UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A-1
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CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 14, 1997
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ROYALE INVESTMENTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Minnesota 0-20047 41-1691930
--------- ------- ----------
(State or other (Commission (IRS Employer
jurisdiction of incorporation) File Number Identification Number)
One Logan Square, Suite 1105
Philadelphia, PA 19103
----------------------
(Address of principal executive offices) (Zip Code)
(215) 567-1800
--------------
Registrant's telephone number, including area code)
Royale Investments, Inc.
3430 List Place
Minneapolis, MN 55416-4547
(Former name or former address, if changed since last report)
Item 1. Changes in Control of Registrant
On October 14, 1997, Royale Investments, Inc. (the "Company"), H/SIC
Corporation, a Delaware corporation ("H/SIC"), Strategic Facility Investors,
Inc., a Delaware corporation ("Strategic"), the sole general partner of Blue
Bell Investment Company, L.P., a Delaware limited partnership ("Blue Bell,
L.P."), South Brunswick Investment Company, LLC, a New Jersey limited liability
company ("SBIC"), a general partner of South Brunswick Investors, L.P., a
Delaware limited partnership ("South Brunswick, L.P."), ComCourt Investment
Corporation, a Pennsylvania corporation ("ComCourt Corporation"), the sole
general partner of ComCourt Investors, L.P., a Delaware limited partnership
("ComCourt, L.P."), and Gateway Shannon Development Corporation, a Pennsylvania
corporation ("Gateway"), the sole general partner of 6385 Flank Drive, L.P., a
Pennsylvania limited partnership ("Flank, L.P."), completed a number of
transactions (collectively, the "Shidler Transactions") pursuant to the
Formation/Contribution Agreement dated September 7, 1997, as amended by the
Amendment thereto dated as of October 13, 1997 (collectively, the "Formation
Agreement"). H/SIC, Strategic and ComCourt Corporation are each 50% owned by Jay
H. Shidler ("Shidler") and Clay W. Hamlin, III ("Hamlin"). Gateway is owned by
Mr. Hamlin. Although the Shidler Transactions involved a number of properties
and partnerships and were effected by a series of intermediate steps, the
Shidler Transactions were negotiated and effected as a unitary transaction in
which one part would not have been done without the other and, in effect,
constituted as described below the acquisition ("Acquisition") by the Company of
an interest in a Delaware limited partnership, FCO, L.P. ("FCO"), formed to
acquire a portfolio of ten properties ("Shidler Acquisition Properties")
representing the Mid-Atlantic suburban office operations of The Shidler Group, a
national real estate investment firm.
Pursuant to the Shidler Transactions, the Company became the sole general
partner of FCO, and FCO acquired all of the limited partnership interests in
Blue Bell, L.P., South Brunswick, L.P., ComCourt, L.P. and Flank, L.P.
(collectively the "Properties Partnerships") except for an 11% limited
partnership interest in Blue Bell, L.P. retained by Shidler Equities, L.P., a
limited partnership in effect controlled by Mr. Shidler and his wife,
Wallette Shidler ("Equities L.P."), and 11% limited partnership interests in
each of ComCourt, L.P. and Flank, L.P. retained by Mr. Hamlin (collectively
the "Retained Interests"). Immediately prior to the acquisition by FCO of
such limited partnership interests, the general partnership interests in the
respective Properties Partnerships held
2
by Strategic, SBIC, ComCourt Corporation and Gateway were converted into limited
partnership interests, and FCO Holdings, Inc. ("Holdings"), a wholly-owned
Delaware subsidiary of the Company, was admitted as the sole general partner of
each of the Properties Partnerships, holding a .1% interest in each of them. The
Company has a 20.6946% interest (before giving effect to the contribution of
Retained Interests) in FCO which it acquired as a result of the contribution by
the Company to FCO of certain limited partnership interests in various of the
Properties Partnerships which had been assigned directly to the Company in
exchange for 600,000 shares of common stock ("Common Shares") of the Company. In
addition, until December 31, 2000, a portion of the Profits (as defined in the
FCO Partnership Agreement) for each fiscal year is to be allocated 19.8% to the
Company as the general partner and 80.2% to all partners (including the Company
as the general partner but not the preferred limited partners holding Preferred
Units (as defined below)).
The Retained Interests are required to be contributed by Equities L.P. and
Hamlin to FCO in November 2000 in consideration for the issuance to them of
limited partnership interests in the form of an aggregate of 282,508 Common
Units (as defined below) and 186,455 Preferred Units.
FCO was formed as a Delaware limited partnership by the Company on
October 9, 1997 for the purpose of effecting the Shidler Transactions. On
October 14, 1997 the Company, as the sole general partner of FCO, and the
limited partners and preferred limited partners named therein entered into a
limited partnership agreement dated that day (the "FCO Partnership
Agreement").
Each of the Properties Partnerships holds one or more suburban office
buildings located in South Brunswick, New Jersey, Blue Bell, Pennsylvania and
Harrisburg, Pennsylvania. The Shidler Acquisition Properties comprise ten
buildings aggregating approximately 1.5 million square feet and in the aggregate
are currently 99.8% leased to major corporate tenants, including Unisys
Corporation, IBM Corporation, Teleport Communications Group, Merck, Hershey
Foods, Pitney-Bowes, Ernst & Young and McGraw-Hill. These leases expire in
various years, commencing in September 1999 and running to June 2009. Six of
these buildings are occupied by single tenants. The Company, through FCO and
Holdings, intends to continue the business of the Properties Partnerships of
owning and leasing commercial office buildings.
3
Immediately prior to the Acquisition, each of the Properties Partnerships
jointly and severally entered into a $100 million principal amount mortgage
financing with Bankers Trust Company pursuant to a Senior Secured Credit
Agreement dated as of October 14, 1997 ("Credit Facility"). Approximately $96.1
million of the proceeds of the Credit Facility was used by entities other than
the Company and FCO to refinance indebtedness of or secured by the assets of the
Properties Partnerships and to pay various costs in connection with the Shidler
Transactions. Approximately $3.9 million of the proceeds of the Credit Facility
were contributed to FCO in connection with the Shidler Transactions. FCO used
approximately $2.9 million of these funds to pay various costs associated with
the Shidler Transactions and retained approximately $1.0 million for working
capital needs. FCO is a joint and several obligor in respect of the Credit
Facility. The Company and Holdings are not obligors with respect to the Credit
Facility, but have pledged certain assets described below to secure repayment of
the Credit Facility. The initial term of the Credit Facility is three years with
the right given to the obligors to extend it, subject to the satisfaction of
conditions precedent thereto, for two successive one year extensions.
Substantially all of the assets of the Properties Partnerships and FCO's and
Holdings' interests in the Properties Partnerships and the Company's interests
in Holdings and FCO have been pledged or mortgaged to secure the Properties
Partnerships' and FCO's joint and several obligations in respect of the Credit
Facility.
For the purposes of the Acquisition, the Properties Partnerships were
treated as having a value of $170 million (before giving effect to the
indebtedness represented by the Credit Facility). For purposes of determining
the consideration to be given in respect of the acquisition by FCO of limited
partnership interests in the Properties Partnerships, limited partner
interests were issued (and will be issued in November 2000 for Retained
Interests) at the rate of one unit for every $5.50 in exchange value (the
"Common Units") and preferred partnership units were issued (and will be
issued in November 2000 for Retained Interests) at a rate of one unit for
every $25.00 in exchange value (the "Preferred Units").
The aggregate consideration issued in the Shidler Transactions by the
Company and FCO on October 14, 1997 to the former general and limited partners
of the Properties Partnerships consisted of (x) 600,000 Common Shares (issued at
a price of $5.50 per share); (y) an aggregate of 2,899,310 Common Units
(including 600,000 Common Units issued to the Company in consideration for
limited partnership interests in the Properties
4
Partnerships acquired by the Company for 600,000 Common Shares and
subsequently contributed by the Company to FCO); and (z) 1,913,545 Preferred
Units in FCO.
Prior to the execution and delivery of the Formation Agreement, there was no
material relationship between the general and limited partners of the Properties
Partnerships and the Company or any of its affiliates.
The nature and amount of consideration given and received by the Company in
the Shidler Transactions was based on its judgment as to the fair market value
of the Shidler Acquisition Properties and the Common Shares at the time the
Formation Agreement was negotiated.
Preferred Units of FCO may be converted on or after October 1, 1999 into
Common Units on the basis of 3.5714 Common Units for each Preferred Unit being
converted plus an amount in cash equal to the accrued Priority Return Amount (as
defined in the FCO Partnership Agreement) in respect of such Preferred Units.
Subject to compliance with the FCO Partnership Agreement, beginning on
September 1, 1998, each limited partner of FCO has the right to require FCO to
redeem all or a portion of the Common Units held by such limited partner. FCO
(or the Company as its general partner) has the right, in its sole discretion,
to deliver to such redeeming limited partner either one Common Share (subject to
anti-dilution adjustment) or a cash payment equal to the then fair market value
of such Common Share (so adjusted) (based on the formula for determining such
value set forth in the FCO Partnership Agreement). Such rights of redemption and
conversion are immediately exercisable upon the happening of a Special Event (as
defined in the FCO Partnership Agreement). The redemption of Common Units for
Common Shares will have the effect of increasing the Company's interest in FCO.
The right to receive Common Shares upon exercise of such right of redemption
is subject to compliance by the Company with a number of significant conditions
precedent including compliance with the Company's charter, all requirements
under the Internal Revenue Code of 1986, as amended, applicable to real estate
investment trusts, the Minnesota Business Corporation Act or any other law then
in effect and any applicable rule or policy of any stock exchange or
self-regulatory organization.
5
The following table sets forth the interests as of October 14, 1997 of the
general and limited partners of FCO and the holders of Preferred Units (before
giving effect to any contribution of Retained Interests):
Common Percentage Preferred
Units Interest Units
---------- ----------- ----------
General Partner
- ---------------
Royale Investments, Inc. ......................................... 600,000 20.6946%
Limited Partners and Preferred Limited Partners
- -----------------------------------------------
Mr. Shidler....................................................... 2,600 0.0897% 126,079
Shidler Equities, L.P.(1) ........................................ 582,103 20.0773% 457,826
Mr. Hamlin........................................................ 5,235 .1805% 115,334
LBCW Limited Partnership(2) ...................................... 875,284 30.1894% 663,808
CHLB Partnership(3) .............................................. 63,243 2.1813% 41,741
Robert L. Denton.................................................. 129,549 4.4683% 85,502
James K. Davis.................................................... 15,368 .5300% 10,142
John E. deB. Blockey, Trustee of the John E. deB. Blockey Living
Trust dated 9/12/88............................................. 89,549 3.0886% 59,102
- ------------------------
(1) A limited partnership controlled by Jay H. Shidler and his wife, Wallette
Shidler.
(2) A limited partnership controlled by Mr. Hamlin, who is the sole general
partner.
(3) A Pennsylvania family partnership controlled by Mr. Hamlin and his wife,
Lynn B. Hamlin, as the sole general partners.
6
Common Percentage Preferred
Units Interest Units
---------- ----------- ----------
Henry D. Bullock.................................................. 34,718 1.1975% 22,914
Frederick K. Ito.................................................. 17,359 0.5987% 11,457
LGR Investment Fund, Ltd. ........................................ 80,030 2.7603% 52,820
Tiger South Brunswick, L.L.C. .................................... 2,875 .0992% 1,898
Westbrook Real Estate Fund I, L.P. ............................... 336,121 11.5931% 221,840
Westbrook Real Estate Co. Investment Partnership I, L.P. ......... 33,299 1.1485% 21,977
Denise J. Liszewski............................................... 10,227 0.3527% 6,750
Samuel Tang....................................................... 6,818 0.2352% 4,500
David P. Hartsfield............................................... 9,091 0.3136% 6,000
Lawrence J. Taff.................................................. 4,091 0.1411% 2,700
Kimberly F. Aquino................................................ 1,750 0.0604% 1,155
---------- ----------- ----------
2,899,310 100.0000% 1,913,545
Pursuant to the Shidler Transactions, Messrs. Shidler and Hamlin each
acquired 300,000 Common Shares in exchange for partnership interests in various
of the Properties Partnerships. The right to acquire 147,818 of these Common
Shares (73,909 by each of Messrs. Shidler and Hamlin) was acquired by Mr.
Shidler and Mr. Hamlin for cash payments aggregating $813,000 to the persons who
contributed certain of these partnership interests to the Company. The Common
Shares issued to Mr. Shidler and Mr. Hamlin represent, in the aggregate,
approximately 26% of the outstanding Common Shares immediately following the
Shidler Transactions. The Properties Partnerships had prior to the Shidler
Transactions in effect been controlled by Mr. Shidler and Mr. Hamlin.
Concurrently with the closing of the Shidler Transactions and pursuant to
the Formation Agreement, the Company ac-
7
quired for 273,729 Common Shares all of the assets of Crown Advisors, Inc.
("Crown") (including 27,646 Common Shares held by Crown and valued for this
purpose at $5.50 per share). The Common Shares held by Crown were then
retired. Crown had been the advisor to the Company pursuant to a management
contract. All of the outstanding capital stock of Crown was owned by Vernon
R. Beck and John Parsinen, then directors and Chairman of the Board and Chief
Executive Officer and Secretary, respectively, of the Company. The management
contract between Crown and the Company was terminated and the Company entered
into a new management agreement with Glacier Realty, LLC ("Glacier"), a
Minnesota limited liability company all of the interests in which are owned by
Vernon R. Beck and John Parsinen. Under this management agreement, Glacier will
be responsible for the management of the retail properties of the Company.
Upon completion of the Shidler Transactions, Mr. Hamlin, Mr. Shidler,
William H. Walton and Kenneth S. Sweet, Jr., nominees of the persons who
previously directly or indirectly held the general and limited partnership
interests in the Properties Partnerships, were elected directors of the Company
and John Parsinen, Orvin J. Hall and Kurt Schoenrock resigned from the Board of
Directors of the Company. Messrs. Vernon R. Beck, Allen C. Gehrke and Kenneth D.
Wethe continued as directors. The Board of Directors of the Company consists of
seven directors. All directors are elected to serve until they die or retire or
until the next annual meeting of the shareholders of the Company and their
successors are elected and qualified. Mr. Shidler has been elected Chairman of
the Board of Directors of the Company as provided by the Formation Agreement.
8
Upon completion of the Shidler Transactions and prior to the date hereof,
the existing officers of the Company resigned and the following officers of the
Company have been appointed:
Clay W. Hamlin, III ......................... President and Chief Executive
Officer
Vernon R. Beck............................... Vice President
Tony Bernheim................................ Chief Investment Officer
James K. Davis, Jr. ......................... Vice President Acquisitions
Thomas D. Cassel............................. Vice President Finance
David P. Hartsfield.......................... Vice President Operations
& Development
John Parsinen................................ Secretary
Denise Liszewski............................. Vice President and Assistant
Secretary
Mr. Hamlin has entered into a two year employment agreement with FCO which
will be renewed automatically unless terminated by either party upon notice to
the other.
Item 2. Acquisition or Disposition of Assets.
See response to Item 1.
Item 3. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired
The combined financial statements of the Shidler Acquisition
Properties filed as part of this report are included herein on
pages F-12 to F-23.
(b) Pro Forma Financial Information
The pro forma condensed consolidated financial statements of the
Company filed as part of this report are included herein on pages
F-2 to F-11.
(c) Exhibits
9
Exhibit Number Description
- ----------------- -------------------
2.1* Formation/Contribution Agreement dated September 7, 1997, as amended, by and among
Royale Investments, Inc., H/SIC Corporation, a Delaware corporation, Strategic
Facility Investors, Inc., a Delaware corporation, the sole general partner of Blue
Bell Investment Company, L.P., a Delaware limited partnership, South Brunswick
Investment Company, LLC, a New Jersey limited liability company, a general partner
of South Brunswick Investors, L.P., a Delaware limited partnership, ComCourt
Investment Corporation, a Pennsylvania corporation, the sole general partner of
ComCourt Investors, L.P., a Delaware limited partnership, and Gateway Shannon
Development Corporation, a Pennsylvania corporation, the sole general partner of
6385 Flank Drive, L.P., a Pennsylvania limited partnership, with exhibits, as
amended by the Amendment thereto dated October 13, 1997.
2.2* Agreement and Plan of Reorganization between the Company and Crown Advisors, Inc.
2.3* FCO, L.P. Partnership Agreement dated October 14, 1997.
2.4* Amended and Restated Partnership Agreement of Blue Bell Investment Company.
2.5* Amended and Restated Partnership Agreement of South Brunswick Investors, L.P.
2.6* Amended and Restated Partnership Agreement of ComCourt Investors, L.P.
2.7* Amended and Restated Partnership Agreement of 6385 Flank, L.P.
10.1* Clay W. Hamlin III Employment Agreement dated October 14, 1997 with FCO, L.P.
10.2* Registration Rights Agreement dated October 14, 1997 for the benefit of certain
shareholders of the Company.
10
Exhibit Number Description
- ----------------- -------------------
10.3* Management Agreement between the Company and Glacier Realty, LLC.
10.4* Senior Secured Credit Agreement dated October 13, 1997 (Exhibits and Schedules have
been omitted pursuant to Rule 6.01(b)(2) of Regulation S-K. Such Exhibits and
Schedules are listed and described in the Credit Agreement. The Company hereby
agrees to furnish to the Securities and Exchange Commission, upon its request, any
or all such omitted Exhibits and Schedules.)
20.* Press Release dated October 14, 1997.
- ------------------------
* Previously filed
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 22, 1997
ROYALE INVESTMENTS, INC.
By: /s/ Clay W. Hamlin, III
-----------------------
Name: Clay W. Hamlin, III
Title: President and Chief
Executive Officer
By: /s/ Thomas D. Cassel
--------------------
Name: Thomas D. Cassel
Title: Vice President Finance
12
ROYALE INVESTMENTS, INC.
INDEX TO FINANCIAL STATEMENTS
I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Pro Forma Condensed Consolidating Balance Sheet as of September 30, 1997 F-3
Pro Forma Condensed Consolidating Statements of Operations for the Year
Ended December 31, 1996 F-4
Pro Forma Condensed Consolidating Statements of Operations for the
Nine Months Ended September 30, 1997 F-5
Notes and Management's Assumptions to Unaudited Pro Forma Condensed
Consolidating Financial Information F-6
II. THE SHIDLER ACQUISITION PROPERTIES
Report of Independent Public Accountants F-12
Combined Balance Sheets as of December 31, 1995 and 1996 (audited)
and September 30, 1997 (unaudited) F-13
Combined Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 (audited) and for
the nine months ended September 30, 1996 and 1997 (unaudited) F-14
Combined Statements of Partners' Capital for the years
ended December 31, 1994, 1995 and 1996 (audited) and for the
nine months ended September 30, 1997 (unaudited) F-15
Combined Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 (audited) and for the
nine months ended September 30, 1996 and 1997 (unaudited) F-16
Notes to Combined Financial Statements F-17
F-1
ROYALE INVESTMENTS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following financial information sets forth the unaudited pro forma condensed
consolidating balance sheet of Royale Investments, Inc. ("Company") as of
September 30, 1997, and the unaudited pro forma condensed consolidating
statements of operations for the year ended December 31, 1996 and the nine month
period ended September 30, 1997.
The unaudited pro forma condensed consolidating financial information is
presented as if the following transactions ("Shidler Transactions") had been
consummated on September 30, 1997 for balance sheet purposes, and as of January
1, 1996 for purposes of the statements of operations.
- - The Company acquired partnership interests in a portfolio of 10
properties, ("Shidler Acquisition Properties"), representing the
Mid-Atlantic suburban office operations of The Shidler Group, a national
real estate investment firm.
- - In the Shidler Transactions, the Company became the sole general
partner of and obtained an 18.86% interest in FCO, L.P. ("FCO"), an
operating partnership formed to acquire and hold the Shidler Acquisition
Properties. The Company's 18.86% interest is calculated after giving
effect to the required contribution to FCO of 11% retained limited
partner ownership interests in 7 of the 10 Shidler Acquisition
Properties by affiliates of the Shidler Group ("Retained Interests") in
exchange for Common Units (as defined below) in November 2000.
- - In connection with the Shidler Transactions, the Company issued
600,000 shares of $0.01 par value common stock ("Common Shares") and FCO
issued (or committed to be issued) 3,181,818 common partnership units
("Common Units") and 2.1 million preferred partnership units ("Preferred
Units"). See Note 1.
- - Immediately prior to the acquisition by the Company, the long term
debt on the Shidler Acquisition Properties was refinanced with a $100.0
million mortgage loan.
- - Simultaneous with the Shidler Transactions, the Company issued
273,729 Common Shares in exchange for the assets of Crown Advisors, Inc.
("Crown"), an affiliate of the Company, previously acting as external
advisor to the Company and assisting in the management operations. The
contract between Crown and the Company was terminated. Further, the
Company retired 27,646 Common Shares previously held by Crown at the
time it was acquired.
- - The Company entered into a property management agreement with
Glacier Realty, LLC ("Glacier"), all of the interests in which are owned
by two current officers of the Company, one of whom is also a current
director. The property management agreement with Glacier provides for
Glacier to manage the seven net lease retail assets of the Company for a
term of five years with a minimum fee of $250,000 per annum.
The pro forma condensed consolidating financial information is unaudited and is
not necessarily indicative of what the actual financial position would have been
at September 30, 1997, nor does it purport to represent the future financial
position and the results of operations of the Company.
F-2
ROYALE INVESTMENTS, INC.
PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997 (Notes 1 and 2)
(unaudited)
(in thousands)
Shidler
Royale Acquisition
Investments, Properties
Inc. Historical Pro Forma Pro Forma
Historical Combined Adjustments Consolidated
----------- ----------- -------------------- -------------
(A) (B) (C) (D)
Assets:
Net investments in real estate....................... $ 22,654 $ 83,128 $ 83,397 $ -- $ 189,179
Cash and cash equivalents............................ 497 1,461 (461) -- 1,497
Restricted cash...................................... -- 2,640 (2,640) -- --
Deferred costs and other assets...................... 535 8,285 (7,669) -- 1,151
----------- ----------- ----------- ----------- -------------
Total assets..................................... $ 23,686 $ 95,514 $ 72,627 $ -- $ 191,827
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Liabilities:
Mortgage notes payable............................... $ 14,448 $ 87,131 $ 12,869 $ -- $ 114,448
Dividends/distributions payable...................... 178 -- -- -- 178
Accounts payable and other liabilities............... 158 4,529 (4,379) -- 308
----------- ----------- ----------- ----------- -------------
Total liabilities................................ 14,784 91,660 8,490 -- 114,934
----------- ----------- ----------- ----------- -------------
Minority interest--Preferred Units..................... -- -- 52,500 -- 52,500
----------- ----------- ----------- ----------- -------------
Minority interest--Common Units........................ -- 3,854 8,716 -- 12,570
----------- ----------- ----------- ----------- -------------
Stockholders' Equity:
Common stock......................................... 14 -- 6 2 22
Additional paid-in capital........................... 12,354 -- 2,915 1,351 16,620
Distributions in excess of accumulated earnings...... (3,466) -- -- (1,353) (4,819)
----------- ----------- ----------- ----------- -------------
Total stockholders' equity....................... 8,902 -- 2,921 -- 11,823
----------- ----------- ----------- ----------- -------------
Total liabilities and stockholders' equity....... $ 23,686 $ 95,514 $ 72,627 $ -- $ 191,827
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
See accompanying notes and managment's assumptions to
pro forma financial statements.
F-3
ROYALE INVESTMENTS, INC.
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 (Notes 1 and 3)
(unaudited)
(in thousands, except share and per share amounts)
Shidler
Royale Acquisition
Investments, Properties
Inc. Historical Pro Forma Pro Forma
Historical Combined Adjustments Consolidated
------------ ----------- ------------- ------------
(A) (B)
Revenues:
Rents....................................................... $ 2,477 $ 11,793 $ -- $ 14,270
Tenant reimbursements....................................... -- 1,852 -- 1,852
Other....................................................... 32 48 -- 80
------------ ----------- ----- ------------
Total revenue........................................... 2,509 13,693 -- 16,202
------------ ----------- ----- ------------
Operating Expenses:
Interest.................................................... 1,246 8,130 (526)(C) 8,850
Depreciation and amortization............................... 567 2,689 887 (D) 4,143
Property expenses........................................... 361 2,458 -- 2,819
General and administrative.................................. 42 236 -- 278
------------ ----------- ----- ------------
Total operating expenses................................ 2,216 13,513 361 16,090
------------ ----------- ----- ------------
Income (loss) before minority interest.................. 293 180 (361)(E) 112
Minority interest in (income) loss--Preferred Units........... -- -- -- (F) --
Minority interest in (income) loss--Common Units.............. -- -- 147 (F) 147
------------ ----------- ----- ------------
Net income (loss) allocated to Common Shares.................. $ 293 $ 180 $ (214) 259
------------ ----------- ----- ------------
------------ ----------- ----- ------------
Per Common Share:
Net income allocated to Common Shares....................... $ 0.21 $ 0.11
------------ ------------
------------ ------------
Weighted average number of shares outstanding including
share equivalents......................................... 1,420,000 2,284,732
------------ ------------
------------ ------------
See accompanying notes and managment's assumptions to
pro forma financial statements.
F-4
ROYALE INVESTMENTS, INC.
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (Notes 1 and 3)
(unaudited)
(in thousands, except share and per share amounts)
Shidler
Royale Acquisition
Investments, Properties
Inc. Historical Pro Forma Pro Forma
Historical Combined Adjustments Consolidated
------------ ----------- ------------- ------------
Revenues:
Rents....................................................... $ 1,881 $ 11,710 -- $ 13,591
Tenant reimbursements....................................... -- 1,116 -- 1,116
Other....................................................... 18 100 -- 118
------------ ----------- ----- ------------
Total revenue........................................... 1,899 12,926 -- 14,825
------------ ----------- ----- ------------
Operating Expenses:
Interest.................................................... 920 7,042 (1,355)(C) 6,607
Depreciation and amortization............................... 426 2,424 258 (D) 3,108
Property expenses........................................... 255 2,569 -- 2,824
General and administrative.................................. 35 114 -- 149
------------ ----------- ----- ------------
Total operating expenses................................ 1,636 12,149 (1,097) 12,688
------------ ----------- ----- ------------
Income (loss) before minority interest.................. 263 777 1,097 (E) 2,137
Minority interest in (income) loss--Preferred Units........... -- -- (1,874)(F) (1,874)
Minority interest in (income) loss--Common Units.............. -- -- -- (F) --
------------ ----------- ----- ------------
Net income (loss) allocated to Common Shares.................. $ 263 $ 777 $ (777) $ 263
------------ ----------- ----- ------------
------------ ----------- ----- ------------
Per Common Share:
Net income allocated to Common Shares....................... $ 0.19 $ 0.12
------------ ------------
------------ ------------
Weighted average number of shares outstanding
including share equivalents............................... 1,420,314 2,284,732
------------ ------------
------------ ------------
See accompanying notes and managment's assumptions to
pro forma financial statements.
F-5
ROYALE INVESTMENTS, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION
(in thousands, except share and unit and per share and per unit amounts)
1. BASIS OF PRESENTATION:
Royale Investments, Inc. ("Company") is a Minnesota corporation. As of
October 14, 1997, the Company owned or held an interest in 7 retail properties
and 10 suburban office properties. The Company is the sole general partner of
and has an 18.86% interest in FCO, L.P. ("FCO"), an operating partnership formed
to acquire and hold the Shidler Acquisition Properties. The Company's 18.86%
interest is calculated after giving effect to the contribution of the 11%
Retained Interests, which interests will be exchanged in November 2000 for
Common Units.
The following is a summary of FCO identifying the units issued (or committed
to be issued) and ownership interests upon the completion of the Shidler
Transactions:
Total
Units
Units Issued to: Total Issued and
----------------------------------- Retained Retained Ownership
Company Others Total Units(a) Units Interest
----------- ---------- ---------- --------- ---------- -----------
Preferred Units -- 1,913,545 1,913,545 186,455 2,100,000
----------- ---------- ---------- --------- ----------
----------- ---------- ---------- --------- ----------
Common Units
General Partner interest 600,000 -- 600,000 600,000 18.86%
Limited Partner interests -- 2,299,310 2,299,310 282,508 2,581,818 81.14%
----------- ---------- ---------- --------- ---------- -----------
Total Common Units 600,000 2,299,310 2,899,310 282,508 3,181,818 100.00%
----------- ---------- ---------- --------- ---------- -----------
----------- ---------- ---------- --------- ---------- -----------
a) Represents units required to be issued in November, 2000 in exchange for
the Retained Interests.
These pro forma financial statements should be read in conjunction with the
historical financial statements and notes thereto of the Company and the Shidler
Acquisition Properties either included elsewhere in this filing or previously
filed by the Company with the Securities and Exchange Commission on its Form
10-K/A for the year ended December 31, 1996 and its Form 10-QSB for the quarter
ended September 30, 1997. In management's opinion, the Company has made all
adjustments necessary to reflect the effects of the acquisition of the Shidler
Acquisition Properties.
F-6
2. ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET:
(A) Reflects the historical balance sheet of the Company as of September 30,
1997.
(B) Reflects the historical combined balance sheet of the Shidler
Acquisition Properties as of September 30, 1997.
(C) To record the purchase of the Shidler Acquisition Properties by the
Company in exchange for issuance of 600,000 Common Shares at a value of $5.50
per share ($3.3 million) and issuance of limited partner interests comprised of
2,100,000 Preferred Units at $25.00 per Preferred Unit ($52.5 million) and
2,581,818 Common Units at $5.50 per Common Unit ($14.2 million) for a total
consideration value of $70 million. The $5.50 per Common Share and per Common
Unit is based on the range of trading prices of the Common Shares at the time
the Shidler Transactions were announced ($5-9/16 and $5-3/8 being the high and
low sales prices on September 5, 1997, the last full trading day prior to the
public announcement). The $25.00 per Preferred Unit is based upon the
contractual Common Unit conversion rate at an assumed $7.00 per Common Share.
The following summarizes such adjustments as of September 30, 1997:
(1) Adjustments to assets:
(a) Real estate investments acquired at fair value.............. $83,397(i)
---------
---------
(b) Cash and cash equivalents
Received in connection with acquisition....................... $ 3,900
Less: costs paid in connection with acquisition............... (2,900)
Less: cash and cash equivalents of Shidler
Acquisition Properties retained by former owners............ (1,461)
---------
Net decrease to cash and cash equivalents.................... $ (461)
---------
---------
(c) Release of restricted cash retained by former owners of the
Shidler Acquisition Properties $ (2,640)
---------
---------
F-7
(d) Adjustments to deferred costs and other assets:
Deferred loan fees relating to new mortgage notes............. $ 735 (ii)
Less:
Straight line rent receivable retained by former owners of
Shidler Acquisition Properties............................ (5,770)(iii)
Deferred loan fees related to mortgage notes retired by
former owners of Shidler
Acquisition Properties.................................... (992)(iv)
Deferred leasing costs and other assets retained by former
owners of Shidler Acquisition Properties.................. (1,523)(v)
Elimination of costs previously deferred by the
Company in connection with the completion
of the Shidler Transactions................................ (119)
----------
Net decrease to deferred costs and other assets............... $ (7,669)
----------
----------
(2) Adjustments to liabilities:
(a) Mortgage notes assumed......................................$ 100,000 (ii)(vi)
Less: mortgage notes retired by former owners of
Shidler Acquisition Properties................................ (87,131)
---------
Net increase to mortgage notes payable $12,869
---------
---------
(b) Accounts payable and other liabilities
Accrual of costs in connection with the
Shidler Transactions $ 150 (ii)(vii)
Less: accounts payable other liabilities of
the Shidler Acquisition Properties (4,529)(ii)(vii)
------
Net decrease to accounts payable and other liabilities.......... $(4,379)
---------
---------
(3) Allocation of adjustments to minority interest and stockholders' equity:
(a) Minority interest share--Preferred Units $52,500
---------
---------
(b) Minority interest share--Common Units, (81.14%) $14,200
Less: Costs in connection with Shidler
Transactions (viii) (1,630)
Less: Accumulated income of
Shidler Acquisition Properties (3,854)
---------
Net increase to minority interest--Common Units................. $8,716
---------
---------
(c) Issuance of 600,000 $0.01 par value Common Shares $ 6
---------
---------
(d) Stockholders' equity, (18.86%)
Issuance of 600,000 Common Shares, excess of
$5.50 over par value $ 3,294
Less: Costs in connection with Shidler
Transactions (viii) (379)
---------
Net increase to stockholders' equity $2,915
---------
---------
F-8
(i) The Company will record costs associated with the cost of acquiring the
Shidler Acquisition Properties totaling $451. These total costs will be
allocated to the fair value of the real estate investments acquired.
(ii) The fair values of all assets, mortgage notes payable and other liabilities
approximate their carrying amounts.
(iii) The accrued straight line rent receivable recorded by the Shidler
Acquisition Properties will be adjusted to a zero carrying value in
connection with the acquisition of the Shidler Acquisition Properties.
(iv) These financing costs were deferred by the Shidler Acquisition Properties.
Such costs will be written off in connection with the retirement of the
related mortgage notes by the former owners of the Shidler Acquisition
Properties.
(v) Certain leasing costs were deferred by the Shidler Acquisition Properties.
Such costs will be adjusted to a zero carrying value as the real estate
investments have been reflected at fair market value absent these deferred
costs.
(vi) The Shidler Acquisition Properties were acquired subject to mortgage
indebtedness of $100.0 million which loan closed immediately prior to the
Company's acquisition of the Shidler Acquisition Properties. The loan
matures on October 13, 2000 and provides for monthly payments of interest
only at a fixed rate of 7.5% per annum.
(vii) Other liabilities include accounts payable, deferred rental income,
security deposits and other. The accounts payable and other liabilities
recorded by the Shidler Acquisition Properties are generally not assumed by
the Company in connection with the Shidler Transactions. The Company has
recorded various accruals of $150 attributable to outstanding costs incurred
in connection with the Shidler Transactions.
(viii)The Company has recorded costs associated with the cost of issuing Common
Stock and other equity interests of the Company totaling $2,009. These total
costs have been charged against equity and minority interest in proportion
to the respective ownership interests.
(D) To record the issuance of 273,729 Common Shares at $5.50 per share ($1,505)
in exchange for the assets of Crown and the termination of Crown's external
advisory contract, net of the retirement of 27,646 Common Shares at $5.50
per share ($152) previously held by Crown at the time it was acquired.
Dr. Nonrecurring charge due to termination of
advisory contract............................................. $ 1,353
Cr. Common Stock--par 2
Cr. Additional paid-in capital 1,351
F-9
3. ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS:
(A) Reflects the historical consolidated operations of the Company.
(B) Reflects the historical combined operations of the Shidler Acquisition
Properties.
(C) Reflects the decrease in interest expense of $526 and $1,355,
respectively, for the year ended December 31, 1996 and for the nine month period
ended September 30, 1997, related to the $100.0 million mortgage notes payable
for the Shidler Acquisition Properties, which provides for an interest rate of
7.5% per annum.
(D) Reflects the increase (decrease) in depreciation and amortization
expense as follows:
For the year For the nine
ended months ended
December 31, September 30,
1996 1997
------------- ---------------
Depreciation of buildings acquired over a 40 year useful life....................... $ 1,246 $ 539
Amortization of deferred financing costs related to the Shidler Acquisition
Properties over 3 year life of mortgage loan...................................... (359) (281)
------ -----
$ 887 $ 258
------ -----
------ -----
(E) Simultaneous with the Shidler Transactions, the Company: (i) issued
273,729 Common Shares valued at $5.50 per share ($1,505) in exchange for the
assets of Crown, (ii) terminated the external advisory contract between Crown
and the Company and (iii) retired 27,646 Common Shares valued at $5.50 per share
($152) previously held by Crown at the time it was acquired. The Company will
record the effect of these transactions in the fourth quarter of 1997. The
transactions will be recorded as a nonrecurring charge attributable to the
termination of the Crown external advisory contract totaling $1,353. Such
adjustment has been omitted from the pro forma condensed consolidating
statements of operations for the year ended December 31, 1996 and the nine
months ended September 30, 1997 as the events are not expected to have a
continuing impact on the Company.
F-10
3. ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS: (CONTINUED)
(F) Minority interest in income (loss) has been reflected in accordance with
the terms of the FCO partnership agreement. Upon consummation of the Shidler
Transactions, the Preferred Units are first allocated income up to 6.5% of their
investment with remaining income, if any, or loss allocated between the Company
which owns 18.86% and the limited partner Common Units which own 81.14%. The
adjustments to record the income (loss) effect of the minority interest share of
income (loss) in the pro forma statements of operations were computed as
follows:
For the year For the nine
ended months ended
December 31, September 30,
1996 1997
------------- -------------
Shidler Acquisition Properties
Income before minority interest................................................... $ 180 $ 777
Impact of pro forma adjustments................................................... (361) 1,097
----------- -----------
Total income (loss)............................................................... $ (181) $ 1,874
Pro forma minority interest in income (loss)
Minority share--Preferred Units................................................... $ -- $ 1,874
Minority share--Common Units (81.14%)............................................. (147) --
----------- -----------
Net income (loss) allocated to Common Shares........................................ $ (34) $ --
----------- -----------
----------- -----------
F-11
REPORT OF INDEPENDENT ACCOUNTANTS
The Partners
The Shidler Acquisition Properties:
We have audited the accompanying combined balance sheets of The Shidler
Acquisition Properties (Group), a group of partnerships more fully described in
Note 1, as of December 31, 1995 and 1996 and the related combined statements of
operations, partners' capital and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the The Shidler
Acquisition Properties as of December 31, 1995 and 1996 and the combined results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Coopers & Lybrand
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 5, 1997
F-12
THE SHIDLER ACQUISITION PROPERTIES
Combined Balance Sheets
(in thousands)
December 31, September 30,
-------------------- -------------
ASSETS 1995 1996 1997
--------- --------- -------------
(unaudited)
Investments in real estate:
Land....................................................................... $ 16,491 $ 18,575 $ 18,575
Buildings, building improvements and equipment............................. 59,860 72,566 74,237
--------- --------- -------------
76,351 91,141 92,812
Accumulated depreciation................................................... (5,780) (7,807) (9,684)
--------- --------- -------------
Net investments in real estate......................................... 70,571 83,334 83,128
Cash and cash equivalents.................................................... 477 1,083 1,461
Restricted cash and escrows.................................................. 11 3,413 2,640
Deferred rent receivable..................................................... 4,286 5,158 5,770
Deferred costs and other assets, net......................................... 1,769 2,561 2,515
--------- --------- -------------
Total assets........................................................... $ 77,114 $ 95,549 $ 95,514
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Mortgage and construction loans payable...................................... $ 70,683 $ 85,917 $ 87,131
Accounts payable and accrued expenses........................................ 286 300 614
Accrued interest............................................................. 1,212 1,192 1,192
Management fees and other amounts due
to related parties......................................................... 2,323 2,559 2,697
Rents received in advance and tenant security deposits....................... 315 2,504 26
--------- --------- -------------
Total liabilities...................................................... 74,819 92,472 91,660
Commitments and contingencies (Note 6)
Partners' capital............................................................ 2,295 3,077 3,854
--------- --------- -------------
Total liabilities and partners' capital................................ $ 77,114 $ 95,549 $ 95,514
--------- --------- -------------
--------- --------- -------------
See accompanying notes to combined financial statements.
F-13
THE SHIDLER ACQUISITION PROPERTIES
Combined Statements of Operations
(in thousands)
Nine months ended
Year ended December 31, September 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(unaudited)
Revenues:
Rental income............................................. $ 9,535 10,818 $ 11,793 $ 8,534 $ 11,710
Tenant reimbursements..................................... -- 1,438 1,852 1,436 1,116
Interest and other income................................. 45 100 48 47 100
--------- --------- --------- --------- ---------
9,580 12,356 13,693 10,017 12,926
--------- --------- --------- --------- ---------
Expenses:
Interest.................................................. 7,503 7,983 8,130 6,047 7,042
Depreciation and
amortization............................................ 2,057 2,290 2,689 1,985 2,424
Utilities................................................. -- 650 833 570 814
Maintenance and repairs................................... -- 425 620 470 869
Management fees........................................... 337 566 666 492 499
Real estate taxes......................................... -- 301 339 266 387
General and administrative................................ 137 126 236 211 114
--------- --------- --------- --------- ---------
10,034 12,341 13,513 10,041 12,149
--------- --------- --------- --------- ---------
Net income (loss)........................................... $ (454) $ 15 $ 180 $ (24) $ 777
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying notes to combined financial statements.
F-14
THE SHIDLER ACQUISITION PROPERTIES
Combined Statements
of Partners' Capital
for the years ended
December 31, 1994, 1995 and 1996
and the nine months ended
September 30, 1997
(unaudited)
Partners' capital, January 1, 1994.................................................. $ 414
Net loss............................................................................ (454)
---------
Partners' capital, December 31, 1994................................................ (40)
Contributions....................................................................... 2,320
---------
Net income.......................................................................... 15
---------
Partners' capital, December 31, 1995................................................ 2,295
Contributions....................................................................... 602
---------
Net income.......................................................................... 180
---------
Partners' capital, December 31, 1996................................................ 3,077
Net income (unaudited).............................................................. 777
---------
Partners' capital, September 30, 1997 (unaudited)................................... $ 3,854
---------
---------
See accompanying notes to combined financial statements.
F-15
THE SHIDLER ACQUISITION PROPERTIES
Combined Statements of Cash Flows
(in thousands)
Year Ended Nine months ended
December 31, September 30,
---------------------------------- --------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- --------- ---------
(unaudited)
Operating Activities
- --------------------
Net income (loss)............................................... $ (454) $ 15 $ 180 $ (24) $ 777
Adjustments to reconcile net income (loss) to net cash provided
by operations:
Depreciation and amortization................................. 2,057 2,290 2,689 1,985 2,424
Changes in:
Deferred rent receivable.................................... (1,190) (1,024) (872) (662) (612)
Other assets................................................ 2 (94) (154) 26 (273)
Accounts payable and accrued expenses....................... 3 261 14 (43) 314
Other liabilities........................................... 338 582 2405 (53) (2,340)
---------- ---------- ---------- --------- ---------
Cash provided by operations............................. 756 2,030 4,262 1,229 290
---------- ---------- ---------- --------- ---------
Investing Activities
- --------------------
Acquisition of and additions to investments in real estate...... (11,898) (14,790) (1,975) (1,560)
Leasing commissions paid........................................ (40) (913) (913) (360)
Restricted cash and escrows..................................... 244 254 -3402 (150) (802)
---------- ---------- ---------- --------- ---------
Cash provided by (used in) investing.................... 244 (11,684) (19,105) (3,038) (1,118)
---------- ---------- ---------- --------- ---------
Financing Activities
- --------------------
Proceeds from mortgage and construction loans payable........... 9,992 24,829 11,357 1,806
Payments on mortgage and construction loans payable............. (1,000) (1,999) (9,595) (8,995) (592)
Capital contributions........................................... 2,320 602 -- --
Financing costs paid............................................ (188) (387) (235) (8)
---------- ---------- ---------- --------- ---------
Cash provided by (used in) financing.................... (1,000) (10,125) (15,449) 2,127 1,206
---------- ---------- ---------- --------- ---------
Increase in cash................................................ -- 471 606 318 378
Cash and cash equivalents at beginning of period................ 6 6 477 477 1,083
---------- ---------- ---------- --------- ---------
Cash and cash equivalents at end of period...................... $ 6 $ 477 $ 1,083 $ 795 $ 1,461
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Supplemental disclosures:
Interest paid................................................. $ 7,518 $ 8,014 $ 8,150 $ 6,067 $ 7,042
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
See accompanying notes to combined financial statements.
