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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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: 333-91532 (1933 ACT)
BEHRINGER HARVARD REIT I, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 68-0509956
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1323 NORTH STEMMONS FREEWAY, SUITE 210, DALLAS, TEXAS 75207
(Address of principal executive offices)
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (866) 655-1605
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 11, 2003, Behringer Harvard REIT I, Inc. had 20,000 shares of
common stock, $.0001 par value, outstanding.
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BEHRINGER HARVARD REIT I, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
PART I
FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002....................3
Condensed Consolidated Statements of Operations for the three and six months ended June
30, 2003 and from inception (June 28, 2002) through June 30, 2002 and June 30, 2003.............4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003
and from inception (June 28, 2002) through June 30, 2002 and June 30, 2003......................5
Notes to Condensed Consolidated Financial Statements...............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................14
ITEM 4. CONTROLS AND PROCEDURES...........................................................................14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................................................15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................15
ITEM 5. OTHER INFORMATION.................................................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................15
SIGNATURE....................................................................................................16
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
------------------ ------------------
ASSETS
Cash and cash equivalents $ 187,113 $ 196,290
Restricted cash 366,603 -
Prepaid assets 8,300 1,005
------------------ ------------------
TOTAL ASSETS $ 562,016 $ 197,295
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Subscriptions for common stock $ 366,603 $ -
------------------ ------------------
TOTAL LIABILITIES 366,603 -
Commitments and contingencies
STOCKHOLDER'S EQUITY
Preferred stock, $.0001 par value per share;
50,000,000 shares authorized, none outstanding - -
Common stock, $.0001 par value per share;
350,000,000 shares authorized, 20,000
shares issued and outstanding 2 2
Additional paid-in capital 199,998 199,998
Deficit accumulated during development stage (4,587) (2,705)
------------------ ------------------
TOTAL STOCKHOLDER'S EQUITY 195,413 197,295
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 562,016 $ 197,295
================== ==================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FROM INCEPTION FROM INCEPTION
THREE MONTHS SIX MONTHS (JUNE 28, 2002) (JUNE 28, 2002)
ENDED ENDED THROUGH THROUGH
JUNE 30, 2003 JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003
------------------ ------------------ ------------------ --------------------
TOTAL REVENUES $ - $ - $ - $ -
EXPENSES
General and
administrative 1,815 1,886 - 5,691
------------------ ------------------ ------------------ --------------------
TOTAL EXPENSES 1,815 1,886 - 5,691
------------------ ------------------ ------------------ --------------------
OTHER INCOME
Interest income 2 4 - 1,104
------------------ ------------------ ------------------ --------------------
TOTAL OTHER INCOME 2 4 - 1,104
------------------ ------------------ ------------------ --------------------
NET LOSS $ (1,813) $ (1,882) $ - $ (4,587)
================== ================== ================== ====================
Basic and diluted weighted
average shares outstanding 20,000 20,000 20,000 20,000
Basic and diluted loss per share $ (0.09) $ (0.09) $ - $ (0.23)
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM INCEPTION FROM INCEPTION
SIX MONTHS (JUNE 28, 2002) (JUNE 28, 2002)
ENDED THROUGH THROUGH
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003
------------------ --------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,882) $ - $ (4,587)
Adjustments to reconcile net loss to
net cash flows from operating activities
Increase in prepaid assets (7,295) - (8,300)
------------------ --------------------- ---------------------
CASH USED IN OPERATING ACTIVITIES (9,177) - (12,887)
------------------ --------------------- ---------------------
------------------ --------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES - - -
------------------ --------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 200,000 200,000
Proceeds from common stock subscriptions 366,603 - 366,603
Increase in restricted cash (366,603) - (366,603)
------------------ --------------------- ---------------------
CASH PROVIDED BY FINANCING ACTIVITIES - 200,000 200,000
------------------ --------------------- ---------------------
Net change in cash and cash equivalents (9,177) 200,000 187,113
Cash and cash equivalents at beginning of period 196,290 - -
------------------ --------------------- ---------------------
Cash and cash equivalents at end of period $ 187,113 $ 200,000 $ 187,113
================== ===================== =====================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Behringer Harvard REIT I, Inc. (the "Company") was organized in
Maryland on June 26, 2002 and intends to qualify as a real estate investment
trust ("REIT") and invest in commercial real estate properties, generally
institutional quality office buildings and other commercial properties, and
lease each such property to one or more tenants. BHR Partners, LLC ("BHR
Partners") and Behringer Harvard Operating Partnership I LP ("Behringer Harvard
OP I") are wholly owned subsidiaries of the Company, organized on June 27, 2002.
BHR Partners is the limited partner and owner of 99.9% of the limited
partnership interest of Behringer Harvard OP I. The Company is the general
partner and owner of the remaining 0.1% of the limited partnership interest of
Behringer Harvard OP I.
The Company's advisor is Behringer Advisors LP ("Behringer Advisors"),
a Texas limited partnership formed in 2002, which is responsible for managing
the Company's affairs on a day-to-day basis and for identifying and making
acquisitions and investments on its behalf.
As of June 30, 2003, 20,000 shares of the Company's common stock were
issued and outstanding and owned by Behringer Harvard Holdings, LLC, the
Company's parent company, and no shares of preferred stock were issued and
outstanding. The Company currently has no common stock equivalents, such as
stock options, outstanding.
The Company is in the development stage and has not begun real estate
operations.
2. PUBLIC OFFERING
On February 19, 2003, the Company's Registration Statement on Form
S-11, covering a public offering (the "Offering") of up to 80,000,000 shares of
common stock to be offered at a price of $10 per share was declared effective
under the Securities Act of 1933. The Registration Statement also covers up to
8,000,000 shares available pursuant to the Company's dividend reinvestment plan
and up to 3,520,000 shares issuable to broker-dealers pursuant to warrants
whereby participating broker-dealers will have the right to purchase one share
for every 25 shares they sell pursuant to the Offering.
The Company will not commence active operations until it receives and
accepts subscriptions for a minimum of 250,000 shares and gross offering
proceeds of $2,500,000. After the initial 250,000 shares are sold, subscription
proceeds will be held in escrow until investors are admitted as stockholders.
The Company intends to admit new stockholders at least monthly. At that time,
subscription proceeds may be released to the Company from escrow and utilized as
consideration for investments and the payment or reimbursement of the dealer
manager fee, selling commissions and other organization and offering expenses.
Until required for such purposes, net offering proceeds will be held in
short-term, liquid investments.
Until the Company satisfies the minimum offering requirement
established for its Offering by accepting subscriptions for at least 250,000
shares of common stock, funds received for these subscriptions will continue to
be escrowed. Amounts associated with these subscriptions are reflected in
Restricted cash and Subscriptions for common stock on the Company's balance
sheets.
6
3. INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements should be
read in conjunction with the Company's Registration Statement on Form S-11, as
amended, which was filed with the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America ("GAAP"), have been condensed or omitted in this
report on Form 10-Q pursuant to the rules and regulations of the SEC. In the
opinion of management, the disclosures contained in this report are adequate to
make the information presented not misleading.
The results for the interim period shown in this report are not
necessarily indicative of future financial results. The accompanying condensed
consolidated financial statements of the Company as of June 30, 2003 have not
been audited by independent accountants. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments (of a normal recurring nature) necessary to present fairly the
consolidated financial position of the Company as of June 30, 2003 and the
consolidated results of its operations and cash flows for the periods then
ended.
Amounts in previous periods have been reclassified to conform to
current period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
was issued in April 2003 and is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. SFAS No. 149 amends and clarifies financial reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company believes adoption of
SFAS No. 149 will not have a material effect on the financial condition, results
of operations, or liquidity of the Company.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued in May 2003 and is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The Company believes adoption of
SFAS No. 150 will not have a material effect on the financial condition, results
of operations, or liquidity of the Company.
