Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004.

For the Transition Period From                      to                     .

Commission file number 0-50854

THOMAS PROPERTIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (213) 613-1900

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  ¨    No  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

THOMAS PROPERTIES GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS

Table of Contents

PART I. FINANCIAL INFORMATION

Separate financial statements for Thomas Properties Group, Inc. (the “Company”) have not been presented as the Company had no operations from inception to September 30, 2004. Operations for the Company commenced upon the consummation of the initial public offering of the Company’s common stock on October 13, 2004. Therefore, combined financial statements for the Company’s predecessor (“Thomas Properties Group, Inc. Predecessor”) have been presented herein as of September 30, 2004 and December 31, 2003, and for the three and nine months ended September 30, 2004 and 2003.

1

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

COMBINED BALANCE SHEETS

(In thousands, except share data)

See accompanying notes to combined financial statements.

2

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

COMBINED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

See accompanying notes to combined financial statements.

3

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to combined financial statements.

4

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

1. Organization and Description of Business

Thomas Properties Group, Inc. (the “Company”) was incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, the Company completed its initial public offering (the “Offering”), which consisted of the sale of 14,285,714 shares of common stock at $12.00 per share, resulting in net proceeds to the Company of $152.5 million, after underwriting discounts and expenses of the Offering. Concurrent with the consummation of the Offering, the Company and a newly formed limited partnership, Thomas Properties Group, L.P. (the “Operating Partnership”), together with the partners and members of the affiliated partnerships and limited liability companies of TPG and other parties which hold direct or indirect ownership interests in the properties engaged in certain formation transactions (the “Formation Transactions”). The Formation Transactions were designed to (i) continue the operations of the Company’s predecessor (Thomas Properties Group, Inc. Predecessor, also referred to herein as “TPG”), (ii) enable the Company to raise the necessary capital to acquire increased interests in certain of the properties, (iii) fund joint venture capital commitments, (iv) provide capital for future acquisitions, and (v) fund future development costs at the Company’s development properties.

The operations of the Company will be conducted through the Operating Partnership. The Company is the sole general partner in the Operating Partnership. Upon completion of the Offering and pursuant to contribution agreements among the owners of TPG, the Company and the Operating Partnership, the Operating Partnership received a contribution of interests in the real estate properties, as well as the investment advisory, property management, leasing and real estate development operations of Thomas Development Partners, L.P., in exchange for units in our Operating Partnership issued to the contributors and the assumption of debt and other specified liabilities. The Company and Operating Partnership are fully integrated, self-administered and self-managed.

TPG was not a legal entity prior to the Offering, but rather a combination of real estate entities and operations as described below and was engaged in the business of owning, managing, leasing, acquiring and developing real estate, consisting primarily of office properties and related parking garages, located in Southern California, Sacramento, California, Philadelphia, Pennsylvania, Northern Virginia and Austin, Texas. During all periods presented in the accompanying combined financial statements, TPG was the general partner or managing member of the real estate entities that directly or indirectly own these properties and TPG had responsibility for the day-to-day operations of such entities. The ultimate owners of TPG were Mr. James A. Thomas and certain others who had minor ownership interests.

The real estate entities included in the accompanying combined financial statements have been combined for only the periods that such entities were under control by TPG. The equity method of accounting is utilized to account for investments in real estate entities over which TPG had significant influence, but not control over major decisions, including the decision to sell or refinance the properties.

Thomas Development Partners, L.P. provides property management, leasing and real estate development services to the real estate entities invested in by TPG and to certain unrelated parties and also provides investment advisory services to unrelated parties. All of the operations of Thomas Development Partners, L.P. unrelated to property management, leasing and real estate development have been excluded from the accompanying combined financial statements. Effective upon the closing of the Offering and the consummation of the Formation Transactions, Thomas Development Partners, L.P. ceased to exist as a separate entity.

5

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

As of September 30, 2004, TPG was invested in the following real estate properties:

2. Summary of Significant Accounting Policies

Principles of Combination

The Company and the real estate entities related to the properties for which TPG controls major decisions and the investment advisory, property management, leasing and real estate development operations of Thomas Development Partners, L.P. are combined in the accompanying combined financial statements. All significant intercompany balances and transactions have been eliminated in combination. The interests in One Commerce Square, beginning June 1, 2004, and Campus El Segundo, for all periods presented, not owned by TPG are reflected as minority interests.

Cash Equivalents

For purposes of the combined statements of cash flows, TPG considers short-term investments with original maturities of three months or less when purchased to be cash equivalents.

Investments in Real Estate

Investments in real estate are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:

6

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.

Uncombined Real Estate Entities

Investments in uncombined real estate entities are accounted for using the equity method of accounting whereby TPG’s investments in partnerships and limited liability companies are recorded at cost and the investment accounts are adjusted for TPG’s share of the entities’ income or loss and for distributions and contributions.

TPG uses the equity method to account for its uncombined real estate entities since it has significant influence but not control over the entities and none of the entities, other than One Commerce Square effective as of June 1, 2004 (see Note 3), are considered variable interest entities.