F-16
THE SHIDLER ACQUISITION PROPERTIES
Notes to Combined Financial Statements
(dollars in thousands)
1. Organization and Basis of Combination:
The accompanying combined financial statements of the Shidler Acquisition
Properties (Group) consist of the accounts of the following real estate
partnerships and business operations:
Acquisition/
Construction Date Partnership's Properties
- -------------------- ---------------------------------------------------
June 1992 Blue Bell Investment Company, L.P. (Blue Bell):
751 Jolly Road, Blue Bell, PA
753 Jolly Road, Blue Bell, PA
760 Jolly Road, Blue Bell, PA
785 Jolly Road, Blue Bell, PA
March 1995 South Brunswick, L.P. (S. Brunswick):
429 Ridge Road, South Brunswick, NJ
431 Ridge Road, South Brunswick, NJ
437 Ridge Road, South Brunswick, NJ
December 1996 ComCourt Investors, L.P. (ComCourt):
2605 Interstate Drive, Harrisburg, PA
2601 Market Place, Harrisburg, PA
August 1995) 6385 Flank Drive, L.P. (Flank):
(placed in service 6385 Flank Drive, Harrisburg, PA
December 1995)
The financial statements include the operations of the properties owned by
Group only for the period owned or placed in service.
The properties listed above have common ownership and management by The
Shidler Group. The Group is engaged in the acquisition, development and
ownership, leasing and management of commercial office properties in the
Pennsylvania and New Jersey area.
As discussed further in Note 7, on October 14, 1997, the Group was acquired
in a transaction with Royale Investments, Inc., heretofore an unaffiliated real
estate investment trust (REIT), which intends to remain qualified as a REIT
under the Internal Revenue Code (Code).
F-17
THE SHIDLER ACQUISITION PROPERTIES
Notes to Combined Financial Statements (Continued)
(dollars in thousands)
1. Organization and Basis of Combination, continued:
Principles of Combination:
These financial statements have been prepared on a combined basis to present
the financial position and results of operations of the Group because the
operations were managed and have been acquired as a single business under common
control. Accordingly, all inter-entity accounts and activities have been
eliminated to reflect the combined results.
Interim Financial Reporting:
The combined financial statements as of September 30, 1997, and for the nine
months ended September 30, 1996 and 1997, are unaudited; however, in the opinion
of management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the combined financial
statements for the interim periods have been included. The results for the
interim periods are not necessarily indicative of the results for the full year.
2. Summary of Significant Accounting Policies:
Use of Estimates:
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Revenue Recognition:
Rental income from tenants is recognized on a straight-line basis regardless
of when payments are due. Deferred rent receivable represents rental income
recognized in excess of contractual payments due.
Rents Received in Advance and Tenant Security Deposits:
Rents received in advance represent the advance payment of contractual rent.
Security deposits are amounts paid by tenants to the Group which are then
refunded to such tenant at the end of the lease term subject to certain
conditions.
F-18
THE SHIDLER ACQUISITION PROPERTIES
Notes to Combined Financial Statements (Continued)
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Concentration of Credit:
As of December 31, 1996, the Group's two most significant tenants are Unisys
Corporation and IBM Corporation. The Group's lease with Unisys and IBM
Corporation comprise 67% and 12%, respectively, of the Group's annualized rental
income. These concentrations are mitigated, in part, by unconditional sublease
obligations with other tenants. The ability of these and other tenants of the
Group to make required payments is dependent upon the financial condition of the
tenants.
Investment in Real Estate and Depreciation:
The Group's investments in real estate are recorded at cost. Effective
January 1, 1996, the Group adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement requires that management of the Group
review long-lived assets for impairment whenever circumstances indicate that the
carrying amount of the asset may not be recoverable. Adoption of this statement
did not affect the Group's financial position or results of operations.
Interest expense, real estate taxes and other directly related expenses
incurred during construction periods are capitalized and depreciated commencing
with the date the asset is placed in service and on the same basis as the
related assets. Depreciation expense is computed using the straight-line method
based on the following useful lives:
Years
---------
Buildings and building improvements........................ 39 to 40
Tenant improvements and equipment.......................... 5-11
Tenant improvements and leasing commissions are capitalized and amortized
over the terms of each specific lease. Maintenance and repairs are charged to
expense when incurred. Expenditures for property improvements are capitalized.
Cash and Cash Equivalents:
For purposes of the statements of cash flows and balance sheets, cash and
cash equivalents include all cash and liquid investments with an initial
maturity of three months or less. The carrying amount of cash equivalents
approximates fair value.
The Group maintains cash in deposit accounts which, from time to time, may
exceed federally insured limits. The Group has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash.
F-19
THE SHIDLER ACQUISITION PROPERTIES
Notes to Combined Financial Statements (Continued)
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Restricted Cash and Escrows:
In accordance with the provisions of the mortgage note payable for Blue
Bell, excess funds (as defined) are invested in commercial paper in amounts up
to the extent of the next interest and principal payment. These funds, which are
invested in Grade A Commercial Paper, were $11, $2,649 and $1,597 at December
31, 1995, 1996 and September 30, 1997, respectively. The remaining account
balance relates to insurance and tax escrows.
Income Taxes:
No income taxes are payable by the Group, and none have been provided in the
accompanying combined financial statements. The partners are required to include
their respective shares of partnership profits and losses in their individual
tax returns.
Fair Value of Financial Instruments:
The financial instruments of the Group include short-term investments and
mortgage and construction loans payable. The estimated fair values of these
instruments were not materially different from their carrying values. On October
14, 1997, in connection with the acquisition of the Group by Royale Investments,
Inc., all of the Group's mortgage and construction loans payable at December 31,
1996 and September 30, 1997 (with a weighted average interest rate of
approximately 10.8%) were refinanced with $100,000 of long-term debt at an
interest rate of 7.5%.