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities" was issued in January 2003. This interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" applies immediately to
variable interest entities created after January 31, 2003, and applies to the
first interim period beginning after June 15, 2003 to entities acquired before
February 1, 2003. This FIN requires the consolidation of results of variable
interest entities in which the Company has a majority variable interest. The
Company believes adoption of FIN No. 46 will not have a material effect on the
financial condition, results of operations, or liquidity of the Company.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Below is a discussion of the accounting policies that the Company
considers to be critical in that they may require complex judgment in their
application or require estimates about matters that are inherently uncertain.
7
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions, balances, and profits have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and highly liquid
investments purchased with original maturities of three months or less.
REAL ESTATE
As the Company commences its operations to acquire real estate,
management will continually monitor events and changes in circumstances
indicating that the carrying amounts of the real estate assets in which it
obtains an ownership interest, either directly or through investments in joint
ventures, may not be recoverable. When such events or changes in circumstances
are present, the Company will assess potential impairment by comparing estimated
future undiscounted operating cash flows expected to be generated over the life
of the asset and from its eventual disposition, to the carrying value of the
asset. In the event that the carrying amount exceeds the estimated future
undiscounted operating cash flows, the Company will recognize an impairment loss
to adjust the carrying amount of the asset to its estimated fair value.
INCOME TAXES
The Company currently accounts for income taxes in accordance with
Statement of Financial Accounting Standards 109, ACCOUNTING FOR INCOME TAXES
("SFAS 109"). Under the liability method of SFAS 109, deferred taxes are
determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect in the years
the differences are expected to reverse. Currently, the Company has a deferred
tax asset related to a loss carryforward of less than $1,000. This deferred tax
asset has been fully reserved for as the Company anticipates qualifying as a
REIT.
The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code, effective for the
Company's taxable year ending December 31, 2003. The Company believes that,
commencing with such taxable year, it will be organized and will operate in such
a manner as to qualify for taxation as a REIT under the Internal Revenue Code,
and it intends to continue to operate in such a manner, but no assurance can be
given that it will operate in a manner so as to qualify or remain qualified as a
REIT.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on income that it distributes
currently to its stockholders.
REVENUE RECOGNITION
The Company will recognize rental income generated from all leases on
real estate assets in which it will have an ownership interest, either directly
or through investments in joint ventures, on a straight-line basis over the
terms of the respective leases unless significant collection problems occur with
the lessee, at which time rents will
8
be recognized on a cash basis. Contingent rent will be recognized as revenue
after the related lease sales targets are achieved.
OPERATING COST REIMBURSEMENTS
The Company will bill tenants for operating cost reimbursements as per
the respective lease terms, either directly or through investments in joint
ventures, on a monthly basis at amounts estimated largely on actual prior period
activity. Such billings will be adjusted on an annual basis as necessary, based
on the actual costs incurred during the period and the respective lease terms.
DEFERRED PROJECT COSTS
The Company's advisor will be paid an acquisition and advisory fee of
3.0% of the contract price of each investment. In addition, the Company will
reimburse its advisor for investment acquisition expenses in an amount of up to
0.5% of the contract price of the Company's investments (subject to certain
overall limitations described in the Company's Registration Statement on Form
S-11). Pending such reimbursement, the Company's advisor will bear such
expenses, and will bear such expense to the extent they exceed 0.5% of the
contract price of the Company's investments. As the Company invests its capital
proceeds, these costs will be capitalized to real estate assets, either directly
or through contributions to joint ventures, at an amount up to 3.5% of the
contract price of each investment in respect of the acquisition and advisory fee
and acquisition expenses and depreciated over the useful lives of the respective
real estate assets.
DEFERRED OFFERING COSTS
The Company's advisor expects to continue to fund, on the Company's
behalf, all of the organization and offering costs and will be reimbursed for
such organization and offering costs up to 2.5% of cumulative capital raised by
the Company in its current public offering. Organization and offering costs
include items such as legal and accounting fees, marketing, promotional and
printing costs, and specifically exclude selling commissions and the dealer
manager fee. The Company will be required to repay the Company's advisor, at an
amount equal to the lesser of 2.5% of cumulative capital raised or actual costs
incurred by third parties less previous reimbursements paid to the advisor. All
offering costs paid by the Company will be recorded as an offset to additional
paid-in capital.
