-----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, VgH2vFNpw6IF/On8dP+nx57bbgopDD6m0lt1mcHVkACWJbNi43OdR88soY+ai+qs gqdlW2WYkTLY1QHlCtdbVQ== 0000950168-98-001390.txt : 19980430 0000950168-98-001390.hdr.sgml : 19980430 ACCESSION NUMBER: 0000950168-98-001390 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980429 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: SEC FILE NUMBER: 001-13100 FILM NUMBER: 98603349 BUSINESS ADDRESS: STREET 1: 3100 SMOKETREE CT 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 PROPERTIES, INC. 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 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 8% Series B Cumulative Redeemable Preferred Shares 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 [X] 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. [ ] 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 20, 1998 was $1,708,104,762. As of March 20, 1998, there were 50,604,018 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 May 14, 1998 are incorporated by reference in Part III Items 10, 11, 12 and 13. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HIGHWOODS PROPERTIES, INC. TABLE OF CONTENTS
Item No. Page No. - ---------- --------- PART I 1. Business .................................................................. 3 2. Properties ................................................................ 10 3. Legal Proceedings ......................................................... 24 4. Submission of Matters to a Vote of Security Holders ....................... 24 X. Executive Officers of the Registrant ...................................... 24 PART II 5. Market for Registrant's Common Stock and Related Stockholder Matters ...... 25 6. Selected Financial Data ................................................... 26 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................. 28 8. Financial Statements and Supplementary Data ............................... 38 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................................... 38 PART III 10. Directors and Executive Officers of the Registrant ........................ 38 11. Executive Compensation .................................................... 38 12. Security Ownership of Certain Beneficial Owners and Management ............ 38 13. Certain Relationships and Related Transactions ............................ 38 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 39
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 oversee 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 owners and operators of suburban office and industrial properties in the southeastern United States. As of December 31, 1997, the Company owned a portfolio of 481 in-service office and industrial properties (the "Properties") and owned 718 acres (and had agreed to purchase an additional 512 acres) of undeveloped land suitable for future development (the "Development Land"). An additional 32 properties (the "Development Projects"), which will encompass approximately 3.3 million square feet, were under development as of December 31, 1997. The Properties consist of 342 suburban office properties and 139 industrial properties (including 73 service centers) located in 19 markets in North Carolina, Florida, Tennessee, Georgia, Virginia, South Carolina, Maryland and Alabama. The Company conducts substantially all of its activities through, and substantially all of its properties are held directly or indirectly by, Highwoods/Forsyth Limited Partnership (the "Operating Partnership"). The Operating Partnership is controlled by the Company as its sole general partner and, as of March 20, 1998, the Company owned approximately 83% of the common partnership interests (the "Common Units") in the Operating Partnership. The remaining Common Units are owned by limited partners (including certain officers and directors of the Company). Each Common Unit may be redeemed by the holder thereof for the cash value of one share of common stock, $.01 par value, of the Company (the "Common Stock") or, at the Company's option, one share (subject to certain adjustments) of Common Stock. With each such exchange, the number of Common Units owned by the Company and, therefore, the Company's percentage interest in the Operating Partnership, will increase. In addition to owning the Properties, the Development Projects and the Development Land, the Company provides leasing, property management, real estate development, construction and miscellaneous tenant services for the Properties as well as for third parties. The Company conducts its third-party fee-based services through Highwoods Tennessee Properties, Inc., a wholly owned subsidiary of the Company, and Highwoods Services, Inc., a subsidiary of the Operating Partnership. The Company was formed in North Carolina in 1994. 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 regional offices in Winston-Salem and Charlotte, North Carolina; Richmond, Virginia; Baltimore, Maryland; Nashville and Memphis, Tennessee; Atlanta, Georgia; Tampa, Boca Raton, Tallahassee and Jacksonville, Florida; and South Florida. 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 and management services allow it to respond to the 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 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. 3 The Company's strategy has been 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. As the Company has expanded into new markets, it has continued to maintain this localized approach by combining with local real estate operators with many years of development and management experience in their respective markets. Also, in making its acquisitions, the Company has sought to employ those property-level managers who are experienced with the real estate operations and the local market relating to the acquired properties, resulting in approximately three-quarters of the portfolio currently being managed on a day-to-day basis by personnel that has had previous experience managing, leasing and/or developing those properties for which they are responsible. 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) the location of the property, (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) the ability of the property to generate returns at or above levels of expected growth. (See " -- Recent Developments" for a discussion of the Company's acquisition and development activities during 1997.) The Company also believes that the 1,230 acres of Development Land controlled as of December 31, 1997 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 Common Units in the Operating Partnership for the property owner's equity in the acquired property. As discussed above, each Common Unit received by these property owners is redeemable for cash from the Operating Partnership or, at the Company's option, one share of Common Stock. 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 it to acquire properties at attractive prices from property owners wishing to enter into tax-deferred transactions. As of December 31, 1997, the Company had acquired 235 properties using the foregoing method since its inception, comprising 16.4 million rentable square feet. 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 20, 1998, the ratio of debt to total market capitalization (based on a Common Stock price of $34.13 per share) was approximately 32%. The Company believes that this debt level improves its ability 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, 1997 (dollars in thousands):
Acquisition Closing Number of Rentable Initial Property Location Date Properties Square Feet Cost - ------------------------------------- ------------------- ------------ ------------ ------------- ------------- Century Center Atlanta 02/01/97 21 1,437,000 $ 128,100 Anderson Properties Atlanta 02/01/97 28 1,914,000 61,800 Patewood I & II Greenville 03/01/97 2 117,000 11,900 3600 Glenwood Avenue Research Triangle 03/01/97 1 78,000 11,000 400 North Business Park Atlanta 05/01/97 3 86,000 7,200 Kennestone Corporate Center Atlanta 05/01/97 5 82,000 5,400 Oxford Lakes Business Center Atlanta 05/01/97 2 102,000 8,000 Bluegrass Place 1 Atlanta 08/29/97 1 69,000 2,500 Bluegrass Place 2 Atlanta 08/29/97 1 72,000 3,000 Centrum Building Memphis 09/03/97 1 71,000 6,600 Pinebrook Charlotte 09/23/97 1 61,000 5,600 1765 The Exchange Atlanta 10/01/97 1 90,000 7,200 NationsBank Plaza Greenville 10/01/97 1 196,000 10,200 Associated Capital Properties, Inc. Florida 10/01/97 84 6,410,000 617,000 Riparius Development Corporation Baltimore 12/23/97 5 364,000 42,000 Shelton Portfolio Piedmont Triad 11/17/97 8 499,000 48,000 Smith Portfolio Tampa 10/17/97 3 217,000 17,900 Triad Crow Portfolio Atlanta 12/04/97 2 267,000 39,300 Riverside Plaza Norfolk 10/31/97 1 87,000 7,700 Zurn Building Tampa 11/01/97 1 74,000 5,400 Avion Building South Florida 11/17/97 1 67,000 5,200 Gulf Atlantic South Florida 12/12/97 1 135,000 11,300 100 Winner's Circle Nashville 12/15/97 1 72,000 8,700 Doral Financial Plaza South Florida 12/22/97 1 222,000 17,300 --- ---------- ---------- 176 12,789,000 $1,088,300 === ========== ==========
A significant portion of the Company's growth during 1997 resulted from its expansion in existing markets, including the ACP Transaction, the Century Center Transaction and the Anderson Transaction (each as defined herein). The Company also entered a new market, Baltimore, Maryland, as a result of the Riparius Transaction (as defined herein). Century Center Transaction. On January 9, 1997, the Company acquired the 17-building Century Center Office Park, four affiliated industrial properties and 20 acres of land for development located in suburban Atlanta, Georgia (the "Century Center Transaction"). The properties total 1.6 million rentable square feet and, as of December 31, 1997, were 99% leased. The cost of the Century Center Transaction was $55.6 million in Common Units (valued at $29.25 per Common Unit, the market value of a share of Common Stock as of the signing of a letter of intent for the Century Center Transaction), the assumption of $19.4 million of secured debt and a cash payment of $53.1 million. All Common Units issued in the transaction are subject to restrictions on transfer and redemption. Such restrictions are scheduled to expire over a three-year period in equal annual installments commencing one year from the date of issuance. Century Center Office Park is located on approximately 77 acres, of which approximately 61 acres are controlled under long-term fixed rental ground leases that expire in 2058. The rent under the leases is approximately $180,000 per year with scheduled 10% increases in 1999 and 2009. The leases do not contain a right to purchase the subject land. 5 Anderson Transaction. On February 12, 1997, the Company acquired a portfolio of industrial, office and undeveloped properties in Atlanta from Anderson Properties, Inc. and affiliates (the "Anderson Transaction"). The Anderson Transaction involved 22 industrial properties and six office properties totaling 1.6 million rentable square feet, three industrial development projects totaling 402,000 square feet and 137 acres of land for development. The in-service properties were 94% leased as of December 31, 1997. The cost of the Anderson Transaction consisted of the issuance of $22.9 million of Common Units (valued at $29.25 per Common Unit, the market value of a share of Common Stock as of the signing of a letter of intent relating to the Anderson Transaction), the assumption of $7.8 million of mortgage debt and a cash payment of $37.7 million. The cash amount does not include $11.1 million paid to complete the three development projects. Approximately $5.5 million of the Common Units are Class B Common Units, which differ from other Common Units in that they are not eligible for cash distributions from the Operating Partnership. The Class B Common Units convert to regular Common Units in 25% annual installments commencing one year from the date of issuance. Prior to such conversion, such Common Units are not redeemable for cash or Common Stock. All other Common Units issued in the transaction are also subject to restrictions on transfer or redemption. Such lock-up restrictions expire over a three-year period in equal annual installments commencing one year from the date of issuance. ACP Transaction. In October of 1997, the Company completed an acquisition (the "ACP Transaction") of Associated Capital Properties, Inc. ("ACP") involving a portfolio of 84 office properties encompassing 6.4 million rentable square feet (the "ACP Properties") and approximately 50 acres of land for development with a build-out capacity of 1.9 million square feet in six markets in Florida. At December 31, 1997, the ACP Properties were approximately 92% leased to approximately 1,100 tenants including IBM, the State of Florida, Prudential, Price Waterhouse, AT&T, GTE, Prosource, Lockheed Martin, NationsBank and Accustaff. Seventy-nine of the ACP Properties are located in suburban submarkets, with the remaining properties located in the central business districts of Orlando, Jacksonville and West Palm Beach. The cost of the ACP Transaction was valued at $617 million and consisted of the issuance of 2,955,238 Common Units (valued at $32.50 per Common Unit), the assumption of approximately $481 million of mortgage debt ($391 million of which was paid off by the Company on the date of closing), the issuance of 117,617 shares of Common Stock (valued at $32.50 per share), a capital expense reserve of $11 million and a cash payment of approximately $24 million. All Common Units and Common Stock issued in the transaction are subject to restrictions on transfer or redemption that will expire over a three-year period. All lockup restrictions on the transfer of such Common Units or Common Stock issued to ACP and its affiliates expire in the event of a change of control of the Company or a material adverse change in the financial condition of the Company. Such restrictions also expire if James R. Heistand, the former president of ACP, is not appointed or elected as a director of the Company by October 7, 1998. Also in connection with the ACP Transaction, the Company issued to certain affiliates of ACP warrants to purchase 1,479,290 shares of the Common Stock at $32.50 per share, exercisable after October 1, 2002. Riparius Transaction. In closings on December 23, 1997 and January 8, 1998, the Company completed an acquisition of Riparius Development Corporation in Baltimore, Maryland involving a portfolio of five office properties encompassing 369,000 square feet, two office development projects encompassing 235,000 square feet, 11 acres of development land and 101 additional acres of development land to be acquired over the next three years (the "Riparius Transaction"). As of December 31, 1997, the in-service properties acquired in the Riparius Transaction were 99% leased. The cost of the Riparius Transaction consisted of a cash payment of $43.6 million. In addition, the Company has assumed the two office development projects with an anticipated cost of $26.2 million expected to be paid in 1998, and will pay out $23.9 million over the next three years for the 101 additional acres of development land. 6 Garcia Transaction. For a discussion of the Company's recent acquisition of substantially all of a property portfolio in Tampa, Florida (the "Garcia Transaction"), see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." Pending Acquisitions For a discussion of the Company's proposed business combinations with J.C. Nichols Company, a publicly traded Kansas City real estate operator, and The Easton-Babcock Companies, a real estate owner and operator in Miami, Florida, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." Development Activity The following table summarizes the 14 development projects placed in service during the year ended December 31, 1997 (dollars in thousands): Completed
Date Placed Number of Rentable Initial Property Location in Service Properties Square Feet Cost (1) - ---------------------------------------- ------------------- ------------- ------------ ------------- --------- Shockoe Alleghany Warehouse ............ Richmond 02/01/97 1 119,000 $19,300 NorthPark .............................. Research Triangle 03/15/97 1 42,000 3,700 Centerpoint V .......................... Columbia 04/11/97 1 20,000 1,700 Sycamore ............................... Research Triangle 04/15/97 1 72,000 6,300 Chastain Place I ....................... Atlanta 05/01/97 1 108,000 3,900 AirPark East-Simplex (Bldg. 6) ......... Piedmont Triad 05/02/97 1 13,000 800 Two Airpark East (Bldg. D) ............. Piedmont Triad 06/01/97 1 54,000 4,200 Airport Center I ....................... Richmond 08/01/97 1 142,000 6,300 Westshore III .......................... Richmond 08/26/97 1 57,000 5,300 Highwoods Plaza II ..................... Nashville 09/02/97 1 102,000 10,400 The Richfood Building .................. Richmond 09/05/97 1 76,000 7,300 R.F. Micro Devices ..................... Piedmond Triad 10/18/97 1 50,000 8,400 Highwoods Office Center At Southwind ............................ Memphis 12/01/97 1 69,000 7,000 Grove Park ............................. Richmond 12/31/97 1 61,000 5,900 -------- -- ------- ------- Total ................................ 14 985,000 $90,500 == ======= =======
- ---------- (1) Initial Cost includes estimated amounts required to complete the project including tenant improvement costs. 7 The Company had 25 suburban office properties and seven industrial properties under development totaling 3.3 million square feet of office and industrial space at December 31, 1997. The following table summarizes these development projects as of December 31, 1997 (dollars in thousands): In process
Rentable Estimated Cost at Pre-Leasing Estimated Name Location Square Feet Costs 12/31/97 Percentage* Completion - --------------------------------- ------------------- ------------- ----------- ---------- ------------- ----------- (dollars in thousands) Office Properties: Ridgefield III Asheville 57,000 $ 5,485 $ 1,638 --% 2Q98 2400 Century Center Atlanta 135,000 16,195 6,527 -- 2Q98 10 Glenlakes Atlanta 254,000 35,135 3,360 -- 4Q98 Automatic Data Processing Baltimore 110,000 12,400 3,367 100 3Q98 Riparius Center at Owings Mills Baltimore 125,000 13,800 2,393 -- 2Q99 BB&T** Greenville 71,000 5,851 81 100 2Q98 Patewood VI Greenville 107,000 11,360 5,202 19 2Q98 Colonnade Memphis 89,000 9,400 5,592 73 2Q98 Southwind C Memphis 74,000 7,657 1,245 34 4Q98 Harpeth V Nashville 65,000 6,900 3,108 47 1Q98 Lakeview Ridge II Nashville 61,000 6,000 2,879 70 1Q98 Southpointe Nashville 104,000 10,878 4,254 26 2Q98 Concourse Center One Piedmont Triad 86,000 8,415 -- -- 1Q99 RMIC Piedmont Triad 90,000 7,650 3,971 100 2Q98 Clintrials Research Triangle 178,000 21,490 12,034 100 2Q98 Situs II Research Triangle 59,000 5,857 1,218 -- 2Q98 Highwoods Centre Research Triangle 76,000 8,327 960 36 3Q98 Overlook Research Triangle 97,000 10,307 1,083 -- 4Q98 Red Oak Research Triangle 65,000 6,394 568 -- 3Q98 Rexwoods V Research Triangle 61,000 7,444 5,894 70 1Q98 Markel-American Richmond 106,000 10,650 5,226 52 2Q98 Highwoods V Richmond 67,000 6,620 1,096 100 2Q98 Interstate Corporate Center** Tampa 309,000 8,600 40 23 4Q98 Intermedia (Sabal) Phase I Tampa 121,000 12,500 1,331 100 4Q98 Intermedia (Sabal) Phase II Tampa 121,000 13,000 662 100 1Q00 --------- -------- ------- --- Office Total or Weighted Average 2,688,000 $268,315 $73,729 43% ========= ======== ======= === Industrial Properties: Chastain Place II & III Atlanta 122,000 $ 4,686 $ 1,359 --% 3Q98 Newpoint Atlanta 119,000 4,660 3,224 20 1Q98 Tradeport 1 Atlanta 87,000 3,070 1,608 -- 1Q98 Tradeport 2 Atlanta 87,000 3,070 1,608 -- 1Q98 Air Park South Warehouse I Piedmont Triad 100,000 2,929 545 90 1Q98 Airport Center II Richmond 70,000 3,197 2,732 54 1Q98 --------- -------- ------- --- Industrial Total or Weighted Average 585,000 $ 21,612 $11,076 26% ========= ======== ======= === Total or Weighted Average of all Development Projects 3,273,000 $289,927 $84,805 40% ========= ======== ======= === Summary By Estimated Completion Date: First Quarter 1998 650,000 $ 37,270 $21,598 41% Second Quarter 1998 1,063,000 111,436 46,839 54 Third Quarter 1998 373,000 31,807 6,254 37 Fourth Quarter 1998 855,000 74,199 7,059 25 First Quarter 1999 86,000 8,415 -- -- Second Quarter 1999 125,000 13,800 2,393 -- First Quarter 2000 121,000 13,000 662 100 --------- -------- ------- --- 3,273,000 $289,927 $84,805 40% ========= ======== ======= ===
- ---------- * Includes letters of intent ** Redevelopment projects 8 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 facilities. 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, 1997, the Company employed 476 persons, as compared to 270 at December 31, 1996. The increase is primarily a result of the Company's expansion within its existing markets and into Baltimore, Maryland. 9 ITEM 2. PROPERTIES General The following table sets forth certain information about the Properties at December 31, 1997:
Percent of Rentable Total Annualized Percent of Office Industrial Total Square Rentable Rental Total Annualized Properties Properties (1) Properties Feet Square Feet Revenue (2) Rental Revenue ------------ ---------------- ------------ ------------ ------------- --------------- ----------------- Research Triangle, NC..... 69 4 73 4,686,120 15.2% $ 65,314,092 17.9% Atlanta, GA .............. 39 31 70 4,824,831 15.5 44,200,033 12.2 Tampa, FL ................ 42 -- 42 2,904,587 9.5 41,772,977 11.4 Piedmont Triad, NC ....... 34 79 113 4,738,992 15.3 36,779,925 10.0 South Florida ............ 27 -- 27 2,384,044 7.8 36,511,089 10.0 Nashville, TN ............ 15 3 18 1,821,485 5.9 27,183,735 7.4 Orlando, FL .............. 30 -- 30 1,990,148 6.5 23,756,539 6.5 Jacksonville, FL ......... 16 -- 16 1,465,139 4.8 17,367,432 4.7 Charlotte, NC ............ 15 16 31 1,428,590 4.7 15,158,758 4.1 Richmond, VA ............. 20 2 22 1,278,726 4.2 14,348,878 3.9 Greenville, SC ........... 8 2 10 1,001,641 3.3 11,051,150 3.0 Memphis, TN .............. 9 -- 9 606,549 2.0 10,033,045 2.7 Baltimore, MD ............ 5 -- 5 364,434 1.2 7,837,121 2.1 Columbia, SC ............. 7 -- 7 423,738 1.4 5,553,603 1.5 Tallahassee, FL .......... 1 -- 1 244,676 0.8 3,372,355 0.9 Norfolk, VA .............. 2 1 3 265,857 0.9 2,843,389 0.8 Birmingham, AL ........... 1 -- 1 115,289 0.4 1,795,236 0.5 Asheville, NC ............ 1 1 2 124,177 0.4 1,180,068 0.3 Ft. Myers, FL ............ 1 -- 1 51,831 0.2 509,720 0.1 --- --- --- --------- ----- ------------ ----- Total ................ 342 139 481 30,720,854 100.0% $366,569,145 100.0% === === === ========== ===== ============ =====
Office Properties Industrial Properties (1) Total or Weighted Average ------------------- --------------------------- -------------------------- Total Annualized Rental Revenue (2) $331,936,875 $34,632,270 $ 366,569,145 Total rentable square feet ........... 23,841,565 6,879,289 30,720,854 Percent leased ....................... 94%(3) 93%(4) 94% Weighted average age (years) ......... 12.2(5) 11.4 12.0
- ---------- (1) Includes 73 service center properties. (2) Annualized Rental Revenue is December 1997 rental revenue (base rent plus operating expense pass throughs) multiplied by 12. (3) Includes 47 single-tenant properties comprising 3.4 million rentable square feet and 378,000 rentable square feet leased but not occupied. (4) Includes 24 single-tenant properties comprising 1.6 million rentable square feet and 27,000 rentable square feet leased but not occupied. (5) Excludes the Comeau Building, which is a historical building constructed in 1926 and renovated in 1996. 10 The following table sets forth certain information about the portfolio of in-service and development properties as of December 31, 1997 and 1996:
December 31, 1997 December 31, 1996 ------------------------------------------- ------------------------------------------ Number Percent Number Percent of Rentable Leased/ of Rentable Leased/ Properties Square Feet Pre-leased Properties Square Feet Pre-leased ------------ ------------- ------------ ------------ ------------- ----------- In-Service Office ............. 342 23,842,000 94% 181 12,350,600 93% Industrial ......... 139 6,879,000 93 111 5,104,600 90 --- ---------- -- --- ---------- -- Total ............. 481 30,721,000 94% 292 17,455,200 92% === ========== == === ========== == Under Development Office ............. 25 2,688,000 43% 12 825,000 52% Industrial ......... 7 585,000 26 2 190,000 24 --- ---------- -- --- ---------- -- Total ............. 32 3,273,000 40% 14 1,015,000 46% === ========== == === ========== == Total Office ............. 367 26,530,000 193 13,175,600 Industrial ......... 146 7,464,000 113 5,294,600 --- ---------- --- ---------- Total ............. 513 33,994,000 306 18,470,200 === ========== === ==========
Tenants As of December 31, 1997, the Properties were leased to approximately 3,100 tenants, which engage in a wide variety of businesses. The following table sets forth information concerning the 20 largest tenants of the Properties as of December 31, 1997:
Percent of Total Number Annualized Annualized Tenant of Leases Rental Revenue (1) Rental Revenue - -------------------------------------------------------- ----------- -------------------- ----------------- 1. IBM ................................................ 13 $13,546,185 3.7% 2. Federal Government ................................. 45 12,059,353 3.3 3. AT&T ............................................... 16 6,985,351 1.9 4. Bell South ......................................... 45 6,340,084 1.7 5. State of Florida ................................... 22 5,215,070 1.4 6. GTE ................................................ 6 2,995,422 0.8 7. NationsBank ........................................ 21 2,953,191 0.8 8. First Citizens Bank & Trust ........................ 8 2,887,811 0.8 9. Blue Cross & Blue Shield of South Carolina ......... 10 2,554,517 0.7 10. MCI ................................................ 10 2,458,637 0.7 11. Prudential ......................................... 13 2,412,640 0.7 12. Jacobs-Sirrene Engineers, Inc. ..................... 1 2,235,550 0.6 13. Price Waterhouse ................................... 3 2,047,953 0.6 14. US Airways ......................................... 4 2,033,940 0.6 15. Alex Brown & Sons .................................. 1 1,943,070 0.5 16. H.L.P. Health Plan of Florida ...................... 2 1,913,005 0.5 17. The Martin Agency, Inc. ............................ 1 1,863,504 0.5 18. Northern Telecom Inc. .............................. 2 1,849,118 0.5 19. BB&T ............................................... 4 1,845,501 0.5 20. ClinTrials ......................................... 4 1,812,206 0.5 --- ----------- ---- Total ............................................. 231 $77,952,108 21.3% === =========== ====
- ---------- (1) Annualized Rental Revenue is December 1997 rental revenue (base rent plus operating expense pass throughs) multiplied by 12. 11 The following tables set forth certain information about the Company's leasing activities for the years ended December 31, 1997 and 1996.
1997 1996 ------------------------------- ------------------------------- Office Industrial Office Industrial -------------- -------------- -------------- -------------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) ................................... 520 241 306 240 Rentable square footage leased .............. 2,531,393 1,958,539 1,158,563 2,302,151 Average per rentable square foot over the lease term: Base rent ................................. $ 16.04 $ 5.37 $ 15.00 $ 4.68 Tenant improvements ....................... ( 1.06) (0.22) ( 0.93) (0.15) Leasing commissions ....................... ( 0.39) (0.13) ( 0.31) (0.10) Rent concessions .......................... ( 0.01) (0.01) -- -- ----------- ---------- ---------- ---------- Effective rent ............................ $ 14.58 $ 5.01 $ 13.76 $ 4.43 Expense stop .............................. ( 3.53) (0.23) ( 3.36) (0.39) ----------- ---------- ---------- ---------- Equivalent effective net rent ............. $ 11.05 $ 4.78 $ 10.40 $ 4.04 =========== ========== ========== ========== Average term in years ....................... 4 3 4 2 =========== ========== ========== ========== Rental Rate Trends: Average final rate with expense pass throughs .................................. $ 13.78 $ 5.08 $ 13.64 $ 4.41 Average first year cash rental rate ......... $ 14.76 $ 5.37 $ 14.46 $ 4.68 ----------- ---------- ---------- ---------- Percentage increase ......................... 7.11% 5.71% 6.01% 6.12% =========== ========== ========== ========== Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases ................................... $11,443,099 $1,421,203 $4,496,523 $ 685,880 Rentable square feet ...................... 2,531,393 1,958,539 1,158,563 2,302,151 ----------- ---------- ---------- ---------- Per rentable square foot .................. $ 4.52 $ 0.73 $ 3.88 $ 0.30 =========== ========== ========== ========== Leasing Commissions: Total dollars committed under signed leases ................................... $ 4,247,280 $ 890,280 $1,495,498 $ 470,090 Rentable square feet ...................... 2,531,393 1,958,539 1,158,563 2,302,151 ----------- ---------- ---------- ---------- Per rentable square foot .................. $ 1.68 $ 0.45 $ 1.29 $ 0.20 =========== ========== ========== ========== Total: Total dollars committed under signed leases ................................... $15,690,379 $2,311,483 $5,992,021 $1,155,970 Rentable square feet ...................... 2,531,393 1,958,539 1,158,563 2,302,151 ----------- ---------- ---------- ---------- Per rentable square foot .................. $ 6.20 $ 1.18 $ 5.17 $ 0.50 =========== ========== ========== ==========
12 The following tables set forth scheduled lease expirations for executed leases as of December 31, 1997, assuming no tenant exercises renewal options. Office Properties:
Average Percentage of Annual Leased Rents Total Percentage of Annual Rents Rental Rate Represented Year of Rentable Leased Square Footage Under Per Square by Lease Number of Square Feet Represented by Expiring Foot for Expiring Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Leases - ------------ ----------- ------------- ----------------------- -------------- ----------------- -------------- 1998 886 3,785,469 17.2% $ 57,338,996 $ 15.15 17.2% 1999 627 3,144,551 14.3 47,330,017 15.05 14.3 2000 684 3,532,083 16.0 54,111,857 15.32 16.3 2001 413 3,077,007 13.9 47,164,815 15.33 14.2 2002 410 3,131,735 14.2 47,142,775 15.05 14.2 2003 86 1,227,155 5.6 18,193,113 14.83 5.5 2004 55 980,824 4.4 16,840,214 17.17 5.1 2005 39 817,786 3.7 10,501,525 12.84 3.2 2006 27 847,453 3.8 11,936,405 14.09 3.6 2007 18 535,012 2.4 7,273,331 13.59 2.2 Thereafter 25 983,034 4.5 14,103,828 14.35 4.2 --- --------- ----- ------------ -------- ----- Total or average 3,270 22,062,109 100.0% $331,936,876 $ 15.05 100.0% ===== ========== ===== ============ ======== =====
Industrial Properties:
Average Percentage of Annual Leased Rents Total Percentage of Annual Rents Rental Rate Represented Year of Rentable Leased Square Footage Under Per Square by Lease Number of Square Feet Represented by Expiring Foot for Expiring Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Leases - ------------- ----------- ------------- ----------------------- -------------- ----------------- -------------- 1998 221 1,686,906 26.2% $ 9,247,354 $ 5.48 26.7% 1999 139 1,215,439 19.0 6,500,284 5.35 18.8 2000 123 1,223,412 19.1 7,304,628 5.97 21.1 2001 58 597,379 9.3 3,523,569 5.90 10.2 2002 54 1,159,283 18.1 5,056,924 4.36 14.6 2003 9 99,905 1.6 760,152 7.61 2.2 2004 5 104,369 1.6 602,516 5.77 1.7 2005 4 33,832 0.5 289,380 8.55 0.8 2006 2 196,600 3.1 882,636 4.49 2.5 2007 -- -- -- -- -- -- Thereafter 1 95,545 1.5 464,826 4.86 1.4 --- --------- ----- ----------- ------- ----- Total or average 616 6,412,670 100.0% $34,632,269 $ 5.40 100.0% === ========= ===== =========== ======= =====
- ---------- (1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. 13 Table of Properties The following table and the notes thereto set forth information regarding the Properties at December 31, 1997:
Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------- ---------- ------- ------------- -------------- ------------------------------------------- Research Triangle, NC - ------------------------- Highwoods Office Center Amica O 1983 20,708 100% Amica Mutual Insurance Co. Interface Technologies Arrowood O 1979 58,743 100 First Citizens Bank & Trust Aspen O 1980 36,796 87 Coopers & Lybrand Birchwood O 1983 12,748 100 Southlight, Inc., Donohoe Construction Co. Cedar East O 1981 40,552 100 Amerimark Building Products Cedar West O 1981 39,609 100 N/A Cottonwood O 1983 40,150 100 First Citizens Bank & Trust Cypress O 1980 39,003 90 GSA-Army Recruiters Dogwood O 1983 40,613 100 First Citizens Bank & Trust Global Software O 1996 92,985 100 Global Software Inc. Hawthorn O 1987 63,797 100 Carolina Telephone & Telegraph Highwoods Tower O 1991 185,446 98 Maupin, Taylor & Ellis Holly O 1984 20,186 100 Capital Associated Industries Ironwood O 1978 35,695 97 First Citizens Bank & Trust Kaiser O 1988 56,975 100 Kaiser Foundation Health Laurel O 1982 39,382 100 Ms. Terry Woods, First Citizens Bank & Trust Leatherwood O 1979 36,581 92 GAB Robins North America, Inc. Smoketree Tower O 1984 150,341 98 N/A Rexwoods Office Center 2500 Blue Ridge O 1982 61,594 97 Rex Hospital, Inc. Blue Ridge II O 1988 20,673 100 McGladrey & Pullen Rexwoods Center O 1990 41,686 100 N/A Rexwoods II O 1993 20,845 100 Raleigh Neurology Clinic, Miller Building Corporation Rexwoods III O 1992 42,488 100 ARCADIS Geraghty & Miller, Inc. Rexwoods IV O 1995 42,331 100 N/A Triangle Business Center Building 2A O 1984 102,400 100 Harris Semiconductor Corporation, Building 2B S 1984 32,000 100 Qualex Inc. Building 3 O 1988 135,382 100 N/A Building 7 O 1986 124,432 91 Broadband Technologies, Inc. Progress Center Cape Fear O 1979 41,527 100 Intercardia, Inc. Catawba O 1980 40,578 100 GSA -- EPA Pamlico O 1980 104,773 100 Northern Telecom, Inc. North Park 4800 North Park O 1985 168,016 100 IBM-PC Division 4900 North Park O 1984 32,339 100 N/A 5000 North Park O 1980 74,653 93 N/A Creekstone Park Creekstone Crossing O 1990 59,299 100 N/A Riverbirch O 1987 60,192 100 Quintiles, Inc. Sycamore O 1997 72,124 95 Northern Telecom Inc. Willow Oak O 1995 89,392 100 AT&T Research Commons EPA Administration O 1966 46,718 100 GSA-EPA EPA Annex O 1966 145,875 100 GSA-EPA 4501 Building O 1985 56,566 100 Lockheed Martin 4401 Building O 1987 117,436 100 Ericsson, GSA-NIH 4301 Building O 1989 90,894 100 Glaxo Wellcome, Inc. 4201 Building O 1991 83,481 100 GSA-EPA Roxboro Road Portfolio Fairfield I O 1987 52,050 92 Reliance Insurance Company Fairfield II O 1989 59,954 100 Qualex, Inc. Qualex O 1985 67,000 100 Qualex, Inc. 4101 Roxboro O 1984 56,000 100 Duke -- Cardiology 4020 Roxboro O 1989 40,000 100 Duke -- Pediatrics Duke -- Cardiology
14
Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------------- ---------- ------- ------------- -------------- ----------------------------------------- Six Forks Center Six Forks Center I O 1982 33,867 98% Centura Bank, NY Life Ins. Co. Six Forks Center II O 1983 55,678 93 N/A Six Forks Center III O 1987 60,814 100 EDS ONCC Phase I S 1981 101,129 75 N/A "W" Building O 1983 91,335 79 Closure Medical Corporation 3645 Trust Drive O 1984 50,652 74 Customer Access Resources, Inc. 5220 Green's Dairy Road O 1984 29,720 100 N/A 5200 Green's Dairy Road O 1984 18,317 32 N/A 5301 Departure Drive S 1984 84,899 100 ABB Power T&D Co., Inc., Cardiovascular Diagnostics, Inc. Other Research Triangle Properties 4000 Aerial Center O 1992 25,330 0 N/A Colony Corporate Center O 1985 52,183 79 Rust Environmental & Infrastructure, Fujitsu Concourse O 1986 131,834 100 ClinTrials Cotton Building O 1972 40,035 100 Cotton Inc., Associated Insurances Inc. Expressway One Warehouse I 1990 59,600 54 Number One Supply Corporation 3600 Glenwood Avenue (2) O 1986 78,008 100 Poyner & Spruill Healthsource O 1996 180,000 100 Healthsource N.C. Holiday Inn O 1984 30,000 100 Holiday Hospitality Corporation Lake Plaza East O 1984 71,339 93 N/A MSA O 1996 55,219 100 Management Systems Associates Phoenix O 1990 26,449 91 Computer Intelligence, Inc. North Park Building One O 1997 42,255 38 Medpartners Acquisition Situs I O 1996 59,255 95 BellSouth South Square I O 1988 56,401 100 Blue Cross and Blue Shield of SC South Square II O 1989 58,793 100 Blue Cross and Blue Shield of NC, ------- --- Duke University Total or Weighted Average 4,686,120 95% ========= === Atlanta, GA - ------------------------------- Oakbrook Oakbrook I S 1981 106,662 100 N/A Oakbrook II O 1983 141,938 100 Assetcare, Inc. Oakbrook III S 1984 164,297 100 N/A Oakbrook IV O 1985 89,102 100 N/A Oakbrook V O 1985 204,338 100 N/A 6348 Northeast Expressway I 1978 49,023 100 Quick Ship Holding, Inc. 6438 Northeast Expressway I 1981 43,024 100 Leather Creations, Inc., Roos, Inc. Chattahoochee Avenue I 1970 62,095 82 N/A Corporate Lakes Dist Center I 1988 235,595 99 Motorola Energy Products Cosmopolitan North O 1980 120,967 90 Wells Fargo Armored Services Corporation Gwinnett Distribution I 1991 316,668 98 N/A Center Lavista Business Park I 1973 216,200 94 N/A Norcross I,II I 1970 64,010 100 Sun Mi Chun Oakbrook Summitt I 1981 234,232 100 N/A Southside Distribution I 1988 191,200 73 Coca-Cola Center Steel Drive I 1975 57,188 93 Ballistic Studios Century Center 1700 Century Circle O 1972 69,368 95 N/A 1800 Century Boulevard O 1975 279,491 100 Bell South 1875 Century Boulevard (3) O 1976 96,069 100 GSA 1900 Century Boulevard (3) O 1971 80,026 96 N/A 2200 Century Parkway (3) O 1971 143,088 100 N/A 2600 Century Parkway (3) O 1973 96,287 100 MBNA Marketing Systems, Inc., GSA 2635 Century Parkway (3) O 1980 210,066 99 GSA 2800 Century Parkway (3) O 1983 220,873 100 AT&T Other Atlanta Properties 1035 Fred Drive I 1973 100,187 100 The Tenstar Corporation 1077 Fred Drive I 1973 105,600 100 Advanced Distribution Systems, International Paper 5125 Fulton Industrial Blvd. I 1973 149,386 100 Martin Brower Co. Fulton Corporate Center I 1973 101,000 87 N/A
15
Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------------- ---------- ------- ------------- -------------- ------------------------------------- 400 North Business Park O 1985 85,756 100% N/A Kennestone Corporate O 1985 81,993 100 N/A Center Oxford Lakes Business O 1985 102,446 100 Vanstar Corporation Center Chastain Place 1 I 1997 108,000 50 Nailco Southeast, Inc. Bluegrass Place 1 I 1995 69,000 100 Ebscaft, Inc. Bluegrass Place 2 I 1996 72,000 100 Hansgrohe, Inc. 1765 The Exchange O 1983 90,215 90 GA Waste Systems Inc. Two Point Royal O 1997 123,032 89 Hartford Fire Insurance Co., Textron Financial Corporation 50 Glenlake O 1997 144,409 93 Hartford Fire Insurance Co ------- --- Total or Weighted Average 4,824,831 96% ========= === Tampa, FL - ------------------------------- Sabal Park Atrium O 1989 131,952 100 GTE Data Services, Inc., Intermedia Communications Sabal Business Center VI O 1988 99,136 100 Pharmacy Management Services, Inc. Progressive Insurance O 1988 83,648 100 Progressive American Insurance Co. Sabal Business Center VII O 1990 71,248 100 Beverly Enterprises, Inc. Sabal Business Center V O 1988 60,578 100 Lebhar-Friedman Inc. Registry II O 1987 58,781 97 N/A Registry I O 1985 58,319 95 N/A Sabal Business Center IV (4) O 1984 49,368 100 Phillips Educational Group of Central Florida, Inc., TGC Home Health Care, Inc. Sabal Tech Center O 1989 48,220 100 Merck-Medco Managed Care Sabal Park Plaza O 1987 46,758 100 State of Florida Department of Revenue, ERM South, Inc. Sabal Lake Building O 1986 44,533 100 Warner Publisher Services, Inc. Sabal Business Center I O 1982 39,866 85 N/A Sabal Business Center II O 1984 32,736 64 Owen Ayres and Associates, Inc. Registry Square O 1988 26,568 91 Proctor & Redfern, Inc. Expo Building O 1981 25,600 100 Exposystems, Inc., Expodisplays Sabal Business Center III O 1984 21,300 100 Progressive Insurance Benjamin Center Benjamin Center #7 O 1991 30,962 100 Basetec Office Systems, Inc., Beers Construction Benjamin Center #9 O 1989 38,405 79 First Image Management Co. Tampa Bay Park Horizon (5) O 1980 92,073 91 IBM Lakeside (5) O 1978 91,545 100 American Portable Telecom Lakepointe I O 1986 229,524 98 IBM, Price Waterhouse Parkside (5) O 1979 102,046 100 IBM Pavillion (5) O 1982 144,166 100 IBM Spectrum O 1984 146,994 100 IBM Other Tampa Properties Tower Place O 1988 181,179 96 N/A Day Care Center O 1986 8,000 100 Brookwood Academy Child Care 5400 Gray Street O 1973 5,408 100 The Wackenhut Corporation Crossroads Office Center O 1981 74,729 63 N/A Cypress West O 1985 64,977 82 Paradigm Communications, Inc. Feathersound II O 1986 79,972 98 N/A Fireman's Fund Building O 1982 49,578 98 Fireman's Fund Insurance Co., Pitney Bowes, Inc. Lakeside Technology Center O 1984 146,663 94 NationsBank Grand Plaza O 1985 239,353 90 N/A Mariner Square O 1973 72,319 99 GSA Telecom Technology Center O 1991 133,820 100 GTE Zurn Building O 1983 74,263 100 N/A ------- --- --- Total or Weighted Average 2,904,587 96% ========= ===
16
Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------- ---------- ------- ------------- -------------- ---------------------------------- Piedmont Triad, NC - ------------------------- Airpark East Highland Industries S 1990 12,500 100% Highland Industries, Inc. Service Center 1 S 1985 18,575 53 N/A Service Center 2 S 1985 19,125 0 N/A Service Center 3 S 1985 16,498 100 ECPI of Tidewater, VA Service Center 4 S 1985 16,500 0 N/A Copier Consultants S 1990 20,000 100 Copier Consultants Service Court S 1990 12,600 81 N/A Building 01 O 1990 24,423 79 Health & Hygiene Building 02 O 1986 23,827 100 GSA-United States Postal Service Building 03 O 1986 23,182 96 Time Warner, Lockheed Martin Building 06 O 1997 12,500 62 Simplex Time Recorder Co. Building A O 1986 56,272 100 N/A Building B O 1988 54,088 100 GSA-United States Postal Service Building C O 1990 134,893 91 Daicore Life and Health Ins. Building D O 1997 54,007 90 Volvo Sears Cenfact O 1989 49,504 100 Sears Hewlett Packard O 1996 15,000 100 Hewlett Packard Co. Inacom O 1996 12,620 100 Inacom Business Centers Inc. Warehouse 1 I 1985 64,000 100 Guilford Business Forms, Inc., Safelite Glass Corporation Warehouse 2 I 1985 64,000 75 Volvo GM Heavy Truck Corporation, State Street Bank Realty Warehouse 3 I 1986 57,600 93 US Air, Inc., Garlock, Inc. Warehouse 4 I 1988 54,000 100 First Data Resources, Inc., Microdyne Systems, Inc. Airpark North DC-1 I 1986 112,000 100 VSA, Inc. DC-2 I 1987 111,905 100 Sears Electric South DC-3 I 1988 75,000 100 Continuous Forms & Checks, Inc., Liberty of NC DC-4 I 1988 60,000 0 N/A Airpark West Airpark I O 1984 60,000 100 Volvo GM Heavy Truck Corp. Airpark II O 1985 45,680 67 Volvo GM Heavy Truck Corp. Airpark IV O 1985 22,612 100 Max Radio of Greensboro Airpark V O 1985 21,923 46 N/A Airpark VI O 1985 22,097 94 Brookstone College, Anacomp West Point Business Park BMF Warehouse I 1986 240,000 100 Sara Lee Knit Products, Inc. WP-11 I 1988 89,600 100 N.C. Record Control Centers, Walt Klein & Associates WP-12 I 1988 89,600 100 Norel Plastics, Sara Lee WP-13 I 1988 89,600 100 Sara Lee Knit Products, Inc. WP-3 & 4 S 1988 18,059 100 Pediatric Services of America, Rayco Safety, Inc. WP-5 S 1995 26,282 100 Cardinal Health, Inc. Fairchild Building I 1990 89,000 100 Fairchild Industrial Products LUWA Bahnson Building O 1990 27,000 100 Luwa Bahnson, Inc. University Commercial Center W-1 I 1983 44,400 100 Lantal Corp. W-2 I 1983 46,500 100 Paper Supply Company SR-1 S 1983 23,112 100 N/A SR-2 01/02 S 1983 17,282 100 Decision Point Marketing SR-3 S 1984 23,925 80 Decision Point Marketing Building 03 O 1985 37,077 61 N/A Building 04 O 1986 34,470 94 Telespectrum Worldwide, Inc. Knollwood Office Center 370 Knollwood O 1994 90,315 100 Krispy Kreme, Prudential Carolinas Realty 380 Knollwood O 1990 164,179 100 N/A Stoneleigh Business Park 7327 W. Friendly Ave. S 1987 11,180 90 Sprint, Salem Imaging 7339 W. Friendly Ave. S 1989 11,784 100 Medical Endoscopy Service, R.F. Micro Devices 7341 W. Friendly Ave. S 1988 21,048 91 R.F. Micro Devices
17
Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------------ ---------- ------- ------------- -------------- ---------------------------------------- 7343 W. Friendly Ave. S 1988 13,463 100% Executone Information Systems 7345 W. Friendly Ave. S 1988 12,300 100 Rule Manufacturing 7347 W. Friendly Ave. S 1988 17,978 93 Carter & Associates, Surf Air 7349 W. Friendly Ave. S 1988 9,840 100 Ardratech, Inc., Anderson & Associates 7351 W. Friendly Ave. S 1988 19,723 100 ACT MEDIA, Inc., Corporate Express, Heritage Capital 7353 W. Friendly Ave. S 1988 22,826 100 Office Equipment Wholesalers, United Dominion Industries 7355 W. Friendly Ave. S 1988 13,296 100 R.F. Micro Devices Spring Garden Plaza 4000 Spring Garden St. S 1983 21,773 91 Lighting Creations, Inc. 4002 Spring Garden St. S 1983 6,684 100 Reynolds & Reynolds 4004 Spring Garden St. S 1983 23,724 92 N/A Pomona Center -- Phase I 7 Dundas Circle S 1986 14,184 91 N/A 8 Dundas Circle S 1986 16,488 100 N/A 9 Dundas Circle S 1986 9,972 43 Netcom Cabling, Inc. Pomona Center -- Phase II 302 Pomona Dr. S 1987 16,488 100 N/A 304 Pomona Dr. S 1987 4,344 100 Fortune Personnel Consultants, OEC Fluid Handling, Inc. 306 Pomona Dr. S 1987 9,840 75 Aqua Science 308 Pomona Dr. S 1987 14,184 100 N/A 5 Dundas Circle S 1987 14,184 91 Engineering Consulting SV Westgate on Wendover -- Phase I 305 South Westgate Dr. S 1985 4,608 100 Alarmguard Security, Inc., The Computer Store, Inc. 307 South Westgate Dr. S 1985 12,672 100 Incutech, Inc. 309 South Westgate Dr. S 1985 12,960 44 GEODAX Technology, Inc., Earth Tech, Inc. 311 South Westgate Dr. S 1985 14,400 110 N/A 315 South Westgate Dr. S 1985 10,368 78 N/A 317 South Westgate Dr. S 1985 15,552 93 N/A 319 South Westgate Dr. S 1985 10,368 78 N/A Westgate on Wendover -- Phase II 206 South Westgate Dr. S 1986 17,376 100 Home Care of the Central Carolinas 207 South Westgate Dr. S 1986 26,448 100 Health Equipment Services 300 South Westgate Dr. S 1986 12,960 87 Health Equipment Services 4600 Dundas Circle S 1985 11,922 0 N/A 4602 Dundas Circle S 1985 13,017 61 Four Seasons Apparel Co. Radar Road 500 Radar Rd. I 1981 78,000 100 N/A 502 Radar Rd. I 1986 15,000 100 East Texas Distributing, Inc. 504 Radar Rd. I 1986 15,000 100 Techno Craft, Inc., Dayva Industries 506 Radar Rd. I 1986 15,000 100 D&N International, Inc. American Coatings of VA, Wentworth Textiles Holden/85 Business Park 2616 Phoenix Dr. I 1985 31,894 100 Pliana, Inc. 2606 Phoenix Dr. -- 100 S 1989 15,000 100 Piedmont Plastics, Inc., Rexam Flexible Packaging Corporation 2606 Phoenix Dr. -- 200 S 1989 15,000 100 REHAU, Inc., Reynolds Renovations 2606 Phoenix Dr. -- 300 S 1989 7,380 100 N/A 2606 Phoenix Dr. -- 400 S 1989 12,300 90 Spectrum Financial Systems 2606 Phoenix Dr. -- 500 S 1989 15,180 100 The Record Exchange, Inc. 2606 Phoenix Dr. -- 600 S 1989 18,540 70 Faith & Victory Church Industrial Village 7906 Industrial Village Rd. I 1985 15,000 100 Texas Aluminum Industries 7908 Industrial Village Rd. I 1985 15,000 100 Air Express, Pharmagraphics Holdings 7910 Industrial Village Rd. I 1985 15,000 100 Wadkin North America, Inc. Consolidated Center Consolidated Center I O 1983 40,000 100 Bali Consolidated Center II O 1983 60,000 92 Bali, Aon Risk Services Consolidated Center III O 1989 50,775 96 Lowes, Shelco, Inc. Consolidated Center IV O 1989 29,312 100 Medcost, Inc.
18
Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------------- ---------- ------------ ------------- -------------- --------------------------------------- Other Piedmont Triad Properties 101 S. Stratford O 1986 78,194 100% First Union, Triad Guaranty Ins. Corporation 6348 Burnt Poplar I 1990 125,000 100 Sears 6350 Burnt Poplar I 1992 57,600 100 Industries for the Blind Champion Madison Park II O 1993 105,723 100 Champion Deep River I O 1989 78,094 78 N/A Forsyth I O 1985 52,922 94 Management Directions Regency One I 1996 127,600 100 New Breed Leasing Corporation Regency Two I 1996 96,000 100 Duorr Medical Corporation R.F. Micro Devices O 1997 49,505 100 R.F. Micro Devices Stratford O 1991 135,533 88 BB&T Chesapeake I 1993 250,000 100 Chesapeake Display & Packaging USAIR Buildings O 1970-1987 134,555 100 US AIR 3288 Robinhood O 1989 19,599 100 N/A --------- --- Total or Weighted Average 4,738,992 93% ========= === South Florida - ------------------------------- 1800 Eller Drive (6) O 1983 103,440 87 Renaissance Cruises 2828 Coral Way Building O 1985 64,000 96 Spanish Radio Network Atrium At Coral Gables O 1984 164,528 100 Prosource Atrium West O 1983 92,014 93 GSA Avion Building O 1985 66,908 91 N/A Centrum Plaza O 1988 40,938 98 N/A Comeau Building O 1926 87,302 66 N/A Corporate Square O 1981 87,823 95 N/A Dadeland Office Complex O 1972 240,148 86 N/A Design Center Plaza O 1982 57,500 94 Carnival Air Lines, Inc. Doral Financial Plaza O 1987 222,000 72 Sun Bank Emerald Hills Plaza I O 1979 63,401 94 N/A Emerald Hills Plaza II O 1979 74,218 76 Sheridan Health Corp Gulf Atlantic (7) O 1986 134,776 97 N/A Highwoods Plaza O 1980 80,260 100 N/A Highwoods Square O 1989 148,945 99 N/A One Boca Place O 1987 277,630 94 N/A Palm Beach Gardens Office O 1984 67,657 95 N/A Park Pine Island Commons O 1985 60,810 74 N/A Venture Corporate Center I O 1982 82,224 96 Conroy, Simberg & Lewis Venture Corporate Center II O 1982 83,737 97 H.I.P. Health Plan Of Florida, Michael Swerdlow Companies Venture Corporate Center III O 1982 83,785 100 H.I.P. Health Plan of Florida --------- --- 2,384,044 90% ========= === Nashville, TN - ------------------------------- Maryland Farms Eastpark 1 O 1978 29,797 100 Brentwood Music, Volunteer Credit Corporation Eastpark 2 O 1978 85,516 100 PMT Services, Inc. Eastpark 3 O 1978 77,480 100 N/A Harpeth II O 1984 78,220 100 N/A Harpeth III O 1987 78,989 100 Alcoa Fujikura Ltd. Harpeth IV O 1989 77,694 100 USF&G, L.M. Berry Co. Highwoods Plaza I O 1996 102,593 100 TCS Management Group, Inc. Highwoods Plaza II O 1997 102,052 100 TCS Management Group, Inc., Windy Hill Pet Food Co. EMI/Sparrow O 1982 59,656 100 EMI Christian Music Group 5310 Maryland Way O 1994 76,615 100 Bell South Grassmere Grassmere I S 1984 87,902 100 Contel Cellular of Nashville, Inc. Grassmere II S 1985 145,092 90 N/A Grassmere III S 1990 103,000 100 Harris Graphics Corporation
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Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------------- ---------- ------------ ------------- -------------- ----------------------------------------- Other Nashville Properties Century City Plaza I O 1987 56,161 96% N/A Lakeview O 1986 99,722 100 The Kroger Co. 3401 Westend O 1982 255,137 99 N/A BNA O 1985 234,198 98 N/A 100 Winner's Circle O 1987 71,661 100 American Color Graphics, McDonald's --------- --- Total or Weighted Average 1,821,485 98% ========= === Orlando, FL - ------------------------------- Metrowest I O 1988 102,019 100 Hilton Grand Vacation Co. Southwest Corporate Center O 1984 98,777 100 Walt Disney World Co. Campus Crusade O 1990 165,000 100 Campus Crusade For Christ ACP-W O 1966-1992 315,515 85 AT&T Corporate Square (8) O 1971 46,915 96 L.J. Norarse, Valencia Community College Executive Point Towers O 1978 123,038 87 AT&T Lakeview Office Park O 1975 212,443 91 N/A 2699 Lee Road (9) O 1974 86,464 97 N/A One Winter Park O 1982 62,564 97 N/A The Palladium O 1988 72,278 100 Westinghouse Electric 201 Pine Street O 1980 241,601 95 N/A Premiere Point North O 1983 47,871 96 Muscato Corporation Premiere Point South O 1983 47,581 95 N/A Shoppes Of Interlachen O 1987 49,705 89 N/A Signature Plaza O 1986 272,931 83 N/A Skyline Plaza O 1985 45,446 98 Hubbard Construction Co. --------- --- Total or Weighted Average 1,990,148 92% ========= === Jacksonville, FL - ------------------------------- Towermarc Plaza O 1991 50,624 100 Aetna Casualty Belfort Park I O 1988 63,925 92 Acr Systems, Inc. Belfort Park II O 1988 56,633 90 Media One Belfort Park III O 1988 84,294 89 Xomed, Inc. Cigna Building O 1972 39,078 74 Insurance Co. of North America Harry James Building O 1982 31,056 100 Aon Independent Square O 1975 639,358 89 N/A Three Oaks Plaza O 1972 257,028 95 N/A Reflections O 1985 114,992 96 N/A Southpoint Office Building O 1980 56,836 92 N/A 100 West Bay Street Building O 1964 71,315 74 Life Of The South Insurance --------- --- Total or Weighted Average 1,465,139 90% ========= === Charlotte, NC - ------------------------------- Steele Creek Park Building A I 1989 42,500 100 Comer MFG Building B I 1985 15,031 100 Pumps Parts & Services Building E I 1985 38,697 100 Bradman-Lake, Inc., Atlas Die, Inc. Building G-1 I 1989 22,500 44 Safewaste Corporation Building H I 1987 53,614 64 Sugravo Rallis Engraving, Inc. Building K I 1985 19,400 100 Queen City Plastics, Inc. Highwoods/Forsyth Business Park 4101 Stuart Andrew Blvd. S 1984 11,573 100 N/A 4105 Stuart Andrew Blvd. S 1984 4,340 100 Re-Directions, Inc., Daltile, G & E Engineering 4109 Stuart Andrew Blvd. S 1984 14,783 100 N/A 4201 Stuart Andrew Blvd. S 1982 19,004 100 Medstaff Contract Nursing 4205 Stuart Andrew Blvd. S 1982 23,042 100 Sunbelt Video, Inc. 4209 Stuart Andrew Blvd. S 1982 15,578 100 N/A 4215 Stuart Andrew Blvd. S 1982 23,372 98 Rodan, Inc. 4301 Stuart Andrew Blvd. S 1982 38,662 99 Circle K 4321 Stuart Andrew Blvd. S 1982 12,018 83 Dilan Parkway Plaza Building 1 O 1982 57,584 99 BASF Corporation Building 2 O 1983 87,314 70 N/A Building 3 O 1984 81,821 93 N/A Building 6 (10) O 1996 40,708 100 Hewlett-Packard Building 7 (11) O 1985 60,722 100 Barclays American Mortgage Building 8 (11) O 1986 40,615 100 Barclays American Mortgage Building 9 (11) I 1984 110,000 100 BB&T
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Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ---------------------------- ---------- ------- ------------- -------------- ---------------------------------------------- Oakhill Business Park Twin Oaks O 1985 97,115 88% Springs Industries, Inc. Water Oak O 1985 95,636 97 N/A Scarlet Oak O 1982 76,584 87 Krueger Ringier, Inc. English Oak O 1984 54,865 100 The Employers Association of the Carolinas Willow Oak O 1982 36,560 0 N/A Laurel Oak O 1984 34,536 100 Paramount Parks Inc., Woolpert Consultants, AG Live Oak O 1989 82,431 97 CHF Industries Other Charlotte Properties First Citizens O 1989 57,171 64 N/A Pinebrook O 1986 60,814 95 Keycorp Corporate Real Estate -------- --- Total or Weighted Average 1,428,590 89% ========= === Richmond, VA - ---------------------------- Innsbrook Office Center Liberty Mutual O 1990 57,915 100 Capital One, Liberty Mutual Markel American O 1988 38,867 91 Mark IV Realty Corporation Proctor-Silex O 1986 58,366 100 Proctor-Silex, Inc. Vantage Place I O 1987 13,584 100 Rountrey and Associates, Spencer Printing Co. Vantage Place II O 1987 14,822 100 Government Entities Vantage Place III O 1988 14,389 100 Broughton Systems, Inc. Vantage Place IV O 1988 13,441 35 Cemetary Mgmt. Vantage Point O 1990 64,898 86 EDS, Nationwide Insurance Innsbrook Tech I S 1991 18,350 89 Air Specialists of VA DEQ Technology Center O 1991 53,554 93 FirstHealth, Dept. of Environmental Quality DEQ Office O 1991 70,423 100 Circuit City Aetna O 1989 99,209 97 N/A Highwoods One O 1996 124,375 100 Amtec Technologies, Dynex Capital Technology Park Virginia Center O 1985 119,672 90 N/A Other Richmond Properties Westshore I O 1995 18,775 100 Snyder Hunt Corporation Westshore II O 1995 27,714 100 Hewlett-Packard Westshore III O 1997 56,500 56 K-Line America,Inc. Shockoe Alleghany O 1996 118,518 100 The Martin Agency, Inc. Warehouse Airport Center 1 I 1997 141,613 100 Federal Express, Stone Container Corporation The Richfood Building O 1997 75,618 80 N/A Grove Park O 1997 61,258 10 N/A East Cary Street O 1987 16,865 66 Butler, Macon Et. Al. -------- --- Total or Weighted Average 1,278,726 89% ========= === Greenville, SC - ---------------------------- Brookfield Corporate Center Brookfield-Jacobs-Sirrine O 1990 228,345 100 Jacobs-Sirrine Engineers, Inc. Brookfield Plaza O 1987 117,982 94 CSC Continuum, Inc. Brookfield-YMCA S 1990 15,500 46 Kids & Company at Pelham Falls, Inc. Patewood Plaza Office Park Patewood Business Center S 1983 103,302 92 N/A Patewood V O 1990 100,187 100 Bell Atlantic Mobile Systems, Inc., PYA/Monarch, Inc. Patewood IV O 1989 61,649 100 MCI Patewood III O 1989 61,539 94 MCI Patewood I O 1985 57,136 100 Metropolitan Life Ins. Co Patewood II O 1987 60,168 79 Coats & Clark, Inc. Other Greenville Properties NationsBank Plaza (12) O 1973 195,833 79 N/A -------- --- Total or Weighted Average 1,001,641 91% ========= === Memphis, TN - ---------------------------- Southwind Office Center "A" O 1991 62,179 100 Promus Hotels, Inc. Office Center "B" O 1990 61,860 64 N/A Highwoods Office Center O 1997 69,023 66 Check Solutions
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Percent Occupied at Tenants Leasing 25% or More Building Year Rentable December 31, of Rentable Square Feet at Property Type (1) Built Square Feet 1997(13) December 31, 1997 - ------------------------------- ---------- ------- ------------- -------------- ---------------------------------- Other Memphis Properties Atrium I O 1984 42,124 100% Baptist Memorial Health Care Atrium II O 1984 42,099 100 Mueller Streamline Co. International Place Phase II O 1988 208,014 94 International Paper Company Kirby Centre O 1984 32,007 100 Financial Federal Savings Bank, Union Central Life Insurance Co. Medical Properties, Inc. O 1988 18,079 100 Health Tech Affiliates, Inc. Centrum Building O 1979 71,164 96 NationsBank -------- --- Total or Weighted Average 606,549 90% ========== === Baltimore - ------------------------------- 9690 Deereco Road O 1989 132,835 99 N/A 375 West Padonia Road (The O 1986 100,800 99 N/A Atrium) Business Center at Owings O 1989 43,753 99 N/A Mills 7 Business Center at Owings O 1989 39,195 99 N/A Mills 8 Business Center at Owings O 1988 47,851 99 N/A -------- --- Mills 9 364,434 99% ========== === Columbia, SC - ------------------------------- Fontaine Business Center Fontaine I O 1985 98,100 99 Blue Cross and Blue Shield of S.C. Fontaine II O 1987 72,468 100 Blue Cross and Blue Shield of S.C. Fontaine III O 1988 57,888 100 Companion Health Care Corporation Fontaine V O 1990 21,107 100 Roche Biomedical Laboratories, Inc. Other Columbia Properties Center Point I O 1988 72,565 93 Sedgewick James of South Carolina, Inc., Alltel Mobile Communication Center Point II O 1996 81,466 46 Bell South Center Point V O 1997 20,144 63 DS Atlantic Corporation, -------- --- Hewlett Packard Total or Weighted Average 423,738 86% ========== === Tallahassee - ------------------------------- Blair Stone Building O 1994 244,676 100% State of Florida ======== === Norfolk, VA - ------------------------------- Battlefield I S 1987 97,633 100 Kasei Memory Products, Inc. Greenbrier Business Center O 1984 81,194 100 Canon Computer Systems, Inc., Roche Biomedical Laboratories, Inc. Riverside Plaza O 1988 87,030 93 First Hospital Corporation -------- --- Total or Weighted Average 265,857 98% ========== === Birmingham, AL - ------------------------------- Grandview I O 1989 115,289 100% N/A ======== === Asheville, NC - ------------------------------- Ridgefield 300 O 1989 63,500 100 N/A Ridgefield 200 S 1987 60,677 100 Medical Business Resource -------- --- Total or Weighted Average 124,177 100% ========== === Ft Myers - ------------------------------- Sunrise Office Center O 1974 51,831 67% N/A ======== === ================================== Total or Weighted Average of All Properties 30,720,854 94% ========== ===
22 - ---------- (1) I = Industrial, S = Service Center and O = Office. (2) The property is subject to a land lease expiring August 31, 2023. Rental payments on this lease are to be adjusted in 1998 and 2013 based on the consumer price index. The Company has a right of first refusal to purchase the leased land during the lease term. (3) The six properties are subject to land leases expiring December 31, 2058. (4) The property is subject to a ground lease expiring May 31, 2002. (5) The four properties are subject to land leases expiring December 31, 2058. Rental payments on these leases are adjusted yearly based on a stated percentage of each property's cash flow over a base amount. (6) The property is subject to a ground lease expiring January 31, 2031. Rental payments on this lease are to be adjusted every five years based on the consumer price index. (7) The property is subject to a ground lease expiring February 14, 2033. (8) The property is subject to a ground lease expiring November 30, 2036. Rental payments on this lease are to be adjusted every five years based on the consumer price index. (9) The property is subject to a ground lease expiring May 25, 2020. (10) The property is subject to a land lease expiring December 31, 2071. (11) The three properties are subject to a ground lease expiring December 31, 2082. The Company has the option to purchase the land during the lease term at the greater of $35,000 per acre or 85% of appraised value. (12) The property is subject to two land leases expiring September 30, 2069 and a land lease expiring August 31, 2069. (13) Includes 405,000 rentable square feet leased but not occupied. Development Land As of December 31, 1997, the Company owned 718 acres and had committed to purchase over the next six years an additional 512 acres of land for development. The Company estimates that it can develop approximately 16 million square feet of office and industrial space on the Development Land. All of the Development Land is zoned and available for office or industrial development, substantially all of which has 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 facilities, additional borrowings and offerings of equity and debt 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 many of its markets. 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. 23 ITEM 3. LEGAL PROCEEDINGS The Company is a party to a variety of legal proceedings arising in the ordinary course of its business. The Company believes that it is adequately covered by insurance and indemnification agreements. Accordingly, none of such proceedings are expected to have a material adverse effect on the financial position or results of operations of the Company. 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 executive officers of the Company:
Name Age Position and Background - ---------------------- ----- ---------------------------------------------------------------------------- Ronald P. Gibson 53 Director, President and Chief Executive Officer. Mr. Gibson is a founder of the Company and has served as President or managing partner of its predecessor since its formation in 1978. John L. Turner 51 Director, Vice Chairman of the Board of Directors and Chief Investment Officer. Mr. Turner co-founded the predecessor of Forsyth Properties in 1975. Edward J. Fritsch 39 Executive Vice President, Chief Operating Officer and Secretary. Mr. Fritsch joined the Company in 1982. John W. Eakin 43 Director and Senior Vice President. Mr. Eakin is responsible for operations in Tennessee, Florida and Alabama. Mr. Eakin was a founder and president of Eakin & Smith, Inc. prior to its merger with the Company. James R. Heistand 46 Senior Vice President. Mr. Heistand is responsible for operations in Florida and is an advisory member of the Company's investment committee. Mr. Heistand is expected to join the Company's Board of Directors and become a voting member of the investment committee this year. Mr. Heistand was the founder and president of ACP prior to its merger with the Company. Gene H. Anderson 52 Director and Senior Vice President. Mr. Anderson manages the operations of the Company's Georgia properties. Mr. Anderson was the founder and president of Anderson Properties, Inc. prior to its merger with the Company. Carman J. Liuzzo 37 Vice President, Chief Financial Officer and Treasurer. Prior to joining the Company in 1994, 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. Mack D. Pridgen, III 48 Vice President and General Counsel. Prior to joining the Company, Mr. Pridgen was a partner with Smith Helms Mulliss & Moore, L.L.P.
As the Company has expanded into new markets, it has sought to enter into business combinations with local real estate operators with many years of management and development experience in their respective markets. Messrs. Turner, Eakin, Anderson and Heistand each joined the Company as executive officers as a result of such business combinations. Mr. Turner entered into a three-year employment contract with the Company in 1995, Mr. Eakin entered into a three-year employment contract with the Company in 1996 and Messrs. Anderson and Heistand each entered into a three-year employment contract with the Company in 1997. 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information and Dividends The Common Stock has been traded on the New York Stock Exchange ("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.
1997 1996 Period or Quarter Ended: High Low Distribution High Low Distribution - ---------------------- ----------- ----------- -------------- ----------- ----------- -------------- March 31 .............$ 35.50 $ 33.00 $ 0.48 $ 30.50 $ 27.75 $ 0.45 June 30 .............. 33.50 30.00 0.51 30.25 26.88 0.48 September 30 ......... 35.81 31.06 0.51 30.38 27.00 0.48 December 31 .......... 37.38 35.81 0.51 33.75 28.50 0.48 1995 Period or Quarter Ended: High Low Distribution - ---------------------- ----------- ----------- ------------- March 31 .............$ 22.00 $ 19.88 $ 0.425 June 30 .............. 25.50 21.25 0.45 September 30 ......... 26.88 23.88 0.45 December 31 .......... 28.38 25.50 0.45
- ---------- On March 20, 1998, the last reported sale price of the Common Stock on the NYSE was $34.13 per share. On March 20, 1998, the Company had 1,012 stockholders of record. The Company intends to continue to pay regular quarterly distributions to holders of shares of Common Stock and holders of Common 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 Internal Revenue Code of 1986 and such other factors as the Board of Directors deems relevant. During the year ended 1997, the Company's distributions totaled $76,620,000 of which $22,986,000 represented return of capital for financial statement purposes. The minimum per share distribution required to maintain REIT status was approximately $1.56 per share in 1997, $1.44 per share in 1996 and $1.55 per share in 1995. The Company has instituted a Dividend Reinvestment and Stock Purchase Plan under which holders of Common Stock may elect to automatically 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 repurchase Common Stock in the open market for purposes of financing its obligations under the Dividend Reinvestment and Stock Purchase Plan. In August 1997, the Company instituted an Employee Stock Purchase Plan ("ESPP") for all active employees. At the end of each three-month offering period, each participant's account balance is applied to acquire shares of Common Stock at 90% of the market value of the Common Stock, calculated as the lower of the average closing price on the NYSE on the five consecutive days preceding the first day of the quarter or the five days preceding the last day of the quarter. A participant may not invest more than $7,500 per quarter. As of December 31, 1997, 5,839 shares of Common Stock have been purchased under the ESPP for the year then ended. Sales of Unregistered Securities On April 1, 1997, the Company issued 13,515 shares of Common Stock in connection with the merger of Eakin & Smith, Inc. into the Company on April 1, 1996. The shares were issued to three principals of Eakin & Smith, Inc., including John W. Eakin, who is an officer and director of the Company. The shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) under Rule 506. Each of the three principals of Eakin & 25 Smith, Inc. are accredited investors under Rule 501 of the Securities Act. The Company exercised reasonable care to assure that the principals were not purchasing the shares with a view to their distribution. On August 28, 1997, the Company issued 1,800,000 shares of Common Stock in connection with the August 1997 Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The shares were issued in a private offering exempt from the registration requirements of the Securities Act. On October 1, 1997, the Company issued 117,617 shares of Common Stock and warrants to purchase 1,479,290 shares of Common Stock in connection with the ACP Transaction. The shares and warrants were issued to principals of ACP and/or its affiliates. The shares and warrants were issued pursuant to an exemption from the registration requirements under Rule 506. Each of the principals of ACP and/or its affiliates are accredited investors under Rule 501 of the Securities Act. The Company exercised reasonable care to assure that the principals were not purchasing the shares with a view to their distribution. On December 23, 1997, the Company issued warrants to purchase 120,000 shares of Common Stock in connection with the Riparius Transaction. The warrants were issued to principals of Riparius Development Corporation. The warrants were issued in a private offering exempt from the registration requirements pursuant to Section 4(2) of the Securities Act. Each of the principals of Riparius Development Corporation are accredited investors under Rule 501 of the Securities Act. The Company exercised reasonable care to assure that the principals were not purchasing shares with a view to their distribution. During 1997, the Company issued an aggregate of 44,958 shares of Common Stock to holders of Common Units upon the redemption of such Common Units in private offerings exempt from the registration requirements pursuant to Section 4(2) of the Securities Act. Each of the holders of Common Units are accredited investors under Rule 501 of the Securities Act. The Company has registered the resale of such shares under the Securities Act. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and operating information for the Company as of December 31, 1997, 1996, 1995 and 1994, for the years ended December 31, 1997, 1996 and 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 the year ended December 31, 1993, and for the period from January 1, 1994, to June 13, 1994. The pro forma operating data for the year ended December 31, 1994 assumes completion of the initial public offering and the Formation Transaction (defined below) as of January 1, 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 year ended December 31, 1995 and the period from June 14, 1994 to December 31, 1994 may not be comparable to the current period results of operations. 26 The Company and the Highwoods Group
Company ------------------------------------------------------------ June 14, 1994 Year Ended Year Ended Year Ended to December 31, December 31, December 31, December 31, 1997 1996 1995 1994 -------------- -------------- -------------- --------------- (Dollars in thousands, except per share amounts) Operating Data: Total revenue .................. $ 274,470 $ 137,926 $ 73,522 $ 19,442 Rental property operating expenses ...................... 76,743 35,313 17,049(1) 5,110(1) General and administrative ................ 10,216 5,666 2,737 810 Interest expense ............... 47,394 26,610 13,720 3,220 Depreciation and amortization .................. 47,533 22,095 11,082 2,607 ------------ ----------- ------------ ------------ Income (loss) before minority interest ............. 92,584 48,242 28,934 7,695 Minority interest .............. (15,106) (6,782) (4,937) (808) ------------ ----------- ------------ ------------ Income before extraordinary item .......................... 77,478 41,460 23,997 6,887 Extraordinary item-loss on early extinguishment of debt .......................... (5,799) (2,140) (875) (1,273) ------------ ----------- ------------ ------------ Net income (loss) .............. 71,679 39,320 23,122 5,614 Dividends on Preferred Shares ........................ (13,117) -- -- -- ------------ ----------- ------------ ------------ Net income available for common stockholders ........... $ 58,562 $ 39,320 $ 23,122 $ 5,614 ============ =========== ============ ============ Net income per common share -- basic ................ $ 1.51 $ 1.51 $ 1.49 $ .63 ============ =========== ============ ============ Net income per common share -- diluted .............. $ 1.50 $ 1.50 $ 1.48 $ .63 ============ =========== ============ ============ Balance Sheet Data (at end of period): Real estate, net of accumulated depreciation....... $ 2,614,654 $ 1,377,874 $ 593,066 $ 207,976 Total assets ................... 2,722,306 1,443,440 621,134 224,777 Total mortgages and notes payable ....................... 978,558 555,876 182,736 66,864 Other Data: Number of in-service properties .................... 481 292 191 44 Total rentable square feet ..... 30,720,854 17,455,174 9,215,171 2,746,219 The Company and the Highwoods Group Company Highwoods Pro Forma Group Highwoods -------------- January 1, Group Year Ended 1994 to Year ended December 31, June 13, December 31, 1994 1994 1993 -------------- -------------- ------------- Operating Data: Total revenue .................. $ 34,282 $ 6,648 $ 13,450 Rental property operating expenses ...................... 9,677(1) 2,596(2) 6,248(2) General and administrative ................ 1,134 280 589 Interest expense ............... 5,604 2,473 5,185 Depreciation and amortization .................. 4,638 835 1,583 ----------- ----------- ----------- Income (loss) before minority interest ............. 13,229 464 (155) Minority interest .............. (1,388) -- -- ----------- ----------- ----------- Income before extraordinary item .......................... 11,841 464 (155) Extraordinary item-loss on early extinguishment of debt .......................... -- -- -- ----------- ----------- ----------- Net income (loss) .............. 11,841 464 (155) Dividends on Preferred Shares ........................ -- -- -- ----------- ----------- ----------- Net income available for common stockholders ........... $ 11,841 $ 464 $ (155) =========== =========== =========== Net income per common share -- basic ................ $ 1.32 =========== Net income per common share -- diluted .............. $ 1.32 =========== Balance Sheet Data (at end of period): Real estate, net of accumulated depreciation....... $ -- $ -- $ 51,590 Total assets ................... -- -- 58,679 Total mortgages and notes payable ....................... -- -- 64,347 Other Data: Number of in-service properties .................... -- 14 14 Total rentable square feet ..... -- 816,690 816,690
- ---------- (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. 27 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, 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"). Minority interest in the Company represents the common 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 Company acquired three additional properties in 1994 after the Formation Transaction. In February 1995, the Company expanded into other North Carolina markets and diversified its portfolio to include industrial and service center properties with its $170 million, 57-property business combination with Forsyth Partners (the "Forsyth Transaction"). During the year ended December 31, 1995, the Company acquired 144 properties encompassing 6,357,000 square feet, at an initial cost of $369.9 million. In September 1996, the Company acquired 5.7 million rentable square feet of office and service center space through its $566 million merger with Crocker Realty Trust, Inc. ("Crocker"). During the year ended December 31, 1996, the Company acquired 91 properties encompassing 7,325,500 square feet at an initial cost of $704.0 million. During the year ended December 31, 1997, the Company acquired 176 properties encompassing 12,789,000 square feet at an initial cost of $1.1 billion. See "Business -- Recent Developments" for a description of the ACP Transaction, the Riparius Transaction, the Century Center Transaction and the Anderson Transaction and for a table summarizing all mergers and acquisitions completed during the year ended December 31, 1997. This information should be read in conjunction with the accompanying consolidated financial statements and the related notes thereto. Results of Operations Comparison of 1997 to 1996 Revenue from rental operations increased $136.1 million, or 103.3%, from $131.8 million in 1996 to $266.9 million in 1997. The increase is primarily a result of revenue from newly acquired and developed properties as well as acquisitions completed in 1996 which only contributed partially in 1996. Interest and other income increased 5.6% from $7.1 million in 1996 to $7.5 million in 1997. Lease termination fees and third-party income accounted for a majority of such income in 1997 while excess cash invested in 1996 from two offerings of Common Stock during the summer of 1996 raising total net proceeds of approximately $293 million (the "Summer 1996 Offering"), accounted for a majority of such income in 1996. Rental operating expenses increased $41.4 million, or 117.3%, from $35.3 million in 1996 to $76.7 million in 1997. The increase is due to the net addition of 13.3 million square feet to the in-service portfolio in 1997 as well as acquisitions completed in 1996 which only contributed partially in 1996. Rental expenses as a percentage of related rental revenues increased from 27.0% for the year ended December 31, 1996, to 28.7% for the year ended December 31, 1997. The increase is a result of an increase in the percentage of office properties in the portfolio, which have fewer "triple net" leases. 28 Depreciation and amortization for the years ended December 31, 1997, and 1996 was $47.5 million and $22.1 million, respectively. The increase of $25.4 million, or 114.9%, is due to an average increase in depreciable assets of 103.5%. Interest expense increased 78.2%, or $20.8 million, from $26.6 million in 1996 to $47.4 million in 1997. The increase is attributable to the increase in outstanding debt related to the Company's acquisition and development activity. Interest expense for the years ended December 31, 1997 and 1996 included $2.3 million and $1.9 million, respectively, of non-cash deferred financing costs and amortization of the costs related to the Company's interest rate protection agreements. General and administrative expenses decreased from 4.3% of rental revenue in 1996 to 3.8% in 1997. The decrease is attributable to the realization of synergies from the Company's growth in 1997. Duplication of personnel costs in the third quarter of 1996 related to the acquisition of Crocker also contributed to the higher general and administrative expenses in the prior year. Net income before minority interest and extraordinary item equaled $92.6 million and $48.2 million, respectively, for the years ended December 31, 1997, and 1996. The extraordinary items consisted of prepayment penalties incurred and deferred loan cost expensed in connection with the extinguishment of secured debt assumed in various acquisitions completed in 1997 and 1996. The Company also recorded $13.1 million in preferred stock dividends for the year ended December 31, 1997. Comparison of 1996 to 1995 Revenue from rental operations increased $59.6 million, or 83.7%, from $71.2 million in 1995 to $130.8 million in 1996. The increase is primarily a result of revenue from newly acquired and developed properties. Interest and other income increased 208.7% from $2.3 million in 1995 to $7.1 million in 1996. This increase is a result of the excess cash and cash equivalents resulting from the Summer 1996 Offering and an increase in third-party management and leasing income. Rental operating expenses increased $18.3 million, or 107.6%, from $17.0 million in 1995 to $35.3 million in 1996. The increase is due to the addition of 8.2 million square feet to the in-service portfolio. Rental expenses as a percentage of related rental revenues increased from 23.9% for the year ended December 31, 1995, to 27.0% for the year ended December 31, 1996. The increase is a result of an increase in the percentage of office properties in the portfolio which have fewer "triple net" leases and approximately $400,000 in additional expenses related to the severe winter weather in 1996 and the hurricane in September of the same year. Depreciation and amortization for the years ended December 31, 1996, and 1995 was $22.1 million and $11.1 million, respectively. The increase of $11.0 million, or 99.1%, is due to a 130.9% increase in depreciable assets. Interest expense increased $12.9 million, or 94.0%, from $13.7 million in 1995 to $26.6 million in 1996. The increase is attributable to the increase in outstanding debt related to the Company's acquisition and development activities. Interest expense for the years ended December 31, 1996, and 1995 included $1.9 million and $1.6 million, respectively, of non-cash deferred financing costs and amortization of the costs related to the Company's interest rate protection agreements. General and administrative expenses increased from 3.8% of rental revenue in 1995 to 4.3% in 1996. This increase is attributable to the addition of four regional offices in Nashville, Memphis, Tampa, and Boca Raton as a result of acquisitions. The duplication of certain personnel costs in the third quarter during the acquisition of Crocker also contributed to higher general and administrative expenses for the year ended December 31, 1996. Such duplicative costs were eliminated in the fourth quarter as the Company realized the planned synergies from the merger. Net income before minority interest and extraordinary item equaled $48.2 million and $28.9 million for the years ended December 31, 1996, and 1995, respectively. The extraordinary items consisted of prepayment penalties incurred and deferred loan cost expensed in connection with the extinguishment of certain debt assumed in the Crocker merger in 1996 and the Forsyth Transaction in 1995. 29 Liquidity and Capital Resources Statement of Cash Flows The Company generated $130.2 million in cash flows from operating activities and $393.2 million in cash flows from financing activities for the year ended December 31, 1997. These combined cash flows of $523.4 million were used to fund investing activities for the year ended December 31, 1997. Such investing activities consisted primarily of development and merger and acquisition activity for the year ended December 31, 1997. See "Business -- Recent Developments." Capitalization Mortgage and notes payable at December 31, 1997, totaled $978.6 million and were comprised of $332.4 million of secured indebtedness with a weighted average interest rate of 8.2% and $646.2 million of unsecured indebtedness with a weighted average interest rate of 7.0%. All of the mortgage and notes payable outstanding at December 31, 1997, were either fixed rate obligations or variable rate obligations covered by interest rate protection agreements (see below). The weighted average life of the indebtedness was approximately 5.3 years at December 31, 1997. Based on the Company's total market capitalization of $3.4 billion at December 31, 1997 (at the December 31, 1997, stock price of $37.19 per share and assuming the redemption of each of the approximately 10.4 million Common Units held by limited partners in the Operating Partnership for a share of Common Stock), the Company's indebtedness represented approximately 29% of its total market capitalization. The Company and the Operating Partnership completed the following financing activities during the year ended December 31, 1997: o Series A Preferred Offering. On February 12, 1997, the Company sold 125,000 Series A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares") for net proceeds of approximately $121.7 million (the "Series A Preferred Offering"). Dividends on the Series A Preferred Shares are cumulative from the date of original issuance and are payable quarterly on or about the last day of February, May, August and November of each year, commencing May 31, 1997, at the rate of 8 5/8% of the $1,000 liquidation preference per annum (equivalent to $86.25 per annum per share). The Series A Preferred Shares are not redeemable prior to February 12, 2027. o X-POSSM Offering. On June 24, 1997, a trust formed by the Operating Partnership sold $100 million of Exercisable Put Option SecuritiesSM ("X-POSSM"), which represent fractional undivided beneficial interests in the trust. The assets of the trust consist of, among other things, $100 million of Exercisable Put Option Notes due June 15, 2011, issued by the Operating Partnership (the "Put Option Notes"). The X-POSSM bear an interest rate of 7.19%, representing an effective borrowing cost of 7.09%, net of a related put option and certain interest rate protection agreement costs. Under certain circumstances, the Put Option Notes could also become subject to early maturity on June 15, 2004. The issuance of the Put Option Notes and the related put option is referred to herein as the "X-POSSM Offering." o August 1997 Offering. On August 28, 1997, the Company entered into two transactions with affiliates of Union Bank of Switzerland (the "August 1997 Offering"). In one transaction, the Company sold 1,800,000 shares of Common Stock to UBS Limited for net proceeds of approximately $57 million. In the other transaction, the Company entered into a forward share purchase agreement (the "Forward Contract") with Union Bank of Switzerland, London Branch ("UBS/LB"). The Forward Contract generally provides that if the price of a share of Common Stock is above $32.14 (the "Forward Price") on August 28, 1998, UBS/LB will return the difference (in shares of Common Stock) to the Company. Similarly, if the price of a share of Common Stock on August 28, 1998, is less than the Forward Price, the Company will pay the difference to UBS/LB in cash or shares of Common Stock, at the Company's option. In the event the Company elects to settle the Forward Contract with shares of Common Stock and the share price is less than the Forward 30 Price, the settlement may result in dilution to the Company shareholders. At December 31, 1997, the Company's share price was $37.38 compared to the Forward Price and the net price of the shares sold to UBS/LB of $31.73 at closing. o Series B Preferred Offering. On September 25, 1997, the Company sold 6,900,000 Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred Shares") for net proceeds of approximately $166.9 million (the "Series B Preferred Offering"). Dividends on the Series B Preferred Shares are cumulative from the date of original issuance and are payable quarterly on March 15, June 15, September 15 and December 15 of each year, commencing December 15, 1997, at the rate of 8% of the $25 liquidation preference per annum (equivalent to $2.00 per annum per share). The Series B Preferred Shares are not redeemable prior to September 25, 2002. o October 1997 Offering. On October 1, 1997, the Company sold 7,500,000 shares of Common Stock in an underwritten public offering for net proceeds of approximately $249 million. The underwriters exercised a portion of their over-allotment option for 1,000,000 shares of Common Stock on October 6, 1997, raising additional net proceeds of $33.2 million (together with the sale on October 1, 1997, the "October 1997 Offering.") o $150 Million Credit Facility. On December 15, 1997, the Company obtained a $150 million unsecured revolving loan with a syndicate of lenders that matures on June 30, 1998. Borrowings under the revolving loan are based on the 30-day LIBOR rate plus 90 basis points. At December 31, 1997, the Company had $100 million available of borrowings under the $150 million loan. During the second or third quarter of 1998, the Company expects to replace the newly acquired revolving loan and its $280 million revolving loan with a revolving loan of up to $500 million. o Issuance of Common Units and Common Stock. In connection with 1997 acquisitions, the Operating Partnership issued 6,613,242 Common Units and the Company issued 117,617 shares of restricted Common Stock for an aggregate value of approximately $210.0 million (based on the agreed-upon valuation of a share of Common Stock at the time of the acquisition). Additional information regarding the X-POSSM Offering, the August 1997 Offering and the newly obtained revolving loan is set forth in the notes related to the accompanying consolidated financial statements. To protect the Company from increases in interest expense due to changes in the variable rate, the Company: (i) purchased an interest rate collar limiting its exposure to an increase in interest rates to 7.25% with respect to $80 million of its $430 million aggregate amount of unsecured revolving loans (the "Revolving Loans") excluding the effect of changes in the Company's credit risk, and (ii) entered into interest rate swaps that limit its exposure to an increase in interest rates to 6.95% in connection with $22 million of variable rate mortgages. The interest rate on all such variable rate debt is adjusted at monthly intervals, subject to the Company's interest rate protection program. Net payments made to counterparties under the above interest rate protection agreements were $47,000 in 1997 and were recorded as an increase to interest expense. Payments received from the counterparties under the interest rate protection agreements were $167,000 and $385,000 for 1996 and 1995, 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 perform fully under the agreements. However, if they were to default on their obligations under the arrangements, the Company could be required to pay the full rates under the Revolving Loans and the variable rate mortgages, even if such rates 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. In anticipation of a 1998 debt offering, on September 17, 1997, the Company entered into a swap agreement with a notional amount of $114 million. The swap agreement has a termination date of 31 April 10, 1998, and carries a fixed rate of 6.3%, which is a combination of the treasury rate plus the swap spread and the forward premium. 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 Revolving Loans and other debt and equity financing. The Company presently has no plans for major capital improvements to the existing properties, other than an $8 million renovation of the common areas of a 639,000-square foot property acquired in the ACP Transaction. A reserve has been established to cover the cost of the renovations. 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 Revolving Loans. 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 Revolving Loans primarily to fund construction and development activities. The Company does not intend to reserve funds to retire existing mortgage indebtedness or indebtedness under the Revolving Loans 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. Recent Developments Recent Acquisitions Riparius Transaction. In closings on December 23, 1997, and January 8, 1998, the Company completed an acquisition of Riparius Development Corporation in Baltimore, Maryland, involving a portfolio of five office properties encompassing 369,000 square feet, two office development projects encompassing 235,000 square feet, 11 acres of development land and 101 additional acres of development land to be acquired over the next three years. As of December 31, 1997, the in-service properties acquired in the Riparius Transaction were 99% leased. The cost of the Riparius Transaction consisted of a cash payment of $43.6 million. In addition, the Company has assumed the two office development projects with an anticipated cost of $26.2 million expected to be paid in 1998, and will pay out $23.9 million over the next three years for the 101 additional acres of development land. 32 Garcia Transaction. On February 4, 1998, the Company acquired substantially all of a portfolio consisting of 28 office properties encompassing 787,000 rentable square feet, seven service center properties encompassing 471,000 square feet and 66 acres of development land in Tampa, Florida (the "Garcia Transaction"). As of December 31, 1997, the properties acquired in the Garcia Transaction were 92% leased. The cost of the Garcia Transaction consists of a cash payment of approximately $87 million and the assumption of approximately $24 million in secured debt. The Company expects to close on the one remaining property by April 4, 1998. Pending Acquisitions J.C. Nichols Transaction. On December 22, 1997, the Company entered into a merger agreement (the "Merger Agreement") with J.C. Nichols Company, a publicly traded Kansas City, Missouri real estate operating company ("J.C. Nichols"), pursuant to which the Company would acquire J.C. Nichols with the view that the Operating Partnership would combine its property operations with J.C. Nichols (the "J.C. Nichols Transaction"). J.C. Nichols is subject to the information requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports and other information with the Securities and Exchange Commission. J.C. Nichols owns or has an ownership interest in 27 office properties encompassing approximately 1.5 million rentable square feet, 13 industrial properties encompassing approximately 337,000 rentable square feet, 33 retail properties encompassing approximately 2.5 million rentable square feet and 16 multifamily communities with 1,816 apartment units in Kansas City, Missouri and Kansas. Additionally, J.C. Nichols has an ownership interest in 21 office properties encompassing approximately 1.3 million rentable square feet, one industrial property encompassing approximately 200,000 rentable square feet and one multifamily community with 418 apartment units in Des Moines, Iowa. As of December 31, 1997, the properties to be acquired in the J.C. Nichols Transaction were 95% leased. Consummation of the J.C. Nichols Transaction is subject, among other things, to the approval of 66 2/3% of the shareholders of J.C. Nichols. Under the terms of the Merger Agreement, the Company would acquire all of the outstanding common stock, $.01 par value, of J.C. Nichols ("J.C. Nichols Common Stock"). Under the Merger Agreement, J.C. Nichols shareholders may elect to receive either 1.84 shares of Common Stock or $65 in cash for each share of J.C. Nichols Common Stock. However, the cash payment to J.C. Nichols shareholders cannot exceed 40% of the total consideration and the Company may limit the amount of Common Stock issued to 75% of the total consideration. The exchange ratio is fixed and reflects the average closing price of the Common Stock over the 20 trading days preceding the effective date of the Merger Agreement. The cost of the J.C. Nichols Transaction under the Merger Agreement is approximately $570 million, including assumed debt of approximately $250 million, net of cash of approximately $65 million. The Merger Agreement provides for payment by J.C. Nichols to the Company of a termination fee and expenses of up to $17.2 million if J.C. Nichols enters into an acquisition proposal other than the Merger Agreement and certain other conditions are met. The failure of J.C. Nichols shareholders to approve the J.C. Nichols Transaction, however, will not trigger the payment of a termination fee, except for a fee of $2.5 million, if, among other things, J.C. Nichols enters into another acquisition proposal before December 22, 1998. No assurance can be given that all or part of the J.C. Nichols Transaction will be consummated or that, if consummated, it would follow the terms set forth in the Merger Agreement. As of the date hereof, certain third parties have expressed an interest to J.C. Nichols and/or certain of its shareholders in purchasing all or a portion of the outstanding J.C. Nichols Common Stock at a price in excess of $65 per share. No assurance can be given that a third party will not make an offer to J.C. Nichols or its shareholders to purchase all or a portion of the outstanding J.C. Nichols Common Stock at a price in excess of $65 per share or that the board of directors of J.C. Nichols would reject any such offer. The Company and/or J.C. Nichols may terminate the Merger Agreement if the J.C. Nichols Transaction is not consummated by June 30, 1998. 33 The properties to be acquired in the J.C. Nichols Transaction include the Country Club Plaza in Kansas City, which covers 15 square blocks and includes 1.0 million square feet of retail space, 1.1 million square feet of office space and 462 apartment units. As of December 31, 1997, the Country Club Plaza was approximately 96% leased. The Country Club Plaza is presently undergoing an expansion and restoration expected to add 800,000 square feet of retail, office, hotel and residential space with an estimated cost of approximately $240 million. Assuming consummation of the J.C. Nichols Transaction, the Company intends to complete the development in the Country Club Plaza previously planned by J.C. Nichols. Assuming completion of the J.C. Nichols Transaction, the Company would succeed to the interests of J.C. Nichols in a strategic alliance with Kessinger/Hunter & Company, Inc. ("Kessinger/Hunter") pursuant to which Kessinger/Hunter manages and leases the office, industrial and retail properties presently owned by J.C. Nichols in the greater Kansas City metropolitan area. J.C. Nichols currently has a 30% ownership interest in the strategic alliance with Kessinger/Hunter and has two additional options to acquire up to a 65% ownership interest in the strategic alliance. Assuming completion of the J.C. Nichols Transaction, the Company would also succeed to the interests of J.C. Nichols in a strategic alliance with R&R Investors, Ltd. ("R&R") pursuant to which R&R manages and leases the properties in which J.C. Nichols has an ownership interest in Des Moines. J.C. Nichols has an ownership interest of 50% or more in each of the properties in Des Moines with R&R or its principal. Easton-Babcock Transaction. The Company has entered into an agreement with The Easton-Babcock Companies, a real estate operating company in Miami, Florida ("Easton-Babcock"), pursuant to which the Company will combine its property operations with Easton-Babcock and acquire a portfolio of 11 industrial properties encompassing 1.8 million rentable square feet, three office properties encompassing 197,000 rentable square feet and 110 acres of land for development, of which 88 acres will be acquired over a three-year period (the "Easton-Babcock Transaction"). As of December 31, 1997, the industrial properties to be acquired in the Easton-Babcock Transaction were 88% leased and the office properties to be acquired in the Easton-Babcock Transaction were 50% leased. The cost of the Easton-Babcock Transaction is $143 million (inclusive of the 88 acres of development land to be acquired over a three-year period) and will consist of an undetermined combination of the issuance of Common Units, the assumption of mortgage debt and a cash payment. Also in connection with the Easton-Babcock Transaction, the Company will issue to certain affiliates of Easton-Babcock warrants to purchase 926,000 shares of Common Stock at $35.50 per share. Although the Easton-Babcock Transaction is expected to close by April 30, 1998, no assurance can be given that all or part of the transaction will be consummated. Financing Activities Set forth below is a summary description of the recent financing activities of the Company and the Operating Partnership: January 1998 Offering. On January 27, 1998, the Company sold 2,000,000 shares of Common Stock in an underwritten public offering (the "January 1998 Offering") for net proceeds of approximately $68.2 million. February 1998 Debt Offering. On February 2, 1998, the Operating Partnership sold $125 million of 6.835% MandatOry Par Put Remarketed Securities ("MOPPRS") due February 1, 2013, and $100 million of 7 1/8% notes due February 1, 2008 (the "February 1998 Debt Offering"). February 1998 Common Stock Offerings. On February 12, 1998, the Company sold an aggregate of 1,553,604 shares of Common Stock in two underwritten public offerings (the "February 1998 Common Stock Offerings") for net proceeds of approximately $51.2 million. March 1998 Offering. On March 30, 1998, the Company sold 428,572 shares of Common Stock in an underwritten public offering (the "March 1998 Offering") for net proceeds of approximately $14.2 million. 34 Possible Environmental Liabilities Under various federal, state and local laws, ordinances and regulations, such as the Comprehensive Environmental Response Compensation and Liability Act or "CERCLA," and common law, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property as well as certain other costs, including governmental fines and injuries to persons and property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials ("ACM"), and third parties may seek recovery from owners or operators of real property for personal injuries associated with ACM. A number of Properties contain ACM or material that is presumed to be ACM. In connection with the ownership and operation of its properties, the Company may be liable for such costs. In addition, it is not unusual for property owners to encounter on-site contamination caused by off-site sources, and the presence of hazardous or toxic substances at a site in the vicinity of a property could require the property owner to participate in remediation activities in certain cases or could have an adverse effect on the value of such property. As of the date hereof, 99% of the Properties have been subjected to a Phase I environmental assessment. These assessments have not revealed, nor is management of the Company aware of, any environmental liability that it believes would have a material adverse effect on the Company's financial position, operations or liquidity taken as a whole. 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 may underestimate the scope and severity of environmental conditions observed, with the result that there may be material environmental liabilities of which the Company is unaware, or material environmental liabilities may have arisen after the assessments were performed of which the Company is unaware. In addition, assumptions regarding groundwater flow and the existence and source of contamination are based on available sampling data, and there are no assurances that the data are 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, or by third parties unrelated to the Company. Some tenants use or generate hazardous substances in the ordinary course of their respective businesses. These tenants are required under their leases to comply with all applicable laws and are responsible to the Company for any damages resulting from the tenants' use of the property. The Company is not aware of any material environmental problems resulting from tenants' use or generation of hazardous substances. There are no assurances that all tenants will comply with the terms of their leases or remain solvent and that the Company may not at some point be responsible for contamination caused by such tenants. 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 35 anticipates, the Company's results of operations, liquidity and capital resources could be materially adversely affected. Impact of Year 2000 Issues The "Year 2000" issue is a general term used to describe the various problems that may result from the improper processing of dates and calculations involving years by many computers throughout the world as the Year 2000 is approached and reached. The Company has reviewed the impact of Year 2000 issues and does not expect any remedial actions taken with respect thereto to materially adversely affect its business, operations or financial condition. FASB Statement No. 128 In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings Per Share," which is effective for financial statements for periods ending after December 15, 1997. FASB Statement No. 128 requires the restatement of prior period earnings per share and requires the disclosure of additional supplemental information detailing the calculation of earnings per share. FASB Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. It is computed using the weighted average number of shares of Common Stock and the dilutive effect of options, warrants and convertible securities outstanding, using the "treasury stock" method. Earnings per share data are required for all periods for which an income statement or summary of earnings is presented, including summaries outside the basic financial statements. All earnings per share amounts for all periods presented have, where appropriate, been restated to conform to the FASB Statement No. 128 requirements. 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. FFO does not represent net income or cash flows from operating, investing or financing activities as defined by Generally Accepted Accounting Principles ("GAAP"). It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO, as described below. FFO and cash available for distributions should not be considered as alternatives to net income as an indication of the Company's performance or to cash flows as a measure of liquidity. FFO 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, the National Association of Real Estate Investment Trusts ("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. 36 FFO and cash available for distribution for the years ended December 31, 1997, and 1996 are summarized in the following table (in thousands):
Year Ended December 31, ------------------------- 1997 1996 ------------ ---------- FFO: Income before minority interest and extraordinary item ............... $ 92,584 $ 48,242 Add (deduct): Dividends to preferred shareholders ................................ (13,117) -- Depreciation and amortization ...................................... 47,533 22,095 Minority interest in Crocker depreciation and amortization ......... -- (117) Third-party service company cash flow .............................. -- 400 --------- -------- FFO before minority interest ...................................... 127,000 70,620 Cash Available for Distribution: Add (deduct): Rental income from straight-line rents ............................. (7,035) (2,603) Amortization of deferred financing costs ........................... 2,256 1,911 Non-incremental revenue generating capital expenditures: Building improvements paid ........................................ (4,401) (3,554) Second generation tenant improvements paid ........................ (9,889) (3,471) Second generation lease commissions paid .......................... (5,535) (1,426) --------- -------- Cash available for distribution ................................. $ 102,396 $ 61,477 ========= ======== Weighted average shares/units outstanding (1) -- basic ............... 46,422 30,219 ========= ======== Weighted average shares/units outstanding (1) -- diluted ............. 46,813 30,442 ========= ======== Dividend payout ratio: FFO ................................................................ 72.4% 79.6% ========= ======== Cash available from distribution ................................... 89.8% 91.4% ========= ========
- ---------- (1) Assumes redemption of Common Units for shares of Common Stock. Minority interest Common Unit holders and the stockholders of the Company share equally on a per Common Unit and per share basis; therefore, the per share information is unaffected by conversion. 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, 97 percent of the leases are for remaining 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. 37 Disclosure Regarding Forward-looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. Accordingly, the Company hereby identifies the following important factors that could cause the Company's actual financial results to differ materially from those projected by the Company in forward-looking statements: (i) unexpected increases in development of office or industrial properties in the Company's markets; (ii) deterioration in the financial condition of tenants; (iii) construction costs of properties exceeding original estimates; (iv) delays in the completion of development projects or acquisitions; (v) delays in leasing or releasing space; (vi) incorrect assessments of (or changes in) the environmental condition of the Company's properties; (vii) unexpected increases in interest rates; and (viii) loss of key executives. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See page F-1 of the financial report included herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section under the heading "Election of Directors" of the Proxy Statement for the Annual Meeting of Stockholders to be held May 14, 1998 (the "Proxy Statement") is incorporated herein by reference for information on directors of the Company. See ITEM X in Part I hereof for information regarding executive officers of the Company. ITEM 11. EXECUTIVE COMPENSATION The section under the heading "Election of Directors" entitled "Compensation of Directors" of the Proxy Statement and the section titled "Executive Compensation" of the Proxy Statement are incorporated herein by reference. 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 The section under the heading "Certain Relationships and Related Transactions" of the Proxy Statement is incorporated herein by reference. 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Documents Filed as a Part of this Report 1. Consolidated Financial Statements and Report of Independent Auditors See Index on Page F-1 2. Financial Statement Schedules See Index on Page F-1 3. Exhibits
Ex. FN Description - ---------- --------- ---------------------------------------------------------------------- 2.1 (1) Master Agreement of Merger and Acquisition by and among the Company, the Operating Partnership, Eakin & Smith, Inc. and the partnerships and limited liability companies listed therein dated April 1, 1996 2.2 (2) Stock Purchase Agreement among AP CRTI Holdings, L.P., AEW Partners, L.P., Thomas J. Crocker, Barbara F. Crocker, Richard S. Ackerman and Robert E. Onisko and the Company and Cedar Acquisition Corporation, dated April 29, 1996 2.3 (2) Agreement and Plan of Merger by and among the Company, Crocker RealtyTrust, Inc. and Cedar Acquisition Corporation, dated as of April 29, 1996 2.4 (3) Contribution and Exchange Agreement by and among Century Center group, the Operating Partnership and the Company, dated December 31, 1996 2.5 (3) Master Agreement of Merger and Acquisition by and among the Company, the Operating Partnership, Anderson Properties, Inc., Gene Anderson, and the partnerships and limited liability companies listed therein, dated January 31, 1997 2.6 (4) Amended and 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 2.7 (5) Master Agreement of Merger and Acquisition by and among the Company, the Operating Partnership, Associated Capital Properties, Inc. and its shareholders dated August 27, 1997 2.8 Agreement and Plan of Merger by and among the Company, Jackson Acquisition Corp. and J.C. Nichols Company dated December 22, 1997. 3.1 (6) Amended and Restated Articles of Incorporation of the Company 3.2 (7) Amended and Restated Bylaws of the Company 4.1 (7) Specimen of certificate representing shares of Common Stock 4.2 (8) Indenture among AP Southeast Portfolio Partners, L.P., Bankers Trust Company of California, N.A. and Bankers Trust Company, dated as of March 1, 1994 4.3 (9) Indenture among the Operating Partnership, the Company, and First Union National Bank of North Carolina, dated as of December 1, 1996 4.4 (9) Form of Notes due 2003 4.5 (9) Form of Notes due 2006 4.6 (10) Specimen of certificate representing 8 5/8% Series A Cumulative Redeemable Preferred Shares
39
Ex. FN Description - --------------- ---------------- ------------------------------------------------------------------- 4.7 (11) Specimen of certificate representing 8% Series B Cumulative Redeemable Preferred Shares 4.8 Purchase Agreement between the Company, UBS Limited and Union Bank of Switzerland, London Branch, dated as of August 28, 1997 4.9 Forward Stock Purchase Agreement between the Company and Union Bank of Switzerland, London Branch, dated as of August 28, 1997 4.10 (12) Rights Agreement, dated as of October 6, 1997, between the Company and First Union National Bank 4.11 (13) Form of Notes due 2008 4.12 (13) Form of MandatOry Par Put Remarketed Securities due 2013 4.13 (13) Form of Remarketing Agreement among the Operating Partnership, the Company and Merrill Lynch, Pierce, Fenner & Smith 4.14 (14) Credit Agreement among the Operating Partnership, the Company, the Subsidiaries named therein and the Lenders named therein, dated as of September 27, 1996 4.15 Credit Agreement among the Operating Partnership, the Company, the Subsidiaries named therein and the Lenders named therein, dated as of December 15, 1997 4.16 Agreement to furnish certain instruments defining the rights of long-term debt holders 10.1 (7) Amended and Restated Agreement of Limited Partnership of the Operating Partnership 10.2 (10) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership with respect to Series A Preferred Units 10.3 (15) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership with respect to certain rights of limited partners upon a change in control 10.4 (11) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership with respect to Series B Preferred Units 10.5 (16) Form of Registration Rights and Lockup Agreement among the Company and the Holders named therein, which agreement is signed by all Common Unit holders 10.6 (16) Articles of Incorporation of Highwoods Services, Inc. 10.7 (16) Bylaws of Highwoods Services, Inc. 10.8 (17)(18) Amended and Restated 1994 Stock Option Plan 10.9 (18) 1997 Performance Award Plan 10.10 (18) 1997 Unit Option Plan 10.11(a) (16)(18) Employment Agreement between the Company and the Operating Partnership and John L. Turner 10.11(b) (1)(18) Employment Agreement between the Company and the Operating Partnership and John W. Eakin 10.11(c) (3)(18) Employment Agreement between the Company and the Operating Partnership and Gene H. Anderson 10.11(d) (18) Employment Agreement between the Company and the Operating Partnership and James R. Heistand 10.12(a) (18)(19) Executive Supplemental Employment Agreement between the Company and Ronald P. Gibson 10.12(b) (18)(19) Executive Supplemental Employment Agreement between the Company and John L. Turner 10.12(c) (18)(19) Executive Supplemental Employment Agreement between the Company and Edward J. Fritsch
40
Ex. FN Description - ---------------- ---------------- ------------------------------------------------------------------ 10.12(d) (18)(19) Executive Supplemental Employment Agreement between the Company and Carman J. Liuzzo 10.12(e) (18)(19) Executive Supplemental Employment Agreement between the Company and Mack D. Pridgen, III 10.13 (4) Form of warrants to purchase Common Stock of the Company issued to John L. Turner, William T. Wilson III and John E. Reece II 10.14 (1) Form of warrants to purchase Common Stock of the Company issued to W. Brian Reames, John W. Eakin and Thomas S. Smith 10.15 Form of warrants to purchase Common Stock of the Company issued to James R. Heistand and certain other shareholders of Associated Capital Properties, Inc. 21 Schedule of subsidiaries of the Company 23 Consent of Ernst & Young 27 Financial Data Schedule
- ---------- (1) Filed as a part of the Company's Current Report on Form 8-K dated April 1, 1996 and incorporated herein by reference. (2) Filed as a part of the Company's Current Report on Form 8-K dated April 29, 1996 and incorporated herein by reference. (3) Filed as a part of the Company's Current Report on Form 8-K dated January 9, 1997 and incorporated herein by reference. (4) Filed as part of Registration Statement 33-88364 with the Securities and Exchange Commission and incorporated herein by reference. (5) Filed as a part of the Company's Current Report on Form 8-K dated August 27, 1997 and incorporated herein by reference. (6) Filed as part of the Company's Current Report on September 25, 1997 and amended by articles supplementary filed as part of the Company's Current Report on Form 8-K dated October 4, 1997, each of which is incorporated herein by reference. (7) Filed as part of Registration Statement 33-76952 with the Securities and Exchange Commission and incorporated herein by reference. (8) Filed by Crocker Realty Trust, Inc. as part of Registration Statement No. 33-88482 filed with the Securities and Exchange Commission and incorporated herein by reference. (9) Filed as a part of the Operating Partnership's Current Report on Form 8-K dated December 2, 1996 and incorporated herein by reference. (10) Filed as a part of the Company's Current Report on Form 8-K dated February 12, 1997 and incorporated herein by reference. (11) Filed as a part of the Company's Current Report on Form 8-K dated September 25, 1997 and incorporated herein by reference. (12) Filed as a part of the Company's Current Report on Form 8-K dated October 4, 1997 and incorporated herein by reference. (13) Filed as a part of the Company's Current Report on Form 8-K dated February 2, 1998 and incorporated herein by reference. (14) Filed as part of the Company's Current Report on Form 8-K dated September 27, 1996 and incorporated herein by reference. (15) Filed as a part of the Operating Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference. 41 (16) Filed as a part of the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. (17) Filed as a part of the Company's proxy statement on Schedule 14A relating to the 1997 Annual Meeting of Stockholders (18) Management contract or compensatory plan. (19) Terms of the agreement are disclosed in the Company's proxy statement on Schedule 14A relating to the 1998 Annual Meeting of Stockholders under the caption "Executive Compensation -- Employment Agreements," which section is incorporated as an exhibit to this Form 10-K. As of the date hereof, such agreement is subject to final documentation. The Company will provide copies of any exhibit, upon written request, at a cost of $.05 per page. (b) Reports on Form 8-K. On October 14, 1997, the Company filed a current report on Form 8-K, dated October 4, 1997, reporting under item 5 of the Form the authorization of a dividend of one preferred share purchase right for each outstanding share of common stock, pursuant to a Rights Agreement between the Company and First Union National Bank, as rights agent. On October 16, 1997, the Company filed a current report on Form 8-K, dated October 1, 1997, reporting under item 2 of the Form the closing of a business combination with Associated Capital Properties, Inc. and related property portfolio acquisition. The report included audited financial statements of Associated Capital Properties, Inc. for the year ended December 31, 1996 and of the 1997 Pending Acquisitions for the year ended December 31, 1996. On January 6, 1998, the Company filed a current report on Form 8-K, dated January 22, 1998, reporting under item 5 of the Form that it had entered into an agreement to merge with J.C. Nichols Company. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Raleigh, State of North Carolina, on March 31, 1998. HIGHWOODS PROPERTIES, INC. By: /s/ RONALD P. GIBSON ------------------------------------- Ronald P. Gibson President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange 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 March 31, 1998 - ------------------------------------- O. Temple Sloan, Jr. Directors /s/ RONALD P. GIBSON President, Chief Executive March 31, 1998 - ------------------------------------- Ronald P. Gibson Officer and Director /s/ JOHN L. TURNER Vice Chairman of the Board March 31, 1998 - ------------------------------------- John L. Turner and Chief Investment Officer /s/ GENE H. ANDERSON Senior Vice President and March 31, 1998 - ------------------------------------- Gene H. Anderson Director /s/ JOHN W. EAKIN Senior Vice President and March 31, 1998 - ------------------------------------- John W. Eakin Director /s/ THOMAS W. ADLER Director March 31, 1998 - ------------------------------------- Thomas W. Adler /s/ WILLIAM E. GRAHAM, JR. Director March 31, 1998 - ------------------------------------- William E. Graham, Jr. /s/ L. GLENN ORR, JR. Director March 31, 1998 - ------------------------------------- Glenn Orr, Jr. /s/ WILLARD W. SMITH JR. Director March 31, 1998 - ------------------------------------- Willard W. Smith Jr. /s/ STEPHEN TIMKO Director March 31, 1998 - ------------------------------------- Stephen Timko
43
Signature Title Date - -------------------------------------- ----------------------------- --------------- /s/ WILLIAM T. WILSON III Director March 31, 1998 - ------------------------------------- William T. Wilson III /s/ CARMAN J. LIUZZO Vice President and Chief March 31, 1998 - ------------------------------------- Carman J. Liuzzo Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Treasurer
44 INDEX TO FINANCIAL STATEMENTS
Page ----- Highwoods Properties, Inc. Report of Independent Auditors ......................................................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996 ........................... F-3 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.. F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 ......................................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 .................................................................................. F-6 Notes to Consolidated Financial Statements ............................................. F-8 Schedule III -- Real Estate and Accumulated Depreciation ............................... F-20
All other schedules are omitted because they are not applicable, or because the required information is included in the financial statements or notes thereto. F-1 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Highwoods Properties, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Raleigh, North Carolina February 20, 1998 F-2 HIGHWOODS PROPERTIES, INC. Consolidated Balance Sheets (Dollars in thousands, except per share amounts)
December 31, ------------------------------ 1997 1996 -------------- ------------- Assets Real estate assets, at cost: Land and improvements ................................................ $ 344,315 $ 222,422 Buildings and tenant improvements .................................... 2,194,641 1,152,990 Development in process ............................................... 95,387 28,858 Land held for development ............................................ 64,454 14,668 Furniture, fixtures and equipment .................................... 3,362 2,096 ---------- ---------- 2,702,159 1,421,034 Less -- accumulated depreciation ..................................... (87,505) (43,160) ---------- ---------- Net real estate assets ............................................... 2,614,654 1,377,874 Cash and cash equivalents .............................................. 10,146 11,070 Restricted cash ........................................................ 9,341 8,539 Accounts receivable net of allowance of $555 and $286 at December 31, 1997 and 1996, respectively .......................................... 17,701 9,039 Advances to related parties ............................................ 9,072 2,406 Accrued straight-line rents receivable ................................. 13,033 6,185 Other assets: Deferred leasing costs ............................................... 21,688 9,601 Deferred financing costs ............................................. 22,294 21,789 Prepaid expenses and other ........................................... 17,607 3,901 ---------- ---------- 61,589 35,291 Less -- accumulated amortization ..................................... (13,230) (6,964) ---------- ---------- 48,359 28,327 ---------- ---------- $2,722,306 $1,443,440 ========== ========== Liabilities and stockholders' equity Mortgages and notes payable ............................................ $ 978,558 $ 555,876 Accounts payable, accrued expenses and other liabilities ............... 55,121 27,600 ---------- ---------- Total liabilities .................................................... 1,033,679 583,476 Minority interest ...................................................... 287,186 89,617 Stockholders' equity: Preferred stock, $.01 par value, authorized 10,000,000 shares; 8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 125,000 shares issued and outstanding at December 31, 1997 ........... 125,000 -- 8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at December 31, 1997 ......... 172,500 -- Common stock, $.01 par value, authorized 100,000,000 shares; issued and outstanding 46,838,600 at December 31, 1997 and 35,636,155 at December 31, 1996 ...................................... 468 356 Additional paid-in capital ............................................. 1,132,100 780,562 Distributions in excess of net earnings ................................ (28,627) (10,571) ---------- ---------- Total stockholders' equity ........................................... 1,401,441 770,347 ---------- ---------- $2,722,306 $1,443,440 ========== ==========
See accompanying notes to consolidated financial statements. F-3 HIGHWOODS PROPERTIES, INC. Consolidated Statements of Income (Dollars in thousands, except per share amounts) For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ----------- ----------- ---------- Revenue: Rental income ...................................................... $266,933 $130,848 $ 71,217 Interest and other income .......................................... 7,537 7,078 2,305 -------- -------- -------- Total revenue ........................................................ 274,470 137,926 73,522 Operating expenses: Rental property .................................................... 76,743 35,313 17,049 Depreciation and amortization ...................................... 47,533 22,095 11,082 Interest expense: Contractual ...................................................... 45,138 24,699 12,101 Amortization of deferred financing costs ......................... 2,256 1,911 1,619 -------- -------- -------- 47,394 26,610 13,720 General and administrative ......................................... 10,216 5,666 2,737 -------- -------- -------- Income before minority interest and extraordinary item ........... 92,584 48,242 28,934 Minority interest .................................................... (15,106) (6,782) (4,937) -------- -------- -------- Income before extraordinary item ................................. 77,478 41,460 23,997 Extraordinary item -- loss on early extinguishment of debt ............................................................ (5,799) (2,140) (875) -------- -------- -------- Net income ....................................................... 71,679 39,320 23,122 Dividends on Preferred stock ......................................... (13,117) -- -- -------- -------- -------- Net income available for common stockholders ....................... $58,562 $39,320 $ 23,122 ======== ======== ======== Net income per common share -- Basic: Income before extraordinary item ................................... $ 1.66 $ 1.59 $ 1.55 Extraordinary item -- loss on early extinguishment of debt ......... ( .15) ( .08) ( .06) -------- -------- -------- Net income ......................................................... $ 1.51 $ 1.51 $ 1.49 ======== ======== ======== Weighted average shares outstanding -- Basic ....................... 38,770 26,111 15,487 ======== ======== ======== Net income per common share -- Diluted: Income before extraordinary item ................................... $ 1.65 $ 1.58 $ 1.54 Extraordinary item loss on early extinguishment of debt ............ ( .15) ( .08) ( .06) -------- -------- -------- Net Income ......................................................... $ 1.50 $ 1.50 $ 1.48 ======== ======== ======== Weighted average shares outstanding -- Diluted ..................... 39,161 30,442 18,801 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 HIGHWOODS PROPERTIES, INC. Consolidated Statements of Stockholders' Equity (Dollars in thousands) For the Years Ended December 31, 1997, 1996 and 1995
Retained Earnings Series A Series B Additional (Distributions Number of Common Preferred Preferred Paid-In in Excess of Shares Stock Stock Stock Capital Net Earnings) Total ------------- -------- ----------- ----------- -------------- --------------- -------------- Balance at December 31, 1994 ...................... 8,986,190 $ 90 $ -- $ -- $ 135,531 $ 594 $ 136,215 Issuance of Common Stock ..................... 10,418,221 104 -- -- 219,717 -- 219,821 Common Stock Dividends ................. -- -- -- -- -- (25,348) (25,348) Net income ................. -- -- -- -- -- 23,122 23,122 ---------- ---- -------- -------- ---------- --------- ---------- Balance at December 31, 1995 ...................... 19,404,411 194 -- -- 355,248 (1,632) 353,810 Issuance of Common Stock ..................... 15,976,161 160 -- -- 419,892 -- 420,052 Common Stock Dividends ................. -- -- -- -- -- (48,259) (48,259) Net income ................. -- -- -- -- -- 39,320 39,320 Shares issued upon redemption of Common Units .............. 255,583 2 -- -- 5,422 -- 5,424 ---------- ---- -------- -------- ---------- --------- ---------- Balance at December 31, 1996 ...................... 35,636,155 356 -- -- 780,562 (10,571) 770,347 Issuance of Common Stock ..................... 10,702,215 107 -- -- 349,147 -- 349,254 Series A Preferred Stock offering .................. -- -- 125,000 -- (3,191) -- 121,809 Series B Preferred Stock offering .................. -- -- -- 172,500 (6,154) -- 166,346 Common Stock Dividends ................. (76,618) (76,618) Preferred Stock Dividends ................. -- -- -- -- -- (13,117) (13,117) Net Income ................. -- -- -- -- -- 71,679 71,679 Shares issued upon redemption of Common Units .............. 500,230 5 -- -- 11,736 -- 11,741 ---------- ---- -------- -------- ---------- --------- ---------- Balance at December 31, 1997 ...................... 46,838,600 $468 $125,000 $172,500 $1,132,100 $ (28,627) $1,401,441 ========== ==== ======== ======== ========== ========= ==========
See accompanying notes to consolidated financial statements. F-5 HIGHWOODS PROPERTIES, INC. Consolidated Statements of Cash Flows (Dollars in thousands) For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------- ------------- ------------- Operating activities: Net income .......................................................... $ 71,679 $ 39,320 $ 23,122 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ...................................................... 44,393 20,752 10,483 Amortization ...................................................... 5,396 3,254 2,218 Loss on early extinguishment of debt .............................. 5,799 2,140 875 Minority interest ................................................. 15,106 6,485 4,937 Changes in operating assets and liabilities: Accounts receivable .............................................. (8,662) (1,140) (1,561) Prepaid expenses and other assets ................................ (3,270) (776) (173) Accrued straight-line rents receivable ........................... (6,848) (2,778) (1,519) Accounts payable, accrued expenses and other liabilities ......... 6,599 4,357 4,787 ---------- ---------- ---------- Net cash provided by operating activities ...................... 130,192 71,317 43,169 Investing activities: Proceeds from disposition of real estate assets ..................... 1,419 900 2,200 Additions to real estate assets ..................................... (465,066) (181,444) (130,411) Advances to related parties ......................................... (6,666) (1,132) (654) Other assets and notes receivable ................................... (18,580) (3,626) (1,123) Cash from contributed net assets .................................... -- 20,711 549 Cash paid in exchange for net assets ................................ (35,390) (322,276) (6,593) ---------- ---------- ---------- Net cash used in investing activities ............................ (524,283) (486,867) (136,032) ---------- ---------- ---------- Financing activities: Distributions paid on Common Stock and Common Units ................. (88,397) (55,515) (29,845) Dividends paid on Preferred Stock ................................... (11,720) -- -- Net proceeds from sale of Preferred Stock ........................... 288,155 -- -- Net proceeds from the sale of Common Stock .......................... 345,325 406,595 219,821 Payment of prepayment penalties ..................................... (6,945) (1,184) (1,046) Borrowings on Revolving Loans ....................................... 563,500 307,500 50,800 Repayment of Revolving Loans ........................................ (264,000) (299,000) (87,000) Proceeds from mortgages and notes payable ........................... 100,000 213,500 90,250 Repayment of mortgages and notes payable ............................ (532,481) (141,216) (148,907) Payment of deferred financing costs ................................. (270) (10,898) (630) ---------- ---------- ---------- Net cash provided by financing activities ........................ 393,167 419,782 93,443 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents ................ (924) 4,232 580 Cash and cash equivalents at beginning of the period ................ 11,070 6,838 6,258 ---------- ---------- ---------- Cash and cash equivalents at end of the period ...................... $ 10,146 $ 11,070 $ 6,838 ========== ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest .............................................. $ 51,283 $ 26,039 $ 11,965 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-6 HIGHWOODS PROPERTIES, INC. Consolidated Statements of Cash Flows -- Continued (Dollars in thousands) For the Years Ended December 31, 1997, 1996 and 1995 Supplemental disclosure of non-cash investing and financing activities: The following summarizes the net assets contributed by the Common Unit holders of the Highwoods/Forsyth Limited Partnership (the "Operating Partnership") or acquired subject to mortgage notes payable:
1997 1996 1995 ----------- ----------- ----------- Assets: Real estate assets, net .......................................... $782,136 $625,137 $260,883 Cash and cash equivalents ........................................ -- 20,711 549 Restricted cash .................................................. 2,727 11,476 -- Tenant leasing costs, net ........................................ 131 -- -- Deferred financing costs, net .................................... 227 3,871 842 Accounts receivable and other .................................... 913 1,635 6,290 -------- -------- -------- Total assets ................................................... 786,134 662,830 268,564 -------- -------- -------- Liabilities: Mortgages and notes payable ...................................... 555,663 244,129 210,728 Accounts payable, accrued expenses and other liabilities ......... 19,527 19,142 549 -------- -------- -------- Total liabilities .............................................. 575,190 263,271 211,277 -------- -------- -------- Net assets .................................................... $210,944 $399,559 $ 57,287 ======== ======== ========
See accompanying notes to consolidated financial statements. F-7 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 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 342 suburban office properties, 139 industrial properties and 718 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: o 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. o The Company consummated various purchase agreements to acquire certain interests in 41 properties, including 27 properties that 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 interests in the 14 properties. For the 27 properties not owned by the Highwoods Group, the Company issued approximately $4,200,000 of common partnership interests in the Operating Partnership ("Common 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. o 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. o The Operating Partnership executed various option and purchase agreements whereby it paid approximately $81,352,000 in cash, issued 1,054,664 Common Units and assumed approximately $118,111,000 of indebtedness in exchange for fee simple interests in the 41 properties and the development land. o 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 each company's voting common stock. F-8 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued Generally one year after issuance (the "lock-up period"), the Operating Partnership is obligated to redeem each Common 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 Common Unit presented for redemption for cash or one share of Common Stock. When a Common Unit holder redeems a Common 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 Common Units owned by the Company are not redeemable for cash. At December 31, 1997, the lock-up period had expired with respect to 3,805,392 of the 10,444,464 Common Units issued and outstanding. Basis of Presentation The consolidated financial statements include the accounts of the Company and the Operating Partnership. The Company's investment in Highwoods Services, Inc. (the "Service Company") is accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company is a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Minority interest represents the limited partnership interest in the Operating Partnership owned by Common Unit holders other than the Company. 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 fair 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. 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 No. 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. F-9 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) Restricted Cash The Company is required by a mortgage note to maintain various depository accounts, a cash collateral account and a contingency reserve account. All rents with respect to the collateralized properties are made payable to, and deposited directly in, the depository accounts, which are then transferred to the cash collateral account. Subsequent to payment of debt service and other required escrows, the residual balance of the cash collateral account is funded to the Company for capital expenditures and operations. The contingency reserve account is required to maintain a balance of $7,000,000. At December 31, 1997, the account balances were $8,624,090 including $7,069,186 in the contingency reserve account. At December 31, 1996, the account balances were $7,691,857 including $7,000,000 in the contingency reserve account. The Company is required by certain mortgage notes to escrow real estate taxes with the mortgagor. At December 31, 1997, and 1996, $717,350 and $846,990, respectively, were escrowed for real estate taxes. 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. 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 REIT for federal income tax purposes. A corporate REIT is a legal entity that holds real estate assets, 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 REIT, 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 3,100 tenants, in 19 geographic locations, which engage in a wide variety of businesses. There is no dependence upon any single tenant. Interest Rate Risk Management The Company may enter into derivative financial instruments such as interest rate swaps and interest rate collars in order to mitigate its interest rate risk on a related financial instrument. The Company has designated these derivative financial instruments as hedges and applies deferral accounting. Gains and losses related to the termination of such derivative financial instruments are deferred and amortized to interest expense over the term of the debt instrument. Payments to or from counterparties are recorded as adjustments to interest expense. F-10 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued The Company also utilizes interest rate contracts to hedge interest rate risk on anticipated debt offerings. These anticipatory hedges are designated, and effective, as hedges of identified debt issuances which have a high probability of occurring. Gains and losses resulting from changes in the market value of these contracts are deferred and amortized into interest expense over the life of the related debt instrument. The Company is exposed to certain losses in the event of non-performance by the counterparties under the collar and swap arrangements. The counterparties are major financial institutions with credit ratings of Aa3 or better, and are expected to perform fully 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 Revolving Loans and the variable rate mortgages, even if such rate were in excess of the rate in the collar and swap agreements. The Company would not realize a material loss as of December 31, 1997, in the event of non-performance by any one counterparty. 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. As described in Note 8, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. 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. Impact of Recently Issued Accounting Standards In 1997, the FASB issued Statements No. 130, "Reporting Comprehensive Income" ("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), which are both effective for fiscal years beginning after December 15, 1997. SFAS 130 addresses reporting amounts of other comprehensive income and SFAS 131 addresses reporting segment information. The Company does not believe that the adoption of these new standards will have a material impact on its financial statements. Reclassifications Certain amounts in the December 31, 1996, Financial Statements have been reclassified to conform to the December 31, 1997, presentation. These reclassifications had no material effect on net income or stockholders' equity as previously reported. F-11 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, 1997, and 1996 (in thousands):
1997 1996 ----------- ----------- Mortgage notes payable: 7.9% mortgage note due 2001 .................. $140,000 $140,000 8.1% mortgage note due 2002 .................. 11,649 -- 9.0% mortgage note due 2005 .................. 39,630 40,168 8.2% mortgage note due 2005 .................. 30,951 31,410 8.0% mortgage note due 2006 .................. 43,465 -- 7.6% to 13% mortgage notes due between 1999 and 2013 ........................... 66,681 73,719 Variable rate mortgage note due 2000 ......... -- 11,612 -------- -------- 332,376 296,909 -------- -------- Unsecured indebtedness: 6.8% notes due in 2003 ....................... 100,000 100,000 7.19% notes due in 2004 ...................... 100,000 -- 7.0% notes due in 2006 ....................... 110,000 110,000 7% and 9% notes due in 1997 .................. -- 11,595 Variable rate note due in 1999 ............... 21,682 22,372 Revolving Loan due in 1998 ................... 50,000 -- Revolving Loan due in 1999 ................... 264,500 15,000 -------- -------- 646,182 258,967 -------- -------- Total ................................................ $978,558 $555,876 ======== ========
Secured Indebtedness Mortgage notes payable were secured by real estate with an aggregate carrying value of $719.4 million at December 31, 1997. The 7.9% Mortgage Note is secured by 46 of the properties (the "Mortgage Note Properties"), which are held by AP Southeast Portfolio Partners, L.P. (the "Financing Partnership"). The Company has a 99.99% economic interest in the Financing Partnership, which is managed indirectly by the Company. The 7.9% Mortgage Note is a conventional, monthly pay, first mortgage note in the principal amount of $140 million issued by the Financing Partnership. The 7.9% Mortgage Note is a limited recourse obligation of the Financing Partnership as to which, in the event of a default under the indenture or the mortgage, recourse may be had only against the Mortgage Note Properties and other assets that have been pledged as security. The 7.9% Mortgage Note was issued to Kidder Peabody Acceptance Corporation I pursuant to an indenture, dated March 1, 1994 (the "Mortgage Note Indenture"), among the Financing Partnership, Bankers Trust Company of California, N.A., and Bankers Trust Company. The Mortgage Note Indenture provides for a lockout period that prohibits optional redemption payments in respect of principal of the 7.9% Mortgage Note (other than a $7 million premium-free redemption payment) prior to November 1998. Thereafter, the Financing Partnership may make optional redemption payments in respect of principal of the 7.9% Mortgage Note on any distribution date, subject to the payment of a yield maintenance charge in connection with such payments made prior to August 1, 2000. F-12 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 2. MORTGAGES AND NOTES PAYABLE -- Continued Under the terms of the purchase agreement relating to the Mortgage Note Properties, the Financing Partnership may be obligated to pay NationsBank, N.A. a deferred contingent purchase price. This contingent payment, which will in no event exceed $4.4 million, is due on April 1, 1998, if the actual four-year cumulative cash flow of such properties exceeds the projected four-year cumulative cash flow. Based on the estimates of future operations, the Company does not believe that any deferred contingent purchase principal price will be payable. Unsecured Indebtedness On November 26, 1996, the Company, through the Operating Partnership, issued $100,000,000 of unsecured 6 3/4% notes due December 1, 2003, and $110,000,000 of unsecured 7% notes due December 1, 2006. Interest on the notes is payable semi-annually on June 1 and December 1 commencing on June 1, 1997. In accordance with the terms of the Indenture under which the unsecured notes are issued, the Company is required to (a) limit its total indebtedness, (b) limit its level of secured debt, (c) maintain a minimum debt service coverage ratio and (d) maintain a minimum level of unencumbered assets. At December 31, 1997, the Company was in compliance with these covenants. On June 24, 1997, a trust formed by the Operating Partnership sold $100 million of X-POSSM, which represent fractional undivided beneficial interests in the trust. The assets of the trust consist of, among other things, $100 million of Put Option Notes. The X-POSSM bear an interest rate of 7.19%, representing an effective borrowing cost of 7.09%, net of a related put option and certain interest rate protection agreement costs. Under certain circumstances, the Put Option Notes could also become subject to early maturity on June 15, 2004. The Put Option Notes are subject to the same covenants as the unsecured 6 3/4% and 7% notes described above. In September 1996, the Company obtained a $280,000,000 unsecured revolving loan which matures on October 31, 1999. Borrowings under such revolving loan will adjust based upon the Company's senior unsecured debt rating with a range of 30-day LIBOR plus 100 basis points to LIBOR plus 175 basis points. The Company had $15,500,000 in available borrowings under this loan at December 31, 1997. At December 31, 1997, the rate was set at 30-day LIBOR plus 100 basis points and the effective interest rate was 6.97%. In December 1997, the Company obtained a $150,000,000-unsecured revolving loan which matures on June 30, 1998. Borrowings under such revolving loan will be based on the 30-day LIBOR rate plus 90 basis points. At December 31, 1997, the effective interest rate was 6.84%. The Company had $100,000,000 in available borrowings under this loan at December 31, 1997. The terms of each of the revolving loans require the Company to pay a commitment fee equal to .15% to .25% of the unused portion of such revolving loan and include certain restrictive covenants which limit, among other things, dividend payments, and which require compliance with certain financial ratios and measurements. At December 31, 1997, the Company was in compliance with these covenants. Other Information The Company has entered into an interest swap agreement with a financial institution to effectively fix the interest rate on the variable rate mortgages and variable rate notes at a rate of 6.95%. At December 31, 1997, the notional amounts of the interest rate swaps equaled the outstanding balance of the indebtedness. The swap expires in June 2000 and had a cost basis of $334,000 at December 31, 1997. To limit increases in interest expense on $80 million of its $430 million aggregate amount of unsecured revolving loans (the "Revolving Loans"), the Company has purchased an interest rate collar which limits its exposure to an increase in 30-day LIBOR to 6.25% plus 100 basis points through November F-13 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 2. MORTGAGES AND NOTES PAYABLE -- Continued 2001. The initial premium used to acquire the $80,000,000 interest rate collar is being amortized over the term of the Revolving Loan due in 1999. The cost basis of the collar was $2,457,000 at December 31, 1997. Net payments made to counterparties under the above interest rate protection agreement were $47,000 in 1997 and were recorded as an increase to interest expense. Payments received from counterparties were $167,000 in 1996 and $385,000 in 1995, and were recorded as a reduction of interest expense. In anticipation of a 1998 debt offering, on September 17, 1997, the Company entered into a hedge agreement with a notional amount of $114 million. The hedge agreement has a termination date of April 10, 1998, and carries a fixed rate of 6.3% which is a combination of the treasury rate plus the swap spread and the forward premium. The estimated fair value of the hedge at December 31, 1997, was ($4.8 million). The aggregate maturities of the mortgage and notes payable at December 31, 1997, are as follows (in thousands): 1998 ................. $ 54,737 1999 ................. 291,541 2000 ................. 21,529 2001 ................. 143,630 2002 ................. 14,504 Thereafter ........... 452,617 -------- $978,558 ========
Total interest capitalized was $7,238,000 in 1997, $2,935,000 in 1996, and $507,000 in 1995. 3. EMPLOYEE BENEFIT PLANS Management Compensation Program The Company has established an incentive compensation plan for employees 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 are included in accrued expenses in the Consolidated Balance Sheets. 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. 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 F-14 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 3. EMPLOYEE BENEFIT PLANS -- Continued 50% of employee contributions. During 1997, 1996 and 1995, the Company contributed $353,000, $160,000, and $51,000, respectively to the Plan. Administrative expenses of the plan are paid by the Company. Employee Stock Purchase Plan In August 1997, the Company instituted an Employee Stock Purchase Plan ("ESPP") for all active employees. At the end of each three-month offering period, each participant's account balance is applied to acquire shares of Common Stock at 90% of the market value of the Common Stock, calculated as the lower of the average closing price on the New York Stock Exchange on the five consecutive days preceding the first day of the quarter or the five days preceding the last day of the quarter. A participant may not invest more than $7,500 per quarter. As of December 31, 1997, 5,839 shares of Common Stock have been purchased under the ESPP for the year. 4. RENTAL INCOME The Company's real estate assets are leased to tenants under operating leases, substantially all of which expire over the next 10 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 the 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, 1997, are as follows (in thousands): 1998 ...................... $ 327,950 1999 ...................... 274,130 2000 ...................... 214,538 2001 ...................... 150,889 2002 ...................... 95,660 Thereafter ................ 262,215 ---------- $1,325,382 ==========
5. RELATED PARTY TRANSACTIONS The Company makes advances to Highwoods Services, Inc. for working capital purposes. These advances bear interest at a rate of 7% per annum, are due on demand and totaled $7,022,000 at December 31, 1997, and $2,406,000 at December 31, 1996. The Company recorded interest income from these advances of $142,000, $91,000 and $43,000 for the years ended December 31, 1997, 1996 and 1995, respectively. On October 1, 1997, the Company transferred title to the Ivy Distribution Center in Winston-Salem, North Carolina, to a limited liability company controlled by an executive officer of the Company for $2,050,000. The Company accepted a note receivable of $2,050,000 as consideration for this transaction which approximated the carrying value of the property. The note bears interest at 8% per annum and is payable in full on September 1, 1998. The Company recorded interest income of $41,000 for the year ended December 31, 1997. F-15 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 5. RELATED PARTY TRANSACTIONS -- Continued On March 18, 1997, the Company purchased 5.68 acres of development land in Raleigh, North Carolina, for $1,298,959 from a partnership in which an executive officer and director and an additional director of the Company each has an 8.5% limited partnership interest. 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 of the Company 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 respective acquisition dates. 6. STOCKHOLDERS' EQUITY Common Stock Distributions Distributions paid on Common Stock were $1.98, $1.86 and $1.75 per share for the years ended December 31, 1997, 1996 and 1995 respectively. For federal income tax purposes, the following table summarizes the estimated taxability of distributions paid:
1997 1996 1995 ---------- ---------- ---------- Per Share: Ordinary income ........... $ 1.39 $ 1.50 $ 1.63 Capital gains ............. -- .01 -- Return of capital ......... .59 .35 .12 ------- ------- ------- Total .............................. $ 1.98 $ 1.86 $ 1.75 ======= ======= =======
The Company's tax returns for the year ended December 31, 1997, have not been filed, and the taxability information for 1997 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. The tax basis of the Company's assets and liabilities are $2,307,497,000 and $1,035,558,000 respectively. On February 4, 1998, the Board of Directors declared a Common Stock distribution of $.51 per share payable on February 21, 1997, to stockholders of record on February 14, 1997. Preferred Stock On February 7, 1997, the Company issued 125,000 Series A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares"). The Series A Preferred Shares are non-voting and have a liquidation preference of $1,000 per share for an aggregate liquidation preference of $125.0 million plus accrued and unpaid dividends. The net proceeds (after underwriting commission and other offering costs) of the Series A Preferred Shares issued were $121.8 million. Holders of the Series A Preferred Shares are entitled to receive, when, as and if declared by Highwood's Board of Directors (the "Board"), out of funds legally available for payment of distributions, cumulative preferential cash distributions at a rate of 8 5/8% of the liquidation preference per annum (equivalent to $86.2 per share). On or after February 12, 2027, the Series A Preferred Shares may be redeemed for cash at the option of the Company. The redemption price (other than the portion thereof consisting of accrued and unpaid distributions) is payable solely out of the sale proceeds of other capital shares of Highwoods, which may include shares of other series of preferred shares. F-16 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 6. STOCKHOLDERS' EQUITY -- Continued The Company's 1997 distributions of $69.24 per Series A Preferred Share will be taxed as ordinary income. On September 22, 1997, the Company issued 6,900,000 Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred Shares"). The Series B Preferred Shares are non-voting and have a liquidation preference of $25 per share for an aggregate liquidation preference of $172.5 million plus accrued and unpaid dividends. The net proceeds (after underwriting commission and other offering costs) of the Series B Preferred Shares issued were $166.3 million. Holders of the Series B Preferred Shares are entitled to receive, when, as and if declared by Highwood's Board of Directors (the "Board"), out of funds legally available for payment of distributions, cumulative preferential cash distributions at a rate of 8% of the liquidation preference per annum (equivalent to $2.00 per share). On or after September 25, 2002, the Series B Preferred Shares may be redeemed for cash at the option of the Company. The redemption price (other than the portion thereof consisting of accrued and unpaid distributions) is payable solely out of the sale proceeds of other capital shares of Highwoods, which may include shares of other series of preferred shares. The Company's 1997 distributions of $.44 per Series B Preferred Share will be taxed as ordinary income. Shareholder Rights Plan On October 4, 1997, the Board declared a dividend on one preferred share purchase right ("Right") for each outstanding Common Share to be distributed to all holders of record of the Common Shares on October 16, 1997. Each Right entitles the registered holder to purchase one-hundredth of a participating preferred share for an exercise price of $140.00 per one-hundredth of a participating preferred share, subject to adjustment as provided in the Rights Agreement. The Rights will generally be exercisable only if a person or group acquires 15% or more of the Common Shares or announces a tender offer for 15% or more of the Common Shares. The Rights will expire on October 6, 2007, unless the expiration date of the Rights is extended, and the Rights are subject to redemption at a price of $0.01 per Right under certain circumstances. Dividend Reinvestment Plan The Company has instituted a Dividend Reinvestment and Stock Purchase Plan under which holders of Common Stock may elect to automatically 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 repurchase Common Stock in the open market for purposes of financing its obligations under the Dividend Reinvestment and Stock Purchase Plan. Forward Share Purchase Agreement On August 28, 1997, the Company entered into two transactions with affiliates of Union Bank of Switzerland (the "August 1997 Offering"). In one transaction, the Company sold 1,800,000 shares of Common Stock to UBS Limited for net proceeds of approximately $57 million. In the other transaction, the Company entered into a forward share purchase agreement (the "Forward Contract") with Union Bank of Switzerland, London Branch ("UBS/LB"). The Forward Contract generally provides that, if the price of a share of Common Stock is above $32.14 (the "Forward Price") on August 28, 1998, UBS/LB will return the difference (in shares of Common Stock) to the Company. Similarly, if the price of a share of Common Stock on August 28, 1998, is less than the Forward Price, the Company will pay the difference of UBS/LB in cash or shares of Common Stock, at the Company's option. At December 31, 1997, the Company's share price was $37.38 compared to the Forward Price and the net price of the shares sold to UBS/LB of $31.73. F-17 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 7. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings Per Share," which is effective for financial statements for periods ending after December 15, 1997. FASB Statement No. 128 requires the restatement of prior period earnings per share and requires the disclosure of additional supplemental information detailing the calculation of earnings per share. FASB Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. It is computed using the weighted average number of shares of Common Stock and the dilutive effect of options, warrants and convertible securities outstanding, using the "treasury stock" method. Earnings per share data are required for all periods for which an income statement or summary of earnings is presented, including summaries outside the basic financial statements. All earnings per share amounts for all periods presented have, where appropriate, been restated to conform to the FASB Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 ------------------ -------------- -------------- Numerator: Net income ............................................... $ 92,584,000 $48,242,000 $28,934,000 Non-convertible preferred stock dividends (2) ............ (13,117,000) -- -- Minority interest ........................................ (15,106,000) (6,782,000) (4,937,000) General partner's portion of extraordinary item .......... (5,799,000) (2,140,000) (875,000) ------------ ----------- ----------- Numerator for basic earnings per share -- income available to common stockholders ........................ 58,562,000 39,320,000 23,122,000 Effect of dilutive securities: Minority interest ....................................... --(1) 6,782,000 4,937,000 Minority interest portion of extraordinary item ......... --(1) (292,000) (193,000) -------------- ----------- ----------- --(1) 6,490,000 4,744,000 Numerator for diluted earnings per share -- income available to common stockholders -- after assumed conversions. ..................................... 58,562,000 45,810,000 27,866,000 Denominator: Denominator for basic earnings per share -- weighted-average shares .................................. 38,770,000 26,111,000 15,487,000 Effect of dilutive securites: Employee stock options (2) .............................. 317,846 189,620 90,041 Warrants (2) ............................................ 73,310 32,258 13,794 Common Units converted .................................. --(1) 4,108,765 3,210,000 -------------- ----------- ----------- Dilutive potential common shares ......................... 391,156 4,330,643 3,313,835 Denominator for diluted earnings per share -- adjusted weighted average shares and assumed conversions .............................................. 39,161,156 30,441,643 18,800,835 Basic earnings per share ................................... $ 1.51 $ 1.51 $ 1.49 ============== =========== =========== Diluted earnings per share ................................. $ 1.50 $ 1.50 $ 1.48 ============== =========== ===========
- ---------- F-18 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) (1) 7,651,935 in Common Units and the related $13,960,000 in minority interest, net $1,146,000 of the minority interest's portion of the extraordinary item, were excluded from the dilutive earnings per share calculation due to the anti-dilutive effect. (2) For additional disclosures regarding outstanding preferred stock, the employee stock options and the warrants, see Notes 3, 6 and 8. On January 27, 1998, the Company sold 2,000,000 shares of Common Stock in an underwritten public offering for net proceeds of approximately $68.2 million. On February 12, 1998, the Company sold an aggregate of 1,553,604 shares of Common Stock in two underwritten public offerings for net proceeds of approximately $51.2 million. On March 30, 1998, the Company sold 428,572 shares of Common Stock in an underwritten public offering for net proceeds of approximately $14.2 million. (See Note 12.) 8. STOCK OPTIONS AND WARRANTS As of December 31, 1997, 2,364,027 shares of the Company's authorized Common Stock were reserved for issuance upon the exercise of options under the Amended and Restated 1994 Stock Option Plan. Options generally vest over a four- or five-year period beginning with the date of grant. In 1997, the Company adopted a Unit Option Plan whereby no limit was placed on the number of authorized Common Units reserved for future issuances. Common Unit options are similar to non-qualified stock options except that the holder is entitled to purchase Common Units in the Operating Partnership. Each Common Unit received upon the exercise of a Common Unit option may be redeemed by the holder thereof for the cash value of one share of Common Stock. The Company intends to allow holders of the Common Unit options to convert them to non-qualified stock options upon approval by the stockholders of the Company. In 1995, the Financial Accounting Standards Board issued a Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"). SFAS 123 recommends the use of a fair value based method of accounting for an employee stock option whereby compensation cost is measured at the grant date on the fair value of the award and is recognized over the service period (generally the vesting period of the award). However, SFAS 123 specifically allows an entity to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") so long as pro forma disclosures of net income and earnings per share are made as if SFAS 123 had been adopted. The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because the Company believes that the models available to estimate the fair value of employee stock options do not provide a reliable single measure of the fair value of employee stock options. Moreover, such models required the input of highly subjective assumptions, which can materially affect the fair value estimates. APB 25 requires the recognition of compensation expense at the date of grant equal to the difference between the option price and the value of the underlying stock. Because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, the Company records no compensation expense for the award of employee stock options. Under SFAS 123, a public entity must estimate the fair value of a stock option by using an option-pricing model that takes into account as of the grant date the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. SFAS provides examples of possible pricing models and includes the Black-Scholes pricing model, which the Company used to develop its pro forma disclosures. However, as previously noted, the Company does not believe that such models provide a reliable single measure of the fair value of employee stock options. Furthermore, the Black-Scholes model was developed for use in estimating the fair value of traded options that have F-19 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 8. STOCK OPTIONS AND WARRANTS -- Continued no vesting restrictions and are fully transferable, rather than for use in estimating the fair value of employee stock options subject to vesting and transferability restrictions. Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, only options granted subsequent to that date were valued using this Black-Scholes model. The fair value of the options granted in 1997 was estimated at the date of grant using the following weighted-average assumptions: risk-free interest rates ranging between 5.75% and 6.72%, dividend yield of 6.5% and a weighted average expected life of the options of five years. The fair values of the 1996 and 1995 options were estimated at the date of grant using the following weighted average assumptions: risk-free interest rate of 6.47%, expected volatility of .182, dividend yield of 7.07% and a weighted-average expected life of the options of five years. Had the compensation cost for the Company's stock option plans been determined based on the fair value at the date of grant for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net income and net income per share would have decreased to the pro forma amounts indicated below:
Year ended December 31 ------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Net income -- as reported ............................. $ 58,562 $ 39,320 $ 23,122 Net income -- pro forma ............................... $ 57,841 $ 38,861 $ 22,999 Net income per share -- basic (as reported) ........... $ 1.51 $ 1.51 $ 1.49 Net income per share -- diluted (as reported) ......... $ 1.50 $ 1.50 $ 1.48 Net income per share -- basic (pro forma) ............. $ 1.49 $ 1.49 $ 1.49 Net income per share -- diluted (pro forma) ........... $ 1.48 $ 1.49 $ 1.48
The following table summarizes information about employees' and Board of Directors' stock options outstanding at December 31, 1997, 1996 and 1995:
Options Outstanding -------------------------------- Weighted Average Number Exercise of Shares Price ------------------ ----------- Balances at December 31, 1994 ......... 326,000 $ 21.00 Options granted ....................... 400,000 22.09 Options canceled ...................... (28,680) 23.22 Options exercised ..................... (8,000) 21.00 ------- -------- Balances at December 31, 1995 ......... 689,320 21.54 Options granted ....................... 586,925 28.27 Options canceled ...................... -- -- Options exercised ..................... (10,545) 20.75 ------- -------- Balances at December 31, 1996 ......... 1,265,700 24.67 Options granted ....................... 2,250,765(1) 32.90 Options canceled ...................... (76,040) 22.20 Options exercised ..................... (117,428) 21.84 ----------- -------- Balances at December 31, 1997 ......... 3,322,997(1) $ 30.40 =========== ========
- ---------- F-20 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) (1) Includes 1,134,310 Common Unit Options granted pursuant to the Operating Partnership's 1997 Unit Option Plan.
Options Exercisable ------------------------- Weighted Average Number of Exercise Shares Price ----------- ----------- December 31, 1995 ......... 48,000 $ 21.00 December 31, 1996 ......... 225,350 $ 21.74 December 31, 1997 ......... 686,870 $ 30.94
Exercise prices for options outstanding as of December 31, 1997, ranged from $20.75 to $35.50. The weighted average remaining contractual life of those options is 9.0 years. Using the Black-Scholes options valuation model, the weighted average fair value of options granted during 1997, 1996 and 1995 was $3.23, $3.10 and $1.90, respectively. Warrants In connection with various acquisitions in 1997, 1996 and 1995, the Company issued warrants to certain officers and directors.
Number of Exercise Date of Issuance Warrants Price - --------------------------- ----------- ----------- February 1995 ......... 100,000 $ 21.00 April 1996 ............ 150,000 $ 28.00 October 1997 .......... 1,479,290 $ 32.50 December 1997 ......... 120,000 $ 34.13 --------- Total ............... 1,849,290 =========
The warrants granted in February 1995, April 1996 and December 1997 expire 10 years from the date of issuance and are exercisable as of December 31, 1996. The warrants granted in October 1997 do not have an expiration date. 9. COMMITMENTS AND CONTINGENCIES Lease Certain properties in the portfolio are subject to land leases expiring through 2082. Rental payments on these leases are adjusted annually based on either the consumer price index or on a predetermined schedule. For three properties, 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. F-21 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 9. COMMITMENTS AND CONTINGENCIES -- Continued The obligation for future minimum lease payments is as follows (in thousands): 1998 ............... $ 1,130 1999 ............... 1,155 2000 ............... 1,166 2001 ............... 1,182 2002 ............... 1,169 Thereafter ......... 60,151 ------- $65,953 =======
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 or indemnities. All of these matters, taken together, are not expected to have a material adverse effect on the accompanying consolidated financial statements notwithstanding possible insurance recovery. Contracts The Company has entered into construction contracts totaling $150.4 million at December 31, 1997. The amounts remaining on these contracts as of December 31, 1997, totaled $69.0 million. The Company has entered into a contract under which it is committed to acquire 36 acres of land over a three-year period for an aggregate purchase price of approximately $6,000,000. The seller has the option to elect to receive the purchase price in either cash or Common Units valued at $26.67 per Common Unit. 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. Capital Expenditures The Company presently has no plans for major capital improvements to the existing properties, other than an $8 million renovation of the common areas of a 639,000-square foot property acquired in the ACP transaction. A reserve has been established to cover the cost of the renovations. Environmental Matters Substantially all of the Company's properties have been subjected to Phase I environmental assessments and/or updates. Such assessments and/or updates 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. Employment Agreements As the Company has expanded into new markets, it has sought to enter into business combinations with local real estate operators with many years of management and development experience in their respective markets. Accordingly, in connection with joining the Company as executive officers as a result of such business combinations, former executive officers have entered into employment agreements with the Company. F-22 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 10. 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 values. 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 values . The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997, were as follows (in thousands):
Carrying Fair Amount Value ---------- ------------ Cash and cash equivalents ........................ $ 19,487 $ 19,487 Accounts and notes receivable .................... $ 17,701 $ 17,701 Mortgages and notes payable ...................... $978,558 $995,180 Interest rate collar and swap agreements ......... $ 2,791 $ (259)
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, 1997, 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 collar 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, 1997. 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 herein. 11. SUPPLEMENTAL PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma information has been prepared assuming the following transactions all occurred as of January 1, 1996: (1) the 1996 acquisition of 91 properties at an initial cost of $704 million, (2) the 1997 acquisition of 176 properties at an initial cost of $1.1 billion, (3) the Summer 1996 and December 1996 Common Stock offerings, (4) the November 1996 issuance of $210 million of unsecured notes, (5) the 1997 Series A and Series B Preferred Stock Offerings, (6) the June 1997 X-POS Offering and (7) the August and October 1997 Stock Offerings. Pro forma interest expense was calculated based on the indebtedness outstanding after debt repayment and using the effective interest rate on such indebtedness. In connection with various transactions, the Company issued Common Units and shares of Common Stock totaling approximately 6.7 million and 1.3 million in 1997 and 1996, respectively, which were recorded at their fair market value upon the closing date of the transactions. F-23 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 11. SUPPLEMENTAL PRO FORMA INFORMATION (UNAUDITED) -- Continued
Pro Forma Year Ended Pro Forma Year Ended December 31, 1997 December 31, 1996 ---------------------- --------------------- (in thousands, except per share amounts) Revenues ................................ $ 352,279 $ 313,166 Net income before extraordinary item ..................... $ 69,977 $ 44,138 Net income .............................. $ 64,178 $ 41,998 Net income per share -- basic ........... $ 1.38 $ .90 Net income per share -- diluted ......... $ 1.37 $ .90
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. 12. SUBSEQUENT EVENTS Recent Acquisitions In closings on December 23, 1997, and January 8, 1998, the Company completed a business combination with Riparius Development Corporation in Baltimore, Maryland, involving the acquisition of a portfolio of five office properties encompassing 369,000 square feet, two office development projects encompassing 235,000 square feet, 11 acres of development land and 101 additional acres of development land to be acquired over the next three years (the "Riparius Transaction"). As of December 31, 1997, the in-service properties acquired in the Riparius Transaction were 99% leased. The cost of the Riparius Transaction consisted of a cash payment of $43.6 million. In addition, the Company has assumed the two office development projects with an anticipated cost of $26.2 million expected to be paid in 1998 and will pay out $23.9 million over the next three years for the 101 additional acres of development land. On February 4, 1998, the Company acquired substantially all of a portfolio consisting of 28 office properties encompassing 787,000 rentable square feet, seven service center properties encompassing 471,000 square feet and 66 acres of development land in Tampa, Florida (the "Garcia Transaction"). The cost of the Garcia Transaction consists of a cash payment of approximately $87 million and the assumption of approximately $24 million in secured debt. The Company expects to close on the one remaining property by April 4, 1998. Pending Acquisitions On December 22, 1997, the Company entered into a merger agreement (the "Merger Agreement") with J.C. Nichols Company, a publicly traded Kansas City, Missouri real estate operating company ("J.C. Nichols"), pursuant to which the Company would acquire J.C. Nichols with the view that the Operating Partnership would combine its property operations with J.C. Nichols (the "J.C. Nichols Transaction"). J.C. Nichols owns or has an ownership interest in 27 office properties encompassing approximately 1.5 million rentable square feet, 13 industrial properties encompassing approximately 337,000 square feet, 33 retail properties encompassing approximately 2.5 million rentable square feet and 16 multifamily communities with 1,816 apartment units in Kansas City, Missouri and Kansas. Additionally, J.C. Nichols has an ownership interest in 21 office properties encompassing approximately 1.3 million F-24 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 12. SUBSEQUENT EVENTS -- Continued rentable square feet, one industrial property encompassing approximately 200,000 rentable square feet and one multifamily community with 418 apartment units in Des Moines, Iowa. Consummation of the J.C. Nichols Transaction is subject, among other things, to the approval of 66 2/3% of the shareholders of J.C. Nichols. Under the terms of the Merger Agreement, the Company would acquire all of the outstanding common stock, $.01 par value, of J.C. Nichols ("J.C. Nichols Common Stock"). Under the Merger Agreement, J.C. Nichols shareholders may elect to receive either 1.84 shares of Common Stock or $65 in cash for each share of J.C. Nichols Common Stock. However, the cash payment to J.C. Nichols shareholders cannot exceed 40% of the total consideration, and the Company may limit the amount of Common Stock issued to 75% of the total consideration. The exchange ratio is fixed and reflects the average closing price of the Common Stock over the 20 trading days preceding the effective date of the Merger Agreement. The cost of the J.C. Nichols Transaction under the Merger Agreement is approximately $570 million, including assumed debt of approximately $250 million, net of cash of approximately $65 million. If J.C. Nichols enters into a business combination with a third party or otherwise terminates the J.C. Nichols Transaction, such third party or J.C. Nichols may be required to pay the Company a break-up fee of up to $14.7 million plus expenses of $2.5 million. Under certain other circumstances, if the J.C. Nichols Transaction is terminated, the terminating party may be required to pay expenses of $2.5 million to the non-terminating party. No assurance can be given that all or part of the J.C. Nichols Transaction will be consummated or that, if consummated, it will follow the terms set forth in the Merger Agreement. As of the date hereof, certain third parties have expressed an interest to J.C. Nichols and/or certain of its shareholders in purchasing all or a portion of the outstanding J.C. Nichols Common Stock at a price in excess of $65 per share. No assurance can be given that a third party will not make an offer to J.C. Nichols or its shareholders to purchase all or a portion of the outstanding J.C. Nichols Common Stock at a price in excess of $65 per share or that the board of directors of J.C. Nichols would reject any such offer. The Company and/or J.C. Nichols may terminate the Merger Agreement if the J.C. Nichols Transaction is not consummated by June 30, 1998. The Company has entered into an agreement with The Easton-Babcock Companies, a real estate operating company in Miami, Florida ("Easton-Babcock"), pursuant to which the Company will combine its property operations with Easton-Babcock and acquire a portfolio of 11 industrial properties encompassing 1.8 million rentable square feet, three office properties encompassing 197,000 rentable square feet and 110 acres of land for development, of which 88 acres will be acquired over a three-year period (the "Easton-Babcock Transaction"). As of December 31, 1997, the industrial properties to be acquired in the Easton-Babcock Transaction were 88% leased and the office properties to be acquired in the Easton-Babcock Transaction were 50% leased. The cost of the Easton-Babcock Transaction is $143 million and will consist of an undertermined combination of the issuance of Common Units, the assumption of mortgage debt and a cash payment. Also in connection with the Easton-Babcock Transaction, the Company will issue to certain affiliates of Easton-Babcock warrants to purchase 926,000 shares of Common Stock at $35.50 per share. No assurance can be given that all or part of the Easton-Babcock transaction will be consummated. Financing Activities On January 27, 1998, the Company sold 2,000,000 shares of Common Stock in an underwritten public offering for net proceeds of approximately $68.2 million. F-25 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 12. SUBSEQUENT EVENTS -- Continued On February 2, 1998, the Operating Partnership sold $125 million of 6.835% MandatOry Par Put Remarketed Securities ("MOPPRS") due February 1, 2013, and $100 million of 7 1/8% notes due February 1, 2008. On February 12, 1998, the Company sold an aggregate of 1,553,604 shares of Common Stock in two underwritten public offerings for net proceeds of approximately $51.2 million. On March 30, 1998, the Company sold 428,572 shares of Common Stock in an underwritten public offering for net proceeds of approximately $14.2 million. 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): Selected quarterly financial data for the years ended December 31, 1997, and 1996 are as follows (in thousands except per share amounts):
For the year ended December 31, 1996* ------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter Total --------------- ---------------- --------------- ---------------- ----------- Revenues ................... $ 23,757 $ 27,680 $ 36,329 $ 50,160 $137,926 -------- -------- -------- -------- -------- Income before minority interest and extraordinary item ..................... 9,002 10,134 14,223 14,883 48,242 Minority interest .......... (1,571) (1,753) (1,881) (1,577) (6,782) Extraordinary item ......... -- -- (2,140) -- (2,140) -------- -------- -------- -------- -------- Net (loss) income .......... $ 7,431 $ 8,381 $ 10,202 $ 13,306 $39,320 ======== ======== ======== ======== ======== Per Share: Income before extraordinary item -- Basic ........... $ 0.38 $ 0.42 $ 0.39 $ 0.41 $ 1.59 ======== ======== ======== ======== ======== Income before extraordinary item -- Diluted ......... $ 0.38 $ 0.42 $ 0.39 $ 0.40 $ 1.58 ======== ======== ======== ======== ========
F-26 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): -- Continued
For the year ended December 31, 1997* -------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter Total --------------- ---------------- --------------- ---------------- ------------ Revenues ...................... 58,321 61,238 63,655 91,256 274,470 ------ ------ ------ ------ ------- Income before minority interest and extraordinary item ........................ 19,554 20,595 21,554 30,881 92,584 Minority interest ............. (3,129) (3,295) (3,448) (5,234) (15,106) Extraordinary item ............ (3,337) -0- (1,328) (1,134) (5,799) ------ ------ ------ ------ ------- Net (loss) income ............. 13,088 17,300 16,778 24,513 71,679 ====== ====== ====== ====== ======= Preferred dividends ........... (1,407) (2,695) (2,870) (6,145) (13,117) ------ ------ ------ ------ ------- Net income available for common stockholders ......... 11,681 14,605 13,908 18,368 58,562 ------ ------ ------ ------ ------- Per Share: Income before extraordinary item -- Basic .............. $ .43 $ .41 $ .42 $ .42 $ 1.66 ====== ====== ====== ====== ======= Income before extraordinary item -- Diluted ............ $ .42 $ .40 $ .42 $ .41 $ 1.65 ====== ====== ====== ====== =======
- ---------- * The total of the four quarterly amounts for net income per share does not equal the total for the year due to the use of a weighted average to compute the average number of shares outstanding. F-27 HIGHWOODS PROPERTIES, INC. SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (In thousands)
Cost Capitalized Subsequent Gross Amount at Initial Cost to Acquisition Which Carried at Close of Period ------------ -------------- -------------------------------- Building & Building & Building & Description Encumbrance Land Improvements Land Improvements Land Improvements Total (16) - ------------------------- ------------- ------- -------------- ------ -------------- ------- -------------- ------------ Ridgefield 200 1,685 636 3,607 -- 176 636 3,783 4,419 Ridgefield 300 1,837 910 5,157 -- 21 910 5,178 6,088 1765 The Exchange -- 767 6,325 -- 66 767 6,391 7,158 Two Point Royal -- 1,793 14,951 -- -- 1,793 14,951 16,744 400 North Business Park -- 979 6,174 -- 21 979 6,195 7,174 50 Glenlake -- 2,500 20,000 -- 60 2,500 20,060 22,560 6348 N.E. Expressway 1,437 277 1,646 -- 7 277 1,653 1,930 6438 N.E. Expressway 1,629 181 2,225 -- 27 181 2,252 2,433 Bluegrass Place 1 -- 491 2,036 -- -- 491 2,036 2,527 Bluegrass Place 2 -- 412 2,555 -- -- 412 2,555 2,967 1700 Century Circle -- 1,115 3,148 -- 240 1,115 3,388 4,503 1800 Century Boulevard -- 1,441 28,939 -- 98 1,441 29,037 30,478 1875 Century Boulevard -- -- 8,790 -- 27 -- 8,817 8,817 1900 Century Boulevard -- -- 4,721 -- 138 -- 4,859 4,859 2200 Century Parkway -- -- 14,318 -- 231 -- 14,549 14,549 2600 Century Parkway -- -- 10,357 -- 11 -- 10,368 10,368 2635 Century Parkway -- -- 21,230 -- 80 -- 21,310 21,310 2800 Century Parkway -- -- 20,149 -- 6 -- 20,155 20,155 Chattahoochee Avenue -- 248 1,840 -- 175 248 2,015 2,263 Chastain Place I -- 472 3,011 -- 416 472 3,427 3,899 Corporate Lakes -- 1,275 7,242 -- 274 1,275 7,516 8,791 Distribution Center Cosmopolitan North -- 2,855 4,155 -- 105 2,855 4,260 7,115 1035 Fred Drive -- 270 1,246 -- 1 270 1,247 1,517 1077 Fred Drive -- 384 1,195 -- 15 384 1,210 1,594 5125 Fulton Industrial -- 578 3,147 -- 31 578 3,178 3,756 Blvd Fulton Corporate Center -- 542 2,048 -- 26 542 2,074 2,616 Gwinnett Distribution -- 1,128 5,943 -- 226 1,128 6,169 7,297 Center Kennestone Corporate -- 518 4,874 -- -- 518 4,874 5,392 Center Lavista Business Park -- 821 5,244 -- 211 821 5,455 6,276 Norcross, I, II -- 326 1,989 -- -- 326 1,989 2,315 Oakbrook I 2,013 873 4,948 -- 53 873 5,001 5,874 Oakbrook II 3,463 1,579 8,950 -- 563 1,579 9,513 11,092 Oakbrook III 3,931 1,480 8,388 -- 115 1,480 8,503 9,983 Oakbrook IV 2,381 953 5,400 -- 25 953 5,425 6,378 Oakbrook V 5,664 2,206 12,501 -- 149 2,206 12,650 14,856 Oakbrook Summitt 4,600 950 6,596 -- 29 950 6,625 7,575 Oxford Lake Business -- 855 7,085 -- 6 855 7,091 7,946 Center Southside Distribution -- 810 4,527 -- 23 810 4,550 5,360 Center Steel Drive -- 171 1,219 -- -- 171 1,219 1,390 9690 Deereco Road -- 1,188 16,460 -- -- 1,188 16,460 17,648 Atrium Building -- 1,390 9,964 -- -- 1,390 9,964 11,354 Business Center at -- 827 1,597 -- -- 827 1,597 2,424 Owings Mills-7 Business Center at -- 786 2,263 -- -- 786 2,263 3,049 Owings Mills-8 Business Center at -- 960 6,187 -- -- 960 6,187 7,147 Owings Mills-9 Grandview I 5,154 1,895 10,739 -- 56 1,895 10,795 12,690 Highwoods Square -- 2,586 14,657 -- 315 2,586 14,972 17,558 Highwoods Plaza -- 1,772 10,042 -- 128 1,772 10,170 11,942 One Boca Place -- 5,736 32,505 -- 336 5,736 32,841 38,577 4101 Stuart -- 70 510 -- 234 70 744 814 Andrew Blvd. Life on Which Accumulated Date of Depreciation Description Depreciation Construction is Computed - ------------------------- -------------- -------------- ------------- Ridgefield 200 129 1987 5-40 yrs. Ridgefield 300 176 1989 5-40 yrs. 1765 The Exchange 38 1983 5-40 yrs. Two Point Royal 16 1997 5-40 yrs. 400 North Business Park 114 1985 5-40 yrs. 50 Glenlake 22 1997 5-40 yrs. 6348 N.E. Expressway 37 1978 5-40 yrs. 6438 N.E. Expressway 50 1981 5-40 yrs. Bluegrass Place 1 19 1995 5-40 yrs. Bluegrass Place 2 24 1996 5-40 yrs. 1700 Century Circle 87 1972 5-40 yrs. 1800 Century Boulevard 702 1975 5-40 yrs. 1875 Century Boulevard 213 1976 5-40 yrs. 1900 Century Boulevard 131 1971 5-40 yrs. 2200 Century Parkway 365 1971 5-40 yrs. 2600 Century Parkway 251 1973 5-40 yrs. 2635 Century Parkway 518 1980 5-40 yrs. 2800 Century Parkway 488 1983 5-40 yrs. Chattahoochee Avenue 67 1970 5-40 yrs. Chastain Place I 91 1997 5-40 yrs. Corporate Lakes 195 1988 5-40 yrs. Distribution Center Cosmopolitan North 104 1980 5-40 yrs. 1035 Fred Drive 30 1973 5-40 yrs. 1077 Fred Drive 29 1973 5-40 yrs. 5125 Fulton Industrial 77 1973 5-40 yrs. Blvd Fulton Corporate Center 51 1973 5-40 yrs. Gwinnett Distribution 143 1991 5-40 yrs. Center Kennestone Corporate 87 1985 5-40 yrs. Center Lavista Business Park 126 1973 5-40 yrs. Norcross, I, II 44 1970 5-40 yrs. Oakbrook I 179 1981 5-40 yrs. Oakbrook II 395 1983 5-40 yrs. Oakbrook III 313 1984 5-40 yrs. Oakbrook IV 183 1985 5-40 yrs. Oakbrook V 436 1985 5-40 yrs. Oakbrook Summitt 151 1981 5-40 yrs. Oxford Lake Business 128 1985 5-40 yrs. Center Southside Distribution 101 1988 5-40 yrs. Center Steel Drive 27 1975 5-40 yrs. 9690 Deereco Road 17 1989 5-40 yrs. Atrium Building 10 1986 5-40 yrs. Business Center at 2 1989 5-40 yrs. Owings Mills-7 Business Center at 2 1989 5-40 yrs. Owings Mills-8 Business Center at 7 1988 5-40 yrs. Owings Mills-9 Grandview I 364 1989 5-40 yrs. Highwoods Square 501 1989 5-40 yrs. Highwoods Plaza 344 1980 5-40 yrs. One Boca Place 1,101 1987 5-40 yrs. 4101 Stuart 67 1984 5-40 yrs. Andrew Blvd.
F-28
Cost Capitalized Subsequent Gross Amount at Initial Cost to Acquisition Which Carried at Close of Period ------------ -------------- -------------------------------- Building & Building & Building & Description Encumbrance Land Improvements Land Improvements Land Improvements Total (16) - -------------------- ------------- -------- -------------- ------ -------------- -------- -------------- ------------ 4105 Stuart -- 26 189 -- 13 26 202 228 Andrew Blvd. 4109 Stuart -- 87 636 -- 9 87 645 732 Andrew Blvd. 4201 Stuart -- 110 809 -- 28 110 837 947 Andrew Blvd. 4205 Stuart -- 134 979 -- 16 134 995 1,129 Andrew Blvd. 4209 Stuart -- 91 665 -- 18 91 683 774 Andrew Blvd. 4215 Stuart -- 133 978 -- 26 133 1,004 1,137 Andrew Blvd. 4301 Stuart -- 232 1,702 -- 33 232 1,735 1,967 Andrew Blvd. 4321 Stuart -- 73 534 -- 5 73 539 612 Andrew Blvd. First Citizens -- 647 5,528 -- 153 647 5,681 6,328 English Oak 1,968 750 4,248 -- 34 750 4,282 5,032 Laurel Oak 1,448 471 2,671 -- 248 471 2,919 3,390 Live Oak 1,403 5,611 -- 563 1,403 6,174 7,577 Scarlet Oak 2,177 1,073 6,078 -- 40 1,073 6,118 7,191 Twin Oaks 3,406 1,243 7,044 -- 65 1,243 7,109 8,352 Willow Oak 1,234 442 2,505 -- 206 442 2,711 3,153 Water Oak 5,097 1,623 9,196 -- 482 1,623 9,678 11,301 Pinebrook -- 846 4,739 -- 41 846 4,780 5,626 Parkway Plaza -- 1,110 4,741 -- 155 1,110 4,896 6,006 Building 1 Parkway Plaza -- 1,694 6,777 -- 1,009 1,694 7,786 9,480 Building 2 Parkway Plaza -- 1,570 6,282 -- 376 1,570 6,658 8,228 Building 3 Parkway Plaza -- -- 2,438 -- 510 -- 2,948 2,948 Building 6 Parkway Plaza -- -- 4,648 -- 73 -- 4,721 4,721 Building 7 Parkway Plaza -- -- 4,698 -- 30 -- 4,728 4,728 Building 8 Parkway Plaza -- -- 6,008 -- 13 -- 6,021 6,021 Building 9 Steele Creek Park (4) 499 1,998 -- 146 499 2,144 2,643 Building A Steele Creek Park (4) 110 441 -- 8 110 449 559 Building B Steele Creek Park (4) 188 751 -- 292 188 1,043 1,231 Building E Steele Creek Park (4) 196 783 -- 25 196 808 1,004 Building G-1 Steele Creek Park (4) 169 677 -- 153 169 830 999 Building H Steele Creek Park (4) 148 592 -- 5 148 597 745 Building K Center Point I 3,549 1,313 7,441 -- 30 1,313 7,471 8,784 Center Point II -- 1,183 6,702 1 1,328 1,184 8,030 9,214 Center Point V -- 265 1,279 -- 107 265 1,386 1,651 Fontaine I 3,520 1,219 6,907 -- 191 1,219 7,098 8,317 Fontaine II 1,807 941 5,335 -- 686 941 6,021 6,962 Fontaine III -- 853 4,833 -- 78 853 4,911 5,764 Fontaine V 1,192 395 2,237 -- -- 395 2,237 2,632 6348 Burnt Poplar -- 721 2,883 -- 7 721 2,890 3,611 6350 Burnt Poplar -- 339 1,365 -- 5 339 1,370 1,709 Deep River I 2,305 1,033 5,855 -- 162 1,033 6,017 7,050 Copier Consultants (3) 252 1,008 -- 12 252 1,020 1,272 East - Building 01 (3) 377 1,510 -- 46 377 1,556 1,933 East - Building 02 (3) 461 1,842 -- 22 461 1,864 2,325 East - Building 03 (3) 321 1,283 -- 61 321 1,344 1,665 East - Building 06 -- 103 526 -- 159 103 685 788 Hewlett Packard -- 149 727 -- 193 149 920 1,069 Inacom -- 106 478 -- 293 106 771 877 Life on Which Accumulated Date of Depreciation Description Depreciation Construction is Computed - -------------------- -------------- -------------- ------------- 4105 Stuart 15 1984 5-40 yrs. Andrew Blvd. 4109 Stuart 42 1984 5-40 yrs. Andrew Blvd. 4201 Stuart 59 1982 5-40 yrs. Andrew Blvd. 4205 Stuart 65 1982 5-40 yrs. Andrew Blvd. 4209 Stuart 47 1982 5-40 yrs. Andrew Blvd. 4215 Stuart 70 1982 5-40 yrs. Andrew Blvd. 4301 Stuart 115 1982 5-40 yrs. Andrew Blvd. 4321 Stuart 34 1982 5-40 yrs. Andrew Blvd. First Citizens 523 1989 5-40 yrs. English Oak 147 1984 5-40 yrs. Laurel Oak 128 1984 5-40 yrs. Live Oak 217 1989 5-40 yrs. Scarlet Oak 216 1982 5-40 yrs. Twin Oaks 236 1985 5-40 yrs. Willow Oak 95 1982 5-40 yrs. Water Oak 370 1985 5-40 yrs. Pinebrook 43 1986 5-40 yrs. Parkway Plaza 264 1982 5-40 yrs. Building 1 Parkway Plaza 471 1983 5-40 yrs. Building 2 Parkway Plaza 404 1984 5-40 yrs. Building 3 Parkway Plaza 108 1996 5-40 yrs. Building 6 Parkway Plaza 241 1985 5-40 yrs. Building 7 Parkway Plaza 240 1986 5-40 yrs. Building 8 Parkway Plaza 308 1984 5-40 yrs. Building 9 Steele Creek Park 187 1989 5-40 yrs. Building A Steele Creek Park 33 1985 5-40 yrs. Building B Steele Creek Park 93 1985 5-40 yrs. Building E Steele Creek Park 67 1989 5-40 yrs. Building G-1 Steele Creek Park 108 1987 5-40 yrs. Building H Steele Creek Park 43 1985 5-40 yrs. Building K Center Point I 246 1988 5-40 yrs. Center Point II 257 1996 5-40 yrs. Center Point V 31 1997 5-40 yrs. Fontaine I 229 1985 5-40 yrs. Fontaine II 320 1987 5-40 yrs. Fontaine III 172 1988 5-40 yrs. Fontaine V 74 1990 5-40 yrs. 6348 Burnt Poplar 208 1990 5-40 yrs. 6350 Burnt Poplar 99 1992 5-40 yrs. Deep River I 226 1989 5-40 yrs. Copier Consultants 73 1990 5-40 yrs. East - Building 01 131 1990 5-40 yrs. East - Building 02 134 1986 5-40 yrs. East - Building 03 103 1986 5-40 yrs. East - Building 06 28 1997 5-40 yrs. Hewlett Packard 88 1996 5-40 yrs. Inacom 61 1996 5-40 yrs.
F-29
Cost Capitalized Subsequent Initial Cost to Acquisition ------------ -------------- Building & Building & Description Encumbrance Land Improvements Land Improvements - ------------------------ ------------- -------- -------------- ---------- -------------- East - Building A (3) 541 2,913 -- 279 East - Building B (3) 779 3,200 -- 255 East - Building C (3) 2,384 9,535 -- 298 East - Building D -- 271 3,213 -- 654 Service Center 1 (3) 275 1,099 -- 81 Service Center 2 (3) 222 889 -- 20 Service Center 3 (3) 304 1,214 -- 62 Service Center 4 (3) 224 898 -- 12 Service Court (3) 194 774 -- 36 Warehouse 1 (3) 384 1,535 -- 39 Warehouse 2 (3) 372 1,488 -- 28 Warehouse 3 (3) 370 1,480 -- 26 Warehouse 4 (3) 657 2,628 -- 28 Highland Industries (3) 175 699 -- 7 206 South Westgate Dr. -- 91 664 -- 64 207 South Westgate Dr. -- 138 1,012 -- 8 300 South Westgate Dr. -- 68 496 -- 3 305 South Westgate Dr. -- 30 220 -- 17 307 South Westgate Dr. -- 66 485 -- 6 309 South Westgate Dr. -- 68 496 -- 13 311 South Westgate Dr. -- 75 551 -- 26 315 South Westgate Dr. -- 54 396 -- 7 317 South Westgate Dr. -- 81 597 -- 7 319 South Westgate Dr. -- 54 396 -- 3 4600 Dundas Circle -- 62 456 -- 26 4602 Dundas Circle -- 68 498 -- 18 7906 Industrial -- 62 455 -- 5 Village Rd. 7908 Industrial -- 62 455 -- 11 Village Rd. 7910 Industrial -- 62 455 -- 14 Village Rd. Airpark North - DC1 (3) 723 2,891 -- 57 Airpark North - DC2 (3) 1,094 4,375 -- 83 Airpark North - DC3 (3) 378 1,511 -- 240 Airpark North - DC4 (3) 377 1,508 -- 75 2606 Phoenix Dr. - 100 -- 63 466 -- -- 2606 Phoenix Dr. - 200 -- 63 466 -- 3 2606 Phoenix Dr. - 300 -- 31 229 -- 37 2606 Phoenix Dr. - 400 -- 52 382 -- 8 2606 Phoenix Dr. - 500 -- 64 471 -- 9 2606 Phoenix Dr. - 600 -- 78 575 -- 10 2616 Phoenix Dr. -- 135 990 -- 44 5 Dundas Circle -- 72 531 -- 10 7 Dundas Circle -- 75 552 -- 11 8 Dundas Circle -- 84 617 -- 18 9 Dundas Circle -- 51 373 -- 3 302 Pomona Dr. -- 84 617 -- 42 304 Pomona Dr. -- 22 163 -- -- 306 Pomona Dr. -- 50 368 -- 8 308 Pomona Dr. -- 72 531 -- 2 500 Radar Rd. -- 202 1,484 -- 82 502 Radar Rd. -- 39 285 -- 43 504 Radar Rd. -- 39 285 -- 3 506 Radar Rd. -- 39 285 -- 5 Regency One -- 515 2,352 -- 571 Regency Two -- 435 1,864 -- 503 Sears Cenfact -- 861 3,446 -- 21 4000 Spring Garden St. -- 127 933 -- 34 4002 Spring Garden St. -- 39 290 -- 2 4004 Spring Garden St. -- 139 1,019 -- 57 R.F. Micro Devices -- 512 7,674 -- -- West Airpark I (4) 954 3,817 -- 365 West Airpark II (4) 887 3,536 (3) 138 West Airpark IV (4) 226 903 -- 120 West Airpark V (4) 242 966 -- 29 Gross Amount at Which Carried at Close of Period Life on Which Building & Accumulated Date of Depreciation Description Land Improvements Total (16) Depreciation Construction is Computed - ------------------------ -------- -------------- ------------ -------------- -------------- ------------- East - Building A 541 3,192 3,733 272 1986 5-40 yrs. East - Building B 779 3,455 4,234 290 1988 5-40 yrs. East - Building C 2,384 9,833 12,217 729 1990 5-40 yrs. East - Building D 271 3,867 4,138 107 1997 5-40 yrs. Service Center 1 275 1,180 1,455 96 1985 5-40 yrs. Service Center 2 222 909 1,131 64 1985 5-40 yrs. Service Center 3 304 1,276 1,580 107 1985 5-40 yrs. Service Center 4 224 910 1,134 65 1985 5-40 yrs. Service Court 194 810 1,004 63 1990 5-40 yrs. Warehouse 1 384 1,574 1,958 121 1985 5-40 yrs. Warehouse 2 372 1,516 1,888 113 1985 5-40 yrs. Warehouse 3 370 1,506 1,876 109 1986 5-40 yrs. Warehouse 4 657 2,656 3,313 191 1988 5-40 yrs. Highland Industries 175 706 881 51 1990 5-40 yrs. 206 South Westgate Dr. 91 728 819 41 1986 5-40 yrs. 207 South Westgate Dr. 138 1,020 1,158 63 1986 5-40 yrs. 300 South Westgate Dr. 68 499 567 31 1986 5-40 yrs. 305 South Westgate Dr. 30 237 267 14 1985 5-40 yrs. 307 South Westgate Dr. 66 491 557 32 1985 5-40 yrs. 309 South Westgate Dr. 68 509 577 31 1985 5-40 yrs. 311 South Westgate Dr. 75 577 652 41 1985 5-40 yrs. 315 South Westgate Dr. 54 403 457 25 1985 5-40 yrs. 317 South Westgate Dr. 81 604 685 39 1985 5-40 yrs. 319 South Westgate Dr. 54 399 453 25 1985 5-40 yrs. 4600 Dundas Circle 62 482 544 30 1985 5-40 yrs. 4602 Dundas Circle 68 516 584 34 1985 5-40 yrs. 7906 Industrial 62 460 522 28 1985 5-40 yrs. Village Rd. 7908 Industrial 62 466 528 30 1985 5-40 yrs. Village Rd. 7910 Industrial 62 469 531 31 1985 5-40 yrs. Village Rd. Airpark North - DC1 723 2,948 3,671 212 1986 5-40 yrs. Airpark North - DC2 1,094 4,458 5,552 324 1987 5-40 yrs. Airpark North - DC3 378 1,751 2,129 147 1988 5-40 yrs. Airpark North - DC4 377 1,583 1,960 114 1988 5-40 yrs. 2606 Phoenix Dr. - 100 63 466 529 29 1989 5-40 yrs. 2606 Phoenix Dr. - 200 63 469 532 30 1989 5-40 yrs. 2606 Phoenix Dr. - 300 31 266 297 16 1989 5-40 yrs. 2606 Phoenix Dr. - 400 52 390 442 27 1989 5-40 yrs. 2606 Phoenix Dr. - 500 64 480 544 33 1989 5-40 yrs. 2606 Phoenix Dr. - 600 78 585 663 37 1989 5-40 yrs. 2616 Phoenix Dr. 135 1,034 1,169 63 1985 5-40 yrs. 5 Dundas Circle 72 541 613 38 1987 5-40 yrs. 7 Dundas Circle 75 563 638 36 1986 5-40 yrs. 8 Dundas Circle 84 635 719 43 1986 5-40 yrs. 9 Dundas Circle 51 376 427 25 1986 5-40 yrs. 302 Pomona Dr. 84 659 743 40 1987 5-40 yrs. 304 Pomona Dr. 22 163 185 10 1987 5-40 yrs. 306 Pomona Dr. 50 376 426 27 1987 5-40 yrs. 308 Pomona Dr. 72 533 605 33 1987 5-40 yrs. 500 Radar Rd. 202 1,566 1,768 102 1981 5-40 yrs. 502 Radar Rd. 39 328 367 22 1986 5-40 yrs. 504 Radar Rd. 39 288 327 18 1986 5-40 yrs. 506 Radar Rd. 39 290 329 18 1986 5-40 yrs. Regency One 515 2,923 3,438 173 1996 5-40 yrs. Regency Two 435 2,367 2,802 149 1996 5-40 yrs. Sears Cenfact 861 3,467 4,328 249 1989 5-40 yrs. 4000 Spring Garden St. 127 967 1,094 66 1983 5-40 yrs. 4002 Spring Garden St. 39 292 331 19 1983 5-40 yrs. 4004 Spring Garden St. 139 1,076 1,215 72 1983 5-40 yrs. R.F. Micro Devices 512 7,674 8,186 40 1997 5-40 yrs. West Airpark I 954 4,182 5,136 433 1984 5-40 yrs. West Airpark II 884 3,674 4,558 290 1985 5-40 yrs. West Airpark IV 226 1,023 1,249 95 1985 5-40 yrs. West Airpark V 242 995 1,237 76 1985 5-40 yrs.
F-30
Cost Capitalized Subsequent Gross Amount at Initial Cost to Acquisition Which Carried at Close of Period ------------ -------------- -------------------------------- Building & Building & Building & Description Encumbrance Land Improvements Land Improvements Land Improvements Total (16) - --------------------------- ------------- -------- -------------- ------ -------------- -------- -------------- ------------ West Airpark VI (4) 326 1,308 -- 89 326 1,397 1,723 7327 W. Friendly Ave. -- 60 441 -- 6 60 447 507 7339 W. Friendly Ave. -- 63 465 -- 14 63 479 542 7341 W. Friendly Ave. -- 113 831 -- 64 113 895 1,008 7343 W. Friendly Ave. -- 72 531 -- 7 72 538 610 7345 W. Friendly Ave. -- 66 485 -- 11 66 496 562 7347 W. Friendly Ave. -- 97 709 -- 57 97 766 863 7349 W. Friendly Ave. -- 53 388 -- 13 53 401 454 7351 W. Friendly Ave. -- 106 778 -- 28 106 806 912 7353 W. Friendly Ave. -- 123 901 -- 12 123 913 1,036 7355 W. Friendly Ave. -- 72 525 -- 7 72 532 604 Nations Bank Plaza -- 642 9,349 -- 69 642 9,418 10,060 Brookfield Plaza 4,768 1,489 8,437 -- 294 1,489 8,731 10,220 Brookfield-Jacobs-Sirrine 12,049 3,022 17,125 -- -- 3,022 17,125 20,147 Brookfield-YMCA 429 33 189 -- 8 33 197 230 Patewood I -- 942 5,066 -- -- 942 5,066 6,008 Patewood II -- 942 5,066 -- -- 942 5,066 6,008 Patewood III 5,417 835 4,733 -- 141 835 4,874 5,709 Patewood IV (13) 1,210 6,856 -- -- 1,210 6,856 8,066 Patewood V 4,779 1,677 9,503 -- -- 1,677 9,503 11,180 Patewood Business 2,576 1,312 7,436 -- 25 1,312 7,461 8,773 Center Belfort Park I -- 1,322 4,285 -- -- 1,322 4,285 5,607 Belfort Park II -- 831 5,066 -- -- 831 5,066 5,897 Belfort Parkway III -- 647 4,063 -- 387 647 4,450 5,097 The Cigna Building -- 381 1,592 -- -- 381 1,592 1,973 Harry James Building -- 272 1,360 -- 34 272 1,394 1,666 Independent Square -- 3,985 47,495 -- 67 3,985 47,562 51,547 Three Oaks Plaza -- 1,630 14,036 -- 107 1,630 14,143 15,773 The Reflections 6,750 958 9,877 -- 8 958 9,885 10,843 Southpoint Office -- 594 3,987 -- (1) 594 3,986 4,580 Building Towermarc Plaza -- 1,143 6,476 -- 8 1,143 6,484 7,627 100 West Bay Street -- 184 4,750 -- 54 184 4,804 4,988 Building Atrium I & II -- 1,530 6,121 40 125 1,570 6,246 7,816 Centrum Building -- 1,013 5,523 -- 27 1,013 5,550 6,563 Medical Properties, Inc. -- 398 2,256 -- 1 398 2,257 2,655 Highwoods Office -- 1,005 3,816 -- 714 1,005 4,530 5,535 Center at Southwind International Place -- 4,847 27,469 -- 1,004 4,847 28,473 33,320 Phase II Kirby Centre -- 525 2,973 -- 13 525 2,986 3,511 Southwind Office -- 996 5,643 -- 4 996 5,647 6,643 Center A Southwind Office -- 1,356 7,684 -- 22 1,356 7,706 9,062 Center B Battlefield I 2,717 774 4,387 -- -- 774 4,387 5,161 Greenbrier Business 2,768 936 5,305 -- 47 936 5,352 6,288 Center Riverside Plaza -- 1,495 5,998 483 -- 1,978 5,998 7,976 3401 Westend -- 6,103 23,343 -- 788 6,103 24,131 30,234 5310 Maryland Way -- 1,923 7,360 -- 12 1,923 7,372 9,295 BNA 11,649 -- 22,588 -- 299 -- 22,887 22,887 Century City Plaza I -- 903 3,612 -- 153 903 3,765 4,668 Eastpark 1, 2, 3 4,099 3,137 11,842 -- 497 3,137 12,339 15,476 Grassmere I 2,856 1,251 7,091 -- 373 1,251 7,464 8,715 Grassmere II 4,401 2,260 12,804 -- 130 2,260 12,934 15,194 Grassmere III 5,053 1,340 7,592 -- 5 1,340 7,597 8,937 Highwoods Plaza I -- 1,772 6,380 -- 2,596 1,772 8,976 10,748 Highwoods Plaza II -- 1,448 6,948 -- 417 1,448 7,365 8,813 Harpeth II -- 1,419 5,677 1 141 1,420 5,818 7,238 Harpeth on the -- 1,658 6,633 2 121 1,660 6,754 8,414 Green III Harpeth on the -- 1,709 6,835 5 355 1,714 7,190 8,904 Green IV Lakeview -- 2,179 7,545 -- 124 2,179 7,669 9,848 Life on Which Accumulated Date of Depreciation Description Depreciation Construction is Computed - --------------------------- -------------- -------------- ------------- West Airpark VI 137 1985 5-40 yrs. 7327 W. Friendly Ave. 27 1987 5-40 yrs. 7339 W. Friendly Ave. 31 1989 5-40 yrs. 7341 W. Friendly Ave. 55 1988 5-40 yrs. 7343 W. Friendly Ave. 33 1988 5-40 yrs. 7345 W. Friendly Ave. 33 1988 5-40 yrs. 7347 W. Friendly Ave. 57 1988 5-40 yrs. 7349 W. Friendly Ave. 27 1988 5-40 yrs. 7351 W. Friendly Ave. 53 1988 5-40 yrs. 7353 W. Friendly Ave. 56 1988 5-40 yrs. 7355 W. Friendly Ave. 33 1988 5-40 yrs. Nations Bank Plaza 52 1973 5-40 yrs. Brookfield Plaza 298 1987 5-40 yrs. Brookfield-Jacobs-Sirrine 565 1990 5-40 yrs. Brookfield-YMCA 8 1990 5-40 yrs. Patewood I 112 1985 5-40 yrs. Patewood II 112 1987 5-40 yrs. Patewood III 195 1989 5-40 yrs. Patewood IV 226 1989 5-40 yrs. Patewood V 313 1990 5-40 yrs. Patewood Business 249 1983 5-40 yrs. Center Belfort Park I 23 1988 5-40 yrs. Belfort Park II 27 1988 5-40 yrs. Belfort Parkway III 21 1988 5-40 yrs. The Cigna Building 8 1972 5-40 yrs. Harry James Building 7 1982 5-40 yrs. Independent Square 287 1975 5-40 yrs. Three Oaks Plaza 74 1972 5-40 yrs. The Reflections 52 1985 5-40 yrs. Southpoint Office 21 1980 5-40 yrs. Building Towermarc Plaza 214 1991 5-40 yrs. 100 West Bay Street 25 1964 5-40 yrs. Building Atrium I & II 162 1984 5-40 yrs. Centrum Building 41 1979 5-40 yrs. Medical Properties, Inc. 74 1988 5-40 yrs. Highwoods Office 4 1997 5-40 yrs. Center at Southwind International Place 931 1988 5-40 yrs. Phase II Kirby Centre 100 1984 5-40 yrs. Southwind Office 188 1991 5-40 yrs. Center A Southwind Office 255 1990 5-40 yrs. Center B Battlefield I 145 1987 5-40 yrs. Greenbrier Business 176 1984 5-40 yrs. Center Riverside Plaza 32 1988 5-40 yrs. 3401 Westend 1,068 1982 5-40 yrs. 5310 Maryland Way 314 1994 5-40 yrs. BNA 985 1985 5-40 yrs. Century City Plaza I 161 1987 5-40 yrs. Eastpark 1, 2, 3 611 1978 5-40 yrs. Grassmere I 260 1984 5-40 yrs. Grassmere II 446 1985 5-40 yrs. Grassmere III 251 1990 5-40 yrs. Highwoods Plaza I 406 1996 5-40 yrs. Highwoods Plaza II 40 1997 5-40 yrs. Harpeth II 195 1984 5-40 yrs. Harpeth on the 195 1987 5-40 yrs. Green III Harpeth on the 197 1989 5-40 yrs. Green IV Lakeview 323 1986 5-40 yrs.
F-31
Cost Capitalized Subsequent Gross Amount at Initial Cost to Acquisition Which Carried at Close of Period ------------ -------------- -------------------------------- Building & Building & Building & Description Encumbrance Land Improvements Land Improvements Land Improvements Total (16) - ------------------------- ------------- -------- -------------- ------ --------------- -------- -------------- ------------ EMI/Sparrow -- 1,262 5,047 -- 39 1,262 5,086 6,348 100 Winner's Circle -- 1,495 7,148 -- -- 1,495 7,148 8,643 Campus Crusade -- 1,505 9,875 -- -- 1,505 9,875 11,380 ACP-W -- 4,700 18,865 -- -- 4,700 18,865 23,565 Corporate Square -- 900 1,717 -- 6 900 1,723 2,623 Executive Point Towers -- 2,200 7,230 -- 30 2,200 7,260 9,460 Lakeview Office Park -- 5,400 13,998 -- 60 5,400 14,058 19,458 201 Lee Road -- 1,500 6,003 -- (2) 1,500 6,001 7,501 Metrowest I 3,530 1,344 7,618 -- 96 1,344 7,714 9,058 One Winter Park 2,354 1,000 3,652 -- 5 1,000 3,657 4,657 The Palladium -- 1,400 5,555 -- -- 1,400 5,555 6,955 2699 Pine Street -- 4,400 30,118 -- (1) 4,400 30,117 34,517 Premiere Point North -- 800 3,061 -- -- 800 3,061 3,861 Premiere Point South -- 600 3,429 -- 20 600 3,449 4,049 Shoppes of Interlachen 2,105 1,100 2,716 -- 4 1,100 2,720 3,820 Signature Plaza -- 4,300 30,611 -- 129 4,300 30,740 35,040 Skyline Center -- 700 2,773 -- 4 700 2,777 3,477 Southwest Corporate 3,717 991 5,613 -- -- 991 5,613 6,604 Center Blue Ridge II -- 434 -- 29 1,433 463 1,433 1,896 2500 Blue Ridge -- 722 4,552 -- 871 722 5,423 6,145 Qualex -- 879 3,522 -- 1 879 3,523 4,402 Fairfield II -- 910 3,647 -- 367 910 4,014 4,924 3600 Glenwood Avenue -- -- -- -- 10,994 -- 10,994 10,994 ONCC - 3645 Trust Drive 1,778 520 2,949 -- 50 520 2,999 3,519 4020 Roxboro -- 675 2,708 -- 49 675 2,757 3,432 4101 Roxboro -- 1,059 4,243 -- 186 1,059 4,429 5,488 Fairfield I -- 805 3,227 -- 105 805 3,332 4,137 4201 Building -- 1,204 7,715 -- 2,388 1,204 10,103 11,307 4301 Building -- 900 7,425 -- 607 900 8,032 8,932 4401 Building -- 1,249 8,929 -- 4,806 1,249 13,735 14,984 4501 Building -- 785 4,448 -- 675 785 5,123 5,908 4800 North Park -- 2,678 17,673 -- 233 2,678 17,906 20,584 4900 North Park 1,486 770 1,989 -- 230 770 2,219 2,989 5000 North Park -- 1,010 4,697 -- 879 1,010 5,576 6,586 5200 Green's Dairy Road 593 169 959 -- 17 169 976 1,145 5220 Green's Dairy Road 1,072 382 2,165 -- 60 382 2,225 2,607 5301 Departure Drive 2,466 882 5,000 -- 6 882 5,006 5,888 4000 Aerial Center -- 541 2,163 -- 5 541 2,168 2,709 Amica -- 289 1,544 -- 52 289 1,596 1,885 Arrowwood -- 955 3,406 -- 202 955 3,608 4,563 Aspen -- 560 2,104 -- 244 560 2,348 2,908 Birchwood -- 201 911 -- (4) 201 907 1,108 Cedar East -- 563 2,498 -- 238 563 2,736 3,299 Cedar West -- 563 2,487 -- 380 563 2,867 3,430 Colony Corporate Center -- 613 3,296 -- 442 613 3,738 4,351 Concourse -- 986 12,069 -- 465 986 12,534 13,520 Cape Fear -- 131 -- -- 2,586 131 2,586 2,717 Creekstone Crossing -- 728 3,891 -- 50 728 3,941 4,669 Cotton Building -- 460 1,844 -- 113 460 1,957 2,417 Catawba -- 125 -- -- 1,897 125 1,897 2,022 Cottonwood -- 609 3,253 -- 8 609 3,261 3,870 Cypress -- 567 1,747 -- 104 567 1,851 2,418 Dogwood -- 766 2,790 -- (4) 766 2,786 3,552 EPA Annex/ -- 2,601 10,920 -- 91 2,601 11,011 13,612 Administration Expressway One -- 242 -- 4 1,854 246 1,854 2,100 Warehouse Global Software -- 465 5,358 -- 2,127 465 7,485 7,950 Hawthorn -- 904 3,782 -- 73 904 3,855 4,759 Holiday Inn -- 867 2,748 -- 123 867 2,871 3,738 Holly -- 300 1,170 -- 18 300 1,188 1,488 Healthsource -- 1,294 10,593 10 1,609 1,304 12,202 13,506 Highwoods Tower -- 203 16,948 -- 478 203 17,426 17,629 Ironwood -- 319 1,276 -- 215 319 1,491 1,810 Kaiser -- 133 3,625 -- 28 133 3,653 3,786 Life on Which Accumulated Date of Depreciation Description Depreciation Construction is Computed - ------------------------- -------------- -------------- ------------- EMI/Sparrow 163 1982 5-40 yrs. 100 Winner's Circle 8 1987 5-40 yrs. Campus Crusade 52 1990 5-40 yrs. ACP-W 99 1966-1992 5-40 yrs. Corporate Square 9 1971 5-40 yrs. Executive Point Towers 38 1978 5-40 yrs. Lakeview Office Park 74 1975 5-40 yrs. 201 Lee Road 31 1974 5-40 yrs. Metrowest I 260 1988 5-40 yrs. One Winter Park 19 1982 5-40 yrs. The Palladium 29 1988 5-40 yrs. 2699 Pine Street 158 1980 5-40 yrs. Premiere Point North 16 1983 5-40 yrs. Premiere Point South 18 1983 5-40 yrs. Shoppes of Interlachen 14 1987 5-40 yrs. Signature Plaza 164 1986 5-40 yrs. Skyline Center 15 1985 5-40 yrs. Southwest Corporate 185 1984 5-40 yrs. Center Blue Ridge II 405 1988 5-40 yrs. 2500 Blue Ridge 441 1982 5-40 yrs. Qualex 216 1985 5-40 yrs. Fairfield II 250 1989 5-40 yrs. 3600 Glenwood Avenue 218 1986 5-40 yrs. ONCC - 3645 Trust Drive 97 1984 5-40 yrs. 4020 Roxboro 168 1989 5-40 yrs. 4101 Roxboro 269 1984 5-40 yrs. Fairfield I 206 1987 5-40 yrs. 4201 Building 1,499 1991 5-40 yrs. 4301 Building 554 1989 5-40 yrs. 4401 Building 2,132 1987 5-40 yrs. 4501 Building 591 1985 5-40 yrs. 4800 North Park 1,618 1985 5-40 yrs. 4900 North Park 210 1984 5-40 yrs. 5000 North Park 640 1980 5-40 yrs. 5200 Green's Dairy Road 36 1984 5-40 yrs. 5220 Green's Dairy Road 72 1984 5-40 yrs. 5301 Departure Drive 165 1984 5-40 yrs. 4000 Aerial Center 56 1992 5-40 yrs. Amica 191 1983 5-40 yrs. Arrowwood 389 1979 5-40 yrs. Aspen 234 1980 5-40 yrs. Birchwood 100 1983 5-40 yrs. Cedar East 287 1981 5-40 yrs. Cedar West 319 1981 5-40 yrs. Colony Corporate Center 329 1985 5-40 yrs. Concourse 1,178 1986 5-40 yrs. Cape Fear 1,262 1980 5-40 yrs. Creekstone Crossing 263 1990 5-40 yrs. Cotton Building 99 1972 5-40 yrs. Catawba 1,020 1980 5-40 yrs. Cottonwood 296 1983 5-40 yrs. Cypress 208 1980 5-40 yrs. Dogwood 248 1983 5-40 yrs. EPA Annex/ 796 1966 5-40 yrs. Administration Expressway One 343 1990 5-40 yrs. Warehouse Global Software 557 1996 5-40 yrs. Hawthorn 1,701 1987 5-40 yrs. Holiday Inn 259 1984 5-40 yrs. Holly 121 1984 5-40 yrs. Healthsource 493 1996 5-40 yrs. Highwoods Tower 2,986 1991 5-40 yrs. Ironwood 185 1978 5-40 yrs. Kaiser 1,175 1988 5-40 yrs.
F-32
Cost Capitalized Subsequent Gross Amount at Initial Cost to Acquisition Which Carried at Close of Period ------------ -------------- -------------------------------- Building & Building & Building & Description Encumbrance Land Improvements Land Improvements Land Improvements Total (16) - --------------------------- ------------- -------- -------------- ------ -------------- -------- -------------- ------------ Laurel -- 884 2,537 -- 13 884 2,550 3,434 Lake Plaza East -- 856 4,893 -- 644 856 5,537 6,393 Leatherwood -- 213 851 -- 243 213 1,094 1,307 MSA -- 717 3,418 -- 1,297 717 4,715 5,432 North Park Building One -- 405 -- -- 3,273 405 3,273 3,678 Phase I 1,988 768 4,353 -- 43 768 4,396 5,164 W Building 3,789 1,163 6,592 -- 279 1,163 6,871 8,034 Pamlico -- 269 -- 20 10,868 289 10,868 11,157 Phoenix -- 394 2,019 -- 50 394 2,069 2,463 Rexwoods Center (4) 775 -- 103 3,686 878 3,686 4,564 Rexwoods II -- 355 -- 7 1,823 362 1,823 2,185 Rexwoods III -- 886 -- 34 2,858 920 2,858 3,778 Rexwoods IV -- 586 -- -- 3,616 586 3,616 4,202 Riverbirch -- 448 -- 21 4,231 469 4,231 4,700 Situs I -- 693 2,917 -- 1,473 693 4,390 5,083 Six Forks Center I -- 666 2,688 -- 262 666 2,950 3,616 Six Forks Center II -- 1,086 4,370 -- 336 1,086 4,706 5,792 Six Forks Center III -- 862 4,444 -- 93 862 4,537 5,399 Smoketree Tower -- 2,353 11,922 -- 1,959 2,353 13,881 16,234 South Square I (4) 606 3,785 -- 415 606 4,200 4,806 South Square II -- 525 4,742 -- 159 525 4,901 5,426 Sycamore -- 255 -- -- 6,057 255 6,057 6,312 Triangle Business Center (4) 377 4,004 -- 660 377 4,664 5,041 Building 2A Triangle Business Center (4) 118 1,225 -- 192 118 1,417 1,535 Building 2B Triangle Business Center (4) 409 5,349 -- 571 409 5,920 6,329 Building 3 Triangle Business Center (4) 414 6,301 -- 243 414 6,544 6,958 Building 7 Willow Oak -- 458 4,685 -- 1,769 458 6,454 6,912 Highwoods Airport -- 708 4,374 -- 1,140 708 5,514 6,222 Center East Cary Street Building -- 171 685 -- 48 171 733 904 DEQ Office -- 1,324 5,305 -- 154 1,324 5,459 6,783 DEQ Tech Center -- 541 2,166 -- 100 541 2,266 2,807 Grove Park I -- 349 2,685 -- 86 349 2,771 3,120 Highwoods One -- 1,846 8,613 -- 1,935 1,846 10,548 12,394 Highwoods Two -- 785 5,170 -- 756 785 5,926 6,711 Liberty Mutual Building 3,431 1,205 4,819 -- 111 1,205 4,930 6,135 Markel American (5) 585 2,347 -- 114 585 2,461 3,046 Aetna -- 2,163 8,659 -- 140 2,163 8,799 10,962 Proctor-Silex (5) 1,086 4,344 -- 56 1,086 4,400 5,486 One Shockoe Plaza -- -- -- -- 19,232 -- 19,232 19,232 Westshore I -- 358 1,431 -- 23 358 1,454 1,812 Westshore II -- 545 2,181 -- 30 545 2,211 2,756 West Shore III -- 961 3,601 -- 592 961 4,193 5,154 Innsbrook Tech I -- 264 1,058 -- 7 264 1,065 1,329 Virginia Center -- 1,438 5,858 -- 257 1,438 6,115 7,553 Vantage Place II -- 203 811 -- 79 203 890 1,093 Vantage Place IV -- 233 931 -- 30 233 961 1,194 Vantage Place I -- 235 940 -- 31 235 971 1,206 Vantage Place III -- 218 873 -- 183 218 1,056 1,274 Vantage Point -- 1,089 4,354 -- 170 1,089 4,524 5,613 2828 Coral Way Building -- 1,100 4,303 -- 6 1,100 4,309 5,409 Atrium at Coral Gables -- 3,000 16,528 -- 29 3,000 16,557 19,557 Atrium West 4,242 1,300 5,598 -- -- 1,300 5,598 6,898 Avion Building -- 800 4,357 -- -- 800 4,357 5,157 Centrum Plaza 2,861 1,000 3,574 -- -- 1,000 3,574 4,574 Comeau Building -- 460 3,719 -- -- 460 3,719 4,179 Corporate Square -- 1,750 3,402 -- 22 1,750 3,424 5,174 Dadeland Office 6,579 3,700 18,571 -- 51 3,700 18,622 22,322 Complex Desigh Center Plaza -- 1,000 4,040 -- 3 1,000 4,043 5,043 Doral Financial Plaza -- 3,423 13,692 -- -- 3,423 13,692 17,115 1800 Eller Drive -- -- 9,724 -- 71 -- 9,795 9,795 Emerald Hills Plaza I -- 1,450 5,861 -- 13 1,450 5,874 7,324 Life on Which Accumulated Date of Depreciation Description Depreciation Construction is Computed - --------------------------- -------------- -------------- ------------- Laurel 227 1982 5-40 yrs. Lake Plaza East 560 1984 5-40 yrs. Leatherwood 127 1979 5-40 yrs. MSA 220 1996 5-40 yrs. North Park Building One 63 1997 5-40 yrs. Phase I 146 1981 5-40 yrs. W Building 220 1983 5-40 yrs. Pamlico 2,057 1980 5-40 yrs. Phoenix 191 1990 5-40 yrs. Rexwoods Center 836 1990 5-40 yrs. Rexwoods II 191 1993 5-40 yrs. Rexwoods III 473 1992 5-40 yrs. Rexwoods IV 417 1994 5-40 yrs. Riverbirch 1,050 1987 5-40 yrs. Situs I 274 1996 5-40 yrs. Six Forks Center I 162 1982 5-40 yrs. Six Forks Center II 269 1983 5-40 yrs. Six Forks Center III 386 1987 5-40 yrs. Smoketree Tower 1,373 1984 5-40 yrs. South Square I 407 1988 5-40 yrs. South Square II 448 1989 5-40 yrs. Sycamore 82 1997 5-40 yrs. Triangle Business Center 609 1984 5-40 yrs. Building 2A Triangle Business Center 144 1984 5-40 yrs. Building 2B Triangle Business Center 785 1988 5-40 yrs. Building 3 Triangle Business Center 593 1988 5-40 yrs. Building 7 Willow Oak 803 1995 5-40 yrs. Highwoods Airport 83 1997 5-40 yrs. Center East Cary Street Building 20 1987 5-40 yrs. DEQ Office 296 1991 5-40 yrs. DEQ Tech Center 123 1991 5-40 yrs. Grove Park I 16 1997 5-40 yrs. Highwoods One 511 1996 5-40 yrs. Highwoods Two 48 1997 5-40 yrs. Liberty Mutual Building 129 1990 5-40 yrs. Markel American 188 1988 5-40 yrs. Aetna 343 1989 5-40 yrs. Proctor-Silex 270 1986 5-40 yrs. One Shockoe Plaza 508 1996 5-40 yrs. Westshore I 61 1995 5-40 yrs. Westshore II 86 1995 5-40 yrs. West Shore III 35 1997 5-40 yrs. Innsbrook Tech I 65 1991 5-40 yrs. Virginia Center 509 1985 5-40 yrs. Vantage Place II 69 1987 5-40 yrs. Vantage Place IV 60 1988 5-40 yrs. Vantage Place I 62 1987 5-40 yrs. Vantage Place III 65 1988 5-40 yrs. Vantage Point 294 1990 5-40 yrs. 2828 Coral Way Building 23 1985 5-40 yrs. Atrium at Coral Gables 87 1984 5-40 yrs. Atrium West 29 1983 5-40 yrs. Avion Building 14 1985 5-40 yrs. Centrum Plaza 19 1988 5-40 yrs. Comeau Building 20 1926 5-40 yrs. Corporate Square 18 1981 5-40 yrs. Dadeland Office 98 1972 5-40 yrs. Complex Desigh Center Plaza 21 1982 5-40 yrs. Doral Financial Plaza 14 1987 5-40 yrs. 1800 Eller Drive 51 1983 5-40 yrs. Emerald Hills Plaza I 31 1979 5-40 yrs.
F-33
Cost Capitalized Subsequent Gross Amount at Initial Cost to Acquisition Which Carried at Close of Period ------------ -------------- -------------------------------- Building & Building & Building & Description Encumbrance Land Improvements Land Improvements Land Improvements Total (16) - --------------------------- --------------- -------- -------------- ------ -------------- -------- -------------- ------------ Emerald Hills Plaza II -- 1,450 7,095 -- -- 1,450 7,095 8,545 Gulf Atlantic Center -- -- 11,237 -- -- -- 11,237 11,237 Palm Beach Gardens -- 1,000 4,554 -- 12 1,000 4,566 5,566 Office Park Pine Island Commons 3,089 1,750 4,216 -- 6 1,750 4,222 5,972 Venture Corporate -- 1,867 7,532 -- 44 1,867 7,576 9,443 Center I Venture Corporate -- 1,867 8,906 -- 1 1,867 8,907 10,774 Center II Venture Corporate -- 1,867 8,838 -- -- 1,867 8,838 10,705 Center III 5400 Gray Street -- 350 295 -- -- 350 295 645 Atrium -- 1,639 9,286 -- 61 1,639 9,347 10,986 Benjamin Center #7 -- 296 1,678 -- 41 296 1,719 2,015 Benjamin Center #9 -- 300 1,699 -- 1 300 1,700 2,000 Crossroads Office Center -- 561 3,375 -- 27 561 3,402 3,963 Cypress West 2,139 615 5,043 -- 215 615 5,258 5,873 Day Care Center -- 61 347 -- 24 61 371 432 Expo Building -- 171 969 -- 21 171 990 1,161 Feathersound II 2,319 800 7,362 -- 168 800 7,530 8,330 Fireman's Fund Building -- 500 4,148 -- 33 500 4,181 4,681 Grand Plaza (Office) -- 1,100 7,752 -- 29 1,100 7,781 8,881 Grand Plaza (Retail) -- 840 10,754 -- -- 840 10,754 11,594 Horizon (2) -- 6,174 -- -- -- 6,174 6,174 Lakeside (2) -- 7,272 -- 5 -- 7,277 7,277 Lakepoint (2) 2,100 31,390 -- 34 2,100 31,424 33,524 Lakeside Technology -- 1,325 8,164 -- 32 1,325 8,196 9,521 Center Mariner Square 2,508 650 2,855 -- -- 650 2,855 3,505 Parkside (2) -- 9,285 -- 27 -- 9,312 9,312 Pavillion (2) -- 16,183 -- -- -- 16,183 16,183 Progressive Insurance -- 1,366 7,742 -- 1,370 1,366 9,112 10,478 Registry I -- 744 4,216 -- 97 744 4,313 5,057 Registry II -- 908 5,147 -- 166 908 5,313 6,221 Registry Square -- 344 1,951 -- -- 344 1,951 2,295 Sabal Business Center I -- 375 2,127 -- -- 375 2,127 2,502 Sabal Business Center II 1,235 342 1,935 -- -- 342 1,935 2,277 Sabal Business Center III 852 290 1,642 -- 16 290 1,658 1,948 Sabal Business Center IV 2,107 819 4,638 -- -- 819 4,638 5,457 Sabal Business Center V 2,532 1,026 5,813 -- 3 1,026 5,816 6,842 Sabal Business Center VI 5,919 1,609 9,116 -- 38 1,609 9,154 10,763 Sabal Business 4,815 1,519 8,605 -- 32 1,519 8,637 10,156 Center VII Sabal Lake Building -- 572 3,241 -- 142 572 3,383 3,955 Sabal Park Plaza -- 611 3,460 -- 6 611 3,466 4,077 Sabal Tech Center -- 548 3,107 -- -- 548 3,107 3,655 Spectrum (2) 1,450 14,315 -- -- 1,450 14,315 15,765 Sunrise Office Center -- 422 3,513 -- -- 422 3,513 3,935 Telecom Technology -- 1,250 11,336 -- 172 1,250 11,508 12,758 Center Tower Place -- 3,194 18,098 -- 104 3,194 18,202 21,396 Zurn Building -- 795 4,537 -- 29 795 4,566 5,361 Blair Stone Building -- 1,550 33,262 -- -- 1,550 33,262 34,812 Stratford -- 2,777 11,459 -- 105 2,777 11,564 14,341 Chesapeake (4) 1,236 4,944 -- 8 1,236 4,952 6,188 Forsyth I 1,963 326 1,850 -- 450 326 2,300 2,626 370 Knollwood (3) 1,819 7,451 -- 459 1,819 7,910 9,729 380 Knollwood (3) 2,977 11,912 -- 687 2,977 12,599 15,576 3288 Robinhood -- 290 1,159 -- 85 290 1,244 1,534 101 S. Stratford-First -- 1,205 6,826 -- -- 1,205 6,826 8,031 Union Consolidated Center I -- 625 2,130 -- -- 625 2,130 2,755 Consolidated Center II -- 625 4,380 -- -- 625 4,380 5,005 Consolidated Center III -- 680 3,525 -- -- 680 3,525 4,205 Consolidated Center IV -- 376 1,629 -- -- 376 1,629 2,005 Champion-Madison -- 1,725 6,280 -- -- 1,725 6,280 8,005 Park II Life on Which Accumulated Date of Depreciation Description Depreciation Construction is Computed - --------------------------- -------------- -------------- ------------- Emerald Hills Plaza II 37 1979 5-40 yrs. Gulf Atlantic Center 12 1986 5-40 yrs. Palm Beach Gardens 24 1984 5-40 yrs. Office Park Pine Island Commons 22 1985 5-40 yrs. Venture Corporate 41 1982 5-40 yrs. Center I Venture Corporate 47 1982 5-40 yrs. Center II Venture Corporate 46 1982 5-40 yrs. Center III 5400 Gray Street 2 1973 5-40 yrs. Atrium 309 1989 5-40 yrs. Benjamin Center #7 70 1991 5-40 yrs. Benjamin Center #9 56 1989 5-40 yrs. Crossroads Office Center 18 1981 5-40 yrs. Cypress West 27 1985 5-40 yrs. Day Care Center 12 1986 5-40 yrs. Expo Building 32 1981 5-40 yrs. Feathersound II 39 1986 5-40 yrs. Fireman's Fund Building 22 1982 5-40 yrs. Grand Plaza (Office) 41 1985 5-40 yrs. Grand Plaza (Retail) 57 N/A 5-40 yrs. Horizon 32 1980 5-40 yrs. Lakeside 38 1978 5-40 yrs. Lakepoint 165 1986 5-40 yrs. Lakeside Technology 43 1984 5-40 yrs. Center Mariner Square 15 1973 5-40 yrs. Parkside 49 1979 5-40 yrs. Pavillion 85 1982 5-40 yrs. Progressive Insurance 255 1988 5-40 yrs. Registry I 149 1985 5-40 yrs. Registry II 184 1987 5-40 yrs. Registry Square 64 1988 5-40 yrs. Sabal Business Center I 70 1982 5-40 yrs. Sabal Business Center II 64 1984 5-40 yrs. Sabal Business Center III 55 1984 5-40 yrs. Sabal Business Center IV 153 1984 5-40 yrs. Sabal Business Center V 193 1988 5-40 yrs. Sabal Business Center VI 301 1988 5-40 yrs. Sabal Business 284 1990 5-40 yrs. Center VII Sabal Lake Building 114 1986 5-40 yrs. Sabal Park Plaza 114 1987 5-40 yrs. Sabal Tech Center 102 1989 5-40 yrs. Spectrum 75 1984 5-40 yrs. Sunrise Office Center 18 1974 5-40 yrs. Telecom Technology 60 1991 5-40 yrs. Center Tower Place 599 1988 5-40 yrs. Zurn Building 24 1983 5-40 yrs. Blair Stone Building 175 1994 5-40 yrs. Stratford 841 1991 5-40 yrs. Chesapeake 356 1993 5-40 yrs. Forsyth I 108 1985 5-40 yrs. 370 Knollwood 639 1994 5-40 yrs. 380 Knollwood 998 1990 5-40 yrs. 3288 Robinhood 110 1989 5-40 yrs. 101 S. Stratford-First 22 1986 5-40 yrs. Union Consolidated Center I 7 1983 5-40 yrs. Consolidated Center II 14 1983 5-40 yrs. Consolidated Center III 11 1989 5-40 yrs. Consolidated Center IV 5 1989 5-40 yrs. Champion-Madison 20 1993 5-40 yrs. Park II
F-34
Cost Capitalized Subsequent Initial Cost to Acquisition ------------ -------------- Building & Building & Description Encumbrance Land Improvements Land Improvements - --------------------------- ------------- -------- -------------- --------------------- -------------- USAIR Buildings -- 2,625 14,889 -- -- UCC Building 03 -- 429 1,771 -- 102 UCC Building 04 -- 514 2,058 -- 150 UCC SR-1 -- 276 1,155 -- 55 UCC SR-2 01/02 -- 215 859 -- 113 UCC SR-3 -- 167 668 -- 19 UCC W-1 -- 203 812 -- -- UCC W-2 -- 196 786 -- 8 BMF Warehouse (1) 795 3,181 -- -- LUWA Bahnson Building -- 346 1,384 -- 1 WP-3 & 4 (1) 120 480 -- 2 WP-11 (1) 393 1,570 -- 57 WP-12 (1) 382 1,531 -- 34 WP-13 (1) 297 1,192 -- 32 Fairchild Building -- 640 2,577 -- -- WP-5 -- 178 590 -- 265 One Point Royal -- -- 1 -- -- EKA Chemicals -- -- 1 -- -- Glenlakes -- -- -- 2,908 -- Northern Telecom -- -- (2) -- -- Newpoint Place III -- -- -- 628 -- Newpoint Place -- -- -- 1,550 -- Atlanta Tradeport -- -- -- 8,052 -- NationsFord Business -- 1,206 -- 5 -- Park Center Point VI -- -- -- 265 -- Airport Center Drive -- 1,600 -- (565) (10) -- Airpark East Expansion -- -- -- 1,280 -- Airpark East Land -- 1,932 -- (616) (8) -- Airpark North Land -- 804 -- -- -- 385 Building 1 -- 1,413 1,401 -- 81 385 Land -- -- -- 1,800 -- Patewood VI -- -- -- -- 22 Belfort Park Land Annex -- -- -- 2,600 -- Southwind Land Annex -- -- -- 679 -- Highwoods Plaza at -- -- -- -- 29 International Place International Place -- -- -- 1,566 -- Phase III Ayers Land -- -- -- 1,164 -- Cool Springs - -- -- -- 3,089 -- Building II Grassmere -- 1,779 -- -- -- Ridge Development -- 1,960 -- (1,531) (11) -- Grassmere/Thousdale -- 760 -- -- -- Land Westwood South -- -- -- 2,106 -- Maitland Building B -- -- -- 1,115 -- Maitland Building C -- -- -- 743 -- Pine Street - Building II -- -- -- 2,000 -- Pine Street Parking -- -- -- 4,000 -- Capital Center -- 851 -- (629) (9) -- Clintrials -- -- -- -- 209 Highwoods Health Club -- 142 564 -- (26) Highwoods Office -- 1,555 49 (839) (7) -- Center North Highwoods Office -- 2,518 -- -- -- Center South Martin Land -- -- -- 3,409 -- Creekstone Park -- 1,255 -- (1,106) (6) -- North Park - Wake Forest -- 962 -- 132 -- - Land Research Commons -- 1,349 -- -- -- Rexwoods V -- -- -- -- 3 Highwoods Distribution -- -- -- 3,270 -- Center East Shore One -- -- -- 114 -- Gross Amount at Which Carried at Close of Period -------------------------------- Life on Which Building & Accumulated Date of Depreciation Description Land Improvements Total (16) Depreciation Construction is Computed - --------------------------- -------- -------------- ------------- -------------- -------------- ------------- USAIR Buildings 2,625 14,889 17,514 47 1970-1987 5-40 yrs. UCC Building 03 429 1,873 2,302 136 1985 5-40 yrs. UCC Building 04 514 2,208 2,722 170 1986 5-40 yrs. UCC SR-1 276 1,210 1,486 95 1983 5-40 yrs. UCC SR-2 01/02 215 972 1,187 89 1983 5-40 yrs. UCC SR-3 167 687 854 49 1984 5-40 yrs. UCC W-1 203 812 1,015 58 1983 5-40 yrs. UCC W-2 196 794 990 57 1983 5-40 yrs. BMF Warehouse 795 3,181 3,976 229 1986 5-40 yrs. LUWA Bahnson Building 346 1,385 1,731 100 1990 5-40 yrs. WP-3 & 4 120 482 602 35 1988 5-40 yrs. WP-11 393 1,627 2,020 121 1988 5-40 yrs. WP-12 382 1,565 1,947 112 1988 5-40 yrs. WP-13 297 1,224 1,521 87 1988 5-40 yrs. Fairchild Building 640 2,577 3,217 185 1990 5-40 yrs. WP-5 178 855 1,033 117 1995 5-40 yrs. One Point Royal -- 1 1 -- N/A N/A EKA Chemicals -- 1 1 -- N/A N/A Glenlakes 2,908 -- 2,908 -- N/A N/A Northern Telecom -- (2) (2) -- N/A N/A Newpoint Place III 628 -- 628 -- N/A N/A Newpoint Place 1,550 -- 1,550 -- N/A N/A Atlanta Tradeport 8,052 -- 8,052 -- N/A N/A NationsFord Business 1,211 -- 1,211 -- N/A N/A Park Center Point VI 265 -- 265 -- N/A N/A Airport Center Drive 1,035 -- 1,035 -- N/A N/A Airpark East Expansion 1,280 -- 1,280 -- N/A N/A Airpark East Land 1,316 -- 1,316 -- N/A N/A Airpark North Land 804 -- 804 -- N/A N/A 385 Building 1 1,413 1,482 2,895 13 N/A 5-40 yrs. 385 Land 1,800 -- 1,800 -- N/A N/A Patewood VI -- 22 22 -- N/A N/A Belfort Park Land Annex 2,600 -- 2,600 -- N/A N/A Southwind Land Annex 679 -- 679 -- N/A N/A Highwoods Plaza at -- 29 29 -- N/A N/A International Place International Place 1,566 -- 1,566 -- N/A N/A Phase III Ayers Land 1,164 -- 1,164 -- N/A N/A Cool Springs - 3,089 -- 3,089 -- N/A N/A Building II Grassmere 1,779 -- 1,779 -- N/A N/A Ridge Development 429 -- 429 -- N/A N/A Grassmere/Thousdale 760 -- 760 -- N/A N/A Land Westwood South 2,106 -- 2,106 -- N/A N/A Maitland Building B 1,115 -- 1,115 -- N/A N/A Maitland Building C 743 -- 743 -- N/A N/A Pine Street - Building II 2,000 -- 2,000 -- N/A N/A Pine Street Parking 4,000 -- 4,000 -- N/A N/A Capital Center 222 -- 222 -- N/A N/A Clintrials -- 209 209 -- N/A N/A Highwoods Health Club 142 538 680 14 N/A 5-40 yrs. Highwoods Office 716 49 765 13 N/A 5-40 yrs. Center North Highwoods Office 2,518 -- 2,518 -- N/A N/A Center South Martin Land 3,409 -- 3,409 -- N/A N/A Creekstone Park 149 -- 149 -- N/A N/A North Park - Wake Forest 1,094 -- 1,094 -- N/A N/A - Land Research Commons 1,349 -- 1,349 -- N/A N/A Rexwoods V -- 3 3 -- N/A N/A Highwoods Distribution 3,270 -- 3,270 -- N/A N/A Center East Shore One 114 -- 114 -- N/A N/A
F-35
Cost Capitalized Subsequent Initial Cost to Acquisition ------------ -------------- Building & Building & Description Encumbrance Land Improvements Land Improvements - --------------------------- ------------- ----------- -------------- ----------------- -------------- East Shore Two -- -- -- 907 -- End of Cox Road Land -- 966 -- -- -- Sadler & Cox Land -- -- -- 296 -- Development -- 26 -- -- -- Opportunity Strip Virginia Mutual -- -- -- 900 -- Tampa Fairgrounds -- 1,412 5,647 -- 42 Fireman's fund Land -- -- -- 1,000 -- Tampa Bay Land -- -- -- 2,000 -- Sabal Pavilion - Phase II -- -- -- 661 -- Sabal Industrial -- -- -- 301 -- Park Land West Point -- 1,759 -- (518)(12) -- ------ ----- ----- ----- -- Business Park $365,276 $2,051,331 $ 43,493 $143,311 ======== ========== ========= ======== Gross Amount at Which Carried at Close of Period -------------------------------- Life on Which Building & Accumulated Date of Depreciation Description Land Improvements Total (16) Depreciation Construction is Computed - --------------------------- ----------- -------------- ------------ -------------- -------------- ------------- East Shore Two 907 -- 907 -- N/A N/A End of Cox Road Land 966 -- 966 -- N/A N/A Sadler & Cox Land 296 -- 296 -- N/A N/A Development 26 -- 26 -- N/A N/A Opportunity Strip Virginia Mutual 900 -- 900 -- N/A N/A Tampa Fairgrounds 1,412 5,689 7,101 6 N/A N/A Fireman's fund Land 1,000 -- 1,000 -- N/A N/A Tampa Bay Land 2,000 -- 2,000 -- N/A N/A Sabal Pavilion - Phase II 661 -- 661 -- N/A N/A Sabal Industrial 301 -- 301 -- N/A N/A Park Land West Point 1,241 -- 1,241 -- N/A N/A ----- ----- ----- -- Business Park $408,769 $2,194,641 $2,603,410 $86,062 ======== ========== ========== =======
- -------- (1) These assets are pledged as collateral for a $5,668,000 first mortgage loan. (2) These assets are pledged as collateral for a $43,465,000 first mortgage loan. (3) These assets are pledged as collateral for an $39,630,000 first mortgage loan. (4) These assets are pledged as collateral for a $30,951,000 first mortgage loan. (5) These assets are pledged as collateral for a $4,850,000 first mortgage loan. (6) Reflects land transferred to the Willow Oak property, Highwoods Centre property, Sycamore property. (7) Reflects land transferred to the Global property, Red Oak property. (8) Reflects land transferred to Hewlett Packard property, Inacom property, East Building D property, East Building 6 property. (9) Reflects land transferred to Situs II property. (10) Reflects land transferred to Airport Center I property. (11) Reflects land transferred to Lakeview Ridge II property, Lakeview Ridge 3 property. (12) Reflects sale of land. (13) Patewood III and IV are considered one property for encumbrance purposes. (14) The aggregate cost for Federal Income Tax purposes was approximately $1,828,000,000. F-36 HIGHWOODS PROPERTIES, INC. NOTE TO SCHEDULE III (in thousands) As of December 31, 1997, 1996 and 1995 A summary of activity for real estate and accumulated depreciation is as follows:
December 31, --------------------------------------------- 1997 1996 1995 -------------- -------------- ----------- Real Estate: Balance at beginning of year ........................ $1,390,079 $ 598,536 $218,699 Additions: Acquisitions, development and improvements ......... 1,216,687 792,697 381,936 Cost of real estate sold ............................ (3,356) (1,154) (2,099) ---------- ---------- -------- Balance at close of year (a) .......................... $2,603,410 $1,390,079 $598,536 ========== ========== ======== Accumulated Depreciation: Balance at beginning of year ........................ $ 42,194 $ 21,452 $ 11,003 Depreciation expense ................................ 44,002 20,752 10,483 Real estate sold .................................... (134) (10) (34) ---------- ---------- -------- Balance at close of year (b) ........................ $ 86,062 $ 42,194 $ 21,452 ========== ========== ========
- ---------- (a) Reconciliation of total cost to balance sheet caption at December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ------------- ------------- ----------- Total per schedule III ...................... $2,603,410 $1,390,079 $598,536 Construction in progress exclusive of land included in Schedule III .......... 95,387 28,859 15,508 Furniture, fixtures and equipment ........... 3,362 2,096 1,288 ---------- ---------- -------- Total real estate assets at cost ............ $2,702,159 $1,421,034 $615,332 ========== ========== ========
(b) Reconciliation of total accumulated depreciation to balance sheet caption at December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ---------- ---------- ---------- Total per schedule III ............................................ $86,062 $42,195 $21,452 Accumulated depreciation -- furniture, fixtures and equipment...... 1,443 965 814 ------- ------- ------- Total accumulated depreciation .................................... $87,505 $43,160 $22,266 ======= ======= =======
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