-----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, CxeWC9KUpf6AJoI9DF85YlwmWPbYFgG8ajWA5V/lfGxfIvM2zbqqywfU7lcQ4Xta JemSl4uqXVa4kwbwZI8iFw== 0000950168-96-001000.txt : 19960604 0000950168-96-001000.hdr.sgml : 19960604 ACCESSION NUMBER: 0000950168-96-001000 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960603 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGHWOODS PROPERTIES INC CENTRAL INDEX KEY: 0000921082 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561871668 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13100 FILM NUMBER: 96576264 BUSINESS ADDRESS: STREET 1: 3100 SMOKETREE COURT STREET 2: STE 600 CITY: RALEIGH STATE: NC ZIP: 27604 BUSINESS PHONE: 9198724924 MAIL ADDRESS: STREET 1: 3100 SMOKETREE COURT STREET 2: STE 700 CITY: RALEIGH STATE: NC ZIP: 27604 10-K/A 1 HIGHWOODS 10-K/A 43757.1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [(check mark)] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-13100 HIGHWOODS PROPERTIES, INC. (Exact name of registrant as specified in its charter) Maryland 56-1871668 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
3100 Smoketree Court, Suite 600 Raleigh, N.C. 27604 (Address of principal executive offices) (Zip Code) 919-872-4924 (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the Act:
Name of Each Exchange on Title of Each Class Which Registered Common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (Check Mark) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. (Check Mark) The aggregate market value of the shares of common stock held by non-affiliates (based upon the closing sale price on the New York Stock Exchange) on March 1, 1996 was approximately $582,229,230. As of March 1, 1996, there were 19,407,641 shares of common stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement in connection with its Annual Meeting of Shareholders to be held April 30, 1996 are incorporated by reference in Part III Items 10, 11, 12 and 13. HIGHWOODS PROPERTIES, INC. TABLE OF CONTENTS
Item No. FINANCIAL INFORMATION Page No. PART I 1. Business................................................................................ 3 2. Properties.............................................................................. 9 3. Legal Proceedings....................................................................... 20 4. Submission of Matters to a Vote of Security Holders..................................... 20 X. Executive Officers of the Registrant.................................................... 20 PART II 5. Market for Registrant's Common Shares and Related Stockholder Matters................... 22 6. Selected Financial Data................................................................. 22 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 24 8. Financial Statements and Supplementary Data............................................. 30 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 30 PART III 10. Directors and Executive Officers of the Registrant...................................... 31 11. Executive Compensation.................................................................. 31 12. Security Ownership of Certain Beneficial Owners and Management.......................... 33 13. Certain Relationships and Related Transactions.......................................... 33 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 35
2 PART I ITEM 1. BUSINESS General Highwoods Properties, Inc. (the "Company") is a self-administered and self-managed real estate investment trust ("REIT") that began operations through a predecessor in 1978. Originally founded to over-see the development, leasing and management of the 201-acre Highwoods Office Center in Raleigh, North Carolina, the Company has since evolved into one of the largest full service real estate companies in the Southeastern United States. Historically, the Company's real estate operations have been focused in the Raleigh-Durham, North Carolina market, an area also known as the Research Triangle, one of the nation's premier business centers. On June 14, 1994, the Company completed an initial public offering of 8,510,000 shares of Common Stock in connection with the reorganization of the Company's predecessor, whereby the Company succeeded to the ownership of 36 suburban office buildings, four service center properties, one warehouse facility and 94 acres of undeveloped land (the "Formation Transaction"). As of December 31, 1995, the Company owned a portfolio of 191 in-service office and industrial properties (the "Properties") and 203 acres of undeveloped land suitable for future development (the "Development Land"). The Properties consist of 87 suburban office properties and 104 industrial properties (including 68 service centers) located in Raleigh-Durham, Winston-Salem, Greensboro and Charlotte, North Carolina and Richmond, Virginia. The Company currently conducts all of its business and owns all of its assets through Highwoods/Forsyth Limited Partnership (the "Operating Partnership") and its subsidiaries. The Company is the sole general partner and also a limited partner of the Operating Partnership and currently holds approximately 84% of the partnership interests ("Units"). The Company currently provides management services for 23 properties owned by third parties, comprising approximately 847,000 square feet, and exclusive leasing services with respect to 29 third-party-owned properties, comprising approximately 1.7 million square feet. The Company conducts its third-party fee-based services through two subsidiaries, Highwoods Services, Inc. and Forsyth Properties Services, Inc. (the "Service Companies"), as well as through Forsyth-Carter Brokerage of North Carolina, L.L.C., a joint venture with Carter-Oncor International. The Company's executive offices are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604, and its telephone number is (919) 872-4924. The Company also maintains divisional offices at 380 Knollwood, Suite 430, Winston-Salem, North Carolina 27103, telephone number (910) 631-9000 and 4405 Cox Road, Suite 220, Glen Allen, Virginia 23060, telephone number (804) 747-7800. Business Objectives and Strategy of the Company The Company seeks to maximize the total return to its stockholders (i) through contractual increases in rental rates from existing leases, (ii) by renewing or re-leasing space with expiring leases at higher effective rental rates, (iii) by increasing occupancy levels in properties, (iv) by acquiring new properties, (v) by developing new properties, including properties on the Development Land, and (vi) by providing a complete line of real estate services to the Company's tenants and to third parties. The Company believes that its in-house development, acquisition, construction management, leasing, brokerage and management services allow it to respond to many demands of its existing and potential tenant base, and enable it to provide its tenants cost-effective services such as build-to-suit construction and space modification, including tenant improvements and expansions. In addition, the breadth of the Company's capabilities and resources, particularly its in-house leasing and third-party brokerage services, provides it with market information not generally available and gives the Company increased access to development, acquisition and management opportunities. The Company believes that the operating efficiencies achieved through its fully integrated organization also provide a competitive advantage in setting its lease rates and pricing its other services. The Company's strategy is to focus its real estate activities in markets where it believes its extensive local knowledge gives it a competitive advantage over other real estate developers and operators with less local experience, particularly with regard to site selection, market information and clients. Through its 1995 business combinations with Forsyth Properties, Inc. and Ross-Kreckman Management Corporation, the Company was able to diversify its portfolio to include industrial properties and to expand its geographic 3 focus beyond the Raleigh-Durham market to include Winston-Salem/Greensboro and the Richmond, Virginia markets, while maintaining its localized approach to real estate. The Company continued to diversify its portfolio with its acquisitions in Charlotte, North Carolina. See "Recent Developments." In addition, the Company has recently entered into a letter of intent to purchase a significant portfolio in Nashville, Tennessee. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's executive officers have an average of approximately 18 years of experience in the real estate industry almost exclusively in their local markets. The Company seeks to acquire suburban office and industrial properties at prices below replacement cost that offer attractive returns, including acquisitions of underperforming, high-quality assets in situations offering opportunities for the Company to improve such assets' operating performance. In evaluating potential acquisition opportunities, the Company will continue to rely on the extensive experience of its management and its research capabilities in considering a number of factors, including: (i) whether the property is strategically located, (ii) the construction quality and condition of the property, (iii) the occupancy and demand of properties of a similar type in the market and (iv) whether the property is able to generate returns at or above levels of expected growth and appreciation in the property's value. (See "Recent Developments" for a discussion of the Company's acquisition and development activities during 1995.) The Company also believes that its 203 acres of development land should provide it with a competitive advantage in its future development activities. The Company may from time to time acquire properties from property owners through the exchange of Units in the Operating Partnership for the property owner's equity in the acquired property. The Units received by these property owners would be exchangeable into shares of Common Stock of the Company under certain circumstances. In connection with the transactions, the Company may also assume outstanding indebtedness associated with the acquired properties. The Company believes that this acquisition method may permit the Company to acquire properties at attractive prices from property owners wishing to enter into tax-deferred transactions. Using the foregoing structure, the Company has acquired 87 properties since its inception, comprising 4.9 million rentable square feet. The acquisitions include the Forsyth, Research Commons, and Hock properties, and a portion of the properties in the Bissell portfolio and the Richmond expansion. See "Recent Developments." The Company will also selectively seek opportunities for fee-producing development, management and brokerage business with third-party owners through the Service Companies and Forsyth-Carter Brokerage. The Company is also committed to maintaining a capital structure that will allow it to grow through development and acquisition opportunities. As part of this commitment, the Company intends to operate with a ratio of debt to total market capitalization below 40%. At March 1, 1996, the ratio of debt to total market capitalization (based on a Common Stock price of $30 per share) is approximately 21%. The Company believes that as a result of this debt level it should be able to borrow funds at attractive rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 4 Recent Developments Merger and Acquisition Activity The following table summarizes the mergers and acquisitions completed during the year ended December 31, 1995 (dollars in thousands):
Number of Rentable Initial Property Location Properties Square Feet Cost Forsyth Transaction Piedmont Triad/Charlotte 57 3,630,565 $ 169,900 Richmond Expansion Richmond 10 362,844 28,700 Research Commons Research Triangle 6 539,310 60,000 Creekstone Crossing Research Triangle 1 59,299 4,500 Bissell Portfolio Piedmont Triad/Charlotte 56 920,283 36,900 Hock Portfolio Research Triangle 5 274,604 21,200 Six Forks I & II Research Triangle 2 89,470 8,800 Cotton Research Triangle 1 40,035 2,400 Parkway Plaza Charlotte 6 440,134 37,500 Total 144 6,356,544 $ 369,900
A significant portion of the Company's growth during 1995 resulted from its expansion into new markets. The Company entered three new markets and established two divisional offices as a result of the Forsyth Transaction and the Richmond Expansion (both transactions defined below). Forsyth Transaction On February 23, 1995, the Company consummated a transaction with Forsyth Properties, Inc. and its affiliates (collectively, "Forsyth"), pursuant to which the Company and Forsyth combined their respective property portfolios, management teams and business operations (the "Forsyth Transaction"). As part of the Forsyth Transaction, the Company succeeded to the ownership of an additional 20 suburban office properties, 37 industrial properties and approximately 76 acres of development land located primarily in Winston-Salem and Greensboro, North Carolina, an area known as the Piedmont Triad. The Forsyth-owned properties totaled approximately 3.6 million square feet. As consideration for the Forsyth Transaction, the Company assumed approximately $122.8 million of indebtedness, paid approximately $6.0 million in cash to certain non-continuing investors, and issued 904,478 Units in the Operating Partnership to certain executive officers of Forsyth and certain holders of direct or indirect interests in the Forsyth properties. In connection with the Forsyth Transaction, the Company completed a second public offering of 5,640,000 shares of Common Stock at $20.75 per share. Richmond Expansion On July 12, 1995, the Company acquired two suburban office properties located in Innsbrook Office Center in Richmond, Virginia. The properties, encompassing 97,672 rentable square feet, were purchased for the aggregate purchase price of $8.3 million. The purchase price was paid through the assumption of $7.9 million of indebtedness and cash of $0.4 million. On September 1, 1995, the Company established a Richmond office upon the completion of its acquisition of the Ross-Kreckman Management Corporation. Furthermore, on September 20, 1995, and October 10, 1995, the Company completed the acquisition of six suburban office properties and two service center properties encompassing 265,172 square feet in the Innsbrook Office Center in Richmond, Virginia. The purchase price for the properties totaled approximately $20.4 million and was funded through the assumption of $5.7 million of indebtedness, the issuance of 40,319 Units and the payment of $13.7 million in cash. The Company has entered into a contract with the original developer of the Innsbrook Office Center to acquire 64 acres of development land in the park at a fixed price of $10.2 million. In January, 1996, the Company acquired the first 10 acres of this land for an aggregate purchase price of $1.8 million in cash. The Company will acquire the remaining 54 acres over a five-year period commencing with the closing date. 5 The consolidated transaction described above (the "Richmond Expansion") encompasses 362,844 square feet and 64 acres of development land in eight suburban office and two service center properties. The total cost, excluding the 64 acres of development land, was $28.7 million. Research Commons On February 10, 1995, the Company acquired six suburban office buildings located within the confines of Research Triangle Park from the Research Commons Group. The buildings are situated in an office park known as Research Commons, contain approximately 538,000 rentable square feet. The Company also acquired all of the Research Commons office park, which contains approximately 60 acres of land, 10 of which is undeveloped but zoned for office and other commercial development. As consideration for the Research Commons Acquisition, the Company assumed approximately $26.2 million of indebtedness owed to a financial institution, assumed a $5.0 million promissory note to Beaunit, an affiliate of certain members of the Research Commons Group, and issued 1,390,179 Units in the Operating Partnership to the Research Commons Group. In the event the buildings at Research Commons meet certain operating results in the future, the Company agreed to issue to the Research Commons Group up to an additional 40,000 Units. The Company agreed to allow the current property manager of Research Commons, Practical Management Inc., to continue to manage the properties following consummation of the acquisition. The Company however, has the right to terminate such arrangement upon 180 days notice. Creekstone Crossing On May 25, 1995, the Company acquired Creekstone Crossings, a 59,000-square foot service center property adjacent to the Research Triangle Park in Raleigh-Durham, North Carolina. Creekstone Crossings is located in the Company-owned Creekstone Park development, which includes the Riverbirch building and 22 acres of development land. The aggregate purchase price of $4.5 million was paid through the issuance of 4,640 Units and the assumption of approximately $4.4 million of indebtedness, which was repaid at closing from a draw under the Company's credit facility. Certain directors and officers of the Company owned an interest in Creekstone Crossings. Bissell Portfolio On July 12, 1995, the Company acquired a 914,000-square foot industrial and service center portfolio consisting of 47 buildings located in Greensboro and nine buildings located in Charlotte, North Carolina (the "Bissell Portfolio"). As part of the acquisition, the Company initially acquired six acres of development land and will acquire 20 additional acres over a five-year period. The aggregate purchase price of approximately $38.7 million was paid through the issuance of 81,716 Units, the assumption of $6.7 million of indebtedness, the payment of $28.3 million in cash and a deferred payment of $1.6 million. The $28.3 million cash payment was financed with a $12.3 million first mortgage loan and a $16.0 million draw under the Company's credit facility. The deferred payment will be payable in installments as the balance of the 20 acres of development land are placed in service or five years from the closing, whichever occurs first. The Bissell Portfolio contains 167,000 square feet of warehouse space and 747,000 square feet of service center space. Hock Portfolio On July 20, 1995, the Company acquired a 275,000-square foot, five-building, suburban office complex located in Durham, North Carolina (the "Hock Portfolio").The aggregate purchase price of approximately $21.6 million was paid through the issuance of 183,000 Units and the assumption of approximately $17.0 million of indebtedness, which was repaid at closing through a draw under the Company's credit facility. As part of the transaction, the Company was granted certain development rights with respect to approximately 78 acres of development land adjacent to the Hock Portfolio. Six Forks I & II On November 23, 1995, the Company closed on the acquisition of two suburban office properties (Six Forks I and II) encompassing 89,000 square feet. The properties are located adjacent to the Company's Six Forks Center III property. As consideration for the purchase, the Company paid $8.8 million in cash. 6 Cotton Building On December 5, 1995, the Company closed the 40,000 square-foot Cotton Building for $2.3 million. The purchase price was funded through the issuance of 23,466 Units and the assumption of $1.7 million of indebtedness, which was repaid simultaneously at closing. Parkway Plaza On December 19, 1995, the Company completed a $37.5 million acquisition of Parkway Plaza located in Charlotte, North Carolina. The portfolio consists of 330,000 square feet of office space in four buildings and 110,000 square feet of industrial space in a single building and is located in the I-77 Southwest Charlotte submarket. The 110,000-square foot industrial property is 32% finished office space. The purchase price was comprised of $32.6 million in cash and the assumption of a $4.9 million, 9.75% mortgage with a maturity date of February 1, 1998. The buildings are situated on 40.2 acres. Of these 40.2 acres, 23.6 are on a ground lease which expires in 2082 and includes a purchase option allowing the Company to acquire the land at any time at 85% of the appraised value. Development Activity The following table summarizes the three development projects placed in service during the year ended December 31, 1995 (dollars in thousands):
Number of Rentable Initial Property Location Properties Square Feet Cost Rexwoods IV Research Triangle 1 42,003 $ 4,300 Willow Oak Research Triangle 1 88,783 8,100 West Point 5 Piedmont Triad 1 25,200 1,200 Total or Average 3 155,986 $13,600
The Company has six suburban office properties and one industrial property under development totaling 718,300 square feet of office and industrial space. The following table summarizes these development projects in process as of December 31, 1995 (dollars in thousands):
Estimated Rentable Budgeted Percent Completion Office Properties Location Square Feet Cost Preleased Date Hewlett-Packard Piedmont Triad 18,000 $ 1,000 77% 1Q96 Global Software Research Triangle 92,700 7,500 76 1Q96 MSA Research Triangle 57,000 5,500 100 4Q96 Healthsource Research Triangle 180,000 15,300 100 4Q96 Shockoe Plaza Richmond 117,000 15,100 85 4Q96 Innsbrook Richmond 126,000 12,500 0 4Q96 Total or Weighted Average 590,700 $56,900 71% Industrial Property Regency One Piedmont Triad 127,600 3,500 100% 1Q96 Total or Weighted Averager 718,300 $60,400 76%
Financing Activity During the quarter ended March 31, 1995, the Company completed a 5,640,000 share public offering of Common Stock (including 640,000 shares issued pursuant to the underwriters' over allotment option, the "Second Offering"). The net proceeds of the offering totaled $109.8 million and were used primarily to retire indebtedness assumed in connection with the Forsyth Transaction. Also during the quarter ended March 31, 1995, the Company received the proceeds from a $41 million, 20-year fixed rate (8.97%) mortgage loan. After 10 years the loan provides for a rate reset, with each party 7 having the option at that time to put or call the loan, as the case may be. The proceeds from the loan were used, together with the offering proceeds discussed above, to fund the Forsyth Transaction. During the quarter ended September 30, 1995, the Company completed a 4,774,989 share public offering of Common Stock (including 574,989 shares issued pursuant to the underwriter's over allotment option, the "Third Offering"). The net proceeds of the offering totaled $110.0 million and were used primarily to retire amounts outstanding under the Company's credit facility, to fund the Richmond Expansion, to fund the cost of the Company's various development projects and to provide working capital. Also, during the quarter ended September 30, 1995, the Company received the proceeds from a $32 million, 20-year fixed rate (8.15%) mortgage loan. After 10 years the loan provides for a rate reset and a put/call option (as described above). The proceeds from the loan were used to fund property acquisitions made during the quarter. In connection with the acquisition of the Bissell Portfolio, the Company entered into a $12.2 million, 15-year variable rate (1.35% over 30 days LIBOR) mortgage loan with a put/call option at the end of years five and ten. In connection with the Company's 1995 acquisitions, the Company assumed 13 loans with an aggregate outstanding balance on the closing dates of $72.5 million and issued 2,676,000 Units valued at $57.3 million. The Company has received a commitment from three commercial banks providing for a $140.0 million unsecured credit facility. The unsecured credit facility, which is expected to close March 31, 1996 subject to completion of final documentation, will replace the current $80.0 million secured credit facility and will have a maturity date of June 14, 1999. Competition The Properties compete for tenants with similar properties located in the Company's markets primarily on the basis of location, rent charged, services provided and the design and condition of the improvements. The Company also competes with other REITs, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire properties. Employees As of December 31, 1995, the Company employed 124 persons, as compared to 43 at December 31, 1994. The increase is primarily a result of the Company's expansion into the Piedmont Triad and Richmond markets. 8 ITEM 2. PROPERTIES General The following table sets forth certain information with respect to the Company's properties at December 31, 1995:
Office Properties Industrial Properties Total Number of Rentable Number of Rentable Number of Rentable In-Service: Properties Square Feet Properties Square Feet Properties Square Feet Research Triangle......................... 53 3,186,643 6 515,387 59 3,702,030 Piedmont Triad............................ 20 1,056,629 78 3,095,604 98 4,152,233 Charlotte................................. 6 387,348 17 491,652 23 879,000 Richmond.................................. 8 290,750 3 191,158 11 481,908 Total................................... 87 4,921,370 104 4,293,801 191 9,215,171 Under Development: Research Triangle......................... 3 329,700 -- -- 3 329,700 Piedmont Triad............................ 1 18,000 1 127,600 2 145,600 Charlotte................................. -- -- -- -- -- -- Richmond.................................. 2 243,000 -- -- 2 243,000 Total................................... 6 590,700 1 127,600 7 718,300 Total: Research Triangle......................... 56 3,516,343 6 515,387 62 4,031,730 Piedmont Triad............................ 21 1,074,629 79 3,223,204 100 4,297,833 Charlotte................................. 6 387,348 17 491,652 23 879,000 Richmond.................................. 10 533,750 3 191,158 13 724,908 Total................................... 93 5,512,070 105 4,421,401 198 9,933,471
Occupancy Rate of In-Service Properties Office Industrial Weighted Properties Properties Average Research Triangle........................................................... 95% 89% 94% Piedmont Triad.............................................................. 95 92 93 Charlotte................................................................... 93 87 90 Richmond.................................................................... 98 91 95 Weighted average.......................................................... 95% 91% 93%
9 Tenants The Properties are leased to approximately 950 tenants, which engage in a wide variety of businesses including computers, healthcare, telecommunications, finance, insurance and electronics. The following table sets forth information concerning the 20 largest tenants of the Properties as of December 31, 1995:
Percent of Total Annualized Number Annualized Rental Tenant of Leases Rental Revenue (1) Revenue 1. Federal Government Environmental Protection Agency........................... 4 $ 4,482,619 5.1% U.S. Army and Marine Corps................................ 2 243,473 0.2 National Institute of Health Sciences..................... 1 165,394 0.2 Other..................................................... 2 77,427 0.1 Total.................................................. 9 $ 4,968,913 5.6% 2. IBM Corporation............................................. 3 3,549,603 4.0 3. First Citizens Bank & Trust................................. 7 2,766,733 3.1 4. Duke University............................................. 5 1,378,797 1.5 5. Sears, Roebuck & Company.................................... 4 1,364,841 1.5 6. Volvo....................................................... 3 1,342,728 1.5 7. Clintrials of North Carolina................................ 4 1,294,525 1.5 8. Virginia State Government................................... 2 1,194,000 1.3 9. Glaxo Wellcome.............................................. 3 1,193,100 1.3 10. Kaiser Foundation Health Plan............................... 3 1,082,798 1.2 11. Martin Marietta............................................. 5 1,077,163 1.2 12. Southern National Bank...................................... 2 1,071,889 1.2 13. EDS......................................................... 2 1,071,674 1.2 14. CompuChem Corporation (2)................................... 1 1,023,738 1.2 15. Maupin Taylor Ellis & Adams................................. 1 948,185 1.1 16. AT&T........................................................ 5 944,742 1.1 17. Qualex...................................................... 3 867,038 1.0 18. Broadband Technologies...................................... 1 849,968 1.0 19. Ericsson, Inc............................................... 3 848,673 1.0 20. Norwest Mortgage............................................ 1 831,563 0.9 Total....................................................... 67 $ 29,670,671 33.4%
(1) Calculated by multiplying December 1995 rental revenue (base rent plus operating pass throughs) times 12. (2) CompuChem Corporation lease expires May 31, 1996. 10 The following tables set forth certain information about the Company's leasing activities for the year ended December 31, 1995 and for the period from June 14, 1994 to December 31, 1994.
1995 1994 Office Industrial Office Industrial Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases)............. 145 97 52 1 Rentable square footage leased........................... 655,546 586,748 111,379 25,600 Average per rentable square foot over the lease term: Base rent.............................................. $ 15.39 $ 5.54 $ 15.94 $ 6.77 Tenant improvements.................................... (0.29) (0.06) (0.96) (0.14) Leasing commissions.................................... (0.31) (0.12) (0.39) (0.06) Rent concessions....................................... (0.01) -- (0.14) -- Effective rent......................................... $ 14.78 $ 5.36 $ 14.45 $ 6.57 Expense stop........................................... (4.36) (0.32) (4.28) -- Equivalent effective net rent.......................... $ 10.42 $ 5.04 $ 10.17 $ 6.57 Average term in years.................................... 4 3 4 5 Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases............ $1,604,591 $ 115,097 $536,946 $ 17,920 Rentable square feet................................... 655,546 586,748 111,379 25,600 Per rentable square foot............................... $ 2.45 $ 0.20 $ 4.82 $ 0.70 Leasing Commissions: Total dollars committed under signed leases............ $ 770,614 $ 169,929 $189,167 $ 7,680 Rentable square feet................................... 655,546 586,748 111,379 25,600 Per rentable square foot............................... $ 1.18 $ 0.29 $ 1.70 $ 0.30 Total: Total dollars committed under signed leases............ $2,375,205 $ 285,026 $726,113 $ 25,600 Rentable square feet................................... 655,546 586,748 111,379 25,600 Per rentable square foot............................... $ 3.62 $ 0.49 $ 6.52 $ 1.00 Re-leased Space Activity: Number of leases commenced during period................. 141 68 33 -- Rentable square feet..................................... 377,340 397,052 63,268 -- Average final rate with expense pass throughs............ $ 14.63 $ 5.41 $ 15.03 -- Average first year cash rental rate...................... $ 15.12 $ 6.02 $ 15.22 -- Percentage increase...................................... 3.35% 11.28% 1.3% --
11 The following tables set forth scheduled lease expirations for executed leases as of December 31, 1995, assuming no tenant exercises renewal options. Office Properties:
Average Annual Total Percentage of Annual Rents Rental Rate Per Percentage of Rentable Leased Square Footage Under Square Leased Rents Year of Lease Number of Square Feet Represented by Expiring Foot for Represented by Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Expiring Leases 1996 164 539,214 11.3% $ 7,379,537 $ 13.69 10.7% 1997 136 778,416 16.4 10,980,414 14.11 15.9 1998 116 798,789 16.8 11,554,107 14.46 16.7 1999 71 458,142 9.6 6,679,161 14.58 9.6 2000 98 686,510 14.4 9,882,161 14.39 14.3 2001 30 764,025 16.0 11,103,977 14.53 16.1 2002 16 253,829 5.3 4,189,429 16.50 6.0 2003 10 350,877 7.4 5,589,183 15.93 8.1 2004 6 71,182 1.5 972,833 13.67 1.4 2005 5 61,927 1.3 821,394 13.26 1.2 Thereafter -- -- -- -- -- -- Total or average 652 4,762,911 100.0% $69,152,196 $ 14.52 100.0%
Industrial Properties:
Average Annual Total Percentage of Annual Rents Rental Rate Per Percentage of Rentable Leased Square Footage Under Square Leased Rents Year of Lease Number of Square Feet Represented by Expiring Foot for Represented by Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Expiring Leases 1996 202 1,673,969 44.4% $ 7,245,030 $ 4.33 36.6% 1997 81 533,990 14.2 2,732,089 5.12 13.8 1998 81 497,015 13.2 3,775,415 7.60 19.1 1999 31 282,453 7.5 1,950,285 6.90 9.8 2000 33 441,497 11.7 2,540,394 5.75 12.8 2001 6 46,809 1.2 416,299 8.89 2.1 2002 3 259,710 6.9 802,403 3.09 4.1 2003 2 5,875 0.1 54,071 9.20 0.3 2004 1 4,399 0.1 46,981 10.68 0.2 2005 5 27,082 0.7 242,289 8.95 1.2 Thereafter -- -- -- -- -- -- Total or average 445 3,772,799 100.0% $19,805,256 $ 5.25 100.0%
(1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. 12 Table of Properties The following table and the notes thereto set forth information regarding the Properties:
Percent Ceiling/ Rentable Occupied at Percent Clear Building Year Square December 31, Office Height Property Type (1) Built Feet 1995 (2) Finish (Feet) Research Triangle Properties Highwoods Office Center Amica O 1983 20,708 100% 100% 8 Arrowood O 1979 58,743 100 100 8 Aspen O 1980 36,666 95 100 8 Birchwood O 1983 12,748 100 100 8 Cedar East O 1981 39,904 98 100 8 Cedar West O 1981 39,903 81 100 8 Cottonwood O 1983 40,150 100 100 8 Cypress O 1980 39,004 100 100 8 Dogwood O 1983 40,613 100 100 8 Hawthorn O 1987 63,797 100 100 9-12 Highwoods Tower O 1991 185,222 99 100 9 Holly O 1984 20,186 100 100 8 Ironwood O 1978 35,695 92 100 8 Kaiser O 1988 56,915 100 100 9 Laurel O 1982 39,382 100 100 9 Leatherwood O 1979 36,581 99 100 8 Smoketree Tower O 1984 151,703 72 100 9 Rexwoods Office Center 2500 Blue Ridge O 1982 61,864 100 100 8 Blue Ridge II O 1988 20,673 100 100 8 Rexwoods Center O 1990 41,686 100 100 9 Rexwoods II O 1993 20,845 100 100 9 Rexwoods III O 1992 42,484 100 100 9 Rexwoods IV O 1995 42,003 77 100 9 Triangle Business Center Bldg. 2A S 1984 102,400 98 90 18 Bldg. 2B S 1984 32,000 100 50 18 Bldg. 3 S 1988 135,360 84 80 18 Bldg. 7 S 1986 126,728 78 95 12 Progress Center Cape Fear O 1979 40,058 43 100 8 Catawba O 1980 37,456 100 100 8 CompuChem O 1980 105,540 100 100 8 North Park 4800 North Park O 1985 168,016 100 100 9 4900 North Park O 1984 32,002 94 100 9 5000 North Park O 1980 75,395 81 100 9-10 Creekstone Park Creekstone Crossing S 1990 59,299 92 96 12 Riverbirch O 1987 59,971 100 100 8 Willow Oak O 1995 88,783 93 100 9 Research Commons (3) EPA Administration O 1966 46,718 100 100 9 EPA Annex O 1966 145,875 100 50 9 4501 Bldg. O 1985 56,566 100 100 9 4401 Bldg. O 1987 115,526 84 93 9 4301 Bldg. O 1989 90,894 100 27 9 4201 Bldg. O 1991 83,731 100 100 9 Hock Portfolio Fairfield I O 1987 50,540 92 100 9 Fairfield II O 1989 61,064 90 100 9 Qualex O 1985 67,000 100 100 9 4101 Roxboro O 1984 56,000 100 100 9 Tenants Leasing 25% or More of Rentable Square Feet at Property December 31, 1995 Highwoods Office Center Amica Amica Mutual Insurance Company Arrowood First Citizens Bank & Trust Aspen N/A Birchwood Donohoe Construction Company, Southlight, Inc. Cedar East Amerimark Building Products Cedar West N/A Cottonwood First Citizens Bank & Trust Cypress GSA-Army Recruiters Dogwood First Citizens Bank & Trust Hawthorn Carolina Telephone Highwoods Tower Maupin, Taylor, Ellis & Adams Holly Capital Associated Industries Ironwood First Citizens Bank & Trust Kaiser Kaiser Foundation Laurel Microspace Communications, First Citizens Bank & Trust Leatherwood GAB North America, Inc. Smoketree Tower N/A Rexwoods Office Center 2500 Blue Ridge Rex Hospital, Inc. Blue Ridge II McGladrey & Pullen Rexwoods Center N/A Rexwoods II Raleigh Neurology Clinic, Miller Building Corporation Rexwoods III Piedmont Olson Hensley, Inc. Rexwoods IV N/A Triangle Business Center Bldg. 2A Harris Corporation, AAI Systems Management, Inc. Bldg. 2B International Paper Bldg. 3 N/A Bldg. 7 Broadband Technologies, Inc. Progress Center Cape Fear N/A Catawba GSA -- EPA CompuChem CompuChem North Park 4800 North Park IBM-PC Division 4900 North Park N/A 5000 North Park N/A Creekstone Park Creekstone Crossing N/A Riverbirch Digital Equipment Corporation, Quintiles, Inc. Willow Oak AT&T Corporation Research Commons (3) EPA Administration Environmental Protection Agency EPA Annex Environmental Protection Agency 4501 Bldg. Martin Marietta 4401 Bldg. Ericsson 4301 Bldg. Glaxo Wellcome Inc. 4201 Bldg. Environmental Protection Agency Hock Portfolio Fairfield I Reliance Fairfield II Qualex Qualex Qualex 4101 Roxboro Duke -- Cardiology
13
Percent Ceiling/ Rentable Occupied at Percent Clear Building Year Square December 31, Office Height Property Type (1) Built Feet 1995 (2) Finish (Feet) 4020 Roxboro O 1989 40,000 100% 100% 9 Other Research Triangle Properties Colony Corporate Center O 1985 53,324 100 100 8 Concourse O 1986 131,645 96 100 9 Expressway One Warehouse I 1990 59,600 100 5 24 Holiday Inn O 1984 30,000 100 100 10 Lake Plaza East O 1984 71,254 95 100 9 Phoenix O 1990 26,449 91 100 8 Six Forks Center I O 1982 33,867 95 100 9 Six Forks Center II O 1983 55,603 94 100 9 Six Forks Center III O 1987 60,662 99 100 9 South Square I O 1988 56,401 100 100 9 South Square II O 1989 58,793 100 100 9 Cotton Building O 1972 40,035 100 79 8-15 Total or Weighted Average of Research Triangle Properties 3,702,030 94% Tenants Leasing 25% or More of Rentable Square Feet at Property December 31, 1995 4020 Roxboro Duke -- Pediatrics Duke -- Cardiology Other Research Triangle Properties Colony Corporate Center Rust Environmental & Infrastructure, Fujitsu Concourse Clintrials Expressway One Warehouse West's Durham Transfer & Storage Holiday Inn Holiday Inns, Inc. Lake Plaza East N/A Phoenix N/A Six Forks Center I Centura Bank Six Forks Center II N/A Six Forks Center III EDS South Square I Blue Cross and Blue Shield South Square II Coastal Healthcare Group, Inc. Cotton Building Cotton Inc., Associated Insurances Inc. Total or Weighted Average of Research Triangle Properties
Piedmont Triad Properties Airpark East Highland Industries S 1990 12,500 100 48 18 Service Center 1 S 1985 18,575 100 96 14 Service Center 2 S 1985 18,672 100 94 14 Service Center 3 S 1985 16,498 86 97 14 Service Center 4 S 1985 16,500 100 100 14 Copier Consultants S 1990 20,000 100 60 18 Service Court S 1990 12,600 76 100 16 Bldg. 01 O 1990 24,423 100 100 9 Bldg. 02 O 1986 23,827 100 100 9 Bldg. 03 O 1986 23,182 100 100 9 Bldg. A O 1986 56,272 70 100 9 Bldg. B O 1988 54,088 98 100 9 Bldg. C O 1990 134,893 100 100 9 Sears Cenfact O 1989 49,504 100 100 9 Warehouse 1 I 1985 64,000 100 21 21 Warehouse 2 I 1985 64,000 100 48 21 Warehouse 3 I 1986 57,600 100 8 21 Warehouse 4 I 1988 54,000 81 89 21 Airpark North DC-1 I 1986 112,000 100 7 20 DC-2 I 1987 111,905 100 61 20 DC-3 I 1988 75,000 100 5 20 DC-4 I 1988 60,000 100 8 20 Airpark West Airpark I O 1984 60,000 100 100 9 Airpark II O 1985 45,680 100 100 9 Airpark IV O 1985 22,612 100 100 9 Airpark V O 1985 21,923 100 100 9 Airpark VI O 1985 22,097 90 100 9 West Point Business Park BMF Warehouse I 1986 240,000 100 3 32 WP-11 I 1988 89,600 100 8 24 WP-12 I 1988 89,600 100 4 30 WP-13 I 1988 89,600 100 2 20 WP-3 & 4 S 1988 18,059 100 54 15
Airpark East Highland Industries Highland Industries, Inc. Service Center 1 Genetic Design Service Center 2 Genetic Design Service Center 3 ECPI Service Center 4 Genetic Design Copier Consultants Copier Consultants Service Court Genetic Design Bldg. 01 Health & Hygiene Bldg. 02 United States Postal Service Bldg. 03 Time Warner, Martin Marietta Bldg. A N/A Bldg. B Hewlett-Packard Co., United States Postal Service Bldg. C John Hancock Sears Cenfact Sears Roebuck & Company Warehouse 1 Guilford Business Forms, Inc., Safelite Glass Corp. Warehouse 2 Volvo GM Heavy Truck Corp., State Street Bank Realty Warehouse 3 US Air Inc., Garlock, Inc. Warehouse 4 First Data Resources, Inc. Airpark North DC-1 VSA, Inc. DC-2 Sears Roebuck & Co., Summit Pet Products Dist. Inc., Electric South DC-3 Fashions Outlet of America, Inc. DC-4 RSVP Communications, Inc. Airpark West Airpark I Volvo GM Heavy Truck Corp. Airpark II Mohawk Carpet Corporation (4) Airpark IV Max Radio of Greensboro Airpark V NCR Corporation Airpark VI Brookstone College, Anacomp West Point Business Park BMF Warehouse Sara Lee Knit Products, Inc. WP-11 Microfibres WP-12 Norel Plastics, Sara Lee WP-13 Sara Lee Knit Products, Inc. WP-3 & 4 Tri-Communications, Inc., Royso Safety, Inc.
14
Percent Ceiling/ Rentable Occupied at Percent Clear Building Year Square December 31, Office Height Property Type (1) Built Feet 1995 (2) Finish (Feet) WP-5 S 1995 25,200 52% 20% 18 Fairchild Bldg. I 1990 89,000 100 20 30 LUWA Bahnson Bldg. O 1990 27,000 100 100 9 University Commercial Center W-1 I 1983 44,400 100 1 24 W-2 I 1983 46,500 100 7 24 SR-1 S 1983 23,112 100 68 16 SR-2 01/02 S 1983 17,282 100 67 16 SR-3 S 1984 23,825 65 70 16 Bldg. 01/02 O 1983 9,993 40 100 9 Bldg. 03 O 1985 37,077 79 100 9 Bldg. 04 O 1986 34,470 60 100 9 Ivy Distribution Center (5) I 1930- 400,000 55 2 14-16 1980 Knollwood Office Center 370 Knollwood O 1994 90,315 100 100 9 380 Knollwood O 1990 164,141 98 100 9 Stoneleigh Business Park 7327 W. Friendly Ave. S 1987 11,180 100 59 11 7339 W. Friendly Ave. S 1989 11,784 100 59 11 7341 W. Friendly Ave. S 1988 21,048 100 36 12 7343 W. Friendly Ave. S 1988 13,463 100 36 12 7345 W. Friendly Ave. S 1988 12,300 100 36 12 7347 W. Friendly Ave. S 1988 17,978 100 36 12 7349 W. Friendly Ave. S 1988 9,840 100 36 12 7351 W. Friendly Ave. S 1988 19,723 100 36 12 7353 W. Friendly Ave. S 1988 22,826 100 36 12 7355 W. Friendly Ave. S 1988 13,296 100 36 12 Spring Garden Plaza 4000 Spring Garden St. S 1983 21,773 86 69 14 4002 Spring Garden St. S 1983 6,684 100 69 14 4004 Spring Garden St. S 1983 23,724 92 69 14 Pomona Center -- Phase I 7 Dundas Circle S 1986 14,760 91 55 12 8 Dundas Circle S 1986 16,488 100 55 12 9 Dundas Circle S 1986 9,972 100 55 12 Pomona Center -- Phase II 302 Pomona Dr. S 1987 16,488 94 55 12 304 Pomona Dr. S 1987 4,344 100 55 12 306 Pomona Dr. S 1987 9,840 63 55 12 308 Pomona Dr. S 1987 14,184 96 55 12 5 Dundas Circle S 1987 14,184 83 55 12 Westgate on Wendover -- Phase I 305 South Westgate Dr. S 1985 5,760 83 54 12 307 South Westgate Dr. S 1985 12,672 100 54 12 309 South Westgate Dr. S 1985 12,960 100 54 12 311 South Westgate Dr. S 1985 14,400 100 54 12 315 South Westgate Dr. S 1985 10,368 89 54 12 317 South Westgate Dr. S 1985 15,552 98 54 12 319 South Westgate Dr. S 1985 10,368 100 54 12 Westgate on Wendover -- Phase II 206 South Westgate Dr. S 1986 17,376 100 65 12 207 South Westgate Dr. S 1986 26,448 100 65 12 300 South Westgate Dr. S 1986 12,960 100 65 12 4600 Dundas Circle S 1985 11,922 100 65 12 4602 Dundas Circle S 1985 13,017 61 65 12 Radar Road 500 Radar Rd. I 1981 78,000 100 4 21 502 Radar Rd. I 1986 15,000 100 10 18 504 Radar Rd. I 1986 15,000 100 10 18 Tenants Leasing 25% or More of Rentable Square Feet at Property December 31, 1995 WP-5 N/A Fairchild Bldg. Fairchild Industrial Products LUWA Bahnson Bldg. Luwa Bahnson, Inc. University Commercial Center W-1 Lagenthal Corp. W-2 Paper Supply Company SR-1 N/A SR-2 01/02 Decision Point Marketing SR-3 Decision Point Marketing Bldg. 01/02 N/A Bldg. 03 N/A Bldg. 04 N/A Ivy Distribution Center (5) N/A Knollwood Office Center 370 Knollwood Krispy Kreme, Prudential Carolinas Realty 380 Knollwood N/A Stoneleigh Business Park 7327 W. Friendly Ave. American Telecom, Salem Imaging 7339 W. Friendly Ave. IKEA, R.F. Micro Devices 7341 W. Friendly Ave. R.F. Micro Devices 7343 W. Friendly Ave. Executone 7345 W. Friendly Ave. Disston 7347 W. Friendly Ave. Law Engineering, Winship 7349 W. Friendly Ave. N/A 7351 W. Friendly Ave. General Transport, Burlington Air Express 7353 W. Friendly Ave. Office Equipment, Windsor Door 7355 W. Friendly Ave. R.F. Micro Devices Spring Garden Plaza 4000 Spring Garden St. N/A 4002 Spring Garden St. Jordan Graphics 4004 Spring Garden St. N/A Pomona Center -- Phase I 7 Dundas Circle N/A 8 Dundas Circle N/A 9 Dundas Circle Netcom, Conservatop Corporation Pomona Center -- Phase II 302 Pomona Dr. 304 Pomona Dr. Fortune Personnel Consultants 306 Pomona Dr. AEL Defense Corporation 308 Pomona Dr. Hering North America 5 Dundas Circle Westgate on Wendover -- Phase I 305 South Westgate Dr. Alarmguard, The Computer Store 307 South Westgate Dr. Anders Lufvenholm 309 South Westgate Dr. Network Information, McRae Graphics 311 South Westgate Dr. N/A 315 South Westgate Dr. N/A 317 South Westgate Dr. N/A 319 South Westgate Dr. N/A Westgate on Wendover -- Phase II 206 South Westgate Dr. Home Care of the Central Carolinas 207 South Westgate Dr. Health Equipment Services 300 South Westgate Dr. N/A 4600 Dundas Circle Oakwood Homes, Aquaterra, Inc. 4602 Dundas Circle Four Seasons Apparel Radar Road 500 Radar Rd. Amoco Foam 502 Radar Rd. East Texas Distributing 504 Radar Rd. Triad International Maintenance, Dayva Industries
15
Percent Ceiling/ Rentable Occupied at Percent Clear Building Year Square December 31, Office Height Property Type (1) Built Feet 1995 (2) Finish (Feet) 506 Radar Rd. I 1986 15,000 100% 10% 18 Holden/85 Business Park 2616 Phoenix Dr. I 1985 31,894 100 32 10 2606 Phoenix Dr. -- 100 S 1989 15,000 100 32 10 2606 Phoenix Dr. -- 200 S 1989 15,000 100 32 10 2606 Phoenix Dr. -- 300 S 1989 7,380 83 32 10 2606 Phoenix Dr. -- 400 S 1989 12,300 90 32 10 2606 Phoenix Dr. -- 500 S 1989 15,180 100 32 10 2606 Phoenix Dr. -- 600 S 1989 18,540 90 32 10 Industrial Village 7906 Industrial Village Rd. I 1985 15,000 100 15 18 7908 Industrial Village Rd. I 1985 15,000 100 15 18 7910 Industrial Village Rd. I 1985 15,000 100 15 18 Other Piedmont Triad Properties 6348 Burnt Poplar I 1990 125,000 100 4 20 6350 Burnt Poplar I 1992 57,600 100 3 20 Stratford O 1991 135,533 97 100 9 Chesapeake I 1993 250,000 100 3 28 3288 Robinhood O 1989 19,599 83 100 9 Total or Weighted Average of Piedmont Triad Properties 4,152,233 93% Tenants Leasing 25% or More of Rentable Square Feet at Property December 31, 1995 506 Radar Rd. Triad International Maintenance, American Coatings Holden/85 Business Park 2616 Phoenix Dr. Pliana, Inc. 2606 Phoenix Dr. -- 100 Piedmont Plastics, Rexham Corp. 2606 Phoenix Dr. -- 200 REHAU, Inc., Readervision, Inc. 2606 Phoenix Dr. -- 300 N/A 2606 Phoenix Dr. -- 400 Spectrum Financial Services 2606 Phoenix Dr. -- 500 The Record Exchange 2606 Phoenix Dr. -- 600 AT&T, Sumitomo Electrical Industrial Village 7906 Industrial Village Rd. Texas Aluminum 7908 Industrial Village Rd. Bullock Distributors, Air Express 7910 Industrial Village Rd. Wadkin North America, Inc. Other Piedmont Triad Properties 6348 Burnt Poplar Sears Roebuck & Co. 6350 Burnt Poplar Industries for the Blind Stratford Southern National Bank Chesapeake Chesapeake Display & Packaging 3288 Robinhood N/A Total or Weighted Average of Piedmont Triad Properties
Charlotte Properties Steele Creek Park Bldg. A I 1989 42,500 100 19 21 Bldg. B I 1985 15,031 100 20 21 Bldg. E I 1985 39,300 57 13 21 Bldg. G-1 I 1989 22,500 44 11 21 Bldg. H I 1987 53,614 64 16 21 Bldg. K I 1985 19,400 100 25 21 Bldg. N I 1989 22,000 100 11 21 Highwoods/Forsyth Business Park 4101 Stuart Andrew Blvd. S 1984 12,185 100 60 16 4105 Stuart Andrew Blvd. S 1984 4,528 100 60 16 4109 Stuart Andrew Blvd. S 1984 15,212 100 60 16 4201 Stuart Andrew Blvd. S 1982 19,333 69 60 16 4205 Stuart Andrew Blvd. S 1982 23,401 91 60 16 4209 Stuart Andrew Blvd. S 1982 15,901 100 60 16 4215 Stuart Andrew Blvd. S 1982 23,372 95 60 16 4301 Stuart Andrew Blvd. S 1982 40,601 84 60 16 4321 Stuart Andrew Blvd. S 1982 12,774 100 60 16 Parkway Plaza Building 1 O 1982 58,263 88 100 8 Building 2 O 1983 88,227 93 100 8 Building 3 O 1984 82,307 83 100 8 Building 7 (7) O 1985 60,722 100 100 8 Building 8 (7) O 1986 40,615 100 100 8 Building 9 (7) I 1984 110,000 100 32 26 Other Charlotte Properties First Citizens O 1989 57,214 100 100 9 Total or Weighted Average of Charlotte Properties 879,000 90%
Steele Creek Park Bldg. A Terrell Gear Drives, Inc. Bldg. B Pumps Parts & Services Inc. (6) Bldg. E Bradman-Lake Inc. (6), Aptech, Inc. Bldg. G-1 Safewaste Corp. Bldg. H Sugravo Rallis Engraving Bldg. K Aptech, Inc. Bldg. N Marketing Assoc. International Highwoods/Forsyth Business Park 4101 Stuart Andrew Blvd. N/A 4105 Stuart Andrew Blvd. Re-Directions, Transit & Level Clinic, Bell/Sysco Food 4109 Stuart Andrew Blvd. N/A 4201 Stuart Andrew Blvd. N/A 4205 Stuart Andrew Blvd. N/A 4209 Stuart Andrew Blvd. N/A 4215 Stuart Andrew Blvd. Cleaning Services Group, Rodan, Inc. 4301 Stuart Andrew Blvd. Circle K 4321 Stuart Andrew Blvd. Communications Technology Parkway Plaza Building 1 BASF Corporation Building 2 N/A Building 3 N/A Building 7 (7) Northwest Mortgage Building 8 (7) Greenpoint Financial Corp. Building 9 (7) Aegis Technologies Other Charlotte Properties First Citizens Volvo Car Finance, Inc. Total or Weighted Average of Charlotte Properties
16
Percent Ceiling/ Rentable Occupied at Percent Clear Building Year Square December 31, Office Height Property Type (1) Built Feet 1995 (2) Finish (Feet) Tenants Leasing 25% or More of Rentable Square Feet at Property December 31, 1995
Richmond Properties Innsbrook Office Center Market American O 1988 39,306 93% 100% 8 Proctor-Silex O 1986 58,366 100 100 8 Vantage Place I O 1987 15,334 90 100 8 Vantage Place II O 1987 14,223 87 100 8 Vantage Place III O 1988 14,615 100 100 8 Vantage Place IV O 1988 14,616 100 100 8 Vantage Point O 1990 63,867 98 100 16 Innsbrook Tech I S 1991 18,095 100 58 16 DEQ Technology Center S 1991 53,999 81 80 16 DEQ Office O 1991 70,423 100 100 8 Technology Park Virginia Center S 1985 119,064 94 70 14 Total or Weighted Average of Richmond Properties 481,908 95% Total or Weighted Average of All Properties 9,215,171 93%
Innsbrook Office Center Market American Mark IV Proctor-Silex Proctor-Silex, Inc. Vantage Place I Rountrey and Associates Vantage Place II Hastings-Tapley Vantage Place III Stenrich Group, Inc. Vantage Place IV Corvel Healthcare, Cemetary Mgmt. Vantage Point EDS, Colonial Inc. Innsbrook Tech I Air Specialists of VA, Hobbs & Assoc. DEQ Technology Center Virginia State Gov., First Health DEQ Office Virginia State Gov. Technology Park Virginia Center N/A Total or Weighted Average of Richmond Properties Total or Weighted Average of All Properties
(1) I = Industrial, S = Service Center and O = Office. (2) Includes 29,000 rentable square feet leased but not occupied. (3) Research Triangle Foundation of North Carolina, Inc. has a right of first refusal option to purchase any property offered for sale within the confines of the Research Triangle Park. (4) Mohawk Corporation currently subleases its space to Volvo GM Heavy Truck Corp. (5) Ivy Distribution Center enables the Company to establish relationships with potential tenants that need large blocks of affordable storage space, frequently on a short-term basis. With the exception of 1989 when the building was renovated to convert it from a manufacturing facility to a bulk warehouse facility, Ivy Distribution Center has produced a positive cash flow every year since its acquisition in 1978. (6) These tenants have a first right of refusal option to purchase their respective leased properties in the event the Company elects to sell any of these properties pursuant to a bona fide third-party offer to purchase such properties. (7) Properties subject to ground lease expiring December 31, 2082. Company has option to purchase land during the lease term at the greater of $35,000 per acre or 85% of appraised value. 17 Development Land As of December 31, 1995, the Company owned approximately 203 acres of land for development. The following table sets forth the location (business park), acreage, build-out capacity and estimated construction costs with respect to the development land (dollars in thousands):
Estimated Rentable Square Feet Construction Business Park Location Acreage (Office) (Industrial) (Total) Costs Capital Center................... Raleigh 15 165,000 -- 165,000 $ 14,250 Creekstone Park.................. Durham 16 186,000 -- 186,000 15,810 Highwoods Office Center North.... Raleigh 18 310,000 -- 310,000 26,350 Highwoods Office Center South.... Raleigh 45 525,000 -- 525,000 44,625 Research Commons................. RTP (1) 10 100,000 -- 100,000 8,500 Airpark East..................... Greensboro 13 57,000 50,000 107,000 5,020 Airpark North.................... Greensboro 10 20,000 -- 20,000 1,600 NationsFord Business Park........ Charlotte 15 -- 170,000 170,000 3,920 West Point Business Park........................... Winston-Salem 35 -- 384,000 384,000 8,712 Airport Center Drive (2)............................ Greensboro 20 241,000 -- 241,000 21,690 Highwoods/Forsyth Park........................... Greensboro 6 -- 60,000 60,000 3,600 Total.......................... 203 1,604,000 664,000 2,268,000 $154,077
(1) RTP = Research Triangle Park (2) This land will be acquired in installments as it is placed in service or by June 2000, whichever occurs first. All of the Development Land is zoned and available for office or industrial development and 166 acres have utility infrastructure already in place. The Company believes that the cost of developing the Development Land could be financed with the funds available from the Company's existing credit facility, additional borrowings and offerings of equity securities. The Company believes that its commercially zoned and unencumbered land in existing business parks gives the Company an advantage in its future development activities over other commercial real estate development companies in the Research Triangle, the Piedmont Triad and Charlotte. Any future development, however, is dependent on the demand for industrial or office space in the area, the availability of favorable financing and other factors, and no assurance can be given that any construction will take place on the Development Land. In addition, if construction is undertaken on the Development Land, the Company will be subject to the risks associated with construction activities, including the risk that occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable, construction costs may exceed original estimates and construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction expense. Option Land The Company has options to purchase or rights of first refusal to purchase, lease or develop a total of 166 acres of undeveloped land (the "Option Land") at locations adjacent to Properties in two existing business parks. The Company has long-term rights of first refusal to purchase, lease or develop: (i) 147 acres in the Expressway Commerce Center, which is targeted for development of warehouses and service center facilities and (ii) 19 acres adjacent to Creekstone Park, which is targeted for service center development. The Company believes that its options to purchase and rights of first refusal to purchase and develop the Option Land may provide a competitive advantage regarding its future development activities in the Research Triangle. Such future development, however, is dependent on the availability of favorable financing and other factors, and no assurance can be given that any of the Option Land will be purchased or developed by the Company. In connection with the acquisition of the Hock Portfolio, the Company has obtained certain rights to purchase or develop approximately 78 acres of land. 18 Third-Party Purchase Options Five of the Properties are subject to purchase options in favor of existing tenants during the terms of their leases. Highland Industries, Inc. has the option during the term of its lease to purchase the Highlands Building in Airpark East for a purchase price of $1,034,000 during each of the first five years of the lease term and, thereafter, at decreasing amounts through the tenth year of the lease term when the price will be $926,000. Although the Company believes that the option purchase price on the Highlands Building is currently at or above the current fair market value of the subject property, no assurance can be given that such price will be equal to the fair market value of such property at the time the option is exercised. Marketing Associates International, Inc. has an option to purchase the building it occupies in Steele Creek Park for a purchase price of $900,000. On March 31, 1995, the option was extended for one year upon payment of $25,000. The extension payments may be applied to the purchase price which remains at $900,000 during the first extension period and may be increased above $900,000 during the second extension period based upon the percentage increase in the Consumer Price Index ("CPI"). Marketing Associates International, Inc. has notified the Company that it will exercise its purchase option on March 31, 1996. Pump Parts & Services, Inc. has an option to purchase the building it occupies in Steele Creek Park for a purchase price of $37.37 per square foot ($561,708), subject to a minimum increase in the per square foot purchase price of 5% per year. One of the tenants of Rexwoods II has an option to purchase 33% of the property in December 1998 for cash at the then-current fair market value, as to be determined by an independent appraiser. In addition, Glaxo Wellcome has the option to purchase the 4301 Building at Research Commons from March 1997 to the earlier of the lease termination or March 2003 for cash at the then-current fair market value to be determined by an appraiser chosen by the Company, provided the terms of such purchase are acceptable to the Company and Glaxo Wellcome. 19 ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the directors and executive officers of the Company:
Name Age Principal Occupations and Other Directorships O. Temple Sloan, Jr. 56 Director and Chairman of the Board of Directors. Mr. Sloan is a founder of the predecessor of the Company and most recently served as its Secretary-Treasurer. Mr. Sloan also serves as Chairman of General Parts, Inc., a nationwide distributor of automobile replacement parts, which he founded. Mr. Sloan is Vice Chairman of the Board of Trustees of Peace College and is a trustee of St. Andrews College. Ronald P. Gibson 51 Director, President and Chief Executive Officer. Mr. Gibson is a founder of the Company and has served as its President since its incorporation in 1992 and as managing partner of its predecessor since its formation in 1978. Mr. Gibson is a member the Society of Industrial and Office Realtors and is a director of Capital Associated Industries. John L. Turner 49 Director, Vice Chairman of the Board of Directors and Chief Investment Officer. Mr. Turner began his career in the real estate industry in 1969 and co-founded Forsyth's predecessor in 1975. Mr. Turner is active in several Piedmont Triad economic development and business recruiting organizations. Mr. Turner serves on the University of North Carolina Board of Visitors and on the Winston-Salem Board of Directors of NationsBank. William T. Wilson, III 41 Director, Executive Vice President and President of the Company's Forsyth Division. Mr. Wilson joined Forsyth in 1982 and served as its President from 1993 until its merger with the Company. Mr. Wilson serves on the Board of Directors of Amos Cottage Rehabilitation Hospital, an affiliate of the Department of Pediatrics of Bowman Gray School of Medicine, Old Salem, Inc. and Reynolda House, Inc. Thomas W. Adler 55 Director. Mr. Adler is Chairman and a Principal of Cleveland Real Estate Partners, a fee-based real estate service company based in Cleveland, Ohio. Mr. Adler helped create the Grubb and Ellis Institutional Investment Group and previously served as its President. Mr. Adler served five years as a member of the Executive Committee and Board of Governors of the National Association of Real Estate Investment Trusts, and he was national president in 1990 of the Society of Industrial and Office Realtors. Mr. Adler formerly served on the Board of Directors of the National Association of Realtors and currently serves on the Board of Governors of the American Society of Real Estate Counselors. He is an active member of the Urban Land Institute. William E. Graham 66 Director. Mr. Graham is a lawyer in private practice with the firm of Hunton & Williams. Before joining Hunton & Williams on January 1, 1994, Mr. Graham was Vice Chairman of Carolina Power & Light Company and had previously served as its general counsel. Mr. Graham is a former member of the Board of Directors of Carolina Power & Light Company and currently serves on the Raleigh Board of Directors of NationsBank. He also serves on the Board of Directors of BB&T Mutual Funds Group and is a former Director of Kaiser Foundation Health Plan of North Carolina. Robert L. Kirby 65 Director. Mr. Kirby is a self-employed management consultant. Before retiring from the banking business in 1990, Mr. Kirby spent 34 years with NationsBank and its predecessor, North Carolina National Bank. At the time of his retirement, he was President and a member of the Board of Directors of NCNB National Bank of Florida. Mr. Kirby is a member of the Boards of Directors of NationsBank of Texas, N.A. and Cato Corporation.
20
Name Age Principal Occupations and Other Directorships L. Glenn Orr, Jr. 55 Director. Mr. Orr is the Chairman, President and Chief Executive Officer of Orr Management Co. He served as Chairman of the Board of Directors, President and Chief Executive Officer of Southern National Corporation until its merger with Branch Banking & Trust. Mr. Orr continues to be a director of the merged bank. Mr. Orr, who previously served as President and Chief Executive Officer of Forsyth Bank and Trust Co. and President of Community Bank in Greenville, S.C., is former President of the North Carolina Bankers Association. He is a trustee of Wake Forest University and the University of North Carolina at Greensboro. Stephen Timko 67 Director. Mr. Timko is a partner of JHPB Partners, a limited partner of the Operating Partnership. He has served as Associate Vice President of Financial Affairs for Temple University and Chief Financial Officer and Executive Vice President of Finance and Administration for Beaunit Corporation. Mr. Timko currently serves as Treasurer for Beaunit Corporation. Edward J. Fritsch 37 Vice President, Secretary and President of the Company's Research Triangle Division. Mr. Fritsch joined the Company in 1982 and currently serves as President of the Company's Highwoods Division. Mr. Fritsch is a Certified Property Manager. Carman J. Liuzzo 35 Vice President, Chief Financial Officer and Treasurer. Mr. Liuzzo joined the Company in 1994 and currently serves as Chief Financial Officer. Prior to joining the Company, Mr. Liuzzo was Vice President and Chief Accounting Officer for Boddie-Noell Enterprises, Inc. and Boddie-Noell Restaurant Properties, Inc. Mr. Liuzzo is a certified public accountant.
Employment Agreements The Company's executive officers generally have employment agreements with the Company with a three-year duration. Messrs. Gibson and Fritsch have employment agreements through June 1997, and Messrs. Turner, Wilson and Liuzzo have employment agreements through February 1998. Each contract includes provisions restricting the officers from competing with the Company during employment and, except in certain circumstances, for a limited period of time after termination of employment. Each of the employment contracts provides for severance payments in the event of termination by the Company without cause equal to the officer's base salary for the later of one year from the date of termination or the expiration of the three-year employment agreement. 21 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Stock has been traded on the NYSE under the symbol "HIW" since the Company's initial public offering. The following table sets forth the quarterly high and low sales prices per share reported on the NYSE for the periods indicated and the distributions paid per share for each such period.
Period or Quarter 1995 1994 Ended: High Low Distribution High Low Distribution March 31............ $22.00 $19.88 $0.425 -- -- --(1) June 30............. 25.50 21.25 0.45 $21.68 $19.68 0.075(2) September 30........ 26.88 23.88 0.45 21.13 19.75 0.425 December 31......... 28.38 25.50 0.45 21.68 18.50 0.425
(1) Prior to the Company's June 14, 1994, initial public stock offering. (2) No distribution was paid during this period. The accrued distribution of $0.075 per share was paid on November 16, 1994 at the time the Company paid its initial distribution for the period from inception to September 30, 1994. On March 1, 1996, the last reported sale price of the Common Stock on the NYSE was $30.00 per share. On March 1, 1996, the Company had 516 stockholders of record. The Company intends to continue to pay regular quarterly distributions to holders of shares of Common Stock and holders of Units. Although the Company intends to maintain its current distribution rate, future distributions by the Company will be at the discretion of the Board of Directors and will depend on the actual funds from operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. During the year ended 1995, the Company's distributions totalled $25,348,000 of which $2,226,000 represented return of capital for financial statement purposes. The minimum per share distribution required to maintain REIT Status was approximately $1.55 per share in 1995 and $.48 per share in 1994. The Company has instituted a Dividend Reinvestment and Stock Purchase Plan under which holders of Common Stock may elect automatically to reinvest their distributions in additional shares of Common Stock and may make optional cash payments for additional shares of Common Stock. The Company may issue additional shares of Common Stock or, with respect to reinvested distributions, repurchase Common Stock in the open market for purposes of financing its obligations under the Dividend Reinvestment and Stock Purchase Plan. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and operating information for the Company as of December 31, 1995 and 1994, for the year ended December 31, 1995, and for the period from June 14, 1994 (commencement of operations) to December 31, 1994. The following table also sets forth selected financial and operating information on a historical basis for the Highwoods Group (the predecessor to the Company) as of and for each of the years in the five-year period ended December 31, 1993, and for the period from January 1, 1994, to June 13, 1994. Due to the impact of the initial formation of the Company and the initial public offering in 1994, the second and third offerings in 1995 and the transactions more fully described in "Management's Discussion and Analysis -- Overview and Background," the historical results of operations for the years ended December 31, 1991, 1992, 1993 and 1994 may not be comparable to the current period results of operations. 22 The Company and the Highwoods Group
Company Year ended December 31, Year Ended Highwoods December 31, Group Year ended December 31, 1995 June 14, January 1, 1994 to 1994 to December 31, June 13, Highwoods Group 1994 1994 1993 1992 1991 (Dollars in thousands, except per share amounts) Operating Data: Total revenue............................... $ 73,522 $ 19,442 $ 6,648 $13,450 $12,532 $ 9,774 Rental property operating expenses........................ 17,049(1) 5,110(1) 2,596(2) 6,248(2) 5,587(2) 4,467(2) General and administrative.................. 2,737 810 280 589 694 690 Interest expense............................ 13,720 3,220 2,473 5,185 5,059 3,908 Depreciation and amortization............... 11,082 2,607 835 1,583 1,431 1,135 Income (loss) before minority interest...... 28,934 7,695 464 (155) (239) (426) Minority interest........................... (4,937) (808) -- -- -- -- Income before extraordinary item............ 23,997 6,887 464 (155) (239) (426) Extraordinary item-loss on early extinguishment of debt.................... (875) (1,273) -- -- -- -- Net income (loss)........................... $ 23,122 $ 5,614 $ 464 $ (155) $ (239) $ (426) Net income per common share.............................. $ 1.49 $ .63 Balance Sheet Data (at end of period): Real estate, net of accumulated depreciation.................. $ 593,066 $ 207,976 $ -- $51,590 $46,626 $44,554 Total assets................................ 621,134 224,777 -- 58,679 53,688 48,647 Total mortgages and notes payable............................. 182,736 66,864 -- 64,347 60,279 56,455 Other Data: Number of in-service properties............. 191 44 14 14 13 13 Total rentable square feet.................. 9,215,171 2,746,219 816,690 816,690 794,174 794,174
(1) Rental property operating expenses include salaries, real estate taxes, insurance, repairs and maintenance, property management, security and utilities. (2) Rental property operating expenses include salaries, real estate taxes, insurance, repairs and maintenance, property management, security, utilities, leasing, development, and construction expenses. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview and Background The Highwoods Group (the predecessor to the Company) was comprised of 13 office properties and one warehouse facility (the "Highwoods-Owned Properties"), 94 acres of development land and the management, development and leasing business of Highwoods Properties Company ("HPC"). On June 14, 1994, following completion of the Company's initial public offering of 8,510,000 shares of Common Stock at a price of $21.00 per share, the Company, through a business combination involving entities under varying common ownership, succeeded to the Highwoods-Owned Properties, HPC's real estate business and 27 additional office properties owned by unaffiliated parties (such combination being referred to as the "Formation Transaction"). The Company acquired three additional Properties in 1994 after the Formation Transaction. During the year ended December 31, 1995, the Company acquired 144 Properties encompassing 6,357,000 square feet at a initial cost of $369,900,000. The following table summarizes the mergers and acquisitions completed during the year ended December 31, 1995 (dollars in thousands):
Number of Rentable Initial Property Location Properties Square Feet Cost Forsyth Transaction Piedmont Triad/Charlotte 57 3,630,565 $169,900 Richmond Expansion Richmond 10 362,844 28,700 Research Commons Research Triangle 6 539,310 60,000 Creekstone Crossing Research Triangle 1 59,299 4,500 Bissell Portfolio Piedmont Triad/Charlotte 56 920,283 36,900 Hock Portfolio Research Triangle 5 274,604 21,200 Six Forks I & II Research Triangle 2 89,470 8,800 Cotton Research Triangle 1 40,035 2,400 Parkway Plaza Charlotte 6 440,134 37,500 Total 144 6,356,544 $369,900
Minority interest in the Company represents the limited partnership interest owned by various individuals and entities and not the Company in the Operating Partnership, the entity that owns the Company's properties and through which the Company, as the sole general partner, conducts substantially all of its operations. The combined financial statements of the Highwoods Group for the two years ended December 31, 1993, include the accounts of the management, leasing and development operations of HPC and the partnerships that owned 14 buildings and two parcels of development land. The Highwoods Group's financial statements have been presented on a combined basis because of the affiliated general partners and common management of the Highwoods-Owned Properties. Given the effect of the acquisitions discussed above, the results of the Highwoods Group for the period from January 1, 1994, to June 13, 1994, and for the year ended December 31, 1993, are not comparable to the current operations of the Company. This information should be read in conjunction with the accompanying consolidated and combined financial statements and the related notes thereto. The pro forma operating data for the year ended December 31, 1994 assumes completion of the Initial Public Offering and the Formation Transaction as of January 1, 1994. See Note 1 "Organization and Formation of the Company." Results of Operations Comparison of the Company 1995 to the Company Pro Forma 1994 For the year ended December 31, 1995 total revenues were comprised of $71,217,000 of rental revenues and $2,305,000 of interest and other income. For the year ended December 31, 1994 pro forma total 24 revenues included $33,626,000 of rental revenues, $200,000 in distributions from Highwoods Services, Inc. and $456,000 of interest income. The $37,591,000 increase in rental income from pro forma 1994 to 1995 was primarily attributable to the rental revenue derived from properties acquired during 1995. Revenues from the Company's initial portfolio of 41 properties increased by 2.1% over the comparable 1994 period. Vacancies in Smoketree Tower and Cape Fear partially offset rental rate increases and occupancy gains in other properties. The increase in interest income from $465,000 in pro forma 1994 to $2,305,000 in 1995 was due primarily to the increase in short-term investments during the three month period following the Company's Third Offering in August 1995. Rental property expenses represented 23.9% of rental revenues in 1995 compared to 28.8% for pro forma 1994. The decline in this ratio was a result of increased operating efficiencies and the addition of revenues from industrial properties in 1995. Industrial properties are generally leased on a "triple net" basis with the tenant paying all operating costs. General and administrative expenses increased from $1,134,000 or 3.3% of total revenues for pro forma 1994 to $2,737,000 or 3.7% of total revenues for 1995. The increase in general and administrative expenses was a result of the growth of the Company's operations into the Piedmont Triad and Richmond. Interest expense increased from $5,604,000 for pro forma 1994 to $13,720,000 for 1995. The increase in interest expense was a result of an increased debt level during 1995 compared to 1994 as the Company financed a portion of its 1995 acquisition activity through the use of debt financing. Depreciation and amortization expense increased from $4,638,000 for pro forma 1994 to $11,082,000 for 1995. The increase in depreciation and amortization expense reflects the increase in real estate assets during 1995. Net income before minority interest and extraordinary item equaled $28,934,000 or $1.87 per share for 1995 compared to $13,229,000 or $1.47 per share for pro forma 1994. In connection with the repayment of indebtedness related to the Forsyth Transaction, the Company incurred prepayment penalties of $1,047,000. This amount was recorded as an extraordinary item and is presented in the consolidated financial statement as ($875,000), net of the minority interest in such loss. Comparison of the Company Pro Forma 1994 to the Highwoods Group for the Year Ended December 31, 199 3 For 1994, total revenue on a pro forma basis was $34,282,000 compared to historical revenues of $13,450,000 for the Highwoods Group for the same period of 1993. The net increase is primarily attributed to the addition of 27 additional office properties in connection with the initial public offering and increased occupancy of the Highwoods Group offset by the decrease in non-rental revenue (leasing, development and construction) due to the Company accounting for its interest in Highwoods Realty Services, Inc. and Highwoods Leasing Company under the cost method of accounting. Accordingly, on a pro forma basis, total revenues will include only the distributions from such subsidiaries. For 1994, rental property operating expenses total $9,677,000 and equaled 28.8% of rental revenues on a pro forma basis compared to $4,398,186 and 48.9% of rental revenues for the Highwoods Group on a historical basis for the same period of 1993. This decrease from historical to pro forma, as a percentage of rental revenues, is due primarily to the operations of the Properties on a combined, self-managed basis as compared to separate entities historically. Major components of the decrease in rental operating expenses as a percentage of rental revenues can be attributed to the provision of management and leasing services by employees of the Company for which fees were paid historically. For 1994 general and administrative expenses equaled $1,134,000 or 3.3% of total revenues on a pro forma basis compared to $589,000 or 4.4% of total revenues for 1993. Increased operating efficiencies in 1994 generated the decrease in general and administrative expenses as a percentage of revenues. For 1994, interest expense totaled $5,604,000 and equaled 16.3% of total revenues on a pro forma basis compared to $5,185,000 and 38.6% of total revenues on a historical basis for the Highwoods Group 25 for the same period of 1993. This decrease from historical to pro forma, as a percentage of total revenues, is due primarily to the Company's reduced leverage as a result of the reduction of debt using proceeds from the initial public offering. The increase in depreciation expense from $1,583,000 for the Highwoods Group for 1993 to $4,638,000 for pro forma 1994 was due to the increase in real estate assets during 1994 as the Company increased its portfolio from 14 properties to 30 properties. For 1994, net income before minority interest would have been $13,229,000 on a pro forma basis compared to a loss of ($155,000) on a historical basis for the Highwoods Group for the same period of 1993. Lower interest expense combined with the operating efficiencies gained from operating the Properties on a combined basis and the increased revenues of the Company were the primary reasons for the increase in net income before minority interest from the historical periods to the same periods on a pro forma basis. Highwoods Group -- Comparison of 1993 to 1992 Revenue from rental operations for the Highwoods Group for 1993 increased $800,000, or 10%, to $8,984,000, as compared to $8,184,000 for 1992. Approximately $360,000 of the increase related to additional lease up of Highwoods Tower, $165,000 resulted from the acquisition of the Leatherwood and Ironwood properties and $110,000 resulted from the opening in October 1993 of Rexwoods II. The balance of the increase, approximately $165,000, related to improved occupancy in the remainder of the portfolio, including approximately $100,000 in the Hawthorn building. Revenue from leasing, development, and construction income for the Highwoods Group for 1993, increased $231,000, or 7%, to $3,721,000, as compared to $3,490,000 for 1992. This increase was primarily due to the new properties (Highwoods Tower and Rexwoods II) and related construction income earned from the tenants occupying these properties. Operating expenses (which include property, construction, maintenance, leasing, depreciation, amortization, and marketing, general and administrative expenses) increased $709,000, or 9%, to $8,421,000 for 1993, as compared to $7,712,000 for 1992. This increase resulted primarily from an increase in property operating expenses of $201,000, an increase in construction and maintenance expense of $724,000, offset by a decrease in leasing expense of $263,000 for 1993 as compared to 1992. General and administrative expenses decreased $105,000 due to a reduction in professional services, and interest expense increased $126,000 from additional debt service on Rexwoods II for 1993 as compared to 1992. Depreciation and amortization increased $152,000 from $1,431,000 for 1992 to $1,583,000 for 1993. Depreciation expense on tenant improvements accounted for $234,000 of the depreciation expense for 1993. As a result of these changes in rental revenue and expenses, net loss decreased $84,000, or 35%, to $155,000 in 1993, as compared to $239,000 in 1992. Liquidity and Capital Resources Statement of Cash Flows The Company generated $43,169,000 in cash flows from operating activities and $93,443,000 in cash flow from financing activities for the year ended December 31, 1995. The Company utilized $136,032,000 of this cash flow to invest in real property assets of $130,411,000 and cash payments to joint venture partners of $6,593,000. Capitalization The Company's total indebtedness at December 31, 1995 totaled $182,736,000 and was comprised of $6,500,000 outstanding under the Company's current $80,000,000 Credit Facility (the "Credit Facility"), $134,687,000 of conventional fixed rate mortgage indebtedness with an average rate of 9.0%, $36,549,000 outstanding under variable rate mortgages (see below for a discussion of interest rate protection agreements) and a 9%, $5,000,000 unsecured note. Based on the Company's total market capitalization of $836,328,000 at December 31, 1995 (at the December 31, 1995, stock price of $28.25 and including the conversion of the 3,731,000 Units of minority 26 interest in the Operating Partnership), the Company's debt represented approximately 22% of its total market capitalization. The Company completed the following financing activities during year ended December 31, 1995: (Bullet) During the quarter ended March 31, 1995, the Company completed a 5,640,000 share public offering of Common Stock (including 640,000 shares issued pursuant to the underwriter's over allotment option). The net proceeds of the offering totaled $109,800,000 and were used primarily to retire indebtedness assumed in connection with the Forsyth Transaction. (Bullet) Also during the quarter ended March 31, 1995, the Company received the proceeds from a $41,000,000, 20-year fixed rate (8.97%) mortgage loan. After 10 years the loan provides for a rate reset, with each party having the option at that time to put or call the loan, as the case may be. The proceeds from the loan were used, together with the public offering proceeds discussed above, to fund the Forsyth Transaction. (Bullet) During the quarter ended September 30, 1995, the Company completed a 4,774,989 share public offering of Common Stock (including 574,989 shares issued pursuant to the underwriters' over allotment option). The net proceeds of the public offering totaled $110,000,000 and were used primarily to retire amounts outstanding under the Company's Credit Facility, to fund the Richmond Expansion, to fund the cost of various development projects and to provide working capital. (Bullet) Also, during the quarter ended September 30, 1995, the Company received the proceeds from a $32,000,000, 20-year fixed rate (8.15%) mortgage loan. After 10 years the loan provides for a rate reset and a put/call option (as described above). The proceeds from the loan were used to fund the property acquisitions made during the quarter. (Bullet) In connection with the acquisition of the Bissell Portfolio, the Company entered into a $12,250,000, 15-year variable rate mortgage loan with a put/call option at the end of years five and ten. (Bullet) In connection with the Company's 1995 acquisitions, the Company assumed 13 loans with an aggregate outstanding balance on the various transaction closing dates of $72,500,000 and issued 2,676,000 Units valued at $57,300,000. The Credit Facility requires monthly payments of interest only, with the balance of all principal and accrued but unpaid interest due on June 14, 1999. The Credit Facility bears interest at a floating rate equal to 150 basis points over one-month LIBOR, subject to the interest rate protection agreement described below. At December 31, 1995, one-month LIBOR was 5.9%. The Credit Facility is secured by first mortgage liens on a portfolio of 22 Properties. The Company has received a commitment from three commercial banks whereby they will provide the Company with a $140,000,000 unsecured credit facility (the "New Credit Facility"), which is expected to close March 31, 1996 subject to completion of final documentation. The New Credit Facility will replace the existing Credit Facility. To protect the Company from increases in interest expense due to changes in the variable rate, the Company: (i) purchased an interest rate cap limiting its exposure to an increase in interest rates (one-month LIBOR plus 150 basis points) to 7.0% with respect to the $80,000,000 Credit Facility, and (ii) in connection with the $36,549,000 variable rate mortgages, entered into interest rate swaps which limit its exposure to an increase in the interest rates to 7.24% with respect to the assumed indebtedness. The interest rate on all such variable rate debt is adjusted at monthly intervals, subject to the Company's interest rate protection program. Payments received from the counterparties under the interest rate protection agreements were $385,000 and $25,000 for 1995 and 1994, respectively. The Company is exposed to certain losses in the event of non-performance by the counterparties under the cap and swap arrangements. The counterparties are major financial institutions and are expected to fully perform under the agreements. However, if they were to default on their obligations under the arrangements, the Company could be required to pay the full rate under its Credit Facility and the variable rate mortgages, even if such rate were in excess of the rate in the cap and swap agreements. In addition, the Company may incur other variable rate indebtedness in the future. Increases in interest rates on its indebtedness could increase the Company's interest expense and could adversely affect the Company's cash flow and its ability to pay expected distributions to stockholders. 27 Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. Management believes that the Company will have access to the capital resources necessary to expand and develop its business. To the extent that the Company's cash flow from operating activities is insufficient to finance its acquisition costs and other capital expenditures, including development costs, the Company expects to finance such activities through the New Credit Facility and other debt and equity financing. The Company presently has no plans for major capital improvements to the existing properties, other than normal recurring non-revenue enhancing expenditures. The Company expects to meet its short-term liquidity requirements generally through its working capital and net cash provided by operating activities along with the previously discussed Credit Facility. The Company expects to meet certain of its financing requirements through long-term secured and unsecured borrowings and the issuance of debt securities or additional equity securities of the Company. In addition, the Company anticipates utilizing the Credit Facility and New Credit Facility primarily to fund construction and development activities. The Company does not intend to reserve funds to retire existing mortgage indebtedness or indebtedness under the Credit Facility or New Credit Facility upon maturity. Instead, the Company will seek to refinance such debt at maturity or retire such debt through the issuance of additional equity or debt securities. The Company anticipates that its available cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and other sources, will be adequate to meet the capital and liquidity needs of the Company in both the short and long-term. However, if these sources of funds are insufficient or unavailable, the Company's ability to make the expected distributions discussed below may be adversely affected. In order to qualify as a REIT for Federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of recurring, non- incremental revenue-generating expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments. The following factors will affect cash flows from operating activities and, accordingly, influence the decisions of the Board of Directors regarding distributions: (i) debt service requirements after taking into account the repayment and restructuring of certain indebtedness; (ii) scheduled increases in base rents of existing leases; (iii) changes in rents attributable to the renewal of existing leases or replacement leases; (iv) changes in occupancy rates at existing Properties and procurement of leases for newly acquired or developed properties; and (v) operating expenses and capital replacement needs. Pending Nashville Acquisition On January 23, 1996, the Company entered into a letter of intent with Nashville, Tennessee-based Eakin & Smith, Inc. and its affiliates ("Eakin & Smith"), which outlined the principal terms in which the Company and Eakin & Smith would combine their property portfolios, management teams and business operations. Through the combination with Eakin & Smith, the Company will succeed to the ownership of seven 96% leased in-service suburban office buildings totaling 848,000 square feet, a 103,000-square-foot, 50% pre-leased suburban office development project, 18 acres of development land and Eakin & Smith's brokerage and property management operations. The aggregate purchase price, assuming the completion of the in-process development project in December 1996, is expected to total approximately $100,000,000 and is expected to be paid through the issuance of approximately 1.1 million limited partnership units of Highwoods/Forsyth Limited Partnership or shares of Common Stock, the assumption of approximately $42 million of indebtedness and cash payments of approximately $27 million. The aggregate purchase price includes deferred payments totaling $1,500,000, which are attributable to Eakin & Smith's brokerage and property management operations, that will be paid over a four-year period provided certain annual operating measurements are achieved. The Company will fund the cash payments with available capacity under its Credit Facility. Consummation of the transaction is subject to the completion of due diligence, the execution of a definitive contribution and exchange agreement, the consent of certain lenders, the approval of the transaction by the partners and shareholders of the contributing entities and certain other conditions. Assuming satisfaction of these conditions, the transaction is expected to close in March 1996. 28 Possible Environmental Liabilities All of the properties, except Burnt Poplar, have been subjected to Phase I environmental reviews. These assessments have not revealed, nor is the Company aware of, any environmental liability that the Company believes would have a material adverse effect on the Company's results of operations, liquidity or capital resources. This projection, however, could prove to be incorrect depending on certain factors. For example, the Company's assessments may not reveal all environmental liabilities or there may be material environmental liabilities of which the Company is unaware. In addition, assumptions regarding groundwork-flow and the existence of contamination are based on available sampling data, and there are no assurances that the data is reliable in all cases. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Properties (such as the presence of underground storage tanks), or by third parties unrelated to the Company. Compliance with the Americans with Disabilities Act Under the Americans with Disabilities Act (the "ADA"), all public accommodations and commercial facilities are required to meet certain Federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. Although the Company believes that the Properties are substantially in compliance with these requirements, the Company may incur additional costs to comply with the ADA. Although the Company believes that such costs will not have a material adverse effect on the Company, if required changes involve a greater expenditure than the Company currently anticipates, the Company's results of operations, liquidity and capital resources could be adversely affected. Funds From Operations and Cash Available for Distributions The Company considers Funds from Operations ("FFO") to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by GAAP and FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all of the Operating Partnership's cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations does not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO as disclosed by other REITs may not be comparable to the Operating Partnership's calculation of FFO, as described below. Funds from Operations means net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In March 1995, NAREIT issued a clarification of the definition of FFO. The clarification provides that amortization of deferred financing costs and depreciation of non-real estate assets are no longer to be added back to net income in arriving at FFO. Cash available for distribution is defined as funds from operations reduced by non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. Funds from operations and cash available for distributions should not be considered as alternatives to net income as an indication of the Operating Partnership's performance or to cash flows as a measure of liquidity. 29 Funds from operations and cash available for distribution for the year ended December 31, 1995 and for the period from June 14, 1994 to December 31, 1994 are summarized in the following table (in thousands):
1995 1994 Current New Current New Method Method Method Method Income before minority interest and extraordinary item.............. $28,934 $28,934 $ 7,695 $ 7,695 Add (deduct): Depreciation and amortization..................................... 11,082 11,082 2,607 2,607 Amortization of deferred financing costs.......................... 1,619 -- 738 -- Third-party service company cash flow............................. -- -- -- -- Rental income from straight-line rents............................ (1,519) -- (503) -- Funds from operations before minority interest................. 40,116 40,016 10,537 10,302 Cash Available for Distribution: Add (deduct): Rental income from straight-line rents............................ -- (1,519) -- (503) Amortization of deferred financing costs.......................... -- 1,619 -- 738 Non-incremental revenue generating capital expenditures: Building improvements paid..................................... (1,337) (1,337) (150) (150) Second generation tenant improvements paid..................... (1,884) (1,884) (347) (347) Second generation lease commissions paid....................... (1,228) (1,228) (180) (180) Cash available for distribution.............................. $35,667 $35,667 $ 9,860 $ 9,860 Weighted average shares/units outstanding (1)....................... 18,697 18,697 9,991 9,991 Dividend payout ratio: Funds from operations............................................. 81.5% 81.8% 87.7% 89.7% Cash available from distribution.................................. 91.7% 91.7% 93.7% 93.7%
(1) Assumes conversion of Units to shares of Common Stock. Inflation In the last five years, inflation has not had a significant impact on the Company because of the relatively low inflation rate in the Company's geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In addition, many of the leases are for terms of less than seven years, which may enable the Company to replace existing leases with new leases at a higher base if rents on the existing leases are below the then-existing market rate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are listed under Item 14(a) and filed as part of this report on the pages indicated. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section under the heading "Election of Directors" of the Proxy Statement for Annual Meeting of Stockholders to be held April 30, 1996 (the "Proxy Statement") is incorporated herein by reference for information on Directors of the Registrant. See ITEM X in Part I hereof for information regarding executive officers of the Registrant. ITEM 11. EXECUTIVE COMPENSATION Compensation of Directors The Company pays its directors who are not officers of the Company fees for their services as directors. Directors receive annual compensation of $10,000 plus a fee of $1,250 (plus out-of-pocket expenses) for attendance in person at each meeting of the Board of Directors, $500 for each committee meeting attended and $250 for each telephone meeting of the Board of Directors or of a committee. In addition, upon becoming a director of the Company, each non-employee director received options to purchase 10,000 shares of Common Stock at an exercise price equal to the fair market value at the date of grant. These options vest in four equal annual installments commencing on the first anniversary of the date of grant. Officers of the Company who are directors are not paid any director fees. Executive Compensation The following table sets forth certain information concerning the compensation of the chief executive officer and the four other most highly compensated executive officers of the Company (the "Named Executive Officers") for the year ended December 31, 1995 and for the period from June 14, 1994 (the date of the IPO) to December 31, 1994: Summary Compensation Table
Long-Term Annual Compensation Compensation(2) All Other Name and Principal Position Year Salary Bonus(1) Options(#) Compensation Ronald P. Gibson 1995 $ 173,397 $218,750 20,000 $ 2,310(3) President and Chief Executive Officer.... 1994 $ 81,250 $105,169 40,000 $ 7,737(3) John L. Turner 1995 $ 125,230 $119,531 45,000 $ 2,250(3) Chief Investment Officer(4).............. 1994 -- -- -- -- William T. Wilson, III 1995 $ 111,651 $114,750 50,000 $ 2,025(3) Executive Vice President and President of 1994 -- -- -- -- Forsyth Division(4)...................... Edward J. Fritsch 1995 $ 113,750 $105,000 10,000 $ 4,559(3) Vice President, Secretary and President 1994 $ 43,481 $ 36,575 30,000 $ 3,838(3) of Research Triangle Division............ Carman J. Liuzzo 1995 $ 99,167 $ 62,500 10,000 $ 1,511(3) Vice President, Chief Financial Officer 1994 $ 41,347 $ 25,359 25,000 $25,000(5) and Treasurer............................
(1) Includes amounts earned in the indicated period which were paid in the following year. Twenty percent of bonus is in the form of units of phantom stock. Employees are credited with a specified number of units of phantom stock equal to such number of shares of Common Stock as could be purchased with 25% of the employee's cash bonus. Five years from the date of the phantom stock grant, employees will receive the value of a share of Common Stock for each unit of phantom stock. At the end of such five-year period, phantom stock holders also receive the value of the dividends paid during the period on the corresponding Common Stock assuming dividend reinvestment. Payouts with respect to phantom stock grants may be made in shares of Common Stock or cash or both. If an executive officer leaves the Company's employ for any reason (other than death, disability or normal retirement) prior to the end of the five-year period, all awards under the deferred compensation plan will be forfeited. 31 (2) These options will vest in four equal installments on the second, third, fourth and fifth anniversaries of the date of grant. All 1995 amounts were granted in 1996 but were earned in 1995 except that Messrs. Turner and Wilson were each granted 45,000 options in 1995 in connection with the Forsyth Transaction (see the table below captioned "Option Grants in 1995"). (3) Represents amounts contributed by the Company under the Salary Deferral and Profit Sharing Plan. (4) Messrs. Turner and Wilson became employees of the Company upon the combination with Forsyth Partners in February 1995. (5) Paid in connection with Mr. Liuzzo's relocation to Raleigh upon joining the Company in June 1994. The following table sets forth certain information with respect to options granted in 1995 to the Named Executive Officers: Option Grants in 1995
Potential Realizable Number of Percent of Value at Assumed Annual Securities Total Options Rates of Stock Price Underlying Granted to Exercise Appreciation for Option Options Employees Price Expiration Term (2) Name Granted(1) in 1995 Per Share Date 5% 10% Ronald P. Gibson......... -- -- -- -- -- -- John L. Turner........... 45,000 11.3% $ 20.75 February 2005 $ 587,230 $ 1,488,152 William T. Wilson, III... 45,000 11.3% $ 20.75 February 2005 $ 587,230 $ 1,488,152 Edward J. Fritsch........ -- -- -- -- -- -- Carman J. Liuzzo......... -- -- -- -- -- --
(1) These options will vest in four equal installments on the second, third, fourth and fifth anniversaries of the date of grant. (2) Realizable values have been reduced by the per share option exercise price that each optionee will be required to pay to the Company in order to exercise the options. The following table sets forth certain information with respect to options held by the Named Executive Officers at year-end 1995: 1995 Year-End Option Values
Number of Securities Underlying Value of Unexercised in-the-Money Unexercised Options at 1995 Year-End Options at 1995 Year-End Name Exercisable/Unexercisable Exercisable/Unexercisable(1) Ronald P. Gibson........ -- /40,000 -- /$290,000 John L. Turner.......... -- /45,000 -- /$337,500 William T. Wilson, III..................... -- /45,000 -- /$337,500 Edward J. Fritsch....... -- /30,000 -- /$217,500 Carman J. Liuzzo........ -- /25,000 -- /$181,250
(1) Based on a closing price of $28.25 per share of Common Stock on December 29, 1995. Employment Contracts Messrs. Gibson, Fritsch and Liuzzo entered into three-year employment contracts with the Company in 1994, as did Messrs. Turner and Wilson in 1995. These contracts provide for a minimum annual base salary at the rate of $150,000 for Mr. Gibson, $150,000 for Mr. Turner, $135,000 for Mr. Wilson, $85,000 for Mr. Fritsch, and $86,000 for Mr. Liuzzo, which rate may be increased by the Board of Directors. As of December 31, 1995, the annual base salary rate was $175,000 for Mr. Gibson, $150,000 for Mr. Turner, $135,000 for Mr. Wilson, $120,000 for Mr. Fritsch and $100,000 for Mr. Liuzzo. Each contract includes 32 provisions restricting the officers from competing with the Company during employment and, except in certain circumstances, for a limited period of time after termination of employment. Each of the employment contracts provides for severance payments in the event of termination by the Company without cause equal to the officer's base salary at the rate then in effect for the later of one year from the date of termination or three years from the contract date. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section under the heading "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On February 10, 1995, the Operating Partnership acquired the six-building Research Commons office center in exchange for Units and the assumption of certain indebtedness. Mr. Timko, who is a director of the Company, was one of the owners of Research Commons and indirectly received 262,215 Units as a result of the transaction. Mr. Timko may also receive his share of up to 40,000 additional Units, which may be paid in the event the property meets certain performance objectives. Pursuant to the terms of the Research Commons acquisition agreements, if the rentals of the buildings at Research Commons meet certain levels of financial performance, the prior owners of Research Commons are entitled to receive an additional 40,000 Units, subject to increase for accrued dividends from the date of the Company's purchase of Research Commons on any such earn-out Units issued. Earn-out Units will be issued in the event the leases for the 4301 building and the 4501 building at the Research Commons office park are renewed; provided, however, that no earn-out Units are issuable if expenditures related to such renewals exceed $440,000. As part of the Research Commons acquisition, Mr. Timko was released from guarantees aggregating approximately $6.3 million relating to indebtedness secured by Research Commons, and the Company assumed a $5 million promissory note owed by the previous owners of Research Commons (of which Mr. Timko was an affiliate) to Beaunit Corporation, which is also affiliated with Mr. Timko. On February 23, 1995, the Company and Forsyth Partners combined their property portfolios, management teams and business operations. As part of the combination with Forsyth Partners (the "Forsyth Transaction"), the Company succeeded to the ownership of 58 commercial properties and the management, brokerage, development, construction and related businesses of Forsyth Partners. In connection with the Forsyth Transaction, Messrs. Turner and Wilson contributed their interests in the assets of Forsyth Partners in exchange for the following: Mr. Turner received 399,541 Units (including 43,692 Units in exchange for a promissory note secured by Ivy Distribution Center, which was acquired in the Forsyth Transaction); and Mr. Wilson received 258,204 Units. Each of Messrs. Turner and Wilson also received warrants to acquire 35,000 shares of Common Stock at $21.00 per share and options to purchase 45,000 shares of Common Stock at $20.75 per share, which options are exercisable in four equal annual installments commencing on the second anniversary of the date of grant. In addition, (i) Messrs. Turner and Wilson were released from guarantees aggregating approximately $39.5 million relating to indebtedness secured by properties contributed in the Forsyth Transaction, and (ii) the Operating Partnership indemnified certain owners of Forsyth Partners, including Messrs. Turner and Wilson, for any obligations that may arise under approximately $2.5 million of additional guarantees relating to indebtedness that was assumed by the Company and was not released by the lender. On May 25, 1995, the Company purchased Creekstone Crossing, a 59,000-square foot service center (96% office finish) in Raleigh-Durham, North Carolina. The aggregate purchase price was $4.5 million paid through the issuance of 4,640 Units in the Operating Partnership and the assumption of $4.4 million of indebtedness. Messrs. Sloan (chairman of the Board of Directors), Gibson (chief executive officer) and Fritsch (vice president) indirectly owned 16.5%, 4.9% and 1.3%, respectively, of the property prior to its sale to the Company. 33 On December 4, 1995, the Company purchased the Cotton Building, a 40,000-square foot office building in Raleigh-Durham, North Carolina, for approximately $2.3 million. The purchase price consisted of 23,466 Units (valued at $25.50) and the assumption of $1.7 million of indebtedness. Mr. Sloan indirectly owned 50% of the property at the time of its sale to the Company. The property was valued using discount cash flow analysis and by a comparison to other comparable building sale transactions. In accordance with the Company's conflict of interest policies, the purchase price was approved by the Company's independent directors. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K (a) 1. and 2. Financial Statements and Schedules The financial statements and schedules listed below are filed as part of this annual report on the pages indicated. INDEX TO FINANCIAL STATEMENTS
Page Highwoods Properties, Inc. Report of Independent Auditors........................................................................... 39 Consolidated Balance Sheets as of December 31, 1995 and 1994............................................. 40 Consolidated Statements of Operations for the Year Ended December 31, 1995 and for the Period from June 14, 1994 (commencement of operations) to December 31, 1994............................................ 41 Consolidated Statement of Stockholders' Equity for the Period from June 14, 1994 (commencement of operations) to December 31, 1995...................................................................... 42 Consolidated Statement of Cash Flows for the Year Ended December 31, 1995 and for the Period from June 14, 1994 (commencement of operations) to December 31, 1994............................................ 43 Notes to Consolidated Financial Statements............................................................... 45 Schedule III -- Real Estate and Accumulated Depreciation................................................. 57 Highwoods Group Report of Independent Auditors........................................................................... 63 Combined Balance Sheets as of December 31, 1993 and 1992................................................. 64 Combined Statements of Operations for the period from January 1, 1994 to June 13, 1994 and for the years ended December 31, 1993, 1992, and 1991............................................................... 65 Combined Statements of Owners' Deficit for the years ended December 31, 1993, 1992 and 1991.............. 66 Combined Statements of Cash Flows for the period from January 1, 1994 to June 13, 1994 and for the years ended December 31, 1993, 1992 and 1991................................................................ 67 Notes to Combined Financial Statements................................................................... 68 Schedule III-Real Estate and Accumulated Depreciation.................................................... 72
3. Exhibits
Exhibit No. Description 2.1(1) -- Master Agreement of Merger and Acquisition dated January 9, 1995 by and among Highwoods Realty Limited Partnership, Forsyth Partners Holdings, Inc., Forsyth Partners Brokerage, Inc., John L. Turner, William T. Wilson, III, John E. Reece II, H. Jack Leister and the partnerships and corporations listed therein (list of omitted schedules included) 2.2(1) -- Agreement pursuant to Item 601(b)(2) of Regulation S-K 2.3(2) -- Omnibus Option Agreement by and among Highwoods Realty Limited Partnership and the Grantors named therein dated March 24, 1994 3.1(2) -- Amended and Restated Articles of Incorporation of the Company 3.2(2) -- Amended and Restated Bylaws of the Company 4.1(2) -- Specimen of certificate representing shares of Common Stock 10.1(2) -- Amended and Restated Agreement of Limited Partnership of the Operating Partnership 10.2(5) -- Form of Registration Rights and Lockup Agreement among the Company and the Holders named therein, which the Company and all Unit holders have signed to date 10.3(2) -- Articles of Incorporation of Highwoods Services, Inc. 10.4(2) -- Bylaws of Highwoods Services, Inc. 10.5(3) -- Articles of Incorporation of Forsyth Properties Services, Inc. 10.6(3) -- Bylaws of Forsyth Properties Services, Inc. 10.7(4)(5) -- Amended and Restated 1994 Stock Option Plan
35
Exhibit No. Description 10.8(a)(1)(4) -- Employment Agreement between the Company and the Operating Partnership and Ronald P. Gibson 10.8(b)(1)(4) -- Employment Agreement between the Company and the Operating Partnership and Edward J. Fritsch 10.8(c)(3)(4) -- Employment Agreement between the Company and the Operating Partnership and Carman J. Liuzzo 10.8(d)(3)(4) -- Employment Agreement between the Company and the Operating Partnership and John L. Turner 10.8(e)(3)(4) -- Employment Agreement between the Company and the Operating Partnership and William T. Wilson, III 10.9(2) -- Option Agreement dated February 24, 1994 between State of California Public Employees' Retirement System and Highwoods Properties Company relating to acquisition of the CalPERS Properties 10.10(2) -- First Amendment to Option Agreement dated May 1994 between The State of California Public Employees' Retirement System and Highwoods Properties Company 10.11(2) -- Option Agreement dated March 31, 1994 among Duke University; Ralph W. Mullins, Jr.; Daniel C. Austin; M&A Investment Company; Quail Professional Center II; Quail Corners Office Building, Ltd. and A&M Investment Company and Highwoods Properties Company relating to acquisition of the Austin Mullins Properties (the North Park Properties) and the Option Land adjacent thereto 10.12(2) -- Form of Right of First Refusal between The Nelson Company and Highwoods Realty Limited Partnership relating to the Option Land in Creekstone Park 10.13(2) -- Form of Option to Purchase between Rex Drive Associates and Highwoods Properties Company relating to Option Land in the Rexwoods Office Center 10.14(2) -- Form of Agreement for Sale of Partnership Interests among Rexwoods II Associates, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of Rexwoods II 10.15(2) -- Form of Agreement for Sale of Partnership Interests among Expressway One Partnership, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of Expressway One 10.16(2) -- Form of Agreement for Sale of Partnership Interests among Riverbirch Associates, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of Riverbirch 10.17(2) -- Form of Agreement for Sale of Partnership Interests among The Nelson Company, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of Development Land in Creekstone Park 10.18(2) -- Form of Agreement for Sale of Partnership Interests among Blue Ridge II Associates, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of Blue Ridge II 10.19(2) -- Form of Agreement for Sale of Partnership Interests among Progress Center II Partnership, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of CompuChem 10.20(2) -- Form of Agreement for Sale of Partnership Interests among Laser Associates, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of Rexwoods Center 10.21(2) -- Form of Agreement for Sale of Partnership Interests among Rexwoods III Associates, Limited Partnership, Highwoods Realty Limited Partnership and the Sellers named therein relating to the purchase of Rexwoods III 10.22(2) -- Form of Right of First Refusal between Expressway One Partnership and Highwoods Realty Limited Partnership relating to Option Land in Expressway Commerce Center 10.23(1) -- Form of Supplemental Representations, Warranties and Agreements executed by Stanley O. Kelley to Highwoods Realty Limited Partnership related to the transfer of Ivy Distribution Center 10.24(1) -- Omnibus Option Agreement dated January 3, 1995 by and among Highwoods Realty Limited Partnership and the Grantors named therein related to the sale of interests in 370 and 380 Knollwood, Ivy Distribution Center and Chesapeake
36
Exhibit No. Description 10.25(1) -- Omnibus Option Agreement dated January 3, 1995 by and among Highwoods Realty Limited Partnership and the Grantors named therein related to the sale of interests in 370 and 380 Knollwood and Ivy Distribution Center 10.26(1) -- Omnibus Option Agreement dated January 3, 1995 by and between Highwoods Realty Limited Partnership and Stanley O. Kelley related to the sale of interests in Ivy Distribution Center 10.27(1) -- Omnibus Option Agreement dated January 3, 1995 by and between Highwoods Realty Limited Partnership and A.T. Williams Oil Company related to the sale of interests in 3288 Robinhood 10.28(1) -- Omnibus Option Agreement dated January 4, 1995 by and between Highwoods Realty Limited Partnership and James F. Marshall related to the sale of interests in Airpart East, Airpark West, Airpark North, West Point Business Park, Steele Creek Park, Woodlawn Plaza, and 370 and 380 Knollwood 10.29(1) -- Omnibus Option Agreement dated January 6, 1995 by and among Highwoods Realty Limited Partnership and the Grantors named therein related to the sale of interests in Airpark East, Airpark West, Airpark North, West Point Business Park, Steele Creek Park, 370 and 380 Knollwood, Chesapeake, Woodlawn Plaza, University Commercial Center, 3288 Robinhood, the NationsFord Development Land, and the ownership interests in FP Brokerage Partnership, FP Development, FP Construction and FPI 10.30(1) -- Omnibus Option Agreement dated January 6, 1995 by and between Highwoods Realty Limited Partnership and William T. Wilson, III related to the sale of interests in Airpark East, Airpark West, Airpark North, West Point Business Park, Steele Creek Park, 370 and 380 Knollwood, Chesapeake, Woodlawn Plaza, University Commercial Center, 3288 Robinhood, the NationsFord Development Land, and the ownership interests in FP Brokerage Partnership, FP Development, FP Construction and FPI 10.30(1) -- Omnibus Option Agreement dated January 6, 1995 by and between Highwoods Realty Limited Partnership and John L. Turner related to the sale of interests in Airpark East, Airpark West, Airpark North, Ivy Distribution Center, West Point Business Park, Steele Creek Park, Chesapeake, Woodlawn Plaza, the NationsFord Development Land, 3288 Robinhood, 370 and 380 Knollwood, University Commercial Center and the ownership interests in Forsyth Partners Brokerage Partnership, FP Development, FP Construction and FPI 10.31(1) -- Omnibus Option Agreement dated January 3, 1995 by and between Highwoods Realty Limited Partnership and Forsyth Partners Brokerage, Inc. related to the sale of assets to Highwoods Realty Limited Partnership 10.32(1) -- Omnibus Option Agreement dated January 6, 1995 by and among Highwoods Realty Limited Partnership and the Grantors named therein relating to the sale of interests in 370 and 380 Knollwood, West Point Business Park, Woodlawn Plaza and Chesapeake and the ownership interest in FP Development 10.33(1) -- Real Estate Purchase and Sale agreement dated August 4, 1994 between Petula Associates, Ltd. and Forsyth Partners Holding, Inc. with amendment dated December 2, 1994, related to the purchase of interests in Airpark West, Airpark East, Airpark North, University Commercial Center, and Steele Creek Park, which agreement will be assigned to Highwoods Realty Limited Partnership 10.34(a)(1) -- Option Agreement dated July 31, 1994 between Burnt Poplar Associates Limited Partnership and Forsyth Partners Holdings, Inc. related to the acquisition of Burnt Poplar, which agreement will be assigned to Highwoods Realty Limited Partnership 10.34(b)(1) -- Indemnification Agreement dated September 26, 1994 between Burnt Poplar Associates Limited Partnership and Forsyth Partners Holdings, Inc. related to the acquisition of Burnt Poplar, which agreement will be assigned to Highwoods Realty Limited Partnership
37
Exhibit No. Description 10.35(1) -- Contract of Sale and Purchase dated December 2, 1994 between Stratford Properties Joint Venture and Forsyth Partners Holdings, Inc., with amendment dated December 30, 1994, related to the acquisition of Stratford, which agreement will be assigned to Highwoods Realty Limited Partnership 10.36(1) -- Contribution and Exchange Agreement dated January 10, 1995 between 4501 Alexander Associates and Highwoods Realty Limited Partnership related to the acquisition of Research Commons 10.37(1) -- Contribution and Exchange Agreement dated January 10, 1995 between JHPB Partners and Highwoods Realty Limited Partnership related to the acquisition of Research Commons 10.38(5) -- Contribution and Exchange Agreement by and among the Operating Partnership, R-K Properties 3, L.P. and the Partners listed therein, dated as of July 18, 1995, relating to acquisition of Vantage Point 10.39(5) -- Purchase and Sale Agreement by and between the Operating Partnership and R-K Properties 5, L.P., dated as of July 18, 1995, relating to the acquisition of Innsbrook Tech I Center 10.40(5) -- Purchase and Sale Agreement by and between the Operating Partnership and R-K Properties 1, L.P., dated as of July 18, 1995, relating to the acquisition of Vantage Place II 10.41(5) -- Purchase and Sale Agreement by and between the Operating Partnership and R-K Properties 2, L.P., dated as of July 18, 1995, relating to the acquisition of Vantage Place IV 10.42(5) -- Asset Purchase Agreement between Ross-Kreckman Management Corporation and Highwoods Services, dated as of July 5, 1995 10.43(5) -- Contribution and Exchange Agreement by and among the Operating Partnership, Vantage Associates I, L.P. and the Partners listed therein, dated as of July 18, 1995, relating to the acquisition of Vantage Place I 10.44(5) -- Contribution and Exchange Agreement by and among the Operating Partnership, Vantage Associates II, L.P. and the Partners listed therein, dated as of July 18, 1995, relating to the acquisition of Vantage Place III 10.45(5) -- Agreement for Contribution and Exchange of Partnership Interests by and among the Operating Partnership, Creekstone Associates I and the Contributors named therein, dated as of May 11, 1995, relating to the acquisition of Creekstone Crossing 10.46(5) -- Ground Lease Agreement by and between Landlord and Seven Parkway Plaza dated as of July 23, 1985, relating to Parkway Plaza Building 7 10.47(5) -- Ground Lease Agreement by and between Landlord and Eight Parkway Plaza dated as of July 31, 1986, relating to Parkway Plaza Building 8 10.48(5) -- Ground Lease Agreement by and between Landlord and Nine Parkway Plaza dated as of April 29, 1984, relating to Parkway Plaza Building 9 10.49(5) -- Contribution and Exchange of the Cotton Building between SJ Company and the Operating Partnership dated December 4, 1995 10.50(1) -- Form of warrant issued to Messrs. Turner, Wilson and Reece 10.51(1) -- Operating Agreement of Forsyth/Carter Brokerage of North Carolina, L.L.C. (included in Exhibit 2.1) 21.1(1) -- Schedule of Subsidiaries of the Company
(1) Previously filed on Form S-11, File No. 33-88364, and incorporated herein by reference. (2) Previously filed on Form S-11, File No. 33-76952, and incorporated herein by reference. (3) A form of this document was previously filed. Copy of executed document filed on Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Management contract or compensatory plan. (5) Previously filed on Company's Annual Report on Form 10-K for the year ended December 31, 1995. The Company will provide copies of any exhibit, upon written request, at a cost of $.05 per page. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the fourth quarter of 1995. 38 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS HIGHWOODS PROPERTIES, INC. We have audited the accompanying consolidated balance sheets of Highwoods Properties, Inc. as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 1995 and for the period from June 14, 1994 (commencement of operations) to December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. 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 audits provide 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 Highwoods Properties, Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and cash flows for the year ended December 31, 1995 and for the period from June 14, 1994 (commencement of operations) to December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule when considered in relation to the basic financial statements taken as a whole presents fairly in all material respects the information required to be set forth therein. ERNST & YOUNG LLP Raleigh, North Carolina February 2, 1996, except note 11 as to which the date is April 29, 1996 39 HIGHWOODS PROPERTIES, INC. Consolidated Balance Sheets (In thousands, except per share amount)
December 31, 1995 1994 Assets Real estate assets, at cost: Land................................................................................... $106,955 $ 34,484 Buildings and improvements............................................................. 491,581 183,572 Development in process................................................................. 15,508 643 Furniture, fixtures and equipment...................................................... 1,288 967 615,332 219,666 Less -- accumulated depreciation....................................................... (22,266) (11,690) Net real estate assets................................................................. 593,066 207,976 Cash and cash equivalents................................................................ 6,838 6,258 Accounts and notes receivable............................................................ 6,338 496 Notes receivable from service subsidiaries............................................... 1,274 620 Accrued straight line rents receivable................................................... 3,407 1,888 Other assets: Deferred leasing costs................................................................. 4,253 2,139 Deferred financing costs and interest rate caps........................................ 8,268 6,796 Prepaid expenses and other............................................................. 1,521 330 14,042 9,265 Less -- accumulated amortization....................................................... (3,831) (1,726) 10,211 7,539 $621,134 $224,777 Liabilities and stockholders' equity Mortgages and notes payable.............................................................. $182,736 $ 66,864 Accounts payable, accrued expenses and other liabilities................................. 11,052 5,717 Total liabilities...................................................................... 193,788 72,581 Minority interest........................................................................ 73,536 15,981 Stockholders' equity: Common stock, $.01 par value, authorized 100,000,000 shares; issued and outstanding 19,404,411 at December 31, 1995 and 8,986,910 at December 31, 1994................................................................................... 194 90 Additional paid-in capital............................................................... 355,248 135,531 Retained earnings (distributions in excess of net earnings).............................. (1,632) 594 Total stockholders' equity............................................................. 353,810 136,215 $621,134 $224,777
See accompanying notes to consolidated financial statements. 40 HIGHWOODS PROPERTIES, INC. Consolidated Statements of Operations (In thousands, except per share amounts) For the Year Ended December 31, 1995 and for the Period from June 14, 1994 (commencement of operations) to December 31, 1994
1995 1994 Revenue: Rental income............................................................................ $71,217 $19,011 Distributions from service and leasing subsidiaries...................................... -- 100 Interest and other income................................................................ 2,305 331 Total revenue.............................................................................. 73,522 19,442 Operating expenses: Rental property.......................................................................... 17,049 5,110 Depreciation and amortization............................................................ 11,082 2,607 Interest expense: Contractual........................................................................... 12,101 2,482 Amortization of deferred financing costs and interest rate cap........................ 1,619 738 13,720 3,220 General and administrative............................................................... 2,737 810 Income before minority interest and extraordinary item................................ 28,934 7,695 Minority interest.......................................................................... (4,937) (808) Income before extraordinary item...................................................... 23,997 6,887 Extraordinary item -- loss on early extinguishment of debt................................. (875) (1,273) Net income............................................................................ $23,122 $ 5,614 Net income per common share: Income before extraordinary item......................................................... $ 1.55 $ 0.77 Extraordinary item -- loss on early extinguishment of debt............................... (.06) (0.14) Net income............................................................................... $ 1.49 $ 0.63 Weighted average shares outstanding...................................................... 15,487 8,936
See accompanying notes to consolidated financial statements. 41 HIGHWOODS PROPERTIES, INC. Consolidated Statement of Stockholders' Equity (In thousands) For the Year Ended December 31, 1995 and for the Period from June 14, 1994 (commencement of operations) to December 31, 1994
Retained Earnings (Distributions Common Additional in Excess of Stock Paid-In-Capital Net Earnings) Total Balance at June 14, 1994 (commencement of operations).... $-- $ 1 $-- $ 1 Issuance of 8,986,190 shares of common stock............. 90 164,324 164,414 Charge to reflect carryover of historical basis of accounting and recognition of minority interest in Operational Partnership for continuing investors....... -- (28,794) -- (28,794) Distributions paid....................................... -- -- (5,020) (5,020) Net income............................................... -- -- 5,614 5,614 Balance at December 31, 1994............................. 90 135,531 594 136,215 Issuance of 10,418,221 shares of common stock............ 104 219,717 -- 219,821 Distributions paid....................................... -- -- (25,348) (25,348) Net income............................................... -- -- 23,122 23,122 Balance at December 31, 1995............................. $194 $ 355,248 $ (1,632) $353,810
See accompanying notes to consolidated financial statements. 42 HIGHWOODS PROPERTIES, INC. Consolidated Statement of Cash Flows of the Company (In thousands) For the Year Ended December 31, 1995 and for the Period from June 14, 1994 (commencement of operations) to December 31, 1994
1995 1994 Operating activities: Net income............................................................................... $ 23,122 $ 5,614 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................................................... 12,701 3,345 Loss on early extinguishment of debt................................................... 875 1,273 Minority interest...................................................................... 4,937 808 Changes in operating assets and liabilities: Accounts receivable................................................................. (1,561) (321) Prepaid expenses and other assets................................................... (173) (521) Accrued straight line rents receivable.............................................. (1,519) (503) Accounts payable, accrued expenses and other liabilities............................ 4,787 3,455 Net cash provided by operating activities......................................... 43,169 13,150 Investing activities: Proceeds from disposition of real estate assets.......................................... 2,200 -- Additions to real estate assets.......................................................... (130,411) (99,208) Other assets and notes receivable........................................................ (1,777) (620) Cash from contributed net assets......................................................... 549 2,088 Cash paid in exchange for partnership net assets......................................... (6,593) (9,623) Net cash used in investing activities............................................... (136,032) (107,363) Financing activities: Distributions paid....................................................................... (29,845) (5,020) Net proceeds from the sale of common stock............................................... 219,821 164,413 Payment of prepayment penalties and loan costs........................................... (1,046) (1,025) Borrowings on credit facility............................................................ 50,800 62,700 Repayment of credit facility............................................................. (87,000) (20,000) Proceeds from mortgages and notes payable................................................ 90,250 -- Repayment of mortgages................................................................... (148,907) (93,947) Payment of deferred financing costs...................................................... (630) (6,650) Net cash provided by financing activities........................................... 93,443 100,471 Net increase in cash and cash equivalents................................................ 580 6,258 Cash and cash equivalents at beginning of the period..................................... 6,258 -- Cash and cash equivalents at end of the period........................................... $ 6,838 $ 6,258 Supplemental disclosure of cash flow information: Cash paid for interest................................................................... $ 11,965 $ 2,073
See accompanying notes to consolidated financial statements. 43 HIGHWOODS PROPERTIES, INC. Consolidated Statement of Cash Flows of the Company -- Continued (In thousands) For the Year Ended December 31, 1995 and for the Period from June 14, 1994 (commencement of operations) to December 31, 1994 Supplemental disclosure of non-cash investing and financing activities The following summarizes the net assets contributed by the Unit holders of the Operating Partnership or assets acquired subject to mortgages and notes payable:
1995 1994 Assets: Real estate assets, net................................................................... $260,883 $51,614 Cash and cash equivalents................................................................. 549 2,088 Deferred rent receivable.................................................................. -- 1,385 Tenant leasing costs, net................................................................. -- 1,188 Deferred financing costs, net............................................................. 842 488 Accounts receivable and other............................................................. 6,290 174 Total assets............................................................................ 268,564 56,937 Liabilities: Mortgages payable......................................................................... 210,728 63,947 Accounts payable, accrued expenses and other liabilities.................................. 549 2,262 Total liabilities....................................................................... 268,564 66,209 Net assets (liabilities)............................................................. $ 57,287 $(9,272) In connection with the above transactions, the Company made additional cash payments to certain partners in exchange for their partnership net assets in the amounts of $9,623,000 in 1994 and $6,593,000 in 1995. These transactions were accounted for using the purchase method of accounting. Further in connection with these transactions, the Company received cash payments at closing to fund the payment of certain accrued liabilities such as property taxes. Additionally, in connection with the formation of the Company additional debt of $54,164,000 was assumed and Units valued at $4,199,000 were issued during the period from June 14, 1994, to December 31, 1994.
See accompanying notes to consolidated financial statements. 44 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Organization and Formation of the Company Highwoods Properties, Inc. (the "Company") is a self-administered and self managed real estate investment trust (REIT) which operates in the Southeastern United States. The Company's assets include 87 suburban office properties, 104 industrial properties and 203 acres of undeveloped land suitable for future development. The Company was incorporated in Maryland in February 1994 and is the successor to the operations of the Highwoods Group. On June 14, 1994, the Company commenced operations upon completion of a public offering of 7,400,000 shares of $.01 par value Common Stock (plus 1,110,000 shares subsequently issued pursuant to the underwriters' over-allotment option, the "Initial Public Offering"). The Initial Public Offering price was $21 per share resulting in gross offering proceeds of $178,710,000. Proceeds to the Company, net of underwriters' discount, an advisory fee and total offering expenses, were $164,481,300. The following transactions (the "Formation Transactions") occurred in connection with the Initial Public Offering: (Bullet) Through the merger of Highwoods Properties Company ("HPC") into the Company certain investors received 476,190 shares of restricted Common Stock in exchange for their holdings in HPC. (Bullet) The Company consummated various purchase agreements to acquire certain interests in 41 properties, including 27 properties which were not owned by the Highwoods Group prior to the Initial Public Offering. For the 14 properties previously owned by the Highwoods Group, negative net assets of approximately $9,272,000 were contributed to the Operating Partnership at their historical cost. Approximately, $8,400,000 was distributed to the non-continuing partners of the Highwoods Group for their partnership interest in the 14 properties. For the 27 properties not owned by the Highwoods Group, the Company issued approximately $4,200,000 of Units, assumed $54,164,000 of debt and paid $82,129,000 in cash. These 27 properties were recorded at their purchase price using the purchase method of accounting. (Bullet) The Company became the sole general partner of Highwoods/Forsyth Limited Partnership, formerly Highwoods Realty Limited Partnership (the "Operating Partnership"), by contributing its ownership interests in the 41 properties and its third-party fee business and all but $10,400,000 of the net proceeds of the Initial Public Offering in exchange for an approximate 88.3% interest in the Operating Partnership. (Bullet) The Operating Partnership executed various option and purchase agreements whereby it paid approximately $81,352,000 in cash, issued 1,054,664 units in the Operating Partnership ("Units") and assumed approximately $118,111,000 of indebtedness in exchange for fee simple interests in the 41 properties and the development land. (Bullet) The Operating Partnership contributed the third-party management and development business and the third-party leasing business to Highwoods Services, Inc. (formerly Highwoods Realty Services, Inc. and Highwoods Leasing Company) in exchange for 100% of each company's non-voting common stock and 1% of their voting common stock. Generally one year after issuance (the "lock-up period"), the Operating Partnership is obligated to redeem each Unit at the request of the holder thereof for cash equal to the fair market value of one share of the Company's Common Stock at the time of such redemption, provided that the Company at its option may elect to acquire any such Unit presented for redemption for one share of Common Stock. When a Unit 45 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued holder redeems a Unit for a share of Common Stock or cash, the minority interest will be reduced and the Company's share in the Operating Partnership will be increased. The Company's units are not redeemable for cash. At December 31, 1995, the one-year lock-up period had expired with respect to 1,054,664 of the 3,732,412 Units issued. Basis of Presentation The consolidated financial statements include the accounts of the Company and the Operating Partnership. The Company's investments in Highwoods Services, Inc. and Forsyth Properties Services, Inc. (the "Service Companies") are accounted for on the cost basis. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company is a real estate investment trust ("REIT") under Section 856 through 860 of the Internal Revenue Code of 1986, as amended. Minority interest in the Company represents the limited partnership interest in the Operating Partnership owned by various individuals and entities and not the Company. This minority interest relates to holders of Units. Per share information is calculated using the weighted average number of shares outstanding. The extraordinary loss represents the write-off of loan origination fees and prepayment penalties paid on the early extinguishment of debt and is shown net of the minority interest's share in the loss. Real Estate Assets Real estate assets are stated at the lower of cost or net realizable value. All capitalizable costs related to the improvement or replacement of commercial real estate properties are capitalized. Depreciation is computed by the straight-line method over the estimated useful life of 40 years for buildings and improvements and 5 to 7 years for furniture and equipment. Tenant improvements are amortized over the life of the respective leases, using the straight-line method. The Company reviews each property for any evidence of possible impairment of carrying value based on estimated future cash flows. Based on this analysis, as of December 31, 1995 and 1994 the carrying value of all properties is below their estimated net realizable values. In March 1995, the FASB issued 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 long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted the Statement in the first quarter of 1996 and the adoption did not have any material effect. Cash Equivalents The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Revenue Recognition Minimum rental income is recognized on a straight-line basis over the term of the lease. Unpaid rents are included in accounts receivable. Certain lease agreements contain provisions which provide reimbursement of real estate taxes, insurance, advertising and certain common area maintenance (CAM) costs. These additional rents are recorded on the accrual basis. All rent and other receivables from tenants are due from commercial building tenants located in the properties. 46 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued Deferred Lease Fees and Loan Costs Lease fees, concessions and loan costs are capitalized at cost and amortized over the life of the related lease or loan term, respectively. Income Taxes The Company is a real estate investment trust ("REIT") for federal income tax purposes. A corporate REIT is a legal entity that holds real estate interests, and through distributions to stockholders, is permitted to reduce or avoid the payment of Federal income taxes at the corporate level. To maintain qualification as a REIT, the Company must distribute to stockholders at least 95% of REIT taxable income. No provision has been made for income taxes because the Company qualified as a real estate investment trust, distributed the necessary amount of taxable income and, therefore, incurred no income tax expense during the period. Concentration of Credit Risk Management of the Company performs ongoing credit evaluations of its tenants. The properties are leased to approximately 950 tenants, in four georgraphic locations, which engage in a wide variety of businesses. There is no dependence upon any single tenant. Interest Rate Risk Management The Company enters into various interest rate swaps and caps in managing its interest rate risk. Payments to or from the counterparties are recorded as adjustments to interest expense. The Company has designated these instruments as hedges against existing liabilities and accordingly utilizes hedge accounting. The Company would not realize a material loss as of December 31, 1995 in the event of non-performance by any one counterparty. The Company has entered into transactions with financial institution counterparties with a credit rating of Aa3 or better. Additionally, the Company limits the amount of credit exposure with any one institution. Stock Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. In accordance with the FASB's issuance of FAS No. 123 "Accounting for Stock Based Compensation" the Company will elect to provide the required footnote disclosures in 1996. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 47 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. MORTGAGES AND NOTES PAYABLE Mortgages and notes payable consisted of the following at December 31, 1995 and 1994 (in thousands):
1995 1994 Conventional fixed rate mortgages payable (a.).................... $134,687 $24,164 Variable rate mortgages payable (b.).............................. 36,549 -- 9% fixed rate unsecured note payable.............................. 5,000 -- Revolving credit facility (c.).................................... 6,500 42,700 Total........................................................... $182,736 $66,864
(a.) Conventional fixed rate mortgages payable includes 19 loans at December 31, 1995, and seven loans at December 31, 1994. The loans were secured by real estate assets with an aggregate undepreciated cost of approximately $226,000,000 at December 31, 1995. Interest rates on fixed rate mortgages payable range from 7.0% to 13.0% with a weighted average rate of 8.80% at December 31, 1995. (b.) Variable rate mortgages payable includes three loans at December 31, 1995. The loans were secured by real estate assets with an aggregate undepreciated cost of approximately $75,000,000 at December 31, 1995. Interest rates on variable rate mortgages payable range from 1.35% to 1.50% above the 30-day London Interbank Offered Rate ("LIBOR"). At December 31, 1995, 30-day LIBOR was 5.9%. The Company has entered into two interest rate swap agreements with financial institutions to effectively fix the interest rates on the variable rate mortgages payable at a rate of 7.24%. At December 31, 1995, the notional amounts of the interest rate swaps equaled the outstanding balance of the mortgages payable. The swaps expire in June 1999 and July 2000 upon the maturity of the respective mortgage agreements. The cost basis of the interest rate swaps was $670,000 at December 31, 1995. (c.) The Company has a revolving credit facility in the amount of $80,000,000 from two participating banks. The credit facility bears interest at 1.50% above 30-day LIBOR and matures on June 13, 1999. The terms of the credit facility require the Company to pay a commitment fee equal to .25% on the unused portion of the credit facility and include certain restrictive covenants which limit, among other things, dividend payments and additional indebtedness and which requires compliance with certain financial ratios and measurements. At December 31, 1995, the Company was in compliance with the terms of the credit facility. The credit facility is secured by real estate assets with an aggregate undepreciated cost of approximately $133,000,000 at December 31, 1995. To limit increases in interest expense due to changes in 30-day LIBOR, the Company used $6,170,000 of the proceeds from the Initial Public Offering to purchase a five-year, $80,000,000 interest rate protection agreement. The interest rate protection agreement limits the Company's exposure to 30-day LIBOR of 5.5% (7.0% with the 1.50% spread). The initial premium paid to acquire the interest rate protection agreement is being amortized as an increase to interest expense over the five-year term of the agreement. Payments received from the counterparties under the interest rate protection agreements were $385,000 in 1995 and $25,000 in 1994 and were recorded in the contractual interest expense in the income statement. At December 31, 1995 the effective interest rate on the credit facility was 7%. (d.) The aggregate maturities of the mortgages and notes payable are as follows (in thousands): 1996.................................................. $ 4,137 1997.................................................. 25,135 1998.................................................. 7,301 1999.................................................. 38,719 2000.................................................. 39,084 Thereafter............................................ 68,360 $182,736
48 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. MORTGAGES AND NOTES PAYABLE -- Continued During 1995 and 1994, the total interest costs incurred on mortgages and notes payable was $12,608,000 and $2,499,000, respectively. Capitalized interest during 1995 and 1994 was $507,000 and $17,000, respectively. 3. MANAGEMENT COMPENSATION PROGRAM The Company has established an incentive compensation plan for executive officers of the Company. The plan provides for payment of a cash bonus to participating officers and employees if certain Company performance objectives are achieved. The amount of the bonus to participating officers and employees is based on a formula determined for each employee by the Compensation Committee, but may not exceed 100% of base salary. All bonuses may be subject to adjustment to reflect individual performance as measured by specific qualitative criteria to be approved by the Compensation Committee. Bonuses are accrued in the year earned and included in accrued expenses in the Consolidated Balance Sheet. In addition, as an incentive to retain top management, the Company has established a deferred compensation plan which provides for phantom stock awards. Under the deferred compensation plan, phantom stock or stock appreciation rights equal in value to 25% of the yearly cash bonus may be set aside in an incentive pool, with payment after five years. If an employee leaves the Company for any reason (other than death, disability or normal retirement) prior to the end of the five-year period, all awards under the deferred compensation plan will be forfeited. 4. 401(k) SAVINGS PLAN The Company has a 401(k) savings plan covering substantially all employees who meet certain age and employment criteria. The Company matches the first 6% of compensation deferred at the rate of 50% of employee contributions. During the year ended December 31, 1995, the Company contributed $51,000 to the Plan. Administrative expenses are paid by the Company. 5. RENTAL INCOME The Company's real estate assets are leased to tenants under operating leases that expire over the next ten years. The minimum rental amounts under the leases are generally either subject to scheduled fixed increases or adjustments based on the Consumer Price Index. Generally, the leases also require that the tenants reimburse the Company for increases in certain costs above their base year costs. Expected future minimum rents to be received over the next five years and thereafter from tenants for leases in effect at December 31, 1995, are as follows (in thousands): 1996.......................................................................... $ 81,765 1997.......................................................................... 66,760 1998.......................................................................... 50,863 1999.......................................................................... 39,594 2000.......................................................................... 27,134 Thereafter.................................................................... 28,685 $294,801
6. RELATED PARTY TRANSACTIONS The Company makes advances to Highwoods Services, Inc. and Forsyth Properties Services, Inc. for working capital purposes. These advances bear interest at a rate of 7% per annum and totaled $1,274,000 at December 31, 1995, and $620,000 at December 31, 1994. The Company recorded interest income from 49 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. RELATED PARTY TRANSACTIONS -- Continued these advances of $43,000 and $15,000 for the year ended December 31, 1995, and for the period from June 14, 1994, to December 31, 1994. During the year ended December 31, 1995, the Company acquired two properties encompassing 99,334 square feet at an aggregate purchase price of $6,850,000 from partnerships in which certain officers and directors owned a majority interest. These transactions were accounted for using the purchase method of accounting and their operating results are included in the Statements of Income from their acquisition dates. 7. DISTRIBUTIONS Distributions paid were $1.75 per share for the year ended December 31, 1995, and $.50 per share for the period from June 14, 1994, to December 31, 1994. For federal income tax purposes, the following table summarizes the estimated taxability of distributions paid:
1995 1994 Per Share: Ordinary income............................................. $1.63 $.50 Capital gains............................................... -- -- Return of capital........................................... .12 -- Total.................................................... $1.75 $.50
The Company's tax return for the year ended December 31, 1995, has not been filed, and the taxability information for 1995 is based upon the best available data. The Company's tax returns have not been examined by the Internal Revenue Service, and therefore the taxability of distributions is subject to change. On January 30, 1996, the Board of Directors declared a distribution of $.45 per share payable on February 21, 1996, to shareholders of record on February 9, 1996. 8. COMMITMENTS AND CONTINGENCIES Lease: Two of the properties located in Parkway Plaza development are subject to a land lease expiring December 31, 2082. Rental payments are to be adjusted yearly based on the consumer price index. The Company has the option to purchase the leased land during the lease term at the greater of 85% of appraised value or $35,000 per acre. The obligation for future minimum lease payments is as follows (in thousands): 1996................................................................ $ 97 1997................................................................ 97 1998................................................................ 97 1999................................................................ 97 2000................................................................ 97 Thereafter.......................................................... 7,981 $8,466
Litigation: The Company is a party to a variety of legal proceedings arising in the ordinary course of its business. These matters are generally covered by insurance. All of these matters, taken together, are not expected to 50 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. COMMITMENTS AND CONTINGENCIES -- Continued have a material adverse effect on the accompanying consolidated financial statements notwithstanding possible insurance recovery. Stock Options: As of December 31, 1995, 1,400,000 shares of the Company's authorized Common Stock had been reserved for issuance upon the exercise of options granted under the Amended and Restated 1994 Stock Option Plan. For the Company's executive and senior officers and non-independent directors, the options will vest in four equal installments on the second, third, fourth, and fifth anniversaries of the date of grant. For other employees and independent directors, the options will vest in four equal installments on the first, second, third and fourth anniversaries of the date of grant. Options outstanding for the year ended December 31, 1995, and for the period from June 14, 1994 to December 31, 1994, are as follows:
Number of Option Price Shares Per Share Granted at Initial Public Offering......................... 326,000 $21.00 Granted.................................................. -- -- Canceled................................................. -- -- Shares under Option at December 31, 1994................... 326,000 $21.00 Granted.................................................. 400,000 $20.75-$25.00 Exercised................................................ (8,000) $21.00 Canceled................................................. (22,500) $21.00 Shares under Option at December 31, 1995................... 695,500 $20.75-$25.00 Exercisable at December 31, 1995........................... 48,000 $21.00 Available for Grant at December 31, 1995................... 704,500
Warrants: In connection with the Forsyth Transaction, the Company issued warrants to certain officers and directors of the Company to purchase 100,000 shares of the Company's Common Stock at $21 per share. Contracts: The Company has entered into construction contracts totaling $39,173,000 at December 31, 1995. The amounts remaining on these contracts as of December 31, 1995, totaled $26,548,000. The Company has entered into a contract under which it is committed to acquire 64 acres of land over a five-year period for an aggregate purchase price of approximately $10,172,000. The seller has the option to elect to receive the purchase price in either cash or Units valued at $26.67. The Company has also entered into a contract under which it is committed to acquire 18 acres of land on or before August 1, 1998, for an aggregate purchase price of approximately $2,032,000. Environmental Matters: All of the Company's properties, except for Burnt Poplar, have been subjected to Phase I environmental reviews. Such reviews have not revealed, nor is management aware of, any environmental liability that management believes would have a material adverse effect on the accompanying consolidated financial statements. 51 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair values were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value. The carrying amounts and estimated fair value of the Company's financial instruments at December 31, 1995, were as follows (in thousands):
Carrying Fair Amount Value Cash and cash equivalents............................ $ 6,838 $ 6,838 Accounts and notes receivable........................ $ 7,612 $ 7,612 Mortgages and notes payable.......................... $182,735 $186,709 Interest rate swap agreements........................ $ 670 $ (464) Interest rate cap.................................... $ 4,267 $ 1,311
The fair values for the Company's fixed rate mortgages and notes payable were estimated using discounted cash flow analysis, based on the Company's estimated incremental borrowing rate at December 31, 1995, for similar types of borrowing arrangements. The carrying amounts of the Company's variable rate borrowings approximate fair value. The fair values of the Company's interest rate swap and interest rate cap agreements represent the estimated amount the Company would receive or pay to terminate or replace the financial instruments at current market rates. Disclosures about the fair value of financial instruments are based on relevant information available to the Company at December 31, 1995. Although management is not aware of any factors that would have a material effect on the fair value amounts reported herein, such amounts have not been revalued since that date and current estimates of fair value may significantly differ from the amounts presented. 10. MERGERS AND ACQUISITIONS Through mergers and acquisitions during 1995, the Company increased its portfolio of office and industrial space by 6,357,000 square feet at an aggregate cost of $369,900,000. Additionally, during 1995 the Company completed its second and third public offerings of common stock. These transactions were accounted for using the purchase method of accounting and their operating results are included in the Consolidated Statements of Operations from their acquisition dates. During 1994, the Company completed its Initial Public Offering, the Formation Transactions and acquired 207,000 square feet of office and industrial space at an aggregate cost of $15,000,000. Unaudited pro forma results of operations for the years ended December 31, 1995 and 1994 are set forth below. For 1995, such pro forma results assume (i) the acquisition of 5,727,706 square feet of office and industrial space at a total cost of $354,200,000 and (ii) the second and third public offerings occurred at the beginning of the year. For 1994, such pro forma results assume (i) the 1994 acquisition of 5,727,706 square feet of office and industrial space at a total cost of $354,200,000, and (ii) the initial, second and third offerings and the Formation Transactions occurred at the beginning of the year. The proceeds from the second and third offering were used to reduce outstanding indebtedness for working capital purposes. Pro forma interest expense was calculated based upon the indebtedness outstanding after debt repayment and using the effective rate on such indebtedness. In 1994 and 1995, Operating Partnership Units totaling 200,000 and 2,677,748, respectively were issued in connection with various mergers and acquisitions. These Units were recorded at their market value upon the closing date of the transaction. 52 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. MERGERS AND ACQUISITIONS -- Continued
Pro Forma Year Ended Pro Forma Year Ended December 31, 1995 December 31, 1994 (in thousands, except per share amounts) Revenues..................... $ 90,592 $ 83,541 Net Income................... $ 29,764 $ 24,168 Net Income per Share......... $ 1.54 $ 1.25
The pro forma information is not necessarily indicative of what the Company's results of operations would have been if the transactions had occurred at the beginning of each period presented. Additionally, the pro forma information does not purport to be indicative of the Company's results of operations for future periods. 11. SUBSEQUENT EVENTS Credit Facility On March 26, 1996, the Operating Partnership closed on a $140,000,000 unsecured credit facility (the "New Credit Facility") which replaces the existing $80 million line. The balance outstanding at March 31, 1996 is $21,500,000 The New Credit Facility is with three commercial banks and has an initial interest rate of LIBOR +1.50% which will adjust based on the Operating Partnership's senior unsecured credit rating to a range of LIBOR +1.00% to LIBOR +1.75%. The Company will continue to utilize the $80,000,000 interest rate protection agreement to limit its exposure to increases in 30-day LIBOR. Nashville Transaction On April 1, 1996, the Company and the Operating Partnership completed a merger with Eakin & Smith and its affiliates ("Eakin & Smith") combining their property portfolios, management teams and business operations. The merger will be accounted for using the purchase method of accounting. Through the combination, the Company succeeded to the ownership of seven suburban office buildings totaling 848,000 square feet, a 103,000-square-foot suburban office development project, 18 acres of development land and Eakin & Smith's brokerage and property management operations. All the properties and development land are located in Nashville, Tennessee. At March 31, 1996, the properties acquired in the transaction were 97% leased. The aggregate purchase price, assuming the completion of the in-process development project, was approximately $98.5 million payable through the issuance of 537,138 limited partnership units of the Operating Partnership and 489,421 shares of Common Stock, the assumption of $37 million of indebtedness (with a weighted average fixed rate of 8.0%), and cash payments of approximately $33 million. The aggregate purchase price excludes deferred payments of up to 54,056 shares of Common Stock, which are attributable to Eakin & Smith's brokerage and property management operation. A total payment of 13,514 shares of Common Stock will be paid to the three principals of Eakin & Smith, Inc. for each of the first four 12-month periods following the combination in which third-party service revenue attributable to the Eakin & Smith brokerage and property management operations exceeds $2,000,000. As part of the combination, the three principals of Eakin & Smith, Inc. received options to purchase 105,000 shares of common stock at $27.50 per share. Such options vest in four equal annual installments beginning with the second anniversary of the date of grant. Such principals also received warrants to purchase 150,000 shares of Common Stock for $28.00 per share. Pending Acquisition of Crocker Realty Trust, Inc. On April 29, 1996, the Company and the Operating Partnership entered into an Agreement and Plan of Merger (the "Merger Agreement") with Crocker Realty Trust, Inc. ("Crocker"). Under the terms of the Merger Agreement, Cedar Acquisition Corporation ("Cedar"), a newly formed subsidiary of the Company, 53 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 11. SUBSEQUENT EVENTS -- Continued will merge into Crocker with the Company becoming the sole shareholder of Crocker. The Company intends to contribute the shares of common stock of Crocker to the Operating Partnership in exchange for limited partnership interests therein. As a result, Crocker would become a subsidiary of the Operating Partnership. As a result of the Merger, the Operating Partnership will acquire 58 suburban office properties and 12 service center properties (the "Crocker Properties") located in 15 Southeastern markets in Florida, North Carolina, South Carolina, Tennessee, Georgia, Virginia and Alabama. The Crocker Properties encompass 5.7 million rentable square feet and, at March 31, 1996, were 95% leased. Under the terms of the Merger Agreement, the Company will acquire all of the outstanding capital stock of Crocker in exchange for a cash payment of $11.02 per share, subject to certain adjustments. Based on Crocker's 26,981,087 shares of outstanding capital stock at May 31, 1996, the purchase price will total approximately $297 million. In addition, the Company will cash out certain existing options and warrants to purchase Crocker common stock for an estimated $4.2 million and assume approximately $240 million of Crocker's currently outstanding indebtedness, having a weighted average interest rate of 8.6%. In connection with the Merger, the Company has also entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with AP CRTI Holdings, L. P. (an affiliate of Apollo Real Estate Advisors), AEW Partners, L.P. (an investment partnership advised by Aldrich Eastman Waltch), and Crocker's three senior executives (Thomas J. Crocker, Richard S. Ackerman and Robert E. Onisko), who together own approximately 83% of Crocker's outstanding common stock (collectively, the "Crocker Selling Shareholders"), which obligates such shareholders to sell their shares to the Company at a cash price of $11.02, subject to the same adjustments as required under the Merger Agreement. The approximately $247 million purchase price of such shares is part of the total approximately $297 million purchase price for all of Crocker's outstanding shares. The Merger Agreement and the Stock Purchase Agreement may be terminated by the respective parties only in certain limited circumstances. In addition, under the terms of the Merger Agreement, certain specified assets and liabilities of Crocker will not be acquired by the Company. In connection with the Merger, the Company obtained a commitment from NationsBank and First Union National Bank of North Carolina for a $250 million revolving line of credit (the "Revolving Loan"). The Revolving Loan will replace the Credit Facility and will be used together with the proceeds from the Offering to fund the Merger. The Revolving Loan will be unsecured for the first nine months and will bear interest at a rate of LIBOR plus 150 basis points. After the initial nine-month period, the Revolving Loan will either convert to a secured loan with a maturity date two years from its closing date or to an unsecured loan maturing on July 31, 1999. The Revolving Loan will remain unsecured if the Company generates at least $300 million of net proceeds from equity offerings (including the proceeds from this Offering) during the initial nine-month period and meets certain covenants, including covenants relating to debt ratios, tangible net worth and interest coverage. If the Revolving Loan remains unsecured after the initial nine-month period, it would have an interest rate that ranged from LIBOR plus 100 basis points to LIBOR plus 175 basis points based on the Company's senior unsecured credit rating. If the loan converts to a secured facility, the Company will be required to pledge assets at least equal in value to 60% of the outstanding amount of the Revolving Loan and the interest rate will equal LIBOR plus 175 basis points. 54 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): Selected quarterly financial data for the year ended December 31, 1995, and for the period from June 14, 1994, to December 31, 1994, is as follows (in thousands except per share amounts):
For the period from June 14, 1994 to December 31, 1994* First Quarter Second Quarter Third Quarter Fourth Quarter Total Revenues............................ $ -- $ 1,482 $ 8,810 $ 9,150 $19,442 Income before minority interest and extraordinary item................ -- 534 3,652 3,509 7,695 Minority interest................... -- (56) (384) (368) (808) Extraordinary item.................. -- (1,273) -- -- (1,273) Net (loss) income................... $ -- $ (795) $ 3,268 $ 3,141 $ 5,614 Per Share: Income before extraordinary item........................... $ -- $ 0.06 $ 0.36 $ 0.35 $ 0.77 Net (loss) income................. $ -- $ (0.09) $ 0.36 $ 0.35 $ 0.63 For the year ended December 31, 1995* First Quarter Second Quarter Third Quarter Fourth Quarter Total Revenues............................ $12,846 $ 17,518 $20,560 $ 22,598 $73,522 Income before minority interest and extraordinary item................ 4,879 6,829 7,939 9,287 28,934 Minority interest................... (800) (1,270) (1,381) (1,486) (4,937) Extraordinary item.................. (875) -- -- -- (875) Net income.......................... $ 3,204 $ 5,559 $ 6,558 $ 7,801 $23,122 Per Share: Income before extraordinary item........................... $ 0.36 $ 0.39 $ 0.39 $ 0.40 $ 1.55 Net income........................ $ 0.29 $ 0.39 $ 0.39 $ 0.40 $ 1.49
* The total of the four quarterly amounts for net income per share do not equal the total for the year due to the use of a weighted average to compute the average number of shares outstanding. 55 HIGHWOODS PROPERTIES, INC. SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1995 (In thousands)
Cost Gross Amount at Which Capitalized Initial Cost Subsequent Carried at Close of Building & to Period Building & Total Accumulated Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12) Highwoods Office Center Amica (3) $ 289 $ 1,544 $ 42 $ 289 $ 1,586 $ 1,875 $ 61 Arrowwood -- 955 3,406 212 955 3,618 4,573 139 Aspen (3) 560 2,104 56 560 2,160 2,720 91 Birchwood (3) 201 911 -- 201 911 1,112 43 Cedar East (3) 563 2,498 58 563 2,556 3,119 106 Cedar West (3) 563 2,487 94 563 2,581 3,144 101 Cottonwood (3) 609 3,253 15 609 3,268 3,877 127 Cypress (3) 567 1,747 26 567 1,773 2,340 84 Dogwood 2,633 766 2,790 -- 766 2,790 3,556 108 Hawthorn (3) 904 3,782 -- 904 3,782 4,686 1,487 Highwoods Tower (3) 203 16,948 -- 203 16,948 17,151 2,035 Holly -- 300 1,170 -- 300 1,170 1,470 45 Ironwood (3) 319 1,276 99 319 1,375 1,694 82 Kaiser (3) 133 3,625 -- 133 3,625 3,758 978 Laurel (3) 884 2,537 4 884 2,541 3,425 98 Leatherwood -- 213 851 98 213 949 1,162 52 Smoketree Tower (3) 2,353 11,922 723 2,353 12,645 14,998 475 Rexwoods Office Center 2500 Blue Ridge (3) 722 4,552 33 722 4,585 5,307 177 Blue Ridge II 1,445 434 -- 1,450 462 1,422 1,884 333 Rexwoods Center (2) 775 -- 3,771 878 3,668 4,546 648 Rexwoods II (3) 355 -- 1,822 362 1,815 2,177 100 Rexwoods III 3,320 886 -- 2,863 919 2,830 3,749 328 Rexwoods IV (3) 586 -- 3,434 586 3,434 4,020 58 Triangle Business Center Bldg. 2A (2) 377 4,004 303 377 4,307 4,684 193 Bldg. 2B (2) 118 1,225 -- 118 1,225 1,343 47 Bldg. 3 (2) 409 5,349 300 409 5,649 6,058 290 Bldg. 7 (2) 414 6,301 (72) 414 6,229 6,643 240 Progress Center Cape Fear -- 131 -- 1,895 131 1,895 2,026 928 Catawba -- 125 -- 1,650 125 1,650 1,775 912 CompuChem -- 269 -- 6,598 289 6,578 6,867 1,726 North Park 4800 North Park 10,847 2,678 17,673 109 2,678 17,782 20,460 689 4900 North Park 1,567 770 1,989 11 770 2,000 2,770 77 5000 North Park (3) 1,010 4,697 560 1,010 5,257 6,267 203 Creekstone Park Creekstone Crossing -- 728 3,891 16 728 3,907 4,635 61 Riverbirch (3) 448 -- 4,137 469 4,116 4,585 813 Willow Oak -- 458 4,685 343 458 5,028 5,486 21 Research Commons EPA Annex/Administration (5) 1,609 10,920 51 1,609 10,971 12,580 390 4501 Bldg. (5) 748 4,448 653 748 5,101 5,849 184 4401 Bldg. (5) 1,822 8,929 3,575 1,822 12,504 14,326 554 4301 Bldg. (5) 1,094 7,425 -- 1,094 7,425 8,519 132 4201 Bldg. (5) 1,466 7,715 2,305 1,466 10,020 11,486 417 Hock Portfollo Fairfield I -- 805 3,227 21 805 3,248 4,053 37 Date of Date Description Construction Acquired Highwoods Office Center Amica 1983 1994 Arrowwood 1979 1994 Aspen 1980 1994 Birchwood 1983 1994 Cedar East 1981 1994 Cedar West 1981 1994 Cottonwood 1983 1994 Cypress 1980 1994 Dogwood 1983 1994 Hawthorn 1987 1994 Highwoods Tower 1991 1994 Holly 1984 1994 Ironwood 1978 1994 Kaiser 1988 1994 Laurel 1982 1994 Leatherwood 1979 1994 Smoketree Tower 1984 1994 Rexwoods Office Center 2500 Blue Ridge 1982 1994 Blue Ridge II 1988 1994 Rexwoods Center 1990 1994 Rexwoods II 1993 1994 Rexwoods III 1992 1994 Rexwoods IV 1994 1994 Triangle Business Center Bldg. 2A 1984 1994 Bldg. 2B 1984 1994 Bldg. 3 1988 1994 Bldg. 7 1988 1994 Progress Center Cape Fear 1980 1994 Catawba 1980 1994 CompuChem 1980 1994 North Park 4800 North Park 1985 1994 4900 North Park 1984 1994 5000 North Park 1980 1994 Creekstone Park Creekstone Crossing 1990 1995 Riverbirch 1987 1994 Willow Oak 1995 1995 Research Commons EPA Annex/Administration 1966 1995 4501 Bldg. 1985 1995 4401 Bldg. 1987 1995 4301 Bldg. 1989 1995 4201 Bldg. 1991 1995 Hock Portfollo Fairfield I 1987 1995
57
Cost Gross Amount at Which Capitalized Initial Cost Subsequent Carried at Close of Building & to Period Building & Total Accumulated Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12) Fairfield II -- 910 3,647 19 910 3,666 4,576 42 Qualex -- 879 3,522 -- 879 3,522 4,401 40 4101 Roxboro -- 1,059 4,243 10 1,059 4,253 5,312 49 4020 Roxboro -- 675 2,708 8 675 2,716 3,391 31 Other Research Triangle Properties Colony Corporate Center (3) 613 3,296 62 613 3,358 3,971 134 Concourse (3) 986 12,069 185 986 12,254 13,240 477 Cotton Building -- 460 1,844 -- 460 1,844 2,304 2 Expressway One Warehouse 1,650 242 -- 1,836 246 1,832 2,078 248 Holiday Inn 2,464 867 2,748 75 867 2,823 3,690 106 Lake Plaza East (3) 856 4,893 126 856 5,019 5,875 217 Phoenix -- 394 2,019 11 394 2,030 2,424 53 Six Forks Center I -- 666 2,688 -- 666 2,688 3,354 8 Six Forks Center II -- 1,086 4,370 8 1,086 4,378 5,464 14 Six Forks Center III -- 862 4,444 91 862 4,535 5,397 144 South Square I (2) 606 3,785 152 606 3,937 4,543 157 South Square II (3) 525 4,742 106 525 4,848 5,373 187 Airpark East Highland Industries (6) 175 699 -- 175 699 874 15 Service Center 1 (6) 275 1,099 46 275 1,145 1,420 24 Service Center 2 (6) 222 889 -- 222 889 1,111 19 Service Center 3 (6) 304 1,214 -- 304 1,214 1,518 27 Service Center 4 (6) 224 898 -- 224 898 1,122 20 Copier Consultants (6) 252 1,008 -- 252 1,008 1,260 22 Service Court (6) 194 774 1 194 775 969 17 Bldg. 01 (6) 377 1,510 8 377 1,518 1,895 34 Bldg. 02 (6) 461 1,842 1 461 1,843 2,304 40 Bldg. 03 (6) 321 1,283 41 321 1,324 1,645 33 Bldg. A (6) 541 2,913 60 541 2,973 3,514 66 Bldg. B (6) 779 3,200 43 779 3,243 4,022 73 Bldg. C (6) 2,384 9,535 35 2,384 9,570 11,954 214 Sears Cenfact 4,561 861 3,446 6 861 3,452 4,313 75 Warehouse 1 (6) 384 1,535 -- 384 1,535 1,919 34 Warehouse 2 (6) 372 1,488 -- 372 1,488 1,860 33 Warehouse 3 (6) 370 1,480 2 370 1,482 1,852 32 Warehouse 4 (6) 657 2,628 1 657 2,629 3,286 57 Airpark North DC-1 (6) 723 2,891 15 723 2,906 3,629 64 DC-2 (6) 1,094 4,375 42 1,094 4,417 5,511 97 DC-3 (6) 378 1,511 -- 378 1,511 1,889 33 DC-4 (6) 377 1,508 1 377 1,509 1,886 33 Airpark West Airpark I (2) 954 3,817 5 954 3,822 4,776 84 Airpark II (2) 887 3,536 7 887 3,543 4,430 79 Airpark IV (2) 226 903 37 226 940 1,166 22 Airpark V (2) 242 966 6 242 972 1,214 22 Airpark VI (2) 326 1,308 61 326 1,369 1,695 34 West Point Business Park BMF Warehouse (7) 795 3,181 -- 795 3,181 3,976 70 WP-11 (7) 393 1,570 22 393 1,592 1,985 35 WP-12 (7) 382 1,531 22 382 1,553 1,935 34 WP-13 (7) 297 1,192 22 297 1,214 1,511 27 WP-3 & 4 (7) 120 480 -- 120 480 600 11 WP-5 -- 178 590 136 178 726 904 5 Fairchild Bldg. (7) 640 2,577 -- 640 2,577 3,217 56 LUWA Bahnson Bldg. (7) 346 1,384 1 346 1,385 1,731 30 Date of Date Description Construction Acquired Fairfield II 1989 1995 Qualex 1985 1995 4101 Roxboro 1984 1995 4020 Roxboro 1989 1995 Other Research Triangle Properties Colony Corporate Center 1985 1994 Concourse 1986 1994 Cotton Building 1972 1995 Expressway One Warehouse 1990 1994 Holiday Inn 1984 1994 Lake Plaza East 1984 1994 Phoenix 1990 1994 Six Forks Center I 1982 1995 Six Forks Center II 1983 1995 Six Forks Center III 1987 1994 South Square I 1988 1994 South Square II 1989 1994 Airpark East Highland Industries 1990 1995 Service Center 1 1985 1995 Service Center 2 1985 1995 Service Center 3 1985 1995 Service Center 4 1985 1995 Copier Consultants 1990 1995 Service Court 1990 1995 Bldg. 01 1990 1995 Bldg. 02 1986 1995 Bldg. 03 1986 1995 Bldg. A 1986 1995 Bldg. B 1988 1995 Bldg. C 1990 1995 Sears Cenfact 1989 1995 Warehouse 1 1985 1995 Warehouse 2 1985 1995 Warehouse 3 1986 1995 Warehouse 4 1988 1995 Airpark North DC-1 1986 1995 DC-2 1987 1995 DC-3 1988 1995 DC-4 1988 1995 Airpark West Airpark I 1984 1995 Airpark II 1985 1995 Airpark IV 1985 1995 Airpark V 1985 1995 Airpark VI 1985 1995 West Point Business Park BMF Warehouse 1986 1995 WP-11 1988 1995 WP-12 1988 1995 WP-13 1988 1995 WP-3 & 4 1988 1995 WP-5 1995 1995 Fairchild Bldg. 1990 1995 LUWA Bahnson Bldg. 1990 1995
58
Cost Gross Amount at Which Capitalized Initial Cost Subsequent Carried at Close of Building & to Period Building & Total Accumulated Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12) University Commercial Center W-1 -- 203 812 -- 203 812 1,015 18 W-2 -- 196 786 -- 196 786 982 17 SR-1 -- 276 1,155 6 276 1,161 1,437 26 SR-2 01/02 -- 215 859 90 215 949 1,164 26 SR-3 -- 167 668 -- 167 668 835 15 Bldg. 01/02 -- 26 102 13 26 115 141 3 Bldg. 03 -- 429 1,771 3 429 1,774 2,203 39 Bldg. 04 -- 514 2,058 6 514 2,064 2,578 46 Ivy Distribution Center -- 452 1,812 67 452 1,879 2,331 42 Knollwood Office Center 370 Knollwood (6) 1,819 7,451 444 1,819 7,895 9,714 192 380 Knollwood (6) 2,977 11,912 163 2,977 12,075 15,052 272 Stoneleigh Business Park 7327 W. Friendly Ave. -- 60 441 6 60 447 507 5 7339 W. Friendly Ave. -- 63 465 8 63 473 536 6 7341 W. Friendly Ave. (1) 113 831 11 113 842 955 10 7343 W. Friendly Ave. (1) 72 531 7 72 538 610 6 7345 W. Friendly Ave. (1) 66 485 6 66 491 557 6 7347 W. Friendly Ave. (1) 97 709 9 97 718 815 8 7349 W. Friendly Ave. (1) 53 388 5 53 393 446 4 7351 W. Friendly Ave. (1) 106 778 11 106 789 895 9 7353 W. Friendly Ave. (1) 123 901 12 123 913 1,036 10 7355 W. Friendly Ave. (1) 72 525 7 72 532 604 6 Spring Garden Plaza 4000 Spring Garden St. -- 127 933 7 127 940 1,067 11 4002 Spring Garden St. -- 39 290 2 39 292 331 3 4004 Spring Garden St. -- 139 1,019 8 139 1,027 1,166 12 Pomona Center-Phase I 7 Dundas Circle (1) 75 552 -- 75 552 627 6 8 Dundas Circle (1) 84 617 -- 84 617 701 7 9 Dundas Circle (1) 51 373 -- 51 373 424 4 Pomona Center-Phase II 302 Pomona Dr. (1) 84 617 -- 84 617 701 7 304 Pomona Dr. (1) 22 163 -- 22 163 185 2 306 Pomona Dr. (1) 50 368 -- 50 368 418 4 308 Pomona Dr. (1) 72 531 -- 72 531 603 6 5 Dundas Circle (1) 72 531 -- 72 531 603 6 Westgate on Wendover-Phase I 305 South Westgate Dr. (4) 30 220 1 30 221 251 3 307 South Westgate Dr. (4) 66 485 4 66 489 555 6 309 South Westgate Dr. (4) 68 496 3 68 499 567 6 311 South Westgate Dr. (4) 75 551 4 75 555 630 6 315 South Westgate Dr. (4) 54 396 2 54 398 452 5 317 South Westgate Dr. (4) 81 597 3 81 600 681 7 319 South Westgate Dr. (4) 54 396 2 54 398 452 5 Westgate on Wendover-Phase II 206 South Westgate Dr. (1) 91 664 4 91 668 759 8 207 South Westgate Dr. (1) 138 1,012 6 138 1,018 1,156 12 300 South Westgate Dr. (1) 68 496 3 68 499 567 6 4600 Dundas Circle (1) 62 456 19 62 475 537 5 4602 Dundas Circle (1) 68 498 -- 68 498 566 6 Radar Road 500 Radar Rd. (1) 202 1,484 -- 202 1,484 1,686 17 502 Radar Rd. (1) 39 285 -- 39 285 324 3 Date of Date Description Construction Acquired University Commercial Center W-1 1983 1995 W-2 1983 1995 SR-1 1983 1995 SR-2 01/02 1983 1995 SR-3 1984 1995 Bldg. 01/02 1983 1995 Bldg. 03 1985 1995 Bldg. 04 1986 1995 1930- Ivy Distribution Center 1980 1995 Knollwood Office Center 370 Knollwood 1994 1995 380 Knollwood 1990 1995 Stoneleigh Business Park 7327 W. Friendly Ave. 1987 1995 7339 W. Friendly Ave. 1989 1995 7341 W. Friendly Ave. 1988 1995 7343 W. Friendly Ave. 1988 1995 7345 W. Friendly Ave. 1988 1995 7347 W. Friendly Ave. 1988 1995 7349 W. Friendly Ave. 1988 1995 7351 W. Friendly Ave. 1988 1995 7353 W. Friendly Ave. 1988 1995 7355 W. Friendly Ave. 1988 1995 Spring Garden Plaza 4000 Spring Garden St. 1983 1995 4002 Spring Garden St. 1983 1995 4004 Spring Garden St. 1983 1995 Pomona Center-Phase I 7 Dundas Circle 1986 1995 8 Dundas Circle 1986 1995 9 Dundas Circle 1986 1995 Pomona Center-Phase II 302 Pomona Dr. 1987 1995 304 Pomona Dr. 1987 1995 306 Pomona Dr. 1987 1995 308 Pomona Dr. 1987 1995 5 Dundas Circle 1987 1995 Westgate on Wendover-Phase I 305 South Westgate Dr. 1985 1995 307 South Westgate Dr. 1985 1995 309 South Westgate Dr. 1985 1995 311 South Westgate Dr. 1985 1995 315 South Westgate Dr. 1985 1995 317 South Westgate Dr. 1985 1995 319 South Westgate Dr. 1985 1995 Westgate on Wendover-Phase II 206 South Westgate Dr. 1986 1995 207 South Westgate Dr. 1986 1995 300 South Westgate Dr. 1986 1995 4600 Dundas Circle 1985 1995 4602 Dundas Circle 1985 1995 Radar Road 500 Radar Rd. 1981 1995 502 Radar Rd. 1986 1995
59
Cost Gross Amount at Which Capitalized Initial Cost Subsequent Carried at Close of Building & to Period Building & Total Accumulated Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12) 504 Radar Rd. (1) 39 285 -- 39 285 324 3 506 Radar Rd. (1) 39 285 -- 39 285 324 3 Holden/85 Business Park 2616 Phoenix Dr. (1) 135 990 -- 135 990 1,125 11 2606 Phoenix Dr. -- 100 (1) 63 466 -- 63 466 529 5 2606 Phoenix Dr. -- 200 (1) 63 466 -- 63 466 529 5 2606 Phoenix Dr. -- 300 (1) 31 229 -- 31 229 260 3 2606 Phoenix Dr. -- 400 (1) 52 382 2 52 384 436 5 2606 Phoenix Dr. -- 500 (1) 64 471 5 64 476 540 6 2606 Phoenix Dr. -- 600 (1) 78 575 -- 78 575 653 7 Industrial Village 7906 Industrial Village Rd. (1) 62 455 5 62 460 522 5 7908 Industrial Village Rd. (1) 62 455 5 62 460 522 5 7910 Industrial Village Rd. (1) 62 455 5 62 460 522 5 Other Piedmont Triad Properties 6348 Burnt Poplar -- 721 2,883 7 721 2,890 3,611 63 6350 Burnt Poplar -- 339 1,365 5 339 1,370 1,709 30 Stratford (3) 2,777 11,459 -- 2,777 11,459 14,236 252 Chesapeake (2) 1,236 4,944 -- 1,236 4,944 6,180 108 3288 Robinhood 1,172 290 1,159 24 290 1,183 1,473 28 Steele Creek Park Bldg. A (2) 499 1,998 7 499 2,005 2,504 44 Bldg. B (2) 110 441 -- 110 441 551 10 Bldg. E (2) 188 824 85 188 909 1,097 16 Bldg. G-1 (2) 196 783 20 196 803 999 18 Bldg. H (2) 169 677 72 169 749 918 30 Bldg. K (2) 148 592 -- 148 592 740 13 Bldg. N (2) 199 722 -- 199 722 921 17 Highwoods/Forsyth Business Park 4101 Stuart Andrew Blvd. (1) 70 510 2 70 512 582 6 4105 Stuart Andrew Blvd. (1) 26 189 1 26 190 216 2 4109 Stuart Andrew Blvd. (1) 87 636 4 87 640 727 7 4201 Stuart Andrew Blvd. (1) 110 809 4 110 813 923 9 4205 Stuart Andrew Blvd. (1) 134 979 8 134 987 1,121 11 4209 Stuart Andrew Blvd. (1) 91 665 3 91 668 759 8 4215 Stuart Andrew Blvd. (1) 133 978 9 133 987 1,120 11 4301 Stuart Andrew Blvd. (1) 232 1,702 11 232 1,713 1,945 20 4321 Stuart Andrew Blvd. (1) 73 534 3 73 537 610 6 Parkway Plaza Building 1 -- 1,110 4,741 -- 1,110 4,741 5,851 4 Building 2 -- 1,694 6,777 -- 1,694 6,777 8,471 5 Building 3 -- 1,570 6,282 -- 1,570 6,282 7,852 5 Building 7 -- -- 4,648 -- -- 4,648 4,648 4 Building 8 -- -- 4,698 -- -- 4,698 4,698 4 Building 9 4,865 -- 6,008 -- -- 6,008 6,008 5 Other Charlotte Properties First Citizens (3) 647 5,528 30 647 5,558 6,205 218 Date of Date Description Construction Acquired 504 Radar Rd. 1986 1995 506 Radar Rd. 1986 1995 Holden/85 Business Park 2616 Phoenix Dr. 1985 1995 2606 Phoenix Dr. -- 100 1989 1995 2606 Phoenix Dr. -- 200 1989 1995 2606 Phoenix Dr. -- 300 1989 1995 2606 Phoenix Dr. -- 400 1989 1995 2606 Phoenix Dr. -- 500 1989 1995 2606 Phoenix Dr. -- 600 1989 1995 Industrial Village 7906 Industrial Village Rd. 1985 1995 7908 Industrial Village Rd. 1985 1995 7910 Industrial Village Rd. 1985 1995 Other Piedmont Triad Properties 6348 Burnt Poplar 1990 1995 6350 Burnt Poplar 1992 1995 Stratford 1991 1995 Chesapeake 1993 1995 3288 Robinhood 1989 1995 Steele Creek Park Bldg. A 1989 1995 Bldg. B 1985 1995 Bldg. E 1985 1995 Bldg. G-1 1989 1995 Bldg. H 1987 1995 Bldg. K 1985 1995 Bldg. N 1989 1995 Highwoods/Forsyth Business Park 4101 Stuart Andrew Blvd. 1984 1995 4105 Stuart Andrew Blvd. 1984 1995 4109 Stuart Andrew Blvd. 1984 1995 4201 Stuart Andrew Blvd. 1982 1995 4205 Stuart Andrew Blvd. 1982 1995 4209 Stuart Andrew Blvd. 1982 1995 4215 Stuart Andrew Blvd. 1982 1995 4301 Stuart Andrew Blvd. 1982 1995 4321 Stuart Andrew Blvd. 1982 1995 Parkway Plaza Building 1 1982 1995 Building 2 1983 1995 Building 3 1984 1995 Building 7 1985 1995 Building 8 1986 1995 Building 9 1984 1995 Other Charlotte Properties First Citizens 1989 1994
60
Cost Gross Amount at Which Capitalized Initial Cost Subsequent Carried at Close of Building & to Period Building & Total Accumulated Description Encumbrance Land Improvements Acquisition Land Improvements (11) Depreciation (12) Innsbrook Office Center Markel American (8) 585 2,347 81 585 2,428 3,013 34 Proctor-Silex (8) 1,086 4,344 -- 1,086 4,344 5,430 50 Vantage Place I -- 235 940 1 235 941 1,176 7 Vantage Place II -- 203 811 2 203 813 1,016 6 Vantage Place III -- 218 873 2 218 875 1,093 6 Vantage Place IV -- 233 931 2 233 933 1,166 7 Vantage Point 4,493 1,089 4,354 51 1,089 4,405 5,494 32 Innsbrook Tech I 1,181 264 1,058 -- 264 1,058 1,322 8 DEQ Technology Center -- 541 2,166 -- 541 2,166 2,707 11 DEQ Office -- 1,324 5,305 -- 1,324 5,305 6,629 28 Technology Park Virginia Center -- 1,438 5,858 -- 1,438 5,858 7,296 157 Development Projects Global Software -- 465 -- 58 465 58 523 -- MSA -- 717 -- 9 717 9 726 -- Healthsource -- 1,294 -- 1 1,294 1 1,295 -- Highwoods Health Club -- 142 555 -- 142 555 697 -- Regency One -- 554 -- -- 554 -- 554 -- Development Land Capital Center -- 851 -- -- 851 -- 851 -- Creekstone Park -- 1,255 -- (453)(9) 802 -- 802 -- Highwoods Office Center North -- 1,555 49 (450) 10) 1,105 49 1,154 10 Highwoods Office Center South -- 2,518 -- -- 2,518 -- 2,518 -- Research Commons -- 1,349 -- -- 1,349 -- 1,349 -- Airpark East -- 1,932 -- -- 1.932 1,932 Airpark North -- 804 -- -- 804 -- 804 -- NationsFord Business Park -- 1,206 -- -- 1,206 -- 1,206 -- West Point Business Park -- 1,759 -- -- 1,759 -- 1,759 -- Airport Center Drive 1,600 1,600 -- -- 1,600 -- 1,600 -- $41,798 $ 107,642 $449,766 $ 41,128 $ 106,955 $491,581 $ 598,536 $21,452 Date of Date Description Construction Acquired Innsbrook Office Center Markel American 1988 1995 Proctor-Silex 1986 1995 Vantage Place I 1987 1995 Vantage Place II 1987 1995 Vantage Place III 1988 1995 Vantage Place IV 1988 1995 Vantage Point 1990 1995 Innsbrook Tech I 1991 1995 DEQ Technology Center 1991 1995 DEQ Office 1991 1995 Technology Park Virginia Center 1985 1994 Development Projects Global Software N/A MSA N/A N/A Healthsource N/A N/A Highwoods Health Club N/A N/A Regency One N/A N/A Development Land Capital Center N/A 1995 Creekstone Park N/A 1994 Highwoods Office Center North N/A 1994 Highwoods Office Center South N/A 1994 Research Commons N/A 1995 Airpark East N/A 1995 Airpark North N/A 1995 NationsFord Business Park N/A 1995 West Point Business Park N/A 1995 Airport Center Drive N/A 1995 N/A N/A
(1) These assets are pledged as collateral for a $12,067,000 first mortgage loan. (2) These assets are pledged as collateral for a $31,834,000 first mortgage loan. (3) These assets are pledged as collateral for an $80,000,000 credit facility. (4) These assets are pledged as collateral for a $6,669,000 first mortgage loan. (5) These assets are pledged as collateral for a $24,481,000 first mortgage loan. (6) These assets are pledged as collateral for a $40,659,000 first mortgage loan. (7) These assets are pledged as collateral for an $8,733,000 first mortgage loan. (8) These assets are pledged as collateral for a $4,995,000 first mortgage loan. (9) Reflects land transferred to the Willow Oak Property. (10) Reflects land transferred to the Global Property. (11) The aggregate cost for Federal Income Tax purposes was approximately $509,000,000. (12) Depreciation is computed using economic lives ranging from 5 to 40 years. 61 HIGHWOODS PROPERTIES, INC. NOTE TO SCHEDULE III (in thousands) As of December 31, 1995 and 1994 A summary of activity for real estate and accumulated depreciation is as follows:
December 31, 1995 1994 Real Estate: Balance at beginning of year........................................................ $ 218,699 $ 61,656 Additions: Acquisitions and development..................................................... 365,130 154,946 Improvements..................................................................... 16,806 2,097 Cost of real estate sold............................................................ (2,099) -- Balance at close of year (a).......................................................... $ 598,536 $218,699 Accumulated Depreciation: Balance at beginning of year........................................................ $ 11,003 $ 8,679 Depreciation expense................................................................ 10,483 2,324 Real estate sold.................................................................... (34) -- Balance at close of year (b)........................................................ $ 21,452 $ 11,003
(a) Reconciliation of total cost to balance sheet caption at December 31, 1995 and 1994 (in thousands):
1995 1994 Total per schedule III $598,536 $218,699 Construction in progress exclusive of land of $3,172 included in Schedule III 15,508 -- Furniture, fixtures and equipment 1,288 967 Total real estate assets at cost $615,332 $219,666
(b) Reconciliation of total accumulated depreciation to balance sheet caption at December 31, 1995 and 1994 (in thousands):
1995 1994 Total per schedule III $21,452 $11,003 Accumulated depreciation -- furniture, fixtures and equipment 814 687 Total accumulated depreciation $22,266 $11,690
62 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS HIGHWOODS PROPERTIES, INC. We have audited the accompanying combined balance sheets of the Highwoods Group as of December 31, 1993 and 1992, and the related combined statements of operations, owners' deficit, and cash flows for the period from January 1, 1994 to June 13, 1994 and for each of the three years in the period ended December 31, 1993. We have also audited the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Highwoods Group's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Highwoods Group at December 31, 1993 and 1992, and the combined results of operations and cash flows for the period from January 1, 1994 to June 13, 1994 and for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule when considered in relation to the basic financial statements taken as a whole presents fairly in all material respects the information required to be set forth therein. ERNST & YOUNG LLP Raleigh, North Carolina January 10, 1995 63 HIGHWOODS GROUP COMBINED BALANCE SHEETS
December 31, 1993 1992 Assets Rental properties, at cost: Land............................................................................ $ 9,488,616 $ 8,602,272 Buildings and improvements...................................................... 50,141,219 44,876,022 Equipment....................................................................... 924,782 791,357 60,554,617 54,269,651 Less accumulated depreciation................................................... (8,649,712) (7,390,178) Rental property, net......................................................... 51,904,905 46,879,473 Cash and cash equivalents......................................................... 865,647 2,363,204 Restricted cash................................................................... 928,773 462,545 Rents and other receivables from tenants (net of allowance of $20,000 in December 1993 and $19,000 in December 1992).............................................. 1,314,983 706,682 Accounts receivable from related parties.......................................... 156,942 199,562 Accrued straight line rents receivable............................................ 1,624,535 1,357,433 Deferred offering costs and prepaids.............................................. 180,604 25,549 Other assets: Deferred lease fees and loan costs.............................................. 2,838,182 2,505,724 Less accumulated amortization................................................... (1,136,059) (812,279) 1,702,123 1,693,445 Total assets...................................................................... $58,678,512 $53,687,893 Liabilities and owners' deficit Mortgages and notes payable including $159,362 to related parties at December 31, 1993 and $262,552 at December 31, 1992.......................................... $64,346,580 $60,279,344 Accrued expenses and accounts payable............................................. 2,226,879 1,034,212 Accounts payable to related parties............................................... 81,833 197,747 Total liabilities................................................................. 66,655,292 61,511,303 Owners' deficit................................................................... (7,976,780) (7,823,410) Commitments (Notes 3, 5 and 7).................................................... Total liabilities and owners' deficit............................................. $58,678,512 $53,687,893
See accompanying notes. 64 HIGHWOODS GROUP COMBINED STATEMENTS OF OPERATIONS
January 1, 1994 to Year ended December 31, June 13, 1994 1993 1992 1991 Revenue: Rental income....................................... $ 4,953,444 $ 8,983,623 $ 8,184,195 $ 5,636,933 Leasing, Development and Construction Income........ 1,267,725 3,721,407 3,490,283 3,039,210 Other income........................................ 427,300 745,173 857,512 1,097,842 Total revenue......................................... 6,648,469 13,450,203 12,531,990 9,773,985 Expenses: Property operating expenses......................... 2,246,830 4,398,186 4,197,621 3,123,351 Leasing, Development and Construction Expenses...... 349,677 1,849,778 1,388,629 1,343,955 Interest............................................ 2,472,609 5,184,781 5,058,973 3,907,894 Depreciation and amortization....................... 834,622 1,583,314 1,431,455 1,134,657 Marketing, general and administrative............... 280,777 589,257 693,892 690,283 Total expenses........................................ 6,184,515 13,605,316 12,770,570 10,200,140 Net income (loss)..................................... $ 463,954 $ (155,113) $ (238,580) $ (426,155)
See accompanying notes. 65 HIGHWOODS GROUP COMBINED STATEMENTS OF OWNERS' DEFICIT
Owners' Deficit Balance at January 1, 1991......................................................................... $(7,670,302) Owners' distributions............................................................................ (1,794,472) Owners' contributions............................................................................ 706,209 Net loss for the year ended December 31, 1991.................................................... (426,155) Balance at December 31, 1991....................................................................... (9,184,720) Owners' distributions............................................................................ (1,437,427) Owners' contributions............................................................................ 3,037,317 Net loss for the year ended December 31, 1992.................................................... (238,580) Balance at December 31, 1992....................................................................... (7,823,410) Owners' distributions............................................................................ (1,043,944) Owners' contributions............................................................................ 1,045,687 Net loss for the year ended December 31, 1993.................................................... (155,113) Balance at December 31, 1993....................................................................... (7,976,780) Owners' distributions............................................................................ (1,759,220) Net income for the period from January 1, 1994 to June 13, 1994.................................. 463,954 Balance at June 13, 1994........................................................................... $(9,272,046)
See accompanying notes. 66 HIGHWOODS GROUP COMBINED STATEMENTS OF CASH FLOWS
January 1, 1994 to Year ended December 31, June 13, 1994 1993 1992 1991 Operating activities Net income (loss)......................................... $ 463,954 $ (155,113) $ (238,580) $ (426,155) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................... 834,622 1,583,314 1,431,455 1,134,657 Changes in operating assets and liabilities: Rents and other receivables from tenants.............. 1,100,324 (608,301) (133,796) (136,346) Deferred lease fees and loan costs.................... 26,150 (332,458) (923,681) (594,547) Accounts receivable from related parties.............. -- 42,620 (28,788) (109,486) Deferred offering costs and prepaids.................. 181,303 (155,055) (3,218) (7,957) Tenant security deposits.............................. 7,682 (5,660) (22,067) 6,862 Accrued straight line rents receivable................ 238,707 (267,102) (380,279) (283,812) Accrued expenses and accounts payable................. (53,828) 1,198,327 (111,059) 342,158 Accounts payable to related parties................... -- (115,914) (11,395) 209,142 Net cash provided by (used in) operating activities....... 2,798,914 1,184,658 (421,408) 134,516 Investing activities Changes in restricted cash................................ 834,717 (466,228) (462,545) -- Purchases of, and improvements to, rental properties...... (346,978) (6,284,966) (3,220,404) (16,140,703) Net cash provided by (used in) investing activities....... 487,739 (6,751,194) (3,682,949) (16,140,703) Financing activities Proceeds from borrowings.................................. -- 4,918,424 27,168,946 19,550,834 Principal payments on notes payable....................... (398,724) (851,188) (23,344,668) (2,061,674) Distributions to partners................................. (1,759,220) (1,043,944) (1,437,427) (1,794,472) Capital contributions from partners....................... -- 1,045,687 3,037,317 706,209 Net cash (used in) provided by financing activities....... (2,157,944) 4,068,979 5,424,168 16,400,897 Net increase (decrease) in cash and cash equivalents...... 1,128,709 (1,497,557) 1,319,811 394,710 Cash and cash equivalents at beginning of year............ 865,647 2,363,204 1,043,393 648,683 Cash and cash equivalents at end of year.................. $ 1,994,356 $ 865,647 $ 2,363,204 $ 1,043,393 Supplemental disclosures of cash flow information Cash paid during the year for interest (net of interest capitalized of $-0-, $15,772, $-0-, and $487,173, for the period from January 1, 1994 to June 13, 1994 and for the years ended December 31, 1993, 1992, and 1991, respectively)........................................... $ 2,410,237 $ 5,098,233 $ 5,147,855 $ 3,745,068
See accompanying notes. 67 HIGHWOODS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Description of Business The Highwoods Group is engaged in the ownership, management, operation, leasing and development of commercial real estate properties. The Highwoods Group owns and operates fourteen buildings located in the Research Triangle Park region of North Carolina. Principles of Combination The Highwoods Group is not a legal entity but rather a combination of commercial real estate properties that are organized as general partnerships and are under common control, and an affiliated real estate management company, the Highwoods Properties Company ("HPC"). HPC provides property management services to the properties. All significant intercompany transactions and balances have been eliminated in the combination. As discussed in Note 7, on June 14, 1994, the Highwoods Group intended to transfer its properties and property management operation to a real estate investment trust (REIT), Highwoods Properties, Inc. Rental Property Rental properties are stated at the lower of cost or net realizable value. All capitalizable costs related to the improvement or replacement of commercial real estate properties are capitalized. Depreciation is computed by the straight-line method over the estimated useful life of 40 years for buildings and improvements and five to seven years for furniture and equipment. Tenant improvements are amortized over the life of respective leases, using the straight-line method. Cash Equivalents The Highwoods Group considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Revenue Recognition Minimum rental income is recognized on a straight-line basis over the term of the lease, and due and unpaid rents are included in rents and other receivables from tenants in the accompanying balance sheet. Certain lease agreements contain provisions which provide reimbursement of real estate taxes, insurance and certain common area maintenance (CAM) costs. These additional rents are recorded on the accrual basis. All rent and other receivables from tenants are due from commercial building tenants located in the properties. Lease fee income is recognized 50% when the lease is signed and 50% when the tenant takes occupancy. Deferred Lease Fees and Loan Costs Lease fees and concessions and loan costs are capitalized at cost and amortized over the life of the related lease or loan. Other Income Other income consists primarily of management fees generated by HPC from providing property management services to third parties and interest income. Income Taxes No provision has been made for income taxes because the commercial real estate properties are owned by partnerships whose partners are required to include their respective share of profits or losses in their individual tax returns. 68 HIGHWOODS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued HPC elected to be taxed for federal and state income tax purposes as an S-Corporation under provisions of the Internal Revenue Code. Consequently income, losses and credits are passed through directly to the shareholders, rather than being taxed at the corporate level. This election was effective as of January 1, 1993. Previously, HPC operated as a general partnership. 2. MORTGAGES AND NOTES PAYABLE Mortgages Payable Conventional mortgages payable are comprised of 20 loans at December 31, 1993 and 17 loans at December 31, 1992, each of which is collateralized by a building and related land included in real estate assets. The mortgages payable are generally due in monthly installments of interest and principal and mature at various dates through 2011. Interest rates on fixed rate mortgages payable aggregating $41,138,812 and $38,469,318 at December 31, 1993 and 1992, respectively, range from 7% to 9.875% (averaging 8.77% at December 31, 1993). Interest rates on variable rate mortgages payable aggregating $22,720,011 and $21,023,907 at December 31, 1993 and 1992, respectively, range from the prime rate (6.0% at December 31, 1993) to 1.5% above the prime rate. Unsecured Notes Payable Unsecured notes payable are comprised of four loans at December 31, 1993, and six loans at December 31, 1992. The notes payable are generally due in monthly installments of interest and principal and mature at various dates through 2000. Interest rates on fixed rate notes payable aggregating $328,395 and $523,567 at December 31, 1993 and 1992 respectively, range from 6% to 11% (averaging 8.31% at December 31, 1993). Interest rates on variable rate notes payable aggregating $159,362 and $262,552 (of which all is due to related parties) at December 31, 1993 and 1992 respectively, range from the prime rate (6.0% at December 31, 1993) to 1.5% above the prime rate. Combined aggregate principal maturities of mortgages and notes payable at December 31, 1993 are as follows: 1994...................................................................... $18,435,354 1995...................................................................... 1,132,936 1996...................................................................... 782,363 1997...................................................................... 846,760 1998...................................................................... 8,350,738 Thereafter................................................................ 34,798,429 $64,346,580
All of the properties are pledged as collateral for the mortgages payable. In connection with the procurement of mortgages on completed buildings, the lenders require a holdback of a portion of the loan proceeds to provide for tenant fit-ups in the buildings. These proceeds are then drawn as fit-up expenses are incurred. Such hold back amounts are included in restricted cash in the consolidated balance sheet. (1993 -- $928,773; 1992 -- $462,545). 69 HIGHWOODS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) 3. LEASES The Highwoods Group leases automobiles, and office space under various operating leases. Total rent expense for these leases was $69,900, $148,000, $162,000 and $163,000 for the period from January 1, 1994 to June 13, 1994 and for the years ended December 31, 1993, 1992 and 1991, respectively. As of June 13, 1994, the Company did not have contractual leases in place with remaining terms of one year or more. 4. MANAGEMENT COMPENSATION PROGRAM In 1989, HPC adopted two bonus plans for four members of management. The first plan provides for approximately 15.5% of the net income of HPC for each fiscal year to be divided among the managers, based on performance, and paid in the first quarter following the end of the fiscal year. The second plan provides that 25% of all profits of HPC in excess of $700,000 for each fiscal year be contributed to a pool for the same four members of management, based on established percentages. Amounts contributed under the plan are paid to the employees ratably over a three-year period. These bonuses are discretionary and approved by the partners annually. If any of the employees under the plan are terminated or leave HPC for any reason, that employee forfeits rights to receive payout of the unpaid portion in their bonus account. Compensation expense related to the bonus plan was $212,060, $147,703, and $225,146 for the years ended December 31, 1993, 1992 and 1991 respectively. There was no expense incurred for the period from January 1, through June 13, 1994. 5. RENTAL INCOME The Highwoods Group's developed property is being leased to tenants under operating leases that expire over the next ten years. The minimum rental amounts under the leases are either subject to scheduled fixed increases or adjustments based on the Consumer Price Index. Generally, the leases also require that the tenants reimburse the Highwoods Group for increases in certain costs above their base year costs. Expected future minimum rents to be received over the next five years and thereafter from related party and other tenants for leases in effect at December 31, 1993 are as follows:
Related Other Party Tenants Total 1994................................................................. $ 78,589 $ 9,371,140 $ 9,449,729 1995................................................................. 78,589 8,943,983 9,022,572 1996................................................................. 78,589 7,684,132 7,762,721 1997................................................................. 6,549 6,223,503 6,230,052 1998................................................................. -- 5,149,191 5,149,191 Thereafter........................................................... -- 10,335,729 10,335,729 $242,316 $47,707,678 $47,949,994
Two major tenants represented 11% and 10% of the Highwoods Group's total rental income for the year ended December 31, 1993. 6. RELATED PARTY TRANSACTIONS There are several business relationships with related parties which involve management, leasing and maintenance fees for buildings, as well as advancing money in the ordinary course of business to other entities whose principal owners are partners in HPC. Total fees received from related parties for the period from January 1, 1994 to June 13, 1994 and for the years ended December 31, 1993, 1992 and 1991 were $10,989, $494,000, $516,000 and $330,000, respectively. 70 HIGHWOODS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) 6. RELATED PARTY TRANSACTIONS -- Continued Other related party transactions include leasing fees paid to an affiliated business of $2,267, $12,100, $6,300 and $56,000 for the period from January 1, 1994 to June 13, 1994 and during 1993, 1992 and 1991, respectively, partners' management fees of $-0- for the period from January 1, 1994 to June 13, 1994 $30,000 in each of 1993, 1992 and 1991 and rent paid to an affiliated business of $9,900, $34,000, $38,000 and $39,000 for the period from January 1, 1994 to June 13, 1994 and in 1993, 1992, and 1991, respectively. During 1992, the Highwoods Group purchased a vehicle from a related company for approximately $21,000. The amount of land purchased from related parties for the years ended December 31, 1993 and 1991 was $142,284 and $888,854 respectively. 7. SUBSEQUENT EVENT On June 14, 1994, the Highwoods Group transferred all of its assets and liabilities to Highwoods Realty Limited Partnership in connection with Highwoods Properties, Inc.'s initial public offering of common stock. 71 HIGHWOODS GROUP SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1993
Cost Capitalized Gross Amount at Which Initial Cost Subsequent to Carried at Close of Buildings & Acquisition Buildings & Period Buildings & Description Encumbrance Land Improvements Land Improvements Land Improvements Total (A) Blue Ridge II $ 1,686,036 $ 433,556 -- -- $ 1,323,291 $ 433,556 $ 1,323,291 $ 1,756,847 Cape Fear/Catawba 3,010,488 256,322 -- -- 3,258,258 256,322 3,258,258 3,514,580 CompuChem 7,220,423 268,866 -- -- 6,097,552 268,866 6,097,552 6,366,418 Expressway One 1,794,970 241,583 -- -- 1,724,973 241,583 1,724,973 1,966,556 Hawthorn 5,035,976 904,437 -- -- 3,767,097 904,437 3,767,097 4,671,534 Highwoods North 1,851,720 1,554,732 -- -- 48,892 1,554,732 48,892 1,603,624 Highwoods South 4,057,240 2,746,136 -- $(249,225) -- 2,496,911 -- 2,496,911 Highwoods Tower 17,000,000 203,419 -- -- 16,574,375 203,419 16,574,375 16,777,794 Ironwood/ Leatherwood 2,802,433 531,609 $2,126,435 -- 68,611 531,609 2,195,046 2,726,655 Kaiser 5,035,976 133,126 -- -- 3,564,301 133,126 3,564,301 3,697,427 Rexwoods II 1,599,416 354,735 -- -- 1,773,567 354,735 1,773,567 2,128,302 Rexwoods III 3,572,377 885,598 -- -- 2,709,598 885,598 2,709,598 3,595,196 Rexwoods Center 4,452,026 775,408 -- -- 3,243,234 775,408 3,243,234 4,018,642 Riverbirch 4,739,742 448,314 -- -- 3,861,035 448,314 3,861,035 4,309,349 $63,858,823 $ 9,737,841 $2,126,435 $(249,225) $48,014,784 $ 9,488,616 $50,141,219 $ 59,629,835 Life on Which Accumulated Date of Depreciation Description Depreciation Construction is Computed Blue Ridge II $ 262,871 1988 5-40 yrs. Cape Fear/Catawba 1,660,012 1980 5-40 yrs. CompuChem 1,402,874 1980 5-40 yrs. Expressway One 156,031 1990 5-40 yrs. Hawthorn 1,298,151 1987 5-40 yrs. Highwoods North 7,566 1983 5-40 yrs. Highwoods South -- 1983 N/A Highwoods Tower 1,181,907 1991 5-40 yrs. Ironwood/ Leatherwood 8,355 (B) 5-40 yrs. Kaiser 798,539 1988 5-40 yrs. Rexwoods II 9,615 1993 5-40 yrs. Rexwoods III 188,277 1992 5-40 yrs. Rexwoods Center 468,538 1990 5-40 yrs. Riverbirch 597,156 1987 5-40 yrs. $8,039,892
(A) The aggregate cost for Federal Income Tax purposes was approximately $59,629,835. (B) The property was acquired in 1993. 72 HIGHWOODS GROUP SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) June 13, 1994 The changes in the Highwoods Group for the period from January 1, 1994 to June 13, 1994 and for the three years ended December 31, 1993 are as follows:
Period from January 1, 1994 to June 13, 1994 1993 1992 1991 Real estate balance at beginning of period.... $ 59,629,835 $ 53,478,294 $50,324,176 $34,218,255 Properties developed (1)...................... -- 2,128,302 686,918 15,680,331 Properties acquired........................... -- 2,658,044 -- -- Improvements.................................. 2,025,410 1,365,195 2,479,315 686,376 Disposals..................................... -- -- (12,115) (260,786) Balance at end of period...................... $ 61,655,245 $ 59,629,835 $53,478,294 $50,324,176
(1) Land was acquired from related parties for $142,284 in 1993 and $888,854 in 1991. The changes in accumulated depreciation for the period from January 1, 1994 to June 13, 1994 and for the three years ending December 31, 1993 are as follows:
Period from January 1, 1994 to June 13, 1994 1993 1992 1991 Balance at beginning of period.................... $8,039,892 $ 6,852,176 $5,769,702 $4,928,759 Depreciation for period......................... 639,541 1,187,716 1,082,474 851,566 Disposals....................................... -- -- -- (10,623) Balance at end of period.......................... $8,679,433 $ 8,039,892 $6,852,176 $5,769,702
73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Raleigh, State of North Carolina, on June 3, 1996. HIGHWOODS PROPERTIES, INC. By: /s/ RONALD P. GIBSON Ronald P. Gibson, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date /s/ O. TEMPLE SLOAN, JR. Chairman of the Board of Directors June 3, 1996 O. Temple Sloan, Jr. /s/ RONALD P. GIBSON President, Chief Executive Officer and June 3, 1996 Director Ronald P. Gibson /s/ JOHN L. TURNER Vice Chairman of the Board June 3, 1996 John L. Turner /s/ WILLIAM T. WILSON III Executive Vice President and Director June 3, 1996 William T. Wilson III /s/ WILLIAM E. GRAHAM Director June 3, 1996 William E. Graham /s/ THOMAS W. ADLER Director June 3, 1996 Thomas W. Adler /s/ ROBERT L. KIRBY Director June 3, 1996 Robert L. Kirby /s/ STEPHEN TIMKO Director June 3, 1996 Stephen Timko /s/ L. GLENN ORR, JR. Director June 3, 1996 L. Glenn Orr, Jr. /s/ CARMAN J. LIUZZO Chief Financial Officer (Principal June 3, 1996 Financial Officer and Principal Carman J. Liuzzo Accounting Officer)
74 -----END PRIVACY-ENHANCED MESSAGE-----