CONCENTRATION OF CREDIT RISK
At June 30, 2003, the Company had cash and restricted cash on deposit
in two financial institutions in excess of federally insured levels. The Company
regularly monitors the financial stability of these financial institutions and
does not believe it is exposed to any significant credit risk on cash and
restricted cash.
5. RELATED PARTY ARRANGEMENTS
Certain affiliates of the Company will receive fees and compensation in
connection with the Offering, and the acquisition, management and sale of the
assets of the Company. Behringer Securities LP ("Behringer Securities"), the
affiliated dealer manager, will receive a commission of up to 7.0% of gross
offering proceeds before reallowance of commissions earned by participating
broker-dealers. In addition, up to 2.5% of gross proceeds before reallowance to
participating broker-dealers will be paid to Behringer Securities as a dealer
manager fee; provided that Behringer Securities will receive 1.0% of the gross
proceeds of purchases pursuant to the Company's dividend reinvestment plan.
Behringer Securities will reallow all of its commission of 7.0% of gross
offering proceeds to participating broker-dealers and may reallow a portion of
its dealer manager fee of up to 1.5% of the gross offering proceeds to be paid
to such participating broker-dealers as marketing fees, including bona fide
conference fees incurred, and due diligence expense reimbursement.
9
Behringer Advisors, the affiliated advisor for the Company, or its
affiliates, may receive up to 2.5% of gross offering proceeds for reimbursement
of organization and offering expenses. All organization and offering expenses
(excluding selling commissions and the dealer manager fee) are being funded by
Behringer Advisors or its affiliates and may be reimbursed by the Company for up
to 2.5% of gross offering proceeds. As of June 30, 2003, Behringer Advisors or
its affiliates had incurred $3,820,286 of organization and offering expenses on
behalf of the Company. Behringer Advisors or its affiliates determines the
amount of organization and offering expenses owed to Behringer Advisors based on
specific invoice identification as well as an allocation of costs to the Company
and Behringer Harvard Mid-Term Value Enhancement Fund I LP and Behringer Harvard
Short-Term Opportunity Fund I LP, affiliates of the Company, based on
anticipated equity size. Behringer Advisors or its affiliates also will receive
acquisition and advisory fees of up to 3.0% of the contract purchase price of
each asset for the acquisition, development or construction of real property or,
with respect to any mortgage loan, up to 3.0% of the funds advanced for the
purchase or making of a mortgage. Behringer Advisors or its affiliates may also
receive up to 0.5% of the contract purchase price of each asset or, with respect
to the making or purchase of a mortgage loan, up to 0.5% of the funds advanced,
for reimbursement of expenses related to making investments.
The Company expects to pay HPT Management LP, its property manager,
fees for the management and leasing of the Company's properties. Such fees are
expected to equal 3.0% of gross revenues plus leasing commissions based upon the
customary leasing commission applicable to the geographic location of the
respective property.
The Company will pay Behringer Advisors an annual advisor asset
management fee of 0.5% of aggregate asset value. Any portion of the asset
management fee may be deferred and paid in a subsequent year.
Behringer Advisors or its affiliates also will be paid fees if the
advisor provides a substantial amount of services, as determined by the
Company's independent directors, in connection with the sale of one or more
properties. In such event, the Company will pay the advisor an amount not
exceeding the lesser of: (A) one-half of the brokerage commission paid, or (B)
3.0% of the sales price of each property sold, provided that such fee will be
subordinated to distributions to investors from sale proceeds of an amount
which, together with prior distributions to the investors, will equal (1) 100.0%
of their capital contributions plus (2) a 9.0% annual, cumulative,
non-compounded return on their capital contributions. Subordinated disposition
fees that are not payable at the date of sale, because investors have not yet
received their required minimum distributions, will be deferred and paid at such
time as these subordination conditions have been satisfied. In addition, after
investors have received a return on their net capital contributions and a 9.0%
annual, cumulative, non-compounded return, then Behringer Advisors is entitled
to 15.0% of remaining net sale proceeds. Subordinated participation in net sale
proceeds that are not payable at the date of sale, because investors have not
yet received their required minimum distribution, will be deferred and paid at
such times as the subordination conditions have been satisfied.
Upon listing of the Company's common stock on a national securities
exchange or included for quotation on the Nasdaq Stock Market, a listing fee
equal to 15.0% of the amount by which the market value of the Company's
outstanding stock plus distributions paid by the Company prior to listing,
exceeds the sum of the total amount of capital raised from investors and the
amount of cash flow necessary to generate a 9.0% annual, cumulative,
non-compounded return to investors will be paid to Behringer Advisors. Upon
termination of the Advisory Agreement with Behringer Advisors, a performance fee
of 15.0% of the amount by which the Company's appraised asset value at the time
of such termination exceeds the aggregate capital contributions contributed by
investors plus payment to investors of a 9.0% annual, cumulative, non-compounded
return on the capital contributed by investors will be paid to Behringer
Advisors as a performance fee. No performance fee will be paid if the Company
has already paid or become obligated to pay Behringer Advisors a listing fee.
The Company will reimburse Behringer Advisors for all expenses it pays
or incurs in connection with the services it provides to the Company, subject to
the limitation that the Company will not reimburse for any amount by which the
advisor's operating expenses (including the asset management fee) at the end of
the four preceding fiscal quarters exceeds the greater of: (i) 2.0% of the
Company's average invested assets, or (ii) 25.0% of the
10
Company's net income other than any additions to reserves for depreciation, bad
debts or other similar non-cash reserves and any gain from the sale of the
Company's assets for that period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the accompanying financial statements of the Company and the notes thereto:
FORWARD-LOOKING STATEMENTS
This section contains forward-looking statements, including discussion
and analysis of the Company's financial condition, anticipated capital
expenditures required to complete projects, amounts of anticipated cash
distributions to the Company's stockholders in the future and other matters.
These forward-looking statements are not historical facts but are the intent,
belief or current expectations of the Company's business and industry. Words
such as "anticipates", "expects", "intends", "plans", "believes", "seeks",
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees of
the future performance and are subject to risks, uncertainties and other
factors, some of which are beyond the Company's control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may
ultimately prove to be incorrect or false. You are cautioned to not place undue
reliance on forward-looking statements, which reflect the Company's management's
view only as of the date of this Form 10-Q. The Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any
forward-looking statements made in this Form 10-Q include changes in general
economic conditions, changes in real estate conditions, construction costs which
may exceed estimates, construction delays, increases in interest rates, lease-up
risks, inability to obtain new tenants upon the expiration of existing leases,
and the potential need to fund tenant improvements or other capital expenditures
out of operating cash flow. The forward-looking statements should be read in
light of these factors and the factors identified in the "Risk Factors" section
of the Company's Registration Statement on Form S-11 filed with the Securities
and Exchange Commission.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Below is a discussion of the accounting policies that the Company
considers to be critical in that they may require complex judgment in their
application or require estimates about matters that are inherently uncertain.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
REAL ESTATE
As the Company commences its operations to acquire real estate,
management will continually monitor events and changes in circumstances
indicating that the carrying amounts of the real estate assets in which it
obtains an ownership interest, either directly or through investments in joint
ventures, may not be recoverable. When such events or changes in circumstances
are present, the Company will assess potential impairment by comparing estimated
future undiscounted operating cash flows expected to be generated over the life
of the asset and from its eventual disposition, to the carrying value of the
asset. In the event that the carrying amount exceeds the estimated
11
future undiscounted operating cash flows, the Company will recognize an
impairment loss to adjust the carrying amount of the asset to its estimated fair
value.
INCOME TAXES
The Company currently accounts for income taxes in accordance with
Statement of Financial Accounting Standards 109, ACCOUNTING FOR INCOME TAXES
("SFAS 109"). Under the liability method of SFAS 109, deferred taxes are
determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect in the years
the differences are expected to reverse. Currently, the Company has a deferred
tax asset related to a loss carryforward of less than $1,000. This deferred tax
asset has been fully reserved for as the Company anticipates qualifying as a
REIT.
