have full control over the partnership or joint venture. We will seek to maintain sufficient control of such partnerships or joint ventures to achieve our objectives. Our organizational documents do not limit the amount of available funds which we may invest in partnerships or joint ventures. RISKS INVOLVED IN ACQUISITIONS THROUGH SUBSIDIARIES The common stock of Tenant Communications Inc. consists of two classes: voting and nonvoting. Of the voting common stock, Messrs. Leventhal and Fortin hold 91% and the Operating Partnership holds 9%. The Operating Partnership holds all of the nonvoting stock. The Operating Partnership owns 99% of the economic interest in Tenant Communications, Inc. and Messrs. Leventhal and Fortin jointly own 1% of such economic interest. As holders of 91% of the voting common stock, Messrs. Leventhal and Fortin have the ability to elect the board of directors of Tenant Communications, Inc. We are not able to elect the directors, which means that we may not be able to influence the day-to-day decisions affecting Tenant Communications, Inc. As such, the board of directors of Tenant Communications, Inc. may implement business policies or decisions that would not have been implemented by persons controlled by the Company and may be adverse to our interests and could adversely impact our results of operations. 16 FOREIGN REAL PROPERTIES ARE SUBJECT TO CURRENCY CONVERSION RISKS AND UNCERTAINTY OF FOREIGN LAWS In addition to making investments in domestic Assets, we may invest in Assets located outside the United States. Risks inherent in investing in real estate located in foreign countries generally include: - unexpected changes in regulatory environments; - longer accounts receivable payment cycles; - potentially adverse tax consequences; and - the burden of complying with a wide variety of foreign laws. Moreover, investments in foreign Assets may be exposed to the risk of fluctuations in the foreign exchange rates between the US dollar and the currency in which a transaction is conducted. LEGAL AND TAX RISKS TAX RISKS We intend to operate in a manner that will enable us to qualify as a REIT for federal income tax purposes. Although we do not intend to request a ruling from the Internal Revenue Service (the "IRS") as to our REIT status, we received (in connection with the filing of this Registration Statement) an opinion from our counsel, Goodwin, Procter & Hoar LLP. Their opinion states the following: - that the Company has been and will be organized in conformity with the requirements for qualification as a REIT; and - that the Company's proposed manner of operation will enable it to qualify as a REIT. This opinion is based on certain factual and other assumptions and representations with respect to the Company's past and expected ongoing businesses and investment activities and other customary matters. No assurances can be given to you as to the accuracy of such assumptions and representations or that the Company will be able to comply with them in the future. Furthermore, this opinion is not binding on the IRS or any court, and no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. This opinion of Goodwin, Procter & Hoar LLP represents only their view based on their review and analysis of existing law, which includes no controlling precedent and which is subject to change (possibly on a retroactive basis). See "Federal Income Tax Considerations--Requirements for Qualification." Furthermore, both the validity of this opinion and the Company's continued qualification as a REIT will depend on the Company's satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. Our operations will not be monitored by Goodwin, Procter & Hoar LLP to ensure continued compliance with the REIT requirements. If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by the Company in computing its taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders, which in turn could have an adverse impact on the value of (and trading prices for) our Common Stock. Unless entitled to relief under certain REIT provisions of the Code, we also would be disqualified from taxation as a REIT for the four taxable years subsequent to the year during which we ceased to qualify as a REIT. See "Federal Income Tax Considerations--Requirements for Qualification." We must distribute annually at least 95% of our net taxable income (excluding any net capital gain) in order to avoid corporate income taxation of the earnings that we distribute. In addition, we will be subject 17 to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid or deemed paid by the Company with respect to any calendar year are less than the sum of: - 85% of the Company's ordinary income for that year; - 95% of the Company's capital gain net income for that year; and - 100% of the Company's undistributed taxable income from prior years. The amount of any net long-term capital gains that we elect to retain and pay income tax on will be treated as distributed for purposes of the 4% excise tax. We intend to make distributions to our stockholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require the Company to borrow funds or sell assets on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. The requirement to distribute a substantial portion of the Company's net taxable income could cause the Company: - to sell assets in adverse market conditions; - to distribute amounts that represent a return of capital; or - to distribute amounts that would otherwise be spent on future acquisitions, capital expenditures, or repayment of debt. Gains from the disposition of any asset held primarily for sale to customers in the ordinary course of business generally will be subject to a 100% tax. See "Federal Income Tax Considerations--Requirements for Qualification." It is anticipated that we may purchase mortgage loans. If we purchases such Assets and are deemed to have issued debt obligations having two or more maturities (the payments on which correspond to payments on such mortgage loans) such arrangement will be treated as a "taxable mortgage pool" for federal income tax purposes. If all or a portion of the Company is considered a "taxable mortgage pool," the Company's status as a REIT generally should not be impaired, but a portion of the Company's taxable income may be characterized as "excess inclusion income" and allocated to stockholders. Any excess inclusion income: - could not be offset by net operating losses of a stockholder; - would be subject to tax as "unrelated business taxable income" to a tax-exempt stockholder; - would be subject to the application of federal income tax withholding (without reduction pursuant to any otherwise applicable income tax treaty), with respect to amounts allocable to foreign stockholders; and - would be taxable (at the highest corporate tax rate) to the Company (rather than its stockholders) to the extent allocable to shares of stock of the Company held by disqualified organizations (generally, tax-exempt entities not subject to tax on unrelated business taxable income, including governmental organizations). ADVERSE IMPACT OF FUTURE LEGISLATION REGARDING REITS. Our qualification as a REIT or our ability to fully utilize the BCP Sister Corp. structure could be affected by future legislation. Recently enacted laws freeze the grandfathered status of REITs that are "paired" or "stapled" with a related operating company. Unlike such "paired" or "stapled" structures, our proposed BCP Sister Corp. structure would be a "paper clip" structure in which interests in the BCP Sister Corp. distributed to our stockholders could be transferred independently from our Common Stock. 18 Although this new legislation does not affect "paper clip" structures, we cannot assure you that it will not place legislative or judicial scrutiny on the "paper clip" structure or that legislation adversely affecting such a structure will not be proposed and enacted. See "Federal Income Tax Considerations--Impact of Future Legislation." AGGREGATE STOCK OWNERSHIP LIMIT MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES To maintain our qualification as a REIT, five or fewer individuals may not own (directly or indirectly) more than 50% of our Common Stock at any time during the last half of our taxable year. As such, our Charter contains an aggregate stock ownership provision which generally prohibits any single stockholder from owning more than 9.8% of our Common Stock. In addition, our Charter contains a look-ownership limit that permits certain mutual funds and certain other widely-held entities (other than pension plans as described in Section 401(a) of the Code) to own up to 15% of our Common Stock. The Board of Directors may waive or modify either of these two provisions if it is satisfied (based upon the receipt of a ruling from the IRS or the advice of tax counsel) that ownership in excess of this limit will not jeopardize our status as a REIT. In addition, these ownership limits may inhibit or impede a change in control. Such inhibitions and impediments could adversely affect stockholders' ability to realize a premium over the then-prevailing market price for our Common Stock in connection with such a transaction. See "Description of Securities--Transfer Restrictions" and "Federal Income Tax Considerations--Requirements for Qualification." FOREIGN INVESTORS SHOULD CONSIDER TAX RISKS UNDER FIRPTA If the Company is not a domestically controlled REIT, non-U.S. Stockholders who own and then sell our Common Stock will be taxed according to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). We will be a domestically controlled REIT if non-U.S. persons own (directly or indirectly) less than 50% of our Common Stock during specified testing periods. We cannot assure you that we will continue to be a domestically-controlled REIT. Even if not subject to FIRPTA, non-U.S. stockholders are subject to taxation under certain other circumstances. See "Federal Income Tax Considerations--Taxation of Non-U.S. Stockholders." PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK ERISA is a broad statutory framework that governs non-governmental employee benefit plans in the United States. Fiduciaries of pension, profit-sharing or other employee benefit plans subject to Title I of ERISA ("ERISA Plans") should carefully consider the impact of ERISA and the regulations of the Department of Labor (the "DOL") thereunder on the ERISA Plan's decision to invest in our Common Stock. In particular, a fiduciary of an ERISA Plan should consider whether its decisions with respect to these matters would satisfy the requirements set forth in Part 4 of subtitle B of Title I of ERISA, including: - the diversification and prudence requirements of ERISA; - the requirement that the decisions be in the best interests of the participants and beneficiaries of the ERISA Plan; and - the requirement that the decisions be authorized under the appropriate governing instruments and investment policies of the ERISA Plan. ERISA also prohibits certain transactions involving an ERISA Plan and persons who are "parties in interest" with respect to the ERISA Plan. In addition, the IRS Code provides for similar prohibited transaction rules applicable to "plans" (as defined in Section 4975 of the IRS Code) and "disqualified persons" with respect to such plans. The fiduciary of an ERISA Plan or a plan described in Section 4975 of the Code (referred to together herein as "Plans") contemplating an investment in our Common Stock should consider whether the acquisition of such Common Stock would result in a prohibited transaction under ERISA and/or the IRS Code, and (if so) whether an exemption from these prohibited transaction 19 rules is available. In addition, the Plan Assets Regulation provides that (subject to certain exceptions) the assets of an entity in which a Plan holds an equity interest may be treated as assets of the investing Plan, in which event the underlying assets of such entity (and transactions involving such assets) would be subject to ERISA and applicable provisions of the IRS Code (including prohibited transaction provisions of ERISA and the Code). We intend to take such steps as may be necessary to qualify the Company and the Operating Partnership (and any BCP Sister Corp.) for one or more of the exceptions available under such regulation and, thereby, prevent the assets of the Company from being treated as assets of any investing Plan. Specifically, we will use our reasonable best efforts to qualify as a "real estate operating company" (within the meaning of the Plan Assets Regulation) at least until such time as our Common Stock qualifies as a class of "publicly offered securities" (as such term is defined in such regulation). In addition, with respect to any BCP Sister Corp., we will take such steps as may be necessary to qualify such BCP Sister Corp. as an operating company or a venture capital operating company or for one of the other available exceptions under the Plan Assets Regulation prior to distributions of its equity interests (although no assurances can be made in this regard). See "ERISA Considerations--The Treatment of the Company's Underlying Assets Under ERISA." CHANGES IN MANAGEMENT MAY BE DETERRED We are subject to the Maryland General Corporation Law (the "MGCL") because we are incorporated in Maryland. Certain provisions of the MGCL: - impose restrictions and require procedures with respect to business combinations, including (but not limited) to transactions with holders of more than 10% of the voting power of our equity securities; and - limit voting rights for holders of 20% or more of the voting power of our stock. These provisions could discourage a takeover or other transaction involving a change in control. Our Charter exempts from the MGCL any business combination with Alan M. Leventhal, Lionel P. Fortin or current or future affiliates, associates or other persons acting in concert as a group with either of Messrs. Leventhal or Fortin. In addition, the right of the Participation Plan to receive an Incentive Return in the event of a change of control of the Company (as defined in the Operating Partnership Agreement) may deter third parties from entering into transactions with the Company. See "Certain Provisions of Maryland Law and of BCP's Charter and Bylaws--Business Combinations," "--Control Share Acquisitions" and "The Company--Long-Term Incentive Plan." BOARD OF DIRECTORS MAY CHANGE CERTAIN POLICIES WITHOUT STOCKHOLDER CONSENT Our policies will be determined by our Board of Directors. The Board of Directors may amend or revise these policies, or approve transactions that deviate from these policies without a vote of the stockholders. These changes in policy may be positive or negative. See "Certain Provisions of Maryland Law and of BCP's Charter and Bylaws." LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT THE COMPANY We intend to avoid regulation as an investment company under the Investment Company Act of 1940. The Investment Company Act exempts entities that (directly or through majority-owned subsidiaries) are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (the "Qualifying Interests"). The commission currently interprets the Investment Company Act to exempt companies that: - maintain at least 55% of their Assets in Qualifying Interests, and 20 - maintain an additional 25% in Qualifying Interests or other Real Estate-Related Assets. As such, the Assets we may acquire are limited by this exemption. In addition, we could be required to either: - change the manner in which we conduct our operations to avoid being required to register as an investment company; or - register as an investment company. Either of these possibilities could have an adverse effect on the Company and the market price for our Common Stock. LIMITATION ON LIABILITY OF OFFICERS AND DIRECTORS OF THE COMPANY Our Charter limits the liability of a director or officer to the Company and our stockholders for money damages, except for liability resulting from: - actual receipt of an improper benefit or profit in money, property or services; or - active and deliberate dishonesty established by a final judgment as being material to the cause of action. See "Certain Provisions of Maryland Law and of BCP's Charter and Bylaws." OTHER RISKS RISK THAT MARKET FOR COMMON STOCK WILL NOT DEVELOP Our Common Stock presently has no established trading market and there is no assurance one will develop. Our Common Stock has been accepted for trading in the PORTAL Market, a real-time electronic National Association of Securities Dealers marketplace that facilitates trading in securities offered pursuant to Rule 144A transactions. We cannot assure you that an active trading market for our Common Stock will develop in the PORTAL Market or elsewhere. In addition, access to the PORTAL Market (unlike other prominent stock exchanges or NASDAQ markets) is restricted to certain parties and can only be used for the trading of certain restricted securities. Accordingly, we cannot assure you as to: - the likelihood that an active market for our Common Stock will develop; - the liquidity of any such market; - your ability to sell your Common Stock; or - the prices that you may obtain for your Common Stock. 21 THE COMPANY Beacon Capital Partners, Inc. is a real estate investment trust. We formed on January 21, 1998 as a Massachusetts corporation and reincorporated (through a merger) in Maryland on March 17, 1998. The Operating Partnership is a Delaware limited partnership. Our principal executive offices are located at One Federal Street, 26th Floor, Boston, Massachusetts 02110. Our telephone number is (617) 457-0400. We believe that our senior management has long-standing relationships with institutional owners, lenders, bankers and other real estate operators and developers. We anticipate that these relationships may provide us with regular access to transaction activity and investment opportunities. In addition, our senior management has gained operating experience through the management of public and private companies. This experience provides a unique perspective that is expected to be particularly valuable to us as the real estate cycle changes and as the real estate industry continues to transform from private to public capitalization. In addition, our senior management has been active in the development, acquisition and management of a broad spectrum of property types, including: - office; - lodging; - apartment; - industrial; - retail; and - mixed-use projects. Beacon Capital Partners Management, LLC ("Management Affiliate") is a Delaware limited liability company and our wholly-owned subsidiary. The Management Affiliate manages our properties. We have executed management agreements with the Management Affiliate to assure that the quality of services rendered to our tenants is appropriate for the type of property under management. The Management Affiliate engages sub-agents to handle the day-to-day and on-site management responsibilities for each property. The sub-agent's compensation for its services depends upon the particular property and the property's occupancy situation. This compensation can be either: - a flat fee; - a flat fee with an incentive component; or - based upon a percentage of gross rental income realized. We manage the Management Affiliate. As such, the Management Affiliate and the Company share the same management team. We do not award additional compensation to our officers and employees who handle the business affairs of the Management Affiliate. The Management Affiliate manages The Athenaeum Portfolio, Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio. The Management Affiliate has engaged Spaulding & Slye as sub-agent under an agreement that expires on December 31, 1999 to manage The Athenaeum Portfolio, Technology Square and The Draper Building. The Management Affiliate can terminate the agreement without cause or penalty on 30 days' notice to the sub-agent. Breunig Commercial Management, Inc. currently manages the Dallas Office and Industrial Portfolio. This management agreement expires on December 31, 1998. Beginning on January 1, 1999, Trans Western Property Company LLC will take over as sub-agent. An affiliate of Martin Smith Real Estate Services will manage Millenium Tower (once constructed). We negotiated the management arrangement as part of a joint venture structure. 22 An affiliate of Menlo Equities will manage the Mathilda Research Centre (once constructed). We negotiated the management arrangement as part of a joint venture structure. RECENT ACQUISITIONS THE ATHENAEUM PORTFOLIO On May 1, 1998 we purchased a portfolio of eleven buildings in Cambridge, MA known as The Athenaeum Portfolio for $195 million, including the assumption of approximately $69 million of first mortgage debt. We estimate that the aggregate purchase price is approximately 80% of replacement cost. The mixed-use portfolio consists of approximately 970,000 square feet and contains office, laboratory and retail uses as well as a 1,530 space parking garage. Two limited liability companies hold title to these properties. On May 20, 1998, we formed a joint venture with PW Acquisitions IX, LLC (an affiliate of PaineWebber). Under the joint venture agreement, each party has a 50% interest in a master limited liability company that controls the two limited liability companies holding title to the properties. The portfolio has two components: One Kendall Square and The Athenaeum House (215 First Street), which are located within close proximity of M.I.T. Several of the buildings were originally built as manufacturing buildings at the turn of the century and were fully renovated in the mid-1980's for office and laboratory uses. A nine-screen cinema was added to the complex in 1994. The buildings are currently 100% occupied. Major tenants which occupy more than 10% of the portfolio include: Genzyme, CLAM Associates, Cambridge Neuroscience, and Mitotix. The Athenaeum Portfolio is located in the East Cambridge office market. The overall Cambridge office market includes approximately 10 million square feet. According to Spaulding & Slye, the Cambridge office market had an overall vacancy rate of 2.4% as of June 30, 1998. Since the time that we purchased The Athenaeum Portfolio demand, primarily from biotechnology, biological science and pharmaceutical companies, has driven market rents from $21.00 per square foot to nearly $30.00 per square foot. The current unleveraged net operating income ("NOI") yield of approximately 10% is expected to rise to 12% by 2002. The projected internal rate of return ("IRR"), assuming 54% leverage and a seven year holding period, is 20.3%. TECHNOLOGY SQUARE & THE DRAPER BUILDING On June 24, 1998 we purchased a four-building complex known as Technology Square and an adjacent building known as The Draper Building from a partnership managed by Prudential. The properties are located in Cambridge, MA, adjacent to One Kendall Square (described above) and M.I.T. and consist of 1,026,000 square feet. We paid $123 million for the properties. As part of the purchase, Prudential accepted approximately $51.4 million in the form of units of the Operating Partnership at a blended rate of $20.31 per unit. There are no mortgages outstanding against these properties. Technology Square is currently 100% leased to two tenants: M.I.T. and Polaroid Corporation. Their leases expire in mid-1999. Average net lease rates in place are $6.53 per square foot, which we believe to be substantially below current market. Accordingly, we believe we will be able to re-let Technology Square at current market rents. We intend to re-develop and re-lease the property over the next 18-24 months and project substantial increases in net operating income as the property stabilizes at current market net rents. We believe the current market net rent is approximately $24 per square foot. We are currently reviewing the scope of the re-development. As such, we have not established an estimated cost. We anticipate that we will finance any re-development from cash on hand or project financing. The Draper Building is 100% leased to Draper Labs under a long-term lease that expires on October 20, 2001. The lease contains extension options through October 2051, pursuant to which the tenant has an option (under certain circumstances) to acquire The Draper Building. 23 Technology Square and The Draper Building are located in the East Cambridge office market. The overall Cambridge office market includes approximately 10 million square feet. We now own approximately 2 million square feet of office and commercial space in the Cambridge market, including The Athenaeum Portfolio, Technology Square and The Draper Building. According to Spaulding & Slye, the Cambridge office market had an overall vacancy rate of 2.4% as of June 30, 1998. Since the time that we purchased Technology Square and The Draper Building, office market rents have increased from $26.00 per square foot (gross) to $35.00 per square foot (gross). Massachusetts Institute of Technology, which occupies 106,000 square feet (approximately 20% of the space), has agreed to terms for a new five-year lease, at an average rate of approximately $35.00 per square foot. Demand from prospective tenants for the remaining space is strong. As a result (without the additional development), we expect to achieve a stabilized, unleveraged NOI yield of approximately 14% by 2000. In addition, we expect to gain approval for additional development of approximately 500,000 square feet during 1999. This additional development, which will likely commence in 1999, is expected to generate an unleveraged NOI yield of 12-14%. The projected IRR, assuming 60% leverage and a seven year holding period, is 20.5%. THE DALLAS OFFICE AND INDUSTRIAL PORTFOLIO On July 1, 1998 we acquired a 1,335,000 square foot portfolio of seven office properties and seven research & development (R&D) properties located in suburban Dallas, TX. We purchased the properties from Breunig Commercial Management, Inc.(a Dallas-based real estate owner and manager) for a total consideration of $91.2 million, including the assumption of approximately $21.7 million of first mortgage debt. The purchase price is approximately $68 per square foot, which we estimate to be approximately 65% of the replacement cost of the assets. The properties are predominately located along the North Central Expressway corridor in North Dallas. As measured on a square foot basis, the portfolio is approximately two-thirds office (842,000 s.f.) and one-third R&D (493,000 s.f.). The current average occupancy rate for the portfolio is 95%. However, leases for nearly 54% of the space in the buildings expire over the next 3 years. Average net rents at the properties are more than $3.00/s.f. (or nearly 56%) below what we estimate to be current market rents. Since the space is currently leased at below market rates, we believe that we can substantially increase the net operating income by re-leasing the properties at current market rents. Major tenants include: Blue Cross, Texas Instruments, Dallas Teachers Credit, Puretan, Inc., and Specialized Resources. The overall Dallas office market contains 133 million square feet of space. According to Cushman & Wakefield, as of the end of the second quarter 1998, the overall vacancy rate was 13.1%. The office properties in the Dallas Office and Industrial Portfolio are located primarily in the North Central Expressway and LBJ Freeway submarkets where the second quarter 1998 vacancy rates were 11.9% and 5.5%, respectively. The Office/Showroom category of the Dallas industrial market (which includes R&D space), contains 49.5 million square feet of space. The overall vacancy rate as of the end of the second quarter 1998 was 5.4%. The R&D properties in the Dallas Office and Industrial Portfolio are located primarily in the Richardson/Plano and North Dallas submarkets, where the second quarter 1998 vacancy rates were 3.4% and 3.5%, respectively. The Dallas Office and Industrial Portfolio, which will experience rollover in excess of 50% over the next two and one-half years, will benefit from the disparity between rents-in-place and market rents. We have leased in excess of 85,000 square feet since we acquired this portfolio, increasing rents by 80% from approximately $6.00 per square foot (net) to $11.00 per square foot (net). We expect to achieve a stabilized unleveraged NOI yield of 12% by 2001. The projected IRR, assuming 60% leverage and a seven year holding period, is 19.8%. 24 MILLENNIUM TOWER On September 1, 1998 we executed a joint venture agreement with HA L.L.C., an affiliate of Martin Smith Real Estate Services (a Seattle based real estate developer) by which we agreed to fund 66 2/3% of the equity required to develop a high-rise building in downtown Seattle, Washington and HA L.L.C. agreed to fund 33 1/3%. After each party receives a 15% per annum return on their equity, the profits from the venture will be split 60% to the Company and 40% to HA L.L.C. The building will be located at Second Avenue and Columbia Street. It will consist of 13 floors of Class A office space above which there will be located 6 floors of luxury residential condominiums. The ground floor will be devoted to retail uses. Of the 273,000 square feet in the building: - the office area will comprise 188,000 square feet; - the retail area will comprise 10,000 square feet; and - the residential portion will comprise 75,000 square feet. The site is fully entitled. At this point, we have not pre-leased the office space, nor have we commenced a sales program for the condominiums. HA L.L.C. contributed the land to the joint venture for an agreed value of $10.5 million. As such, we agreed to fund the first $19 million of cash requirements for the venture. The venture intends to finance the balance of development costs from a construction loan with an institutional lender. No loan has been obtained yet, and our $19 million initial contribution may be used before any monies are drawn down under the construction loan. The estimated cost of the project is $71 million, including the value of the land. The property is located in the downtown Seattle office market, which includes approximately 28.0 million square feet of office space, of which 14.6 million square feet is Class A space. According to Colliers Parrish International, at the end of the third quarter 1998 the market had an overall office vacancy rate of 2.5%, and the Class A sub-market had a vacancy rate of 2.3%. The projected leveraged IRR is expected to be 18.2%, assuming the property is sold at stabilization. MATHILDA RESEARCH CENTRE On August 9, 1998, we executed a joint venture agreement with Mathilda Partners LLC, an affiliate of Menlo Equities (a California based developer). Under the agreement, we have agreed to fund 87.5% of the equity required to develop two Class A office buildings and Mathilda Partners LLC has agreed to fund 12.5%. After each party receives a 12% per annum return on their equity, the profits from the venture will be split equally. In November 1998, the venture acquired a twelve-acre site on Mathilda Avenue in Sunnyvale, California. The venture plans to construct two four-story office buildings with surface parking containing an aggregate of approximately 267,000 square feet. However, the venture must obtain certain changes in the entitlements for the property because currently the density is limited to 187,000 square feet. The venture has not pre-leased either building. The venture intends to finance the development as following: - cash contributions for approximately 35% of the development expenditures (including the acquisition of the land); and - construction loan from an institutional lender for the balance of the expenditures. Although the venture has not finalized the development budget, it anticipates the budget to be approximately $57.0 million if it constructs the full 267,000 square feet. The site for the development is in the Sunnyvale office market, which includes approximately 21.5 million square feet. According to Colliers Parrish International, the Sunnyvale office research and development market had an overall vacancy rate at the end of the third quarter 1998 of 4.94%. 25 The projected leveraged IRR is expected to be 21.8%, assuming the property is sold at stabilization. INVESTMENT IN CYPRESS COMMUNICATIONS, INC. On September 30, 1998, we invested $5 million to acquire preferred stock in Cypress Communications, Inc. ("Cypress"). Our investment represents a 13.5% fully diluted ownership position in the company. Dividends will be earned on our investment as and when dividends are declared on the preferred stock or any other class of stock in Cypress. Our preferred stock will be treated preferentially upon a liquidation of Cypress (should a liquidation occur) and is held by the Operating Partnership and Tenant Communications, Inc., a Massachusetts corporation ("Tenant Communications"). Messrs. Leventhal and Fortin hold 91% of the voting common stock of Tenant Communications. The Operating Partnership holds 9% of the voting common stock and all of the non-voting stock of Tenant Communications. The Operating Partnership owns 99% of the economic interests in Tenant Communications and Messrs. Leventhal and Fortin jointly own a 1% economic interest in Tenant Communications. Cypress provides bundled communications services to tenants in multi-tenant commercial buildings. These bundled services include Internet access, video, voice mail and telephone service. By bundling services to multiple tenants in an office building, Cypress can aggregate the traffic of customers and give them the advantage of a cost-effective service with a high level of customer care. In the opinion of management, each of our properties is adequately insured. 26 THE PROPERTIES Set forth below are summary descriptions of the Properties. (1)(2)
PERCENT RENTABLE LEASED YEAR BUILT/ OWNERSHIP NO. OF PROPERTY AREA IN AT PROPERTY RENOVATED INTEREST (3) BLDGS. LOCATION SQUARE FEET 9/30/98 - ----------------------------------- ----------- ------------ ------ ------------- ----------- --------- CAMBRIDGE OFFICE MARKET: 215 First Street................... 1885/1981 50% 1 Cambridge, MA 306,084 100% One Kendall Square Cinema.......... 1994 50% 1 Cambridge, MA 31,641 100% Buildings 100-500.................. 1887/1984 50% 4 Cambridge, MA 222,372 99% Buildings 600/650/700.............. 1916/1985 50% 2 Cambridge, MA 236,661 100% Buildings 1500 & 1700.............. 1914/1986 50% 2 Cambridge, MA 39,707 100% Building 1400...................... 1989 50% 1 Cambridge, MA 133,211 100% -- ----------- --------- Subtotal The Athenaeum Portfolio...................... 11 969,676 100% -- ----------- --------- 545 Technology Square (4).......... 1965 100% 1 Cambridge, MA 144,123 100% 549 Technology Square.............. 1962 100% 1 Cambridge, MA 40,377 100% 565 Technology Square.............. 1965 100% 1 Cambridge, MA 201,816 100% 575 Technology Square.............. 1965 100% 1 Cambridge, MA 165,208 100% The Draper Building (5)............ 1976 100% 1 Cambridge, MA 474,817 100% -- ----------- --------- Subtotal Technology Square & Draper Building 5 1,026,341 100% -- ----------- --------- Total Cambridge 16 1,996,017 100% -- ----------- --------- SUBURBAN DALLAS OFFICE AND INDUSTRIAL MARKET: Bank One LBJ....................... 1982 100% 1 Dallas, TX 42,000 80% Brandywine Place................... 1984 100% 4 Plano, TX 66,237 99% Crosspoint Atrium.................. 1981 100% 1 Dallas, TX 220,212 97% Forest Abrams Place................ 1983 100% 2 Dallas, TX 68,827 89% 6500 Greenville Avenue (6)......... 1981/1996 100% 1 Dallas, TX 114,600 93% Northcreek Place II (7)............ 1984 100% 2 Dallas, TX 163,303 95% One Glen Lakes (8)................. 1982 100% 1 Dallas, TX 166,272 91% Richardson, Park North Business Center......... 1979 100% 2 TX 36,885 84% Plaza at Walnut Hill............... 1982 100% 2 Dallas, TX 88,280 96% Richardson, Richardson Business Center......... 1983 100% 2 TX 66,300 100% Richardson Commerce Centre......... 1981 100% 3 Dallas, TX 60,517 100% Richardson, Sherman Tech....................... 1981 100% 1 TX 16,176 100% Richardson, T I Business Park.................. 1980 100% 1 TX 96,902 100% Farmers Venture Drive Tech Center.......... 1975 100% 3 Branch, TX 128,322 100% -- ----------- --------- Subtotal Dallas 26 1,334,833 95% -- ----------- --------- Total/Weighted Average Properties 42 3,330,850 98% -- -- ----------- --------- ----------- ---------
- -------------------------- (1) Millennium Tower has not been included in these figures because it is a development project. Millennium Tower is a joint venture between the Company and HA L.L.C., which plans to build a high-rise building in downtown Seattle, Washington. (2) The Sunnyvale acquisition has not been included in these figures because it is a development project. Sunnyvale is a joint venture between the Company and Mathilda Partners L.L.C., which plans to build two Class A office buildings in Sunnyvale, California. (3) The Company holds a 50% interest in The Athenaeum Portfolio which includes 11 buildings, a nine screen-- 1,200 seat cinema and 1,530 structured parking spaces. (4) Technology Square includes 955 structured parking spaces. (5) The Draper Building includes 965 structured parking spaces. (6) 6500 Greenville Avenue includes 281 structured parking spaces. (7) Northcreek Place II includes 232 structured parking spaces. (8) One Glen Lakes includes 546 structured parking spaces. 27 OCCUPANCY RATES, BASE RENTS AND NET EFFECTIVE RENTS 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 the Company's Properties as of September 30, 1998. Base Rent is gross rent excluding payments by tenants on account of real estate tax and operating expense escalation. 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, less total operating expenses and real estate taxes.
AVERAGE AVERAGE TOTAL % BASE NET EFF PROPERTY AREA LEASED RENT RENT - ------------------------------------------------------------------------- ---------- --------- --------- --------- 215 First Street......................................................... 306,084 100% $ 19.31 $ 15.02 One Kendall Square Cinema................................................ 31,641 100% 18.29 13.48 Buildings 100-500........................................................ 222,372 99% 23.60 16.34 Buildings 600/650/700.................................................... 236,661 100% 33.95 24.92 Buildings 1500 & 1700.................................................... 39,707 100% 14.92 10.45 Building 1400............................................................ 133,211 100% 27.23 19.68 ---------- --------- --------- --------- The Athenaeum Portfolio.................................................. 969,676 100% 24.74 18.15 ---------- --------- --------- --------- 545 Technology Square (NNN).............................................. 144,123 100% 13.35 13.35 549 Technology Square.................................................... 40,377 100% 6.51 4.06 565 Technology Square.................................................... 201,816 100% 6.63 4.08 575 Technology Square.................................................... 165,208 100% 7.32 4.16 The Draper Building (NNN)................................................ 474,817 100% 6.16 6.16 ---------- --------- --------- --------- Technology Square & The Draper Building.................................. 1,026,341 100% 7.46 6.36 ---------- --------- --------- --------- Total Cambridge, MA...................................................... 1,996,017 100% 15.84 12.07 ---------- --------- --------- --------- Bank One LBJ............................................................. 42,000 80% 12.28 6.29 Brandywine Place......................................................... 66,237 99% 10.45 7.52 Crosspoint Atrium........................................................ 220,212 97% 12.30 6.82 Forest Abrams Place...................................................... 68,827 89% 12.13 6.74 6500 Greenville Avenue................................................... 114,600 93% 12.31 6.75 Northcreek Place II...................................................... 163,303 95% 11.65 6.75 One Glen Lakes........................................................... 166,272 91% 15.21 9.86 Park North Business Center............................................... 36,885 84% 5.35 4.22 Plaza at Walnut Hill..................................................... 88,280 96% 7.21 4.59 Richardson Business Center............................................... 66,300 100% 4.39 4.27 Richardson Commerce Centre............................................... 60,517 100% 6.76 5.45 Sherman Tech............................................................. 16,176 100% 6.79 4.96 T I Business Park........................................................ 96,902 100% 5.01 4.33 Venture Drive Tech Center................................................ 128,322 100% 4.70 3.56 ---------- --------- --------- --------- Total Dallas, TX......................................................... 1,334,833 95% 9.89 6.23 ---------- --------- --------- --------- Total/Weighted Average................................................... 3,330,850 98% $ 13.52 $ 9.80 ---------- --------- --------- --------- ---------- --------- --------- ---------
28 LEASE EXPIRATIONS--ALL PROPERTIES The following table sets forth lease expirations (in square feet) for each of our Properties.
10/1/98 TO PROPERTY 12/31/98 1999 2000 2001 2002 2003 2004 2005 2006 - ----------------------- ------------ --------- --------- --------- --------- --------- --------- --------- --------- CAMBRIDGE, MA - ----------------------- 215 FIRST STREET - ----------------------- square feet (a)........ 31,014 49,771 11,345 44,277 41,910 127,417 0 0 0 % sq. ft. (b).......... 10.1% 16.3% 3.7% 14.5% 13.7% 41.6% 0.0% 0.0% 0.0% annual rent (c)........ 543,095 1,108,930 163,420 841,040 753,218 2,642,037 0 0 0 % annual rent (d)...... 9.0% 18.3% 2.7% 13.9% 12.4% 43.7% 0.0% 0.0% 0.0% tenants (e)............ 5 9 4 4 4 6 0 0 0 ONE KENDALL SQUARE CINEMA - ----------------------- square feet (a)........ 0 0 0 0 0 0 0 0 0 % sq. ft. (b).......... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........ 0 0 0 0 0 0 0 0 0 % annual rent (d)...... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............ 0 0 0 0 0 0 0 0 0 BUILDINGS 100-500 - ----------------------- square feet (a)........ 42,820 28,523 34,172 16,648 30,025 45,981 0 21,200 0 % sq. ft. (b).......... 19.3% 12.8% 15.4% 7.5% 13.5% 20.7% 0.0% 9.5% 0.0% annual rent (c)........ 791,362 653,066 926,647 350,976 717,629 1,128,061 0 522,324 0 % annual rent (d)...... 15.5% 12.8% 18.2% 6.9% 14.1% 22.2% 0.0% 10.3% 0.0% tenants (e)............ 9 8 8 7 11 4 0 5 0 BUILDINGS 600/650/700 - ----------------------- square feet (a)........ 5,095 19,650 71,738 4,629 31,333 161 0 103,760 0 % sq. ft. (b).......... 2.2% 8.3% 30.3% 2.0% 13.2% 0.1% 0.0% 43.8% 0.0% annual rent (c)........ 235,689 393,811 2,442,338 117,395 1,252,066 1,932 0 3,285,386 0 % annual rent (d)...... 3.0% 5.1% 31.6% 1.5% 16.2% 0.0% 0.0% 42.5% 0.0% tenants (e)............ 3 13 3 1 1 1 0 2 0 BUILDINGS 1500 & 1700 - ----------------------- square feet (a)........ 3,830 275 0 15,707 4,709 0 0 0 0 % sq. ft. (b).......... 9.6% 0.7% 0.0% 39.6% 11.9% 0.0% 0.0% 0.0% 0.0% annual rent (c)........ 20,529 2,196 0 393,462 103,598 0 0 0 0 % annual rent (d)...... 3.3% 0.3% 0.0% 62.5% 16.5% 0.0% 0.0% 0.0% 0.0% tenants (e)............ 1 1 0 1 1 0 0 0 0 BUILDING 1400 - ----------------------- square feet (a)........ 0 0 0 32,409 0 0 0 100,802 0 % sq. ft. (b).......... 0.0% 0.0% 0.0% 24.3% 0.0% 0.0% 0.0% 75.7% 0.0% annual rent (c)........ 0 0 0 982,295 0 0 0 2,763,609 0 % annual rent (d)...... 0.0% 0.0% 0.0% 26.2% 0.0% 0.0% 0.0% 73.8% 0.0% tenants (e)............ 0 0 0 2 0 0 0 8 0 ------------ --------- --------- --------- --------- --------- --------- --------- --------- TOTAL THE ATHENAEUM PORTFOLIO - ----------------------- square feet (a)........ 82,759 98,219 117,255 113,670 107,977 173,559 0 225,762 0 % sq. ft. (b).......... 8.5% 10.1% 12.1% 11.7% 11.1% 17.9% 0.0% 23.3% 0.0% annual rent (c)........ 1,590,675 2,158,002 3,532,405 2,685,167 2,826,511 3,772,030 0 6,571,320 0 % annual rent (d)...... 6.7% 9.1% 14.8% 11.3% 11.9% 15.8% 0.0% 27.6% 0.0% tenants (e)............ 18 31 15 15 17 11 0 15 0 2008 & PROPERTY 2007 BEYOND - ----------------------- --------- --------- CAMBRIDGE, MA - ----------------------- 215 FIRST STREET - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 ONE KENDALL SQUARE CINEMA - ----------------------- square feet (a)........ 0 31,641 % sq. ft. (b).......... 0.0% 100.0% annual rent (c)........ 0 578,802 % annual rent (d)...... 0.0% 100.0% tenants (e)............ 0 1 BUILDINGS 100-500 - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 BUILDINGS 600/650/700 - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 BUILDINGS 1500 & 1700 - ----------------------- square feet (a)........ 0 15,186 % sq. ft. (b).......... 0.0% 38.2% annual rent (c)........ 0 109,494 % annual rent (d)...... 0.0% 17.4% tenants (e)............ 0 3 BUILDING 1400 - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 --------- --------- TOTAL THE ATHENAEUM PORTFOLIO - ----------------------- square feet (a)........ 0 46,827 % sq. ft. (b).......... 0.0% 4.8% annual rent (c)........ 0 688,296 % annual rent (d)...... 0.0% 2.9% tenants (e)............ 0 4
- ------------------------------ (a) Total area in square feet covered by such leases. (b) Percentage of total square feet of the Property. (c) Annualized expiring base rental income represented by such leases in the year of expiration plus the current tenant payments on account of real estate tax and operating escalations (amounts in dollars). (d) Calculated as annual rent divided by the total annual rent. (e) The number of tenants whose leases will expire. 29
10/1/98 TO PROPERTY 12/31/98 1999 2000 2001 2002 2003 2004 2005 2006 - -------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- 545 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 144,123 0 0 0 0 0 0 0 % sq. ft. (b)............. 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........... 0 3,149,241 0 0 0 0 0 0 0 % annual rent (d)......... 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............... 0 2 0 0 0 0 0 0 0 549 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 40,377 0 0 0 0 0 0 0 % sq. ft. (b)............. 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........... 0 205,823 0 0 0 0 0 0 0 % annual rent (d)......... 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............... 0 1 0 0 0 0 0 0 0 565 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 201,816 0 0 0 0 0 0 0 % sq. ft. (b)............. 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........... 0 1,403,561 0 0 0 0 0 0 0 % annual rent (d)......... 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............... 0 1 0 0 0 0 0 0 0 575 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 165,208 0 0 0 0 0 0 0 % sq. ft. (b)............. 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........... 0 1,208,911 0 0 0 0 0 0 0 % annual rent (d)......... 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............... 0 1 0 0 0 0 0 0 0 THE DRAPER BUILDING(F) - -------------------------- square feet (a)........... 0 0 0 0 0 0 0 0 0 % sq. ft. (b)............. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........... 0 0 0 0 0 0 0 0 0 % annual rent (d)......... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............... 0 0 0 0 0 0 0 0 0 --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL TECHNOLOGY SQUARE & THE DRAPER BUILDING - -------------------------- square feet (a)........... 0 551,524 0 0 0 0 0 0 0 % sq. ft. (b)............. 0.0% 53.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........... 0 5,967,535 0 0 0 0 0 0 0 % annual rent (d)......... 0.0% 53.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............... 0 5 0 0 0 0 0 0 0 2008 & PROPERTY 2007 BEYOND - -------------------------- --------- --------- 545 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 0 % sq. ft. (b)............. 0.0% 0.0% annual rent (c)........... 0 0 % annual rent (d)......... 0.0% 0.0% tenants (e)............... 0 0 549 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 0 % sq. ft. (b)............. 0.0% 0.0% annual rent (c)........... 0 0 % annual rent (d)......... 0.0% 0.0% tenants (e)............... 0 0 565 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 0 % sq. ft. (b)............. 0.0% 0.0% annual rent (c)........... 0 0 % annual rent (d)......... 0.0% 0.0% tenants (e)............... 0 0 575 TECHNOLOGY SQUARE - -------------------------- square feet (a)........... 0 0 % sq. ft. (b)............. 0.0% 0.0% annual rent (c)........... 0 0 % annual rent (d)......... 0.0% 0.0% tenants (e)............... 0 0 THE DRAPER BUILDING(F) - -------------------------- square feet (a)........... 0 474,817 % sq. ft. (b)............. 0.0% 100.0% annual rent (c)........... 0 5,232,483 % annual rent (d)......... 0.0% 100.0% tenants (e)............... 0 1 --------- --------- TOTAL TECHNOLOGY SQUARE & THE DRAPER BUILDING - -------------------------- square feet (a)........... 0 474,817 % sq. ft. (b)............. 0.0% 46.3% annual rent (c)........... 0 5,232,483 % annual rent (d)......... 0.0% 46.7% tenants (e)............... 0 1
- ---------------------------------- (a) Total area in square feet covered by such leases. (b) Percentage of total square feet of the Property. (c) Annualized expiring base rental income represented by such leases in the year of expiration plus the current tenant payments on account of real estate tax and operating escalations (amounts in dollars). (d) Calculated as annual rent divided by the total annual rent. (e) The number of tenants whose leases will expire. (f) The Draper Building is reflected as a 2008 & beyond expiration; although the current lease term expires in 2001, the tenant has options to extend through October 2051 at rental rates that are significantly below market. 30
10/1/98 TO PROPERTY 12/31/98 1999 2000 2001 2002 2003 2004 2005 2006 - ----------------------- ------------ --------- --------- --------- --------- --------- --------- --------- --------- DALLAS, TX - ----------------------- BANK ONE LBJ - ----------------------- square feet (a)........ 4,801 896 3,597 11,647 0 12,357 350 0 0 % sq. ft. (b).......... 11.4% 2.1% 8.6% 27.7% 0.0% 29.4% 0.8% 0.0% 0.0% annual rent (c)........ 44,729 11,200 43,265 145,809 0 157,963 13,801 0 0 % annual rent (d)...... 10.7% 2.7% 10.4% 35.0% 0.0% 37.9% 3.3% 0.0% 0.0% tenants (e)............ 3 1 2 3 0 3 1 0 0 BRANDYWINE PLACE - ----------------------- square feet (a)........ 5,187 23,169 17,665 7,279 9,610 2,530 0 0 0 % sq. ft. (b).......... 7.8% 35.0% 26.7% 11.0% 14.5% 3.8% 0.0% 0.0% 0.0% annual rent (c)........ 42,289 208,267 202,501 97,134 125,407 35,420 0 0 0 % annual rent (d)...... 5.9% 29.3% 28.5% 13.7% 17.6% 5.0% 0.0% 0.0% 0.0% tenants (e)............ 2 6 10 5 6 1 0 0 0 CROSSPOINT ATRIUM - ----------------------- square feet (a)........ 6,709 54,419 27,046 13,135 21,811 44,539 2,856 0 0 % sq. ft. (b).......... 3.0% 24.7% 12.3% 6.0% 9.9% 20.2% 1.3% 0.0% 0.0% annual rent (c)........ 60,404 721,843 385,394 220,923 357,930 730,975 46,924 0 0 % annual rent (d)...... 1.9% 22.4% 12.0% 6.9% 11.1% 22.7% 1.5% 0.0% 0.0% tenants (e)............ 7 11 9 4 4 9 1 0 0 FOREST ABRAMS PLACE - ----------------------- square feet (a)........ 1,941 30,554 12,554 4,381 3,967 6,611 1,520 0 0 % sq. ft. (b).......... 2.8% 44.4% 18.2% 6.4% 5.8% 9.6% 2.2% 0.0% 0.0% annual rent (c)........ 24,461 381,995 185,891 58,177 61,082 90,628 20,900 0 0 % annual rent (d)...... 3.0% 46.4% 22.6% 7.1% 7.4% 11.0% 2.5% 0.0% 0.0% tenants (e)............ 2 14 12 4 3 2 1 0 0 6500 GREENVILLE AVENUE - ----------------------- square feet (a)........ 7,068 13,429 30,096 21,039 24,214 10,749 0 0 0 % sq. ft. (b).......... 6.2% 11.7% 26.3% 18.4% 21.1% 9.4% 0.0% 0.0% 0.0% annual rent (c)........ 76,816 179,559 386,789 303,722 395,665 171,984 0 0 0 % annual rent (d)...... 5.1% 11.9% 25.5% 20.1% 26.1% 11.4% 0.0% 0.0% 0.0% tenants (e)............ 6 9 9 7 6 2 0 0 0 NORTHCREEK PLACE II - ----------------------- square feet (a)........ 13,494 50,061 19,820 9,590 52,466 4,916 5,606 0 0 % sq. ft. (b).......... 8.3% 30.7% 12.1% 5.9% 32.1% 3.0% 3.4% 0.0% 0.0% annual rent (c)........ 46,951 674,648 291,218 161,196 738,023 81,521 100,908 0 0 % annual rent (d)...... 2.2% 32.2% 13.9% 7.7% 35.2% 3.9% 4.8% 0.0% 0.0% tenants (e)............ 4 14 6 6 4 2 1 0 0 ONE GLEN LAKES - ----------------------- square feet (a)........ 3,284 15,255 32,062 25,303 49,626 5,286 19,693 0 0 % sq. ft. (b).......... 2.0% 9.2% 19.3% 15.2% 29.8% 3.2% 11.8% 0.0% 0.0% annual rent (c)........ 45,783 208,060 526,417 463,423 883,130 102,801 367,688 0 0 % annual rent (d)...... 1.8% 8.0% 20.3% 17.8% 34.0% 4.0% 14.2% 0.0% 0.0% tenants (e)............ 2 5 8 5 8 2 3 0 0 PARK NORTH BUSINESS CENTER - ----------------------- square feet (a)........ 4,083 10,981 15,813 0 0 0 0 0 0 % sq. ft. (b).......... 11.1% 29.8% 42.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........ 26,213 73,905 94,257 0 0 0 0 0 0 % annual rent (d)...... 13.5% 38.0% 48.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............ 1 2 2 0 0 0 0 0 0 2008 & PROPERTY 2007 BEYOND - ----------------------- --------- --------- DALLAS, TX - ----------------------- BANK ONE LBJ - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 BRANDYWINE PLACE - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 CROSSPOINT ATRIUM - ----------------------- square feet (a)........ 0 42,694 % sq. ft. (b).......... 0.0% 19.4% annual rent (c)........ 0 696,286 % annual rent (d)...... 0.0% 21.6% tenants (e)............ 0 2 FOREST ABRAMS PLACE - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 6500 GREENVILLE AVENUE - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 NORTHCREEK PLACE II - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 ONE GLEN LAKES - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 PARK NORTH BUSINESS CENTER - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0
31
10/1/98 TO PROPERTY 12/31/98 1999 2000 2001 2002 2003 2004 2005 2006 - ----------------------- ------------ --------- --------- --------- --------- --------- --------- --------- --------- PLAZA AT WALNUT HILL - ----------------------- square feet (a)........ 1,204 11,734 25,645 27,746 14,221 4,134 0 0 0 % sq. ft. (b).......... 1.4% 13.3% 29.0% 31.4% 16.1% 4.7% 0.0% 0.0% 0.0% annual rent (c)........ 10,104 94,138 184,801 201,384 93,574 26,871 0 0 0 % annual rent (d)...... 1.7% 15.4% 30.3% 33.0% 15.3% 4.4% 0.0% 0.0% 0.0% tenants (e)............ 2 4 8 5 1 1 0 0 0 RICHARDSON BUSINESS CENTER - ----------------------- square feet (a)........ 0 0 58,425 7,875 0 0 0 0 0 % sq. ft. (b).......... 0.0% 0.0% 88.1% 11.9% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........ 0 0 336,002 56,858 0 0 0 0 0 % annual rent (d)...... 0.0% 0.0% 85.5% 14.5% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............ 0 0 2 1 0 0 0 0 0 RICHARDSON COMMERCE CENTRE - ----------------------- square feet (a)........ 4,944 0 840 0 8,000 35,961 10,772 0 0 % sq. ft. (b).......... 8.2% 0.0% 1.4% 0.0% 13.2% 59.4% 17.8% 0.0% 0.0% annual rent (c)........ 34,163 0 5,536 0 54,320 278,058 82,255 0 0 % annual rent (d)...... 7.5% 0.0% 1.2% 0.0% 12.0% 61.2% 18.1% 0.0% 0.0% tenants (e)............ 1 0 1 0 1 5 2 0 0 SHERMAN TECH - ----------------------- square feet (a)........ 0 0 11,777 4,399 0 0 0 0 0 % sq. ft. (b).......... 0.0% 0.0% 72.8% 27.2% 0.0% 0.0% 0.0% 0.0% 0.0% annual rent (c)........ 0 0 85,146 31,893 0 0 0 0 0 % annual rent (d)...... 0.0% 0.0% 72.8% 27.2% 0.0% 0.0% 0.0% 0.0% 0.0% tenants (e)............ 0 0 3 1 0 0 0 0 0 TI BUSINESS PARK - ----------------------- square feet (a)........ 31,977 12,447 26,689 20,573 0 5,216 0 0 0 % sq. ft. (b).......... 33.0% 12.8% 27.5% 21.2% 0.0% 5.4% 0.0% 0.0% 0.0% annual rent (c)........ 137,459 71,335 138,597 153,420 0 41,728 0 0 0 % annual rent (d)...... 25.3% 13.1% 25.5% 28.3% 0.0% 7.7% 0.0% 0.0% 0.0% tenants (e)............ 2 3 5 2 0 1 0 0 0 VENTURE DRIVE TECH CENTER - ----------------------- square feet (a)........ 6,525 0 55,177 20,379 0 46,241 0 0 0 % sq. ft. (b).......... 5.1% 0.0% 43.0% 15.9% 0.0% 36.0% 0.0% 0.0% 0.0% annual rent (c)........ 27,861 0 299,935 103,118 0 213,803 0 0 0 % annual rent (d)...... 4.3% 0.0% 46.5% 16.0% 0.0% 33.2% 0.0% 0.0% 0.0% tenants (e)............ 1 0 5 1 0 2 0 0 0 ------------ --------- --------- --------- --------- --------- --------- --------- --------- TOTAL DALLAS OFFICE AND INDUSTRIAL PORTFOLIO - ----------------------- square feet (a)........ 91,217 222,945 337,206 173,346 183,915 178,540 40,797 0 0 % sq. ft. (b).......... 6.8% 16.7% 25.3% 13.0% 13.8% 13.4% 3.1% 0.0% 0.0% annual rent (c)........ 577,234 2,624,951 3,165,747 1,997,056 2,709,131 1,931,752 632,475 0 0 % annual rent (d)...... 4.0% 18.3% 22.1% 13.9% 18.9% 13.5% 4.4% 0.0% 0.0% tenants (e)............ 33 69 82 44 33 30 9 0 0 ------------ --------- --------- --------- --------- --------- --------- --------- --------- TOTAL PROPERTIES - ----------------------- square feet (a)........ 173,976 872,688 454,461 287,016 291,892 352,099 40,797 225,762 0 % sq. ft. (b).......... 5.2% 26.2% 13.6% 8.6% 8.8% 10.6% 1.2% 6.8% 0.0% annual rent (c)........ 2,167,909 10,750,489 6,698,152 4,682,223 5,535,642 5,703,782 632,475 6,571,320 0 % annual rent (d)...... 4.4% 21.8% 13.6% 9.5% 11.2% 11.6% 1.3% 13.3% 0.0% tenants (e)............ 51 105 97 59 50 41 9 15 0 2008 & PROPERTY 2007 BEYOND - ----------------------- --------- --------- PLAZA AT WALNUT HILL - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 RICHARDSON BUSINESS CENTER - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 RICHARDSON COMMERCE CENTRE - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 SHERMAN TECH - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 TI BUSINESS PARK - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 VENTURE DRIVE TECH CENTER - ----------------------- square feet (a)........ 0 0 % sq. ft. (b).......... 0.0% 0.0% annual rent (c)........ 0 0 % annual rent (d)...... 0.0% 0.0% tenants (e)............ 0 0 --------- --------- TOTAL DALLAS OFFICE AND INDUSTRIAL PORTFOLIO - ----------------------- square feet (a)........ 0 42,694 % sq. ft. (b).......... 0.0% 3.2% annual rent (c)........ 0 696,286 % annual rent (d)...... 0.0% 4.9% tenants (e)............ 0 2 --------- --------- TOTAL PROPERTIES - ----------------------- square feet (a)........ 0 564,338 % sq. ft. (b).......... 0.0% 16.9% annual rent (c)........ 0 6,617,066 % annual rent (d)...... 0.0% 13.4% tenants (e)............ 0 7
- ---------------------------------- (a) Total area in square feet covered by such leases. (b) Percentage of total square feet of the Property. (c) Annualized expiring base rental income represented by such leases in the year of expiration plus the current tenant payments on account of real estate tax and operating escalations (amounts in dollars). (d) Calculated as annual rent divided by the total annual rent. (e) The number of tenants whose leases will expire. 32 HISTORICAL OPERATING INFORMATION The following charts set forth the Historic Occupancy, Historic Base Rent and Historic Net Rent (as defined below) per square foot for each of the Properties. Historic Net Rent is Base Rent plus tenant payments on account of real estate tax and operating expense escalation, less total operating expenses and real estate taxes.
HISTORIC OCCUPANCY TOTAL ----------------------------------------------------- PROPERTY AREA 1993 1994 1995 1996 1997 - ----------------------------------------------------- --------- --------- --------- --------- --------- --------- 215 First Street..................................... 306,084 63% 86% 97% 96% 100% One Kendall Square Cinema (a)........................ 31,641 -- -- 100% 100% 100% Buildings 100-500.................................... 222,372 69% 91% 75% 84% 84% Buildings 600/650/700................................ 236,661 95% 95% 95% 97% 99% Buildings 1500 & 1700 (b)............................ 39,707 -- 87% 82% 87% 87% Building 1400........................................ 133,211 98% 96% 90% 100% 100% --------- --------- --------- --------- --------- --------- The Athenaeum Portfolio.............................. 969,676 78% 91% 90% 94% 95% --------- --------- --------- --------- --------- --------- 545 Technology Square................................ 144,123 100% 100% 100% 100% 100% 549 Technology Square................................ 40,377 100% 100% 100% 100% 100% 565 Technology Square................................ 201,816 100% 100% 100% 100% 100% 575 Technology Square................................ 165,208 100% 100% 100% 100% 100% The Draper Building.................................. 474,817 100% 100% 100% 100% 100% --------- --------- --------- --------- --------- --------- Technology Square & The Draper Building.............. 1,026,341 100% 100% 100% 100% 100% --------- --------- --------- --------- --------- --------- Bank One LBJ (b)..................................... 42,000 -- -- -- -- -- Brandywine Place (b)................................. 66,237 -- 96% 94% 92% 99% Crosspoint Atrium (b)................................ 220,212 -- 79% 87% 94% 95% Forest Abrams Place (b).............................. 68,827 -- -- -- -- 76% 6500 Greenville Avenue (b)........................... 114,600 -- -- -- 78% 83% Northcreek Place II (b).............................. 163,303 -- 95% 91% 98% 95% One Glen Lakes (b)................................... 166,272 -- -- 94% 96% 95% Park North Business Center (b)....................... 36,885 -- -- -- 100% 100% Plaza at Walnut Hill (b)............................. 88,280 -- 71% 78% 81% 84% Richardson Business Center (b)....................... 66,300 -- -- -- 100% 92% Richardson Commerce Centre (b)....................... 60,517 -- 90% 94% 99% 90% Sherman Tech (b)..................................... 16,176 -- 100% 96% 98% 100% T I Business Park (b)................................ 96,902 -- -- 85% 97% 99% Venture Drive Tech Center (b)........................ 128,322 -- 87% 94% 94% 92% --------- --------- --------- --------- --------- --------- Dallas Office and Industrial Portfolio............... 1,334,833 -- 86% 90% 93% 92% --------- --------- --------- --------- --------- --------- Total/Weighted Average............................... 3,330,850 90% 93% 93% 96% 96% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
HISTORIC BASE RENT TOTAL ----------------------------------------------------- PROPERTY AREA 1993 1994 1995 1996 1997 - ----------------------------------------------------- --------- --------- --------- --------- --------- --------- 215 First Street..................................... 306,084 $ 17.32 $ 14.36 $ 13.52 $ 15.19 $ 16.62 One Kendall Square Cinema (a)........................ 31,641 -- -- 16.07 17.71 17.93 Buildings 100-500.................................... 222,372 17.93 19.43 20.92 17.82 21.74 Buildings 600/650/700................................ 236,661 26.96 28.49 28.47 28.99 31.91 Buildings 1500 & 1700 (b)............................ 39,707 -- 9.43 10.51 11.58 11.46 Building 1400........................................ 133,211 23.16 25.67 27.96 26.95 27.30 --------- --------- --------- --------- --------- --------- The Athenaeum Portfolio.............................. 969,676 20.88 20.52 20.81 20.71 22.82 --------- --------- --------- --------- --------- --------- 545 Technology Square................................ 144,123 27.14 22.89 22.28 21.86 20.84 549 Technology Square................................ 40,377 11.88 11.61 11.12 10.42 9.88 565 Technology Square................................ 201,816 9.09 9.32 9.28 8.63 8.01 575 Technology Square................................ 165,208 10.61 10.50 9.90 9.38 8.59 The Draper Building.................................. 474,817 6.16 6.16 6.16 6.16 6.16 --------- --------- --------- --------- --------- --------- Technology Square & The Draper Building.............. 1,026,341 10.63 10.05 9.84 9.54 9.12 --------- --------- --------- --------- --------- ---------
33
HISTORIC BASE RENT TOTAL ----------------------------------------------------- PROPERTY AREA 1993 1994 1995 1996 1997 - ----------------------------------------------------- --------- --------- --------- --------- --------- --------- Bank One LBJ (b)..................................... 42,000 -- -- -- -- -- Brandywine Place (b)................................. 66,237 -- -- 7.64 8.81 8.81 Crosspoint Atrium (b)................................ 220,212 -- 7.76 8.59 10.12 10.74 Forest Abrams Place (b).............................. 68,827 -- -- -- -- -- 6500 Greenville Avenue (b)........................... 114,600 -- -- -- -- 10.84 Northcreek Place II (b).............................. 163,303 -- 9.41 12.06 11.26 11.17 One Glen Lakes (b)................................... 166,272 -- -- -- 11.37 12.08 Park North Business Center (b)....................... 36,885 -- -- -- 5.31 5.40 Plaza at Walnut Hill (b)............................. 88,280 -- 7.06 6.73 7.76 6.12 Richardson Business Center (b)....................... 66,300 -- -- -- 2.78 3.75 Richardson Commerce Centre (b)....................... 60,517 -- -- 4.94 5.22 5.84 Sherman Tech (b)..................................... 16,176 -- -- 11.21 5.36 5.58 T I Business Park (b)................................ 96,902 -- -- -- 4.34 4.27 Venture Drive Tech Center (b)........................ 128,322 -- -- 3.92 3.97 4.34 --------- --------- --------- --------- --------- --------- Dallas Office and Industrial Portfolio............... 1,334,833 -- 8.20 8.00 8.06 8.52 --------- --------- --------- --------- --------- --------- Total/Weighted Average............................... 3,330,850 $ 15.41 $ 13.72 $ 13.22 $ 12.50 $ 13.02 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
HISTORIC NET RENT TOTAL ----------------------------------------------------- PROPERTY AREA 1993 1994 1995 1996 1997 - ----------------------------------------------------- --------- --------- --------- --------- --------- --------- 215 First Street..................................... 306,084 $ 7.23 $ 8.06 $ 8.63 $ 9.64 $ 11.18 One Kendall Square Cinema (a)........................ 31,641 -- -- 13.33 14.56 13.38 Buildings 100-500.................................... 222,372 8.19 14.34 16.42 13.90 13.98 Buildings 600/650/700................................ 236,661 16.95 18.79 18.56 18.27 20.75 Buildings 1500 & 1700 (b)............................ 39,707 -- 6.75 6.47 8.70 7.93 Building 1400........................................ 133,211 14.01 14.46 17.48 16.93 16.52 --------- --------- --------- --------- --------- --------- The Athenaeum Portfolio.............................. 969,676 11.03 13.11 14.12 13.85 14.83 --------- --------- --------- --------- --------- --------- 545 Technology Square................................ 144,123 16.38 12.14 12.01 12.38 11.85 549 Technology Square................................ 40,377 3.36 3.27 3.84 3.82 3.31 565 Technology Square................................ 201,816 2.96 3.16 3.14 3.19 2.71 575 Technology Square................................ 165,208 3.39 3.65 3.30 3.81 3.54 The Draper Building.................................. 474,817 5.87 5.86 5.85 5.84 5.83 --------- --------- --------- --------- --------- --------- Technology Square & The Draper Building.............. 1,026,341 6.27 5.75 5.69 5.83 5.60 --------- --------- --------- --------- --------- --------- Bank One LBJ (b)..................................... 42,000 -- -- -- -- -- Brandywine Place (b)................................. 66,237 -- -- 4.60 4.82 5.36 Crosspoint Atrium (b)................................ 220,212 -- 2.20 2.29 4.14 4.20 Forest Abrams Place (b).............................. 68,827 -- -- -- -- -- 6500 Greenville Avenue (b)........................... 114,600 -- -- -- -- 3.66 Northcreek Place II (b).............................. 163,303 -- 4.79 5.75 6.43 5.23 One Glen Lakes (b)................................... 166,272 -- -- -- 5.54 5.70 Park North Business Center (b)....................... 36,885 -- -- -- 3.96 4.01 Plaza at Walnut Hill (b)............................. 88,280 -- 3.45 3.66 3.54 2.12 Richardson Business Center (b)....................... 66,300 -- -- -- 1.90 3.46 Richardson Commerce Centre (b)....................... 60,517 -- -- 3.43 3.82 4.11 Sherman Tech (b)..................................... 16,176 -- -- 8.82 2.45 2.46 T I Business Park (b)................................ 96,902 -- -- -- 3.87 3.89 Venture Drive Tech Center (b)........................ 128,322 -- -- 3.52 2.85 3.26 --------- --------- --------- --------- --------- --------- Dallas Office and Industrial Portfolio............... 1,334,833 -- 3.33 3.87 4.33 4.21 --------- --------- --------- --------- --------- --------- Total/Weighted Average............................... 3,330,850 $ 8.50 $ 8.12 $ 8.18 $ 7.80 $ 7.85 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ---------------------------------- (a) Construction of The Cinema at Kendall Square was completed in late 1994. (b) The previous owners did not have historical information prior to their ownership of these properties. Therefore, no information prior to their ownership is available. 34 MORTGAGE INDEBTEDNESS Our total outstanding consolidated mortgage debt and our proportionate share of the total outstanding unconsolidated mortgage debt on the properties is approximately $56.1 million at September 30, 1998. The following table sets forth certain information regarding our consolidated and unconsolidated mortgage debt obligations, including mortgage obligations relating to specific Properties. All of the mortgage debt is nonrecourse to the Company, with certain exceptions such as liability for fraud, misapplication of insurance proceeds and environmental matters.
PRINCIPAL COMPANY'S ESTIMATED AMOUNT PORTION OF INTEREST MATURITY BALANCE DUE ON PROPERTY (AS OF 9/30/98) PRINCIPAL RATE DATE MATURITY - -------------------------- ----------------- --------------- ----------- ----------- --------------- (DOLLAR AMOUNTS IN MILLIONS) MORTGAGE INDEBTEDNESS: CONSOLIDATED PROPERTIES Northcreek Place II....... $ 4.3 $ 4.3 7.80% 12/1/05 $ 3.6 One Glen Lakes............ 5.7 5.7 7.75% 9/1/05 4.8 6500 Greenville Avenue.... 3.5 3.5 7.80% 12/1/04 3.1 Brandywine Place.......... 1.5 1.5 9.00% 12/1/99 1.5 Plaza at Walnut Hill...... 1.5 1.5 9.00% (e) 0.0 Richardson Business Center.................. 1.5 1.5 9.00% (g) 0.0 Park North Business Center.................. 1.0 1.0 8.25% (i) 0.0 T I Business Park......... 1.6 1.6 9.25% 5/1/02 1.4 Richardson Commerce Centre.................. 1.0 1.0 9.00% (l) 0.0 ----- ----- ----- Total Consolidated Properties............ 21.6 21.6 14.4 ----- ----- ----- UNCONSOLIDATED PROPERTIES The Athenaeum Portfolio (n)........... 68.9 34.5 8.485% 1/11/27 0.0 ----- ----- ----- Total Unconsolidated Properties............ 68.9 34.5 0.0 ----- ----- ----- Total Mortgage Debt..... $ 90.5 $ 56.1 $ 14.4 ----- ----- ----- ----- ----- ----- PROPERTY PREPAYMENT PROVISIONS - -------------------------- -------------------------- MORTGAGE INDEBTEDNESS: CONSOLIDATED PROPERTIES Northcreek Place II....... Prepayable subject to conditions (a) One Glen Lakes............ Prepayable subject to conditions (b) 6500 Greenville Avenue.... Prepayable subject to conditions (c) Brandywine Place.......... Prepayable subject to conditions (d) Plaza at Walnut Hill...... Prepayable subject to conditions (f) Richardson Business Center.................. Prepayable subject to conditions (h) Park North Business Center.................. Prepayable subject to conditions (j) T I Business Park......... Prepayable subject to conditions (k) Richardson Commerce Centre.................. Prepayable subject to conditions(m) Total Consolidated Properties............ UNCONSOLIDATED PROPERTIES The Athenaeum Portfolio (n)........... Prepayable subject to conditions (o) Total Unconsolidated Properties............ Total Mortgage Debt.....
- ------------------------ (a) Prepayable after January 1, 2001 subject to a yield maintenance payment based on the rate of United States Treasury Notes having a term closest to the date of maturity but in no event less than 1% of the then balance. (b) Prepayable after October 1, 2000 subject to a yield maintenance payment based on the rate of United States Treasury Notes having a term closest to the date of maturity but in no event less than 1% of the then balance. (c) Prepayable after January 1, 2002 subject to a yield maintenance payment based on the rate of United States Treasury Notes having a term closest to the date of maturity but in no event less than 1% of the then balance. (d) Prepayable subject to payments of 3% of the amount prepaid before December 1, 1998, 2% if prepaid before June 1, 1999 and 1% thereafter. (e) Plaza at Walnut Hill loan matures on July 1, 2017. The lender has the right to accelerate the maturity in the sixth, eleventh or sixteenth loan years, on six months' notice. No prepayment fees apply in that event. 35 (f) Prepayable after June 12, 2002 subject to payment of 5% of the amount prepaid, reducing by 1% per annum to a minimum prepayment of 1% of the amount prepaid. (g) The Richardson Business Center loan matures on November 1, 2021. The lender has the right to accelerate the maturity in the sixth, eleventh, sixteenth or twenty-first loan years, on six months' notice. No prepayment fees apply in that event. (h) Prepayable after October 24, 2001 subject to payment of 5% of the amount prepaid, reducing by 1% per annum to a minimum prepayment of 1% of the amount prepaid. (i) The Park North Business Center loan matures on October 1, 2022. The lender has the right to accelerate the maturity in the sixth, eleventh, sixteenth or twenty-first loan years, on six months' notice. No prepayment fees apply in that event. (j) Prepayable after September 8, 2002 subject to payment of 5% of the amount prepaid, reducing by 1% per annum to a minimum prepayment of 1% of the amount prepaid. (k) Prepayable after March 1, 2000 subject to a yield maintenance payment based on the rate of United States Treasury Notes having a term closest to the date of maturity but in no event less than 2% of the then balance. (l) The Richardson Commerce Centre loan matures on March 1, 2019. The lender has the right to accelerate the maturity in the sixth, eleventh, sixteenth or twenty-first loan years, on six months' notice. No prepayment fees apply in that event. (m) Prepayable after February 24, 1999 subject to payment of 5% of the amount prepaid, reducing by 1% per annum to a minimum prepayment of 1% of the amount prepaid. (n) The Company holds a 50% interest in the master limited liability company that controls the two limited liability companies that hold title to The Athenaeum Portfolio. (o) Prepayable after January 11, 2007 without a fee. Prior to January 11, 2007 but after April 11, 1999, all or a portion of the loan may be defeased; i.e., the amount prepaid is used to purchase U.S. Obligations with maturities sufficient to enable the scheduled payments on the loan to be met. MANAGEMENT COMPENSATION We intend to initially provide each executive officer at the Senior Vice President level with the same annual salary. In addition, we have awarded certain stock options and anticipate that we may: - award bonus compensation for certain members of senior management; and - allow members of senior management to participate in the Incentive Return (as described below) at the discretion of Messrs. Leventhal and Fortin and the Compensation Committee. See "--Long-Term Incentive Plan." The following table sets forth certain information about the expected compensation of our executive officers.
NAME ANNUAL SALARY STOCK OPTIONS GRANTED - ---------------------------------------------------- ------------- --------------------- Alan M. Leventhal................................... $ 200,000 500,000(1) Lionel P. Fortin.................................... $ 200,000 500,000(2) Erin R. O'Boyle..................................... $ 125,000 175,000 William A. Bonn..................................... $ 125,000 150,000 Randy J. Parker..................................... $ 125,000 150,000 Jeremy B. Fletcher.................................. $ 125,000 125,000 John Halsted........................................ $ 125,000 125,000 Douglas S. Mitchell................................. $ 125,000 125,000 E. Valjean Wheeler.................................. $ 125,000 125,000
- ------------------------ (1) Includes stock options granted to Mr. Leventhal and subsequently transferred to a trust, of which Mr. Leventhal is a beneficiary. (2) Includes stock options granted to Mr. Fortin and subsequently transferred to a trust, of which Mr. Fortin's wife is a beneficiary. 36 DIRECTORS AND EXECUTIVE OFFICERS We believe that we have developed an organization of real estate investment and management professionals that is well-positioned to take advantage of today's real estate and capital environment. The following table sets forth certain information about our Directors and executive officers.
NAME AGE POSITION(S) HELD - ----------------------------- --- --------------------------------------------------------- Alan M. Leventhal............ 46 Chairman of the Board of Directors and Chief Executive Officer Lionel P. Fortin............. 55 President, Chief Operating Officer and Director William A. Bonn.............. 47 Senior Vice President and General Counsel Jeremy B. Fletcher........... 49 Senior Vice President of BCP and Chief Executive Beacon Capital Partners West, a division of BCP John Halsted................. 34 Senior Vice President of BCP and Chief Investment Officer of Beacon Venture Partners, Inc. Douglas S. Mitchell.......... 56 Senior Vice President--Development Erin R. O'Boyle.............. 38 Senior Vice President and Chief Investment Officer Randy J. Parker.............. 40 Senior Vice President and Chief Financial Officer E. Valjean Wheeler........... 54 Senior Vice President of BCP and Chief Executive Beacon Capital Partners Central, a division of BCP Stephen T. Clark............. 43 Director Steven Shulman............... 57 Director Scott M. Sperling............ 41 Director
The principal occupation for the last five years of each of our Directors and senior managers, as well as other related information, is set forth below. ALAN M. LEVENTHAL. Mr. Leventhal is co-founder of BCP and serves as Chairman, a Class I Director with a term expiring in 1999, and Chief Executive Officer. Prior to founding BCP, Mr. Leventhal served as President and Chief Executive Officer of Beacon Properties Corporation ("Beacon Properties"), one of the largest REITs in the United States. Beacon Properties' portfolio included 124 office properties nationwide, comprising approximately 18.8 million square feet. Beacon Properties was merged with Equity Office Properties Trust in December 1997. Mr. Leventhal received his Bachelor's degree in Economics from Northwestern University in 1974 and a Master of Business Administration from the Amos Tuck School of Business Administration at Dartmouth College in 1976. Mr. Leventhal is a Trustee of Boston University and the New England Aquarium Corporation and recently served as First Vice Chair of the National Association of Real Estate Investment Trusts ("NAREIT"). He is also a member of the Visiting Committee of Northwestern University and the Board of Overseers of WGBH, Beth Israel Deaconess Medical Center, and the Museum of Science in Boston. Mr. Leventhal has lectured at the Amos Tuck School of Business Administration at Dartmouth College and the Massachusetts Institute of Technology Center for Real Estate. Mr. Leventhal has been awarded the Realty Stock Review's "Outstanding CEO Award" for 1996 and 1997, and the Commercial Property News' "Office Property Executive of the Year" for 1996. LIONEL P. FORTIN. Mr. Fortin is co-founder of BCP and serves as President, Chief Operating Officer and a, a Class II Director with a term expiring in 2000. He served as Executive Vice President, Chief Operating Officer and a Director of Beacon Properties. From May 1994 through February 1995, Mr. Fortin served as Chief Financial Officer of Beacon Properties. Mr. Fortin serves as a Director of Energy Capital Partners, an energy finance company, and has lectured at the Massachusetts Institute of Technology Center for Real Estate. Mr. Fortin graduated from Bentley College in 1968 and is a member of the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. 37 WILLIAM A. BONN. Mr. Bonn serves as Senior Vice President of, and General Counsel to, the Company. Mr. Bonn served as General Counsel to Beacon Properties prior to joining the Company. From 1987 to 1997, Mr. Bonn served as General Counsel and Senior Vice President for Property Capital Trust, a Boston-based REIT. From 1978 to 1987, Mr. Bonn held various positions as an attorney with The Prudential Insurance Company of America. From 1976 to 1978, Mr. Bonn was involved in the private practice of law in Los Angeles. Mr. Bonn currently serves as Co-Chairman of the Government Relations Committee of NAREIT. Mr. Bonn holds a Bachelor of Science degree from the University of California at San Diego and a Juris Doctor degree from the University of San Diego. He is admitted to practice law in Massachusetts, New York and California, and is a member of the American, California and Boston Bar Associations. JEREMY B. FLETCHER. Mr. Fletcher serves as Senior Vice President and Chief Executive of Beacon Capital Partners West, a division of BCP. Mr. Fletcher served as Senior Vice President and Chief Executive of Beacon Properties West prior to joining the Company. Before joining the Company, Mr. Fletcher was the Director of Insignia Commercial Group, Inc., Los Angeles. From 1993 to July 1996, Mr. Fletcher was with the Paragon Group, where he served as Senior Vice President/General Partner of the Southern California/Arizona Region. Mr. Fletcher received his Bachelor's degree in Geology from Albion College. He is a member of the Urban Land Institute (ULI), Real Estate Investment Advisory Council ("REIAC"), and National Association of Industrial and Office Properties (NAIOP) and is a licensed real estate broker in the State of California. JOHN HALSTED. Mr. Halsted serves as Senior Vice President and, upon formation of the BCP Sister Corp., will serve as Chief Investment Officer of Beacon Venture Partners, Inc. Prior to joining the Company, Mr. Halsted was Vice President at Harvard Private Capital Group ("Harvard"). He joined Harvard in 1993 and was responsible for the origination and management of investments in specialty, finance, retail and energy companies. From 1991 to 1993, Mr. Halsted was an Associate with Simmons & Company, an investment banking firm based in Houston, Texas. Mr. Halsted earned his Masters in Business Administration from The Harvard Business School and a degree in economics from The University of California at Berkeley. DOUGLAS S. MITCHELL. Mr. Mitchell serves as Senior Vice President--Development. Mr. Mitchell served as the Senior Vice President--Leasing/Management and Development of Beacon Properties and as President of the Beacon Properties Management Company from 1994 until 1997. He joined the Beacon Properties organization in 1964 and has extensive experience in leasing, management and development. He graduated from the Wentworth Institute in 1962 and is a member of the Greater Boston Real Estate Board. Mr. Mitchell is also a licensed real estate broker in Massachusetts and New York. ERIN R. O'BOYLE. Ms. O'Boyle serves as Senior Vice President and Chief Investment Officer. Prior to joining the Company, Ms. O'Boyle served as Vice President, Acquisitions for Beacon Properties, where she was responsible for negotiating over $1.8 billion of investment opportunities. Ms. O'Boyle joined Beacon Properties in 1986 and has held positions in asset management and development. Ms. O'Boyle received her Bachelor of Science in structural engineering from the University of Delaware and her Master of Science in real estate development from the Massachusetts Institute of Technology. Ms. O'Boyle is the past chair of the Alumni Association for the Massachusetts Institute of Technology Center for Real Estate, is past president of the New England Women in Real Estate ("NEWIRE"), and currently is on the board of the Northeast chapter of REIAC. RANDY J. PARKER. Mr. Parker serves as Senior Vice President and Chief Financial Officer. Before joining the Company, Mr. Parker was Vice President, Investor Relations for Beacon Properties, where he was responsible for managing the relationships with institutional stockholders and analysts. Prior to joining Beacon Properties, Mr. Parker was Senior Vice President and Portfolio Manager at Aldrich Eastman & Waltch ("AEW"), where he was responsible for the management of over $400 million of investment portfolios on behalf of institutional clients. During his eight year tenure at AEW, Mr. Parker also held positions in asset management and investment origination. Mr. Parker was also previously associated with 38 JMB/Federated Realty, where he served as Project Manager for various retail development projects. Mr. Parker holds a Master of Business Administration degree from the Wharton School, University of Pennsylvania and a Bachelor of Architecture degree from the University of Kentucky. E. VALJEAN WHEELER. Mr. Wheeler serves as Senior Vice President and Chief Executive of Beacon Capital Partners Central, a division of BCP. Mr. Wheeler served as Senior Vice President and Chief Executive of Beacon Properties Midwest prior to joining the Company. Before joining Beacon Properties, Mr. Wheeler held various senior management positions with Equity Office Holdings, L.L.C. beginning in 1989, and served as President and Chief Operating Officer from 1995 to 1997. He also held various senior management positions with the Broe Companies and Williams Realty Corporation. Mr. Wheeler graduated from Oklahoma State University with a Bachelor of Science in Education. He is a member of the Urban Land Institute (ULI) and has served on the National Advisory Council of the Building Owners and Managers Association (BOMA). STEPHEN T. CLARK. Mr. Clark serves as a Class II Director with a term expiring in 2000. Since 1995, Mr. Clark has been President of Cypress Realty, Inc., a real estate investor and developer based in Houston, Texas. Previously, Mr. Clark served as Managing Director of Harvard Private Capital Group where he directed the group responsible for real estate investment and management activities. Prior to joining Harvard, Mr. Clark was a partner in Clark-Pilgrim Limited Partnership and in Trammell Crow Company where he was in charge of office and industrial activities in Philadelphia and Delaware. Mr. Clark has extensive investment experience in developmental and distressed real estate assets. He received a Masters in Business Administration degree from Harvard Business School and received his undergraduate degree from Duke University. Mr. Clark serves as Chairman of the Board of Abacoa Development Company. STEVEN SHULMAN. Mr. Shulman serves as a Class III Director with a term expiring in 2001. He served as a Director of Beacon Properties from 1995 to 1997. Since 1984, Mr. Shulman has been active in investment banking through his wholly owned company, The Hampton Group, and Latona Associates, Inc. where he serves as a Managing Director. Currently, Mr. Shulman is a shareholder and director in a diversified group of companies, including Ermanco Incorporated, Corinthian Directory, Terrace Holdings, Inc. and WPI Group, Inc. In addition, he serves as Non-executive Chairman of Terrace Holdings, Inc. Mr. Shulman is a graduate of Stevens Institute of Technology where he received a Bachelor's degree in Mechanical Engineering and a Master's degree in Industrial Management. Mr. Shulman serves as Vice Chairman of the Board of Stevens Institute of Technology. SCOTT M. SPERLING. Mr. Sperling serves as a Class III Director with a term expiring in 2001. He served as a Director of Beacon Properties from 1994 to 1997. Mr. Sperling joined Thomas H. Lee Co., a Boston-based investment firm, as a general partner in September 1994. Previously, Mr. Sperling served as Managing Partner and Vice Chairman of the Aeneas Group, Inc./Harvard Management Company from 1984 through 1994. Mr. Sperling has been the founder and/or lead investor of numerous companies and has led the acquisition or turnaround of companies in a wide variety of industries. He is currently a director of Livent, PriCellular Corporation, Softkey, The Learning Company, General Chemical Group, Object Design, Inc. and several private firms. He received a Master's of Business Administration degree from the Harvard Business School and received his undergraduate degree from Purdue University. Mr. Sperling is a member of the Corporation of the Brigham and Women's Hospital and a director of the American Technion Society. OTHER PROFESSIONALS DAVID P. BENNETT. Mr. Bennett serves as Regional Vice President of Beacon Capital Partners Central, located in Chicago. Prior to joining the Company, Mr. Bennett served as Regional Vice President at Beacon Properties, where he had asset management responsibilities for the Midwest region consisting of approximately 5.0 million square feet. Before joining Beacon Properties, Mr. Bennett was a Vice President 39 at The Balcor Company and held various positions from 1987-1997. He holds a Bachelor of Science degree in Finance from the University of Illinois. MICHAEL J. BOWLER. Mr. Bowler serves as Director of Financial Analysis for Beacon Capital Partners. Before joining the company, Mr. Bowler served as the Director of Financial Analysis for Beacon Properties Corporation where he was responsible for all acquisition, asset management and development financial analysis. Prior to joining Beacon, Mr. Bowler was an Assistant Vice President at Northland Investment Corporation where he held a variety of financial and accounting positions from 1982 to 1994. Mr. Bowler is a graduate of Bentley College where he received a Bachelor of Science degree in Accounting. NANCY J. BRODERICK. Ms. Broderick serves as Vice President and Treasurer. Before joining the Company, Ms. Broderick served as Vice President and Treasurer for Beacon Properties where she was responsible for a variety of corporate finance and treasury functions, including key banking and institutional lender relationships as well as administration of Beacon Properties' credit facility. Ms. Broderick holds a Bachelor of Science degree in Accounting from Stonehill College and a Master of Science degree in Taxation from Bentley College. She is a certified public accountant and a member of the American Institute of Certified Public Accountants and the Massachusetts Society of Public Accountants. JEFFREY D. BROWN. Mr. Brown serves as Acquisition Manager. Before joining the Company, Mr. Brown was a Financial Analyst at Beacon Properties, where he was responsible for the analysis and underwriting of investment opportunities. Mr. Brown was a Consultant with E&Y Kenneth Leventhal Real Estate Group from 1994 to 1996, where he was responsible for valuation analysis and due diligence assignments for various clients. Mr. Brown holds a Bachelor of Science degree from Cornell University. DAVID L. COHAN. Mr. Cohan serves as Vice President. Prior to joining the Company, Mr. Cohan served as a Senior Acquisition Manager at Beacon Properties. Before joining Beacon Properties, Mr. Cohan held operations, planning and asset management positions at Copley Real Estate Advisors in Boston. He has also had project management roles for firms developing retail, resort, waterfront, residential, and industrial projects throughout the continental United States and Hawaii. Mr. Cohan holds a Master of Science degree in Real Estate Development from the Massachusetts Institute of Technology Center for Real Estate where he also served as a teaching and research assistant in recent years. He has a Bachelor's degree in English writing from the University of Pennsylvania. LISA A. MEOMARTINO. Ms. Meomartino serves as Corporate Controller for Beacon Capital Partners. Prior to joining the Company, Ms. Meomartino served as Director of Property Accounting for Beacon Properties Corporation where she managed the financial reporting, accounting systems administration and lease administration functions for 21.3 million square feet of commercial office buildings. She joined Beacon in 1985 and has held various corporate and property accounting positions. Ms. Meomartino holds a BS in Business Administration from Bryant College and a MS in Finance from Boston College. ROBERT J. PALUMBO. Mr. Palumbo serves as Development Executive. Prior to joining the Company, Mr. Palumbo most recently served as Senior Development Manager for Beacon Properties Corporation and Equity Office Properties Trust. Mr. Palumbo has twenty-five years' experience in real estate and construction, having also previously been Vice President-Team Executive within BankBoston's real estate group and Vice President of Development for Weston Financial Group. He has acted in a project management capacity for office, research, industrial, retail and residential properties located throughout New England and the Southeastern United States. Mr. Palumbo holds a Master of Business Administration degree from Boston University and a Bachelor of Science degree in Mechanical Engineering from Northeastern University. JENNIFER L. PLUMPTON. Ms. Plumpton serves as a Financial Analyst. Before joining the Company, Ms. Plumpton was a Financial Analyst at Morgan Stanley Realty Incorporated, where she was responsible for the analysis and execution of securities offerings, mergers, acquisitions and asset sales for real estate 40 investment trusts and real estate operating companies. Ms. Plumpton holds a Bachelor's degree in Mathematics from Providence College. THOMAS RAGNO. Mr. Ragno serves as Vice President, Management and Leasing. Prior to joining the Company, Mr. Ragno served as Vice President, Property Management of Beacon Properties where he directly supervised property management operations in the metro-Boston region consisting of approximately 8.0 million square feet and 170 employees. Mr. Ragno joined Beacon Properties in 1986 and has held various positions in leasing and project management. Mr. Ragno holds an S.M. in Civil Engineering from the Massachusetts Institute of Technology and a Bachelor of Science degree in Civil Engineering and Engineering & Public Policy from Carnegie-Mellon University. STEPHEN A. STANLEY. Mr. Stanley serves as Director of Information Technology for Beacon Capital Partners. Prior to joining the Company, Mr. Stanley was the Director of Technical Services for Beacon Properties Corporation from 1994 to 1997. Prior to joining Beacon, Mr. Stanley was Manager of Information Systems at First Winthrop Corporation. Mr. Stanley is a graduate of the University of Maine where he received a Bachelor of Science degree with a concentration in Finance. M. WISTAR WOOD. Mr. Wood serves as Vice President, Acquisitions. Prior to joining the Company he served as Vice President, Acquisitions for Beacon Properties Corporation, where he managed the search and negotiations for ownership opportunities. Prior to joining Beacon in February 1997, Mr. Wood served as Vice President of Acquisitions for Metric Realty from 1995 to 1997 and oversaw all acquisition activity in a 26-state territory. Prior to joining Metric in 1995, he was with Copley Real Estate Advisors, responsible for acquisitions and sales. Mr. Wood is a graduate of Princeton University and holds a MBA from the Wharton School, University of Pennsylvania. He is the founder of REIAC's Northeast Chapter, and a member of ICSC. BOARD OF DIRECTORS AND INDEMNIFICATION OF OFFICERS AND DIRECTORS The Board of Directors has three classes of directors. The initial terms of the first, second and third classes will expire in 1999, 2000 and 2001, respectively. Beginning in 1999, directors of each class will be chosen for three-year terms upon the expiration of their current terms. Each year one class of directors will be elected by the stockholders. All officers serve at the discretion of the Board of Directors. Each Director who is not an employee of the Company (the "Independent Directors") receives an annual director's fee of $20,000. Each Independent Director also receives: - $1,000 for each regular quarterly or special meeting of the Board of Directors attended; - $1,000 for each committee meeting attended; and - $250 for each special telephonic committee meeting or meeting of the Board of Directors in which the Independent Director participates. Independent Directors are also reimbursed for reasonable expenses incurred to attend director and committee meetings. Independent Directors may elect in lieu of cash fees to receive either: - options to purchase Common Stock at a discount to fair market value; or - deferred stock units. These compensation elections must be approved by the Board's compensation committee (the "Compensation Committee"). Any officer of the Company who is also a Director will not be paid the directors' fees. Independent Directors also receive (upon initial election to the Board of Directors) an option to purchase 5,000 shares of Common Stock. Each subsequent year they will receive an option to purchase an additional 5,000 shares of Common Stock. All options granted to Independent Directors vest on the date of grant. Our Charter provides that (except in the case of a vacancy) a majority of the members of the Board of Directors will be Independent Directors. The vote of a majority of the Directors and the vote of a majority of the Independent Directors is required to fill any vacancies among the Independent Directors. The 41 Compensation Committee will consist solely of Independent Directors, except that Mr. Leventhal (or his designee) may serve as a non-voting member of the Compensation Committee. The Maryland General Corporation Law (the "MGCL") permits a corporation to include in its charter a provision limiting the liability of directors and officers to the corporation or its stockholders for money damages, except (i) to the extent that it is proved that the director or officer actually received an improper benefit or profit in money, property or services or (ii) if a judgment or other final adjudication is entered in a proceeding based on a finding that the director's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Our Charter limits the liability of the Board of Directors and officers to the Company to the fullest extent permitted from time to time by Maryland law. See "Certain Provisions of Maryland Law and BCP's Charter and of Bylaws--Limitation of Liability and Indemnification." Our Charter authorizes us, (to the maximum extent permitted by Maryland law) to obligate ourselves to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer or (b) any individual who, while a director of the Company and at the request of the Company, serves or has served another corporation, REIT, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, REIT, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her status as a present or former director or officer of the Company. Our Bylaws obligate us to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director of the Company and at the request of the Company, serves or has served another corporation, REIT, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, REIT, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. Our Charter and Bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company. The MGCL requires a corporation (unless its charter provides otherwise, which our Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service to, or at the request of, the corporation, unless it is established that (a) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and (i) the act or omission was committed in bad faith or (ii) the act or omission was the result of active and deliberate dishonesty, (b) the indemnified party actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (a) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling BCP pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 42 LONG-TERM INCENTIVE PLAN Our compensation and incentive plans are designed to align the interests of our executive management with the interests of our stockholders. Our Long-Term Incentive Plan is designed to reward certain members of management for growth of our Funds from Operations in excess of a specified benchmark as described below. If our Funds from Operations exceed this benchmark, management will be entitled to receive an Incentive Return determined in the manner described below (the "Incentive Return"). This Incentive Return shall be calculated at the end of the three year period following the completion of the first calendar year following the date of the Original Offering of Common Stock to NationsBanc (the "Determination Date"). The Incentive Return shall equal the product of: (A) 12% of the dollar amount by which: (i) the Actual Return exceeds (ii) the Base Return; multiplied by (B) the weighted average of shares of Common Stock and Units outstanding for the 12 months immediately preceding the Determination Date; multiplied by (C) the Company's Multiple as defined below. The Incentive Return is a function of the amount by which the Actual Return exceeds the Base Return. If the Actual Return does not exceed the Base Return, no Incentive Return will have been earned. Likewise, the maximum Incentive Return is limited by the amount the Actual Return exceeds the Base Return. For the purposes of calculating the Incentive Return: "Actual Return" means our Funds from Operations (before the Incentive Return) per share of Common Stock and per Unit for the 12 months immediately preceding the Determination Date; "Base Return" means an amount equal to what our Funds from Operations would have been for the twelve month period immediately preceding the Determination Date assuming a benchmark cumulative rate of return on the Offering Price equal to 10% per annum, compounding quarterly, calculated since the beginning of the calendar quarter following the date of Closing. "Funds from Operations," as defined by NAREIT, means net income (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization (in each case, only Real Estate-Related Assets), and after adjustments for unconsolidated partnerships and joint ventures; and "Multiple" means the price of our Common Stock (as defined below) divided by our Funds from Operations per share for the fiscal quarter ending on the Determination Date on an annualized basis. For the purposes of calculating the Multiple, the price of our Common Stock will be calculated as follows: (1) where there exists a public market for our Common Stock, the price of our Common Stock will be the average of the closing bid and asked prices of our Common Stock quoted in the Over-The-Counter Market Summary or the last reported sale price of our Common Stock or the closing price quoted on the NASDAQ System or on any exchange on which our Common Stock is listed, whichever is applicable, as published in THE WALL STREET JOURNAL for the 90 calendar days prior to the calculation of the Multiple. (2) if no public market for our Common Stock exists at the time of such exercise, the price of our Common Stock will be determined by a single, independent appraiser to be selected by a committee composed of Independent Directors, which appraiser shall appraise the fair market value 43 of one share of our Common Stock within 30 days of its selection within such guidelines as shall be determined by the committee of Independent Directors. In the event of a change in control of the Company (as such term is defined in the Operating Partnership Agreement), the right to receive the Incentive Return shall automatically accelerate and the determination of the Incentive Return shall be appropriately adjusted to reflect such acceleration as determined by our Compensation Committee. We anticipate that the mechanism by which the Incentive Return will be adjusted as a result of a change of control shall be established by the Compensation Committee in advance of any such event. In order for participants to receive advantageous tax treatment on the gains (if any) realized through our Long-Term Incentive Plan, the Long-Term Incentive Plan consists of a Convertible Unit which was issued to the Participation Plan on March 16, 1998. The Convertible Unit is convertible at the Determination Date (assuming the Incentive Return has in fact been earned) into a certain number of Incentive Units of limited partnership interest in the Operating Partnership (the "Incentive Units") with a fair market value equal to the amount of the Incentive Return. The Incentive Units share equally on a unit-by-unit basis with the outstanding Units in all distributions by the Operating Partnership and are redeemable for cash or, at the election of our Independent Directors, exchangeable for shares of Common Stock. See "Operating Partnership Agreement." Certain members of our senior management have been, and from time to time may be, offered the opportunity to acquire equity interests in the Participation Plan. Messrs. Leventhal and Fortin (with the assistance and advice of the Compensation Committee) shall decide who shall be offered equity interests in the Participation Plan. Members of our senior executive management who become equity holders of the Participation Plan shall be allocated an interest in: - the Incentive Return, subject to certain vesting restrictions; and - the Units held by the Participation Plan. As of December 1, 1998, Messrs. Bonn, Fletcher, Halsted, Mitchell, Parker and Wheeler, as well as Ms. O'Boyle, each held a 3% interest in the Incentive Return. The balance of the Incentive Return is split equally between the family trusts of Messrs. Leventhal and Fortin. On the Determination Date, 50% of each equity holder's interest in the Incentive Return shall vest. On the first anniversary of the Determination Date, each equity holder's interest in the Incentive Return shall be fully vested. If the employment of an equity holder of Participation Plan terminates prior to full vesting of his or her interest in the Incentive Return: - that equity holder forfeits the unvested interest; and - the general partner of the Participation Plan has the authority to reallocate the forfeited interest as he deems appropriate. See "Risk Factors--Economic and Business Risks--Conflicts of Interest." We cannot assure you that the awards under the Long-Term Incentive Plan (or the stock options or other rewards pursuant to the Stock Incentive Plan described below) will provide an incentive to our management to enhance the value of our Common Stock. We also cannot assure you that management's efforts will actually enhance the value of our Common Stock. In addition, the Incentive Return (if paid) could substantially reduce cash available for distribution to stockholders. See "Risk Factors--Economic and Business Risks--Conflicts of Interest." Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to either: - net income as an indication of our performance; or - cash flows as a measure of liquidity or ability to make distributions. 44 Our ability to execute successfully the investment strategies described in this Prospectus and other factors (many of which are not within our control) will affect: - our ability to generate Funds from Operations in excess of the Base Return described above; and - the ability of the Participation Plan to earn the Incentive Return described in the preceding paragraph. STOCK INCENTIVE PLAN We have adopted a Stock Incentive Plan that provides options to purchase shares of Common Stock. The Stock Incentive Plan authorizes the grant of options (and other stock-based awards) to our executive officers, Directors and employees and other key persons. The Stock Incentive Plan provides performance- based compensation to offer an incentive for the members of our management to enhance the value of our Common Stock. PLAN ADMINISTRATION; ELIGIBILITY The Compensation Committee of the Board of Directors (the "Administrator") administers the Stock Incentive Plan. The Administrator will have full power to: - select (from among the persons eligible for awards) the individuals to whom awards will be granted; - make any combination of awards to participants; and - determine the specific terms of each award (subject to the provisions of the Stock Incentive Plan). Individuals eligible to participate in the Stock Incentive Plan are generally: - executive officers; - Independent Directors; - employees of the Company; and - other key persons who are responsible for or contribute to the management, growth or profitability of the Company. RESERVED SHARES The maximum number of shares of Common Stock reserved and available for issuance under the Stock Incentive Plan will be such aggregate number of shares as does not exceed the sum of: (i) 12% of the outstanding equity interests in the Company (including Common Stock and Units subject to redemption rights); plus (ii) an additional positive number equal to 10% of any net increase of outstanding equity interests in the Company. The share calculation percentages were determined as of the date of the Original Offering to NationsBanc. STOCK OPTIONS The Stock Incentive Plan permits the granting of: (i) options to purchase Common Stock intended to qualify as incentive stock options ("Incentive Options") under Section 422 of the Code; and (ii) options that do not qualify ("Non-Qualified Options"). Each option's exercise price will be determined by the Administrator but may not be less than: 45 - 100% of the fair market value of our Common Stock on the date of grant in the case of Incentive Options; and - 25% of the fair market value of our Common Stock on the date of grant in the case of Non-Qualified Options. Plan participants may elect (with the consent of the Administrator) to receive discounted Non-Qualified Options in lieu of cash compensation. To qualify as Incentive Options, options must meet additional federal tax requirements, including limits on the value of shares subject to Incentive Options which first become exercisable in any one calendar year, and a shorter term and higher minimum exercise price in the case of certain large stockholders. The Administrator will fix the term of each option, which may not exceed ten years from date of grant in the case of an Incentive Option. The Administrator will determine at what time or times each option may be exercised and (subject to the provisions of the Stock Incentive Plan) the period of time (if any) after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The Administrator may accelerate the exerciseability of options. OTHER STOCK BASED GRANTS The Administrator may award: - shares of Common Stock or Units (or other interests in the Operating Partnership) which may or may not be subject to a risk of forfeiture; - deferred stock units which are ultimately payable in the form of shares of Common Stock; - performance share awards to participants entitling the participant to receive shares of Common Stock upon the achievement of individual or company performance goals; - dividend equivalent rights (which entitle the recipient to receive credits for dividends that would be paid if the recipient had held specified shares of Common Stock); or - capital stock other than Common Stock and other awards that are valued in whole or in part by reference to or are otherwise based on, Common Stock. CHANGE OF CONTROL PROVISIONS The Stock Incentive Plan provides that (unless otherwise provided in the award agreement) all awards become fully vested and non-forfeitable upon a change of control of the Company (as defined in the Stock Incentive Plan). AMENDMENTS AND TERMINATION The Board of Directors may amend or terminate the Stock Incentive Plan at any time, except that approval by our stockholders is required for amendments or termination to the extent the Board of Directors determines that stockholder approval is necessary or desirable to meet certain exceptions under securities, tax and other applicable laws. EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE We have executed employment agreements (the "Employment Agreements") with Messrs. Leventhal and Fortin. They have a term of three years from the date of the Original Offering of Common Stock to NationsBanc. They contain provisions that are customary for senior executives of publicly-traded REITs. See "--Management Compensation." 46 CREDIT FACILITY We may obtain a commitment from a lender to enter into a credit facility (the "Credit Facility") to provide us with an available source of debt financing. See "Risk Factors--Investment Activity Risks--Real Estate Financing Risks" and "Plan of Distribution." AVAILABLE INFORMATION We are subject to the informational requirements of the Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange Act, we file reports, proxy and information statements and other information with the SEC. You can inspect and copy the reports, proxy and information statements and other information at the SEC addresses listed on page 103 of this Prospectus. We report our financial statements on a year ended December 31. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent certified public accountants and make available quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST Messrs. Leventhal and Fortin have formed Beacon Capital Participation Plan and have offered equity interests in Beacon Capital Participation Plan to certain members of the Company's senior management. In addition, Messrs. Leventhal and Fortin (individually and through their family trusts and Beacon Capital Participation Plan) have purchased (directly from the Company and the Operating Partnership) a combination of shares of Common Stock and Units for an aggregate purchase price of approximately $15 million, representing approximately 3.2% of the equity interests in the Company on a fully diluted basis. In addition, we have established the Long-Term Incentive Plan to align the interests of management with the interests of our stockholders, pursuant to which Beacon Capital Participation Plan has been issued (for no additional consideration) a Convertible Unit of the Operating Partnership. Provided that the Incentive Return has (in fact) been earned, at the end of the three year period following the date of the first calendar year following the Closing Date of the Original Offering, the Convertible Unit will convert into a certain number of Incentive Units with a fair market value equal to the Incentive Return. See "The Company-- Long-Term Incentive Plan" and "Risk Factors--Economic and Business Risks--Conflicts of Interest." Beacon Capital Participation Plan has been granted certain registration rights with respect to any Common Stock issuable upon an exchange of Units and Incentive Units held by Beacon Capital Participation Plan. See "Description of Securities--Registration Rights." Our senior management, by holding equity interests in Beacon Capital Participation Plan, is able to participate in the Incentive Return subject to certain vesting restrictions. See "The Company--Long-Term Incentive Plan" and "Risk Factors-- Economic and Business Risks--Conflicts of Interest." Although we believe that the Long-Term Incentive Plan will serve to align the interests of management with the interests of our stockholders, the possibility exists that conflicts of interest could arise between the interests of management and the interests of our stockholders relating to the Long-Term Incentive Plan and the conversion of the Convertible Unit into Incentive Units (including for example, with respect to the timing of transactions which could affect our Funds from Operations in the fiscal year or fiscal quarter in which the Convertible Unit converts into the Incentive Units, if any). After the formation of the BCP Sister Corp. and the distribution of the BCP Sister Corp.'s equity interests to the partners and stockholders of the Company, the BCP Sister Corp. will rely on the Company to provide it investments. We expect that the provisions in the BCP Sister Corp.'s formation documents will - provide that the BCP Sister Corp. will enter into transactions with the Company to the extent deemed beneficial by their respective boards of directors (and the Company may enter into an intercompany agreement with the BCP Sister Corp. with respect thereto) and 47 - generally prohibit the BCP Sister Corp. from engaging in activities or making investments appropriate for a REIT (for a specified time period) unless the Company was first given the opportunity to do so but elected not to do so. While it is our intention that the Company and the BCP Sister Corp. have separate boards of directors, to the extent that there is overlap, the Board of Directors may be subject to various potential conflicts of interest as a result of the relationships with the BCP Sister Corp. and the Company. See "Risk Factors--Investment Activity Risks--Conflicts of Interest." In addition, to the extent that the BCP Sister Corp. requires separate financing arrangements, conflicts may arise between the BCP Sister Corp. and the Company to the extent that the BCP Sister Corp. has difficulty obtaining or maintaining such financing. See "Risk Factors--Economic and Business Risks--BCP Sister Corp. Will Have Separate Financing." The market in which we expect to purchase assets is characterized by rapid evolution of products and services and, thus, there may in the future be relationships between the Company and the BCP Sister Corp. and its affiliates, in addition to those we have already described. USE OF PROCEEDS The Selling Stockholders will receive all of the proceeds from the sale of the securities offered hereby. We will not receive any of the proceeds from the sale by the Selling Stockholders of their Common Stock. DISTRIBUTION POLICY In order to avoid corporate income taxation on the earnings that we distribute, we must distribute to our stockholders an amount at least equal to (i) 95% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain) plus (ii) 95% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code less (iii) any excess noncash income (as determined under the Code). See "Federal Income Tax Considerations." The actual amount and timing of distributions, however, will be at the discretion of the Board of Directors and will depend upon our financial condition in addition to the requirements of the Code. Subject to the distribution requirements referred to in the immediately preceding paragraph, we intend (to the extent practicable) to invest substantially all of the principal from repayments, sales and refinancings of our Assets in Assets. We may, however, under certain circumstances, make a distribution of principal or of Assets. Such distributions, if any, will be made at the discretion of our Board of Directors. It is anticipated that distributions generally will be taxable as ordinary income to our non-tax exempt stockholders, although we may designate a portion of such distributions as long-term capital gain or as a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their federal income tax status. For a discussion of the federal income tax treatment of our distributions, see "Federal Income Tax Considerations--Taxation of the Company" and "--Taxation of Taxable U.S. Stockholders." The declaration and payment of dividends by any BCP Sister Corp. (if and when formed) will be made by the BCP Sister Corp.'s board of directors from time to time based on such considerations as the BCP Sister Corp.'s board of directors deems relevant, will be payable only out of funds legally available therefor under the laws of the state of formation of the BCP Sister Corp. and will be subject to any limitations which may be contained in the debt instruments of the BCP Sister Corp. See "Risk Factors--Economic and Business Risks--Conflicts of Interest." 48 INVESTMENT STRATEGIES AND EXPERIENCE INVESTMENT STRATEGIES AND EXPERIENCE Our investment strategy will be driven by the background and experience of our senior management, including management's experience with public and private real estate companies. As the capitalization of the real estate industry continues to evolve toward a publicly-held format, we believe, based upon our management's experience through several economic cycles in the real estate industry, that numerous investment opportunities will continue to emerge that reflect several primary shifts in the real estate industry. These shifts include: - rapid recovery of the real estate markets; - extraordinary growth of the public capital markets for real estate companies; - continued consolidation of the ownership of real estate; - alignment of interests between investors and management; and - recognition of real estate companies as operating businesses. These factors have resulted in significant investment opportunities in real estate, including arbitrage between public and private market pricing. It is our belief that as the real estate industry continues its transformation (and recognizing that real estate is still fundamentally a cyclical business), disparities in pricing and capital availability, as well as ineffective management of real estate Assets by others, will provide opportunities for skilled and experienced management teams, such as our management team. Initially, we expect to focus primarily on opportunities in the office sector. As the real estate market cycle advances, we expect additional opportunities to emerge in non-office market sectors, including opportunities in the lodging, residential and industrial sectors. See "Risk Factors--Investment Activity Risks--Multi-Sector Investment Strategy." We believe that, increasingly, management expertise and creative real estate solutions will be required for successful real estate companies. Our management team has a proven track record in this regard in office as well as with other property types. Based on these observations, we intend to identify, create and realize value for us in our investment in Real Estate-Related Assets (as outlined below). Several themes underlie this strategy: - RELATIONSHIPS--our management will draw upon its extensive network of domestic and foreign institutional relationships established over the past twenty years in the public and private company sectors. These relationships have provided, and are expected to continue to provide, early and sometimes exclusive access to negotiated transactions and avoidance of competitive auctions. - OPERATING COMPANY EXPERTISE--we will identify opportunities where our expertise in actively managing both public and private real estate companies can be applied to under-performing real estate Assets or real estate companies. - INDUSTRY TRENDS--we will identify and capitalize on industry trends that emerge as the market continues its transformation and maturation process. We initially intend to focus our investment activity in the following types of Real Estate-Related Assets: (i) value-added repositionings and discounted purchases; (ii) development and re-development; (iii) multiple-property portfolios; (iv) joint ventures and strategic partnerships; and (v) real estate companies and real estate-related businesses. (i) VALUE-ADDED REPOSITIONINGS AND DISCOUNTED PURCHASES. We expect to target investments in under-utilized or poorly capitalized single Assets and portfolios that may be recapitalized on advantageous terms and repositioned with the expectation of returns greater than those that could be achieved by acquiring a stabilized property. These investments may include the purchase of the property at a discount to replacement cost or the purchase of the underlying debt thereon often at a discount to face value. In today's dynamic real estate industry with an ever-changing and cyclical economy and changing demographic characteristics, there generally will be opportunities to take better advantage of well-located and 49 structurally sound properties. Opportunities in this area include acquisitions of properties and portfolios from controlling parties who are not focused on maximizing value in these Assets, whether because they have lost economic incentive or because they are non-strategic or inefficient owners of real estate. In addition, opportunities may involve substantial rehabilitation or redevelopment and ground-up development where market conditions warrant new construction. Investments in this area may benefit from our value-added problem-solving and structuring capabilities, as well as from the skills of operating partners in joint venture investments. We believe that there may be an availability of these opportunities due to short-term issues with the properties (such as vacancies) that may not appeal to larger publicly-traded REITs. (ii) DEVELOPMENT AND RE-DEVELOPMENT. We expect that we will target, on a selected basis, investments requiring strategic ground-up development or re-development of existing properties that can benefit from repositioning. Based on the current stage of the real estate business cycle, we believe that attractive development opportunities are presenting themselves in a number of markets. We expect to seek out opportunities where market vacancy rates and market rents justify new construction and where job growth will support new demand for office space. Our management has significant experience in numerous urban and suburban development projects in Boston and throughout the United States, including prominent office and mixed-use developments, particularly in Boston. In addition, our principals also have development expertise in other property types, including lodging, industrial, retail, apartments and mixed-use projects. (iii) MULTIPLE PROPERTY PORTFOLIOS. We expect to target real estate acquisitions resulting from corporate divestitures from users, financial institutions, and other non-strategic and inefficient owners of real estate. Many domestic and foreign corporations and institutions (i.e., insurance companies, pension funds and endowments) have made direct investments in real estate Assets or, on occasion, have established full-service real estate subsidiaries. In the current era of corporate restructuring and downsizing, many companies have chosen to liquidate non-core businesses and real estate Assets. In addition, we believe that the trend from private to public ownership is motivating many institutions to liquidate their privately-held real estate portfolios. As a result, we believe that many opportunities will exist to acquire real estate Assets, real estate operating businesses or interests in real estate joint ventures directly from corporations and institutions. In some instances, the selling companies may have particular objectives, such as the need to sell Assets prior to the end of a fiscal quarter or a desire to allow an operating partner to continue to participate in an investment, which we expect to be able to accommodate. We also believe that foreign institutions may become particularly active sellers of domestic and foreign Assets in the near future. We believe that we will be able to capitalize on management's historically successful relationships with a wide range of institutions and, therefore, have a competitive advantage in accessing many of these portfolios. We believe that our experienced management team and our expertise in managing large, complex portfolios may allow us to (i) pursue property portfolios that other real estate investment entities may view as too complex, and (ii) take advantage of the opportunities presented by these portfolios that may have been inefficiently managed. (iv) JOINT VENTURES AND STRATEGIC PARTNERSHIPS. We expect to enter into, or acquire interests in, joint ventures or strategic partnerships as a way to leverage both capital and expertise. (v) REAL ESTATE COMPANIES AND REAL ESTATE-RELATED BUSINESSES. As public market ownership and consolidation continues in the real estate industry, we expect to target investments in real estate companies and businesses with a real estate component. Opportunities in this target area include public and private companies, and generally fall into three types of companies: (a) real estate ownership companies, including REITs and non-REIT ownership companies, homebuilders and other development companies; (b) real estate service companies, such as management or brokerage companies; and (c) businesses with a strategic dependence on real estate. In particular, there may be opportunities to acquire controlling interests in certain small to mid-sized REITs that do not trade at multiples as high as many other larger and better capitalized REITs. We intend to invest in private placements of common stock or other securities convertible into common stock. When we identify strong management teams and growth prospects, we 50 may provide growth capital to such companies and may recapitalize over-leveraged or other poorly-capitalized companies. We believe that our experienced management will enhance such companies' abilities to evaluate investment opportunities. We expect to take advantage of the arbitrage between private and public market pricing of real estate with our investments in this area. Conversely, when an entity can be acquired for less than the value of its Assets, we may acquire control of such entity, whether directly (through the acquisition of a controlling equity interest) or indirectly (through the acquisition of debt). To supplement our efforts in this strategic area, our management team includes an individual with extensive experience in corporate private equity investments. Although we expect that our primary emphasis will be on the acquisition of the above-described categories of Real Estate-Related Assets, future acquisitions also may include Other Assets. We have no current plans to invest in such Other Assets. When and if such investments are made, they will not be the principal focus of our investment strategy. We intend to conduct all of our investment activities, including those investments in the Other Assets, in a manner consistent with maintaining our status as a REIT for United States federal income tax purposes. For a description of the restrictions imposed on a company desiring to be taxed as a REIT as to types of investments and limitations on the amounts of such investments, see "Federal Income Tax Considerations--Requirements for Qualification." Other than these restrictions, we have no policy limiting the types of Other Assets in which we may invest or limiting the amount of its investments, if any, in such Other Assets. To the extent that we believe that any of the above-described investments may add value, but are inconsistent with maintaining our status as a REIT, such investments could be made by the BCP Sister Corp. However, our ability to fully utilize the BCP Sister Corp. structure could be affected as a result of future legislation. See "Risk Factors--Legal and Tax Risks--Adverse Impact of Future Legislation Regarding REITs." In addition to making such investments through the BCP Sister Corp., we might make such investments through a taxable corporate subsidiary in which we would hold a majority of the economic interest but less than 10% of the voting power. See "Federal Income Tax Considerations--Requirements for Qualifications." Any such investments will be structured to avoid jeopardizing our qualification as a REIT under the Code. We cannot anticipate with any certainty the percentage of the net proceeds of the Original Offering, or our other Assets or funds, that will be invested in each category of Real Estate-Related Assets or Other Assets. We have broad discretion in the manner in which we make investments, subject to our Investment Strategy. There can be no assurance that we will be successful in our Investment Strategy. See "Risk Factors--Investment Activity Risks--Appropriate Investments May Not Be Available and Investments of Net Proceeds May Be Delayed." INVESTMENT MANAGEMENT We intend to create value in, and realize value from, our investments by identifying advantageous investment management strategies. Our senior management has extensive experience in a broad range of aspects of real estate investment management, including financing, asset and property management, development and dispositions. Our corporate office, located in Boston, is staffed by twenty-five employees. We have regional offices located in Chicago and Los Angeles, staffed by three and two employees, respectively. We intend to pursue investments throughout the country. In addition, we intend to enhance and extend our internal management resources through the relationships and contacts with third-party property management and brokerage firms with specialized geographic and property-type expertise and information that our management has developed as a result of its experience in the real estate industry. Through our existing offices and these relationships, we can gain a local presence in strategic markets and hands-on operational knowledge of the Assets underlying our investments, as well as better access to proprietary transactions. Our senior management has developed a network of such parties and will expand such relationships as they pursue our Investment Strategy. Generally, we intend to structure relationships with parties who will make meaningful equity investments and provide incentives to its partners to ensure that the parties' interests 51 are aligned, while we retain control over each investment. See "Risk Factors--Economic and Business Risks--Risks Related to Growth Strategy." We intend to finance investments with the use of leverage in an effort to maximize equity returns while allowing maximum flexibility and maintaining an acceptable level of risk. Our senior management has established relationships in the lending community, being regular users of debt financing and we expect to benefit from such individual lending relationships. See "Management's Discussion and Analysis of Liquidity and Capital Resources" and "Risk Factors--Investment Activity Risks--Real Estate Financing Risks." Generally, we intend to pursue a strategy of portfolio diversification in terms of geographic location, property type, and investment type. We believe that diversification is important to reducing potential down-side risks. However, we will have no predetermined limitations or targets for concentration of geographic location, property type, or investment type. Instead, we plan to make investment decisions on a case-by-case basis. See "Risk Factors--Investment Activity Risks--Appropriate Investments May Not Be Available" and "Risk Factors--Investment Activity Risks--Multi-Sector Investment Strategy." THE BCP SISTER CORP. We anticipate that we may, from time to time, identify Assets that we believe may be advantageous investments, but that may be inappropriate (whether for REIT qualification, or other tax reasons) for investment, in whole or in part, by a REIT, or which may otherwise be determined by us, based on general prudent considerations, to be inappropriate, in whole or in part, for investment by us. In order to permit stockholders to participate in the economic benefits that may be associated with such non-qualifying REIT Assets, we may, from time to time, cause the Operating Partnership to form one or more subsidiary corporations, partnerships or other entities (each, a "BCP Sister Corp."), which would not elect to be taxed as a REIT. This structure has been employed by certain other REITs. The Operating Partnership would initially contribute to the BCP Sister Corp. a portion of its capital together with, on behalf of the Limited Partners, a pro rata portion of the capital of the Operating Partnership allocable to the Limited Partners' contributed capital, which will be sufficient to permit the BCP Sister Corp. to make such initially identified investments, in exchange for all of the issued and outstanding equity interests in the BCP Sister Corp. The Operating Partnership would then distribute the equity interests pro rata to the Company and the Limited Partners. We in turn would distribute the BCP Sister Corp.'s equity interests to its stockholders in a taxable transaction. Concurrently with the formation of the BCP Sister Corp., if any, or immediately subsequent thereto, the BCP Sister Corp. will form an operating partnership (the "Sister OP") upon substantially the same terms and conditions as the Operating Partnership Agreement (including, without limitation, the terms respecting the distribution of the Incentive Return to Beacon Capital Participation Plan). Alternatively, the units of partnership of the Sister OP may be distributed directly to the Limited Partners and our stockholders. Furthermore, to the extent that certain synergies and efficiencies are possible between us, the BCP Sister Corp. and the Sister OP, we intend to maximize the opportunities presented by such synergies and efficiencies. For example, we, the BCP Sister Corp. and the Sister OP may jointly acquire investments in Assets and businesses, such as hotels or health care facilities, where we will acquire title to the underlying real property and lease such property to the Sister OP, at market rents (including rents based upon a percentage of gross revenues), while the Sister OP acquires and operates the operating business. We anticipate that such synergies and efficiencies will provide us with advantages in making investments over other companies; however, no assurance can be made that we will be successful in creating and implementing such synergies and efficiencies. See "Risk Factors--Economic and Business Risks--Conflicts of Interest" and "Risk Factors--Legal and Tax Risks--Adverse Impact of Future Legislation Regarding REITs." The formation of the BCP Sister Corp. will permit our stockholders who retain common stock of the BCP Sister Corp. to participate in our real estate operations (including ownership of real property) and the BCP Sister Corp.'s operation of operating businesses and other Assets which may not otherwise be 52 appropriate for a REIT. Our principal focus will be to make real estate investments while any BCP Sister Corp.'s principal function will be to serve as an operating company. The operating activities and operating Assets made available to the BCP Sister Corp. by us are designed to provide our stockholders with the long-term benefits of ownership in an entity devoted to the conduct of operating business activities in addition to their ownership interest. A small number of REITs, operating under tax provisions that no longer are available to newly-formed REITs, have their shares "paired" or "stapled" with shares of a related operating company, and, therefore, cannot be owned or transferred independently. It is our intention that our Common Stock and the equity interests of the BCP Sister Corp. will not be paired or stapled, but rather will be structured as a "paper clip," a structure designed to permit us to continue to qualify as a REIT. With respect to our Common Stock and the equity interests of the BCP Sister Corp. that may be owned and transferred, subject to applicable securities laws restrictions, separately and independently of each other, we and the BCP Sister Corp. will not necessarily provide a paired investment on an ongoing basis. After the initial formation of the BCP Sister Corp. and the distribution of its equity interests, the BCP Sister Corp. and we will pursue independent sources of financing and, because the stock may trade separately, may ultimately have differing ownership. See "The Company--Certain Relationships; Conflicts of Interest," "Federal Income Tax Considerations--BCP Sister Corp." and "Risk Factors-- Legal and Tax Risks--Adverse Impact of Future Legislation Regarding REITs." To the extent that payments of rent may be made by the BCP Sister Corp. to us, we will be required to monitor and comply with the "related party tenant" provisions of the Code, which provide that payments made under a lease will not constitute qualifying income for purposes of the REIT requirements if we own, directly or indirectly or pursuant to attribution rules, 10% or more of the ownership interests in the relevant lessee. The Aggregate Stock Ownership Limit is designed to prevent stockholders from owning an amount of shares that would cause us to be treated as owning a BCP Sister Corp. However, any stockholder owning 10% or more of the Company by reason of a waiver of the Aggregate Stock Ownership Limit or the application of the Look-Through Ownership Limit may be required to reduce its ownership percentage to below 10% in order to receive its pro rata share of the distribution of the stock of the BCP Sister Corp., to ensure that rents received by the REIT are not disqualified under the related party tenant provisions. Our ability to fully utilize the BCP Sister Corp. structure could be affected as a result of future legislation. In that regard, Congress recently enacted, and the Clinton Administration signed into law, certain revenue proposals as part of the Internal Revenue Service Restructuring and Reform Act of 1998 that included, among other things, a freeze on the grandfathered status of REITs that are "paired" or "stapled" with a related operating company. Unlike such "paired" or "stapled" structures, the proposed BCP Sister Corp. structure would be a "paper clip" structure in which interests in the BCP Sister Corp. distributed to the our stockholders could be transferred independently from our Common Stock. Although such legislation does not affect the "paper clip" structure, there can be no assurance that the recently enacted legislation affecting the paired share structure will not place legislative or judicial scrutiny on the "paper clip" structure or that legislation adversely affecting such a structure will not be proposed and enacted. See "Risk Factors--Legal and Tax Risks--Adverse Impact of Future Legislation Regarding REITs" and "Federal Income Tax Considerations--Impact of Proposed Legislation." POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES Although we have no specific policy with respect to such activities, we do not presently anticipate that we will (i) underwrite the securities of other unaffiliated issuers, or (ii) repurchase or reacquire our shares or, other than through the redemption of Units in the Operating Partnership, other securities. 53 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 1, 1998, the total number of shares of Common Stock beneficially owned, and the percent so owned, by (i) each person known by the Company to own more than 5% of the Common Stock, (ii) each of BCP's directors and executive officers and (iii) all directors and executive officers as a group.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2) ------------------ NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT - ---------------------------------------- --------- ------- Wellington Management Company........... 2,300,000 10.9% (3) 75 State Street Boston, MA 02109 Southeastern Asset Management........... 2,075,000 9.8% 6410 Poplar Drive Memphis, TN 38119 RREEF Venture Capital Fund LP........... 1,650,000 7.8% 875 N. Michigan Avenue Chicago, IL 60611 ABKB/La Salle........................... 1,337,500 6.4% 100 East Pratt St. Baltimore, MD 21202 Alan M. Leventhal....................... 591,312 2.8% (4) Lionel P. Fortin........................ 271,040 1.2% (5) Stephen T. Clark........................ 6,425 * (6) Steven Shulman.......................... 11,986 * (7) Scott M. Sperling....................... 6,425 * (8) Jeremy Fletcher......................... 10,723 * (9)(10) Douglas Mitchell........................ 5,361 * (9) Erin O'Boyle............................ 2,000 * (11) Nancy J. Broderick...................... 1,350 *
54 Randy Parker............................ 1,340 * (12) E. Valjean Wheeler...................... 1,340 * (9) William A. Bonn......................... 1,000 * (12) All Directors and Executive Officers as a Group (12 persons).......................... 910,302 4.3% (4)(5)(6)(7)(8)(9)(10)(11)(12)
- ------------------------ * Less than one percent (1) All information has been determined as of June 1, 1998. For the purposes of this table, a person is deemed to have "beneficial ownership" of the number of shares of Common Stock that person has the right to acquire pursuant to the exercise of stock options or redemption of Operating Partnership Units (assuming the Company elects to issue Common Stock rather than pay cash upon such redemption) held by such person or an affiliate of such person. Unless otherwise noted the address of each Beneficial Owner is: c/o Beacon Capital Partners, Inc., One Federal Street, 26th Floor, Boston, MA 02110. (2) For the purpose of computing the percentage of outstanding shares of Common Stock held by each person, any shares of Common Stock which such person has the right to acquire pursuant to the exercise of a stock option or upon the redemption of Operating Partnership Units is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percent ownership of any other person. (3) Includes shares held by 2 separate stockholders which the Company believes to be controlled by Wellington Management Company. (4) Includes Operating Partnership Units held indirectly by a trust, of which Mr. Leventhal is a beneficiary. Excludes options to purchase 500,000 shares of Common Stock granted to Mr. Leventhal and subsequently transferred to a trust, of which Mr. Leventhal is a beneficiary, which options are not presently exercisable. (5) Includes Operating Partnership Units held indirectly by a trust, of which Mr. Fortin's wife is a trustee. Excludes options to purchase 500,000 shares of Common Stock granted to Mr. Fortin and subsequently transferred to a trust, of which Mr. Fortin's wife is a beneficiary, which options are not presently exercisable. (6) Includes currently exercisable options to purchase 6,425 shares of Common Stock. (7) Includes currently exercisable options to purchase 6,625 shares of Common Stock. (8) Includes currently exercisable options to purchase 6,425 shares of Common Stock. (9) Excludes options to purchase 125,000 shares of Common Stock, which options are not presently exercisable. (10) Includes 10,723 shares of Common Stock held by a trust, of which Mr. Fletcher is a trustee. (11) Excludes options to purchase 175,000 shares of Common Stock, which options are not presently exercisable. (12) Excludes options to purchase 150,000 shares of Common Stock, which options are not presently exercisable. 55 PRICE RANGE OF COMMON STOCK There is no established market for the Common Stock, which is not listed on any securities exchange, and trading in the Common Stock has not been quoted on any interdealer or over-the-counter bulletin board since the Original Offering. As of December 1, 1998, the Company believes there to be approximately 354 holders of record of BCP's Common Stock. CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1998, and on a pro forma basis to reflect the Pro Forma Transactions (as defined under "Selected Historical and Unaudited Pro Forma Financial Data"):
ACTUAL PRO FORMA ---------- ----------- (IN THOUSANDS) Mortgage notes payable................................................ $ 21,631 $ 21,631 Minority interest..................................................... 55,976 55,976 Common stock; $.01 par value, 500,000,000 shares authorized, 20,973,932 shares issued and outstanding and adjusted pro forma.............................................. 210 210 Additional paid-in capital............................................ 389,520 389,520 Retained earnings..................................................... 6,549 6,549 ---------- ----------- Total........................................................... $ 473,886 $ 473,886 ---------- ----------- ---------- -----------
56 SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA The selected historical financial data set forth below presents the historical financial data of the Company as of September 30, 1998 and for the period from January 21, 1998 (our inception) through September 30, 1998. The selected pro forma financial data of the Company set forth below assumes that we will qualify as a REIT and gives effect to (i) the pending additional funding of an investment in a joint venture known as Mathilda Research Centre and (ii) the pending additional funding of an investment in a joint venture known as Millennium Tower as if these transactions had occurred as of September 30, 1998. The income statement data gives effect to these transactions as well as to (i) the acquisition of The Athenaeum Portfolio, and the subsequent formation of a 50% joint venture, (ii) the acquisition of Technology Square and The Draper Building and (iii) the acquisition of Dallas Office and Industrial Portfolio as if all transactions had occurred January 1, 1998. The selected pro forma financial data are not necessarily indicative of what our actual financial position or results of operations would have been as of or for the period ended September 30, 1998, nor do they purport to be indicative of the financial position or results of operations for future periods. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our historical financial statements and notes thereto and our unaudited pro forma financial statements and notes thereto, each included elsewhere herein.
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1998 ----------------------- HISTORICAL PRO FORMA ---------- ----------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Income Statement Data: Revenues............................................................ $ 16,795 $ 24,538 Net income.......................................................... 6,549 5,704 Net income per common share--basic and diluted...................... 0.32 0.27 Balance Sheet Data: Real estate......................................................... $ 214,601 $ 214,601 Investments in and advance to joint ventures and corporations....... 70,975 107,626 Total assets........................................................ 480,113 480,113
57 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following should be read in conjunction with our Consolidated Financial Statements and notes thereto and our unaudited Pro Forma Condensed Consolidated Financial Statements, each contained elsewhere herein. Our Consolidated Financial Statements include BCP and the Operating partnership, our majority-owned partnership. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $323.9 million at March 31, 1998, which was primarily the result of the Original Offering on March 20, 1998. Cash and cash equivalents were $192.3 million at September 30, 1998. The decrease primarily resulted from (i) the acquisitions of Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio, (ii) investments in and advances to The Athenaeum Portfolio, Mathilda Research Centre, Millennium Tower and Cypress Communications, Inc. and (iii) loan repayments to the Company founders offset by (a) proceeds received from the exercise of the underwriter's over-allotment option, (b) the issuance of Operating Partnership units and (c) cash flow from operations. SHORT AND LONG TERM LIQUIDITY We have considered our short-term liquidity needs and the adequacy of expected liquidity sources to meet these needs. We believe that our principal short-term liquidity needs are to fund normal recurring expenses, debt service requirements and the minimum distribution required to maintain our REIT qualification under the Code. We believe that these needs will be funded from cash flows provided by operating activities. We expect to meet our long-term 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 long-term secured and unsecured indebtedness, joint ventures and the issuance of additional Operating Partnership Units and equity securities. FINANCING ACTIVITIES BCP was incorporated on January 21, 1998 as a Massachusetts corporation and was initially capitalized through loans from the Company founders, Messrs. Leventhal and Fortin, in the amount of $3.6 million. On May 1, 1998, those loans were repaid. On March 20, 1998, we completed an initial private offering issuing 17,360,769 shares of Common Stock with proceeds, net of offering costs, of $323.1 million. On April 3, 1998 and April 13, 1998, through the exercise of the underwriter's over-allotment option, 3,613,163 additional shares were issued with proceeds, net of offering costs, of $66.6 million. In connection with our re-incorporation of BCP (through a merger) as a Maryland corporation, we established the Operating Partnership. As contemplated in the Original Offering, an entity controlled by Messrs. Leventhal and Fortin was to contribute $4.2 million to the Operating Partnership for a 1% limited partnership interest. In order to comply with the requirements of ERISA, such contribution could only be made subsequent to the closing of our first real estate transaction. The $4.2 million contribution was made on May 4, 1998. 58 INVESTING ACTIVITIES On May 1, 1998, we acquired The Athenaeum Portfolio, an eleven building, 970,000 square foot mixed-use portfolio located in Cambridge, MA. The aggregate consideration for the properties was $195 million, consisting of approximately $125.9 million in cash and the assumption of approximately $69.1 million of first mortgage debt. We used proceeds from the Original Offering for the cash portion of the acquisition. Subsequent to the closing of the transaction, we completed the formation of a joint venture with PW Acquisitions IX, LLC, an affiliate of PaineWebber, in which both parties hold a 50% interest in the master limited liability company that controls the two limited liability companies that hold title to The Athenaeum Portfolio. On June 24, 1998, we acquired a four building complex known as Technology Square and an adjacent building known as The Draper Building. The properties are located in Cambridge, MA and consist of approximately 1,026,000 square feet. The aggregate consideration for the properties was $123 million, consisting of $71.6 million in cash and the issuance of $51.4 million of units of limited partnership interest in the Operating Partnership. We used proceeds from the Original Offering for the cash portion of the acquisition. On July 1, 1998, we acquired the Dallas Office and Industrial Portfolio, a 1,335,000 square foot portfolio of seven office properties and seven research & development (R&D) properties located in suburban Dallas, TX. The aggregate consideration for the properties was $91.2 million, consisting of approximately $69.5 million in cash and the assumption of approximately $21.7 million of first mortgage debt. We used proceeds from the Original Offering for the cash portion of the acquisition. On August 9, 1998, we entered into a joint venture agreement with Mathilda Partners LLC, an affiliate of Menlo Equities, a California based developer. 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, two four-story Class A office buildings with surface parking. Although not finalized, the budget for the 267,000 square foot development is anticipated to be approximately $57 million, of which approximately 35% will be funded from cash contributions and the balance is intended to be financed with a construction loan from an institutional lender. Currently, we have invested approximately $17 million in the project 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 was formed to develop Millennium Tower, a 19-story office and residential tower, located at Second Avenue and Columbia Street in downtown Seattle, Washington. The estimated cost of the 273,000 square foot building is $71 million, approximately 60% of which the venture intends to finance with a construction loan from an institutional lender. Currently, we have invested approximately $4 million in the project using proceeds from the Original Offering. On September 30, 1998, we invested $5 million to acquire preferred stock in Cypress Communications, Inc., ("Cypress") representing a 13.5% fully diluted ownership position in such company. Dividends will be earned on our 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. We used proceeds from the Original Offering for the investment. Cypress Communications, Inc. is a provider of bundled communications services to tenants in multi-tenant commercial buildings. These bundled services include Internet access, video, voice mail and telephone service. By bundling services to multiple tenants in an office building, Cypress can aggregate the 59 traffic of customers and give them the advantage of a cost-effective service with a high level of customer care. CAPITALIZATION As of September 30, 1998, our total consolidated mortgage debt is approximately $21.6 million, and our total consolidated mortgage debt plus our proportionate share of total unconsolidated mortgage debt is approximately $56.1 million. Our current consolidated mortgage indebtedness has a weighted average rate of 8.22%, with maturities ranging from 1999 through 2022, and is secured by some of our properties. Our proportionate share of our current total unconsolidated mortgage debt consists of approximately $34.5 million with a rate of 8.485% and a maturity of 2027 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). Our consolidated and unconsolidated fixed rate mortgage debt has a weighted average rate of 8.38%. RESULTS OF OPERATIONS For the period January 21, 1998 through March 31, 1998, we had a net loss of $0.4 million consisting primarily of $0.6 million of interest income earned on the investment of the net proceeds of the Original Offering offset by general and administrative expenses of approximately $1 million. For the period April 1, 1998 through September 30, 1998, we had net income of $6.9 million, generated from total revenues of $16.2 million offset by expenses of $8.9 million and minority interest in consolidated partnership of $0.4 million. The revenues consist of Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio rental income of $6.2 million, The Athenaeum Portfolio equity earnings of $2.1 million, interest income of $7.8 million and other income of $0.1 million. Expenses consist of Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio property operating and real estate taxes of $1.7 million and $1 million, respectively, general and administrative expenses of $4.6 million, interest expense of $.5 million and depreciation and amortization of $1.1 million. For the period January 21, 1998 through September 30, 1998, we had net income of $6.5 million, generated from total revenues of $16.8 million offset by expenses of $9.9 million and minority interest in consolidated partnership of $.4 million. The revenues consist of Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio rental income of $6.2 million, The Athenaeum Portfolio equity earnings of $2.1 million, interest income of $8.4 million and other income of $.1 million. Expenses consist of Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio property operating and real estate taxes of $1.7 million and $1 million, respectively, general and administrative expenses of $5.6 million, interest expense of $.5 million and depreciation and amortization of $1.1 million. On a pro forma basis, for the nine months ended September 30, 1998, we had net income of $5.7 million, generated from total revenues of $24.5 million offset by expenses of $18.1 million and minority interest in consolidated partnership of $0.7 million. The revenues consist of Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio rental income of $17.2 million, The Athenaeum Portfolio equity earnings of $3.5 million, interest income of $3.5 million and other income of $0.3 million. Expenses consist of Technology Square, The Draper Building and the Dallas Office and Industrial Portfolio property operating and real estate taxes of $5.2 million and $2.8 million, respectively, general and administrative expenses of $5.6 million, interest expense of $1.4 million and depreciation and amortization of $3.1 million. The minority interest in consolidated partnership represents the portion of the Operating Partnership that is not owned by us. 60 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 us and our 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 will implement a Year 2000 initiative which has 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 undertaken phases (i) and (ii) 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 of such systems and applications were installed in 1998 and are substantially Year 2000 compliant. By January, 1999, all corporate and property financial records will be maintained on our corporate accounting system. We have contacted the vendors for these systems and have received assurance that these systems are Year 2000 compliant. We have not incurred any material costs to address our Year 2000 compliance issues. We have not yet completed the budgeting phase of our Year 2000 initiative. 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 begun working on phase (vi) of our Year 2000 initiative. We have retained third party property managers to operate our properties. Included in the contractual obligations of these parties is an undertaking by the third party managers to work with us on our Year 2000 initiative. Currently, we are requesting and reviewing information from these third parties to determine their Year 2000 readiness. Though this review is not complete, we believe that our managers are in the process of reviewing building systems and the systems of the properties' tenants and vendors to ensure Year 2000 preparedness. We have rights to approve all lease agreements and have reviewed our standard lease form to address Year 2000 compliance issues. Our inability, or the inability of 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 do not currently have a contingency plan in place in the event that we, or our managers, tenants or vendors, do not successfully address Year 2000 compliance issues. We will evaluate the status of our Year 2000 initiative by the end of the first quarter of 1999 and determine whether such a contingency plan is necessary. We expect to complete our Year 2000 initiative by the end of the third quarter of 1999, including the development of any contingency plan, if needed. 61 DESCRIPTION OF SECURITIES The following description of the terms of our securities is not complete. This description is subject to and qualified in its entirety by reference to our Charter and Bylaws, (copies of which are available upon request to the Company). See "Certain Provisions of Maryland Law and of BCP's Charter and Bylaws." GENERAL Our Charter provides that the Company has the authority to issue up to 950,000,000 shares of stock, consisting of 500,000,000 shares of Common Stock ($.01 par value per share); 250,000,000 shares of excess stock ($.01 par value per share) ("Excess Stock"); and 200,000,000 shares of preferred stock ($.01 par value per share) ("Preferred Stock"). As of December 1, 1998, 20,973,932 shares of our Common Stock are issued and outstanding and no shares of Excess Stock or Preferred Stock are issued and outstanding. Under Maryland law, stockholders generally are not liable for the corporation's debts or obligations. COMMON STOCK Subject to the preferential rights of any other class or series of stock and to the provisions of our Charter regarding Excess Stock, holders of shares of our Common Stock are entitled to receive dividends on such Common Stock if, as and when authorized and declared by our Board of Directors (out of assets legally available therefor) and to share ratably in the Company's assets legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding-up (after payment of or adequate provision for all of the Company's known debts and liabilities). Subject to the provisions of our Charter regarding Excess Stock, each outstanding share of our Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders (including the election of directors). Except as otherwise required by law and except as provided with respect to any other class or series of stock, the holders of such shares of Common Stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of Common Stock can elect all of the directors then standing for election and the holders of the remaining shares of Common Stock will not be able to elect any Directors. Holders of shares of our Common Stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights (except as provided by Maryland law) and have no preemptive rights to subscribe for any securities of the Company. Subject to the provisions of our Charter regarding Excess Stock, shares of our Common Stock will have equal dividend, liquidation and other rights. Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two thirds of the shares entitled to vote on the matter unless a different percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. Our Charter does not provide for a different percentage in such situations, except for certain amendments to our Charter. See "Certain Provisions of Maryland Law and BCP's Charter and Bylaws--Amendment of Charter and Bylaws." PREFERRED STOCK Our Charter authorizes the Board of Directors to classify any unissued shares of Preferred Stock and to reclassify any previously classified but unissued shares of Preferred Stock of any series, as authorized by the Board of Directors. Prior to issuance of shares of each class or series, the Board is required by the MGCL and our Charter to fix, subject to the provisions of our Charter regarding Excess Stock, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series. Such 62 rights, powers, restrictions and limitations could include the right to receive specified dividend payments and payments on liquidation prior to any such payments being made to the holders of some, or a majority, of our Common Stock. The Board of Directors could authorize the issuance of Preferred Stock with terms and conditions that could have the effect of discouraging a takeover or any other transaction that holders of our Common Stock might believe to be in their best interests or in which holders of some, or a majority, of our Common Stock might receive a premium for their shares over the then current market price of such shares. As of the date hereof, no shares of Preferred Stock are outstanding and we have no present plans to issue any Preferred Stock. POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK We believe that the power of the Board of Directors to issue additional authorized but unissued shares of Common Stock or Preferred Stock and to classify or reclassify unissued shares of Common or Preferred Stock and thereafter to cause the Company to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the Common Stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although the Board of Directors has no intention at the present time of doing so, it could authorize the Company to issue a class or series that could (depending upon the terms of such class or series) delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for holders of our Common Stock or otherwise be in their best interest. DIVIDEND REINVESTMENT PLAN We may implement a dividend reinvestment plan whereby our stockholders may automatically reinvest their dividends in the Common Stock. Details about any such plan would be sent to our stockholders following adoption thereof by the Board of Directors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is EquiServe (the "Transfer Agent") in Boston, Massachusetts. TRANSFER RESTRICTIONS Restrictions Under Charter In order for the Company to qualify as a REIT under the Code, among other things, not more than 50% in value of its outstanding stock may be owned, directly or indirectly, by five or fewer individuals (defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made) (the "Five or Fewer Requirement"), and such shares of capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. See "Federal Income Tax Considerations." In order to protect the Company against the risk of losing its status as a REIT and to otherwise protect the Company from the consequences of a concentration of ownership among its stockholders, our Charter (subject to certain exceptions) provides that no single person (which may include certain "groups" of persons) may "beneficially own" more than 9.8% (the "Aggregate Stock Ownership Limit") of the aggregate number of outstanding shares of any class or series of stock; provided, however, that certain mutual funds registered under the Investment Company Act of 1940 and certain other widely-held entities (other than pension plans as described in Section 401(a) of the Code) ("Look-Through Entities") may "beneficially own" no more than 15% (the "Look-Through Ownership Limit"). Under our Charter, a 63 person generally "beneficially owns" shares if (i) such person has direct ownership of such shares, (ii) such person has indirect ownership of such shares taking into account the constructive ownership rules of Section 544 of the IRS Code (as modified by Section 856(h)(1)(B) of the IRS Code) or (iii) such person would be deemed to "beneficially own" such shares pursuant to Rule 13d-3 under the Exchange Act. Any transfer of shares of stock or of any security convertible into shares of stock that would create a direct or indirect ownership of shares of stock in excess of the Aggregate Stock Ownership Limit or the Look-Through Ownership Limit (as applicable) or that would result in the disqualification of the Company as a REIT, including any transfer that results in the shares of stock being owned by fewer than 100 persons or results in the Company being "closely held" within the meaning of Section 856(h) of the Code or results in the Company constructively owning 10% or more of the ownership interests in a tenant of the Company within the meaning of Section 318 of the Code as modified by Section 856(d)(5) of the Code, shall be null and void, and the intended transferee will acquire no rights to the shares of stock. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines that it is no longer in the best interests of the Company to attempt to qualify (or to continue to qualify) as a REIT. The Board of Directors, upon receipt of a ruling from the IRS, or an opinion of counsel or other evidence or undertakings acceptable to it, may, in its sole discretion, waive the Aggregate Stock Ownership Limit and the Look-Through Ownership Limit if evidence satisfactory to the Board of Directors is presented that the changes in ownership will not jeopardize the Company's REIT status or cause the Company to be a "pension-held REIT" for federal income tax purposes and the Board of Directors otherwise decides that such action is in the best interest of the Company. If any purported transfer of stock of the Company or any other event would otherwise result in any person violating the Aggregate Stock Ownership Limit or the Look-Through Ownership Limit (as applicable) or our Charter, then any such purported transfer will be void and of no force or effect with respect to the purported transferee (the "Prohibited Transferee") as to that number of shares in excess of the applicable limit and the Prohibited Transferee shall acquire no right or interest (or, in the case of any event other than a purported transfer, the person or entity holding record title to any such shares in excess of the applicable limit (the "Prohibited Owner") shall cease to own any right or interest) in such excess shares. Any such excess shares described above will be converted automatically into an equal number of shares of Excess Stock (the "Excess Shares") and transferred automatically (by operation of law) to a trust, the beneficiary of which will be a qualified charitable organization selected by the Company (the "Beneficiary"). Such automatic transfer shall be deemed to be effective as of the close of business on the Trading Day (as defined in our Charter) prior to the date of such violative transfer. As soon as practical after the transfer of shares to the trust but in an orderly fashion so as not to materially adversely affect the trading price of our Common Stock, the trustee of the trust (who we shall designate and who will be unaffiliated with the Company and any Prohibited Transferee or Prohibited Owner) will be required to sell such Excess Shares to a person or entity who could own such shares without violating the applicable Limit, and distribute to the Prohibited Transferee an amount equal to the lesser of the price paid by the Prohibited Transferee for such Excess Shares or the sales proceeds received by the trust for such Excess Shares. In the case of any Excess Shares resulting from any event other than a transfer, or from a transfer for no consideration (such as a gift or devise), the trustee will be required to sell such Excess Shares to a qualified person or entity and distribute to the Prohibited Owner an amount equal to the lesser of the fair market value of such Excess Shares as of the date of such event or the sales proceeds received by the trust for such Excess Shares. In either case, any proceeds in excess of the amount distributable to the Prohibited Transferee or Prohibited Owner (as applicable) will be distributed to the Beneficiary. Prior to a sale of any such Excess Shares by the trust, the trustee will be entitled to receive in trust for the Beneficiary, all dividends and other distributions we pay with respect to such Excess Shares. The Prohibited Owner with respect to such Excess Shares shall repay to the trust the amount of any dividends or distributions received by it that (i) are attributable to any shares of stock that have been converted into Excess Shares and (ii) were distributed by the Company to stockholders of record on a 64 record date which was on or after the date that such shares were converted into Excess Shares. Each Excess Share shall entitle the holder to no voting rights other than those voting rights which accompany a class of stock under Maryland law. The trustee, as record holder of the Excess Shares, shall be entitled to vote all Excess Shares. Any vote by a Prohibited Owner as a purported holder of shares of stock prior to our discovery that such shares of stock have been converted into Excess Shares shall, subject to applicable law, (i) be rescinded and shall be void AB INITIO with respect to such Excess Shares and (ii) be recast in accordance with the desires of the trustee acting for the benefit of the Beneficiary; provided, however, that if we have already taken irreversible corporate action, then the trustee shall not have the authority to rescind and recast such vote. In addition, our shares of stock held in the trust shall be deemed to have been offered for sale to the Company, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the trust (or, in the case of a devise or gift, the market price at the time of such devise or gift) and (ii) the market price on the date we (or our designee), accept such offer. We shall have the right to accept such offer for a period of 90 days following the later of (a) the date of the event which resulted in such shares of Excess Stock or (b) the date the Board of Directors first determined that the event resulting in the shares of Excess Stock occurred, if we do not receive notice of such event. Upon such a sale to the Company, the interest of the Beneficiary in the shares sold shall terminate and the trustee shall distribute the net proceeds of the sale to the Prohibited Owner. Each stockholder shall upon demand be required to disclose to the Company in writing any information with respect to the direct, indirect and constructive ownership of capital stock as the Board of Directors deems necessary to comply with the provisions of the Code applicable to REITs, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. The above-described ownership limits may have the effect of precluding acquisition of control of the Company. REGISTRATION RIGHTS The Selling Stockholders of our Common Stock are entitled to the benefits of a Registration Rights Agreement between the Company and the Initial Purchaser in the Original offering (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, we have agreed for the benefit of the holders of our Common Stock that it will from time to time (at its expense) (i) promptly, but in any event within 90 days after the date of issuance of the Common Stock, file a shelf registration statement (the "Shelf Registration Statement") with the Commission with respect to resales of the Common Stock, (ii) use its best efforts to cause such Shelf Registration Statement to be declared effective by the Commission as promptly as practicable and (iii) use its best efforts to maintain such Shelf Registration Statement continuously effective under the Securities Act, until the date (the "Expiration Date") which is the earliest of the dates described in the following clauses (a), (b) and (c): (a) the second annual anniversary of the latest date of original issuance of the Common Stock, (b) such time as all Common Stock covered by the Shelf Registration Statement has been sold pursuant to the Shelf Registration Statement, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in a new security not subject to transfer restrictions under the Securities Act being delivered, and (c) such time as, in the opinion of counsel, all of the Common Stock held by nonaffiliates of the Company and covered by the Shelf Registration Statement are eligible for resale pursuant to Rule 144(k) (or any successor or analogous rule) under the Securities Act and the legend described under "Notice to Investors" has been removed from such Common Stock. The Registration Statement of which this Prospectus forms a part has been filed pursuant to the foregoing provisions of the Registration Rights Agreement. Notwithstanding the foregoing, we will be permitted to suspend the use, from time to time, of this prospectus that is part of the Shelf Registration Statement for periods (any such period hereinafter 65 referred to as a "blackout period"), if the Company's Board of Directors shall have determined in good faith that it is in the best interests of the Company to suspend such use and we provide the Selling Stockholders with written notice of such suspension. A Selling Stockholder that sells Common Stock pursuant to the Shelf Registration Statement, including through the use of this Prospectus, generally will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement that are applicable to such a holder (including certain indemnification rights and obligations). In addition, each holder of Common Stock may be required to deliver information to be used in connection with the Shelf Registration Statement in order to have such holder's Common Stock included in the Shelf Registration Statement and to benefit from the provisions of the succeeding paragraph. Each Common Stock certificate contains a legend to the effect that the holder thereof, by its acceptance thereof, will be deemed to have agreed to be bound by the provisions of the Registration Rights Agreement. In that regard, each holder is deemed to have agreed that, upon receipt of notice from the Company of the occurrence of any event which makes a statement in this prospectus untrue in any material respect or which requires the making of any changes in such prospectus in order to make the statements therein not misleading, or of certain other events specified in the Registration Rights Agreement, such holder will suspend the sale of Common Stock pursuant to this prospectus until the Company has amended or supplemented such prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented prospectus to such holder or we have given notice that the sale of our Common Stock may be resumed. We have agreed (pursuant to a registration rights agreement with Luddite Associates, a partnership owned by The Prudential Insurance Company of America and its affiliates) to register, on any four occasions after September 1, 1999, at the request of Luddite Associates (or in certain other circumstances), the shares of Common Stock which we may issue upon the redemption of 2,528,296 Units held by Luddite Associates. We will bear all expenses incident to the registration of securities under this agreement, except that such expenses shall not include any underwriting discounts or commissions, or transfer taxes, if any, relating to such shares. 66 CERTAIN PROVISIONS OF MARYLAND LAW AND OF BCP'S CHARTER AND BYLAWS THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND TO OUR CHARTER AND BYLAWS. Our Charter and the Bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These provisions may have the effect of delaying, deterring or preventing certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Board of Directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging such proposals because, among other things, negotiation of such proposals might result in an improvement of their terms. AMENDMENT OF CHARTER AND BYLAWS Our Charter may be amended only by the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter, (or, if less than 75% of the Directors then in office approve the amendment, by the affirmative vote of holders of two-thirds of all votes entitled to be cast on the matter) except that amendments dealing with certain articles of our Charter (for example, articles relating to stockholder action; the powers, election of, removal of and classification of directors; limitation of liability; and amendment of our Charter) shall require the affirmative vote of not less than seventy-five percent of the outstanding votes entitled to be cast on the matter. Unless otherwise required by law, the Board of Directors may amend our Bylaws by the affirmative vote of a majority of the Directors then in office. DISSOLUTION OF THE COMPANY The MGCL permits the dissolution of the Company by (i) the affirmative vote of a majority of the entire Board of Directors declaring such dissolution to be advisable and directing that the proposed dissolution be submitted for consideration at an annual or special meeting of stockholders, and (ii) upon proper notice, stockholder approval by the affirmative vote of two-thirds of the votes entitled to be cast on the matter. MEETINGS OF STOCKHOLDERS Under our Bylaws, annual meetings of stockholders shall be held at such date and time as determined by the Board of Directors, the Chairman of the Board or the President. The Bylaws establish an advance notice procedure for stockholders to make nominations of candidates for directors or bring other business before an annual meeting of stockholders. Special meetings of stockholders may be called by a majority of our Directors then in office or by stockholders holding not less than a majority of the outstanding stock entitled to vote at the meeting and only matters set forth in the notice of the meeting may be considered and acted upon at such a meeting. THE BOARD OF DIRECTORS Our Charter provides that the Board of Directors shall initially consist of five Directors and thereafter the number of Directors of the Company may be established by the Board of Directors but may not be fewer than the minimum number required by the MGCL nor more than nine. Subject to the rights of the holders of any series of Preferred Stock to elect Directors and to fill vacancies in the Board of Directors relating thereto, any vacancy will be filled, including any vacancy created by an increase in the number of Directors, at any regular meeting or at any special meeting called for the purpose, by a majority of the remaining Directors. Pursuant to the terms of our Charter, the Directors are divided into three classes. One class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 67 1999, another class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 2000 and the third class will hold office initially for a term expiring in 2001. As the term of each class expires, Directors in that class will be elected for a term of three years and until their successors are duly elected and qualified. The use of a classified board may render more difficult a change in control of the Company or removal of incumbent management. Our Charter provides that a Director may be removed from office (a) only with cause and (b) only by the affirmative vote of the holders of at least 75% of the shares entitled to vote at a meeting of stockholders called for that purpose. We believe, however, that classification of the Board of Directors will help to assure the continuity and stability of its business strategies and policies. Our Charter provides that the affirmative vote of more than 75% of the Directors then in office is required to approve certain transactions or actions of the Board, including a change of control (as defined in the Charter) of the Company or of the Operating Partnership, any amendment to the Operating Partnership Agreement, any waiver of the limitations on ownership contained in our Charter, any merger, consolidation or sale of all or substantially all of the assets of the Company or the Operating Partnership, certain issuances of equity securities by the Company or the termination of our status as a REIT. See "Operating Partnership Agreement." LIMITATION OF LIABILITY AND INDEMNIFICATION Our Charter limits the liability of the Board of Directors and officers to the Company to the fullest extent permitted from time to time by Maryland law. The MGCL permits a corporation to include in its charter a provision limiting the liability of directors and officers to the corporation or its stockholders for money damages, except (i) to the extent that it is proved that the director or officer actually received an improper benefit or profit in money, property or services or (ii) if a judgment or other final adjudication is entered in a proceeding based on a finding that the director's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. This provision does not limit our ability or our stockholders to obtain other relief, such as an injunction or a rescission. Our Charter authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer or (b) any individual who, while a director of the Company and at the request of the Company, serves or has served another corporation, REIT, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, REIT, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her status as a present or former director or officer of the Company. Our Bylaws obligate the Company, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director of the Company and at the request of the Company, serves or has served another corporation, REIT, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, REIT, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. Our Charter and Bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company. The MGCL requires a corporation (unless its charter provides otherwise, which our Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its directors, officers and certain other parties against judgments, penalties, fines, 68 settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service to or at the request of the corporation, unless it is established that (a) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and (i) the act or omission was committed in bad faith or (ii) the act or omission was the result of active and deliberate dishonesty, (b) the indemnified party actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (a) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with each of our Directors and executive officers which require, among other things, that we indemnify our Directors and executive officers to the fullest extent permitted by law and advance to the Directors and executive officers all related expenses (subject to reimbursement if it is subsequently determined that indemnification is not permitted). Under these agreements, we must also indemnify and advance all expenses incurred by Directors and executive officers seeking to enforce their rights under the indemnification agreements and may cover Directors and executive officers under the Company's Directors' and officers' liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded by law, it provides greater assurance to Directors and executive officers that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the Board of Directors or the stockholders to eliminate the rights it provides. BUSINESS COMBINATIONS Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate of such an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of outstanding voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These 69 provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. Our Charter exempts from the Maryland statute any business combination with Alan M. Leventhal or Lionel P. Fortin, or current or future affiliates, associates or other persons acting in concert as a group with either of Messrs. Leventhal or Fortin. CONTROL SHARE ACQUISITIONS The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting. If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our Charter exempts from the control share acquisition statute the purchases of Common Stock on the Closing Date of the Original Offering and any future transactions which would otherwise be subject to the statute by Alan M. Leventhal or Lionel P. Fortin or current or future affiliates, associates or other persons acting in concert or as a group with either of Messrs. Leventhal or Fortin. Consequently, the prohibition on voting control shares will not apply to such persons. 70 COMMON STOCK AVAILABLE FOR FUTURE SALE As of September 30, 1998, we have outstanding 20,973,932 shares of Common Stock and have reserved for issuance upon exercise of Stock Options or redemption of Units 5,550,223 additional shares of Common Stock. Shares of Common Stock issued to holders of Units upon exercise of the Redemption Rights, will be "restricted" securities under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. See "Description of Securities-- Transfer Restrictions" and "Operating Partnership Agreement--Redemption of OP Units." In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any "affiliate" of the Company, as defined in Rule 144 (an "Affiliate"), the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company which will require us to file periodic reports under the Exchange Act. If two years have elapsed since the date of acquisition of restricted shares from the Company or from any Affiliate of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an Affiliate of the Company at any time during the three months preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. No assurance can be given as to (i) the likelihood that an active market for the shares will develop, (ii) the liquidity of any such market, (iii) the ability of the stockholders to sell their Common Stock, or (iv) the prices that stockholders may obtain for their Common Stock. In addition to the shares to be registered hereby, the holders of 2,528,296 Units have the right to demand, on any four occasions after September 1, 1999, to have the common stock that they might receive upon the redemption of such Units registered. We will bear all expenses incident to the registration under the registration rights agreement, except that such expenses shall not include any underwriting discounts or commissions, or transfer taxes, if any, relating to such shares. 71 OPERATING PARTNERSHIP AGREEMENT THE FOLLOWING SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT DESCRIBES THE MATERIAL PROVISIONS OF SUCH AGREEMENT. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPERATING PARTNERSHIP AGREEMENT. CLASSES OF UNITS The Operating Partnership has authority to issue three classes of units of limited partnership interests: Units; Convertible Units; and Incentive Units. The Units, and the Incentive Units once issued (collectively, the "OP Units"), will share equally on a unit-by-unit basis in all distributions of the Operating Partnership. The Convertible Units will not participate in any distributions of the Operating Partnership and represent solely the right to convert into a certain number of Incentive Units (if any) with a fair market value equal to the Incentive Return. See "The Company--Long-Term Incentive Plan." MANAGEMENT The Operating Partnership is a Delaware limited partnership. We are the sole general partner of, and hold approximately 88% of the economic interests in the Operating Partnership. We hold an approximate 1% general partner interest in the Operating Partnership and the balance is held as a limited partner interest. We intend to conduct substantially all of its business through the Operating Partnership and its subsidiaries. Pursuant to the Operating Partnership Agreement, we (as the sole general partner of the Operating Partnership), generally have full, exclusive and complete responsibility and discretion in the management, operation and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions, including acquisitions, developments and dispositions of properties and refinancings of existing indebtedness. No limited partner may take part in the operation, management or control of the business of the Operating Partnership by virtue of being a holder of any class of units of the Operating Partnership. Certain restrictions apply to our ability to engage in a Business Combination, as described more fully under "Extraordinary Transactions" below. The limited partner of the Operating Partnership has agreed that in the event of any conflict in the fiduciary duties owed by the Company to its stockholders and by the Company, (as general partner of the Operating Partnership), to such limited partners, we may act in the best interests of our stockholders without violating our fiduciary duties to such limited partners or being liable for any resulting breach of our duties to the limited partners. The Operating Partnership Agreement provides that all business activities of the Company, including all activities pertaining to the acquisition and operation of properties, must be conducted through the Operating Partnership, and that the Operating Partnership must be operated in a manner that will enable the Company to satisfy the requirements for being classified as a REIT. REMOVAL OF THE GENERAL PARTNER; TRANSFER OF THE GENERAL PARTNER'S INTEREST The Operating Partnership Agreement provides that the limited partners may not remove us as general partner of the Operating Partnership. We may not transfer any of our interests as general or limited partner in the Operating Partnership except (i) in connection with a merger or sale of all or substantially all of its assets pursuant to a transaction for which it has obtained the requisite approval in accordance with the terms of the Operating Partnership Agreement, (ii) if the limited partners holding at least 66 2/3% of the OP Units (excluding OP Units owned by BCP) consent to such transfer or (iii) to certain affiliates of the Company. 72 AMENDMENTS OF THE OPERATING PARTNERSHIP AGREEMENT Generally, the Operating Partnership Agreement may be amended with our approval, (as general partner), and limited partners (including us) holding a majority of the OP Units. Certain amendments that would, among other things, convert a limited partner's interest into a general partner's interest, modify the limited liability of a limited partner, alter the interest of a partner in profits or losses or the right to receive any distributions, alter or modify the redemption right described below, or cause the termination of the Operating Partnership at a time or on terms inconsistent with those set forth in the Operating Partnership Agreement must be approved by us and each limited partner that would be adversely affected by such amendment. Notwithstanding the foregoing, we, (as general partner), have the power, (without the consent of the limited partners), to amend the Operating Partnership Agreement as may be required to (1) add to our obligations as general partner or surrender any right or power granted to us as general partner, (2) reflect the admission, substitution, termination or withdrawal of partners in accordance with the terms of the Operating Partnership Agreement, (3) establish the rights, powers, duties and preferences of any additional partnership interests issued in accordance with the terms of the Operating Partnership Agreement, (4) reflect a change of an inconsequential nature that does not materially adversely affect the limited partners, or cure any ambiguity, correct or supplement any provisions of the Operating Partnership Agreement not inconsistent with law or with other provisions of the Operating Partnership Agreement, or make other changes concerning matters under the Operating Partnership Agreement that are not otherwise inconsistent with the Operating Partnership Agreement or law, or (5) satisfy any requirements of federal or state law. Certain provisions affecting our rights and duties as general partner (e.g., restrictions on our power to conduct businesses other than owning OP Units; restrictions relating to the issuance of our securities and related capital contributions to the Operating Partnership; restrictions relating to certain extraordinary transactions involving us or the Operating Partnership) may not be amended without the approval of a majority of the OP Units not held by us. TRANSFER OF UNITS; SUBSTITUTE LIMITED PARTNERS The Operating Partnership Agreement provides that limited partners generally may transfer their OP Units and Convertible Units without the consent of any other person, but may substitute a transferee as a limited partner only with the prior written consent of the Company as the sole general partner of the Operating Partnership. In addition, limited partners may not transfer OP Units until the one-year anniversary of the closing of the Original Offering or in violation of certain regulatory and other restrictions set forth in the Operating Partnership Agreement. Notwithstanding the foregoing, the 2,528,296 Units issued to Luddite Associates, a partnership owned by The Prudential Insurance Company of America and its affiliates, in connection with the acquisition of Technology Square and The Draper Building can generally be transferred to any direct or indirect wholly-owned subsidiary of Prudential at any time after September 21, 1998, and such transferee shall then be admitted as a substitute limited partner. REDEMPTION OF OP UNITS The Operating Partnership will be obligated after the one-year anniversary of the closing date of the Original Offering to redeem each OP Unit at the request of the holder thereof for cash equal to the fair market value of such unit at the time of such redemption (as determined in accordance with the provisions of the Operating Partnership Agreement), provided that we may elect to acquire any such OP Unit presented for redemption for one share of Common Stock or an amount of cash of the same value. If Incentive Units are presented for redemption, the election by the Company to acquire such Incentive Units for shares of Common Stock must be approved by the Independent Directors. With each redemption or acquisition by the Company, our percentage ownership interest in the Operating Partnership will increase. Beacon Capital Participation Plan shall have certain rights, pursuant to separate registration rights agreements, to have the issuance of shares of Common Stock that may be issued to it in exchange for 73 its OP Units, or the resale of such shares, registered under the Securities Act. See "Common Stock Available for Future Sale." OPERATIONS The Operating Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable us to satisfy the requirements for being classified as a REIT for federal tax purposes, to avoid any federal income or excise tax liability imposed by the Code, and to ensure that the Operating Partnership will not be classified as a "publicly traded partnership" for purposes of Section 7704 of the Code. In addition, the Operating Partnership will be operated in a manner so as to qualify it as a "real estate operating company" under the Plan Assets Regulation, at least until such time as the Common Stock qualifies as shares of "publicly offered securities" within the meaning of the Plan Assets Regulation. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership, it is anticipated that the Operating Partnership will pay all administrative costs and expenses of the Company (collectively, the "Company Expenses") and such Company Expenses will be treated as expenses of the Operating Partnership. The Company Expenses generally will include (i) all expenses relating to the formation and continuity of existence of the Company, (ii) all expenses relating to the offering and registration of securities by the Company, (iii) all expenses associated with the preparation and filing of any periodic reports by the Company under federal, state or local laws or regulations, (iv) all expenses associated with compliance by the Company with laws, rules and regulations promulgated by any regulatory body, and (v) all other operating or administrative costs of the Company incurred in the ordinary course of its business on behalf of the Operating Partnership. ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS We (as general partner) are authorized (without the consent of the limited partners), to cause the Operating Partnership to issue additional Units, Incentive Units and Convertible Units to the Company, to the limited partners or to other persons for such consideration and on such terms and conditions as we (as general partner) deem appropriate. If additional OP Units are issued to the Company, then we must (i) issue additional shares of Common Stock and must contribute to the Operating Partnership the entire proceeds received by us from such issuance or (ii) issue additional OP Units to all partners in proportion to their respective interests in the Operating Partnership. In addition, we may cause the Operating Partnership to issue to us additional partnership interests in different series or classes, which may be senior to the OP Units, in conjunction with an offering of our securities of having substantially similar rights, in which the proceeds thereof are contributed to the Operating Partnership. Consideration for additional partnership interests may be cash or other property or assets. No limited partner has preemptive, preferential or similar rights with respect to additional capital contributions to the Operating Partnership or the issuance or sale of any partnership interests therein. EXTRAORDINARY TRANSACTIONS The Operating Partnership Agreement provides that we may not generally engage in any merger, consolidation or other combination with or into another person or sale of all or substantially all of its assets, or any reclassification, or any recapitalization or change of outstanding shares of Common Stock (a "Business Combination"), unless the holders of OP Units will receive, or have the opportunity to receive, the same consideration per OP Unit as holders of Common Stock receive per share of Common Stock in the transaction; if holders of OP Units will not be treated in such manner in connection with a proposed Business Combination, we may not engage in such transaction unless limited partners (other than the Company) holding at least 66 2/3% of the OP Units held by limited partners vote to approve the Business Combination. 74 EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER The Operating Partnership Agreement generally provides that we, as general partner of the Operating Partnership, will incur no liability to the Operating Partnership or any limited partner for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if we carried out our duties in good faith. In addition, we are not responsible for any misconduct or negligence on the part of our agents, provided we appointed such agents in good faith. We may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors, and any action we take or omit to take in reliance upon the opinion of such persons, as to matters that we reasonably believes to be within their professional or expert competence, shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. The Operating Partnership Agreement also provides for the indemnification of us, our Directors and officers, and such other persons as we may from time to time designate against any judgments, penalties, fines, settlements and reasonable expenses actually incurred by such person in connection with the preceding unless it is established that: (1) the act or omission of the indemnified person was material to the matter giving rise to the preceding and either was committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified person actually received an improper personal benefit in money, property or services; or (3) in the case of any criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. TAX MATTERS We are the tax matters partner of the Operating Partnership and, as such, has the authority to make tax elections under the Code on behalf of the Operating Partnership. 75 FEDERAL INCOME TAX CONSIDERATIONS The following summary of material federal income tax considerations is based upon current law and is for general information purposes only. The discussion contained herein does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders (including, without limitation, insurance companies, tax-exempt organizations (except as described below), financial institutions or broker-dealers, and, except as discussed below, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. The statements in this discussion are based on current provisions of the Code, existing, temporary, and currently proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, existing administrative rulings and practices of the IRS, and judicial decisions. No assurance can be given that future legislative, judicial, or administrative actions or decisions, which may be retroactive in effect, will not affect the accuracy of any statements in this Prospectus with respect to the transactions entered into or contemplated prior to the effective date of such changes. EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM, HER OR IT OF THE PURCHASE, OWNERSHIP, AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, AND SALE, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY We will elect to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with the year ending on December 31, 1998. The sections of the Code relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth only the material aspects of the Code sections that govern the federal income tax treatment of a REIT and its stockholders. The discussion is qualified in its entirety by the applicable Code provisions, Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all of which are subject to change prospectively or retroactively. OPINION OF TAX COUNSEL Goodwin, Procter & Hoar LLP has acted as counsel to the Company in connection with the Offering and BCP's election to be taxed as a REIT. In the opinion of Goodwin, Procter & Hoar LLP (the "Opinion"), provided that the elections and other procedural steps described in this discussion of "Federal Income Tax Considerations" are completed by us in a timely fashion, we will be organized in conformity with the requirements for qualification as a REIT pursuant to Sections 856 through 860 of the Code, and our proposed method of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the Code. Investors should be aware, however, that opinions of counsel are not binding upon the Service or any court. It must be emphasized that the Opinion is based on various assumptions and is conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our properties and the past and future conduct of our business. Such factual assumptions and representations are described below in this discussion of "Federal Income Tax Considerations" and are set out in the Opinion. Moreover, such qualification and taxation as a REIT depends upon our ability to meet on a continuing basis, through actual annual operating results, distribution levels, and stock ownership, the various qualification tests imposed under the Code discussed below. Goodwin, Procter & Hoar LLP will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that the actual results of our operations for any particular taxable year will satisfy any such requirements. For a discussion of the tax consequences of failure to qualify as a REIT. See "--Failure to Qualify." 76 If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on our net income that is distributed currently to our stockholders. That treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) that generally results from an investment in a corporation. However, we will be subject to federal income tax as follows: - we will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains; - under certain circumstances, we may be subject to the "alternative minimum tax" on our undistributed items of tax preference, if any; - if we have (i) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income; - if we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax; - if we should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but have maintained our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on the gross income attributable to the greater of the amount by which BCP fails the 75% or 95% gross income test, multiplied by a fraction intended to reflect BCP's profitability; - if we should fail to distribute during each calendar year at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year (other than such capital gain net income which the Company elects to retain and pay tax on) , and (iii) any undistributed taxable income from prior periods, we would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed; - if we acquire any asset from a "C" corporation (i.e., a corporation generally subject to full corporate-level tax) in a merger or other transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset (or any other asset) in the hands of a "C" corporation and we recognize gain on the disposition of such asset during the 10-year period beginning on the date on which it acquired such asset, then to the extent of such asset's "built-in-gain" (i.e., the excess of the fair market value of such asset at the time of acquisition by us over the adjusted basis in such asset at such time), we will be subject to tax at the highest regular corporate rate applicable (as provided in Treasury Regulations that have not yet been promulgated). The results described above with respect to the tax on "built-in-gain" assume that we will elect pursuant to IRS Notice 88-19 to be subject to the rules described in the preceding sentence if we were to make any such acquisition. REQUIREMENTS FOR QUALIFICATION DEFINITION OF A REIT UNDER THE CODE The Code defines a REIT as a corporation, trust, or association (i) that is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; 77 (iii) that would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Service that must be met in order to elect and maintain REIT status; (viii) that uses a calendar year for federal income tax purposes; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets. The IRS Code provides that conditions (i) to (iv) above, inclusive, must be met during the entire taxable year and that condition (v) above must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (v) and (vi) above will not apply until after the first taxable year for which an election is made by the Company to be taxed as a REIT. For purposes of determining stock ownership under the 5/50 Rule, a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. A trust that is a qualified trust under Code Section 401(a), however, generally is not considered an individual and beneficiaries of such trust are treated as holding shares of a REIT in proportion to their actuarial interests in such trust for purposes of the 5/50 Rule. If we comply with all the requirements for ascertaining the ownership of its outstanding stock in a taxable year and does not know or have reason to know that it violated the 5/50 Rule, we will be deemed to have complied with the 5/50 Rule for such taxable year. We believe we have issued sufficient Common Stock with sufficient diversity of ownership pursuant to the Original Offering to allow it to satisfy requirements (v) and (vi) in the preceeding paragraph. In addition, our Charter provides for restrictions regarding the transfer of the Common Stock that are intended to assist us in continuing to satisfy the share ownership requirements described in clauses (v) and (vi) above. However there can be no assurance that we will continue to meet the REIT Stock Ownership Requirements. Such transfer restrictions are described in "Description of Securities--Transfer Restrictions." Code Section 856(i) provides that a corporation that is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital stock of which is held by the REIT. If we acquire a corporation already in existence at the time of acquisition, such corporation would be treated as liquidating on the date of acquisition and we would be required to distribute any C corporation earnings and profits of the corporation before the end of the taxable year. Thus, in applying these requirements, any of our "qualified REIT subsidiaries" will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiaries will be treated as our assets, liabilities, and items of income, deduction, and credit. CERTAIN TREASURY REGULATIONS RELATING TO OUR STATUS AS A REIT In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the gross income of the partnership attributable to such share. In addition, the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of Section 78 856 of the Code, including for purposes of satisfying the gross income and asset tests described below. Our proportionate share of the assets and gross income of the Operating Partnership will be treated as assets and gross income for purposes of applying these requirements. INCOME TESTS GROSS INCOME REQUIREMENTS In order for the Company to qualify and to maintain its qualification as a REIT, two requirements relating to the Company's gross income must be satisfied annually. - At least 75% of our gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and interest on obligations secured by mortgages on real property or on interests in real property, and dividends or other distributions on and gain from the sale of stock in other REITs) or from certain types of temporary investment income. - At least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property, mortgages on real property, or temporary investments, and from dividends, other types of interest, and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. RENTS FROM REAL PROPERTY The rents we receive from the tenants of the Real Property ("Rent") will qualify as "rents from real property" in satisfying the gross income tests for a REIT described above only if several conditions are met. - The amount of Rent must not be based, in whole or in part, on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales or solely by reason of being based on the income or profits of a tenant if such tenant derives substantially all of its gross income from the related property through the sub-leasing of substantially all of its interest in the property to the extent the amounts received by such tenant would be characterized as rents from real property if received by the REIT. - The Code provides that the Rent received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if we own, or a direct or indirect owner of 10% or more of the Company owns, 10% or more of such tenant, either actually or constructively (a "Related Party Tenant"). - If Rent attributable to personal property, leased in connection with a lease of Real Property, is greater than 15% of the total Rent received under the lease, then the portion of Rent attributable (taking into account both actual and constructive ownership) to such personal property will not qualify as "rents from real property." For the Rent to qualify as "rents from real property," we generally must not operate or manage the Real Property or furnish or render services to the tenants of such Real Property, other than through an "independent contractor" who is adequately compensated by the tenants and from whom we derive no revenue. The "independent contractor" requirement, however, does not apply to the extent that the services we provide are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant." We have represented that we will not charge Rent for any portion of any Real Property that is based, in whole or in part, on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of receipts or sales, as described above) to the extent that the receipt of such 79 Rent would jeopardize our status as a REIT. In addition, we have represented that, to the extent that we receive Rent from a Related Party Tenant, such Rent will not cause us to fail to satisfy either the 75% or 95% gross income test. We have also represented that we will not allow the Rent attributable to personal property leased in connection with any lease of Real Property to exceed 15% of the total Rent received under the lease, if the receipt of such Rent would cause the Company to fail to satisfy either the 75% or 95% gross income test. Finally, we have represented that we will not operate or manage our Real Property or furnish or render noncustomary services to the tenants of our Real Property other than through an "independent contractor," to the extent that such operation or the provision of such services would jeopardize our status as a REIT. The Ownership Limit and the Excess Share Provisions in our Charter are designed in part to prevent a stockholder of the Company from owning Company stock that would cause us to own, actually or constructively, 10% or more of the ownership interests in a tenant, including any BCP Sister Corp. However, because the relevant constructive ownership rules are broad and it is not possible to monitor continually direct and indirect transfers of our shares, and because our Charter provisions referred to above may not be effective, there can be no absolute assurance that transfers or other events will not cause us to constructively own 10% or more of one or more tenants at some future date. The term "interest," as defined for purposes of the 75% and 95% gross income tests, generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. In addition, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on the income or profits of a debtor if the debtor derives substantially all of its gross income from the related property through the leasing of substantially all of its interests in the property, to the extent the amounts received by the debtor would be characterized as rents from real property if received by a REIT. Furthermore, to the extent that interest from a loan that is based on the cash proceeds from the sale of the property securing the loan constitutes a "shared appreciation provision" (as defined in the Code), income attributable to such participation feature will be treated as gain from the sale of the secured property, which generally is qualifying income for purposes of the 75% and 95% gross income tests. Interest will qualify as "interest on obligations secured by mortgages on real property or on interests in real property" if the obligation is secured by a mortgage on real property having a fair market value, as of the date on which the commitment to make or purchase the obligation becomes binding on us, at least equal to the highest principal amount of the loan outstanding during the taxable year. However, if we receive interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date on which the commitment to acquire or originate the mortgage loan becomes binding on us, the interest income will be apportioned between the real property and the other property, which apportionment may cause us to recognize income that is not qualifying income for purposes of the 75% gross income test. We may receive income not described above that is not qualifying income for purposes of one or both of the 75% and 95% gross income tests. For example, it is possible that certain fees for services rendered by the Operating Partnership will not be qualifying income for purposes of either gross income test. It is not anticipated that the Operating Partnership will receive a significant amount of such fees. In addition, dividends received from Real Estate Companies that are C corporations generally will be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. We will monitor the amount of nonqualifying income produced by our assets and have represented that we will manage our portfolio in order to comply at all times with the two gross income tests. REITs generally are subject to tax at the maximum corporate rate on any income from foreclosure property (other than income that would be qualifying income for purposes of the 75% gross income test), 80 less expenses directly connected with the production of such income. "Foreclosure property" is defined as any real property (including interests in real property) and any personal property incident to such real property - that is acquired by a REIT as the result of such REIT having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness owed to the REIT that such property secured, - for which the related loan was acquired by the REIT at a time when default was not imminent or anticipated, and - for which such REIT makes a proper election to treat such property as foreclosure property. We do not anticipate that we will receive any income from foreclosure property that is not qualifying income for purposes of the 75% gross income test, but, if we do receive any such income, we will make an election to treat the related property as foreclosure property. Property we acquire will not be eligible for the election to be treated as foreclosure property ("Ineligible Property") if the related loan was acquired by us at a time when default was imminent or anticipated. In addition, income received with respect to such Ineligible Property may not be qualifying income for purposes of the 75% or 95% gross income tests. Net income derived from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. We intend to conduct our operations so that no asset we own or owned by the Operating Partnership will be held for sale to customers and that a sale of any such asset will not be in the ordinary course of our business or the Operating Partnership's business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the facts and circumstances in effect from time to time, including those related to a particular property. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when asset sales will not be characterized as prohibited transactions. Complete assurance cannot be given, however, that we can comply with the safe-harbor provisions of the Code or avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of a trade or business." From time to time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including, without limitation, interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. To the extent that we enter into such a contract to hedge against the interest rate risks of any indebtedness incurred to acquire or carry real estate assets, any periodic income or gain from the disposition of such contract should be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. To the extent that we hedge with other types of financial instruments or in other situations, we may not be entirely clear how the income from those transactions will be treated for purposes of the various income tests that apply to REITs under the Code. We intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT. If we fail to satisfy one or both of the 75% and 95% gross income tests for any taxable year, we nevertheless may qualify as a REIT for such year if we are entitled to relief under certain provisions of the Code. Those relief provisions generally will be available if our failure to meet such tests is due to reasonable cause and not due to willful neglect, we attache a schedule of the sources of our income to our return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances that we would be entitled to the benefit of those relief provisions. As discussed above in "--Taxation of the Company," even if those relief provisions apply, a 100% tax would be imposed on the gross income attributable to the greater of the amount by which we fail the 75% or 95% gross income test, multiplied by a fraction intended to reflect our profitability. 81 ASSET TESTS At the close of each quarter of each taxable year, we must satisfy three tests relating to the nature of our assets. - At least 75% of the value of our total assets must be represented by cash or cash items (including certain receivables), government securities, "real estate assets," or, in cases where we raise new capital through stock or long-term (at least five-year) debt offerings, temporary investments in stock or debt instruments during the one-year period following our receipt of such capital. The term "real estate assets" includes interests in real property, interests in mortgages on real property to the extent the principal balance of a mortgage does not exceed the fair market value of the associated real property, and shares of other REITs. For purposes of the 75% asset test, the term "interest in real property" includes an interest in mortgage loans or land or improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold of real property, and an option to acquire real property (or a leasehold of real property). - Not more than 25% of our total assets may be represented by securities other than those in the 75% asset class. - Of the investments not included in the 75% asset class, the value of any one issuer's securities we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one issuer's outstanding voting securities (except for its interests in the Operating Partnership, the General Partner, the Limited Partner, any qualified REIT subsidiaries, and other qualified REITs). We expect that any interests in Real Estate Companies and interests in Real Property that we acquire generally will be qualifying assets for purposes of the 75% asset test. If we acquire any interest in a Real Estate Company that is a C corporation, such interest may not (i) represent more than 5% of the value of our total assets or (ii) constitute more than 10% of the Real Estate Company's outstanding voting securities. We will monitor the status of the assets that we acquire for purposes of the various asset tests and have represented that we will manage our portfolio in order to comply at all times with such tests. If we should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause us to lose our REIT status if (i) we satisfied the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets. If the condition described in clause (ii) of the preceding sentence were not satisfied, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. DISTRIBUTION REQUIREMENTS In order to avoid corporate income taxation of the earnings that we distribute, we are required to distribute with respect to each taxable year dividends (other than capital gain dividends) to our stockholders in an aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our federal income tax return for such year and if paid on or before the first regular dividend payment date after such declaration. To the extent that we do not distribute all of our net capital gain or distribute at least 95%, but less than 100%, of our "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates. Furthermore, if we should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of the January 82 immediately following such year) at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain income for such year (other than capital gain income which we elect to retain and pay tax on), and (iii) any undistributed taxable income from prior periods, we would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. Pursuant to recently enacted legislation, we may elect to retain, rather than distribute, all or a portion of our net long-term capital gains. The effect of such an election is that (i) we are required to pay the tax on such gains; (ii) U.S. stockholders (as defined below), while required to include their proportionate share of the undistributed long-term capital gains in income, will receive a credit or refund for their share of the tax paid by us; and (iii) the basis of a U.S. stockholder's Common Stock would be increased by the amount of the undistributed long-term capital gains (minus the amount of capital gains tax paid by us) included in such U.S. stockholder's long-term capital gains. In certain circumstances, our investments may generate income for federal income tax purposes without a corresponding receipt of cash ("Phantom Income"). In order for us to meet REIT qualifications and/or avoid tax at the REIT level on such Phantom Income, we may be forced to use cash generated from other sources, including, without limitation, asset sales and borrowings, to make required distributions. See "Risk Factors--Legal and Tax Risks--Tax Risks." Under certain circumstances, we may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to our stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will be required to pay to the IRS interest based upon the amount of any deduction taken for deficiency dividends. RECORDKEEPING REQUIREMENTS Pursuant to applicable Treasury Regulations, we must maintain certain records and request on an annual basis certain information from our stockholders designed to disclose the actual ownership of our outstanding stock. Failure to comply with such record keeping requirements could result in substantial monetary penalties. We intend to comply with such requirements. EXCESS INCLUSION INCOME It is anticipated that we may purchase mortgage loans. If we purchase such assets and are deemed to have issued debt obligations having two or more maturities, the payments on which correspond to payments on such mortgage loans, such arrangement will be treated as a "taxable mortgage pool" for federal income tax purposes. If all or a portion of the Company is considered a "taxable mortgage pool," our status as a REIT generally should not be impaired; however, a portion of our taxable income may be characterized as "excess inclusion income" and allocated to our stockholders. Any excess inclusion income (i) could not be offset by net operating losses of a stockholder, (ii) would be subject to tax as "unrelated business taxable income" to a tax-exempt stockholder, (iii) would be subject to the application of federal income tax withholding (without reduction pursuant to any otherwise applicable income tax treaty) with respect to amounts allocable to foreign stockholders, and (iv) would be taxable (at the highest corporate tax rate) to us, rather than our stockholders, to the extent allocable to shares of our stock held by disqualified organizations (generally, tax-exempt entities not subject to unrelated business income tax, including governmental organizations). 83 IMPACT OF FUTURE LEGISLATION Our qualification as a REIT or our ability to utilize the BCP Sister Corp. structure could be affected as a result of future legislation. In that regard, Congress recently enacted, and the Clinton Administration signed into law, certain revenue proposals as part of the Internal Revenue Service Restructuring and Reform Act of 1998 that included, among other things, a freeze on the grandfathered status of REITs that are "paired" or "stapled" with a related operating company. Unlike such "paired" or "stapled" structures, the proposed BCP Sister Corp. structure would be a "paper clip" structure in which interests in the BCP Sister Corp. distributed to our stockholders could be transferred independently from our Common Stock. Although such legislation does not affect "paper clip" structures, there can be no assurance that the recently enacted legislation will not place legislative or judicial scrutiny on the "paper clip" structure, or that legislation adversely affecting such structure will not be proposed and enacted. See "Risk Factors-- Legal and Tax Risks--Tax Risks." FAILURE TO QUALIFY If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to our stockholders in any year in which we fail to qualify will not be deductible by us nor will they be required to be made. In such event, to the extent of our current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. It is not possible to state whether in all circumstances we would be entitled to statutory relief from our failure to qualify as a REIT. TAXATION OF TAXABLE U.S. STOCKHOLDERS Definition As used in this section, the term "U.S. stockholder" means a holder of Common Stock that for U.S. federal income tax purposes is - a citizen or resident of the United States; - a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any state or political subdivision thereof; - an estate whose income from sources without the United States is includible in gross income for U.S. federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States; or - any trust with respect to which (A) a U.S. court is able to exercise primary supervision over the administration of such trust and (B) one or more U.S. persons have the authority to control all substantial decisions of the trust. As long as we qualify as a REIT, distributions (including distributions of the BCP Sister Corp. equity interests by us upon the formation of the BCP Sister Corp.) made to our taxable U.S. stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends or retained capital gains) will be taken into account by such U.S. stockholders as ordinary income and will not be eligible for the dividends received deduction generally available to corporations. Distributions that we designate as capital gain dividends will be taxed as long-term capital gains (to the extent that they do not exceed our actual net capital gain for the taxable year) without regard to the period for which the stockholder has held his Common Stock. Pursuant to recently enacted legislation, in the case of a 84 stockholder who is an individual, an estate or a trust, long-term capital gains and losses are separated into three tax rate groups, a 20% group, a 25% group and a 28% group, and are subject to tax at the rate effective for each group. Pursuant to Notice 97-64, 1997-47 IRB 1, we will designate capital gain dividends, if any, as 20% rate gain distributions, 25% rate gain distributions or 28% rate gain distributions and detail such designations in a manner intended to comply with applicable requirements. Final regulations, if and when issued by the Treasury Department, could affect the rules set forth in the Notice. In addition, the IRS has not issued regulations or other guidance regarding the application of the new rates to sales of interests in REITs such as the Company, and it remains unclear how the new rules will affect such sales, if at all. The IRS has not yet issued guidance modifying the rules set forth in the Notice to take into account the recent elimination of the 18-month holding period required for individuals, estates and trusts to be eligible for the preferential 20% capital gains rate. If we elect to retain capital gains rather than distribute them, a U.S. stockholder will be deemed to receive a capital gain dividend equal to the amount of such retained capital gains. A U.S. stockholder will be allowed a credit against its federal income tax liability for its proportionate share of tax we paid on retained capital gains. See "--Requirements for Qualification." Such gains are subject to apportionment among the three tax rate groups as set forth above. Corporate stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such stock. To the extent that such distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a stockholder's Common Stock, such distributions will be included in income as long-term capital gain (or, in the case of all taxpayers, short-term capital gain if the Common Stock had been held for one year or less), provided that the Common Stock is a capital asset in the hands of the stockholder. In addition, any distribution that we declare in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by us and received by the stockholder on December 31 of such year, provided that we actually pay the distribution during January of the following calendar year. Stockholders may not include in their individual income tax returns any net operating losses or capital losses we incur. Instead, we would carry over such losses for potential offset against our future income (subject to certain limitations). Taxable distributions that we make and gain from the disposition of our Common Stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any "passive activity losses" (such as losses from certain types of limited partnerships in which a stockholder is a limited partner) against such income. In addition, taxable distributions that we make generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of Common Stock (or distributions treated as such), however, will be treated as investment income only if the stockholder so elects, in which case such capital gains will be taxed at ordinary income rates. We will notify stockholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income or capital gain dividends and in the case of capital gain dividends to non-corporate stockholders, those designated as 20% rate gain distributions, 25% rate gain distributions and 28% rate gain distributions. It is possible that we may invest in certain types of mortgage loans that may cause us under certain circumstances to recognize taxable income in excess of our economic income (also known as "Phantom Income") and to experience an offsetting excess of economic income over our taxable income in later years. As a result, stockholders may from time to time be required to pay federal income tax on distributions that economically represent a return of capital, rather than a dividend. Such distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Accordingly, if we receive Phantom Income, our stockholders may be required to pay federal income tax with respect to such income on an accelerated basis, i.e., before such income is realized by the stockholders in an economic sense. If there is taken into account the time value of money, such an acceleration of federal income tax liabilities would cause stockholders to receive an after-tax rate of return on an investment in the Company that would be less than 85 the after-tax rate of return on an investment with an identical before-tax rate of return that did not generate Phantom Income. In general, as the ratio of our Phantom Income to our total income increases, the after-tax rate of return received by a taxable stockholder will decrease. We will consider the potential effects of Phantom Income on our taxable stockholders in managing our investments. TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK In general, any gain or loss realized upon a taxable disposition of the Common Stock by a U.S. stockholder who is not a dealer in securities will be treated as capital gain or loss. Any such capital gain or loss generally will (x) in the case of U.S. stockholders which are corporations, be long-term capital gain or loss if the Common Stock has been held for more than 12 months, and (y) in the case of U.S. stockholders who are non-corporate taxpayers, be long-term capital gain or loss taxed at a maximum federal income tax rate of (i) 20% if the U.S. stockholder's holding period in such Common Stock was more than 18 months at the time of such disposition or (ii) 28% if the U.S. stockholder's holding period was more than one year but not more than 18 months at the time of such disposition. However, the Internal Revenue Service Restructuring and Reform Act of 1998 eliminated the 18-month holding period requirements, effective for taxable years ending after December 31, 1997, and therefore the 20% long-term capital gains rate will generally apply to capital assets held more than one year. In general, any loss upon a sale or exchange of Common Stock by a U.S. stockholder who has held such Common Stock for six months or less (after applying certain holding period rules) will be treated as long-term capital loss to the extent our distributions are required to be treated by that stockholder as long-term capital gain. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING We will report to our U.S. stockholders and to the IRS the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. A stockholder who does not provide us with his correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. TAXATION OF TAX-EXEMPT STOCKHOLDERS Tax exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"), as defined in Section 512(a)(1) of the IRS Code. While many investments in real estate generate UBTI, the IRS has issued a published ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed by the Company to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Stock with debt, a portion of its income from the Company will constitute UBTI pursuant to the "debt-financed property" rules. In addition, in certain circumstances, a pension trust that owns more than 10% of our stock is required to treat a percentage of the dividends we pay as UBTI. This rule applies to a pension trust holding more than 10% (by value) of our stock only if (i) the percentage of our income that is UBTI (determined as if we were a pension trust) is at least 5% and (ii) we are treated as a "pension-held" REIT. We will be treated as a "pension-held" REIT if 86 (i) we qualify as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding our shares in proportion to their actuarial interests in the pension trust, and (ii) either (A) one pension trust owns more than 25% of the value of our stock or (B) a group of pension trusts individually holding more than 10% of the value of our stock collectively owns more than 50% of the value of our stock. We are unlikely to become a "pension-held" REIT because, pursuant to the Aggregate Stock Ownership Limit and the Look-Through Ownership Limit in our Charter, no person may beneficially own shares of Common Stock in excess of 9.8% of the outstanding shares of our Common Stock; provided, however, that certain Look-Through Entities may beneficially own up to 15% of such shares of Common Stock. Although our Board of Directors has the discretion to waive the application of the Aggregate Stock Ownership Limit or the Look-Through Ownership Limit with respect to any person, the Board of Directors intends to grant such waivers only in a manner that would not cause us to be or become a "pension-held" REIT. However, there can be no assurance that we will not become a "pension-held" REIT or that pension trusts will not be required to treat a percentage of dividends received from us as UBTI. TAXATION OF NON-U.S. STOCKHOLDERS The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt will be made herein to provide more than a summary of such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS. Distributions to Non-U.S. Stockholders that are not attributable to gain from sales or exchanges by us of U.S. real property interests and are not designated by us as capital gains dividends or retained capital gains will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the Common Stock is treated as effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business, the Non-U.S. Stockholder generally will be subject to federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such distributions (and also may be subject to the 30% branch profits tax in the case of a Non-U.S. Stockholder that is a non-U.S. corporation). We expect to withhold U.S. income tax at the rate of 30% on the gross amount of any such distributions made to a Non-U.S. Stockholder unless (i) a lower treaty rate applies and any required form evidencing eligibility for that reduced rate is filed with us or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with BCP claiming that the distribution is effectively connected income. Furthermore, on October 6, 1997, the U.S. Treasury Department issued final Treasury regulations governing information reporting and the certification procedures regarding withholding and backup withholding on certain amounts paid to Non-U.S. Stockholders after December 31, 1998 (the "New Withholding Regulations"). The New Withholding Regulations may alter the procedure for claiming the benefits of an income tax treaty. Distributions in excess of our current and accumulated earnings and profits will not be taxable to a Non-U.S. Stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of his Common Stock, as described below. Because it generally cannot be determined at the time a distribution is made 87 whether or not such distribution will be in excess of current and accumulated earnings and profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, amounts so withheld are refundable to the extent it is determined subsequently that such distribution was, in fact, in excess of our current and accumulated earnings and profits. We are required to withhold 10% of any distribution in excess of our current and accumulated earnings and profits. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution, to the extent that we do not do so, any portion of a distribution not subject to withholding at a rate of 30% will be subject to withholding at a rate of 10%. For any year in which we qualify as a REIT, distributions that are attributable to gain from our sales or exchanges of U.S. real property interests (i.e., interests in real property located in the United States and interests in U.S. corporations at least 50% or whose assets consist of U.S. real property interests) will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. trade or business. Non-U.S. Stockholders thus would be taxed at the normal capital gain rates applicable to U.S. stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a non-U.S. corporate stockholder not entitled to treaty relief or exemption. We are required to withhold 35% of any distribution that we designate as a capital gains dividend. The amount withheld is creditable against the Non-U.S. Stockholder's FIRPTA tax liability. Gain recognized by a Non-U.S. Stockholder upon a sale of his or her Common Stock generally will not be taxed under FIRPTA if we are a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by non-U.S. persons. Although it is currently anticipated that we will be a "domestically controlled REIT" and, therefore, that the sale of the Common Stock will not be subject to taxation under FIRPTA, there can be no assurance that we will be a "domestically-controlled REIT." Even if such gain is not subject to FIRPTA, such gain will be taxable to a Non-U.S. Stockholder if (i) investment in the Common Stock is effectively connected with the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. If the gain on the sale of the Common Stock were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S. stockholders with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In addition, a purchaser of Common Stock subject to taxation under FIRPTA would generally be required to deduct and withhold a tax equal to 10% of the amount realized on the disposition by a Non-U.S. Stockholder. Any amount withheld would be creditable against the Non-U.S. Stockholder's FIRPTA tax liability. Additional issues may arise pertaining to information reporting and backup withholding with respect to Non-U.S. Stockholders. The New Withholding Regulations alter the application of the information reporting and backup withholding rules to Non-U.S. Stockholders. Non-U.S. Stockholders should consult with a tax advisor with respect to any such information reporting and backup withholding requirements. Backup withholding with respect to a Non-U.S. Stockholder is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a Non-U.S. Stockholder will be allowed as a credit against any United States federal income tax liability of such Non-U.S. Stockholder. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the Service. 88 OTHER TAX CONSEQUENCES The Company, our stockholders, the Operating Partnership or its General Partner or Limited Partners may be subject to state and local tax in various states and localities, including those states and localities in which it or they transact business, own property, or reside. The state and local tax treatment of the Company and its stockholders in such jurisdictions may differ from the federal income tax treatment described above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in the Common Stock. In addition, the Taxpayer Relief Act of 1997 includes several provisions, some of which have been described in the discussion above, that will liberalize certain of the requirements for qualification as a REIT. However, these provisions will have neither a material beneficial effect nor a material adverse effect on our ability to operate as a REIT. BCP SISTER CORP. Each BCP Sister Corp. organized as a corporation will pay federal, state and local income taxes on its taxable income at regular corporate rates. Any such taxes will reduce amounts available for distribution by the BCP Sister Corp. to its stockholders. 89 ERISA CONSIDERATIONS ERISA and the Code impose certain restrictions on (a) Plans, including individual retirement accounts or Keogh plans, (b) any entities whose underlying assets include Plan assets by reason of a Plan's investment in such entities ("Plan Assets Entities") and (c) persons who have certain specified relationships to such Plans and Plan Assets Entities ("Parties-in-Interest" under ERISA and "Disqualified Persons" under the Code). Moreover, based on the reasoning of the United States Supreme Court in JOHN HANCOCK LIFE INS. CO. V. HARRIS TRUST AND SAV. BANK, 114 S. Ct. 517 (1993), an insurance company's general account may be deemed to include assets of the Plans investing in the general account (e.g., through the purchase of an annuity contract), and the insurance company might be treated as a Party-in-Interest or Disqualified Person with respect to a Plan by virtue of such investment. ERISA also imposes certain duties on persons who are fiduciaries of Plans subject to ERISA and prohibits certain transactions between a Plan and Parties-in-Interest or Disqualified Persons with respect to such Plans. THE TREATMENT OF THE COMPANY'S UNDERLYING ASSETS UNDER ERISA The DOL has issued the Plan Assets Regulation which defines what constitutes the assets of a Plan. This regulation provides that, as a general rule, the underlying assets and properties of corporations, partnerships, trusts and certain other entities in which a Plan purchases an "equity interest" will be deemed for purposes of ERISA and the Code to be assets of the investing Plan unless certain exceptions apply. The Plan Assets Regulation defines an "equity interest" as any interest in an entity other than an instrument that is treated as indebtedness under applicable local law and which has no substantial equity features. The Common Stock offered hereby should be treated as "equity interests" for purposes of the Plan Assets Regulation. One exception under the Plan Assets Regulation provides that an investing Plan's assets will not include any of the underlying assets of an entity if at all times less than 25% of each class of "equity" interests in the entity is held by "benefit plan investors," which is defined to include Plans that are not subject to ERISA such as foreign benefit plans, governmental pension plans and individual retirement accounts as well as Plans that are subject to ERISA. Another exception is provided for an investment in an "operating company," which is defined in the Plan Assets Regulation to include a "real estate operating company." To be a "real estate operating company" an entity must have, on the date of its first long-term investment and on certain annual testing dates thereafter, at least 50% of its assets (other than short-term investments pending long-term commitment or distribution to investors), valued at cost, invested in real estate that is managed or developed and with respect to which such entity has the right to substantially participate in such management or development activities. Another exception under the Plan Assets Regulation provides that an investing Plan's assets will not include any of the underlying assets of an entity if the class of "equity" interests in question is a class of "publicly offered securities." Publicly offered securities are securities that are (i) widely held (i.e., held by 100 or more investors who are independent of the issuer and each other), (ii) freely transferable, and (iii) part of a class of securities registered under Section 12(b) or 12(g) of the Exchange Act. The Board of Directors of the Company and any Sister Corp. will take such steps as may be necessary to qualify for one or more of the exceptions available under the Plan Assets Regulation and thereby prevent the assets of the Company or any BCP Sister Corp. from being treated as assets of any investing Plan. Specifically, we intend to qualify as a real estate operating company until at least such time as the Common Stock qualifies as a class of publicly offered securities. In this connection, we have obtained an opinion of counsel that, on the date of the Operating Partnership's first long-term investment we qualified as a real estate operating company. It is intended that, thereafter, on at least one date during each of the Company's "annual valuation periods" (as defined in the Plan Assets Regulation) until at least such time as the Common Stock qualifies as publicly offered securities, at least 50% of our assets (valued at cost and excluding certain short-term investments) will be invested, by reason of its investment in the Operating Partnership, in real estate which is managed or developed and as to which we will have the right to 90 substantially participate in the management or development of the real estate. Consequently, BCP should qualify as a real estate operating company. In addition, with respect to any BCP Sister Corp., we will take such steps as may be necessary to qualify such BCP Sister Corp. as an operating company or a venture capital operating company or for another available exception under the Plan Assets Regulation prior to distribution of its equity interests. Any Plan fiduciary that proposes to cause a Plan to purchase Common Stock should consult with its counsel with respect to the potential applicability of ERISA and the Code to such investment and determine on its own whether any exceptions or exemptions are applicable and whether all conditions of any such exceptions or exemptions have been satisfied. Moreover, each Plan fiduciary should determine whether, under the general fiduciary standards of investment prudence and diversification, an investment in the Common Stock is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's investment portfolio. SELLING STOCKHOLDERS The Common Stock was originally issued and sold to NationsBanc Montgomery Securities LLC (the "Initial Purchaser"), in a transaction exempt from registration requirements of the Securities Act. The securities were resold by NationsBanc to persons reasonably believed by NationsBanc to be "qualified institutional buyers" (as defined in Rule 144A under the Securities Act), to a limited number of institutional "accredited investors" (as defined in Rule 501 (a) (1), (2), (3) or (7) under the Securities Act) and to individual "accredited investors" (as defined in Rule 501 (a) (4), (5) or (6) under the Securities Act). The Selling Stockholders may from time to time offer and sell pursuant to this Prospectus any or all of the Common Stock. The term Selling Stockholders includes the holders listed below and the beneficial owners of the Common Stock and their transferees, pledgees, donees or other successors. The following table sets forth information with respect to the Selling Stockholders of the Common Stock and the respective number of shares of Common Stock beneficially owned by each Selling Stockholders that may be offered pursuant to this Prospectus. We are obligated by the terms of a Registration Rights Agreement to file this Registration Statement on behalf of each of the listed stockholders. Each Selling Stockholder may offer and sell all of the securities registered hereby. If such Stockholder sells all shares registered hereby such stockholder will not beneficially own any securities of the Company after this Offering. Inclusion on this list does not imply that any person or entity will actually offer or sell any of the shares registered on his, her or its behalf.
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- 1st Trust & Co....................................................... 5,000 * FBO Glenn Bennett FTC IRA Standard 1st Trust Co. TR..................................................... 5,000 * FBO Lawrence W. Gold IRA ABKB/La Salle Securities............................................. 1,337,500 6.4% David Abromowitz (1)................................................. 2,680 * Louis R. Adimare..................................................... 10,000 * Richard Adler........................................................ 7,500 * Advantus Capital (MIMLIC Asset)...................................... 500,000 2.4% AETNA................................................................ 400,000 1.9% AEW Capital Management............................................... 125,000 *
91
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Gregory L. Allcroft & (1)............................................ 2,680 * Leah Allcroft Comm. Prop. Bruce W. Altrock & Carolyn D. Altrock................................ 12,500 * TR Altrock Living Trust UA 08/13/92 Adarsh K. Arora...................................................... 5,000 * Michael Ashendorf (1)................................................ 5,361 * Aslam International Inc. EBP......................................... 500 * Steven R. Astrove & (2).............................................. 1,340 * David M. Astrove JT TEN Atlantic Trust Co. Tr................................................ 50,000 * FBO Susan R.G. Revocable Trust UA 06/06/96 The American Century Real Estate Fund................................ 150,000 * Tony Avila & Jacquelyn Avila JT TEN (1).............................. 1,072 * Robert A. Baffi & Rosemary G. Baffi.................................. 2,680 * TR Baffi Fam Rev Trust UA 01/17/94 Louis P. Bansbach III................................................ 10,000 * Kevin Barnes (1)..................................................... 3,753 * Ray Barshick......................................................... 25,000 * David A. Baylor & Theresa L. Helmer (1).............................. 1,072 * Bayside Development Corp. Ltd........................................ 25,000 * Douglas L. Becker.................................................... 5,000 * Jill Becker & Eric D. Becker......................................... 5,000 * TEN ENT Glenn Bennett & Christina Bennett JT TEN............................. 5,000 * John A. Berg (1)..................................................... 26,809 * Zack B. Bergreen..................................................... 10,000 * Jon R. Berquist (1).................................................. 1,340 * Berrard Hldgs LTD Partnership A Partnership.......................... 8,750 * John R. Bertucci..................................................... 5,000 * Gordon M. & Adele H. Binder.......................................... 25,000 * William D. Birch..................................................... 6,250 * William M. Birch..................................................... 10,000 * Guarantee & Trust Co Tr.............................................. 2,500 * FBO Myron Blackman IRA Rollover Thomas P. Bloch (2).................................................. 1,340 * BNP Bahrain.......................................................... 590,000 2.8% Timothy P. Brady..................................................... 15,000 * Kathleen Higgins Braun & (1)......................................... 5,361 * Kurt George Braun JT TEN
92
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Steven Braverman TR.................................................. 10,000 * Braverman Fam Trust UA 12/26/96 MS Muni Bond Rita Brightman....................................................... 20,000 * Douglas Broyles...................................................... 5,000 * Bruce Brugler (1).................................................... 2,144 * Lucretia A. Bryant................................................... 5,000 * Michael Burbank & Cindy Ann Roberts Community 1,072 * Property (1)....................................................... Thomas C. Byrne...................................................... 3,750 * Vincent J. Campobasso &.............................................. 5,000 * Colleen M. Campobasso JT TEN J. Robert Casey (2).................................................. 5,361 * Douglas A. Catalano.................................................. 10,000 * Chafetz Group LLC.................................................... 5,000 * Robert B. Champagne.................................................. 5,000 * Dominic K. Chan & Marsha Chan JT TEN................................. 10,000 * Chase Asset Management............................................... 750,000 3.6% Cole A. Chevalier & Katherine Chevalier.............................. 15,000 * TR Chevalier Trust UA 06/02/94 Matthew-Luc Clark (1)................................................ 1,072 * Closefire Limited.................................................... 5,000 * Howard E. Cohen &.................................................... 5,361 * Myra Muskant JT TEN Robert & Eileen Coltun JT TEN........................................ 5,000 * Geary Cotton......................................................... 10,000 * Robert Currie & Linda Currie JT Ten.................................. 5,000 * Carl Curtis.......................................................... 5,000 * DBA Pacific Auto Cutler Group LLC..................................................... 5,000 * John H. Dailey III & Beth B. Dailey TR............................... 25,000 * John H Dailey Trust UA 05/17/89 Raju P. Dantuluri & Devi P. Dantuluri JT TEN......................... 10,000 * Nancy M. Davids (2).................................................. 1,340 * DC Investment Partners............................................... 40,000 * Allen Deary.......................................................... 5,000 * Christel Dehaan Tr................................................... 50,000 * Christel Dehaan Trust UA 12/31/92
93
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- C.A. Delaney Capital Management...................................... 150,000 * FBO Spectrum United Canadien Growth Fund Tom Denomme.......................................................... 5,000 * Desert Mutual Benefit Realty Fund.................................... 100,000 * Barbara Devorzon Tr.................................................. 5,000 * Devorzon Fam Trust UA 11/07/90 Timothy Dibble &..................................................... 5,000 * Maureen Dibble JT Ten A/C 2 Daniel J. Doherty III................................................ 15,000 * Atlantic Retail Properties Neal M. Douglas...................................................... 5,000 * Gary L. Downey....................................................... 5,000 * Stichting Bedrijfspensioenfonds voor de Metaalnijverheid............. 750,000 3.6% EAG Enterprises Limited.............................................. 5,000 * Daniel H. Eakins..................................................... 5,000 * Elizabeth H. Edmunds................................................. 2,680 * Jeffrey Elder........................................................ 12,500 * Merrick M. Elfman.................................................... 7,500 * Matthew E. Epstein & (1)............................................. 1,340 * Deborah L. Hiatt JT TEN Dwight Evans......................................................... 7,500 * Lester J. Fagen (2).................................................. 1,875 * Edward J. Faneuil & Eric Slifka &.................................... 5,361 * Alfred Slifka Ten Com FLM Partnership/A Partnership........................................ 8,042 * First American Asset Management...................................... 33,750 * Fisher Group LTD Partnership--Fisher, Jerome......................... 25,000 * John P. Fowler....................................................... 5,361 * Mary Lou Fox......................................................... 5,000 * Joseph Friscia &..................................................... 5,000 * Laura J. Friscia JT TEN Lee Geiger (1)....................................................... 1,072 * General Electric Pension Trust....................................... 750,000 3.6% Robert H. Gersky & (1)............................................... 14,745 * Sue A. Gersky Community Property John W. Gildea 5,500 * Barry Ginsburg &..................................................... 2,500 * Paul Lukoff Tr Merle Z. Gross William Shedd Glassmeyer (1)......................................... 1,072 *
94
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Martin A. Glazer & (2)............................................... 1,340 * Carol A. Glazer JT TEN Glenmeade Trust...................................................... 500,000 2.4% Global Property Advisors............................................. 125,000 * FBO North American Property Securities Trust Ernest C. Goggio..................................................... 5,000 * Bruce Goldman........................................................ 5,000 * William J. Goldsborough.............................................. 10,000 * Carol B. Good........................................................ 1,787 * Julian H. Good....................................................... 1,787 * Louis K. Good III &.................................................. 1,787 * Susan Good TEN COM Goodman & Co. Ltd.................................................... 750,000 3.6% Barry R. Gorsun...................................................... 5,000 * 1998 GPH Fund LLC (2)................................................ 1,876 * E.C. Grayson......................................................... 5,000 * Green Beacon LP...................................................... 5,000 * James B. Greenfield (1).............................................. 1,072 * Lee B. Griffith...................................................... 5,000 * Grisanti, Inc........................................................ 10,000 * Merle Z. Gross-Ginsburg &............................................ 2,500 * Paul Lukoff TR Barry M. Ginsburg 1993 Fam Trust UA 09/30/93 Guarantee & Trust Co. TR............................................. 5,000 * FBO Michael P. Last GTC IRA Guarantee & Trust Co. TR............................................. 10,000 * FBO Barry R. Devorzon GTC IRA Guarantee & Trust Co. TR............................................. 5,361 * FBO Dana C. Djerf Guarantee & Trust Co. TR............................................. 7,238 * FBO M. Allen Chozen GTC IRA Rollover Guarantee & Trust Co. TR............................................. 15,000 * FBO Linda Lee Harper Guarantee & Trust Co. TR............................................. 5,000 * FBO Fred Backer GTC IRA Rollover Guarantee & Trust Co. TR............................................. 5,000 * FBO Jack G. Bryant GTC IRA Rollover Guarantee & Trust Co Tr.............................................. 5,000 * FBO Thomas A. Okulski GTC IRA Guarantee & Trust Co Tr.............................................. 1,608 * FBO Peter R. Pendergast GTC IRA Sep
95
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Guarantee & Trust Co Tr.............................................. 5,000 * FBO Stephen A. Vogel GTC IRA Rollover Sammy Hagar.......................................................... 5,000 * Michael A. Hammer (2)................................................ 1,340 * Hartford Capital Appreciation Fund................................... 300,000 1.4% Hartford Capital Appreciation Fund, Inc.............................. 2,000,000 9.5% K. Stephen Haskins................................................... 10,000 * Peter P. Healy & Virginia Healy JT TEN............................... 6,166 * H. David Henken (2).................................................. 1,340 * Bernard and Jerome Herskowitz........................................ 10,000 * Wilson T. Hileman, Jr. (1)........................................... 1,072 * Rudolf C. Hoehn-Saric................................................ 5,000 * Revell Horsey & (1).................................................. 1,072 * Carrie S. Horsey JT TEN M. Benjamin Howe & (1)............................................... 5,361 * Janet L. Howe JT TEN Jimmy C.M. Hsu....................................................... 5,000 * Tommy C. Hsu......................................................... 5,000 * Douglas M. Husid (2)................................................. 1,340 * Thomas J. Hynes, Jr.................................................. 5,361 * Invesco Realty Advisors, Inc......................................... 115,000 * Naveen Jain &........................................................ 10,000 * Anuradha Jain JT TEN JJ Newport........................................................... 5,000 * Craig R. Johnson & (1)............................................... 13,404 * Nichola Jo Johnson TR Johnson Revocable Trust UA 07/02/97 Gary Johnson......................................................... 5,000 * Donald G. Jones...................................................... 15,000 * Spirit Enterprise LLP Jerry V. Jorge & Susan N. Jorge JT TEN............................... 5,000 * John A. Jurenko...................................................... 25,000 * George S. Karas...................................................... 5,000 * Bruce Katzen &....................................................... 5,000 * Diane Katzen JT TEN Kempen/lbus.......................................................... 40,000 * John Bradford King & Pamela J. King JT TEN........................... 5,000 * Gary C. Klein........................................................ 12,500 * Matt Klein (1)....................................................... 8,041 * William C. Klein & Virginia A. Klein JT ENT.......................... 12,500 *
96
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Gustav Koven......................................................... 5,000 * Jordon P. Krasnow &.................................................. 5,361 * Jean H. Krasnow JT TEN (2) Kresevich Capital Mgmt LLC........................................... 25,000 * E. Floyd Kvamme &.................................................... 25,000 * Jean Kvamme Comm Prop Raymond Kwasnick & (2)............................................... 2,680 * Paul Kwasnick TEN COM Guy & Rita Lammle JT TEN............................................. 5,000 * Richard Langerman.................................................... 2,680 * Leede Investments LLC................................................ 100,000 * David Lehmann & (1).................................................. 1,340 * Dawn Lehmann JT TEN Mark Lehman (1)...................................................... 2,680 * James W. Lewis....................................................... 5,000 * Doug Liman........................................................... 5,000 * Ron & Susanne Lissak JT WROS (1)..................................... 2,000 * Elaine C. Lloyd...................................................... 5,000 * Donald A. Lobo....................................................... 15,000 * Longleaf Partners Realty Fund........................................ 2,075,000 9.8% Richard E. Lucas..................................................... 10,000 * William Maidman Family LP............................................ 5,000 * Paul Malnati--Trans National......................................... 5,000 * Kathleen M. Malo TR (1).............................................. 1,072 * Kathleen M. Malo Trust UA 12/14/95 Sophia A. Mann....................................................... 5,361 * Burt Manning......................................................... 5,000 * Steve Marcie......................................................... 5,000 * Irwin M. Marcus...................................................... 5,361 * Randall E. Marcus.................................................... 5,361 * Univeristy Orthopedic Assoc Richard A. Marks & (2)............................................... 5,361 * Jennifer E. Morrison JT TEN Bharat K. Marya &.................................................... 10,000 * Radhesh Marya TR Marya Revocable Trust UA 09/03/86 Bharat K. Marya &.................................................... 15,000 * Radhesh Marya TR B & R Marya Charitable RMDR Trust UA 08/28/95 Mass Financial Services Company...................................... 292,925 1.4%
97
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Karl L. Matthies (1)................................................. 10,723 * Karl Matthies & Deborah Matthies (1)................................. 8,042 * Community Property Dan Maydan &......................................................... 7,500 * Dalia Maydan TR Dan Maydan & Dalia Maydan Trust UA 03/26/81 James F. McCaffrey................................................... 5,361 * McGlinn Capital Management, Inc. .................................... 175,000 * Mary E. McGoldrick................................................... 10,000 * Mees Pierson/Fortis Investments...................................... 100,000 * James L. Melsa &..................................................... 5,000 * Katherine Melsa JT TEN Robert M. Melzer..................................................... 5,361 * Gilbert G. Menna & Janet L. Remien JT TEN (2)........................ 4,021 * Warren T. Mills &.................................................... 5,000 * Gayle S. Mills TR Warren T. Mills & Gayle S. Mills Revocable Fam Trust UA 02/12/93 James Minchello & (1)................................................ 5,361 * Linda Minchello JT TEN Robert V. Minchello, Jr. (1)......................................... 1,340 * Monte Toole TR....................................................... 10,000 * Monte M. Toole Gasonics Revocable Trust UA 04/06/94 Peter Moore & Christina Moore JT TEN................................. 35,000 * Morgan Stanley Asset Management...................................... 1,000,000 4.8% Dennis R. Morin...................................................... 5,000 * Robert S. Morris..................................................... 5,000 * Alvin Murstein & Amie Murstein TR.................................... 5,000 * Alvin Murstein 2nd Fam Trust UA 10/01/95 John P. Murtagh &.................................................... 17,500 * Geraldine M. Murtagh JT TEN Joseph Nadel &....................................................... 5,000 * Ann Nadel Tr Joseph & Ann Nadel Revocable Living Trust UA 08/23/95 NationsBank Collateral Account....................................... 25,000 * FBO Central Florida Investments Stephen Newberry &................................................... 12,500 * Shelley Newberry Tr The Newberry Living Trust UA 06/18/90
98
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Bernard A. Newcomb TR................................................ 12,500 * Bernard A. Newcomb 1997 Living Trust UA 01/29/97 Anna F. Ng TR........................................................ 12,500 * Anna F. Ng 1996 Trust UA 07/02/96 Steven Nielsen &..................................................... 5,000 * Elizabeth Nielsen JT TEN Northwestern Mutual Life............................................. 500,000 2.4% Alfred J. Novak &.................................................... 5,000 * Carol Novak JT TEN Joseph W. O'Connor................................................... 25,000 * Orchid Management Corporation........................................ 10,723 * Kenneth Olson &...................................................... 5,000 * Ellen Berger JT TEN Jason Pedersen (1)................................................... 2,680 * Kent Ryan Penwell (1)................................................ 1,340 * Robert S. Pepper & Star Pepper TR.................................... 10,000 * Robert S. & Star Pepper Trust UA 04/25/86 David L. Pergola..................................................... 5,361 * Sandra J. Perkins.................................................... 5,000 * Robert J. Perriello.................................................. 5,361 * Robert Y. Pick Tr.................................................... 5,361 * Robert Y. Pick Self-Employed Profit Sharing Plan UA 01/01/85 Rudolph F. Pierce (2)................................................ 1,340 * Guy C. Pinkerton &................................................... 12,500 * Nancy J. Pinkerton JT TEN Points West INTL INVSTMTS LTD........................................ 31,063 * Bruce Pollock & Carol Pollock JT TEN................................. 5,000 * Ponte Vedra Partners LTD............................................. 50,000 * Bruce Potter (1)..................................................... 13,000 * Bruce G. Potter TR (1)............................................... 1,341 * Alexandra Kelly Matthies 1997 Trust B UA 10/03/97 Bruce G. Potter TR (1)............................................... 1,341 * Casey Elizabeth Matthies 1997 Trust UA 10/03/97 Franck Prissert (1).................................................. 1,340 * Putnam Investment Management......................................... 500,000 2.4%
99
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Safi U. Qureshey & Anita Sue Qureshey TR............................. 5,000 * Qureshey Fam Trust UA 05/21/84 Rainbow Partners, L.P................................................ 150,000 * Rand Rosenberg (1)................................................... 5,361 * Sol Rosenberg &...................................................... 5,000 * Susan Rosenberg JT TEN Sol Rosenberg & Susan Rosenberg Tr................................... 10,000 * Rosenberg Fam Charitable Trust UA 10/11/96 Franklin Reider & Michelle Reider JT TEN............................. 5,000 * James P. Reilly...................................................... 5,000 * Dana F. Rodin (2).................................................... 1,340 * Edwin R. Rodriguez Jr. Tr............................................ 5,361 * Edwin R. Rodriguez Jr Revocable Trust UA 08/29/85 John R. Rollins & Cynthia A. Rollins TR.............................. 20,000 * Thomas B. & Rita Brightman Charitable Remainder Trust UA 05/12/93 Alan W. Rottenberg (2)............................................... 1,340 * RREEF Venture Capital Fund, L.P...................................... 1,500,000 7.2% Eli Rubenstein (2)................................................... 1,340 * Michael B. Rukin TR TTEE FBO......................................... 10,000 * The Concord Hill Group Trust DTD 02/23/93 William Rutter....................................................... 50,000 * Burton M. Sack....................................................... 5,000 * William J. Sales..................................................... 5,040 * Sandler O'Neill Asset Management..................................... 62,500 * Thomas J. Sartory (2)................................................ 1,340 * John R. Sasso........................................................ 5,361 * Sharam I. & Fariba S. Sasson, TR..................................... 25,000 * Ori Sasson & Susan Sasson Tr......................................... 25,000 * Sasson Trust UA 03/31/94 Donald L. Saunders................................................... 5,000 * John Schnugg (1)..................................................... 5,361 * Jack Schwartz........................................................ 15,000 * Edward H. Schweitzer & (1)........................................... 1,072 * Chris A. Schweitzer TR Schweitzer Fam Rev Trust UA 02/13/95 Shawn Sedaghat....................................................... 25,000 * Fred A. Seigel....................................................... 5,361 *
100
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- Uday Sengupta........................................................ 5,000 * Asia Quest Richard Sherman...................................................... 5,000 * Donald L. Shulman (2)................................................ 1,340 * Robert J. Siedlecki.................................................. 5,000 * John R. Silber....................................................... 5,361 * Victoria Simms....................................................... 15,000 * Michael Singer (1)................................................... 1,072 * Vassilios Sirpolaidis & Lynne Sirpolaidis JT TEN..................... 25,000 * Jeffrey S. Slowgrove &............................................... 7,500 * Toni A. Slowgrove TEN ENT Slyman International LLC............................................. 5,000 * Richard A. Smith & Mary Ellen Zweifel Smith TR....................... 13,404 * Smith Family Trust UA 04/03/96 Mark C. Smith........................................................ 25,000 * Alan B. Snyder & Susan R. Katz-Snyder................................ 50,000 * Jure Sola & Michelle Sola TR......................................... 12,500 * Jure & Michelle Sola Trust UA 12/18/92 Alan D. Solomont..................................................... 5,000 * Sasson R. & Eta Somekh TR............................................ 5,000 * Marvin Sparrow....................................................... 2,680 * Harold Stahler &..................................................... 2,680 * Dale I. Stahler JT TEN Standard Pacific Capital............................................. 750,000 3.6% State Board of Administration of Florida............................. 500,000 2.4% State Street Research Aurora Fund.................................... 120,000 * Stephens Inc. ....................................................... 20,000 * John G. Stewart...................................................... 25,000 * Marilyn L. Sticklor.................................................. 2,680 * Michael E. Tacelosky TR.............................................. 5,000 * Michael E. Tacelosky 1994 Trust Fund UA 12/20/94 Richard W. Talkov & Susan P. Davis JT TEN............................ 1,340 * Andrew R. Tang (1)................................................... 1,072 * Lester J. Tanner..................................................... 5,000 * Steven Taslitz....................................................... 5,000 * Third Point Partners LP.............................................. 67,315 * Third Point Offshore Fund LTD........................................ 45,877 * Robert Tishman (1)................................................... 8,042 * Daniel D. Tompkins................................................... 5,000 * Chester Tomsick...................................................... 10,000 *
101
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- David Toole.......................................................... 5,000 * Trans National Grp Svcs LLC.......................................... 5,000 * Norvald L. Ulvestad TR............................................... 5,000 * Norvald L. Ulvestad Trust UA 09/28/82 William V. Urone &................................................... 15,000 * Joyce A. Urone TR Urone Trust UA 10/26/93 US Die Casting & Development Company Inc............................. 10,000 * E. Vittoria, J. Vittoria & A Vittoria................................ 25,000 * J Vittoria TR Joseph Vittoria Irrevocable Trust UA 12/19/97 Ian Wallace.......................................................... 5,000 * James F. Wallack & Rebecca Matthews JT TEN........................... 1,340 * David N. K. Wang..................................................... 10,000 * Robert S. Washburn TR................................................ 10,000 * Robert S. Washburn Money * Purchase Pension & Profit Keogh Plan UA 01/01/88 Craig Stephen & Jocelyn Weingart JT TEN.............................. 1,072 * Harris Weinstein Tr.................................................. 12,500 * Harris Weinstein Revocable Trust UA 01/26/94 Frenchmans Creek Mark Weinstein....................................................... 5,000 * Thomas W. Weisel (1)................................................. 23,215 * Welch & Forbes Inc................................................... 66,000 * Wendelin White & Paul Feinberg JT TEN................................ 5,000 * Lisa Mashihara Westley............................................... 1,072 * Wigold Partners...................................................... 5,000 * Robert L. Williamson &............................................... 5,000 * Rebecca A. Williamson TEN COM Fred Winograd (1).................................................... 1,340 * Frederic E. Wittmann................................................. 5,361 * Geoffrey Y. Yang..................................................... 5,000 * Lewis Yarborough &................................................... 5,000 * Paula M. Yarborough TR Yarborough Family Annual Gift Trust UA 01/17/94 Robin C. Yoshimura &................................................. 5,000 * Randy Yoshimura JT TEN
102
SHARES BENEFICIALLY OWNED PRIOR TO THIS OFFERING ----------------------- SELLING STOCKHOLDER NUMBER PERCENTAGE - --------------------------------------------------------------------- ---------- ----------- ZPG Securities LLC................................................... 5,745 *
- ------------------------ * Less than 1% (1) Such Selling Stockholder is affiliated with NationsBanc Montgomery Securities, LLC, the Initial Purchaser in the Original Offering. (2) Such Selling Stockholder is affiliated with Goodwin, Procter & Hoar LLP or Goulston & Storrs, PC, law firms that provide professional services to the Registrant. Except as shown above, none of the Selling Stockholders has, or within the past three years has had, any position, office or other material relationship with the Company or any of its predecessors or affiliates. Because the Selling Stockholders may, pursuant to this Prospectus, offer all or some portion of the Common Stock, no estimate can be given as to the amount of the Common Stock that will be held by the Selling Stockholders upon termination of any such sales. In addition, the Selling Stockholders identified above may have sold, transferred or otherwise disposed of all or a portion of their Common Stock since the date on which they provided the information regarding their Common Stock, in transactions exempt from the registration requirements of the Securities Act, including transactions pursuant to Rule 144 under the Securities Act. 103 PLAN OF DISTRIBUTION The Offered Securities may be sold from time to time to purchasers directly by the Selling Stockholders. As used herein, Selling Stockholders includes donees and pledgees selling shares received from a named Selling Stockholder after the date of this prospectus. Alternatively, the Selling Stockholders may from time to time offer the Offered Securities to or through underwriters, broker/dealers or agents, who may receive compensation in the form of underwriting discounts, concessions or commissions from the Selling Stockholders or the purchasers of such securities for whom they may act as agents. The Selling Stockholders and any underwriters, broker/dealers or agents that participate in the distribution of Offered Securities may be deemed to be "underwriters" within the meaning of the Securities Act and any profit on the sale of such securities and any discounts, commissions, concessions or other compensation received by any such underwriter, broker/dealer or agent may be deemed to be underwriting discounts and commissions under the Securities Act. The Offered Securities may be sold from time to time in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. The sale of the Offered Securities may be effected in transactions (which may involve crosses or block transactions) - on any national securities exchange or quotation service on which the Offered Securities may be listed or quoted at the time of sale; - in the over-the-counter market; - in transactions otherwise than on such exchanges or in the over-the-counter market; or - through the writing of options. At the time a particular offering of the Offered Securities is made, a Prospectus Supplement, if required, will be distributed which will set forth the aggregate amount and type of Offered Securities being offered and the terms of the offering, including the name or names of any underwriters, broker/dealers or agents, any discounts, commissions and other terms constituting compensation from the Selling Stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker/ dealers. Each Common Stock certificate contains a legend to the effect that the holder thereof, by its acceptance thereof, will be deemed to have agreed to be bound by the provisions of the Registration Rights Agreement. In that regard, each holder is deemed to have agreed that, upon receipt of notice from the Company of the occurrence of any event which makes a statement in this prospectus untrue in any material respect or which requires the making of any changes in such prospectus in order to make the statements therein not misleading, or of certain other events specified in the Registration Rights Agreement, such holder will suspend the sale of Common Stock pursuant to this prospectus until the Company has amended or supplemented such prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented prospectus to such holder or the Company has given notice that the sale of the Common Stock may be resumed. To comply with the securities laws of certain jurisdictions, if applicable, the Offered Securities will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain jurisdictions the Offered Securities may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or any exemption from registration or qualification is available and is complied with. The Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, which provisions may limit the timing of the purchases and sales of any of the Offered Securities by the Selling Stockholders. The foregoing may affect the marketability of such securities. 104 All expenses of the registration of the Offered Securities will be paid by the Company, including, without limitation, Commission filing fees and expenses of compliance with state securities or "blue sky" laws; provided, however, that the Selling Stockholders will pay all the underwriting discounts and selling commissions, if any. The Selling Stockholders will be indemnified by the Company against certain civil liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. We will be indemnified by the Selling Stockholders severally against certain civil liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. LEGAL MATTERS Certain legal matters will be passed upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Certain partners of Goodwin, Procter & Hoar LLP directly or indirectly own an aggregate of 7,237 shares of Common Stock of the Company. EXPERTS The (i) consolidated financial statements of Beacon Capital Partners, Inc. at March 31, l998 and for the period from January 21, l998 (inception) through March 31, l998, (ii) the combined historical summary of gross income and direct operating expenses for The Athenaeum Portfolio for the year ended December 31, l997, (iii) the historical summary of gross income and direct operating expenses for Technology Square and The Draper Building for the year ended December 31, 1997, and (iv) the combined historical summary of gross income and direct operating expenses for The Bruenig Portfolio (referred to elsewhere herein as the Dallas Office and Industrial Portfolio) for the year ended December 31, 1997, all appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-11 under the Securities Act of 1933, as amended (the "Securities Act"), for the Common Stock offered in this Prospectus. This Prospectus is one part of the Registration Statement and does not contain all of the information in the Registration Statement. Any statements made in this Prospectus referring to any contract, agreement or other document are a summary of the material terms of such contract, agreement or other document. Our Registration Statement may be inspected and copied at the SEC's public reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Our Registration Statement will also be available for inspection and copying at the SEC's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, (Suite 1400), Chicago, Illinois 60661. You may also obtain copies of the Registration Statement from the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC also maintains a website that contains reports, proxy and information statements and other information at http://www.sec.gov. 105 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Pro Forma Financial Information (Unaudited): Beacon Capital Partners, Inc. Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1998.......... F-3 Notes to Pro Forma Condensed Consolidated Balance Sheet.......................... F-4 Pro Forma Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and the Year Ended December 31, 1997................... F-5 Notes to Pro Forma Condensed Consolidated Statements of Operations............... F-7 Historical Financial Information: Beacon Capital Partners, Inc. Report of Independent Auditors................................................... F-8 Consolidated Balance Sheet as of March 31, 1998.................................. F-9 Consolidated Statement of Operations from January 21, 1998 (Inception) to March 31, 1998........................................................................ F-10 Consolidated Statement of Stockholders' Equity from January 21, 1998 (Inception) to March 31, 1998............................................................... F-11 Consolidated Statement of Cash Flows from January 21, 1998 (Inception) to March 31, 1998........................................................................ F-12 Notes to Consolidated Financial Statements....................................... F-13 Consolidated Balance Sheet as of September 30, 1998 (Unaudited).................. F-18 Consolidated Statements of Operations from April 1, 1998 to September 30, 1998 (Unaudited) and January 21, 1998 (Inception) to September 30, 1998 (Unaudited)..................................................................... F-19 Consolidated Statement of Stockholders' Equity from January 21, 1998 (Inception) to September 30, 1998 (Unaudited)............................................... F-20 Consolidated Statement of Cash Flows from January 21, 1998 (Inception) to September 30, 1998 (Unaudited).................................................. F-21 Notes to Consolidated Financial Statements (Unaudited)........................... F-22 Beacon/PW Kendall LLC Consolidated Balance Sheet as of September 30, 1998 (Unaudited).................. F-31 Consolidated Statement of Operations from April 16, 1998 (Inception) to September 30, 1998 (Unaudited)............................................................ F-32 Consolidated Statement of Members' Capital from April 16, 1998 (Inception) to September 30, 1998 (Unaudited).................................................. F-33 Consolidated Statement of Cash Flows from April 16, 1998 (Inception) to September 30, 1998 (Unaudited)............................................................ F-34 Notes to Consolidated Financial Statements (Unaudited)........................... F-35 The Athenaeum Portfolio Report of Independent Auditors................................................... F-38 Combined Historical Summary of Gross Income and Direct Operating Expenses for the period January 1, 1998 to April 30, 1998 (Unaudited) and the Year Ended December 31, 1997........................................................................ F-39 Notes to Combined Historical Summary of Gross Income and Direct Operating Expenses........................................................................ F-40 Technology Square and The Draper Building Report of Independent Auditors................................................... F-41 Historical Summary of Gross Income and Direct Operating Expenses for the period January 1, 1998 to June 23, 1998 (Unaudited) and the Year Ended December 31, 1997............................................................................ F-42 Notes to Historical Summary of Gross Income and Direct Operating Expenses........ F-43 The Bruenig Portfolio (referred to elsewhere herein as the Dallas Office and Industrial Portfolio) Report of Independent Auditors................................................... F-44 Combined Historical Summary of Gross Income and Direct Operating Expenses for the Six Months ended June 30, 1998 (Unaudited) and the Year Ended December 31, 1997............................................................................ F-45 Notes to Combined Historical Summary of Gross Income and Direct Operating Expenses........................................................................ F-46
F-1 BEACON CAPITAL PARTNERS, INC. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) The accompanying unaudited pro forma condensed consolidated balance sheet as of September 30, 1998 has been prepared to reflect the pending additional fundings of joint venture investments subsequent to September 30, 1998, as if such transactions had occurred on September 30, 1998. The accompanying unaudited pro forma condensed consolidated statements of operations have been prepared to reflect the acquisition of properties, the funding and pending funding of joint venture investments, and the issuance of shares as if such transactions had occurred at the beginning of the periods presented. The pro forma information is unaudited and is not necessarily indicative of the consolidated results that would have occurred if the transactions and adjustments reflected therein had been consummated in the period or on the date presented, or on any particular date in the future, nor does it purport to represent the financial position, results of operations or changes in cash flows for future periods. The pro forma information should be read in conjunction with all of the financial statements and notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. F-2 BEACON CAPITAL PARTNERS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS --------------- PURCHASE HISTORICAL TRANSACTIONS (A) (B) PRO FORMA ------------- --------------- ----------- ASSETS: Real Estate Operating properties............................................... $ 214,601 $ -- $ 214,601 ------------- --------------- ----------- Total real estate.............................................. 214,601 -- 214,601 Deferred financing and leasing costs, net of accumulated amortization........................................... 358 358 Cash and cash equivalents............................................ 192,331 (36,651) 155,680 Accounts receivable.................................................. 1,185 -- 1,185 Other assets......................................................... 663 -- 663 Investments in and advance to joint ventures and corporations....................................................... 70,975 36,651 107,626 ------------- --------------- ----------- Total assets................................................... $ 480,113 $ -- $ 480,113 ------------- --------------- ----------- ------------- --------------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable............................................. $ 21,631 $ -- $ 21,631 Accounts payable and accrued expenses.............................. 6,227 -- 6,227 ------------- --------------- ----------- Total liabilities.............................................. 27,858 -- 27,858 Minority interest in consolidated partnership (C).................... 55,976 -- 55,976 Stockholders' equity................................................. 396,279 -- 396,279 ------------- --------------- ----------- Total liabilities and stockholders' equity..................... $ 480,113 $ -- $ 480,113 ------------- --------------- ----------- ------------- --------------- -----------
See accompanying notes. F-3 BEACON CAPITAL PARTNERS, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (A) Reflects the historical consolidated balance sheet of Beacon Capital Partners, Inc. as of September 30, 1998. Beacon Capital Partners, Inc. and its majority-owned subsidiary, Beacon Capital Partners, L.P., are collectively referred to as the "Company". (B) Reflects (1) the pending additional funding of an investment in a joint venture known as Mathilda Research Centre, and (2) the pending additional funding of an investment in a joint venture known as Millennium Tower, all subsequent to September 30, 1998. The Company funded or will fund these acquisitions with existing cash. The following is a summary of the pro forma adjustments related to purchase transactions as if they occurred on September 30, 1998:
MATHILDA RESEARCH MILLENNIUM CENTRE TOWER TOTAL ---------- ----------- ---------- ASSETS Real Estate: Operating properties................................... $ -- $ -- $ -- ---------- ----------- ---------- Total real estate.................................. -- -- -- Cash and cash equivalents................................ (18,074) (18,577) (36,651) Investments in and advance to joint ventures and corporations........................................... 18,074 18,577 36,651 ---------- ----------- ---------- Total assets....................................... $ -- $ -- $ -- ---------- ----------- ---------- ---------- ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities.............................................. $ -- $ -- $ -- Minority interest........................................ -- -- -- Stockholders' equity..................................... -- -- -- ---------- ----------- ---------- Total liabilities and stockholders' equity........................................... $ -- $ -- $ -- ---------- ----------- ---------- ---------- ----------- ----------
(C) Minority interest in consolidated partnership represents an 11.6% minority interest in the Operating Partnership. F-4 BEACON CAPITAL PARTNERS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS ------------------------------ ACQUISITION HISTORICAL PROPERTIES OTHER CONSOLIDATED (A) (B) ADJUSTMENTS (C) PRO FORMA ------------- ------------- --------------- ------------ Revenues: Rental income..................................... $ 6,213 $ 11,006 $ -- $ 17,219 Equity in earnings of joint venture............... 2,087 1,414 -- 3,501 Interest income................................... 8,370 -- (4,823) 3,547 Other income...................................... 125 146 -- 271 ------------- ------------- ------- ------------ Total revenues................................ 16,795 12,566 (4,823) 24,538 ------------- ------------- ------- ------------ Expenses: Property operating................................ 1,702 3,464 -- 5,166 Real estate taxes................................. 983 1,764 -- 2,747 General and administrative........................ 5,591 -- -- 5,591 Interest.......................................... 462 979 -- 1,441 Depreciation and amortization..................... 1,119 2,021 -- 3,140 ------------- ------------- ------- ------------ Total expenses................................ 9,857 8,228 -- 18,085 ------------- ------------- ------- ------------ Income (loss) before minority interest.............. 6,938 4,338 (4,823) 6,453 Minority interest in consolidated partnership (D)... (389) (503) 143 (749) ------------- ------------- ------- ------------ Net income (loss)................................... $ 6,549 $ 3,835 $ (4,680) $ 5,704 ------------- ------------- ------- ------------ ------------- ------------- ------- ------------ Pro forma net income per share--basic and diluted... $ 0.27 ------------ ------------ Weighted average number of common shares outstanding (in thousands).................................... 20,974 ------------ ------------
See accompanying notes. F-5 BEACON CAPITAL PARTNERS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS -------------------------------- ACQUISITION PROPERTIES OTHER CONSOLIDATED HISTORICAL (A) (B) ADJUSTMENTS (C) PRO FORMA --------------- ------------- ----------------- ------------ Revenues: Rental income..................................... $ -- $ 20,742 $ -- $ 20,742 Equity in earnings of joint venture............... -- 2,789 -- 2,789 Other income...................................... -- 337 -- 337 ----- ------------- ----- ------------ Total revenues................................ -- 23,868 -- 23,868 ----- ------------- ----- ------------ Expenses: Property operating................................ -- 6,546 -- 6,546 Real estate taxes................................. -- 3,399 -- 3,399 General and administrative........................ -- -- -- -- Interest.......................................... -- 1,958 -- 1,958 Depreciation and amortization..................... -- 4,126 -- 4,126 ----- ------------- ----- ------------ Total expenses................................ -- 16,029 -- 16,029 ----- ------------- ----- ------------ Income before minority interest..................... -- 7,839 -- 7,839 Minority interest in consolidated partnership (D)................................... -- (909) -- (909) ----- ------------- ----- ------------ Net income.......................................... $ -- $ 6,930 $ -- $ 6,930 ----- ------------- ----- ------------ ----- ------------- ----- ------------ Pro forma net income per share--basic and diluted... $ 0.33 ------------ ------------ Weighted average number of common shares outstanding (in thousands).................................... 20,974 ------------ ------------
See accompanying notes. F-6 BEACON CAPITAL PARTNERS, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (A) Reflects the historical condensed consolidated statement of operations of the Company for the period January 21, 1998 (inception) through September 30, 1998. The Company was not in existence prior to January 21, 1998. See the historical consolidated financial statements and notes thereto of the Company included elsewhere in this prospectus. (B) Reflects the acquisitions of The Athenaeum Portfolio, Technology Square and The Draper Building and Dallas Office and Industrial Portfolio based on the historical operations of such properties for periods prior to acquisition by the Company. The Athenaeum Portfolio acquisition reflects the formation by the Company of a 50% joint venture with PW Acquisitions IX, LLC, an affiliate of PaineWebber, subsequent to the closing of the acquisition of The Athenaeum Portfolio as if the formation of the joint venture had occurred on January 1, 1997. The joint venture is being accounted for using the equity method of accounting and, accordingly, 50% of the historical operations of The Athenaeum Portfolio, adjusted for depreciation using an asset life of 40 years, and an allocation between land and buildings of $35,773 and $159,756, respectively, has been reflected in equity in earnings of joint venture. The other acquired properties are owned directly by the Company. The Technology Square and The Draper Building acquisition also reflects estimated depreciation based upon an asset life of 40 years, and an allocation between land and buildings of $36,162 and $87,150, respectively. Dallas Office and Industrial Portfolio acquisition also reflects estimated depreciation based upon an asset life of 40 years, and an allocation between land and buildings of $14,932 and $77,250, respectively. See the Combined Historical Summary of Gross Income and Direct Operating Expenses and notes thereto for each of the properties included elsewhere in this prospectus. (C) Reflects interest income reduction attributed to cash used to fund the acquisitions of The Athenaeum Portfolio, Technology Square and The Draper Building, Dallas Office and Industrial Portfolio, Mathilda Research Centre, and Millennium Tower and the interest earned from the loan receivable from the joint venture which holds The Athenaeum Portfolio properties. (D) Minority interest in consolidated partnership represents an 11.6% minority interest in the Operating Partnership. F-7 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Beacon Capital Partners, Inc. We have audited the accompanying consolidated balance sheet of Beacon Capital Partners, Inc. as of March 31, 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the period from January 21, 1998 (inception) through March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beacon Capital Partners, Inc. at March 31, 1998, and the consolidated results of its operations and its cash flows for the period from January 21, 1998 (inception) through March 31, 1998, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Boston, Massachusetts June 3, 1998 F-8 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) ASSETS Cash and cash equivalents......................................................... $ 323,893 Contributions receivable--affiliate............................................... 4,200 Other assets...................................................................... 3,777 --------- Total assets.............................................................. $ 331,870 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Loans payable--affiliate...................................................... $ 3,560 Accounts payable and accrued expenses......................................... 1,387 --------- Total liabilities......................................................... 4,947 --------- Commitments and contingencies..................................................... Minority interest in consolidated partnership..................................... 4,200 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, 17,360,769 shares issued and outstanding....................................................... 174 Additional paid-in capital.................................................... 322,936 Accumulated deficit........................................................... (387) --------- Total stockholders' equity................................................ 322,723 --------- Total liabilities and stockholders' equity................................ $ 331,870 --------- ---------
SEE ACCOMPANYING NOTES. F-9 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 21, 1998 (INCEPTION) TO MARCH 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenues: Interest income.................................................................. $ 576 Other income..................................................................... 8 --------- Total revenues............................................................. 584 Expenses: General and administrative....................................................... 968 Depreciation..................................................................... 3 --------- Total expenses............................................................. 971 --------- Loss before minority interest...................................................... (387) Minority interest in operating partnership......................................... -- --------- Net loss................................................................... $ (387) --------- --------- Loss per common share--basic and diluted........................................... $ (0.02) --------- --------- Weighted average number of common shares outstanding (in thousands)................ 17,361 --------- ---------
SEE ACCOMPANYING NOTES. F-10 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 21, 1998 (INCEPTION) TO MARCH 31, 1998 (DOLLARS IN THOUSANDS)
ADDITIONAL NUMBER OF COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT TOTAL ------------ ----------- ---------- ------------- ---------- Issuance of Common Stock, net..................... 17,360,769 $ 174 $ 322,936 $ -- $ 323,110 Net loss.......................................... -- -- -- (387) (387) ------------ ----- ---------- ----- ---------- Balance at March 31, 1998......................... 17,360,769 $ 174 $ 322,936 $ (387) $ 322,723 ------------ ----- ---------- ----- ---------- ------------ ----- ---------- ----- ----------
SEE ACCOMPANYING NOTES. F-11 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 21, 1998 (INCEPTION) TO MARCH 31, 1998 (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................................................ $ (387) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation expense.......................................................... 3 Increase (decrease) in cash arising from changes in operating assets and liabilities: Other assets.................................................................. (617) Accounts payable and accrued expenses......................................... 1,387 --------- Net cash provided by operating activities................................. 386 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Deposits........................................................................ (3,000) Acquisition costs............................................................... (119) Purchases of furniture, fixtures and equipment.................................. (44) --------- Net cash used in investing activities..................................... (3,163) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans payable--affiliate.......................................... 3,560 Issuance of common stock........................................................ 345,800 Offering costs.................................................................. (22,690) --------- Net cash provided by financing activities................................. 326,670 --------- Net increase in cash and cash equivalents and balance at end of period............ $ 323,893 --------- ---------
SEE ACCOMPANYING NOTES. F-12 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1. ORGANIZATION Beacon Capital Partners, Inc. ("BCP") was incorporated on January 21, 1998 as a Massachusetts corporation (the "Formation"), and was initially capitalized through loans payable from the two founders (Messrs. Leventhal and Fortin) of BCP, which 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 formed to develop, acquire, lease and manage real estate and real estate related assets. 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 Rule 144A of the Securities Act. BCP initially issued 17,360,769 common shares with proceeds, net of expenses, of $323,110. Subsequent to March 31, 1998, 3,613,163 additional shares were issued through the exercise of the underwriter's over-allotment, with proceeds, net of expenses, of $67,185. 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 holds approximately 99% 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. As contemplated in the Original Offering, a contribution of $4,200 was due from an entity controlled by Messrs. Leventhal and Fortin to the Operating Partnership for a 1% limited partner interest. For technical reasons, such contribution could only be made subsequent to the closing of the first real estate transaction of the Company. The $4,200 contribution was made on May 4, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles and include the accounts of BCP and its majority-owned subsidiary, Beacon Capital Partners, L.P. BCP consolidates all wholly-owned subsidiaries and those majority-owned subsidiaries in which it exercises control. Investor entities over which BCP can exercise influence, but does not control, are accounted for on the equity method. All significant intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. F-13 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES For the period ending March 31, 1998, BCP had limited operations. Although BCP is not yet able to elect to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code, BCP intends to make such election on its initial Federal return for the taxable year ended December 31, 1998. As a result of such election, BCP will generally not be subject to Federal income taxes to the extent that it makes timely distributions to its shareholders at least equal to its taxable income and meets certain other requirements for qualification as a real estate investment trust. BCP has indicated that it may acquire and operate businesses that do not satisfy the REIT qualification tests prescribed by the Internal Revenue Code. Transactions that give rise to such assets and income are expected to be owned through a C corporation known as a "paper clip", the shares of such entity would be distributed to BCP's stockholders. Such C corporation, if formed, will be subject to Federal, state and local taxation. REVENUE RECOGNITION Revenues are recognized when earned and the amounts can be reasonably estimated on the accrual basis of accounting. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid assets with original maturities of three months or less from the date of purchase. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment are recorded at cost and depreciated over their useful lives, ranging from three to ten years. STOCK OPTIONS AND OTHER AWARDS BCP has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock- Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of BCP's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. FAIR VALUE OF FINANCIAL INSTRUMENTS BCP is required to disclose the fair value of financial instruments, for which it is practicable to estimate such fair value. The fair value of financial instruments are estimates based upon market conditions and perceived risks at March 31, 1998 and require varying degrees of management judgment. F-14 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The fair value of financial instruments presented may not be indicative of amounts BCP could realize on the disposition of the financial instruments. Cash and cash equivalents are carried at an amount, which due to their nature, approximates fair value. BASIC EARNINGS PER COMMON SHARE Computation of basic earnings per common share is based upon the weighted average number of shares of common stock outstanding during the period subsequent to the Original Offering. As BCP has no dilutive securities, there is no difference between basic and diluted earnings per share of common stock. 3. STOCK INCENTIVE PLAN The Company has adopted a Stock Incentive Plan, which authorizes the grant of options to purchase shares of common stock and other stock-based awards to the Company's executive officers, independent directors and employees and other key persons. The Stock Incentive Plan will be administered by the Compensation Committee of the Board of Directors (the "Administrator"). The maximum number of shares of common stock reserved and available for issuance under the Stock Incentive Plan will be such aggregate number of shares as does not exceed the sum of (i) 12% of the outstanding equity interests in the Company (including common stock and units subject to redemption rights) as determined as of the final original offering closing date plus (ii) as of the last business day of each calendar quarter ending after the final original offering closing date, an additional positive number equal to 10% of any net increase of outstanding equity interests in the Company. The Stock Incentive Plan permits the granting of (i) options to purchase common stock intended to qualify as incentive stock options ("Incentive Options") under Section 422 of the Internal Revenue Code and (ii) options that do not so qualify ("Non-Qualified Options"). The option exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of grant in the case of Incentive Options, and may not be less than 25% of the fair market value of the common stock on the date of grant in the case of Non-Qualified Options. The term of each option will be fixed and may not exceed ten years from date of grant in the case of an Incentive Option. The Administrator will determine at what time or times each option may be exercised and, subject to the provisions of the Stock Incentive Plan, the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments, and the exercisability of options may be accelerated by the Administrator. F-15 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 3. STOCK INCENTIVE PLAN (CONTINUED) Changes in options outstanding under the Stock Incentive Plan during the period were as follows:
NUMBER OF SHARES PER SHARE OPTION UNDER OPTION PRICEAVERAGE ----------------- ----------------- Granted at Initial Private Offering.......................................... 649,500 $ 20.00 Granted March 20--March 31, 1998............................................. -- -- Canceled March 20--March 31, 1998............................................ -- -- ----------------- ------ Shares under option at March 31, 1998........................................ 649,500 $ 20.00 ----------------- ------ ----------------- ------ Options available for grant at beginning of period........................... -- ----------------- ----------------- Options available for grant at end of period................................. 1,460,816 ----------------- -----------------
The weighted-average fair value of the options granted during the period is $20.00. 4. LONG-TERM INCENTIVE PLAN The Company has adopted a Long-Term Incentive Plan which is designed to reward certain members of management for growth of the Company's Funds from Operations, as defined by the National Association of Real Estate Investment Trusts, in excess of a specified benchmark. If the Company's Funds from Operations exceeds the specified benchmark, management will be entitled to receive an incentive return which shall be calculated at the end of the three year period following the completion of the first calendar year following the closing of the original offering (the "Determination Date"). The incentive return shall equal the product of (A) 12% of the dollar amount by which (i) the Actual Return, as defined, exceeds (ii) the Base Return, as defined, multiplied by (B) the weighted average of shares of common stock and units outstanding for the 12 months immediately preceding the Determination Date multiplied by (C) the Company's Multiple, as defined. The Long-Term Incentive Plan will take the form of a convertible unit which will be issued to an affiliated organization in connection with the closing of the original offering. The convertible unit is convertible at the Determination Date into a certain number of incentive units in the Operating Partnership with a fair market value equal to the amount of the incentive return. No amount has been earned with respect to the Long-Term Incentive Plan. 5. SUBSEQUENT EVENTS On May 1, 1998 the Company purchased a portfolio of eleven buildings in Cambridge, MA known as The Athenaeum Portfolio. The mixed-use portfolio consists of approximately 970,000 square feet and contains office, laboratory and retail uses as well as a 1,530 space parking garage. The purchase price for the portfolio was $195,000, including the assumption of approximately $69,000 of first mortgage debt. Subsequent to the closing of the transaction, the Company completed the formation of a joint venture with an affiliate of PaineWebber, in which both parties hold a 50% equity interest in the properties. On April 22, 1998, the Company entered into a purchase and sale agreement with The Prudential Insurance Company of America ("Prudential") to acquire a four-building complex known as Technology F-16 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 5. SUBSEQUENT EVENTS (CONTINUED) Square and an adjacent building known as The Draper Building. The properties are located in Cambridge, MA, and consist of approximately 1,026,000 square feet. The purchase price for the properties under the purchase and sale agreement is $123,000. The Company and Prudential are currently negotiating the form of the consideration for the properties. F-17 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) ASSETS Real Estate: Land............................................................................ $ 51,094 Buildings, improvements and equipment........................................... 164,615 --------- 215,709 Less accumulated depreciation................................................... 1,108 --------- 214,601 Deferred financing and leasing costs, net of accumulated amortization of $11...... 358 Cash and cash equivalents......................................................... 192,331 Accounts receivable............................................................... 1,185 Other assets...................................................................... 663 Investments in and advance to joint ventures and corporations..................... 70,975 --------- Total assets.............................................................. $ 480,113 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable........................................................ $ 21,631 Accounts payable and accrued expenses......................................... 6,227 --------- Total liabilities......................................................... 27,858 --------- Minority interest in consolidated partnership..................................... 55,976 --------- 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 Additional paid-in capital.................................................... 389,520 Retained earnings............................................................. 6,549 --------- Total stockholders' equity................................................ 396,279 --------- Total liabilities and stockholders' equity................................ $ 480,113 --------- ---------
See accompanying notes. F-18 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FOR THE FOR THE PERIOD FROM PERIOD FROM JANUARY 21, 1998 APRIL 1, 1998 TO (INCEPTION) TO SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------ ------------------ (UNAUDITED) (UNAUDITED) Revenues: Rental income........................................................... $ 6,213 $ 6,213 Equity in earnings of joint venture..................................... 2,087 2,087 Interest income......................................................... 7,794 8,370 Other income............................................................ 117 125 ------- ------- Total revenues...................................................... 16,211 16,795 ------- ------- Expenses: Property operating...................................................... 1,702 1,702 Real estate taxes....................................................... 983 983 General and administrative.............................................. 4,623 5,591 Interest expense........................................................ 462 462 Depreciation and amortization........................................... 1,116 1,119 ------- ------- Total expenses...................................................... 8,886 9,857 ------- ------- Income before minority interest........................................... 7,325 6,938 Minority interest in consolidated partnership............................. (389) (389) ------- ------- Net income............................................................ $ 6,936 $ 6,549 ------- ------- ------- ------- Income per common share--basic and diluted................................ $ 0.33 $ 0.32 ------- ------- ------- ------- Weighted average number of common shares outstanding (in thousands)....... 20,885 20,668 ------- ------- ------- -------
See accompanying notes. F-19 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 21, 1998 (INCEPTION) TO SEPTEMBER 30, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS)
ADDITIONAL NUMBER OF COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL ------------ ----------- ---------- ----------- ---------- Issuance of Common Stock, net.............................. 20,973,932 $ 210 $ 389,520 $ -- $ 389,730 Net income................................................. -- -- -- 6,549 6,549 ------------ ----- ---------- ----------- ---------- Balance at September 30, 1998.............................. 20,973,932 $ 210 $ 389,520 $ 6,549 $ 396,279 ------------ ----- ---------- ----------- ---------- ------------ ----- ---------- ----------- ----------
See accompanying notes. F-20 BEACON CAPITAL PARTNERS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 21, 1998 (INCEPTION) TO SEPTEMBER 30, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................................................... $ 6,549 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense......................................................... 1,108 Amortization expense......................................................... 11 Equity in earnings of joint venture.......................................... (2,087) Minority interest in consolidated partnership................................ 389 Increase (decrease) in cash arising from changes in operating assets and liabilities: Accounts receivable.......................................................... (1,185) Other assets................................................................. (625) Accounts payable and accrued expenses........................................ 6,227 --------- Net cash provided by operating activities.................................. 10,387 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Real estate asset acquisitions and improvements................................ (142,628) Payment of deferred leasing costs.............................................. (266) Payment of deferred acquisition costs.......................................... (38) Investments in and advance to joint ventures and corporations.................. (68,888) --------- Net cash used in investing activities...................................... (211,820) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments on mortgage notes................................................... (91) Payment of deferred financing costs............................................ (103) Proceeds from loans payable--affiliate......................................... 3,560 Payment of loans payable--affiliate............................................ (3,560) Issuance of Operating Partnership units........................................ 4,228 Issuance of common stock....................................................... 417,871 Offering costs................................................................. (28,141) --------- Net cash provided by financing activities.................................. 393,764 --------- Net increase in cash and cash equivalents and balance at end of period......... $ 192,331 --------- --------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of Operating Partnership units to acquire property...................... $ 51,359 Assumption of mortgage debt to acquire property.................................. 21,722 --------- $ 73,081 --------- ---------
See accompanying notes. F-21 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1. ORGANIZATION Beacon Capital Partners, Inc. ("BCP") 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. On March 17, 1998, BCP was re-incorporated (through a merger) 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 re-incorporation 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 September 30, 1998, 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles and include the accounts of BCP and its majority-owned subsidiary, Beacon Capital Partners, L.P. BCP consolidates all wholly-owned subsidiaries and those majority-owned subsidiaries in which it exercises control. Investor entities over which BCP can exercise influence, but does not control, are accounted for on the equity method. Investor entities which BCP neither controls nor over which BCP can exercise influence are accounted for on the cost method. All significant intercompany transactions and balances have been eliminated in consolidation. Minority interest in consolidated partnership represents Operating Partnership units not held by BCP. As of September 30, 1998, $51,359 in units had been issued in connection with the purchase of the property known as Technology Square and The Draper Building, and $4,228 in units had been issued to Messrs. Leventhal's and Fortin's family trusts. The financial statements of BCP have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form S-11 and Rule 10-01 of Regulation S-X. 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. F-22 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. INCOME TAXES Although BCP is not yet able to elect to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code, BCP intends to make such election on its initial Federal return for the taxable year ended December 31, 1998. As a result of such election, BCP will generally not be subject to Federal income taxes to the extent that it makes timely distributions to its shareholders at least equal to its taxable income and meets certain other requirements for qualification as a real estate investment trust. BCP has indicated that it may acquire and operate businesses that do not satisfy the REIT qualification tests prescribed by the Internal Revenue Code. Transactions that give rise to such assets and income may be owned through a C corporation known as a "paper clip," the shares of which entity would be distributed to BCP's stockholders, or through a taxable corporate subsidiary in which BCP would hold the majority of economic interest but less than 10% of the voting power. Such C corporations, if formed, will be subject to Federal, state and local taxation. REVENUE RECOGNITION Revenues are recognized when earned and the amounts can be reasonably estimated on the accrual basis of accounting. Rental income from operating leases is recognized on a straight-line basis over the life of the lease agreements. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid assets with original maturities of three months or less from the date of purchase. REAL ESTATE Buildings are recorded at cost and are depreciated on the straight-line method over their estimated useful life of forty years. The cost of buildings includes the purchase price of the property, legal fees, and other acquisition costs. Acquisition costs associated with the purchase of new property consist of third party costs and internal direct costs only, and have been capitalized to the appropriate assets. BCP measures impairment in accordance with FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on specific long-lived assets used in operations where indicators of impairment are present and the undiscounted cash flows (net realizable value) estimated to be generated by those assets are less than the assets' carrying amount. F-23 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Furniture, fixtures and equipment are depreciated using the straight-line method over their expected useful lives of three to ten years. INVESTMENTS IN AND ADVANCE TO JOINT VENTURES AND CORPORATIONS BCP uses the equity method of accounting for its earnings in joint ventures and corporations in which BCP shares influence over operating and financial policy. BCP uses the cost method of accounting to account for its investments in entities in which BCP does not influence operating and financial policy. Losses in excess of investments are not recorded where BCP has neither guaranteed nor intends to provide any future financial support to the respective investment. STOCK OPTIONS AND OTHER AWARDS BCP has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock- Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of BCP's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Compensation attributable to the Company's Long-Term Incentive Plan will be charged to expense over the period covered by the Long-Term Incentive Plan. FAIR VALUE OF FINANCIAL INSTRUMENTS BCP is required to disclose the fair value of financial instruments, for which it is practicable to estimate such fair value. The fair value of financial instruments are estimates based upon market conditions and perceived risks at September 30, 1998 and require varying degrees of management judgment. The fair value of financial instruments presented may not be indicative of amounts BCP could realize on the disposition of the financial instruments. Cash and cash equivalents are carried at an amount, which due to their nature, approximates fair value. BASIC EARNINGS PER COMMON SHARE Computation of basic earnings per common share is based upon the weighted average number of shares of common stock outstanding during the periods subsequent to the Original Offering. As BCP has no dilutive securities, there is no difference between basic and diluted earnings per share of common stock. F-24 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 3. INVESTMENTS IN AND ADVANCE TO JOINT VENTURES AND CORPORATIONS The investments in and advance to 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 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"). 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, MA. 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. As of September 30, 1998, each member had an approximate $63,600 equity interest in Beacon/PW Kendall LLC. Summarized financial information for this joint venture follows:
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED) ------------------ Gross revenue............................................................. $ 12,145 Expenses.................................................................. 10,239 -------- Income before depreciation and amortization............................... 1,906 Depreciation and amortization............................................. 1,665 -------- Net income................................................................ $ 241 -------- --------
AS OF SEPTEMBER 30, 1998 (UNAUDITED) ------------------ Real estate and equipment, net............................................ $ 193,864 Cash and cash equivalents................................................. 5,797 Other assets.............................................................. 2,182 -------- Total assets.............................................................. $ 201,843 -------- -------- Mortgage note payable..................................................... $ 68,931 Accounts payable and accrued expenses..................................... 5,651 Minority interest......................................................... 6 Members' equity (including accumulated earnings of $241).................. 127,255 -------- Total liabilities and members' equity..................................... $ 201,843 -------- --------
On August 9, 1998, the Company entered into a joint venture agreement with Mathilda Partners LLC, an affiliate of Menlo Equities, a California based developer, to develop two Class A office 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 F-25 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 3. INVESTMENTS IN AND ADVANCE TO JOINT VENTURES AND CORPORATIONS (CONTINUED) acquired a twelve-acre site on Mathilda Avenue in Sunnyvale, CA, on which the venture plans to construct Mathilda Research Centre. Although it is anticipated that the buildings will contain approximately 267,000 square feet, certain changes in the entitlements for the property will be required to increase the permitted density from the currently permitted 187,000 square feet. In addition to funding approximately 35% of the development expenditures (including the acquisition of the land) from cash contributions, the venture intends to finance the balance of those expenditures with a construction loan from an institutional lender. The scope of the development budget has not been finalized, but it is anticipated to be approximately $57,000 if the full 267,000 square feet are constructed. 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. 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. 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 which is controlled by Messrs. Leventhal and Fortin. The Operating Partnership owns 99% of the economic interests in Tenant Communications. Cypress Communications, Inc. is a provider of bundled communications services to tenants in multi-tenant commercial buildings. These bundled services include Internet access, video, voice mail and telephone service. By bundling services to multiple tenants in an office building, Cypress can aggregate the traffic of customers and give them the advantage of a cost-effective service with a high level of customer care. F-26 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 3. INVESTMENTS IN AND ADVANCE TO JOINT VENTURES AND CORPORATIONS (CONTINUED) A reconciliation of the underlying net assets to the Company's carrying value of property investments in and advance to joint ventures and corporations is as follows:
MATHILDA BEACON/PW RESEARCH MILLENNIUM CYPRESS KENDALL LLC CENTRE TOWER COMMUNICATIONS, INC. TOTAL ------------ ----------- ------------- --------------------- --------- BCP, L.P. equity interest (including accumulated earnings).................... $ 63,576 $ 1,750 $ 65,326 Investments in preferred stock............. $ 5,000 5,000 Advance from BCP, L.P...................... $ 426 426 Acquisition costs.......................... 41 54 77 51 223 ------------ ----------- ----- ------ --------- Carrying value of investments in and advance to joint ventures and corporations............................. $ 63,617 $ 1,804 $ 503 $ 5,051 $ 70,975 ------------ ----------- ----- ------ --------- ------------ ----------- ----- ------ ---------
4. MORTGAGE NOTES PAYABLE The mortgage notes payable, collateralized by certain properties and assignment of leases are as follows: Mortgage notes with fixed interest at: 9.00% maturing December 1, 1999.................................... $ 1,546 9.25% maturing May 1, 2002......................................... 1,581 7.80% maturing December 1, 2004.................................... 3,461 7.75% maturing September 1, 2005................................... 5,726 7.80% maturing December 1, 2005.................................... 4,315 9.00% maturing July 1, 2017........................................ 1,464 9.00% maturing March 1, 2019....................................... 986 9.00% maturing November 1, 2021.................................... 1,515 8.25% maturing October 1, 2022..................................... 1,037 --------- Total.............................................................. $ 21,631 --------- ---------
F-27 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 4. MORTGAGE NOTES PAYABLE (CONTINUED) Scheduled amortization and maturities of mortgage notes payable are as follows: 1998............................................................... $ 72 1999............................................................... 1,903 2000............................................................... 382 2001............................................................... 426 2002............................................................... 1,839 Thereafter......................................................... 17,009 --------- Total.............................................................. $ 21,631 --------- ---------
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. The Company has determined that the fair value of its mortgage rates approximates their carrying value. 5. STOCK INCENTIVE PLAN The Company has adopted a Stock Incentive Plan, which authorizes the grant of options to purchase shares of common stock and other stock-based awards to the Company's executive officers, independent directors, employees and other key persons. The Stock Incentive Plan will be administered by the Compensation Committee of the Board of Directors (the "Administrator"). The maximum number of shares of common stock reserved and available for issuance under the Stock Incentive Plan will be such aggregate number of shares as does not exceed the sum of (i) 12% of the outstanding equity interests in the Company (including common stock and units subject to redemption rights) as determined as of the final original offering closing date plus (ii) as of the last business day of each calendar quarter ending after the final original offering closing date, an additional positive number equal to 10% of any net increase of outstanding equity interests in the Company. The Stock Incentive Plan permits the granting of (i) options to purchase common stock intended to qualify as incentive stock options ("Incentive Options") under Section 422 of the Internal Revenue Code and (ii) options that do not so qualify ("Non-Qualified Options"). The option exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of grant in the case of Incentive Options, and may not be less than 25% of the fair market value of the common stock on the date of grant in the case of Non-Qualified Options. The term of each option will be fixed and may not exceed ten years from date of grant in the case of an Incentive Option. The Administrator will determine at what time or times each option may be exercised and, subject to the provisions of the Stock Incentive Plan, the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments, and the exercisability of options may be accelerated by the Administrator. F-28 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 5. STOCK INCENTIVE PLAN (CONTINUED) Changes in options outstanding under the Stock Incentive Plan during the period were as follows:
NUMBER OF PER SHARE SHARES UNDER OPTION OPTION PRICE--AVERAGE ------------- --------------- Granted at Initial Private Offering............................ 649,500 $ 20.00 Granted March 20--September 30, 1998........................... 1,728,375 20.00 Canceled March 20--September 30, 1998.......................... -- -- ------------- Shares under option at September 30, 1998...................... 2,377,875 20.00 ------------- ------------- Options available for grant at beginning of period............. -- Options available for grant at end of period................... 418,851 ------------- -------------
The weighted-average fair value of the options granted during the period is $20.00. 6. LONG-TERM INCENTIVE PLAN The Company has adopted a Long-Term Incentive Plan which is designed to reward certain members of management for growth of the Company's Funds from Operations, as defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), in excess of a specified benchmark. If the Company's Funds from Operations exceeds the specified benchmark, management will be entitled to receive an incentive return which shall be calculated on December 31, 2001 (the "Determination Date"). The incentive return shall equal the product of (A) 12% of the dollar amount by which (i) the Actual Return, as defined, exceeds (ii) the Base Return, as defined, multiplied by (B) the weighted average of shares of common stock and units outstanding for the 12 months immediately preceding the Determination Date multiplied by (C) the Company's Multiple, as defined. The Long-Term Incentive Plan takes the form of a convertible unit which was issued on March 16, 1998 to an affiliated organization in connection with the closing of the original offering. The convertible unit is convertible at the Determination Date into a certain number of incentive units in the Operating Partnership with a fair market value equal to the amount of the incentive return. No amount has been earned with respect to the Long-Term Incentive Plan. F-29 BEACON CAPITAL PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 7. LEASES Minimum future rentals under operating leases in effect at December 31, 1997 are summarized as follows: 1998............................................................... $ 19,157 1999............................................................... 14,583 2000............................................................... 9,557 2001............................................................... 7,097 2002............................................................... 3,255 Thereafter......................................................... 5,502 --------- $ 59,151 --------- ---------
Terms of leases range from one to fifteen years and in certain cases provide for operating expense reimbursement, real estate tax escalation charges and increases in minimum rents. F-30 BEACON/PW KENDALL LLC CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Real Estate Land............................................................................ $ 35,773 Buildings, improvements and equipment........................................... 159,756 --------- 195,529 Less accumulated depreciation................................................... 1,665 --------- 193,864 Cash and cash equivalents......................................................... 5,797 Other assets...................................................................... 2,182 --------- Total assets.................................................................. $ 201,843 --------- --------- LIABILITIES AND MEMBERS' CAPITAL Liabilities: Mortgage note payable........................................................... $ 68,931 Accounts payable and accrued expenses........................................... 5,651 --------- Total liabilities............................................................. 74,582 --------- Minority interest................................................................. 6 --------- Members' Capital: Members' capital................................................................ 127,014 Retained earnings............................................................... 241 --------- 127,255 --------- Total liabilities and members' capital........................................ $ 201,843 --------- ---------
See accompanying notes. F-31 BEACON/PW KENDALL LLC CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE PERIOD FROM APRIL 16, 1998 (INCEPTION) TO SEPTEMBER 30, 1998 (UNAUDITED) ------------------ Revenues: Rental income............................................................................... $ 8,430 Reimbursement of operating expenses and taxes............................................... 3,658 Interest and other income................................................................... 57 ------- Total revenues.......................................................................... 12,145 ------- Expenses: Property operating.......................................................................... 2,648 Real estate taxes........................................................................... 1,621 Interest expense............................................................................ 5,970 Depreciation and amortization............................................................... 1,665 ------- Total expenses.......................................................................... 11,904 ------- Net income.................................................................................. $ 241 ------- -------
See accompanying notes. F-32 BEACON/PW KENDALL LLC CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL FOR THE PERIOD FROM APRIL 16, 1998 (INCEPTION) TO SEPTEMBER 30, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS)
BEACON CAPITAL PW ACQUISITION PARTNERS, LP IX, LLC TOTAL -------------- -------------- ---------- Issuance of Members' Capital......................................... $ 63,507 $ 63,507 $ 127,014 Net income........................................................... 68 173 241 ------- ------- ---------- Balance at September 30, 1998........................................ $ 63,575 $ 63,680 $ 127,255 ------- ------- ---------- ------- ------- ----------
See accompanying notes. F-33 BEACON/PW KENDALL LLC CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM APRIL 16, 1998 (INCEPTION) TO SEPTEMBER 30, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................................................... $ 241 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense........................................ 1,665 Minority interest............................................................ 6 Increase (decrease) in cash arising from changes in operating assets and liabilities: Other assets................................................................. (2,182) Accounts payable and accrued expenses........................................ 5,651 --------- Net cash provided by operating activities.................................. 5,381 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Real estate asset acquisitions and improvements................................ (126,411) --------- Net cash used in investing activities...................................... (126,411) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Advance from BCP, L.P.......................................................... 116,981 Repayment of advance from BCP, L.P............................................. (116,981) Repayment on mortgage note..................................................... (187) Contributions from members..................................................... 127,014 --------- Net cash provided by financing activities.................................. 126,827 --------- Net increase in cash and cash equivalents and balance at end of period......... $ 5,797 --------- --------- SUPPLEMENTAL DISCLOSURES: Cash paid for interest........................................................... $ 5,644 --------- --------- NON CASH ITEMS: Mortgage note assumed in connection with real estate acquisition................. $ 69,118 --------- ---------
See accompanying notes. F-34 BEACON/PW KENDALL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS) 1. ORGANIZATION Beacon/PW Kendall LLC ("the Company") was formed on April 16, 1998 as a Delaware limited liability company. The members of the Company are Beacon Capital Partners, L.P. and PW Acquisitions IX, LLC (the "Members"). Each of the members holds a fifty percent economic interest in the Company and each has made a $63,507 equity contribution. Beacon Capital Partners, L.P. is the managing member of the Company. The Company is the sole member of One Kendall LLC. One Kendall LLC has invested in certain land, buildings, and improvements in Cambridge, Massachusetts. The Company is the managing member of Kendall Athenaeum LLC, holding a 99% economic interest. Kendall Athenaeum LLC and the Company are the members of Cambridge Athenaeum LLC, holding 1% and 99% economic interests, respectively. Kendall Athenaeum LLC is the managing member of Cambridge Athenaeum LLC. Cambridge Athenaeum LLC has invested in certain other land, buildings and improvements in Cambridge, Massachusetts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles and include the accounts of the Company, its wholly-owned subsidiary One Kendall LLC and its majority-owned subsidiaries, Kendall Athenaeum LLC, and Cambridge Athenaeum LLC. The Company consolidates all wholly-owned subsidiaries and those majority-owned subsidiaries in which it exercises control. Investor entities over which the Company can exercise influence, but does not control, are accounted for on the equity method. All significant intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. INCOME TAXES As a limited liability company, the Company is deemed to be a partnership for federal and state income tax purposes. As such, no provision or credit has been made in the accompanying financial statements for federal or state income taxes since the members of the Company are required to include their respective share of profits or losses in their own tax returns. F-35 BEACON/PW KENDALL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenues are recognized when earned and the amounts can be reasonably estimated on the accrual basis of accounting. Rental income from operating leases is recognized on a straight-line basis over the life of the lease agreements. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid assets with original maturities of three months or less from the date of purchase. REAL ESTATE Buildings are recorded at cost and are depreciated on the straight-line method over their estimated useful life of forty years. The cost of buildings includes the purchase price of the property, legal fees, and other acquisition costs. Acquisition costs associated with the purchase of new property consist of third party costs and internal direct costs only, and have been capitalized to the appropriate assets. The Company measures impairment in accordance with FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on specific long-lived assets used in operations where indicators of impairment are present and the undiscounted cash flows (net realizable value) estimated to be generated by those assets are less than the assets' carrying amount. Furniture, fixtures and equipment are depreciated using the straight-line method over their expected useful lives of three to ten years. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company is required to disclose the fair value of financial instruments, for which it is practicable to estimate such fair value. The fair value of financial instruments are estimates based upon market conditions and perceived risks at September 30, 1998 and require varying degrees of management judgment. The fair value of financial instruments presented may not be indicative of amounts the Company could realize on the disposition of the financial instruments. Cash and cash equivalents are carried at an amount, which due to their nature, approximates fair value. F-36 BEACON/PW KENDALL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS) 3. LONG TERM DEBT Long term debt represents a first mortgage note assumed with the purchase of certain land and buildings by Cambridge Athenaeum LLC. The first mortgage note is due January 11, 2027, with principal and interest payments due monthly. The interest rate on the mortgage note is 8.485%. Future minimum principal payments due during the next five years and thereafter are as follows: 1998............................................................... $ 127 1999............................................................... 524 2000............................................................... 554 2001............................................................... 620 2002............................................................... 676 Thereafter......................................................... $ 66,430
4. TRANSACTIONS WITH RELATED PARTIES Beacon Capital Partners, L.P. advanced $116,981 to the Company to fund the acquisition of the certain land and buildings in Cambridge, Massachusetts owned by One Kendall LLC and Cambridge Athenaeum LLC. On August 28, 1998, this advance was repaid with funds generated by equity contributions by the Members. Interest of $3,481 on the advance was repaid as of September 30, 1998. 5. LEASES Minimum future rentals under operating leases in effect at December 31, 1997 are summarized as follows: 1998............................................................... $ 16,711 1999............................................................... 16,195 2000............................................................... 13,833 2001............................................................... 12,090 2002............................................................... 9,876 Thereafter......................................................... 20,633 --------- $ 89,338 --------- ---------
Terms of the leases range from one to twenty years and provide for operating expense reimbursement, real estate tax escalations, and in certain cases, percentage rent and increases in minimum rent. F-37 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Beacon Capital Partners, Inc. We have audited the accompanying Combined Historical Summary of Gross Income and Direct Operating Expenses (the "Historical Summary") for One Kendall Square Buildings 100-500, One Kendall Square Buildings 600/650/700, One Kendall Square Building 1400, One Kendall Square Building 1500, One Kendall Square Building 1700, 215 First Street, the One Kendall Square Cinema, the One Kendall Square Parking Garage, and 195 First Street Parking Lot (collectively, known as "The Athenaeum Portfolio") for the year ended December 31, 1997. This Historical Summary is the responsibility of The Athenaeum Portfolio's management. Our responsibility is to express an opinion on the Historical Summary based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Historical Summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Historical Summary. An audit also includes assessing the basis of accounting used and significant estimates made by management, as well as evaluating the overall presentation of the Historical Summary. We believe that our audit provides a reasonable basis for our opinion. The accompanying Historical Summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of Beacon Capital Partners, Inc. as described in Note 1, and is not intended to be a complete presentation of The Athenaeum Portfolio's revenues and expenses. In our opinion, the Historical Summary referred to above presents fairly, in all material respects, the gross income and direct operating expenses described in Note 1 of The Athenaeum Portfolio for the year ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Boston, Massachusetts May 22, 1998 F-38 COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES FOR THE ATHENAEUM PORTFOLIO (DOLLARS IN THOUSANDS)
FOR THE PERIOD JANUARY 1, 1998 TO YEAR ENDED APRIL 30, 1998 DECEMBER 31, 1997 ----------------- ----------------- (UNAUDITED) Gross income Rental income............................................................. $ 6,513 $ 19,593 Reimbursement of operating expenses and taxes............................. 1,277 5,238 Other income.............................................................. 106 213 ------ ------- Total gross income.................................................... 7,896 25,044 ------ ------- Direct operating expenses Property operating........................................................ 1,784 5,514 Real estate taxes......................................................... 1,288 3,740 ------ ------- Total direct operating expenses....................................... 3,072 9,254 ------ ------- Gross income in excess of direct operating expenses....................... $ 4,824 $ 15,790 ------ ------- ------ -------
See accompanying notes. F-39 NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES FOR THE ATHENAEUM PORTFOLIO (DOLLARS IN THOUSANDS) 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Presented herein is the combined historical summary ("Historical Summary") of gross income and direct operating expenses of the following properties, held under common control (collectively, "The Athenaeum Portfolio"): One Kendall Square Buildings 100-500 One Kendall Square Cinema One Kendall Square Buildings 600/650/700 195 First Street Parking Lot One Kendall Square Building 1400 215 First Street One Kendall Square Building 1500 One Kendall Square Parking Garage One Kendall Square Building 1700
The mixed-use properties were acquired by Beacon Capital Partners, Inc. on May 1, 1998. The accompanying Historical Summary has been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of Beacon Capital Partners, Inc. Accordingly, certain historical expenses which may not be comparable to the expenses expected to be incurred in the proposed future operations of The Athenaeum Portfolio have been excluded. Excluded expenses consist of depreciation and amortization, and interest not directly related to the future operations of The Athenaeum Portfolio. Rental income is recognized on a straight line basis over the term of the related leases. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Minimum future rentals under operating leases with The Athenaeum Portfolio in effect at December 31, 1997 are summarized as follows:
YEAR - ----------------------------------------------------------------------------------- 1998............................................................................... $ 16,711 1999............................................................................... 16,195 2000............................................................................... 13,833 2001............................................................................... 12,090 2002............................................................................... 9,876 Thereafter......................................................................... 20,633 --------- $ 89,338 --------- ---------
Terms of the leases range from one to twenty years and provide for operating expense reimbursement, real estate tax escalations and, in certain cases, percentage rent and increases in minimum rent. Approximately 26% of The Athenaeum Portfolio's revenue for the year ended December 31, 1997 was derived from one tenant. F-40 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Beacon Capital Partners, Inc. We have audited the accompanying Historical Summary of Gross Income and Direct Operating Expenses (the "Historical Summary") for Technology Square and The Draper Building owned by Asahi Seimei-Prudential Associates, Number Three for the year ended December 31, 1997. This Historical Summary is the responsibility of Technology Square and The Draper Building's management. Our responsibility is to express an opinion on the Historical Summary based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Historical Summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Historical Summary. An audit also includes assessing the basis of accounting used and significant estimates made by management, as well as evaluating the overall presentation of the Historical Summary. We believe that our audit provides a reasonable basis for our opinion. The accompanying Historical Summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of Beacon Capital Partners, Inc. as described in Note 1, and is not intended to be a complete presentation of Technology Square and The Draper Building's revenues and expenses. In our opinion, the Historical Summary referred to above presents fairly, in all material respects, the gross income and direct operating expenses described in Note 1 of Technology Square and The Draper Building for the year ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Boston, Massachusetts May 22, 1998 F-41 HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES FOR TECHNOLOGY SQUARE AND THE DRAPER BUILDING (DOLLARS IN THOUSANDS)
FOR THE PERIOD JANUARY 1, 1998 TO JUNE 23, 1998 YEAR ENDED (UNAUDITED) DECEMBER 31, 1997 ----------------- ----------------- Gross income Rental income............................................................. $ 3,992 $ 8,164 Reimbursement of operating expenses and taxes............................. 954 2,077 Other income.............................................................. -- 58 ------ ------ Total gross income.......................................................... 4,946 10,299 ------ ------ Direct operating expenses Property operating........................................................ 943 1,962 Real estate taxes......................................................... 955 1,929 ------ ------ Total direct operating expenses............................................. 1,898 3,891 ------ ------ Gross income in excess of direct operating expenses....................... $ 3,048 $ 6,408 ------ ------ ------ ------
See accompanying notes. F-42 NOTES TO HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES FOR TECHNOLOGY SQUARE AND THE DRAPER BUILDING (DOLLARS IN THOUSANDS) 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Asahi Seimei-Prudential Associates, Number Three (the "Joint Venture") owns five office buildings, two garages leased to two tenants and land with a surface parking lot located in Cambridge, Massachusetts (collectively, "Technology Square and The Draper Building"). Asahi International Ltd. and The Prudential Insurance Company of America ("Prudential") are the Joint Venture Partners and each have a 50% interest in the Joint Venture. The accompanying Historical Summary has been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of Beacon Capital Partners, Inc. Accordingly, certain historical expenses which may not be comparable to the expenses expected to be incurred in the proposed future operations of Technology Square and The Draper Building have been excluded. Excluded expenses consist of depreciation and amortization, interest and asset management costs not directly related to the future operations of Technology Square and The Draper Building. Rental income is recognized on a straight line basis over the term of the related leases. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amount reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. LEASES The Joint Venture, as lessor, has entered into non-cancelable operating leases at Technology Square and The Draper Building. Minimum future rentals under the leases in effect at December 31, 1997 are summarized as follows:
YEAR - ----------------------------------------------------------------------------------- 1998............................................................................... $ 8,309 1999............................................................................... 5,616 2000............................................................................... 2,923 2001............................................................................... 2,436 --------- $ 19,284 --------- ---------
The leases at Technology Square are generally for a term greater than one year and no more than five years and provide for operating expense reimbursement, real estate tax escalations and, in certain cases, increases in minimum rent. The Draper Building is leased on a triple net basis to a single tenant on a long-term lease through 2001, with extension options through October 2051. Approximately 99% of Technology Square and The Draper Building's revenue at December 31, 1997 was derived from three tenants. F-43 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Beacon Capital Partners, Inc. We have audited the accompanying Combined Historical Summary of Gross Income and Direct Operating Expenses (the "Historical Summary") for Brandywine Place, Crosspoint Atrium, Forest Abrams Place, 6500 Greenville Avenue, Northcreek Place II, One Glen Lakes, Park North Business Center, Plaza at Walnut Hill, Richardson Business Center, Richardson Commerce Centre, Sherman Tech, T. I. Business Park, and Venture Drive Tech Center (collectively, known as "The Breunig Portfolio") for the year ended December 31, 1997. This Historical Summary is the responsibility of The Breunig Portfolio's management. Our responsibility is to express an opinion on the Historical Summary based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Historical Summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Historical Summary. An audit also includes assessing the basis of accounting used and significant estimates made by management, as well as evaluating the overall presentation of the Historical Summary. We believe that our audit provides a reasonable basis for our opinion. The accompanying Historical Summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of Beacon Capital Partners, Inc. as described in Note 1, and is not intended to be a complete presentation of The Breunig Portfolio's revenues and expenses. In our opinion, the Historical Summary referred to above presents fairly, in all material respects, the gross income and direct operating expenses described in Note 1 of The Breunig Portfolio for the year ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Boston, Massachusetts July 1, 1998 F-44 COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES FOR THE BREUNIG PORTFOLIO (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1998 DECEMBER 31, 1997 ----------------- ----------------- (UNAUDITED) Gross income Rental income............................................................. $ 5,695 $ 9,843 Reimbursement of operating expenses and taxes............................. 366 658 Other income.............................................................. 146 279 ------ ------ Total gross income.......................................................... 6,207 10,780 ------ ------ Direct operating expenses Property operating........................................................ 2,521 4,584 Real estate taxes......................................................... 809 1,470 ------ ------ Total direct operating expenses............................................. 3,330 6,054 ------ ------ Gross income in excess of direct operating expenses......................... $ 2,877 $ 4,726 ------ ------ ------ ------
See accompanying notes. F-45 NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES FOR THE BREUNIG PORTFOLIO (DOLLARS IN THOUSANDS) 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Presented herein is the combined historical summary ("Historical Summary") of gross income and direct operating expenses of the following properties, (collectively, "The Breunig Portfolio") all of which are located in or near Dallas, Texas: Brandywine Place Plaza at Walnut Hill Crosspoint Atrium Richardson Business Center Forest Abrams Place Richardson Commerce Centre 6500 Greenville Avenue Sherman Tech Northcreek Place II T I Business Park One Glen Lakes Venture Drive Tech Center Park North Business Center
The mixed-use properties were acquired by Beacon Capital Partners, Inc. on July 1, 1998. The accompanying Historical Summary has been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of Beacon Capital Partners, Inc. Accordingly, certain historical expenses which may not be comparable to the expenses expected to be incurred in the proposed future operations of The Breunig Portfolio have been excluded. Excluded expenses consist of depreciation and amortization, and interest not directly related to the future operations of The Breunig Portfolio. During 1997, Breunig Commercial purchased Park North Business Center and Forest Abrams Place. These properties were owned for three months and six months of 1997, respectively. Partial year financial information is presented within the Historical Summary for the two properties. In addition, on July 1, 1998, Breunig acquired one additional property referred to as Bank One LBJ. No financial information with respect to this property is presented within the accompanying Historical Summary. Inclusion of these three properties for the months prior to their acquisition in the accompanying Historical Summary would not have resulted in a material change to the amounts presented. Rental income is recognized on a straight line basis over the term of the related leases. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amount reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-46 NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES FOR THE BREUNIG PORTFOLIO (DOLLARS IN THOUSANDS) 2. LEASES Minimum future rentals under operating leases with The Breunig Portfolio in effect at December 31, 1997 are summarized as follows:
YEAR - ----------------------------------------------------------------------------------- 1998............................................................................... $ 10,848 1999............................................................................... 8,967 2000............................................................................... 6,634 2001............................................................................... 4,661 2002............................................................................... 3,255 Thereafter......................................................................... 5,502 --------- $ 39,867 --------- ---------
Terms of the leases range from one to fifteen years and provide for operating expense reimbursement, real estate tax escalations and, in certain cases, increases in minimum rent. F-47 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. BEACON CAPITAL PARTNERS, INC. HAS NOT AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING OF THE SECURITIES OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE IN THAT JURISDICTION. ------------------------ TABLE OF CONTENTS
PAGE ----- FORWARD-LOOKING STATEMENTS....................... i PROSPECTUS SUMMARY............................... 1 RISK FACTORS..................................... 6 THE COMPANY...................................... 22 USE OF PROCEEDS.................................. 48 DISTRIBUTION POLICY.............................. 48 INVESTMENT STRATEGIES AND EXPERIENCE............. 49 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................. 54 PRICE RANGE OF COMMON STOCK...................... 55 CAPITALIZATION................................... 55 SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA................................. 57 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 58 DESCRIPTION OF SECURITIES........................ 62 CERTAIN PROVISIONS OF MARYLAND LAW AND OF BCP'S CHARTER AND BYLAWS............................. 67 COMMON STOCK AVAILABLE FOR FUTURE SALE........... 71 OPERATING PARTNERSHIP AGREEMENT.................. 72 FEDERAL INCOME TAX CONSIDERATIONS................ 76 ERISA CONSIDERATIONS............................. 90 SELLING STOCKHOLDERS............................. 91 PLAN OF DISTRIBUTION............................. 104 LEGAL MATTERS.................................... 105 EXPERTS.......................................... 105 AVAILABLE INFORMATION............................ 105 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES...... F-1
20,394,843 SHARES BEACON CAPITAL PARTNERS, INC. COMMON STOCK --------------------- PROSPECTUS --------------------- DECEMBER , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1) The following table sets forth the estimated expenses payable by the Company in connection with this offering (excluding underwriting discounts and commissions):
NATURE OF EXPENSE AMOUNT - ---------------------------------------------------------------------------------- ---------- SEC Registration Fee.............................................................. $ 120,330 Accounting Fees and Expenses...................................................... 200,000 Legal Fees and Expenses........................................................... 250,000 Printing Expenses................................................................. 75,000 Miscellaneous..................................................................... 75,000 ---------- Total....................................................................... $ 720,330 ---------- ----------
- ------------------------ (1) The amounts set forth above, except for the SEC Registration fee, are in each case estimated. ITEM 32. SALES TO SPECIAL PARTIES. See Item 33. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES Set forth in chronological order below is information regarding the number of unregistered shares of capital stock issued by the Registrant since its incorporation in 1998. Further included is the consideration, if any, received by the Registrant for such shares, and information relating to the section of the Securities Act of 1933, as amended (the "Securities Act"), or rule of the Securities and Exchange Commission under which exemption from registration was claimed. (1) In March 1998, BCP issued 1,000 shares of its Common Stock for an aggregate purchase price of $10.00 to Beacon Capital Partners, Inc., a Massachusetts corporation, in reliance upon the exemption from registration under Section 4(2) of the Securities Act. (2) In March 1998, BCP issued 200 shares of its Common Stock to the stockholders of Beacon Capital Partners, Inc., a Massachusetts corporation, in exchange for all of the outstanding capital stock of Beacon Capital Partners, Inc., a Massachusetts corporation, pursuant to a merger agreement and in reliance upon the exemption from registration under Section 4(2) of the Securities Act. (3) On March 20, 1998, BCP issued an aggregate of 16,781,680 shares of Common Stock to NationsBanc Montgomery Securities LLC, in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. NationsBanc subsequently resold the securities they had purchased to Qualified Institutional Buyers (as defined in Rule 144A under the Securities Act) in reliance upon the exemption from registration requirements provided by Rule 144A under the Securities Act and to a limited number of "accredited investors" (as defined in Rule 501 under the Securities Act) in reliance upon the exemptions from registration provided by Sections 4(1) and 4(2) under the Securities Act. The aggregate proceeds to BCP from such offering and the aggregate initial purchaser's discount were $312,969,332 and $22,021,651, respectively. (4) On March 20, 1998, the Company issued an aggregate of 579,089 shares of Common Stock and 225,201 Units to two trusts established by Alan M. Leventhal and Lionel P. Fortin for an II-1 aggregate cash purchase price of approximately $15,000,000 in reliance upon the exemption from registration under Section 4(2) of the Securities Act. (5) On April 3, 1998, BCP issued an aggregate of 2,707,213 shares of Common Stock pursuant to an over-allotment option granted to NationsBanc Montgomery Securities LLC in connection with the offering on March 20, 1998, to NationsBanc Montgomery Securities LLC in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. NationsBanc subsequently resold the shares they purchased to Qualified Institutional Buyers (as defined in Rule 144A under the Securities Act) in reliance upon the exemption from registration requirements provided by Rule 144A under the Securities Act and to a limited number of "accredited investors" (as defined in Rule 501 under the Securities Act) in reliance upon the exemptions from registration provided by Sections 4(1) and 4(2) under the Securities Act. The aggregate proceeds to BCP from such offering and the aggregate initial purchaser's discount were $50,489,522 and $3,510,503, respectively. (6) On April 13, 1998, BCP issued an aggregate of 905,950 shares of Common Stock pursuant to an over-allotment option granted to NationsBanc Montgomery Securities LLC in connection with the offering on March 20, 1998, to NationsBanc Montgomery Securities LLC in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. NationsBanc subsequently resold the shares they purchased to Qualified Institutional Buyers (as defined in Rule 144A under the Securities Act) in reliance upon the exemption from registration requirements provided by Rule 144A under the Securities Act and to a limited number of "accredited investors" (as defined in Rule 501 under the Securities Act) in reliance upon the exemptions from registration provided by Sections 4(1) and 4(2) under the Securities Act. The aggregate proceeds to BCP from such offering and the aggregate initial purchaser's discount were $16,895,968 and $1,174,904, respectively. ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability result from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter contains such a provision which eliminates such liability to the maximum extent permitted by the MGCL. The Charter authorizes BCP, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer or (b) any individual who, while a director of BCP and at the request of BCP serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her status as a present or former director or officer of BCP. The Bylaws obligate BCP, to the maximum extent permitted by Maryland law, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director of BCP and at the request of BCP, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. The Charter and Bylaws also permit BCP to indemnify and advance expenses to any person who served a predecessor of BCP in any of the capacities described above. Under the Bylaws, if a claim for indemnification or advancement of expenses by a director or officer is not paid in II-2 full by BCP within (a) 60 days after the receipt by BCP of a written claim for indemnification or (b) in the case of a director, 10 days after the receipt by BCP of documentation of expenses and the required undertaking, such director or officer may at any time thereafter bring suit against BCP to recover the unpaid amount of the claim, and if successful in whole or in part, such director or officer is also entitled to be paid the expenses of prosecuting such claim. The Bylaws permit BCP to maintain (and it does maintain) insurance, at its expense, to protect itself and any director, officer, or non-officer employee against any liability of any character asserted against or incurred by BCP or any such director, officer, or non-officer employee, or arising out of any such person's corporate status, whether or not BCP would have the power to indemnify such person against such liability under the MGCL or the Bylaws. The MGCL requires a corporation (unless its charter provides otherwise, which the Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which his is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, whether or not received in the director's or officer's official capacity, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (a) a written affirmation by the director or officer of his good belief that he has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling BCP pursuant to the foregoing provisions, BCP has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. BCP has entered into indemnification agreements with each of its directors and senior officers. The indemnification agreements require, among other matters, that BCP indemnify its directors and officers, as well as their spouses and children, to the fullest extent permitted by Maryland law and advance to the directors and officers all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. Under these agreements, BCP must also indemnify and advance all expenses incurred by directors and officers seeking to enforce their rights under the indemnification agreements or recovery under any directors' and officers' liability insurance policies maintained by BCP.. BCP is not required to indemnify the director or officer for amounts paid or to be paid in settlement unless such settlement is approved in advance by BCP. The agreements also require BCP to provide to the directors or officers the maximum amount of directors' and officers' liability insurance available under any insurance policy or policies maintained by BCP, and to continue such coverage for seven years after the directors or officers no longer serve as directors or officers of BCP for events occurring during their service with BCP. Under Section 8 of the Purchase Agreement filed as Exhibit 1.1 hereto, the Initial Purchaser has agreed to indemnify, under certain conditions, BCP, its directors, officers, employees and persons who control BCP within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against certain losses, claims, damages, liabilities or expenses. II-3 ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED. Not applicable. ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS (a) The following financial statements are being filed as part of this Registration Statement: Pro Forma Financial Information Beacon Capital Partners, Inc. Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1998 Notes to Pro Forma Condensed Consolidated Balance Sheet Pro Forma Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and the Year Ended December 31, 1997 Notes to Pro Forma Condensed Consolidated Statements of Operations Historical Financial Information: Beacon Capital Partners, Inc. Report of Independent Auditors Consolidated Balance Sheet as of March 31, 1998 Consolidated Statement of Operations from January 21, 1998 (Inception) to March 31, 1998 Consolidated Statement of Stockholders' Equity from January 21, 1998 (Inception) to March 31, 1998 Consolidated Statement of Cash Flows from January 21, 1998 (Inception) to March 31, 1998 Notes to Consolidated Financial Statements Consolidated Balance Sheet as of September 30, 1998 (Unaudited) Consolidated Statements of Operations from April 1, 1998 to September 30, 1998 (Unaudited) and January 21, 1998 (Inception) to September 30, 1998 (Unaudited) Consolidated Statement of Stockholders' Equity from January 21, 1998 (Inception) to September 30, 1998 (Unaudited) Consolidated Statement of Cash Flows from January 21, 1998 (Inception) to September 30, 1998 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) Beacon/PW Kendall LLC Consolidated Balance Sheet as of September 30, 1998 (Unaudited) Consolidated Statement of Operations from April 16, 1998 (Inception) to September 30, 1998 (Unaudited) Consolidated Statement of Members' Capital from April 16, 1998 (Inception) to September 30, 1998 (Unaudited) Consolidated Statement of Cash Flows from April 16, 1998 (Inception) to September 30, 1998 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) The Athenaeum Portfolio Report of Independent Auditors Combined Historical Summary of Gross Income and Direct Operating Expenses for the period January 1, 1998 to April 30, 1998 (Unaudited) and the Year Ended December 31, 1997 Notes to Combined Historical Summary of Gross Income and Direct Operating Expenses Technology Square and The Draper Building Report of Independent Auditors
II-4 Historical Summary of Gross Income and Direct Operating Expenses for the period January 1, 1998 to June 23, 1998 (Unaudited) and the Year Ended December 31, 1997 Notes to Historical Summary of Gross Income and Direct Operating Expenses The Bruenig Portfolio (referred to elsewhere herein as the Dallas Office and Industrial Portfolio) Report of Independent Auditors Combined Historical Summary of Gross Income and Direct Operating Expenses for the Six Months ended June 30, 1998 (Unaudited) and the Year Ended December 31, 1997 Notes to Combined Historical Summary of Gross Income and Direct Operating Expenses
(b) Exhibits. The following is a complete list of Exhibits filed or incorporated by reference as part of this Registration Statement. 1.1 Placement Agent Agreement between NationsBanc Montgomery Securities LLC and the Company, as amended.(1) 2.1 Agreement and Plan of Merger by and between the Predecessor and the Company.(1) 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) 4.1 Specimen certificate for shares of Common Stock, $.01 par value, of the Company.(1) 5.1 Opinion of Goodwin, Procter & Hoar LLP as to the validity of the securities being offered.(3) 8.1 Opinion of Goodwin, Procter & Hoar LLP as to certain tax matters.(4) 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) 21.1 Subsidiaries of the Registrant.(4) 23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1).(3) 23.2 Consent of Ernst & Young LLP.
II-5 24. Power of Attorney.(1)
- ------------------------ (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 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. (3) Previously filed as an exhibit to Amendment No. 2 to the Company's Registration Statement on Form S-11 (SEC File No. 333-56937) filed with the Commission on September 22, 1998. (4) Previously filed as an exhibit to Amendment No. 3 to the Company's Registration Statement on Form S-11 (SEC File No. 333-56937) filed with the Commission on October 16, 1998. ITEM 37. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To file during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Boston, Massachusetts, on December 28, 1998. BEACON CAPITAL PARTNERS, INC. By: /s/ LIONEL P. FORTIN --------------------------------------------- Lionel P. Fortin PRESIDENT AND CHIEF OPERATING OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------- ------------------------------------------ ---------------------- * Chairman of the Board and Chief December 28, 1998 --------------------------------- Executive Officer and Alan M. Leventhal Director (Principal Executive Officer) /s/ LIONEL P. FORTIN President, Chief Operating Officer December 28, 1998 --------------------------------- and Director Lionel P. Fortin * Senior Vice President and Chief December 28, 1998 --------------------------------- Financial Officer (Principal Financial Randy J. Parker and Accounting Officer) * Director December 28, 1998 --------------------------------- Stephen T. Clark * Director December 28, 1998 --------------------------------- Steven Shulman * Director December 28, 1998 --------------------------------- Scott M. Sperling
*By: /s/ LIONEL P. FORTIN --------------------------------- Lionel P. Fortin, ATTORNEY-IN-FACT
II-7 EXHIBIT INDEX 1.1 Placement Agent Agreement between NationsBanc Montgomery Securities LLC and the Company, as amended(1) 2.1 Agreement and Plan of Merger by and between the Predecessor and the Company.(1) 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) 4.1 Specimen certificate for shares of Common Stock, $.01 par value, of the Company.(1) 5.1 Opinion of Goodwin, Procter & Hoar LLP as to the validity of the securities being offered.(3) 8.1 Opinion of Goodwin, Procter & Hoar LLP as to certain tax matters.(4) 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) 21.1 Subsidiaries of the Registrant.(4) 23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1).(3) 23.2 Consent of Ernst & Young LLP. 24. Power of Attorney.(1)
- ------------------------ (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 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. (3) Previously filed as an exhibit to Amendment No. 2 to the Company's Registration Statement on Form S-11 (SEC File No. 333-56937) filed with the Commission on September 22, 1998. (4) Previously filed as an exhibit to Amendment No. 3 to the Company's Registration Statement on Form S-11 (SEC File No. 333-56937) filed with the Commission on October 16, 1998. EX-23.1 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of (i) our report dated June 3, 1998, with respect to the consolidated financial statements of Beacon Capital Partners, Inc., (ii) our report dated May 22, 1998, with respect to the combined historical summary of gross income and direct operating expenses of The Athenaeum Portfolio, (iii) our report dated May 22, 1998, with respect to the historical summary of gross income and direct operating expenses of Technology Square and The Draper Building, and (iv) our report dated July 1, 1998, with respect to the historical summary of gross income and direct operating expenses of The Breunig Portfolio, all included in post-effective amendment No. 1 to the Registration Statement (Form S-11) and related Prospectus of Beacon Capital Partners, Inc. for the registration of 20,394,843 shares of its common stock. /s/ ERNST & YOUNG LLP Boston, Massachusetts December 23, 1998 -----END PRIVACY-ENHANCED MESSAGE-----