Impairment of Long-Lived Assets

TPG assesses whether there has been impairment in the value of its long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Management believes no impairment in the net carrying values of the investments in real estate and investments in uncombined real estate entities has occurred for the periods presented.

Deferred Leasing and Loan Costs

Deferred leasing commissions and other direct costs associated with the acquisition of tenants are capitalized and amortized on a straight-line basis over the terms of the related leases. Loan costs are capitalized and amortized to interest expense over the terms of the related loans using a method that approximates the effective-interest method.

Purchase Accounting for Acquisition of Interests in Real Estate Entities

Purchase accounting was applied, on a pro rata basis, to the assets and liabilities related to real estate entities for which TPG acquired interests, based on the percentage interest acquired. For purchases of additional interests that were consummated subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards No. 141, Business Combinations, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values.

The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to

7

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the terms in the respective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the additional interests in real estate entities acquired by TPG because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

Revenue Recognition

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred rents in the accompanying combined balance sheets and contractually due but unpaid rents are included in rents and other receivables.

Tenant reimbursements for real estate taxes, common area maintenance and other recoverable costs are recognized in the period that the expenses are incurred. Lease termination fees, which are included in other income in the accompanying combined statements of operations, are recognized when the related leases are canceled and TPG has no continuing obligation to provide services to such former tenants.

Investment advisory fees are based on a percentage of net operating income earned by a property under management and are recorded on a monthly basis as earned. Property management fees are based on a percentage of the revenue earned by a property under management and are recorded on a monthly basis as earned. Generally, 50% of leasing fees are recognized upon the execution of the lease and the remainder upon tenant occupancy unless significant future contingencies exist. Development fees are recognized as the real estate development services are rendered using the percentage-of-completion method of accounting.

8

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

New Accounting Pronouncements

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and provides guidance on the identification of entities for which control is achieved through means other than through voting rights, referred to as “variable interests,” and how to determine when and which business enterprise should consolidate the variable interest entity (“VIE”). This new model for consolidation applies to an entity in which either (1) the equity investors, if any, do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and defer the effective date of implementation for certain entities. The provisions of FIN 46R are effective for the first reporting period ending after December 15, 2003 for entities considered to be special-purpose entities. The provisions for all other entities subject to FIN 46R are effective for financial statements of the first reporting period ending after March 15, 2004. The adoption of this statement on January 1, 2003 had an impact on TPG’s financial statements as One Commerce Square was considered to be a variable interest entity beginning June 1, 2004 (see Note 3).

Income Taxes

TPG’s real estate entities are partnerships and limited liability companies, and its property management, leasing, and real estate development operations are held by a partnership. Under applicable federal and state income tax rules, the allocated share of net income or loss from partnerships and limited liability companies is reportable in the income tax returns of the partners and members. Accordingly, no income tax provision is included in the accompanying combined financial statements.

Management’s Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Management has identified certain critical accounting policies that affect management’s more significant judgments and estimates used in the preparation of TPG’s combined financial statements. On an ongoing basis, management evaluates estimates related to critical accounting policies, including those related to revenue recognition and the allowance for doubtful accounts receivable and investments in real estate and asset impairment. The estimates are based on information that is currently available to management and on various other assumptions that management believes are reasonable under the circumstances.

Management must make estimates related to the collectibility of accounts receivable related to minimum rent, deferred rent, expense reimbursements, lease termination fees and other income. Management specifically analyzes accounts receivable and historical bad debts, tenant concentrations, tenant creditworthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on TPG’s net income, because a higher bad debt allowance would result in lower net income.

9

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Management is required to make subjective assessments as to the useful lives of the properties for purposes of determining the amount of depreciation to record on an annual basis with respect to TPG’s investments in real estate. These assessments have a direct impact on TPG’s net income because if management were to shorten the expected useful lives of TPG’s investments in real estate, TPG would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

Management is required to make subjective assessments as to whether there are impairments in the values of TPG’s investments in real estate, including real estate held by the uncombined real estate entities accounted for using the equity method. These assessments have a direct impact on TPG’s net income because recording an impairment loss results in an immediate negative adjustment to net income.

Management is required to make subjective assessments as to the fair value of assets and liabilities in connection with purchase accounting related to interests in real estate entities acquired by TPG. These assessments have a direct impact on TPG’s net income subsequent to the acquisition of the interests as a result of depreciation and amortization being recorded on these assets and liabilities over the expected lives of the related assets and liabilities. Management estimates the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.

Segment Disclosure

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” established standards for disclosure about operating segments and related disclosures about products and services, geographic areas and major customers. TPG currently operates in one business segment: the acquisition, development, ownership, and management of commercial real estate. Additionally, the Company operates in one geographic area: the United States.

The products for the office segment include rental of office space to tenants, parking, rental of storage space and other tenant services.

Concentration of Credit Risk

TPG’s only combined operating properties are located in downtown Philadelphia, Pennsylvania. In addition, one of the two uncombined operating properties is also located in downtown Philadelphia, Pennsylvania. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the communities in which the tenants operate.