The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code, effective for the
Company's taxable year ending December 31, 2003. The Company believes that,
commencing with such taxable year, it will be organized and will operate in such
a manner as to qualify for taxation as a REIT under the Internal Revenue Code,
and it intends to continue to operate in such a manner, but no assurance can be
given that it will operate in a manner so as to qualify or remain qualified as a
REIT.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on income that it distributes
currently to its stockholders.
REVENUE RECOGNITION
The Company will recognize rental income generated from all leases on
real estate assets in which it will have an ownership interest, either directly
or through investments in joint ventures, on a straight-line basis over the
terms of the respective leases unless significant collection problems occur with
the lessee, at which time rents will be recognized on a cash basis. Contingent
rent will be recognized as revenue after the related lease sales targets are
achieved.
OPERATING COST REIMBURSEMENTS
The Company will bill tenants for operating cost reimbursements as per
the respective lease terms, either directly or through investments in joint
ventures, on a monthly basis at amounts estimated largely on actual prior period
activity. Such billings will be adjusted on an annual basis as necessary, based
on the actual costs incurred during the period and the respective lease terms.
DEFERRED PROJECT COSTS
The Company's advisor will be paid an acquisition and advisory fee of
3.0% of the contract price of each investment. In addition, the Company will
reimburse its advisor for investment acquisition expenses in an amount of up to
0.5% of the contract price of the Company's investments (subject to certain
overall limitations described in the Company's Registration Statement on Form
S-11). Pending such reimbursement, the Company's advisor will bear such
expenses, and will bear such expense to the extent they exceed 0.5% of the
contract price of the Company's investments. As the Company invests its capital
proceeds, these costs will be capitalized to real estate assets, either directly
or through contributions to joint ventures, at an amount up to 3.5% of the
contract price of each investment in respect of the acquisition and advisory fee
and acquisition expenses and depreciated over the useful lives of the respective
real estate assets.
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DEFERRED OFFERING COSTS
The Company's advisor expects to continue to fund, on the Company's
behalf, all of the organization and offering costs and will be reimbursed for
such organization and offering costs up to 2.5% of cumulative capital raised by
the Company in its current public offering. Organization and offering costs
include items such as legal and accounting fees, marketing, promotional and
printing costs, and specifically exclude selling commissions and the dealer
manager fee. The Company will be required to repay the Company's advisor, at an
amount equal to the lesser of 2.5% of cumulative capital raised or actual costs
incurred by third parties less previous reimbursements paid to the advisor. All
offering costs paid by the Company will be recorded as an offset to additional
paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
The amount of dividends to be distributed to the Company's stockholders
will be determined by its board of directors and is dependent on a number of
factors, including funds available for payment of dividends, financial
condition, capital expenditure requirements and annual distribution requirements
needed to maintain the Company's status as a REIT under the Internal Revenue
Code. Operating cash flows are expected to increase as additional properties are
added to the Company's investment portfolio.
The Company's principal demands for funds will be for property
acquisitions, either directly or through investment interests, for mortgage loan
investments, for the payment of operating expenses and dividends, and for the
payment of interest on the Company's outstanding indebtedness and other
investments. Generally, cash needs for items other than property acquisitions
and mortgage loan investments are expected to be met from operations, and cash
needs for property acquisitions are expected be met from the Company's current
public offering of up to 88,000,000 shares of common stock at $10 per share.
However, there may be a delay between the sale of the Company's shares and its
purchase of properties and mortgage loan investments, which could result in a
delay in the benefits to its stockholders, if any, of returns generated from the
Company's operations. The Company expects that at least 84.2% of the money that
stockholders invest will be used to buy real estate, make or invest in mortgage
loans or make other investments and approximately 0.8% of the gross proceeds of
the offering will be set aside as initial working capital reserves for such
properties. The remaining 15.0% will be used to pay expenses and fees for
selling commissions and dealer manager fees, organization and offering expenses,
acquisition and advisory fees and acquisition expenses. The Company's advisor
evaluates potential property acquisitions and mortgage loan investments and
engages in negotiations with sellers and borrowers on the Company's behalf.
Investors should be aware that after a purchase contract is executed that
contains specific terms, the property will not be purchased until the successful
completion of due diligence and negotiation of final binding agreements. During
this period, the Company may decide to temporarily invest any unused proceeds
from the Offering in certain investments that could yield lower returns than the
properties. These lower returns may affect the Company's ability to make
distributions.
Potential future sources of capital include proceeds from secured or
unsecured financings from banks or other lenders, proceeds from the sale of
properties and undistributed funds from operations. If necessary, the Company
may use financings or other sources of capital in the event of unforeseen
significant capital expenditures.
RESULTS OF OPERATIONS
As of the date of this Form 10-Q, no significant operations have
commenced because the Company is in its development stage. No operations will
commence until the Company has sold at least 250,000 shares of its common stock
with gross proceeds of $2,500,000 pursuant to its Registration Statement filed
on Form S-11 with the Securities and Exchange Commission ("Form S-11"). The
Company's management is not aware of any material trends or uncertainties, other
than national economic conditions affecting real estate generally, that may
reasonably be expected to have a material impact, favorable or unfavorable, on
revenues from the acquisition and
13
operations of real properties and mortgage loans, other than those referred to
in this Form 10-Q and the Company's Form S-11.
INFLATION
The real estate market has not been affected significantly by inflation
in the past several years due to the relatively low inflation rate. However, the
Company intends to include provisions in the majority of its tenant leases that
would protect it from the impact of inflation. These provisions include
reimbursement billings for common area maintenance charges, real estate tax and
insurance reimbursements on a per square foot basis, or in some cases, annual
reimbursement of operating expenses above a certain per square foot allowance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has limited exposure to financial market risks, including
changes in interest rates and other relevant market prices. The Company does not
have any foreign operations and is not exposed to foreign currency fluctuations.
Currently, the Company's cash and restricted cash balances at financial
institutions represent the majority of the Company's assets. A 10.0% increase or
decrease in interest rates would have no material affect on the Company's
financial position and results of operations.
ITEM 4. CONTROLS AND PROCEDURES.
The Chief Executive Officer and Chief Financial Officer of the Company
have concluded, based on their evaluation as of the period ended June 30, 2003,
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no significant changes in the Company's internal controls
that could significantly affect these controls subsequent to the date of such
evaluation.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 19, 2003, the Company's Registration Statement on Form
S-11, covering a public offering (the "Offering") of up to 80,000,000 shares of
common stock to be offered at a price of $10 per share was declared effective
under the Securities Act of 1933. The Registration Statement also covers up to
8,000,000 shares available pursuant to the Company's dividend reinvestment plan
and up to 3,520,000 shares issuable to broker-dealers pursuant to warrants
whereby participating broker-dealers will have the right to purchase one share
for every 25 shares they sell pursuant to the Offering.
The Company will not commence active operations until it receives and
accepts subscriptions for a minimum of 250,000 shares for gross offering
proceeds of $2,500,000. After the initial 250,000 shares are sold, subscription
proceeds will be held in escrow until investors are admitted as stockholders.
The Company intends to admit new stockholders at least monthly. At that time,
subscription proceeds may be released to the Company from escrow and utilized as
consideration for investments and the payment or reimbursement of the dealer
manager fee, selling commissions and other organization and offering expenses.
Until required for such purposes, net offering proceeds will be held in
short-term, liquid investments.
Until the Company satisfies the minimum offering requirement
established for its Offering by accepting subscriptions for at least 250,000
shares of common stock, funds received for these subscriptions will continue to
be escrowed. Amounts associated with these subscriptions are reflected in
Restricted cash and Subscriptions for common stock on the Company's balance
sheets.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 31.1 - Certification of Principal Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 - Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 - Certificate of Chief Executive and Financial
Officers
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 2003.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEHRINGER HARVARD REIT I, INC.
Dated: August 14, 2003 By: /s/ Gary S. Bresky
------------------------------------------
Gary S. Bresky
Chief Financial Officer and Treasurer
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INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive and Financial Officers
17