Deferred Costs:
Fees and costs associated with lease originations and costs incurred to
obtain long-term financing have been capitalized and are amortized over the
terms of the respective leases or debt. At December 31, 1995, 1996, and
September 30, 1997, deferred costs include the following:
December 31, September 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
(unaudited)
Deferred financing costs.................................. $ 3,387 $ 3,662 $ 3,669
Deferred leasing costs.................................... 40 953 1,313
--------- --------- -------------
3,427 4,615 4,982
Less accumulated amortization............................. (1,740) (2,231) (2,866)
--------- --------- -------------
$ 1,687 $ 2,384 $ 2,116
--------- --------- -------------
--------- --------- -------------
Amortization expense relating to deferred costs was $457, $500 and $603 for
the years ended December 31, 1994, 1995 and 1996, respectively. Amortization
expense was $372 and $635 for the nine months ended September 30, 1996 and 1997,
respectively (unaudited).
F-20
THE SHIDLER ACQUISITION PROPERTIES
Notes to Combined Financial Statements (Continued)
(dollars in thousands)
3. Related Party Transactions:
Blue Bell has a management agreement contract with Hamlin/Shidler Investment
Corporation (H/ SIC), an affiliate of the Group. The agreement states that Blue
Bell shall pay H/SIC an annual fee of 4% of rental income to be allocated 0.5%
as a base management fee and 3.5% as a contingent management fee. Expenses for
the years ended December 31, 1994, 1995 and 1996 were $337,341, and $259,
respectively, and for each of the nine months ended September 30, 1996 and 1997
were $260 and $132, respectively (unaudited). Substantially all of the amounts
reported as "Management fees and other amounts due to related parties" in the
accompanying balance sheets relate to unpaid management fees to H/SIC. The
agreement also provides for an acquisition coordination fee of 2% of the
purchase price of the real property acquired. Additionally, the agreement
provides for an asset management fee of 3/4% of the fair market value of the
property, payable when and if Blue Bell generates cash flow from operations, as
defined; this fee in the estimated amount of $488 has not been recorded. No
amounts have been incurred or paid related to the acquisition coordination or
asset management fee terms.
Blue Bell is also party to a cost sharing agreement with H/SIC and another
related party. Expenses for each of the years ended December 31, 1994, 1995 and
1996 were $12. Expenses for each of the nine months ended September 30, 1996 and
1997 were $9 (unaudited). These amounts represent an allocation of telephone,
accounting services, and other costs paid for by H/SIC.
S. Brunswick has a management agreement with H/SIC. The agreement states
that S. Brunswick shall pay H/SIC an annual property management fee of the
amount of management fees (2% of rents) recovered from tenants plus 1.5% of
gross rents. Management fees for the years ended December 31, 1995 and 1996 were
$98 and $133, respectively. Management fees for the nine months ended September
30, 1996 and 1997 were $98 and $141, respectively (unaudited). The agreement
also provides for a leasing fee of 1% of net rents. Leasing fees for the year
ended December 31, 1996 were $53. Leasing fees for the nine months ended
September 30, 1997 were $57 (unaudited). Additionally, the agreement provides
for a construction management fee for tenant improvements, construction, and
renovation costs of 3% of the contract amount. Construction management fees for
the year ended December 31, 1996 were $21 and for the nine months ended
September 30, 1996 and 1997 were $16 and $27, respectively (unaudited).
ComCourt has a management agreement with H/SIC and First Industrial
Management Corporation, a related party. The agreement requires that ComCourt
shall pay an annual property management fee in the amount of 4% of rental
income. Management fees for the nine months ended September 30, 1997 were $63
(unaudited).
Flank Drive has a management agreement with H/SIC and First Industrial
Management Corporation. The agreement requires that Flank shall pay an annual
property management fee in the amount of 4% of rental income. Management fees
for the year ended December 31, 1996 were $8. Management fees the nine months
ended September 30, 1996 and 1997 were $4 and $11, respectively (unaudited).
F-21
THE SHIDLER ACQUISITION PROPERTIES
Notes to Combined Financial Statements (Continued)
(dollars in thousands)
4. Mortgage and Construction Loans Payable:
Mortgage and construction loans payable consists of the following:
December 31, September 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
(unaudited)
Mortgage note payable in the original amount of $65,000. Collateralized by land,
building and assignment of rents in Blue Bell; interest rate of 11.85%.
Interest is paid quarterly on outstanding principal balance. Final payment
due in May 1999. This note payable is also collateralized by $12,500 of funds
held in trust, pursuant to a related trust agreement. These funds are not
reflected on the accompanying financial statements........................... $ 61,335 $ 60,364 $ 60,364
Mortgage note in the original amount of $10,500. Collateralized by land, building
and assignment of rents in ComCourt; interest rate of LIBOR + 4% (9.6% and
9.7% at December 31, 1996 and September 30, 1997, respectively). Payable
monthly. Maturing in January 2000............................................ -- 10,500 10,500
Note payable in the original amount of $8,500. Collateralized by land, building,
and assignment of rents in S. Brunswick; interest rate of Prime plus 1% (9.5%
at December 31, 1995). Payable monthly. Maturing in May 1997................. 7,856 -- --
Notes payable in the original amount of $8,250. Collateralized by land, building
and assignment of rents in S. Brunswick; interest rate of 7%. Payable
monthly. Maturing in May 1998................................................ -- 7,858 7,330
Construction loan in the original amount of $8,500. Collateralized by land,
building, and assignments of rents in S. Brunswick; interest rate of Prime
plus 1% (9.25% and 9.5% at December 31, 1996 and September 30, 1997,
respectively). Interest is paid monthly on outstanding balance. Maturing in
June 1999.................................................................... -- 4,958 6,494
Construction loan in the original amount of $2,477. Collateralized by land,
building and assignment of rents in Flank; interest rate of Treasury index
plus 2%, (7.99, 8.73% and 8.23% at December 31, 1995, 1996 and September 30,
1997, respectively). Interest is paid monthly on unpaid principal balance.
Maturing in September 2002................................................... 1,492 2,237 2,443
--------- --------- -------------
$ 70,683 $ 85,917 $ 87,131
--------- --------- -------------
--------- --------- -------------
F-22
THE SHIDLER ACQUISITION PROPERTIES
Notes to Combined Financial Statements (Continued)
(dollars in thousands)
4. Mortgage and Construction Loans Payable, continued
Approximate future maturities of notes payable are as follows at
December 31, 1996:
Year Amount
----- ---------
1997 --
1998 $ 10,858
1999 62,322
2000 10,500
2001 --
Thereafter 2,237
---------
$ 85,917
---------
---------
5. Operating Leases:
The properties are leased to tenants under gross and net operating leases
with initial term expiration dates ranging from 1997 to 2009. Future minimum
rentals under non-cancelable operating leases, excluding tenant reimbursements
of expenses, in effect at December 31, 1996, are approximately as follows:
Year Amount
---- ----------
1997 $ 14,788
1998 13,467
1999 12,640
2000 12,297
2001 12,066
Thereafter 79,943
----------
$145,201
----------
----------
6. Commitments and Contingencies:
From time to time, the Group is subject to routine litigation incidental to
its business. The Group believes that the results of any pending legal
proceedings will not have a materially adverse effect on the Group's financial
condition or results of operations.
7. Subsequent Event:
On October 14, 1997, all of the mortgage notes payable (Note 4) were
refinanced and replaced with a $100,000 mortgage note which bears interest at
7.5%. Thereafter, Royale Investments, Inc. closed on the acquisition of the
Group. Neither transaction had any effect on these financial statements.
F-23