Financial instruments that subject the Company to credit risk consist primarily of cash and accounts receivable. TPG maintains its cash and cash equivalents and restricted cash on deposit with high quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. TPG performs ongoing credit evaluations of its tenants and maintains reserves for potential credit losses.

Deferred Offering Costs

Included in other assets at September 30, 2004 are deferred offering costs of $6,617,000, of which $5,146,000 is included in accounts payable and other liabilities. Deferred offering costs were recorded as a direct reduction to additional paid in capital of the Company on October 13, 2004, the effective date of the Offering.

10

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Interim Financial Data

The accompanying interim financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for the full fiscal year.

3. Uncombined Real Estate Entities

The uncombined real estate entities include the entities that own One Commerce Square (through May 30, 2004, as this entity was considered to be a variable interest entity on June 1, 2004), 2121 Market Street, Harris Building Associates and City National Plaza (formerly known as ARCO Plaza), including the off-site garage, which serves City National Plaza, known as J-2, (from the purchase date of January 28, 2003).

Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are TPG’s stated ownership percentages, prior to any preferred or special allocation, as of September 30, 2004:

On March 1, 2004, TPG entered into an agreement to purchase the 50% partnership interest in One Commerce Square not owned by it for a purchase price of $24,200,000, subject to certain adjustments. In accordance with the purchase agreement, for the period from June 1, 2004 until the earlier of the closing date, as extended, or the date on which, as a result of a material breach or default by TPG, the sellers terminated the purchase agreement. TPG pays the sellers an amount equal to 6% per annum on the purchase price, as adjusted. Additionally, the purchase price is increased by an amount equal to the aggregate amount of any capital contributions required to be made by the sellers to One Commerce Square for any purpose after June 1, 2004. Based on the terms of the purchase agreement, TPG considers One Commerce Square to be a variable interest entity as of June 1, 2004 and has combined the accounts of that property with TPG for the period from June 1, 2004 through September 30, 2004 and as of September 30, 2004. On October 13, 2004, the Company acquired the 50% partnership interest.

11

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Investments in uncombined real estate entities as of September 30, 2004 are as follows:

The following is a summary of the investments in uncombined real estate entities for the nine months ended September 30, 2004:

The joint venture with CalSTRS, which as of September 30, 2004 owns an 85.4% interest in City National Plaza, was formed in December 2002 to acquire office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Value-add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which can be positively impacted by introduction of new capital and/or management. Under the joint venture agreement, TPG has an exclusive obligation until the earlier of December 23, 2006 and the date CalSTRS has contributed its full capital commitments to the joint venture to first present all acquisition opportunities involving core plus and value-add properties to the joint venture before TPG may buy them.

As of September 30, 2004, TPG has a 5% interest in the joint venture. On October 13, 2004, at the consummation of the Offering, the Company acquired an additional interest and increased its ownership interest in the joint venture to 25%, and as of that date, the unfunded capital commitments of CalSTRS and the Company were $164,000,000 and $56,000,000, respectively.

Upon the earlier to occur of certain events or January 1, 2006, a buy-sell provision may be exercised by either the Company or CalSTRS. Under this provision, the initiating party sets a price for its interest in the joint venture, and the other party has a specified time to either elect to buy the initiating party’s interest, or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has a buy-out option to purchase the Company’s interest in the joint venture. The buyout price is based upon a discount of 3% to the appraised fair market value. Upon the earlier to occur of certain events or January 1, 2006, the minority owners of City National Plaza have the option to require the joint venture to purchase its interest for an amount equal to what would be payable to them upon liquidation of the assets at fair market value.

12

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Two Commerce Square is a party to a master lease agreement and a reciprocal easement and operating agreement with One Commerce Square. The master lease agreement allocates revenues related to the lease of certain retail and commercial office space between Two Commerce Square and One Commerce Square. The reciprocal easement and operating agreement addresses the use of cost sharing, revenue sharing, management and other matters related to the subterranean parking garage and the common plaza amenities shared by Two Commerce Square and One Commerce Square. The revenues from transient parking in the subterranean garage are allocated between Two Commerce Square and One Commerce Square based on the utilization of transient parking spaces by cars visiting either property. Expenses related to the parking operations are allocated based on the same percentages as the revenue allocation.

Following is summarized financial information for the uncombined real estate entities as of September 30, 2004 and December 31, 2003 and for the three months ended September 30, 2004 and 2003 and the nine months ended September 30, 2004 and 2003:

Summarized Balance Sheets

Summarized Statements of Operations

13

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Included in the preceding summarized balance sheet as of September 30, 2004, is the following balance sheet of City National Plaza:

Following is summarized financial information by real estate entity for the three months ended September 30, 2004:

14

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Following is summarized financial information by real estate entity for the three months ended September 30, 2003:

Following is summarized financial information by real estate entity for the nine months ended September 30, 2004:

15

Table of Contents

THOMAS PROPERTIES GROUP, INC. PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

(Tabular amounts in thousands)

Following is summarized financial information by real estate entity for the nine months ended September 30, 2003: