<PAGE>
PROSPECTUS
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7,000,000 Shares
PAN PACIFIC RETAIL PROPERTIES, INC.
Common Stock
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Pan Pacific Retail Properties, Inc. (the "Company"), a self-administered and
self-managed real estate investment trust (a "REIT"), was formed in April 1997
to continue and expand the acquisition, ownership, management, leasing and
development business of Pan Pacific Development (U.S.) Inc. and its affiliates
(collectively, "PPD"). The Company's portfolio consists principally of community
and neighborhood shopping centers predominantly located in four key western U.S.
markets with attractive economic and demographic characteristics. Upon the
consummation of this offering (the "Offering") and a series of related
transactions (the "Formation Transactions"), the Company will own or control a
portfolio of 25 shopping center properties (collectively, the "Properties"), of
which 21 are located in the western United States (including six in Northern
California, six in Southern California, five in Las Vegas, Nevada and four in
the Pacific Northwest). The Properties have an average age of approximately
seven years and encompass over 3.6 million square feet of gross leasable area
(the "GLA"), of which 96.0% was leased to 616 tenants as of March 31, 1997. The
Company intends to make regular quarterly distributions to its stockholders
beginning with a distribution for the period ending September 30, 1997.
All of the shares of common stock of the Company, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by the Company and will represent
approximately 44.4% of all shares of Common Stock outstanding after consummation
of the Offering. Upon consummation of the Offering, PPD will own approximately
54.8% of the Common Stock. See "Principal Stockholders." To assist the Company
in maintaining its qualification as a REIT for federal income tax purposes,
ownership by any person generally is limited to 6.25% of the then outstanding
Common Stock.
Prior to the Offering, there has been no public market for the Common Stock of
the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The shares of Common Stock
offered hereby have been approved for listing on the New York Stock Exchange
(the "NYSE") under the symbol "PNP," subject to official notice of issuance. See
"Glossary" beginning on page 120 for definitions of certain terms used in this
Prospectus.
SEE "RISK FACTORS" ON PAGES 15 TO 27 FOR A DISCUSSION OF CERTAIN MATERIAL RISKS
WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY, INCLUDING:
- Third party appraisals were not obtained regarding the properties; the
consideration to be paid by the Company may exceed the fair market value
of the properties and, therefore, the aggregate market value of the Common
Stock may exceed the value of the Company's total assets.
- Demand for shopping center space in the Company's markets may decrease;
the Company's ability to attract and retain tenants may be adversely
affected; and developed properties may cost more and take longer to
develop than anticipated.
- The six recently acquired properties may not perform as well as expected
or may have deficiencies currently unknown to the Company.
- Conflicts of interest with, material benefits to and controlling influence
of PPD and affiliates of the Company exist in connection with the
Formation Transactions, the Offering and the Company's ongoing business.
- The Company's estimated initial annual distributions represent 95.6% of
its estimated initial cash available for distribution; therefore, the
Company may be required to fund distributions from working capital or
borrowings or to reduce such distributions.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share.......................................... $19.50 $1.20 $18.30
Total(3)........................................... $136,500,000 $8,400,000 $128,100,000
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $2,800,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 1,050,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$156,975,000 the total Underwriting Discounts and Commissions will be
$9,660,000 and the total Proceeds to Company will be $147,315,000. See
"Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made at the office of
Prudential Securities Incorporated, One New York Plaza, New York, New York, on
or about August 13, 1997.
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
August 7, 1997 SMITH BARNEY INC.
<PAGE>
(1) A map depicting Washington, Oregon, California and Nevada, marked to show
locations of Pan Pacific Properties.
HISTORICAL PERFORMANCE*
<TABLE>
<CAPTION>
AVERAGE BASE RENT PER
SQUARE FOOT FOR NEW AND AVERAGE YEAR
RENEWED LEASES SIGNED END OCCUPANCY
(2) DURING YEAR ($) RATE (%)
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<S> <C> <C>
1994 11.52 96
1995 13.09 95
1996 14.74 96
</TABLE>
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* Reflects the historical performance of the Properties as owned by the
Company's predecessor.
TENANT DIVERSIFICATION
(% OF TOTAL LEASED GROSS LEASABLE AREA)
(3) PIE CHART
<TABLE>
<S> <C>
National 73
Regional 10
Local 17
Non-Anchor 43
Anchor 57
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
Photographs of portions of some of the Company's shopping center properties,
including the following:
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Tanasbourne Village Hillsboro, OR
Cheyenne Commons Las Vegas, NV
Canyon Ridge Plaza Kent, WA
Chino Town Square Chino, CA
Sahara Pavilion North Las Vegas, NV
Laguna Village Sacramento, CA
Sunset Square Bellingham, WA
Sahara Pavilion South Las Vegas, NV
Winterwood Pavilion Las Vegas, NV
Arlington Courtyard Riverside, CA
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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PROSPECTUS SUMMARY............................ 1
The Company................................... 1
Risk Factors.................................. 3
Growth Strategies............................. 4
The Properties................................ 6
Overview of the Company's Key Western U.S.
Markets...................................... 8
Financing Policies............................ 8
The Unsecured Credit Facility................. 9
Existing Mortgage Debt........................ 9
Structure and Formation Transactions of the
Company...................................... 9
The Offering.................................. 12
Distributions................................. 12
Restrictions on Ownership of Common Stock..... 12
Tax Status of the Company..................... 13
Summary Selected Combined Financial Data...... 13
RISK FACTORS.................................. 15
Price to be Paid for Properties and Other
Assets May Exceed Their Fair Market Value.... 15
Real Estate Investment Associated Risks....... 15
Lack of Operating History with Respect to the
Recent Acquisition and Development of
Properties................................... 18
Conflicts of Interests in the Formation
Transactions and the Business of the
Company...................................... 18
Estimated Initial Cash Available for
Distribution May Not Be Sufficient to Make
Distributions at Expected Levels............. 19
Dependence on Key Management Personnel........ 19
Potential Inability to Refinance Indebtedness
on Favorable Terms; Interest Rates May
Rise......................................... 19
Adverse Consequences of Failure to Qualify as
a REIT; Other Tax Liabilities................ 20
Distributions to Stockholders Affected by Many
Factors...................................... 21
Acquisition and Development Investments May
Not Perform as Expected...................... 22
The Properties May Be Subject to Unknown
Environmental Liabilities.................... 22
No Limitation on Amount of Indebtedness the
Company May Incur............................ 23
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Limits on Changes in Control and Potential
Anti-Takeover Effects........................ 24
Certain Types of Losses May Exceed Insurance
Coverage..................................... 25
Historical Losses............................. 26
Effect on Common Stock Price of Shares
Available for Future Sale.................... 26
Immediate and Substantial Dilution............ 26
Absence of Prior Public Market for Common
Stock........................................ 26
Changes in Policies Without Stockholder
Approval..................................... 27
Effect of Market Interest Rates on Price of
Common Stock................................. 27
Disposition of Properties with Built-In
Gain......................................... 27
THE COMPANY................................... 28
General....................................... 28
History....................................... 30
BUSINESS AND GROWTH STRATEGIES................ 31
Business Strategies........................... 31
Growth Strategies............................. 31
USE OF PROCEEDS............................... 34
DISTRIBUTION POLICY........................... 35
CAPITALIZATION................................ 39
DILUTION...................................... 40
SELECTED COMBINED FINANCIAL DATA.............. 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 43
Overview...................................... 43
Results of Operations......................... 43
Pro Forma Operating Results................... 47
Liquidity and Capital Resources............... 48
Cash Flows.................................... 49
Inflation..................................... 50
Impact of Accounting Pronouncements Issued but
not Adopted by the Company................... 50
OVERVIEW OF THE COMPANY'S FOUR KEY WESTERN
U.S. MARKETS................................. 51
General....................................... 51
Selected Submarkets........................... 55
BUSINESS AND PROPERTIES....................... 59
General....................................... 59
Historical Leasing Activity................... 60
</TABLE>
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PAGE
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National, Regional and Local Tenant Summary... 62
Anchor, Non-Anchor Tenant Summary............. 63
Major Tenants................................. 64
Lease Expirations............................. 65
Capital Expenditures.......................... 66
Other Assets.................................. 66
Potential Acquisition......................... 66
Excluded Assets............................... 67
Debt Structure................................ 67
Unsecured Credit Facility..................... 68
Insurance..................................... 68
Management and Employees...................... 69
Legal Proceedings............................. 69
Government Regulation......................... 69
MANAGEMENT.................................... 71
Directors and Executive Officers.............. 71
Committees of the Board of Directors.......... 73
Compensation of Directors..................... 74
Executive Compensation........................ 74
Employment Agreements......................... 74
Stock Incentive Plan.......................... 75
401(k) Plan................................... 78
Indemnification............................... 78
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................. 79
Terms of Transfers............................ 79
Director Designation.......................... 79
Registration Rights........................... 79
Assignment of Lease........................... 79
Preemptive Rights............................. 79
Non-Competition Agreement..................... 79
STRUCTURE AND FORMATION TRANSACTIONS OF THE
COMPANY...................................... 80
Formation Transactions........................ 80
Benefits to Related and Other Parties......... 80
Determination and Valuation................... 81
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES... 82
Investment Policies........................... 82
Dispositions.................................. 83
Financing Policies............................ 83
Working Capital Reserves...................... 84
Conflict of Interest Policies................. 84
Other Policies................................ 85
PRINCIPAL STOCKHOLDERS........................ 86
DESCRIPTION OF CAPITAL STOCK.................. 87
General....................................... 87
Common Stock.................................. 87
Transfer Agent and Registrar.................. 88
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Preferred Stock............................... 88
Power to Issue Additional Shares of Common
Stock and Preferred Stock.................... 88
Restrictions on Ownership and Transfer........ 88
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS................. 92
Board of Directors............................ 92
Removal of Directors.......................... 92
Business Combinations......................... 93
Control Share Acquisitions.................... 93
Amendment to the Charter and Bylaws........... 94
Meetings of Stockholders...................... 94
Advance Notice of Director Nominations and New
Business..................................... 94
Dissolution of the Company.................... 95
Limitation of Liability and Indemnification
for Directors and Officers................... 95
SHARES ELIGIBLE FOR FUTURE SALE............... 97
General....................................... 97
Registration Rights........................... 99
Reinvestment and Share Purchase Plan.......... 99
FEDERAL INCOME TAX CONSEQUENCES............... 100
Taxation of the Company....................... 100
Failure to Qualify............................ 105
Consequences of the Formation Transactions on
the Company's Qualification as a REIT --
Earnings and Profits Distribution
Requirement.................................. 106
Taxation of Taxable U.S. Stockholders
Generally.................................... 107
Backup Withholding............................ 108
Taxation of Tax-Exempt Stockholders........... 108
Taxation of Non-U.S. Stockholders............. 109
Tax Risks Associated with Partnerships........ 112
Recently Enacted Legislation.................. 113
Other Tax Consequences........................ 113
ERISA CONSIDERATIONS.......................... 114
Fiduciary Considerations...................... 114
Plan Assets Issue............................. 114
UNDERWRITING.................................. 116
EXPERTS....................................... 118
LEGAL MATTERS................................. 119
ADDITIONAL INFORMATION........................ 119
GLOSSARY...................................... 120
INDEX TO FINANCIAL STATEMENTS................. F-1
</TABLE>
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<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA, INCLUDING THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS INDICATED OTHERWISE, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE UNDERWRITERS'
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND (II) THE CONSUMMATION OF THE
FORMATION TRANSACTIONS DESCRIBED UNDER THE HEADING "STRUCTURE AND FORMATION
TRANSACTIONS OF THE COMPANY" GIVE PRO FORMA EFFECT THERETO AS IF SUCH
TRANSACTIONS HAD OCCURRED ON MARCH 31, 1997. ALL REFERENCES TO THE "COMPANY" IN
THIS PROSPECTUS INCLUDE PAN PACIFIC RETAIL PROPERTIES, INC. AND ITS CONSOLIDATED
SUBSIDIARIES UNLESS OTHERWISE EXPRESSLY STATED OR THE CONTEXT OTHERWISE
REQUIRES; ALL REFERENCES TO THE SQUARE FOOTAGE OF GROSS LEASABLE AREA ("GLA"),
PERCENTAGES OF GLA AND SQUARE FOOTAGE ARE APPROXIMATE; AND ALL REFERENCES IN
THIS PROSPECTUS TO THE HISTORICAL ACTIVITIES OF THE COMPANY REFER TO THE
ACTIVITIES OF PAN PACIFIC DEVELOPMENT (U.S.) INC. AND ITS AFFILIATES
(COLLECTIVELY, "PPD"). SEE "GLOSSARY" BEGINNING ON PAGE 120 FOR THE DEFINITIONS
OF CERTAIN TERMS USED IN THIS PROSPECTUS, INCLUDING CAPITALIZED TERMS USED
HEREIN WITHOUT DEFINITION.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust (a "REIT") that has been formed to continue to operate and expand the
shopping center business conducted by PPD. The Company is engaged in the
ownership, management, leasing, acquisition and development of shopping centers
located primarily in the western United States. Upon completion of this offering
(the "Offering") and a series of related transactions (the "Formation
Transactions"), the Company will own or control a portfolio of 25 shopping
center properties (each, a "Property" and collectively, the "Properties").
The Properties are well established community and neighborhood shopping
centers which are generally strategically situated in densely populated, middle
and upper income markets and are conveniently located and easily accessible from
major transportation arterials. The Properties consist of an aggregate of over
3.6 million square feet of GLA (not including 611,472 square feet of
anchor-owned space at the Properties), have an average age of approximately
seven years and are primarily situated in submarkets of the four key western
U.S. markets: Northern California, Southern California, Las Vegas, Nevada and
the Pacific Northwest, each of which the Company believes has strong economic
and demographic characteristics. The largest concentration of Properties (39.0%
of the total GLA) is located in California, which has the nation's largest
population and is experiencing an economic recovery, with 21.1% of the total GLA
in Northern California and 17.9% of the total GLA in Southern California.
Properties consisting of 30.9% of the total GLA are located in Las Vegas,
Nevada, which is the fastest growing city in the U.S. and where the Company
believes it is one of the largest owners and operators of community and
neighborhood shopping centers based on square feet owned and operated in the Las
Vegas area. Properties consisting of 22.4% of the total GLA are located in the
Pacific Northwest primarily in the Seattle, Washington and Portland, Oregon
metropolitan areas, which have growing populations and are currently
experiencing steady economic growth. In addition, Properties consisting of the
remaining 7.7% of the total GLA are located in New Mexico, Tennessee, Kentucky
and Florida. Since December 31, 1993, the Company has maintained a year-end
portfolio occupancy rate (based on square footage) ranging from 92.8% to 96.3%
for the Properties owned at such dates. As of March 31, 1997, 96.0% of the
Properties' total GLA was leased to 616 tenants, of which 256 were national
tenants and 74 were regional tenants (together representing 83.0% of the total
leased GLA) such as Wal-Mart (9.1% of leased GLA), Ross Dress for Less (2.2%),
PayLess Drugs (2.1%), 24 Hour Fitness (1.7%), and United Artists Theatre (1.4%).
Sixteen of the Properties are anchored by national or regional supermarkets such
as Albertson's, Kroger, Food-4-Less, Vons, Lucky Stores and Safeway.
The Company's business strategy involves three fundamental practices: (i)
owning and operating shopping centers in select key markets with strong economic
and demographic characteristics in order to establish and maintain a portfolio
of real estate assets with stable income and the potential for long-term growth;
(ii) developing local and regional market expertise through the hands-on
participation of senior
1
<PAGE>
management in property operations and leasing in order to capitalize on market
trends, retailing trends and acquisition opportunities; and (iii) establishing
and maintaining a diversified and complementary tenant mix with an emphasis on
tenants that provide day-to-day consumer necessities in order to provide steady
rental revenue. The Company has a proven track record in enhancing the value of
its Properties by increasing occupancy rates and rental revenue.
As a result of management's in-house leasing program, the Properties benefit
from a diversified merchandising mix, which includes having national and/or
regional anchor tenants in 21 of the 25 shopping centers, complemented by a
carefully planned mix of national, regional and local non-anchor tenants. To
promote stability and attract non-anchor tenants, the Company generally enters
into long-term leases with major or anchor tenants. To take advantage of
improving market conditions and changing retail trends, the Company generally
enters into shorter term leases with non-anchor tenants.
Management intends to continue its strategy of acquiring shopping centers
that provide an opportunity to expand in current markets or to establish a
presence in targeted markets with favorable economic demographic
characteristics. The Company seeks to acquire properties that can benefit from
its hands-on management, that may require repositioning, redevelopment or
renovation or which can be purchased at attractive capitalization rates and are
consistent in terms of quality and location with the Company's existing
portfolio.
Management believes that its ability to continue to grow and enhance the
long-term value of the Company will be based on the continued implementation of
its business and growth strategies along with the following factors: (i) the
attractive economic and demographic characteristics in its four key western U.S.
markets; (ii) the quality of its portfolio and diversified tenant base; (iii)
its relationships with national, regional and local tenants; (iv) the Company's
market knowledge and in-house acquisition, leasing and property management
expertise; and (v) the Company's capital structure, financial flexibility and
access to capital as a public company, including a $150 million variable rate
unsecured acquisition credit facility (the "Unsecured Credit Facility"), as to
which the Company has entered into a commitment letter with Bank of America
NT&SA.
The Company's history in owning and operating retail properties dates back
to 1971 when Mark Tanz began a real estate operation focused on retail
properties in Toronto, Canada and Southern California. In 1985, Mr. Tanz became
the largest shareholder of Revenue Properties Company Limited ("Revenue
Properties"), a publicly-held Canadian real estate company, and implemented a
restructuring plan to focus the business on owning and operating retail
properties in both Canada and the U.S. Since 1985, Mr. Tanz has been a director
of Revenue Properties, and two of his sons, Stuart Tanz and Russell Tanz, have
been directors and executive officers of Revenue Properties.
In 1992, Revenue Properties acquired a controlling interest in the Company's
predecessor entity and acquired the remaining interest in 1993. Since 1992, PPD
has been led by Stuart Tanz, the Company's Chief Executive Officer and
President, along with Jeffrey Stauffer, the Company's Senior Vice President of
Operations and Development. In January 1995, David Adlard joined the Company as
Executive Vice President and Chief Financial Officer. Although the Company has
been a wholly-owned subsidiary of Revenue Properties since 1993, the Company has
functioned as an independent organization with separate management, personnel
and operational systems, including all real estate related activities such as
in-house leasing, acquisition, development, property management and accounting
operations. Since 1992, management has grown PPD's portfolio of shopping centers
from 13 properties (encompassing 2.1 million square feet) to 25 properties
(encompassing 3.6 million square feet) through acquisition and development
activities focused within the Company's four key western U.S. markets.
Upon completion of the Offering and after giving effect to the $26,486,000
capital contribution by PPD to the Company in connection with the Formation
Transactions, Revenue Properties (through its 100% ownership of PPD) will own
approximately 54.8% of the common stock of the Company, par value $.01 per share
(the "Common Stock"). See "Principal Stockholders." Mark Tanz, Stuart Tanz,
Russell Tanz
2
<PAGE>
and the other members of the Tanz family (collectively the "Tanz Family")
together owned approximately 35.6% of the approximately 66,000,000 outstanding
shares of common stock of Revenue Properties at March 31, 1997. At such date,
Stuart Tanz and Russell Tanz individually owned 25,000 shares and 33,360 shares,
respectively, of common stock of Revenue Properties. Russell Tanz also held
options exercisable in 740,000 shares of common stock of Revenue Properties.
Effective August 1, 1997, Russell Tanz resigned as a director and officer of
Revenue Properties and as a director of PPD. Upon the consummation of the
Offering, Stuart Tanz will resign as a director and officer of Revenue
Properties and PPD.
RISK FACTORS
An investment in shares of the Common Stock involves various material risks.
Prospective investors should carefully consider the following risk factors in
addition to the other information set forth in this Prospectus, in connection
with an investment in the shares of Common Stock offered hereby. Such risks
include, among others:
- valuation of the Properties was not based on third-party appraisals, and
the consideration to be paid by the Company for the Properties may exceed
their aggregate fair market value and, therefore, the aggregate market
value of the Common Stock may exceed the value of the Company's total
assets;
- demand for shopping center space in the Company's markets may decrease;
the Company may be unable to attract and retain tenants by renewing leases
or reletting space upon lease expirations or, to pay renovation and
reletting costs in connection therewith; economic and other conditions may
affect shopping center property cash flows and values; tenants may be
unable to make lease payments or may become bankrupt; the Company may be
restricted from making certain decisions with respect to those properties
(Chino Town Square, Melrose Village Plaza and Tanasbourne Village) owned
by partnerships of which the Company owns a partnership interest (the
"Partially-Owned Properties"); a property may not generate revenue
sufficient to meet operating expenses, including future debt service; and
real estate investments are generally illiquid. The foregoing may
adversely affect the Company's ability to make expected distributions to
stockholders;
- the six recently acquired Properties may not perform as well as expected
or may have deficiencies currently unknown to the Company; the recently
acquired Properties may have characteristics or deficiencies unknown to
the Company affecting their valuation or revenue potential and may not
perform in accordance with expectations; the cost of integrating such
acquisitions into the Company's existing management structure may be
greater than expected;
- conflicts of interest with PPD and affiliates of the Company with respect
to the Formation Transactions, including conflicts relating to the
interests of certain members of management in such transactions, conflicts
that may arise between Revenue Properties and the Company and conflicts
which may arise as a result of the lead managing underwriter for the
Offering receiving a portion of the net proceeds of the Offering as
repayment of indebtedness;
- the Company's estimated initial annual distributions represent 95.6% of
the Company's estimated initial cash available for distribution for the
twelve months ending July 31, 1998; therefore, if the Company were not
able to pay its estimated initial annual distribution out of cash
available for distribution, the Company could be required to fund
distributions from working capital, draw down under the Credit Facility,
or reduce the amount of such distribution.
- influence of certain affiliates of the Company (including Revenue
Properties) on the Company may not be consistent with the interests of
other stockholders;
- dependence on key management personnel, whose continued service is not
guaranteed;
3
<PAGE>
- real estate financing risks, including the possibility that the Company
may not be able to refinance outstanding indebtedness upon maturity
(including the Company's proposed $150 million Unsecured Credit Facility
which will mature in three years) or that such indebtedness might be
refinanced at higher interest rates or otherwise on terms less favorable
to the Company than existing indebtedness, which could adversely affect
the Company's ability to make expected distributions to stockholders and
its ability to qualify as a REIT;
- taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes, the Company's liability for certain
federal, state and local income taxes in such event and the resulting
reduction in net earnings of the Company available for distribution to
stockholders;
- distribution requirements of REITs under federal income tax laws may limit
the Company's ability to finance future developments, acquisitions and
expansions without additional debt or equity financing necessary to
achieve the Company's business plan, which in turn may adversely affect
the price of the Company's Common Stock and may limit cash available for
distribution;
- possible environmental liabilities in connection with the Company's
ownership or operation of the Properties, as well as the cost of
compliance with certain governmental regulations which may negatively
impact the Company's financial condition, results of operations and cash
available for distribution;
- absence of a limitation in the organizational documents of the Company on
the amount of indebtedness that the Company may incur;
- potential anti-takeover effects of provisions generally limiting the
actual or constructive ownership of capital stock of the Company by any
one person or entity to 6.25% of the total outstanding shares of capital
stock and of certain other provisions contained in the organizational
documents of the Company, which may discourage a change in control and
limit the opportunity for stockholders to receive a premium for their
Common Stock over then-prevailing market prices;
- certain types of losses, such as from fire, earthquakes, and floods, may
be uninsured or may exceed the Company's insurance coverage; risks
associated with the Company's ability to make distributions to
stockholders;
- PPD Properties had historical net losses for the years ended December 31,
1995 and 1994;
- effect that future sales of Common Stock may have on the market price of
shares of Common Stock;
- potential immediate and substantial dilution in the net tangible book
value per share of the shares of Common Stock purchased by new investors
in the Offering;
- absence of a prior public market for the Common Stock, including the risk
that an active trading market may not develop or if developed, might not
be maintained, which may negatively impact the market price at which
shares of Common Stock may be resold;
- effect of market interest rates on the market price of the Common Stock;
and
- disposition of certain properties with built-in gain may subject the
Company to additional taxes.
GROWTH STRATEGIES
The Company's primary objective is to maximize total return to shareholders
through increasing cash flow per share and enhancing the value of its portfolio.
The Company believes it can achieve this objective by continuing to (i) acquire
select community and neighborhood shopping centers at attractive capitalization
rates; (ii) use its development expertise to redevelop or renovate properties it
may acquire, to build out existing and any acquired undeveloped pads or other
expansion space, and to develop new shopping
4
<PAGE>
centers when it believes market conditions support favorable risk-adjusted
returns; and (iii) maximize cash flow from its existing Properties. The Company
will continue to focus its activities within its four key western U.S. markets
(Northern California, Southern California, Las Vegas, Nevada and the Pacific
Northwest) which continue to exhibit attractive economic and demographic
characteristics and where the Company believes it is well positioned to take
advantage of opportunities based on its experience, market knowledge and
reputation as a leading regional owner and operator of quality shopping centers.
The Company believes that significant acquisition opportunities exist within
its four key markets that are consistent with its existing portfolio and that
provide attractive initial capitalization rates with potential for growth in
cash flow. Management intends to add value to such retail properties through the
application of its active, hands-on management and aggressive leasing
strategies. The Company further believes it has certain competitive advantages
which enhance its ability to identify and capitalize on acquisition
opportunities, including: (i) long-standing relationships with institutional and
other owners of shopping center properties in the Company's four primary
regions; (ii) fully integrated real estate operations which enable the Company
to respond quickly to acquisition opportunities and to capitalize on the
resulting economies of scale; and (iii) access to capital as a public company,
including the Unsecured Credit Facility.
Although the Company believes that current market conditions generally favor
acquisitions, management intends to continue its practice of redeveloping and
expanding properties as market and retailing trends evolve. In addition, the
Company intends to continue developing quality shopping center properties when
it believes market conditions and tenant opportunities support favorable
risk-adjusted returns.
The Company's management has extensive experience in implementing its
acquisition and development strategy focused within its four primary regions. Of
the 25 Properties, management has acquired 21 of the Properties (including the
13 acquired when Revenue Properties acquired Pan Pacific Development Corporation
("PPDC")) and developed four of the Properties. Of the 21 acquired Properties,
six have been acquired since January 1, 1997, encompassing 813,154 square feet
for an aggregate purchase price of $83.4 million, including four properties in
Northern California, one in Southern California and one in Las Vegas.
The Company intends to maximize the cash flow from its existing Properties
by continuing to enhance the operating performance of each Property through its
in-house leasing and property management programs. The Company intends to
continue to aggressively pursue: (i) the leasing of currently available space
(144,847 square feet as of March 31, 1997); (ii) the renewal or releasing of
expiring leases at higher rental rates which management believes currently are
available based on improving market conditions and its recent leasing activity
(during the 12 months ended December 31, 1996, the Company renewed or released
439,887 square feet of GLA for an average base rent of $14.74 per square foot as
compared to an average base rent of $11.44 per square foot under expiring
leases); and (iii) economies of scale in the management and leasing of
properties that may be realized by focusing its acquisition and development
activities within its four primary regions.
There can be no assurance, however, that the Company will acquire any
properties; expand any of its existing Properties or develop any existing pads;
redevelop, renovate or expand properties it may acquire in the future; develop
any new properties; lease available space; renew or release space relating to
leases scheduled to expire; enter into renewals or new leases on space relating
to leases scheduled to expire that reflect rental rates greater than or equal to
the rates in the expiring leases; or experience any economies of scale.
5
<PAGE>
THE PROPERTIES
The following table sets forth certain information about each of the
Properties:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN
TOTAL BASE RENT YEAR
TOTAL PLACE AT 3/31/97(3)
NUMBER ENDED 12/31/96(2) ------------------------
OF ---------------------- ANN. BASE
YEAR TOTAL % LEASED TENANTS % OF RENT/SQ.
PROPERTY AND COMPLETED/ GLA(1) AS OF AS OF BASE PORTFOLIO ANN. BASE FT. MAJOR
LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97 RENT ($) BASE RENT RENT(3)($) (4)($) RETAILERS(5)
- -------------------- ---------- --------- --------- -------- ----------- ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 1988/1994 267,735 99.6 17 1,803,202 4.9 2,024,304 7.59 HomeBase,
CHICO, CA Food-4-Less,
Barnes & Noble,
Office Depot
Monterey Plaza(6) 1990 183,180 95.2 27 2,380,864 6.5 2,439,660 13.99 Wal-Mart,
SAN JOSE, CA Lucky(9),
Walgreens
Lakewood Shopping 1988 107,769 96.2 26 756,034 2.1 978,756 9.44 Raley's, U.S.
Center(6) Post Office
WINDSOR, CA
Fairmont Shopping 1988 104,281 100.0 29 1,156,767 3.1 1,194,792 11.46 Lucky, PayLess
Center(6) Drugs
PACIFICA, CA
Rosewood Village 1988 50,248 92.5 18 681,392 1.9 731,013 15.73 Lad's
SANTA ROSA, CA Supermarket,
Bradley Video
Laguna Village(7) 1996 48,183 100.0 1 564,044 1.5 903,583 18.75 United Artists
SACRAMENTO, CA --------- --- ----------- ----- ----------- Theatre
TOTAL/WEIGHTED AVERAGE 761,396 97.7 118 7,342,303 20.0 8,272,108 11.12
--------- --- ----------- ----- -----------
SOUTHERN CALIFORNIA
Chino Town 1987 337,001 96.1 51 4,356,377 11.9 4,268,379 13.18 Target(9),
Square(8) Wal-Mart,
CHINO, CA Mervyn's(9),
Nordstrom Rack,
AMC Theaters
Melrose Village 1990 132,674 90.8 27 1,325,134 3.6 1,346,542 11.18 Lucky, Sav-On
Plaza(8) Drug
VISTA, CA
Laurentian Center 1988 97,131 92.9 23 1,112,592 3.0 1,121,039 12.42 Pep Boys, 24
ONTARIO, CA Hour Fitness,
A-1 Hardware
Vineyard Village 1992 45,200 100.0 4 362,771 1.0 366,945 8.12 Sears, Dunn
East Edwards Paints
ONTARIO, CA
Foothill Center(6) 1990 19,636 75.2 9 89,011 0.3 107,064 7.25 PIP Printing
RIALTO, CA
Arlington 1991 12,221 100.0 6 150,826 0.4 150,082 12.28 Harvest
Courtyard --------- --- ----------- ----- ----------- Christian
RIVERSIDE, CA Bookstore
TOTAL/WEIGHTED AVERAGE 643,863 94.2 120 7,396,711 20.2 7,360,051 12.13
--------- --- ----------- ----- -----------
LAS VEGAS, NEVADA
Cheyenne Commons 1992 362,758 99.0 44 4,042,473 11.0 4,088,434 11.38 Wal-Mart, 24
LAS VEGAS, NV Hour Fitness,
Ross Dress For
Less
Sahara Pavilion 1989 333,679 94.9 66 3,731,658 10.2 4,029,508 12.72 Vons, Longs
North Drugs, TJMaxx,
LAS VEGAS, NV Shepler's,
Border's Books
Sahara Pavilion 1990 160,682 88.6 22 2,018,969 5.5 1,948,751 13.69 Sports
South Authority,
LAS VEGAS, NV Office Max,
Michael's Arts
& Crafts
Green Valley Town 1990 130,553 98.4 36 1,469,436 4.0 1,660,316 12.93 Lucky/Sav-On
& Country(6) Superstore
HENDERSON, NV
Winterwood 1990 127,975 92.3 21 919,868 2.5 975,212 8.26 Vons,
Pavilion --------- --- ----------- ----- ----------- Heilig-Meyers
LAS VEGAS, NV Furniture
TOTAL/WEIGHTED AVERAGE 1,115,647 95.4 189 12,182,404 33.2 12,702,221 11.93
--------- --- ----------- ----- -----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN
TOTAL BASE RENT YEAR
TOTAL PLACE AT 3/31/97(3)
NUMBER ENDED 12/31/96(2) ------------------------
OF ---------------------- ANN. BASE
YEAR TOTAL % LEASED TENANTS % OF RENT/SQ.
PROPERTY AND COMPLETED/ GLA(1) AS OF AS OF BASE PORTFOLIO ANN. BASE FT. MAJOR
LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97 RENT ($) BASE RENT RENT(3)($) (4)($) RETAILERS(5)
- -------------------- ---------- --------- --------- -------- ----------- ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PACIFIC NORTHWEST
Sunset Square 1989 352,523 93.9 39 2,595,503 7.1 2,593,765 7.83 Kmart, Ennen's
BELLINGHAM, WA Food,
Fabricland,
PayLess Drugs
Tanasbourne 1990 210,692 100.0 40 2,397,142 6.5 2,555,822 12.13 Safeway,
Village(8) PayLess Drugs,
HILLSBORO, OR Jo-Ann Fabrics,
Pier 1 Imports
Olympia Square 1988 164,521 96.1 37 1,808,273 4.9 1,861,866 11.78 Albertsons,
OLYMPIA, WA Ross Dress For
Less
Canyon Ridge Plaza 1995 81,678 96.5 15 681,091 1.9 839,669 10.65 Target(9), Top
KENT, WA --------- --- ----------- ----- ----------- Foods(9), Ross
Dress For Less
TOTAL/WEIGHTED AVERAGE 809,414 96.2 131 7,482,009 20.4 7,851,122 10.08
--------- --- ----------- ----- -----------
OTHER
Maysville 1991/1993 126,507 100.0 19 851,604 2.3 874,616 6.91 Wal-Mart(9),
Marketsquare Kroger Company,
MAYSVILLE, KY J.C. Penney
Ocoee Plaza 1990 52,242 90.7 11 336,345 0.9 339,452 7.16 Food Lion,
OCOEE, FL Family Dollar
Sports Unlimited 1990 51,542 100.0 13 600,803 1.6 601,738 11.67 Sports
MEMPHIS, TN Unlimited(9),
Rich-Well
Bedding Co.,
Hancock Fabrics
Country Club 1988 46,850 92.1 15 500,245 1.4 488,871 11.33 Furr's
Center --------- --- ----------- ----- ----------- Foods(9), Rio
ALBUQUERQUE, NM Rancho Health &
Fitness
TOTAL/WEIGHTED AVERAGE 277,141 96.9 58 2,288,997 6.2 2,304,677 8.58
--------- --- ----------- ----- -----------
PORTFOLIO
TOTAL/WEIGHTED AVERAGE 3,607,461 96.0 616 36,692,424 100.0 38,490,179 11.12
--------- --- ----------- ----- -----------
--------- --- ----------- ----- -----------
</TABLE>
- ----------------------------------
(1) Represents GLA owned by the Company. Excludes 611,472 square feet of
anchor-owned GLA.
(2) Total base rent for the year ended December 31, 1996 calculated in
accordance with GAAP.
(3) Annualized base rent for all leases in place at March 31, 1997 calculated as
follows: total base rent, calculated in accordance with GAAP, to be received
during the entire term of each lease, divided by the terms in months for
such leases, multiplied by 12.
(4) Annualized base rent divided by the GLA leased at March 31, 1997.
(5) National and regional retailers that occupy significant space at the
referenced Property.
(6) Acquired by the Company after March 31, 1997.
(7) Excludes Phase II which encompasses 60,022 square feet and is currently
nearing completion of construction.
(8) The Company owns a 91% interest in Chino Town Square, a 50% interest in
Melrose Village Plaza and a 90% interest in Tanasbourne Village. Table
reflects 100% of Property data. See "Risk Factors--Risks Regarding
Partially-Owned Properties."
(9) These retailers own their space and are not tenants of the Company. The
Company, therefore, does not receive any rent from these retailers and does
not control their space. These retailers, therefore, could sell or sublease
their stores which could adversely effect the related Property.
7
<PAGE>
OVERVIEW OF THE COMPANY'S KEY WESTERN U.S. MARKETS
The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally
recognized experts in real estate consulting and urban economics, to study
certain key regions within the Company's western markets in which 21 of the 25
Properties (representing 92.3% of the total GLA) are located. The discussion of
such markets below is taken from Lesser's findings set forth in a market study
prepared by Lesser (the "Lesser Market Study"). The selected economic and
demographic characteristics (population, employment, median household income and
retail sales) are key factors which indicate the strength of a market for owning
and operating shopping centers. While the Company currently owns properties in
certain of the submarkets of the larger regions discussed herein, the Company
intends to expand by acquiring properties throughout the larger regions. The
economic and demographic trends in these submarkets may differ from those of the
larger region of which they are a part. For example, although the Company
intends to be selective within the larger regions, the population growth rates,
employment growth rates, median household income levels and growth rates or
retail sales growth rates in the larger regions may not be as attractive as in
the submarkets in which the Company currently owns its Properties. Thus, any
properties the Company may acquire in the larger region may not perform as well
as the Company's current Properties. While the Company believes that Lesser's
views of economic and demographic trends in these areas are reasonable, there
can be no assurance that these trends will in fact continue.
POPULATION. For the periods from 1990 to 1996 and from 1996 to 2001, each
of the Company's western U.S. markets has experienced or is expected to
experience population growth and, in the case of Las Vegas, Nevada, substantial
population growth. The Northern California and Southern California populations
are among the largest in the nation (and together constitute approximately 12%
of the nation's population) and Las Vegas is the fastest growing city in the
U.S.
EMPLOYMENT. For the periods from 1990 to 1996 and from 1996 to 2001, each
of the Company's western U.S. markets has experienced or is expected to
experience employment growth and, in the case of Las Vegas, Nevada, substantial
growth. Employment in each of these markets is expected to exceed the national
average.
MEDIAN HOUSEHOLD INCOME. For the periods from 1989 to 1996 and from 1996 to
2001, each of the Company's western U.S. markets has experienced or is expected
to experience median household income growth.
RETAIL SALES. For the period from 1990 to 1995, each of the Company's
western U.S. markets has experienced retail sales growth and, in the case of Las
Vegas, Nevada, substantial retail sales growth, except for Southern California
which has experienced a modest decline when measured from 1990 (most of which is
as a result of the deep recession in the early 1990's). Since 1993, Southern
California has again experienced retail sales growth indicating a recovery from
this recession. Aggregate retail sales in the Northern California and Southern
California markets are among the highest in the nation and together represent
more than 10% of the nation's retail sales.
FINANCING POLICIES
The Company's Board of Directors intends to maintain a debt policy limiting
the Company's total indebtedness to 50% of the Company's total market
capitalization. However, such objective may be altered without the consent of
the Company's stockholders and the Company's organization documents do not limit
the amount of indebtedness that the Company may incur. Upon completion of the
Offering, total debt will constitute approximately 22.9% of the total market
capitalization of the Company. All of the indebtedness will bear interest at
fixed rates with a weighted average rate of 8.11% at March 31, 1997. The Company
intends to utilize one or more sources of capital, including the Unsecured
Credit Facility and undistributed cash flow, for future acquisitions, capital
improvements and development activities.
8
<PAGE>
THE UNSECURED CREDIT FACILITY
The Company has entered into a commitment letter with Bank of America NT&SA,
subject to final documentation, for a $150 million variable rate unsecured
acquisition credit facility. The Unsecured Credit Facility will be used by the
Company primarily to finance acquisition of properties. Borrowings under the
Unsecured Credit Facility will bear interest at 150 basis points over the London
Interbank Offered Rate ("LIBOR"). The Unsecured Credit Facility will provide
revolving credit for two years and, unless extended, will require payment of
principal in twelve equal monthly installments in the third year. The Unsecured
Credit Facility will be subject to customary conditions, including, among other
things, the payment of commitment and maintenance fees and compliance with
certain financial covenants. See "Business and Properties--Unsecured Credit
Facility."
EXISTING MORTGAGE DEBT
Upon completion of the Offering, there will be a total of $91.4 million of
secured debt encumbering 7 of the 25 Properties. The weighted average fixed
interest rate of this debt was 8.11% at March 31, 1997. See "Business and
Properties--Debt Structure."
STRUCTURE AND FORMATION TRANSACTIONS OF THE COMPANY
FORMATION TRANSACTIONS. The Company was incorporated in the State of
Maryland on April 16, 1997. Concurrently with the consummation of the Offering,
the Company and PPD will engage in certain Formation Transactions. The Formation
Transactions have been designed to enable the Company to continue to expand the
real estate operations of PPD and to repay certain mortgage debt relating
thereto, to facilitate the Offering, to enable the Company to qualify as a REIT
for federal income tax purposes commencing with its taxable year ending December
31, 1997 and to preserve certain tax advantages to PPD. The Formation
Transactions are as follows:
- Certain of the Properties have been or will be transferred by PPD entities
to the Company and certain PPD entities that own the remaining Properties
have been or will be merged into the Company.
- PPD will contribute $26,486,000 in cash to the Company (the "PPD
Contribution").
- The Company will sell shares of Common Stock in the Offering.
- Approximately $148,933,000 or 98.7% of the estimated net proceeds of the
Offering and the PPD Contribution will be used by the Company to repay
certain mortgage debt secured by certain of the Properties and
indebtedness outstanding under lines of credit to be assumed by the
Company in the Formation Transactions and to pay transaction costs,
including fees and expenses associated with the Unsecured Credit Facility.
See "Use of Proceeds."
- The Company will enter into the Unsecured Credit Facility.
- Fifty-nine of the 61 current employees of PPD will resign from PPD and
become employees of the Company, including Stuart Tanz, the President and
Chief Executive Officer of PPD, three other officers of PPD (David Adlard,
Jeffrey Stauffer and Laurie Sneve) and other operating and administrative
employees.
Additional information regarding the Formation Transactions is set forth
under "Structure and Formation Transactions of the Company."
9
<PAGE>
The following diagram depicts the ownership structure of the Company upon
completion of the Offering and the other Formation Transactions:
[GRAPH]
- ------------------------
(1) Except for those Properties or interests in Properties which are held,
directly or indirectly, by single-asset, wholly-owned subsidiaries of the
Company, the Properties, interests in Properties and other assets are
directly owned by the Company.
(2) Pan Pacific Development (Tennessee), Inc., together with the Company, owns
100% of the interests in Sports Unlimited.
(3) Pan Pacific Development (Chino), Inc. owns, directly or indirectly, 91% of
the interests in Chino Town Square.
(4) Pan Pacific Development (Kentucky), Inc., together with the Company, owns
100% of the interests in Maysville Marketsquare.
BENEFITS TO RELATED AND OTHER PARTIES. Certain affiliates of the Company
will realize certain material benefits in connection with the Formation
Transactions, including the following:
- In exchange for its ownership interests in certain Properties and certain
PPD entities, PPD will receive a total of 8,634,012 shares of Common
Stock, with a total value of approximately $168.4 million based on the
assumed initial public offering price of the Common Stock, which compares
to a net book value of such interests and assets of approximately $133.0
million as of March 31, 1997 (which amount does not include the $26.5
million PPD Contribution). The Company does not believe that the book
values of the interests and assets exchanged are equivalent to the fair
market values of such interests and assets.
- Approximately $145.3 million of indebtedness (excluding accrued interest)
of PPD secured by certain of the Properties will be repaid in the
Formation Transactions.
- Approximately $91.4 million of indebtedness of PPD secured by certain of
the Properties have been or will be assumed by the Company in the
Formation Transactions.
- Stuart Tanz will serve as a director and officer of the Company and will
enter into an employment agreement providing for annual salary, bonus,
participation in the Company's Stock Incentive Plan and other benefits for
his services.
10
<PAGE>
- David Adlard and Jeffrey Stauffer will serve as officers of the Company
and will enter into employment agreements providing for annual salary,
bonus, participation in the Company's Stock Incentive Plan and other
benefits for their services.
- PPD will have certain participation rights in connection with future
issuances of Common Stock by the Company which will enable PPD and its
affiliates to maintain their overall percentage ownership of the Common
Stock of the Company.
- PPD will have the right to nominate two persons for election to the Board
of Directors of the Company so long as PPD and its affiliates collectively
own at least 25% of the outstanding Common Stock.
- PPD received a loan of $9.6 million from an affiliate of Prudential
Securities Incorporated ("Prudential Securities"), the lead managing
Underwriter for the Offering, to finance the acquisition of one of the
Properties. Such loan, plus accrued interest, will be repaid to such
affiliate at the consummation of the Offering from the proceeds of the
Offering.
Additional information regarding these and certain other benefits to be received
by affiliates of the Company in connection with the Formation Transactions is
set forth under "Structure and Formation Transactions of the Company--Benefits
to Certain Individuals" and "Management--Employment Agreements." "See "Risk
Factors--Conflicts of Interest in the Formation Transactions and the Business of
the Company--Benefits from Formation Transactions" and "Certain Relationships
and Related Transactions."
DETERMINATION AND VALUATION. Upon completion of the Formation Transactions,
the Company will hold 100% of the interests in all of the Properties, except for
the Partially-Owned Properties. Based on the assumed initial public offering
price of the Common Stock: (i) the purchasers of Common Stock in the Offering
will own approximately 44.4% of the outstanding Common Stock; and (ii) PPD will
own approximately 54.8% of the outstanding Common Stock. See "Shares Eligible
for Future Sale" for certain transfer restrictions applicable to the shares of
Common Stock received in connection with the Formation Transactions.
The aggregate estimated value of the Common Stock to be held by PPD after
the Offering is approximately $168.4 million. The net book value of the
interests and assets to be contributed by PPD in the Formation Transactions was
approximately $133.0 million at March 31, 1997 (which amount does not include
the $26.5 million PPD Contribution).
The Company did not obtain appraisals with respect to the market value of
any of the Properties or other assets that the Company will own immediately
after consummation of the Offering and the other Formation Transactions or an
opinion as to the fairness of the allocation of shares to the purchasers in the
Offering. The valuation of the Company has been determined based primarily upon
the estimated cash available for distribution and the factors discussed under
"Underwriting," rather than a property-by-property valuation based on historical
cost or current market value. This methodology has been used because management
believes it is appropriate to value the Company as an ongoing business rather
than with a view to values that could be obtained from a liquidation of the
Company or of individual properties or assets owned by the Company. See "Risk
Factors--Price to be Paid for Properties and Other Assets May Exceed Their Fair
Market Value."
11
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby................. 7,000,000 shares
Common Stock Outstanding after the
Offering.................................. 15,764,012 shares (1)
Use of Proceeds............................. Together with the proceeds from the PPD
Contribution: (i) repayment of $145.3 million
of mortgage debt on certain of the Properties,
excluding accrued interest; (ii) financing
costs and expenses of $3.6 million; and (iii)
for working capital purposes. See "Use of
Proceeds;" "Capitalization;" and "Management's
Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and
Capital Resources."
NYSE Symbol................................. PNP
</TABLE>
- ------------------------
(1) Includes 8,634,012 restricted shares issued to PPD and 130,000 restricted
shares issued to management upon the consummation of the Offering.
DISTRIBUTIONS
The Company intends to make regular quarterly distributions to holders of
the Common Stock. The Company intends to pay a pro rata distribution with
respect to the period commencing on the closing of the Offering and ending on
September 30, 1997, based upon $0.3625 per share for a full quarter. On an
annualized basis, this would be $1.45 per share, or an annual distribution rate
of 7.44%. The Company intends initially to distribute annually approximately
95.6% of estimated cash available for distribution. The Company established this
distribution rate based upon an estimate of cash available for distribution that
will be available for distributions after the Offering. See "Distribution
Policy" for information as to how this estimate was derived. The Company intends
to maintain its initial distribution rate for the twelve-month period following
consummation of the Offering unless actual results of operations, economic
conditions or other factors differ materially from the assumptions used in its
estimate. Distributions by the Company will be determined by the Board of
Directors and will be dependent upon a number of factors. The Company believes
that its estimate of cash available for distribution constitutes a reasonable
basis for setting the initial distribution; however, no assurance can be given
that the estimate will prove accurate, and actual distributions may therefore be
significantly different from the expected distributions. In addition, in order
to maintain its qualification as a REIT under the Code, the Company is, in
general, required to distribute currently 95% of its taxable income. See
"Federal Income Tax Consequences-- Taxation of the Company--Annual Distribution
Requirements." The Company does not intend to reduce the expected distribution
per share if the Underwriters' over-allotment option is exercised.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
Due to limitations on the concentration of ownership of stock of a REIT
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), the
charter of the Company (the "Charter") prohibits any stockholder from actually
or constructively owning more than 6.25% of the outstanding shares of Common
Stock (the "Ownership Limit"), except that the Board of Directors has waived the
Ownership Limit with respect to PPD and the Tanz Family and has permitted PPD
and its affiliates to actually or constructively own up to 55.0% of the
outstanding Common Stock, and the Tanz Family to actually or constructively own
(including through the ownership of stock, of PPD or Revenue Properties), in the
aggregate, up to 24.0% of the outstanding Common Stock. See "Risk
Factors--Limits on Changes in Control and Potential Anti-Takeover Effects" and
"Description of Capital Stock--Restrictions on Ownership and Transfer."
12
<PAGE>
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997, and believes its organization and proposed method of operation will enable
it to meet the requirements for qualification as a REIT. To maintain REIT
status, an entity must meet a number of organizational and operational
requirements, including a requirement that it currently distribute at least 95%
of its taxable income to its stockholders. See "Federal Income Tax
Consequences--Taxation of the Company--Annual Distribution Requirements." As a
REIT, the Company generally will not be subject to federal income tax on net
income it distributes currently to its stockholders. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the
subsequent taxable years. See "Federal Income Tax Consequences" and "Risk
Factors--Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities." Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain federal, state and local taxes on its income and
property.
SUMMARY SELECTED COMBINED FINANCIAL DATA
The following table sets forth summary selected combined financial and
operating information on a pro forma basis for the Company and on a combined
historical basis for the Pan Pacific Development Properties, which is not a
legal entity, but consists solely of the accounts of Pan Pacific Development
(U.S.) Inc. related to the ownership, management and leasing of its neighborhood
and community shopping centers and medical office building (collectively, "PPD
Properties"). All of the accounts of Pan Pacific Development (U.S.) Inc.
unrelated to these activities have been excluded from the combined historical
financial statements of PPD Properties. The Company was formed to carry on the
shopping center related activities of Pan Pacific Development (U.S.) Inc.
Accordingly, the combined financial statements include the PPD Properties on a
historical cost basis in a manner similar to a pooling-of-interests. The
following information should be read in conjunction with the historical and pro
forma financial statements and notes thereto of the Company and of PPD
Properties included elsewhere in this Prospectus. The summary selected combined
historical financial and operating information of PPD Properties at December 31,
1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, has
been derived from the historical combined financial statements audited by KPMG
Peat Marwick LLP, independent auditors, whose report with respect thereto is
included elsewhere in this Prospectus. The summary selected combined historical
financial and operating information for the three months ended March 31, 1997
and March 31, 1996 has been derived from the unaudited combined financial
statements of PPD Properties included elsewhere in this prospectus. The summary
selected combined historical financial and operating information at December 31,
1994, 1993 and 1992 and for the year ended December 31, 1993 and for the 13
months ended December 31, 1992 has been derived from the audited consolidated
financial statements of Pan Pacific Development (U.S.) Inc.
The unaudited summary selected pro forma financial and operating information
for the three months ended March 31, 1997 and the year ended December 31, 1996
is presented as if the Offering, the Formation Transactions, and the
acquisitions of the Properties and certain other assets acquired after March 31,
1997 and prior to the Offering had all occurred on March 31, 1997 for the
combined balance sheet and at the beginning of the period presented for the
combined statements of operations. The Formation Transactions require the
pay-off of debt with proceeds of the Offering. The pro forma financial
statements do not assume the acquisition of any partial interests in the PPD
Properties. The summary selected pro forma financial information is not
necessarily indicative of what the actual financial position or results of the
Company would have been as of and for the periods indicated, nor does it purport
to represent the Company's future financial position or results of operations.
13
<PAGE>
THE COMPANY (PRO FORMA) AND PPD PROPERTIES (COMBINED HISTORICAL)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------
COMBINED
PRO FORMA HISTORICAL PRO FORMA COMBINED HISTORICAL
----------- -------------------- ----------- --------------------
1997 1997 1996 1996 1996 1995
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue:
Base rent............................................. $ 9,078 $ 7,229 $ 6,427 $ 36,170 $ 28,111 $ 23,315
Percentage rent....................................... 68 68 51 239 239 154
Recoveries from tenants................................. 1,954 1,689 1,528 7,613 6,214 5,478
Gain (loss) on sales of real estate..................... -- -- -- -- -- 501
Income (loss) from uncombined partnerships.............. 173 55 125 663 109 (32)
Other revenue........................................... 307 191 -- 874 432 319
----------- --------- --------- ----------- --------- ---------
Total revenue........................................... 11,580 9,232 8,131 45,559 35,105 29,735
----------- --------- --------- ----------- --------- ---------
Property expenses(2).................................... 2,370 1,958 1,748 9,206 7,365 6,789
Depreciation and amortization........................... 2,168 1,827 1,766 8,738 7,245 6,340
Interest expense........................................ 2,041 3,836 3,602 7,524 14,671 12,262
General and administrative expenses..................... 835 918 867 3,340 3,228 3,620
Other expenses.......................................... 244 450 556 203 1,981 1,247
Provision for impairment................................ -- -- -- -- -- --
----------- --------- --------- ----------- --------- ---------
Income (loss) before income tax expense and minority
interest.............................................. 3,922 243 (408) 16,548 615 (523)
Income tax expense...................................... -- (29) (42) -- (122) (87)
Minority interest....................................... (66) (31) 2 (187) (44) (5)
----------- --------- --------- ----------- --------- ---------
Net income (loss)....................................... $ 3,856 $ 183 $ (448) $ 16,361 $ 449 $ (615)
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
Pro forma net income per share (3)...................... $ 0.24 $ 1.04
----------- -----------
----------- -----------
<CAPTION>
1994 1993 1992(1)
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue:
Base rent............................................. $ 20,967 $ 20,834 $ 20,020
Percentage rent....................................... 192 243 171
Recoveries from tenants................................. 5,473 3,210 2,908
Gain (loss) on sales of real estate..................... -- 3,945 (1,209)
Income (loss) from uncombined partnerships.............. (271) (108) (75)
Other revenue........................................... 387 -- 411
--------- --------- ---------
Total revenue........................................... 26,748 28,124 22,226
--------- --------- ---------
Property expenses(2).................................... 7,152 7,450 7,508
Depreciation and amortization........................... 6,129 6,255 7,416
Interest expense........................................ 11,405 10,880 10,661
General and administrative expenses..................... 3,729 3,116 4,460
Other expenses.......................................... 1,592 274 545
Provision for impairment................................ -- -- 9,984
--------- --------- ---------
Income (loss) before income tax expense and minority
interest.............................................. (3,259) 149 (18,348)
Income tax expense...................................... (7) -- --
Minority interest....................................... 50 9 (14)
--------- --------- ---------
Net income (loss)....................................... $ (3,216) $ 158 $ (18,362)
--------- --------- ---------
--------- --------- ---------
Pro forma net income per share (3)......................
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31,
------------------------ ----------------------
PRO FORMA HISTORICAL 1996 1995
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Properties--net of accumulated depreciation and amortization............ $ 345,368 $ 283,869 $ 264,017 $ 251,423
Total assets............................................................ 379,177 307,614 293,186 275,690
Notes payable........................................................... 91,430 191,126 192,915 191,302
Total liabilities....................................................... 96,193 244,051 229,839 212,984
Minority interest....................................................... 1,572 1,572 1,539 1,347
Total owner's equity.................................................... 281,412 61,991 61,808 61,359
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Properties--net of accumulated depreciation and amortization............ $ 214,554 $ 168,280 $ 194,077
Total assets............................................................ 247,101 190,551 201,300
Notes payable........................................................... 160,465 138,181 163,911
Total liabilities....................................................... 183,754 142,955 170,802
Minority interest....................................................... 1,373 (100) --
Total owner's equity.................................................... 61,974 47,696 30,498
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------- -------------------------------------
PRO FORMA COMBINED HISTORICAL PRO FORMA COMBINED HISTORICAL
----------- ------------------------ ----------- ------------------------
1997 1997 1996 1996 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(4)......................... $ 6,025 $ 2,012 $ 1,330 $ 25,139 $ 7,733 $ 5,290
Cash flows from:
Operating activities........................... -- $ 975 $ 1,982 -- $ 6,045 $ 5,456
Investing activities........................... -- $ (20,831) $ (9,773) -- $ (18,354) $ (42,815)
Financing activities........................... -- $ 14,735 $ 6,314 -- $ 14,966 $ 26,683
Number of operating Properties (at end of
period)........................................ 25 20 18 25 19 18
GLA (sq. ft.) (at end of period)................. 3,607,461 3,062,042 2,737,577 3,607,461 2,794,307 2,737,577
Occupancy of Properties owned (at end of
period)........................................ 96.0% 95.9% 94.7% 95.9% 95.8% 95.4%
<CAPTION>
1994
-----------
<S> <C>
OTHER DATA:
Funds from Operations(4)......................... $ 3,095
Cash flows from:
Operating activities........................... $ 1,944
Investing activities........................... $ (24,287)
Financing activities........................... $ 36,927
Number of operating Properties (at end of
period)........................................ 13(5)
GLA (sq. ft.) (at end of period)................. 2,145,708(5)
Occupancy of Properties owned (at end of
period)........................................ 96.3%(5)
</TABLE>
- ----------------------------------
(1) Represents 13 months of operations because of a change in 1992 to a December
31 fiscal year end from a November 30 fiscal year end.
(2) Property expenses includes property operating expenses, property taxes and
property management fees.
(3) Pro forma weighted average common shares outstanding and pro forma net
income per share are presented as if the Formation Transactions (including
the issuance of 130,000 shares of restricted stock) occurred on January 1,
1996. The incremental effect on pro forma net income per share from the
repayment of debt was $.34 and $1.37 for the three months ended March 31,
1997 and the year ended December 31, 1996, respectively. The incremental
effect was calculated by dividing the pro forma reduction in interest
expense by the number of shares that would have to be issued at $18.18 to
repay $145.3 million of debt.
(4) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. The Company computes Funds from Operations
in accordance with standards established by the White Paper. The Company's
computation of Funds from Operations may, however, differ from methodology
for calculating Funds from Operations utilized by other equity REITs and,
therefore, may not be comparable to such other REITs. Funds from Operations
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance
or to cash flow from operating activities (determined in accordance with
GAAP) as a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
(5) Excludes Arlington Courtyard, Laurentian Center and Vineyard Village East
which were acquired on December 31, 1994.
14
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves various risks.
Prospective investors should carefully consider the following risk factors in
conjunction with the other information contained in this Prospectus before
making a decision to purchase shares of Common Stock in the Offering.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Prospectus.
PRICE TO BE PAID FOR PROPERTIES AND OTHER ASSETS MAY EXCEED THEIR FAIR
MARKET VALUE. No independent valuations, appraisals or fairness opinions were
obtained by the Company in connection with the Properties and the Formation
Transactions. In addition, there were no arm's length negotiations in connection
with the consideration paid for the transfer of assets and Properties to the
Company. Therefore, the total market capitalization of the Company at the
initial public offering price may not be indicative of, and may exceed, the
aggregate appraised value of the individual Properties if appraisals of the
Properties had been obtained in connection with the Formation Transactions. The
initial public offering price, however, was determined based on negotiations
between the Company and the Underwriters, and the factors considered in
determining such price include, in addition to prevailing market conditions, the
expected results of operations of the Company (which are based on results of
operations of the Properties in recent periods), estimates of the business
potential and earning prospects of the Company, and the current state of the
economy as a whole. See "Underwriting." There can be no assurance that the value
of the consideration received by PPD in the Formation Transactions accurately
reflects the value of the Properties to the Company.
REAL ESTATE INVESTMENT ASSOCIATED RISKS.
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend in large part on the
amount of income generated and expenses incurred. If the Properties do not
generate revenue sufficient to meet operating expenses, including debt service,
tenant improvements, leasing commissions and other capital expenditures, the
Company may have to borrow additional amounts to cover fixed costs and the
Company's cash flow and ability to make distributions to its stockholders will
be adversely affected.
The Company's revenue and the value of its properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; changes in retail
expenditures by consumers; the perceptions of prospective tenants of the
attractiveness of the property; the ability of the Company to manage and
maintain the Properties and secure adequate insurance; and increased operating
costs (including real estate taxes and utilities). In addition, real estate
values and income from properties are also affected by such factors as
applicable laws, including tax laws, interest rate levels and the availability
of financing.
POTENTIAL INABILITY OF COMPANY TO RETAIN TENANTS AND RELET SPACE. The
Company will be subject to the risks that upon expiration, leases may not be
renewed, the space may not be relet or the terms of renewal or reletting
(including the cost of required renovations) may be less favorable than current
lease terms. Leases covering a total of approximately 2.7% and 35.5% of the
leased GLA of the Properties will expire through the end of 1997 and 2001,
respectively. The Company budgets for renovation and reletting expenses, which
take into consideration its views of both the current and expected market
conditions in the geographic regions in which the Properties are located, but no
assurance can be given that these reserves
15
<PAGE>
will be sufficient to cover such costs. If the Company is unable to promptly
relet or renew leases for all or a substantial portion of this space, if the
rental rates upon such renewal or reletting are significantly lower than
expected or if the Company's reserves for these purposes prove inadequate, the
Company's cash flow and ability to make expected distributions to stockholders
could be adversely affected. The ability of the Company to rent unleased space
may also be affected by many factors, including certain use covenants
restricting the nature of tenants occupying other space at a Property often
found in leases and reciprocal easement agreements or other restrictive
covenants relating to the Property with tenants or other owners or occupants of
the Property. In addition, in the event of a default by a lessee or sublessee in
its obligations to the Company, the Company may experience delays in enforcing
its rights as lessor or sublessor and may incur substantial costs and experience
significant delays associated with protecting its investment, including costs
incurred in acquiring and making substantial improvements or repairs to a
Property.
DEPENDENCE ON MARKET CONDITIONS IN THE GEOGRAPHIC REGIONS. Six Properties
are located in Northern California, six Properties are located in Southern
California, five are located in Las Vegas, Nevada and four are located in the
Pacific Northwest. To the extent that general economic or other relevant
conditions in these regions decline and result in a decrease in consumer demand
in these regions, the Company's performance may be adversely affected. The
markets for certain Properties are also significantly dependent on the financial
results of major local employers and on industry concentrations.
TENANT EARLY TERMINATION RIGHTS. Certain leases at some of the Properties
have provisions which allow the lessee to terminate its lease prior to the end
of the original term thereof under certain conditions, including, for example,
the failure to achieve a stated minimum sales level, the failure to achieve or
maintain a stated minimum leasing level, or the closing of an anchor store and
its failure to reopen within a certain period of time. To the extent that any
tenants terminate their leases prior to the end of the original lease terms,
tenant occupancy may decrease. The failure of the Company to re-lease any of the
Company's space could materially affect the Company's revenues and its ability
to make distributions.
POTENTIAL ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are
relatively illiquid. Such illiquidity will tend to limit the ability of the
Company to vary its portfolio promptly in response to changes in economic or
other conditions. In addition, the Code limits a REIT's ability to sell
properties held for fewer than four years, which may affect the Company's
ability to sell properties without adversely affecting returns to holders of
Common Stock.
COMPETITION WITH OTHER DEVELOPERS AND REAL ESTATE COMPANIES. There are
numerous commercial developers and real estate companies that compete with the
Company in seeking land for development, properties for acquisition and tenants
for properties. There are numerous shopping facilities that compete with the
Properties in attracting retailers to lease space. In addition, retailers at the
Properties face increasing competition from outlet stores, discount shopping
clubs, and other forms of marketing of goods, such as direct mail, internet
advertising and telemarketing. Such competition may reduce properties available
for acquisition or development, reduce percentage rents payable to the Company
and may, through the introduction of competition, contribute to lease defaults
or insolvency of tenants. Thus, competition could materially affect the
Company's ability to generate net income and to make distributions to its
stockholders.
COST OF COMPLIANCE WITH CHANGES IN LAWS. Because increases in income,
service or transfer taxes are generally not passed through to tenants under
leases, such increases may adversely affect the Company's cash flow and its
ability to make distributions to stockholders. The Properties are also subject
to various federal, state and local regulatory requirements, such as
requirements of the Americans with Disabilities Act of 1990 (the "ADA") and
state and local fire and life safety requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants. The Company believes that the
Properties are currently in substantial compliance with all such regulatory
requirements and the Company expects to maintain compliance with such regulatory
requirements. However, there can be no assurance that these requirements will
not be changed or that new
16
<PAGE>
requirements will not be imposed which would require significant unanticipated
expenditures by the Company and could have an adverse effect on the Company's
cash flow and expected distributions.
RELIANCE ON CERTAIN TENANTS AND ANCHORS. The Company's income and funds
from operations could be adversely affected in the event of the bankruptcy or
insolvency, or a downturn in the business, of any anchor store, or if any anchor
tenant does not renew its lease when it expires. If the tenant sales at the
Properties were to decline, tenants might be unable to pay their rent or other
occupancy costs. In the event of default by a tenant, delays and costs in
enforcing the lessor's rights could be experienced. In addition, the closing of
one or more anchor-occupied stores or lease termination by one or more anchor
tenants of a shopping center whose leases may permit termination could adversely
impact that Property and result in lease terminations or reductions in rent by
other tenants whose leases may permit termination or rent reduction in those
circumstances and adversely affect the Company's ability to re-lease the space
that is vacated. Each of these developments could adversely affect the Company's
funds from operations and its ability to make expected distributions to
shareholders.
BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS. At any time, a tenant of the
Properties may seek the protection of bankruptcy laws, which could result in
rejection and termination of such tenant's lease and thereby cause a reduction
in cash flow available for distribution by the Company. Although the Company has
not experienced material losses from tenant bankruptcies, no assurance can be
given that tenants will not file for bankruptcy protection in the future or, if
any tenants file, that they will affirm their leases and continue to make rental
payments in a timely manner. In addition, a tenant from time to time may
experience a downturn in its business which may weaken its financial condition
and result in the failure to make rental payments when due. If tenant leases are
not affirmed following bankruptcy or if a tenant's financial condition weakens,
the Company's income may be adversely affected.
AMERICANS WITH DISABILITIES ACT COMPLIANCE. Under the ADA, places of public
accommodation and for commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective after January 1, 1991. Although management of the Company
believes that the Properties are substantially in compliance with the present
requirements of the ADA, the Company may incur additional costs in connection
with such compliance in the future. In addition, a number of additional federal,
state and local laws and regulations exist that may require modifications to the
Company's properties, or affect certain future renovations thereof, with respect
to access by disabled persons. Non-compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants, and also could
result in an order to correct any non-complying feature. Under certain of the
Company's leases, the tenant is responsible for ensuring that the property
complies with all laws and regulations, including the ADA. Notwithstanding the
foregoing, the Company may be required to make substantial capital expenditures
to comply with this law. In addition, provisions of the ADA may impose
limitations or restrictions on the completion of certain renovations and thus
may limit the overall returns on the Company's investments. Thus, costs of
compliance with the ADA could adversely impact the Company's expenses and,
therefore, affect its ability to make distributions.
LIMITATIONS ON CONTROL OF PARTIALLY-OWNED PROPERTIES. The Company owns a
91% partnership interest in the limited partnership that owns Chino Town Square,
a 50% managing general partnership interest in the limited partnership that owns
Melrose Village Plaza and a 90% managing partnership interest in the limited
partnership that owns Tanasbourne Village. The Company may have certain
fiduciary responsibilities to third parties which it will need to consider when
making decisions relating to the Partially-Owned Properties. The Company will
not have sole control of certain major decisions relating to these Partially-
Owned Properties and will need to seek the consent of such third parties under
certain circumstances such as sales, refinancings, the timing and amount of
additional capital contributions thereto and the transfer, assignment or pledge
of the Company's partnership interests in the partnerships owning the Partially-
Owned Properties. In addition, the Company may also participate with other
entities in property ownership through joint ventures or partnerships in the
future. Partnership or joint venture investments may,
17
<PAGE>
under certain circumstances, involve risks not otherwise present, including the
possibility that the Company's partners or co-venturers might become bankrupt,
that such partners or co-venturers might at any time have economic or other
business interests or goals which are inconsistent with the business interests
or goals of the Company, and that such partners or co-venturers may be in a
position to take action contrary to the Company's instructions or requests or
contrary to the Company's policies or objectives, including the Company's policy
with respect to maintaining its qualification as a REIT. The Company will,
however, seek to maintain sufficient control of such partnerships or joint
ventures to permit the Company's business objectives, including its objective to
maintain its REIT qualification, to be achieved. Nevertheless, the lack of
control over Partially-Owned Properties could materially affect the Company's
ability to make important decisions about its real estate investments. There is
no limitation under the Company's organizational documents as to the amount of
available funds that may be invested in partnerships or joint ventures.
ECONOMIC PERFORMANCE OF PROPERTIES. The revenue from a Property may be
adversely affected by many factors, including tenant mix and the inability of
the Company to collect rent from tenants. From time to time the Company may
experience delays in completing the leasing plan for a specific property for
various reasons. This could result in operating losses from such property and
have a negative impact on the operating results of the Company. Thus, the
Company's cash flow and ability to make distributions could be adversely
affected.
LACK OF OPERATING HISTORY WITH RESPECT TO THE RECENT ACQUISITION AND
DEVELOPMENT OF PROPERTIES. After giving effect to the Formation Transactions,
the Company will own 25 Properties, consisting of over 3.6 million square feet
of GLA. Six of the Properties have been acquired since January 1, 1997, and may
have characteristics or deficiencies currently unknown to the Company that
affect their valuation or revenue potential, and it is also possible that the
operating performance of these Properties may decline under the Company's
management. As the Company acquires additional properties, the Company will be
subject to risks associated with managing new properties, including lease-up and
tenant retention. In addition, the Company's ability to manage its growth
effectively will require it to successfully integrate its new acquisitions into
its existing management structure. No assurances can be given that the Company
will be able to succeed with such integration or to effectively manage
additional properties or that newly acquired properties will perform as
expected.
CONFLICTS OF INTERESTS IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY.
BENEFITS FROM FORMATION TRANSACTIONS. PPD and certain executive officers of
the Company will realize certain benefits from the Formation Transactions that
will not generally be received by other persons participating in the formation
of the Company, including receipt of restricted stock awards and options to
purchase shares of Common Stock under the Stock Incentive Plan. PPD will have
certain board designation rights, registration rights with respect to shares of
Common Stock, and participation rights in connection with future issuances of
Common Stock by the Company. Stuart Tanz will have registration rights similar
to those of PPD. In addition, certain of the Company's executive officers will
enter into employment agreements with the Company. See "Structure and Formation
Transactions of the Company--Benefits to Certain Individuals" and
"Management--Employment Agreements." Because these persons were involved in
structuring the Formation Transactions, they had the ability to influence the
type and level of benefits they received. As such, these persons may have
interests that conflict with the interests of others participating in the
Formation Transactions and with the interests of persons acquiring shares of
Common Stock in the Offering. As a result, the type and level of benefits these
persons received may have been different if they had not participated in
structuring the Formation Transactions.
INFLUENCE OF CERTAIN AFFILIATES. Stuart Tanz, the Company's Chairman,
President and Chief Executive Officer and one of its directors, and Russell
Tanz, a director nominee, through their and their families' ownership interests
in Revenue Properties and Revenue Properties' ownership of PPD, will own or
control approximately 54.8% of the total outstanding shares of Common Stock of
the Company (and, together with options exercisable for shares of Common Stock
and restricted stock awards, 56.1% of the total
18
<PAGE>
outstanding shares). In addition, PPD will have the right to nominate certain of
the directors of the Company. Under the terms of the Company's Charter, no other
stockholder presently is permitted to own in excess of 6.25% of the Common
Stock. Consequently, although the Tanz Family will not be able to take action on
behalf of the Company without the concurrence of other members of the Company's
Board of Directors, they may be able to exert substantial influence over the
Company's affairs, which influence might not be consistent with the interest of
other stockholders. In addition, there may be conflicts between the interests of
the public stockholders of Revenue Properties and the public stockholders of the
Company. Prior to the consummation of the Offering, Stuart Tanz, Jeffrey
Stauffer, David Adlard and Laurie Sneve, who are directors and officers of the
Company, were directors or officers of PPD.
POTENTIAL CONFLICT OF INTERESTS OF PRUDENTIAL SECURITIES AS LENDER AND
UNDERWRITER. An affiliate of Prudential Securities, the lead managing
underwriter for the Offering, will receive approximately $9.6 million from the
proceeds of the Offering (7.7% of the net Offering proceeds) as repayment of
indebtedness and related interest outstanding at the consummation of the
Offering in connection with a loan that such affiliate made to PPD to finance
the acquisition of one of the Properties. Prudential Securities' interests as a
lender in seeking repayment of the loan could conflict with its responsibilities
as lead managing underwriter of the Offering in negotiating the pricing of the
Offering with the Company. Prudential Securities believes, however, that the
pending repayment of the loan has not affected its handling of such
responsibilities.
OTHER REAL ESTATE INTERESTS. Revenue Properties owns interests in shopping
centers, all of which are located in Canada. Although it may elect to change its
policy in the future, the Company currently does not intend to expand into
Canada, and Revenue Properties' shopping centers were not included in the
Formation Transactions for this reason.
ESTIMATED INITIAL CASH AVAILABLE FOR DISTRIBUTION MAY NOT BE SUFFICIENT TO
MAKE DISTRIBUTIONS AT
EXPECTED LEVELS.
The Company's estimated initial annual distributions represent 95.6% of the
Company's estimated initial cash available for the twelve months ending July 31,
1998. In the event that the Company were not able to pay its estimated initial
annual distribution of $1.45 per share to stockholders out of cash available for
distribution as calculated under "Distributions" below, the Company could be
required to fund distributions from working capital, to draw down under the
Unsecured Credit Facility, if available, to provide funds for such distribution,
or to reduce the amount of such distribution. In the event the Underwriters'
over-allotment option is exercised, pending investment of the proceeds
therefrom, the Company's ability to pay such distribution out of cash available
for distribution may be further adversely affected.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL.
The executive officers of the Company have substantial experience in owning,
operating, managing, acquiring and developing shopping centers. The Company
believes that its success will depend in large part upon the efforts of such
persons. The Company intends to enter into employment agreements with certain of
its executive officers which will provide for their continued employment with
the Company for up to three years and will contain certain non-compete
provisions. There can be no assurance that these executive officers will remain
in the employ of the Company, notwithstanding their potential liability for
damages to the Company if they should terminate their employment. See
"Management." In the event key management personnel do not remain in the employ
of the Company, the Company could be adversely affected.
POTENTIAL INABILITY TO REFINANCE INDEBTEDNESS ON FAVORABLE TERMS; INTEREST
RATES MAY RISE.
DEBT FINANCING AND EXISTING DEBT MATURITIES. The Company will be subject to
risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of principal
and interest, the risk that existing indebtedness on the Properties (which in
all cases
19
<PAGE>
will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness. Upon consummation of the Offering and the
Formation Transactions, the Company expects to have outstanding indebtedness of
approximately $91.4 million, which will mature over 10 years. Since the Company
anticipates that only a small portion of the principal of the indebtedness will
be repaid prior to maturity, and the Company will not have funds on hand
sufficient to repay the balance of the indebtedness in full at maturity, it will
be necessary for the Company to refinance the debt either through additional
borrowings or equity or debt offerings. If principal payments due at maturity
cannot be refinanced, extended or paid with proceeds of other capital
transactions, the Company expects that its cash flow will not be sufficient in
all years to pay distributions at expected levels and to repay all such maturing
debt. Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, the interest expense
relating to such refinanced indebtedness would increase, which could adversely
affect the Company's cash flow and its ability to make expected distributions to
its stockholders. In addition, in the event the Company is unable to refinance
the indebtedness on acceptable terms, the Company might dispose of properties
upon disadvantageous terms, which might result in losses to the Company and
might adversely affect funds available for distribution to stockholders.
POTENTIAL DEFAULTS UNDER MORTGAGE FINANCING. Upon completion of the
Offering, the Company will have approximately $91.4 million in principal amount
of mortgage financing. The payment and other obligations under certain of the
mortgage financing is secured by cross-collateralized, and cross-defaulted first
mortgage liens in the aggregate amount of $54.2 million on four Properties. If
the Company is unable to meet its obligations under the mortgage financing, the
Properties securing such debt could be foreclosed upon, which could have a
material adverse effect on the Company and its ability to make expected
distributions and could threaten the continued viability of the Company. See
"Policies With Respect to Certain Activities--Financing Policies."
RISING INTEREST RATES AND VARIABLE RATE DEBT. Upon consummation of the
Offering and the Formation Transactions, the Company expects to enter into the
Unsecured Credit Facility. Advances under the Unsecured Credit Facility may bear
interest at a variable rate. In addition, the Company may incur other variable
rate indebtedness in the future. Increases in interest rates on such
indebtedness would increase the Company's interest expense, which could
adversely affect the Company's cash flow and its ability to pay expected
distributions to stockholders. Accordingly, the Company may in the future engage
in other transactions to further limit its exposure to rising interest rates as
appropriate and cost effective. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES.
TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REIT. The
Company intends to operate so as to qualify as a REIT under the Code, commencing
with its taxable year ending December 31, 1997. Although management believes
that the Company will be organized and will operate in such a manner, no
assurance can be given that the Company will be organized or will be able to
operate in a manner so as to qualify or remain so qualified. Qualification as a
REIT involves the satisfaction of numerous requirements (some on an annual and
some on a quarterly basis) established under highly technical and complex Code
provisions for which there are only limited judicial and administrative
interpretations, and involve the determination of various factual matters and
circumstances not entirely within the Company's control. For example, in order
to qualify as a REIT, at least 95% of the Company's gross income in any year
must be derived from qualifying sources and the Company must pay distributions
to stockholders aggregating annually at least 95% of its REIT taxable income
(excluding capital gains). No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. The Company is relying on
the opinion of Latham & Watkins, counsel to the Company,
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regarding various issues affecting the Company's ability to qualify, and
continue to qualify, as a REIT. See "Federal Income Tax Consequences--Taxation
of the Company." Such legal opinion is based on various assumptions and factual
representations by the Company regarding the Company's ability to meet the
various requirements for qualification as a REIT, and no assurance can be given
that actual operating results will meet these requirements. Such legal opinion
is not binding on the Internal Revenue Service ("IRS") or any court.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. This treatment
would significantly reduce the net earnings of the Company available for
distribution to stockholders because of the additional tax liability to the
Company for the years involved. In addition, distributions to stockholders would
no longer be required to be made. See "Federal Income Tax Consequences--Taxation
of the Company--Requirements for Qualification."
OTHER TAX LIABILITIES. Even if the Company qualifies for and maintains its
REIT status, it will be subject to certain federal, state and local taxes on its
income and property. If the Company has net income from a prohibited
transaction, such income will be subject to a 100% tax. See "Federal Income Tax
Consequences."
DISTRIBUTIONS TO STOCKHOLDERS AFFECTED BY MANY FACTORS. Distributions by
the Company to its stockholders will be based principally on cash available for
distribution from the Properties. Increases in base rent under the leases of the
Properties or the receipt of rental revenue in connection with future
acquisitions will increase the Company's cash available for distribution to
stockholders. However, in the event of a default or a lease termination by a
lessee, there could be a decrease or cessation of rental payments and thereby a
decrease in cash available for distribution. In addition, the amount available
to make distributions may decrease if properties acquired in the future yield
lower than expected returns.
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions and
expansions without additional debt or equity financing. If the Company incurs
additional indebtedness in the future, it will require additional funds to
service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company will also be dependent
on a number of other factors, including the Company's financial condition, any
decision to reinvest funds rather than to distribute such funds, capital
expenditures, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Company deems relevant. In addition, the
Company may issue from time to time additional shares of Common Stock in
connection with the acquisition of properties or in certain other circumstances.
No prediction can be made as to the number of such shares of Common Stock which
may be issued, if any, and, if issued, the effect on cash available for
distribution on a per share basis to holders of Common Stock. Such issuances, if
any, will have a dilutive effect on cash available for distribution on a per
share basis to holders of Common Stock. See "The Company--Growth Strategies."
The possibility exists that actual results of the Company may differ from the
assumptions used by the Board of Directors in determining the initial
distribution rate. In such event, the trading price of the Common Stock may be
adversely affected.
To obtain the favorable tax treatment associated with REITs, the Company
generally will be required to distribute to its stockholders at least 95% of its
REIT taxable income (determined without regard to the dividends paid deduction
and by excluding net capital gains) each year. See "Federal Income Tax
Consequences--Taxation of the Company--Annual Distribution Requirements." In
addition, the Company will be subject to tax at regular corporate rates to the
extent that it does not distribute all of its net capital gain or distributes
more than 95%, but less than 100%, of its REIT taxable income each year. The
Company will also be subject to a 4% nondeductible excise tax on the amount, if
any, by which certain
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distributions paid by it with respect to any calendar year are less than the sum
of 85% of its REIT ordinary income, 95% of its REIT capital gain net income and
100% of its undistributed income from prior years.
The Company intends to make distributions to its stockholders to comply with
the distribution requirements of the Code and to eliminate, or at least
minimize, exposure to federal income taxes and the nondeductible excise tax.
Differences in timing between the receipt of income and the payment of expenses
in arriving at taxable income and the effect of required debt amortization
payments could require the Company to borrow funds on a short-term basis to meet
the distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT.
ACQUISITION AND DEVELOPMENT INVESTMENTS MAY NOT PERFORM AS EXPECTED. The
Company intends to continue acquiring, developing and redeveloping shopping
center properties. See "Business and Growth Strategies--Business Strategies."
Acquisitions of retail properties entail risks that investments will fail to
perform in accordance with expectations. Estimates of development costs and
costs of improvements to bring an acquired property up to standards established
for the market position intended for that property may prove inaccurate. In
addition, there are general investment risks associated with any new real estate
investment. In the event the investments do not perform in accordance with
expectations, the Company's cash flow and ability to make distributions could be
adversely affected.
The Company intends to expand or renovate its Properties from time to time.
Expansion and renovation projects generally require expenditure of capital as
well as various government and other approvals, the receipt of which cannot be
assured. While policies with respect to expansion and renovation activities are
intended to limit some of the risks otherwise associated with such activities,
the Company will nevertheless incur certain risks, including expenditures of
funds on, and devotion of management's time to, projects which may not be
completed.
The Company anticipates that future acquisitions, development and
renovations will be financed through a combination of advances under the
Unsecured Credit Facility, other lines of credit and other forms of secured or
unsecured financing. If new developments are financed through construction
loans, there is a risk that, upon completion of construction, permanent
financing for newly developed properties may not be available or may be
available only on disadvantageous terms.
It is possible that the Company will in the future expand its business to
new geographic markets. The Company will not initially possess the same level of
familiarity with new markets outside of the geographic areas in which the
Properties are currently located, which could adversely affect its ability to
acquire, develop, manage or lease properties in any new localities.
Changing market conditions, including competition from other purchasers of
shopping center properties, may diminish the Company's opportunities for
attractive additional acquisitions.
The Company also intends to develop and construct shopping centers in
accordance with the Company's development and business strategies. See "Business
and Growth Strategies." Risks associated with the Company's development and
construction activities may include: abandonment of development opportunities;
construction costs of a property exceeding original estimates, possibly making
the property uneconomical; occupancy rates and rents at a newly completed
property may not be sufficient to make the property profitable; financing may
not be available on favorable terms for development of a property; and
construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs. In addition, new
development activities, regardless of whether they would ultimately be
successful, typically require a substantial portion of management's time and
attention. Development activities would also be subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary zoning, land use,
building, occupancy, and other required governmental permits and authorizations.
THE PROPERTIES MAY BE SUBJECT TO UNKNOWN ENVIRONMENTAL LIABILITIES. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at such property and may be held liable to a governmental entity or to
third parties for property
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damage and for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner knew of or
caused the presence of the contaminants, even when the contaminants were
associated with previous owners or operators and the liability under such laws
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis for allocation of responsibility. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure properly to remediate the
contamination on such property, may adversely affect the owner's ability to sell
or rent such property or to borrow using such property as collateral. The
presence of contamination at a property can impair the value of the property
even if the contamination is migrating onto the property from an adjoining
property. Persons who arrange for the disposal or treatment of hazardous or
toxic substances at a disposal or treatment facility also may be liable for the
costs of removal or remediation of a release of hazardous or toxic substances at
such disposal or treatment facility, whether or not such facility is owned or
operated by such person. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs incurred
in connection with the contamination. Sometimes, the remedy to remediate
contamination may include deed restriction or institutional control, which can
restrict how the property may be used. Finally, the owner of a site may be
subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such site.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos containing materials ("ACM")
when such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws may impose
liability for release of ACM and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated with
ACM. In connection with its ownership and operation of the Properties, the
Company may be potentially liable for such costs.
Shopping centers may have businesses such as dry cleaners and auto repair or
servicing businesses which handle, store and generate small quantities of
hazardous wastes. The operation may result in spills or releases from
time-to-time that can result in soil or groundwater contamination. Independent
environmental consultants have recently conducted or updated Phase I
Environmental Assessments (the "Phase I Assessments") at the Properties. These
Phase I Assessments have included, among other things, a visual inspection of
the Properties and the surrounding area and a review of relevant state, federal
and historical documents.
The Company's Phase I Assessments of the Properties have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations taken as a
whole, nor is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the Company's Phase I Assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
The Company believes that the Properties are in substantial compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The
Company has not been notified by any governmental authority, and is not
otherwise aware of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
its Properties, other than as noted above.
NO LIMITATION ON AMOUNT OF INDEBTEDNESS THE COMPANY MAY INCUR. Upon
completion of the Offering and the Formation Transactions, the Company's debt to
total market capitalization ratio will be approximately 22.9% (21.8% if the
Underwriters' over-allotment option is exercised in full). The Company
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currently has a policy of incurring debt only if upon such incurrence the debt
to total market capitalization ratio would be 50% or less, but the
organizational documents of the Company do not contain any limitation on the
amount of indebtedness the Company may incur. Accordingly, the Board of
Directors could alter or eliminate this policy. If this policy were changed, the
Company could become more highly leveraged, resulting in an increase in debt
service that could adversely affect the Company's cash flow and, consequently,
the amount available for distribution to stockholders, and could increase the
risk of default on the Company's indebtedness.
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets. The Company has used total market capitalization because it believes
that the book value of its assets (which to a large extent is the depreciated
original cost of real property, the Company's primary tangible assets) does not
accurately reflect its ability to borrow and to meet debt service requirements.
The market capitalization of the Company, however, is more variable than book
value, and does not necessarily reflect the fair market value of the underlying
assets of the Company at all times. The Company will also consider factors other
than market capitalization in making decisions regarding the incurrence of
indebtedness, such as the purchase price of properties to be acquired with debt
financing, the estimated market value of its properties upon refinancing and the
ability of particular properties and the Company as a whole to generate cash
flow to cover expected debt service.
LIMITS ON CHANGES IN CONTROL AND POTENTIAL ANTI-TAKEOVER EFFECTS.
Certain provisions of the Charter and bylaws of the Company (the "Bylaws")
may have the effect of delaying, deferring or preventing a third party from
making an acquisition proposal for the Company and may thereby inhibit a change
in control of the Company. For example, such provisions may (i) deter tender
offers for the Common Stock, which offers may be attractive to the stockholders,
or (ii) deter purchases of large blocks of Common Stock, thereby limiting the
opportunity for stockholders to receive a premium for their Common Stock over
then-prevailing market prices. See "Description of Capital Stock" and "Certain
Provisions of Maryland Law and the Company's Charter and Bylaws." These
provisions include the following:
LIMITS ON OWNERSHIP OF COMMON STOCK. In order for the Company to maintain
its qualification as a REIT, not more than 50% in value of the outstanding
shares of Common Stock of the Company may be owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year (other than the first year for
which the election to be treated as a REIT has been made). In addition, if the
Company, or an owner of 10% or more of the Company, actually or constructively
owns 10% or more of a tenant of the Company (or a tenant of any partnership in
which the Company is a partner), the rent received by the Company (either
directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. See
"Federal Income Tax Consequences--Taxation of the Company." In order to protect
the Company against the risk of losing its REIT status due to the concentration
of ownership among its stockholders, the Ownership Limit included in the Charter
limits actual or constructive (including through the ownership of stock of PPD
or Revenue Properties) ownership of the outstanding shares of Common Stock by
any single stockholder to 6.25% of the total of the then outstanding shares of
Common Stock. See "Description of Capital Stock--Restrictions on Ownership and
Transfer." Although the Board of Directors presently has no intention of doing
so (except as described herein in "Description of Capital Stock-- Restrictions
on Ownership and Transfer--Ownership Limits" and elsewhere), the Board of
Directors could waive this restriction with respect to a particular stockholder
if it were satisfied, based upon the advice of tax counsel, that ownership by
such stockholder in excess of the Ownership Limit would not jeopardize the
Company's status as a REIT and the Board of Directors otherwise decided such
action would be in the best interests of the Company. The Board of Directors has
waived the Ownership Limitation with respect to PPD and certain affiliated
entities and has permitted such entities to actually or constructively own up to
55.0% of the outstanding Common Stock (the "PPD Ownership Limit"). The Board of
Directors has also
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waived the Ownership Limit with respect to the Tanz Family and has permitted
such persons to actually or constructively own (including through the ownership
of stock of PPD or Revenue Properties), in the aggregate, up to 24.0% of the
outstanding Common Stock (the "Tanz Family Ownership Limit"). Actual or
constructive ownership of shares of Common Stock in excess of the Ownership
Limit, the PPD Ownership Limit or the Tanz Family Ownership Limit will cause the
violative transfer or ownership to be void with respect to the transferee or
owner as to that number of shares the ownership of which by such owner or
transferee results in such owner or transferee or any other person violating any
of the foregoing ownership limits (and can include, under certain circumstances,
the divestiture of shares of Common Stock owned by PPD, see "Description of
Capital Stock--Restrictions on Ownership and Transfer") and such shares will be
automatically transferred to a trust for the benefit of a Qualified Charitable
Organization. Such transferee or owner shall have no right to vote such shares
or be entitled to dividends or other distributions with respect to such shares.
See "Description of Capital Stock--Restrictions on Ownership and Transfer" for
additional information regarding the Ownership Limit.
PREFERRED STOCK. The Charter authorizes the Board of Directors to cause the
Company to issue authorized but unissued shares of Common Stock or the preferred
stock of the Company, $.01 par value (the "Preferred Stock") and to classify or
reclassify any unissued shares of Preferred Stock and to set the preferences,
rights and other terms of such classified or unclassified shares. See
"Description of Capital Stock--Preferred Stock." Although the Board of Directors
has no such intention at the present time, it could establish a series of
Preferred Stock that could, depending on the terms of such series, delay, defer
or prevent a transaction or a change in control of the Company that might
involve a premium price for the Common Stock or otherwise be in the best
interest of the stockholders.
SPECIAL MEETINGS OF SHAREHOLDERS. The Company's Bylaws permit a special
meeting of stockholders to be called at the written request of the holders of
shares entitled to cast not less than a majority of all the votes entitled to be
cast at such meeting. Because PPD will hold a majority of the shares of Common
Stock upon consummation of the Offering, other stockholders of the Company will
not be able to request a special meeting of stockholders without the consent of
PPD.
STAGGERED BOARD. The Company's Board of Directors is divided into three
classes of directors. The initial terms of the first, second and third classes
will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors
of each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even though a tender
offer or change in control might be in the best interest of the stockholders.
See "Certain Provisions of Maryland Law and the Company's Charter and
Bylaws--Board of Directors--Number, Classification, Vacancies."
CERTAIN TYPES OF LOSSES MAY EXCEED INSURANCE COVERAGE. The Company carries
comprehensive liability, public area liability, fire, earthquake, flood, boiler
and machinery, extended coverage and rental loss insurance covering the
Properties, with policy specifications and insured limits which the Company
believes are adequate and appropriate under the circumstances. There are,
however, certain types of losses that are not generally insured because it is
not economically feasible to insure against such losses. Should an uninsured
loss or a loss in excess of insured limits occur, the Company could lose its
capital invested in the Property, as well as the anticipated future revenue from
the Property and, in the case of debt which is with recourse to the Company,
would remain obligated for any mortgage debt or other financial obligations
related to the Property. Any such loss would adversely affect the Company. The
Company believes that the Properties are adequately insured. With respect to the
Properties located in California, in light of the California earthquake risk,
California building codes since the early 1970's have established construction
standards for all newly built and renovated buildings, including shopping center
structures. All of the Properties located in California have been built or
redeveloped since January 1, 1985 and the Company believes that all of the
Properties were constructed in full compliance with the applicable
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standards existing at the time of construction. No assurance can be given that
material losses in excess of insurance proceeds will not occur in the future.
HISTORICAL LOSSES. PPD Properties had a combined historical net loss of
approximately $615,000 for the year ended December 31, 1995 and approximately
$3.2 million for the year ended December 31, 1994. These net losses reflect the
substantial interest expense associated with the acquisition financing of the
Properties and certain non-cash charges such as depreciation and amortization.
See "Selected Financial Data" and the financial statements and accompanying
notes included in this Prospectus. These historical results may not be
indicative of future results. Nonetheless, there can be no assurance that the
Company will not incur net losses in the future.
EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Upon
completion of the Offering, the Company will have 15,764,012 shares of Common
Stock outstanding (16,814,012 shares if the Underwriter's over-allotment option
is exercised in full). Sales of a substantial number of shares of Common Stock
(including shares issued upon the exercise of stock options), or the perception
that such sales could occur, could adversely affect prevailing market prices of
the Common Stock. In addition to shares of Common Stock sold by the Company in
the Offering, certain individuals will collectively receive 130,000 shares of
restricted Common Stock. In addition, concurrently with the Offering, options to
purchase 900,000 shares of Common Stock will be granted to certain officers,
directors and employees of the Company. The executive officers and directors of
the Company have agreed that they will not, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any such shares of Common Stock or other capital stock of the Company, or any
securities convertible into or exercisable or exchangeable for any shares of
Common Stock or other capital stock of the Company for a period of three years
from the date of this Prospectus without the prior written consent of Prudential
Securities on behalf of the Underwriters. PPD has agreed that it will be bound
by similar lock-up restrictions, subject to certain exceptions. See "Shares
Eligible for Future Sale." Prudential Securities may, in its sole discretion, at
any time and without notice, release all or any portion of the shares of Common
Stock subject to such lock-up agreements. At the conclusion of the restrictive
period, all shares of Common Stock issued in connection with the formation of
the Company may be sold in the public market pursuant to registration rights or
available exemptions from registration. See "Shares Available for Future Sale."
In addition, 1,620,000 additional shares of Common Stock will be reserved for
issuance pursuant to the Company's Stock Incentive Plan, and these shares will
be available for sale in the public markets from time to time pursuant to
exemptions from registration requirements or upon registration. Options to
purchase a total of 900,000 shares of Common Stock will be granted to certain
executive officers, employees and directors upon the closing of the Offering.
See "Management-- Compensation of Directors," "--Executive Compensation" and
"--Stock Incentive Plan." No prediction can be made about the effect that future
sales of Common Stock will have on the market prices of shares.
IMMEDIATE AND SUBSTANTIAL DILUTION. As set forth more fully under
"Dilution," the pro forma net tangible book value per share of the assets of the
Company after the Offering will be substantially less than the initial public
offering price per share in the Offering. Accordingly, purchasers of the Common
Stock offered hereby will experience an immediate and substantial dilution of
$1.99 per share in the net tangible book value of the Common Stock. See
"Dilution."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to the Offering,
there has been no public market for the Common Stock and there can be no
assurance that an active trading market will develop as a result of the
Offering, or if a trading market does develop, that it will be sustained or that
shares of Common Stock has been resold at or above the initial public offering
price. The initial public offering price of the Common Stock will be determined
by agreement among the Company and the Underwriters and may not be indicative of
the market price for the Common Stock after the Offering. See "Underwriting."
The market value of the Common Stock could be substantially affected by general
market conditions, including changes in interest rates. Moreover, numerous other
factors, such as governmental regulatory
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action and changes in tax laws, could have a significant impact on the future
market price of the Common Stock.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL. The investment,
financing, borrowing and distribution policies of the Company and its policies
with respect to all other activities, including growth, debt, capitalization and
operations, will be determined by the Board of Directors. Although the Board of
Directors has no present intention to do so, these policies may be amended or
revised at any time and from time to time at the discretion of the Board of
Directors without a vote of the stockholders of the Company. A change in these
policies could adversely affect the Company's financial condition, results of
operations or the market price of the Common Stock. See "Policies with Respect
to Certain Activities."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the
factors that will influence the market price of the Common Stock in public
markets will be the annual distribution rate on the shares. Increasing market
interest rates may lead prospective purchasers of the Common Stock to demand a
higher annual distribution rate from future distributions. Such an increase in
the required distribution rate may adversely affect the market price of the
Common Stock.
DISPOSITION OF PROPERTIES WITH BUILT-IN GAIN. In connection with the
formation of the Company, certain subsidiaries taxable as "C" corporations were
merged either into the Company or into subsidiaries of the Company which will
qualify as "qualified REIT subsidiaries." See "Federal Income Tax
Consequences--Taxation of the Company--Ownership of Subsidiaries." Certain of
these subsidiaries held 13 properties with built-in gain at the time the
subsidiaries were merged into the Company or into subsidiaries of the Company.
Pursuant to Treasury Regulations which have not yet been promulgated, if these
properties are sold within 10 years of the date they were acquired by the
Company, the Company will be required to pay taxes on the built-in gain that
would have been realized if the merging "C" corporation had liquidated on the
day before the date of the mergers. Therefore, with respect to managing its
portfolio, the Company may have less flexibility in determining whether or not
to dispose of these properties, and if it desires to do so at some future date,
it may be subject to tax on the built-in gain as a result of any disposition of
these properties to the extent the gain exceeds any available net operating loss
carry forwards for any property.
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THE COMPANY
GENERAL
The Company is a self-administered and self-managed REIT that has been
formed to continue to operate and expand the shopping center business conducted
by PPD. The Company is engaged in the ownership, management, leasing,
acquisition and development of shopping centers located primarily in the western
United States. Upon completion of the Formation Transactions and the Offering,
the Company will own or control a portfolio of 25 shopping center Properties.
The Properties are well established community and neighborhood shopping
centers of which at least 80% are strategically situated in densely populated,
middle and upper income markets and are conveniently located and easily
accessible from major transportation arterials. Of the 25 Properties, 23 have
been operating for at least four years. All of the Properties are located on or
within one mile of a major transportation arterial. The Properties consist of an
aggregate of over 3.6 million square feet of GLA (not including 611,472 square
feet of anchor-owned space at the Properties), have an average age of
approximately seven years and are primarily situated in four key western U.S.
markets: Northern California, Southern California, Las Vegas, Nevada and the
Pacific Northwest, each of which the Company believes has attractive economic
and demographic characteristics. The largest concentration of Properties,
consisting of 39.0% of the total GLA, is located in California, which has the
nation's largest population and is experiencing an economic recovery (Properties
consisting of 21.1% of the total GLA are located in Northern California and
Properties consisting of 17.9% of the total GLA are located in Southern
California). Properties consisting of 30.9% of the total GLA are located in Las
Vegas, Nevada, which is the fastest growing city in the U.S. and where the
Company believes it is one of the largest owners and operators of community and
neighborhood shopping centers based on square feet owned and operated in the Las
Vegas area. Properties consisting of 22.4% of the total GLA are located in the
Pacific Northwest primarily in the Seattle, Washington and Portland, Oregon
metropolitan areas, which have growing populations and are currently
experiencing steady economic growth that outpaces the national average. In
addition, Properties consisting of the remaining 7.7% of the total GLA are
located in New Mexico, Tennessee, Kentucky and Florida. As of March 31, 1997,
96.0% of the Properties' total GLA was leased to 616 tenants, of which 256 were
national tenants and 74 were regional tenants (together representing 83.0% of
the total leased GLA), such as Wal-Mart (9.1% of leased GLA), Ross Dress for
Less (2.2%), PayLess Drugs (2.1%), 24 Hour Fitness (1.7%), and United Artist
Theatre (1.4%). Sixteen of the Properties are anchored by national or regional
supermarkets such as Albertson's, Kroger, Food-4-Less, Vons, Lucky Stores and
Safeway.
The following table sets forth certain summary information regarding the
Properties.
<TABLE>
<CAPTION>
TOTAL BASE
RENT
YEAR ENDED
12/31/96(2)
TOTAL NUMBER -------------
TOTAL % OF % LEASED OF TENANTS
NUMBER OF GLA(1) PORTFOLIO AS OF AS OF
REGION PROPERTIES (SQ. FT.) GLA 3/31/97 3/31/97 BASE RENT
- ----------------------------------- --------------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Northern California................ 6 761,396 21.1 97.7 118 $ 7,342,303
Southern California................ 6 643,863 17.9 94.2 120 7,396,711
Las Vegas, Nevada.................. 5 1,115,647 30.9 95.4 189 12,182,404
Pacific Northwest.................. 4 809,414 22.4 96.2 131 7,482,009
Other.............................. 4 277,141 7.7 96.9 58 2,288,997
--
----------- ----- --- --- -------------
Total............................ 25 3,607,461 100.0 96.0 616 $ 36,692,424
--
--
----------- ----- --- --- -------------
----------- ----- --- --- -------------
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT 3/31/97(3)
--------------------------
% OF ANN. BASE
PORTFOLIO ANN. RENT/
REGION BASE RENT BASE RENT SQ. FT.(4)
- ----------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Northern California................ 20.0 $ 8,272,108 $ 11.12
Southern California................ 20.2 7,360,051 12.13
Las Vegas, Nevada.................. 33.2 12,702,221 11.93
Pacific Northwest.................. 20.4 7,851,122 10.08
Other.............................. 6.2 2,304,677 8.58
----- ------------- -----------
Total............................ 100.0 $ 38,490,179 $ 11.12
----- ------------- -----------
----- ------------- -----------
</TABLE>
- --------------------------
(1) Represents GLA owned by the Company. Excludes 611,472 square feet of
anchor-owned GLA.
(2) Total base rent for the year ended December 31, 1996, calculated in
accordance with GAAP.
(3) Annualized base rent for all leases in place at March 31, 1997 calculated as
follows: total base rent, calculated in accordance with GAAP, to be received
during the entire term of each lease, divided by the terms in months for
such leases, multiplied by 12.
(4) Annualized base rent divided by the GLA leased at March 31, 1997.
28
<PAGE>
The Properties are regionally managed under active central control by the
Company's executive officers. All administration (including the formation and
implementation of policies and procedures), leasing, capital expenditures and
construction decisions are centrally administered at the Company's corporate
office. The Company employs property managers at each of its regional offices to
oversee and direct the day-to-day operations of the Properties, as well as the
on-site personnel, which may include the manager, assistant manager, maintenance
personnel and other necessary staff. Property managers communicate daily with
the Company's corporate offices to implement the Company's policies and
procedures. The Company also benefits from the use of a computer network system,
which provides for real time reporting and communications capabilities between
the Company and its regional and local managers.
As a result of management's in-house leasing program, the Properties benefit
from a diversified merchandising mix, which includes having national and
regional anchor tenants in 21 of the 25 shopping centers complemented by a
carefully planned mix of national, regional and local non-anchor tenants. At
March 31, 1997, 72.9% of the total leased GLA was leased to national tenants,
10.1% leased to regional tenants, and 17.0% to local tenants. To promote
stability and attract non-anchor tenants, the Company generally enters into
long-term leases (typically 15 to 20 years) with major or anchor tenants which
usually contain provisions permitting tenants to renew their leases at rates
which often include fixed rent increases or CPI adjustments from the prior base
rent. At March 31, 1997, anchor tenants leased 56.9% of the total leased GLA
with only 30.9% of anchor-leased GLA (17.5% of the total leased GLA) scheduled
to expire within the next 10 years. To take advantage of improving market
conditions and changing retail trends, the Company generally enters into shorter
term leases (typically three to five years) with non-anchor tenants. The
Company's leases are generally on a triple-net basis, which require the tenants
to pay their pro rata share of all real property taxes, insurance and property
operating expenses.
The following table sets forth certain summary information regarding the
Company's tenant diversification:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE
AT 3/31/97(3)
NUMBER OF ---------------------------------------
TOTAL TENANTS % OF TOTAL LEASED ANN. BASE
LEASED GLA AS OF GLA AS OF ANN. RENT/
TENANT TYPE (SQ. FT.) 3/31/97 3/31/97 BASE RENT % OF TOTAL SQ. FT.(4)
- ------------------------------------------- ------------ ------------- ----------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
National(1)................................ 2,524,457 256 72.9 $ 24,725,705 64.2 $ 9.79
Regional(1)................................ 350,848 74 10.1 4,629,945 12.0 13.20
Local(1)................................... 587,309 286 17.0 9,134,529 23.7 15.55
------------ --- ----- ------------- -----
Total/Weighted Average................... 3,462,614 616 100.0 $ 38,490,179 100.0 $ 11.12
------------ --- ----- ------------- -----
------------ --- ----- ------------- -----
Anchor(2).................................. 1,970,410 50 56.9 $ 15,542,730 40.4 $ 7.89
Non-Anchor(2).............................. 1,492,204 566 43.1 $ 22,947,449 59.6 15.38
------------ --- ----- ------------- -----
Total/Weighted Average................... 3,462,614 616 100.0 $ 38,490,179 100.0 $ 11.12
------------ --- ----- ------------- -----
------------ --- ----- ------------- -----
</TABLE>
- ------------------------
(1) The Company defines a national tenant as any tenant that operates in at
least four metropolitan areas located in more than one region (i.e.
northwest, northeast, midwest, southwest or southeast); regional tenant as
any tenant that operates in two or more metropolitan areas located within
the same region; local tenant as any tenant that operates stores only within
the same metropolitan area as the shopping center.
(2) The Company defines anchors as tenants which lease 15,000 square feet or
more and non-anchors as tenants which lease less than 15,000 square feet.
(3) Annualized base rent for all leases in place at March 31, 1997 calculated as
follows: total base rent, calculated in accordance with GAAP, to be received
during the entire term of each lease, divided by the terms in months for
such leases, multiplied by 12.
(4) Annualized base rent divided by the GLA leased at March 31, 1997.
29
<PAGE>
HISTORY
The Company's history in owning and operating retail properties dates back
to 1971 when Mark Tanz began a real estate operation focused on retail
properties in Toronto, Canada and Southern California. In 1985, Mr. Tanz became
the largest shareholder of Revenue Properties and implemented a restructuring
plan to focus the business on owning and operating retail properties in both
Canada and the U.S. Since 1985, Mr. Tanz has been a director of Revenue
Properties, and two of his sons, Stuart Tanz and Russell Tanz are directors and
executive officers of Revenue Properties. Shares of Revenue Properties trade on
the Toronto Stock Exchange and on NASDAQ.
The Tanz Family first became involved with the management and development of
the Properties when Revenue Properties purchased a controlling stake in 1992 in
PPDC, the former sole shareholder of PPD. Upon acquiring PPDC, Stuart Tanz
assumed responsibility for the management, development, acquisition and leasing
of PPDC's properties located in the United States. At the time of the
acquisition, PPDC's portfolio included 13 of the Properties as well as a number
of other retail, residential and commercial properties located in the United
States and Canada. In June 1993, Revenue Properties acquired the remaining
balance of the outstanding shares of PPDC, and thus PPDC became a wholly-owned
subsidiary of Revenue Properties. PPDC was subsequently amalgamated into Revenue
Properties.
Since 1992, PPD has been led by Stuart Tanz, the Company's Chief Executive
Officer and President, along with Jeffrey Stauffer, the Company's Senior Vice
President of Operations and Development. In January 1995, David Adlard joined
the Company as Executive Vice President and Chief Financial Officer. Although
the Company has been a wholly-owned subsidiary of Revenue Properties since 1993,
the Company has functioned as an independent organization with separate
management, personnel and operational systems, including all real estate related
activities such as its in-house leasing, acquisition, development, property
management and accounting operations. Since 1992, management has grown PPD's
portfolio of shopping centers from 13 properties (encompassing 2.1 million
square feet) to 25 properties (encompassing 3.6 million square feet) through
acquisition and development activities focused within the four key western U.S.
markets.
Upon consummation of the Offering and after giving effect to the PPD
Contribution in connection with the Formation Transactions, Revenue Properties
(through its 100% ownership of PPD) will own approximately 54.8% of the Common
Stock. The Tanz Family collectively owned approximately 35.6% of the 66,000,000
outstanding shares of common stock of Revenue Properties as of March 31, 1997.
At such date, Stuart Tanz and Russell Tanz individually owned 25,000 shares and
33,360 shares, respectively, of common stock of Revenue Properties. Russell Tanz
also held options exercisable in 740,000 shares of common stock of Revenue
Properties. Effective August 1, 1997, Russell Tanz resigned as a director and
officer of Revenue Properties and as a director of PPD. Upon the consummation of
the Offering, Stuart Tanz will resign as a director and officer of Revenue
Properties and PPD.
The Company is a Maryland corporation that was incorporated on April 16,
1997. The Company's executive offices are located at 1631-B South Melrose Drive,
Vista, California 92083; telephone (760) 727-1002; fax (760) 727-1430. The
Company's Website address is http://www.rpc-panpacific.com.
30
<PAGE>
BUSINESS AND GROWTH STRATEGIES
The Company's primary objective is to maximize total return to shareholders
through increasing cash flow per share and enhancing the value of its portfolio.
The Company believes it can achieve this objective by implementing its business
strategies and by continuing to: (i) acquire select community and neighborhood
shopping centers at attractive capitalization rates; (ii) use its development
expertise to redevelop or renovate properties it may acquire, to build out
existing and any acquired undeveloped pads or other expansion space, and to
develop new shopping centers when it believes market conditions support
favorable risk-adjusted returns; and (iii) maximize cash flow from its existing
Properties. The Company also believes, based on its evaluation of market
conditions, its ability to achieve its primary objective will be enhanced by
continuing to focus its activities within its four key western U.S. markets
(Northern California, Southern California, Las Vegas, Nevada and the Pacific
Northwest) which continue to exhibit attractive economic and demographic
characteristics and where the Company believes it is well positioned to take
advantage of opportunities based on its experience, market knowledge and
reputation as a leading regional owner, purchaser and operator of quality
shopping centers. Attractive economic and demographic characteristics include,
among other things, population levels that are high or are growing strongly, or
median household income levels that are high. The Company further believes that
within its four key markets, there are growth opportunities for well-capitalized
owners of real estate and that being a public company will enhance its ability
to obtain acquisition financing, to take advantage of opportunities to acquire
additional retail properties at attractive prices and to develop and redevelop
retail properties, when feasible, at attractive returns.
BUSINESS STRATEGIES
The Company's business strategy involves three fundamental practices: (i)
owning and operating quality shopping centers in select key markets with strong
economic and demographic characteristics in order to establish and maintain a
portfolio of real estate assets with stable income and the potential for
long-term growth; (ii) developing local and regional market expertise through
the hands-on participation of senior management in property operations and
leasing in order to capitalize on market trends, retailing trends and
acquisition opportunities; and (iii) establishing and maintaining a diversified
and complementary tenant mix with an emphasis on tenants that provide day-to-day
consumer necessities in order to provide steady rental revenue. Through its
regional offices, the Company implements its business strategies by: (i) its
on-going analysis of regional and submarket demographic, economic and retailing
trends; (ii) developing and maintaining relationships with key retailers, real
estate brokers, and financial institutions; (iii) emphasizing tenant
satisfaction and retention through its proactive communication with tenants,
community oriented marketing activities and comprehensive maintenance programs;
and (iv) applying aggressive cost control practices and by capitalizing on cost
reduction and economy of scale opportunities arising from the size and proximity
of its properties within each region.
GROWTH STRATEGIES
The Company intends to continue to utilize its in-depth market knowledge
within its four key markets to pursue its strategy of opportunistic acquisitions
of shopping centers for long-term investment. The Company believes that
significant opportunities exist within these markets to acquire shopping center
properties that are consistent with its existing portfolio in terms of quality
of construction, positive submarket demographics and location attributes and
that provide attractive initial capitalization rates with potential for growth
in cash flow. The Company believes that opportunities to increase cash flow
exist where, among other things, focused management is needed or the property to
be acquired needs repositioning, redevelopment or expansion. Management intends
to add value to such retail properties through the application of its active,
hands-on management and aggressive leasing strategies. The Company further
believes it has certain competitive advantages which enhance its ability to
identify and capitalize on acquisition opportunities, including: (i)
long-standing relationships with institutional and other owners of shopping
center properties in the Company's four primary regions; (ii) fully integrated
real estate operations which enable the Company to respond quickly to
acquisition opportunities and to
31
<PAGE>
capitalize on the resulting economies of scale; and (iii) access to capital as a
public company, including the Unsecured Credit Facility.
According to the Lesser Report, public real estate investment trusts, as of
March 31, 1997, owned only 106 or 2.1% of the 4,123 neighborhood and community
shopping centers in the Company's four key western U.S. markets (Northern
California, Southern California, Las Vegas, Nevada and the Pacific Northwest) in
the aggregate. The Company believes that public REITs will be the most
significant acquirors of shopping centers in the foreseeable future.
Accordingly, the Company believes that the lack of concentrated ownership by
public REITs of shopping centers within its four key western U.S. markets
presents significant opportunities for growth.
Although the Company believes that current market conditions generally favor
acquisitions, management intends to continue its practice of redeveloping and
expanding properties as market and retailing trends evolve. In addition, the
Company intends to continue developing quality shopping center properties when
it believes market conditions and tenant opportunities support favorable
risk-adjusted returns.
The Company's management has extensive experience in implementing its
acquisition and development strategy focused within its four primary regions. Of
the 25 Properties, management has acquired 21 of the Properties (including the
13 acquired when Revenue Properties acquired PPDC) and developed four of the
Properties. Of the 21 acquired Properties, six have been acquired since January
1, 1997, encompassing 813,154 square feet (22.5% of the total GLA) for an
aggregate purchase price $83.4 million, including four properties in Northern
California, one in Southern California and one in Las Vegas.
The following table sets forth certain information regarding the Company's
portfolio:
<TABLE>
<CAPTION>
AS OF DEC. 31,
AS OF DEC. 31, 1993 AS OF DEC. 31, 1994 AS OF DEC. 31, 1995 1996
--------------------------- --------------------------- --------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL GLA TOTAL GLA TOTAL GLA
NUMBER OF (SQ. NUMBER OF (SQ. NUMBER OF (SQ. NUMBER OF
REGION PROPERTIES FT.)(1) PROPERTIES FT.)(1) PROPERTIES FT.)(1) PROPERTIES
- ------------------------ --------------- ---------- --------------- ---------- --------------- ---------- ---------------
Northern California..... 1 50,248 1 50,248 1 50,248 2
Southern California..... 2 469,675 2 469,675 5 624,227 5
Las Vegas, Nevada....... 3 622,336 3 622,336 4 985,094 4
Pacific Northwest....... 3 727,736 3 727,736 4 809,414 4
Other................... 4 277,141 4 277,141 4 277,141 4
-- -- -- --
---------- ---------- ----------
Total................... 13 2,147,136 13 2,147,136 18 2,746,124 19
-- -- -- --
-- -- -- --
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
PRO FORMA
---------------------------
<S> <C> <C> <C>
TOTAL GLA TOTAL GLA
(SQ. NUMBER OF (SQ.
REGION FT.)(1) PROPERTIES FT.)(1)
- ------------------------ ---------- --------------- ----------
Northern California..... 98,431 6 761,396
Southern California..... 624,227 6 643,863
Las Vegas, Nevada....... 985,094 5 1,115,647
Pacific Northwest....... 809,414 4 809,414
Other................... 277,141 4 277,141
--
---------- ----------
Total................... 2,794,307 25 3,607,461
--
--
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Represents GLA owned by the Company (excludes anchor-owned GLA).
As an example of the implementation of the Company's acquisition strategy,
in September 1995, the Company acquired Cheyenne Commons a 362,758 square foot
community shopping center, located in Las Vegas, Nevada. Among the key
attributes of the acquisition were: (i) the strong demographic characteristics
of the submarket (according to the Lesser Market Study this submarket had a 1996
population base of 121,956 people, which has grown at more than double the rate
of the Las Vegas metropolitan area, and has a median household income of
$56,454); (ii) the property's proximity to Summerlin, a 25,000 acre master
planned residential community; and (iii) the drawing power and strong sales
performance of the center's largest anchor, Wal-Mart, as well as the diverse mix
of over 40 tenants, which include 30 nationally recognized retailers (over 90%
of the total leased GLA). In addition, based on its local market expertise,
management determined that the long-term value of the property could be enhanced
by repositioning the center, capitalizing on economies of scale and releasing
expiring space at higher rental rates. Subsequent to the acquisition, the
Company implemented a $250,000 capital improvement program aimed at enhancing
the aesthetics and visibility of the center, which included upgrading
landscaping, making architectural changes and improving the signage. Property
management is conducted through the Company's regional office which oversees the
management and leasing of all five of its Las Vegas properties. In addition, the
Company is aggressively pursuing releasing opportunities to take advantage of
improving submarket conditions.
32
<PAGE>
As an example of the implementation of the Company's development strategy,
in November 1995, the Company began its development of Laguna Village, a
multi-phased Property which is expected to consist of 122,000 square feet of GLA
upon completion. Development of the Property was pursued by the Company based on
management's belief that the market was undersupplied with entertainment and
food services. Through existing tenant relationships and contacts, management
successfully negotiated a lease with United Artists Theatres, the terms of which
provided for an economically feasible phased development of the Property. Laguna
Village's Phase I was completed in 1996 with 100% of the GLA (48,183 square
feet) leased to United Artists Theatres. The Company is nearing completion of
the construction of Phase II consisting of 60,022 square feet of GLA which is
scheduled to be completed in September 1997. Consistent with its strategy to
significantly pre-lease its developments, the Company has executed leases
representing 87.4% of the Phase II GLA.
The Company intends to maximize the cash flow from its existing Properties
by continuing to enhance the operating performance of each Property through its
in-house leasing and property management programs. The Company intends to
continue to aggressively pursue: (i) the leasing of currently available space
(144,847 square feet as of March 31, 1997); (ii) the renewal or releasing of
expiring leases at higher rental rates which management believes currently are
available based on improving market conditions and its recent leasing activity
(during the 12 months ending December 31, 1996, the Company renewed or released
439,887 square feet of GLA for an average base rent of $14.74 per square foot as
compared to an average base rent of $11.44 per square foot under expiring
leases); and (iii) economies of scale in the management and leasing of
properties that may be realized by focusing its acquisition and development
activities within its four primary regions. The Company also expects to benefit
over time from leases with CPI or percentage rent adjustments. Management
believes that maintaining high occupancy rates, the renewal and replacement of
tenants and increasing base rents are critical measures of management and
leasing performance. Since December 31, 1993, the Company has maintained a
year-end portfolio occupancy rate (based on square feet) ranging from 92.8% to
96.3% for the Properties owned at such dates. During the past three years, the
Company has renewed or released 979,230 square feet involving 298 lease
transactions, and base rents per square foot from such leasing activity
increased from $11.52 in 1994 to $13.09 in 1995, and to $14.74 in 1996.
The following table sets forth certain summary historical information
regarding the Company's leasing activity during the past three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Number of new and renewed leases signed during period..................... 122 99 77
Square footage leased during period....................................... 439,887 281,774 257,569
Base rent per sq. ft.(1).................................................. $ 14.74 $ 13.09 $ 11.52
Tenant improvements per sq. ft.(2)........................................ $ 2.87 $ 3.68 $ 2.78
Leasing commissions per sq. ft.(3)........................................ $ 2.31 $ 1.89 $ 2.13
Effective rent per sq. ft.(4)............................................. $ 13.84 $ 11.96 $ 10.53
Occupancy for Properties owned at period end(%)(5)........................ 95.8 95.4 96.3
</TABLE>
- ------------------------------
(1) Equals total base rent, calculated in accordance with GAAP, to be received
during the entire term of all lease transactions executed during the
respective period, divided by the terms, in months, for such leases,
multiplied by 12, and divided by the total GLA under such leases.
(2) Tenant improvements are defined as capital costs incurred by the Company for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering.
(3) Leasing commissions are brokerage commission fees paid by the Company in
connection with new leases or lease renewals.
(4) Equals total base rent, calculated in accordance with GAAP, to be received
during the entire term of all lease transactions executed during the
respective period, minus all tenant improvements and leasing commissions
from such leases divided by the terms, in months, for such leases,
multiplied by 12, and divided by the total GLA under such leases.
(5) The 1994 data excludes Arlington Courtyard, Vineyard Village East and
Laurentian Center, which were acquired on December 31, 1994.
33
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock in the
Offering, after the deduction of underwriting discounts and commissions and
estimated offering expenses, are expected to be approximately $124.4 million
(approximately $143.5 million if the Underwriters' over-allotment option is
exercised in full). The Company intends to apply the net proceeds of the
Offering along with the $26.5 million proceeds of the PPD Contribution, as
follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN
THOUSANDS)
<S> <C>
Repayment of existing mortgage debt (net of discounts/premiums)................ $ 145,308
Financing costs and expenses................................................... 3,625
Working capital................................................................ 2,000
-------------
Total........................................................................ $ 150,933
-------------
-------------
</TABLE>
The following table sets forth certain information regarding the debt to be
repaid upon completion of the Offering, which consists primarily of mortgage or
secured debt encumbering certain of the Properties. The mortgages and other
indebtedness to be repaid upon completion of the Offering had a weighted average
interest rate of approximately 7.88% and a weighted average remaining term to
maturity of approximately 4.7 years as of March 31, 1997.
<TABLE>
<CAPTION>
INTEREST MATURITY
PROPERTY RATE DATE
- ---------------------------------------------------------- ----------- --------- BALANCE AT EXPECTED BALANCE
MARCH 31, 1997 AS OF THE DATE
-------------- THE OFFERING IS
CONSUMMATED(1)
(IN THOUSANDS) ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Chico Crossroads (2)...................................... 6.94% 8/12/97 $ 9,600 $ 9,600
Monterey Plaza............................................ 9.72 2/28/02 18,371 18,314
Laguna Village............................................ 7.50 3/31/98 4,747 4,747
Melrose Village Plaza..................................... 6.81 12/31/98 7,000 7,000
Cheyenne Commons.......................................... 7.92 10/31/05 26,926 26,760
Sahara Pavilion South..................................... 8.25 8/31/01 12,530 12,456
Green Valley Town & Country............................... 9.88 9/30/00 11,153 11,102
Winterwood Pavilion....................................... 7.25 12/31/97 6,158 6,158
Sunset Square............................................. 7.31 12/31/98 22,382 22,382
Tanasbourne Village....................................... 7.63 3/31/06 18,120 18,008
Canyon Ridge Plaza........................................ 7.63 7/31/98 4,300 4,300
Ocoee Plaza............................................... 7.31 12/31/98 2,000 2,000
Sports Unlimited.......................................... 7.88 1/31/99 2,533 2,481
-------------- --------
Total................................................. $ 145,820 $ 145,308
-------------- --------
-------------- --------
</TABLE>
- ------------------------
(1) Amounts may change due to amortization.
(2) The Chico Crossroads borrowing occurred after March 31, 1997. See "Risk
Factors--Conflicts of Interests in the Formation Transactions and the
Business of the Company."
Of the foregoing indebtedness, approximately $14.3 million was incurred
within the last year, of which $9.6 million was incurred by PPD to finance Chico
Crossroads and $4.7 million was incurred to finance the construction of Laguna
Village.
In the event that the Underwriters' over-allotment option is exercised, the
net proceeds thereof will be used by the Company for additional working capital
and will be available for development and for future acquisitions of additional
properties not yet identified. Pending application of such net proceeds, the
Company will invest the net proceeds in interest-bearing accounts and
short-term, interest-bearing securities, which are consistent with the Company's
intention to qualify for taxation as a REIT. Such investments may include, for
example, obligations of the Governmental National Mortgage Association, other
government and government agency securities, certificates of deposit and
interest-bearing bank deposits.
34
<PAGE>
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to the holders of its Common Stock. The first dividend, for the
period commencing at the closing of the Offering and ending September 30, 1997,
is anticipated to be in an amount approximately equivalent to a quarterly
distribution of $0.3625 per share (which, if annualized, would equal $1.45 per
share), or an annual yield of 7.44%. The Company does not intend to reduce the
expected distribution per share if the Underwriters' over-allotment option is
exercised.
The Company currently expects to distribute approximately 95.6% of estimated
cash available for distribution for the 12 months following the consummation of
the Offering. The Board of Directors may vary the percentage of cash available
for distribution which is distributed if the actual results of operations,
economic conditions or other factors differ from the assumptions used in the
Company's estimates. The estimate of cash available for distributions for the 12
months ending July 31, 1998 is based upon pro forma Funds from Operations for
the 12 months ended March 31, 1997, adjusted (i) for certain known events and/or
contractual commitments that either have occurred or will occur subsequent to
March 31, 1997 or during the 12 months ended March 31, 1997, but were not
effective for the full 12 months or will not recur, and (ii) for certain
non-GAAP adjustments consisting of (A) revisions to historical rent on a
straight-line, GAAP basis to amounts currently being paid or due from tenants
based on contractual rents, (B) estimates of amounts anticipated for tenant
improvements, leasing commissions and capital expenditures, and (C) scheduled
debt principal payments. No effect was given to any changes in working capital
resulting from changes in current assets and current liabilities (which changes
are not anticipated to be material) or the amount of cash estimated to be used
for (i) investing activities for acquisition and other activities (other than an
estimate of tenant improvements, leasing commissions and capital expenditures)
and (ii) financing activities (other than scheduled debt principal payments on
existing indebtedness). The Company anticipates that, except as reflected in the
table below and the notes thereto, investing and financing activities will not
have a material effect on estimated cash available for distributions. The
Company's estimated pro forma Funds from Operations, as adjusted as reflected in
clause (A) above, is substantially equivalent to the Company's estimated pro
forma cash flows from operating activities determined in accordance with GAAP.
The estimate of cash available for distributions is being made solely for the
purpose of setting the initial distribution and is not intended to be a
projection or forecast of the Company's results of operations or its liquidity,
nor is the methodology upon which such adjustments were made necessarily
intended to be a basis for determining future distributions. For a definition of
Funds from Operations, please see footnote 4 to "Summary Selected Combined
Financial Data."
The Company believes that its estimate of cash available for distribution
constitutes a reasonable basis for setting the initial distribution rate and is
made solely for the purpose of setting the initial distribution rate and is not
intended to be a projection or forecast of the Company's results of operations
or of its liquidity. The Company presently intends to maintain the initial
distribution rate for the 12 months following the consummation of the Offering
unless actual results from operations, economic conditions or other factors
differ significantly from the assumptions used in its estimate. However, no
assurance can be given that the Company's estimate will prove accurate. The
actual return that the Company will realize will be affected by a number of
factors, including the revenue received from the Properties, the operating
expenses of the Company, the interest expense incurred on its borrowings, the
ability of tenants to meet their obligations, general leasing activity and
unanticipated capital expenditures. See "Risk Factors--Real Estate Investment
Risks."
35
<PAGE>
The following table illustrates the adjustments made by the Company to its
pro forma Funds from the Operations for the twelve months ended March 31, 1997
in order to calculate estimated cash available for distributions:
<TABLE>
<CAPTION>
AMOUNTS
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
--------------
<S> <C>
Pro forma income before minority interest for year ended December 31, 1996........................ $ 16,548
Plus pro forma income before minority interest for the three months ended March 31, 1997.......... 3,922
Less pro forma income before minority interest for the three months ended March 31, 1996.......... (3,462)
-------
Pro forma income before minority interest for the 12 months ended March 31, 1997.................. 17,008
Plus pro forma depreciation for the 12 months ended March 31, 1997(1)........................... 6,461
Plus pro forma amortization for the 12 months ended March 31, 1997(2)........................... 2,512
Less pro forma depreciation and amortization on non-real estate assets for the 12 months ended
March 31, 1997................................................................................ (174)
-------
Pro forma Funds from Operations for the 12 months ended March 31, 1997............................ 25,807
Adjustments:
Net increases from renewed leases(3)............................................................ 493
Net increases from new leases(4)................................................................ 3,493
Net effect of lease expirations, assuming no renewals(5)........................................ (2,648)
Net change in interest expense(6)............................................................... (461)
-------
Pro forma Funds from Operations for the 12 months ending July 31, 1998 26,684
Net effect of straight-line rents(7)............................................................ (500)
Non-real estate amortization(8)................................................................. 655
Minority interests share of cash flows from operating activities................................ (267)
-------
Estimated adjusted pro forma cash flows from operating activities for the twelve months ending
July 31, 1998................................................................................... 26,572
-------
Estimated cash flows used in investing activities for the 12 months ending July 31, 1998:
Estimated capitalized tenant improvements and leasing commissions(9)............................ (1,329)
Estimated capital expenditures(10).............................................................. (180)
-------
(1,509)
-------
Estimated pro forma cash flows used in financing activities for the 12 months ending July 31,
1998:
Scheduled debt principal payments(11)........................................................... (1,154)
-------
Estimated cash available for distributions for the 12 months ending July 31, 1998................. $ 23,909
-------
-------
Total estimated initial annual distributions...................................................... $ 22,858
-------
-------
Estimated initial annual distributions per share.................................................. $ 1.45
-------
-------
Payout ratio based on estimated cash available for distributions.................................. 95.6%
-------
-------
</TABLE>
- ------------------------
(1) Pro forma depreciation of $6,463,000 for the year ended December 31, 1996
plus $1,607,000 for the period ended March 31, 1997 less $1,609,000 for the
period ended March 31, 1996.
(2) Pro forma amortization of $2,488,000 for the year ended December 31, 1996,
plus $608,000 for the period ended March 31, 1997 less $584,000 for the
period ended March 31, 1996.
(3) Represents the incremental increase in Funds from Operations attributable
to changes in rental revenue, calculated in accordance with GAAP, for the 12
months ending July 31, 1998 over rental revenue included in pro forma Funds
from
36
<PAGE>
Operations for the 12 months ended March 31, 1997. Changes in rental revenue
are due to lease renewals executed between April 1, 1996 and June 4, 1997,
at which time rental revenue is adjusted, calculated in accordance with
GAAP, to fully reflect the renewal terms.
(4) Represents the incremental increase in Funds from Operations, attributable
to rental revenue from new, fully executed leases commencing on or after
April 1, 1996, for the 12 months ending July 31, 1998 over rental revenue
included in pro forma Funds from Operations for the 12 months ended March
31, 1997. Includes $361,069 of rental revenue, net of operating expenses, on
a fully executed lease on 35,070 square feet at Laguna Phase II, which is
currently in the possession of the tenant. Excludes $278,629 of rental
revenue, net of operating expenses, for the 12 months ended July 31, 1998
under other fully executed leases at Laguna Phase II for spaces expected to
be delivered to tenants by August 31, 1997. Also includes a decrease in
Funds from Operations for Foothill Center of $10,610, representing the
difference between interest income collected in the pro forma 12 months
ended March 31, 1997 of $90,500 and contractual rental revenue from existing
leases in the 12 months ended July 31, 1998 of $79,890.
(5) Represents the incremental decrease in Funds from Operations, attributable
to rental revenue from expiring leases ending on or after April 1, 1996, for
the 12 months ending July 31, 1998 versus rental revenue included in pro
forma Funds from Operations for the 12 months ended March 31, 1997.
(6) Represents the incremental decrease in Funds from Operations attributable
to a net increase in interest expense, calculated in accordance with GAAP,
from the pro forma 12 months ended March 31, 1997 to the 12 months ended
July 31, 1998.
(7) Represents the effect of adjusting straight-line rental income included in
the 12 months ending July 31, 1998 from accrual basis under GAAP to a cash
basis.
(8) Represents: (i) the amortization of the financing costs associated with the
Unsecured Credit Facility of $454,000 ($1.36 million amortized over the
three year term of the facility); and (ii) the amortization of $201,000 in
financing costs associated with the debt to remain after consummation of the
Formation Transactions and the Offering.
(9) Represents projected tenant improvement ("TI") and leasing commission
("LC") costs for the 12 month period ending July 31, 1998 based on the
weighted average TI and LC expenditures per square foot for all renewed and
retenanted space incurred during the years ended December 31, 1994, 1995 and
1996, multiplied by the average annual net rentable square feet of leased
space expiring during the three 12 month periods following the consummation
of the Offering:
<TABLE>
<CAPTION>
12 MONTHS ENDED DECEMBER 31,
------------------------------- WTD.
1994 1995 1996 AVG.
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
TI per square foot leased in period.............................. $ 2.78 $ 3.68 $ 2.87 $ 3.08
LC per square foot leased in period.............................. $ 2.13 $ 1.89 $ 2.31 $ 2.14
Total weighted average TI and LC................................. $ 5.22
Average annual square feet of leased space expiring during the
three 12 month periods following the Offering:................. 254,595
Total estimated annual TI and LC................................. $ 1,329
</TABLE>
(10) Represents an assumed capital expenditure per square foot for the pro forma
12 months ending July 31, 1998 of $0.05 multiplied by the total portfolio
GLA at March 31, 1997 of 3.6 million square feet. The Company's historical
average annual capital expenditure per square foot for the three years ended
December 31, 1996 was $0.02.
(11) Calculations based on pro forma debt outstanding for the 12 months ending
July 31, 1998 and the principal payments related to such indebtedness.
In order to qualify to be taxed as a REIT, the Company must make annual
distributions to stockholders of at least 95% of its REIT taxable income
(determined without regard to the dividends received deduction and by excluding
any net capital gains). See "Federal Income Tax Consequences-- Taxation of the
Company--Annual Distribution Requirements." The Company anticipates that its
estimated cash available for distribution will exceed its REIT taxable income
due to non-cash expenses, primarily depreciation and amortization, to be
incurred by the Company. It is possible, however, that the Company, from time to
time, may not have sufficient cash or other liquid assets to meet these
distribution requirements due to timing differences between (i) the actual
receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at taxable
income of the Company. In the event that such timing differences occur, in order
to meet the distribution requirements, the Company may find it necessary to
arrange for short-term, or possibly long-term, borrowings or to pay dividends in
the form of taxable stock dividends. Distributions by the Company
37
<PAGE>
to the extent of its current and accumulated earnings and profits for federal
income tax purposes, other than capital gain dividends, will be taxable to
stockholders as ordinary dividend income. Capital gain distributions generally
will be treated as long-term capital gains. Distributions in excess of earnings
and profits generally will be treated as a non-taxable return of capital to the
extent of each stockholder's basis in his or her Common Stock and thereafter as
taxable gain. The non-taxable distributions will reduce each stockholder's tax
basis in the Common Stock and, therefore, the gain (or loss) recognized on the
sale of such Common Stock or upon liquidation of the Company will be increased
(or decreased) accordingly. For a discussion of the tax treatment of
distributions to holders of Common Stock, see "Federal Income Tax
Consequences--Taxation of U.S. Stockholders Generally" and "--Taxation of
Non-U.S. Stockholders."
Financing activities such as repayment or refinancing of loans also may
affect the Company's assets and liabilities and the amount of cash available for
distribution for future periods. Management will seek to control the timing and
nature of investing and financing activities in order to maximize the Company's
return on invested capital.
Future distributions by the Company will be subject to the requirements of
the MGCL and the annual distribution requirements under the REIT provisions of
the Code (see "Federal Income Tax Consequences--Taxation of the Company--Annual
Distribution Requirements") and will depend on the actual cash flow of the
Company, its financial condition, its capital requirements, and such other
factors as the Board of Directors deems relevant. There can be no assurance that
any distributions will be made or that the expected level of distributions will
be maintained by the Company. See "Risk Factors--Real Estate Investment Risks"
and "Distribution Payout Percentage." If revenues generated by the Company's
properties in future periods decrease materially from current levels, the
Company's ability to make expected distributions would be materially adversely
affected, which could result in a decrease in the market price of the shares of
Common Stock.
The Company may in the future implement a distribution reinvestment program
under which holders of shares of Common Stock may elect automatically to
reinvest distributions in additional shares of Common Stock. The Company may,
from time to time, repurchase shares of Common Stock in the open market for
purposes of fulfilling its obligations under this distribution reinvestment
program, if adopted, or may elect to issue additional shares of Common Stock. If
the Company adopts a distribution reinvestment program, it will solicit
participation in the program after the Offering by means of a separate
prospectus, and a purchase of shares of Common Stock in the Offering does not
entitle any investor to participate in any such program. There can be no
assurance that the Company will adopt such a program, and consequently, the
probable date of adoption or number of shares of Common Stock that would be
available under such program cannot be determined at this time.
38
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 on an historical basis, and on a pro forma basis as adjusted to give
effect to the Formation Transactions, the Offering, and the application of the
estimated net proceeds therefrom as described under the caption "Use of
Proceeds." The information set forth in the following table should be read in
conjunction with the combined financial statements of the Company and notes
thereto, the pro forma financial information of the Company and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
<S> <C> <C>
HISTORICAL PRO FORMA
---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Notes payable(1)........................................................................ $ 191,126 $ 91,430
Borrowings under Unsecured Credit Facility(2)........................................... -- --
---------- -----------
Total debt................................................................................ 191,126 91,430
---------- -----------
Equity:
Preferred Stock $.01 par value, 30,000,000 shares authorized, none issued or
outstanding........................................................................... -- --
Common Stock, $.01 par value, 100,000,000 shares authorized, 15,764,012 issued and
outstanding (3)....................................................................... -- 158
Capital in excess of par value.......................................................... -- 281,254
Owner's equity.......................................................................... 110,291 --
---------- -----------
Total equity.............................................................................. 110,291 281,412
---------- -----------
Total capitalization...................................................................... $ 301,417 $ 372,842
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) The amount of existing mortgage debt is expected to be approximately $235.0
million immediately prior to the closing date of the Offering.
(2) The Company is negotiating final documentation regarding the Unsecured
Credit Facility, which the Company expects to enter into prior to or
concurrently with the consummation of the Offering. See "Business and
Properties--Unsecured Credit Facility."
(3) Excludes 900,000 shares of the 1,750,000 shares of Common Stock reserved for
issuance pursuant to options to be granted under the Stock Incentive Plan.
See "Management--Stock Incentive Plan." Includes 130,000 restricted shares
of Common Stock to be issued to certain individuals.
39
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of the net tangible book value of their Common Stock
from the initial public offering price. At March 31, 1997, the Company had a
combined net tangible book value of approximately $108.7 million, or $14.87 per
share of Common Stock, excluding the impact of PPD's $26.5 million cash
contribution at closing. After giving effect to (i) the sale of the shares of
Common Stock offered hereby at an initial public offering price of $19.50 per
share of Common Stock; (ii) the deduction of underwriting discounts and
commissions and estimated offering expenses and (iii) the receipt of PPD's $26.5
million cash contribution at closing, the pro forma net tangible book value at
March 31, 1997 would have been $276.0 million, or $17.51 per share of Common
Stock. This amount represents an immediate dilution in pro forma net tangible
book value of $1.99 per share of Common Stock to new public investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $ 19.50
Pro forma net tangible book value before the Offering(1).......... $ 14.87
Increase in pro forma net tangible book value attributable
to the Offering and Formation Transactions...................... $ 2.64
---------
Pro forma net tangible book value after the Offering(2)............. $ 17.51
---------
Dilution in pro forma net tangible book value to new investors(3)... $ 1.99
---------
---------
</TABLE>
- ------------------------
(1) Net tangible book value per share of Common Stock before the Offering is
determined by dividing net tangible book value (total tangible assets less
total liabilities) of the Company by the number of shares of Common Stock of
the Company representing the exchange in full of the Units to be issued to
the Continuing Investors.
(2) Based on pro forma net tangible book value of approximately $276.0 million
divided by 15,764,012 shares of Common Stock outstanding.
(3) Dilution is determined by subtracting pro forma net tangible book value per
share of Common Stock after giving effect to the Formation Transactions and
the Offering from the initial public offering price paid by a new investor
for a share of Common Stock.
The following table sets forth, on a pro forma basis giving effect to the
Offering and the Formation Transactions: (i) the number of shares of Common
Stock to be sold by the Company in the Offering; (ii) the net tangible book
value as of March 31, 1997 of the assets contributed to the Company in the
Formation Transaction; and (iii) the net tangible book value of the average
contribution per share based on total contributions. See "Risk
Factors--Immediate and Substantial Dilution."
<TABLE>
<CAPTION>
SHARE BOOK VALUE OR CASH
ISSUED(1)(2) CONTRIBUTIONS AVERAGE PRICE
------------------------- -------------------------- PER
NUMBER PERCENT PERCENT SHARE
------------ ----------- AMOUNT ----------- -------------
-------------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
New investors................................ 7,000,000 44.4% $ 136,500(3) 46.14% $ 19.50(5)
Shares issued in connection with the
Formation Transactions..................... 8,764,012 55.6% 159,365(4) 53.86% $ 18.18
------------ ----------- ------------- -----------
Total................................ 15,764,012 100.00% $ 295,865 100.00%
------------ ----------- ------------- -----------
------------ ----------- ------------- -----------
</TABLE>
- ------------------------
(1) Reflects the shares of Common Stock offered hereby in exchange for assets
contributed in connection with the Formation Transactions.
(2) Includes 130,000 shares of restricted stock issued in connection with the
consummation of the Offering.
(3) This amount is based on the initial public offering price of $19.50 per
share.
(4) Based on the March 31, 1997 pro forma book value of the assets.
(5) Before deducting the Underwriters' discounts and commissions and Offering
expenses estimated to be $12,053,000.
40
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following table sets forth selected combined financial and operating
information on a pro forma basis for the Company and on a combined historical
basis for PPD Properties, which is not a legal entity, but consists solely of
the accounts of Pan Pacific Development (U.S.) Inc. related to the ownership,
management and leasing of its neighborhood and community shopping centers and
medical office building (collectively, "PPD Properties"). All of the accounts of
Pan Pacific Development (U.S.) Inc. unrelated to these activities have been
excluded from the combined historical financial statements of PPD Properties.
The Company was formed to carry on the shopping center related activities of Pan
Pacific Development (U.S.) Inc. Accordingly, the combined financial statements
include the PPD Properties on a historical cost basis in a manner similar to a
pooling-of-interests. The following information should be read in conjunction
with the historical and pro forma financial statements and notes thereto of the
Company and of PPD Properties included elsewhere in this Prospectus. The
selected combined historical financial and operating information of PPD
Properties at December 31, 1996 and 1995, and for the years ended December 31,
1996, 1995 and 1994, has been derived from the historical combined financial
statements audited by KPMG Peat Marwick LLP, independent auditors, whose report
with respect thereto is included elsewhere in this Prospectus. The selected
combined historical financial and operating information for the three months
ended March 31, 1997 and March 31, 1996 has been derived from the unaudited
combined financial statements of PPD Properties included elsewhere in this
prospectus. The selected combined historical financial and operating information
at December 31, 1994, 1993 and 1992 and for the year ended December 31, 1993 and
the 13 months ended December 31, 1992, has been derived from the audited
consolidated financial statements of Pan Pacific Development (U.S.) Inc.
The unaudited selected pro forma financial and operating information for the
three months ended March 31, 1997 and the year ended December 31, 1996 is
presented as if the Offering, the Formation Transactions, and the acquisitions
of the Properties and certain other assets acquired after March 31, 1997 and
prior to the Offering had all occurred on March 31, 1997 for the combined
balance sheet and at the beginning of the period presented for the combined
statements of operations. The Formation Transactions require the pay-off of debt
with proceeds of the Offering. The pro forma financial statements do not assume
the acquisition of any partial interests in the PPD Properties. The pro forma
selected financial information is not necessarily indicative of what the actual
financial position or results of the Company would have been as of and for the
periods indicated, nor does it purport to represent the Company's future
financial position or results of operations.
41
<PAGE>
THE COMPANY (PRO FORMA) AND PPD PROPERTIES (COMBINED HISTORICAL)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------
COMBINED
PRO FORMA HISTORICAL PRO FORMA COMBINED HISTORICAL
--------- -------------- --------- --------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992(1)
--------- ------ ------ --------- ------- ------- ------- ------- --------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rental revenue:
Base rent............................. $ 9,078 $7,229 $6,427 $36,170 $28,111 $23,315 $20,967 $20,834 $ 20,020
Percentage rent....................... 68 68 51 239 239 154 192 243 171
Recoveries from tenants................. 1,954 1,689 1,528 7,613 6,214 5,478 5,473 3,210 2,908
Gain (loss) on sales of real estate..... -- -- -- -- -- 501 -- 3,945 (1,209)
Income (loss) from uncombined
partnerships.......................... 173 55 125 663 109 (32) (271) (108) (75)
Other revenue........................... 307 191 -- 874 432 319 387 -- 411
--------- ------ ------ --------- ------- ------- ------- ------- --------
Total revenue........................... 11,580 9,232 8,131 45,559 35,105 29,735 26,748 28,124 22,226
--------- ------ ------ --------- ------- ------- ------- ------- --------
Property expenses(2).................... 2,370 1,958 1,748 9,206 7,365 6,789 7,152 7,450 7,508
Depreciation and amortization........... 2,168 1,827 1,766 8,738 7,245 6,340 6,129 6,255 7,416
Interest expense........................ 2,041 3,836 3,602 7,524 14,671 12,262 11,405 10,880 10,661
General and administrative expenses..... 835 918 867 3,340 3,228 3,620 3,729 3,116 4,460
Other expenses.......................... 244 450 556 203 1,981 1,247 1,592 274 545
Provision for impairment................ -- -- -- -- -- -- -- -- 9,984
--------- ------ ------ --------- ------- ------- ------- ------- --------
Income (loss) before income tax expense
and minority interest................. 3,922 243 (408) 16,548 615 (523) (3,259) 149 (18,348)
Income tax expense...................... -- (29) (42) -- (122) (87) (7) -- --
Minority interest....................... (66) (31) 2 (187) (44) (5) 50 9 (14)
--------- ------ ------ --------- ------- ------- ------- ------- --------
Net income (loss)....................... $ 3,856 $ 183 $ (448) $16,361 $ 449 $ (615) $(3,216) $ 158 $(18,362)
--------- ------ ------ --------- ------- ------- ------- ------- --------
--------- ------ ------ --------- ------- ------- ------- ------- --------
Pro forma net income per share(3)....... $ 0.24 $ 1.04
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31,
---------------------- ------------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993 1992
--------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Properties--net of accumulated
depreciation and amortization......... $345,368 $283,869 $264,017 $251,423 $214,554 $168,280 $194,077
Total assets............................ 379,177 307,614 293,186 275,690 247,101 190,551 201,300
Notes payable........................... 91,430 191,126 192,915 191,302 160,465 138,181 163,911
Total liabilities....................... 96,193 244,051 229,839 212,984 183,754 142,955 170,802
Minority interest....................... 1,572 1,572 1,539 1,347 1,373 (100) --
Total owner's equity.................... 281,412 61,991 61,808 61,359 61,974 47,696 30,498
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------------- ------------------------------------------
COMBINED
PRO FORMA HISTORICAL PRO FORMA COMBINED HISTORICAL
--------- ---------------------- --------- -------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(4)................ $ 6,025 $ 2,012 $ 1,330 $ 25,139 $ 7,733 $ 5,290 $ 3,095
Cash flows from:
Operating activities.................. -- 975 1,982 -- 6,045 5,456 1,944
Investing activities.................. -- (20,831) (9,773) -- (18,354) (42,815) (24,287)
Financing activities.................. -- 14,735 6,314 -- 14,966 26,683 36,927
Number of operating Properties (at end
of period)............................ 25 20 18 25 19 18 13(5)
GLA (square feet) (at end of period).... 3,607,461 3,062,042 2,737,577 3,607,461 2,794,307 2,737,577 2,145,708(5)
Occupancy of Properties owned (at end of
period)............................... 96.0% 95.9% 94.7% 95.9% 95.8% 95.4% 96.3%(5)
</TABLE>
- ----------------------------------
(1) Represents 13 months of operations because of a change in 1992 to a December
31 fiscal year end from a November 30 fiscal year end.
(2) Property expenses includes property operating expenses, property taxes and
property management fees.
(3) Pro forma weighted average common shares outstanding and pro forma net
income per share are presented as if the Formation Transactions (including
the issuance of 130,000 shares of restricted stock) occurred on January 1,
1996. The incremental effect on pro forma net income per share from the
repayment of debt was $.34 and $1.37 for the three months ended March 31,
1997 and the year ended December 31, 1996, respectively. The incremental
effect was calculated by dividing the pro forma reduction in interest
expense by the number of shares that would have to be issued at $18.18 to
repay $145.3 million of debt.
(4) The White Paper defines Funds from Operations as net income (loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. Management considers Funds from Operations an appropriate
measure of performance of an equity REIT because it is predicated on cash
flow analyses. The Company computes Funds from Operations in accordance with
standards established by the White Paper. The Company's computation of Funds
from Operations may, however, differ from the methodology for calculating
Funds from Operations utilized by other equity REITs and, therefore, may not
be comparable to such other REITs. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of the Company's financial performance or to cash flow
from operating activities (determined in accordance with GAAP) as a measure
of the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
(5) Excludes Arlington Courtyard, Laurentian Center and Vineyard Village East,
which were acquired on December 31, 1994.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with "Selected
Combined Financial Data", and the Combined Financial Statements of Pan Pacific
Development Properties, and the notes thereto, appearing elsewhere in this
Prospectus. Where appropriate, the following discussion includes analysis of the
effects of the Formation Transactions and the Offering. These effects are
reflected in the Pro Forma Condensed Combined Financial Statements of the
Company, and notes thereto, appearing elsewhere in this Prospectus.
The Company receives income primarily from rental revenue (including
recoveries from tenants) from shopping center properties. As a result of the
Company's acquisition and development program, the financial data shows
increases in total revenue from year to year, largely attributable to the
acquisitions and properties placed into operation during the year and the
benefit of a full period of rental and other revenue for properties acquired or
placed into operation in the preceding year.
The Company believes that overhead costs will decrease as a percentage of
revenue as the Company achieves economies of scale through increases in its
portfolio's revenue base. For example, during 1996 the Company owned properties
comprising a weighted average GLA of 2,770,000 square feet. Total expenses,
excluding interest, depreciation and amortization, for the year ended December
31, 1996 were $12,574,000 or $4.54 per square foot. By comparison, during 1995
the Company owned properties comprising a weighted average GLA of 2,360,000
square feet. Total expenses, excluding interest, depreciation and amortization,
for the year ended December 31, 1995 were $11,656,000 or $4.94 per square foot.
The Company expects that the more significant part of its revenue growth in
the next one to two years will come from additional acquisitions and contractual
rent increases rather than from occupancy increases. See "Business and Growth
Strategies--Growth Strategies."
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO THREE MONTHS ENDED MARCH
31, 1996.
Total revenue increased by $1,101,000 or 13.5% to $9,232,000 for the three
months ended March 31, 1997 as compared to $8,131,000 for the three months ended
March 31, 1996.
Rental revenue increased by $819,000 or 12.6% to $7,297,000 from $6,478,000
for the three months ended March 31, 1997, compared to the three months ended
March 31, 1996. The increase in rental revenue resulted principally from the
completion of Laguna Village Phase I in May 1996 and the acquisition of Chico
Crossroads in February 1997. Rental revenue also increased as a result of
increased occupancy levels, primarily at Canyon Ridge Plaza, Cheyenne Commons,
Sahara Pavilion North and Tanasbourne Village.
Recoveries from tenants increased by $161,000 or 10.5% to $1,689,000 for the
three months ended March 31, 1997, compared to $1,528,000, for three months
ended March 31, 1996. This increase resulted primarily from the inclusion of
recoveries from Laguna Village Phase I and Chico Crossroads in 1997. Recoveries
from tenants were 86.9% of property operating expenses and property taxes for
the three months ended March 31, 1997 as compared to 88.0% of the same expenses
for the same period in 1996.
Property expenses include property operating expenses, property taxes and
property management fees. For the three months ended March 31, 1997 and 1996,
property operating expenses were $1,254,000, and $1,186,000, respectively. The
increase in property operating expenses was primarily attributable to the
properties acquired or placed into operation during calendar year 1996 and
during the three months ended March 31, 1997. Property taxes increased by
$139,000 or 25.3% for the three months ended March 31,
43
<PAGE>
1997, compared to the three months ended March 31, 1996. The increase in
property taxes was primarily the result of the completion of Laguna Village
Phase I and the acquisition of Chico Crossroads.
Depreciation and amortization for the three months ended March 31, 1997
increased by $61,000 or 3.5% to $1,827,000 from $1,766,000, for the three months
ended March 31, 1996. This was primarily due to the May 1996 completion of
Laguna Village Phase I and the acquisition of Chico Crossroads in February 1997.
Interest expense increased by approximately $234,000 or 6.5% for the three
months ended March 31, 1997, compared to the three months ended March 31, 1996,
primarily as a result of the completion of Laguna Village Phase I and the net
impact of the December 1996 refinancing of variable rate debt. This increase was
partially offset by reduced debt levels related to certain properties.
General and administrative expenses amounted to $918,000 for the three
months ended March 31, 1997, as compared to $867,000 for the three months ended
March 31, 1996, an increase of $51,000 or 5.9%. This increase was primarily
attributable to salary increases and costs associated with additional staff.
However, as a percentage of total revenue, general and administrative expenses
during the 1997 period decreased to 9.9% from 10.7% during the 1996 period due
to the economies of scale associated with the addition of properties.
Other expenses, net, consist primarily of loan guaranty fees, miscellaneous
income and expenses, and the write-off of capitalized leasing commissions and
tenant improvements. Other expenses for the three months ended March 31, 1997
amounted to $450,000, a decrease of $106,000 when compared to $556,000 for the
three months ended March 31, 1996. The decrease occurred primarily due to a
decrease in loan guaranty fees, partially offset by an increase in the write-off
of capitalized leasing commissions and tenant improvements.
The following table compares the operating data for the properties ("Same
Store Properties") that were owned and in operation for the three months ended
March 31, 1997 and March 31, 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenue:
Rental.......................................................... $ 6,905,000 $ 6,478,000
Recoveries from tenants......................................... 1,577,000 1,528,000
Income from uncombined partnerships............................. 55,000 125,000
Other........................................................... 157,000 --
------------ ------------
8,694,000 8,131,000
Expenses:
Property operating, property taxes and property management
fees.......................................................... 1,789,000 1,748,000
------------ ------------
Operating income.................................................. $ 6,905,000 $ 6,383,000
------------ ------------
------------ ------------
</TABLE>
Operating income for the Same Store Properties for the three months ended
March 31, 1997 increased over the same period in the prior year by $522,000.
This increase was attributable to increased rental revenue due to increased
occupancy levels primarily at Canyon Ridge Plaza, Cheyenne Commons, Sahara
Pavilion North and Tanasbourne Village. In addition, there were approximately
$90,000 of lease termination fees received by Canyon Ridge Plaza, Sahara
Pavilion North and Tanasbourne Village. There was also an increase in percentage
rent of approximately $25,000 at Tanasbourne Village. Property operating
expenses for these Same Store Properties increased by $41,000 for the three
months ended March 31, 1997, over the same period in the prior year due
primarily to increased center enhancement costs such as painting, new awnings,
signage and landscaping at Cheyenne Commons and Sunset Square of approximately
$26,000.
44
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Total revenue increased by $5,370,000 or 18.1% to $35,105,000 for the year
ended December 31, 1996, as compared to $29,735,000 for the year ended December
31, 1995.
Rental revenue increased $4,881,000 or 20.8% to $28,350,000 for the year
ended December 31, 1996, as compared to $23,469,000 for the year ended December
31, 1995. The increase in rental revenue resulted primarily from a full year of
rental revenue from Cheyenne Commons, which was acquired in September 1995, the
completion of Canyon Ridge in December 1995, the completion of Laguna Village
Phase I in May 1996 and the acquisition of the remaining 98% ownership interest
in Laurentian Center effective January 1996.
Recoveries from tenants increased to $6,214,000 for the year ended December
31, 1996, an increase of $736,000 or 13.4%, as compared to $5,478,000 for the
year ended December 31, 1995. This increase resulted principally from a full
year of recoveries from tenants of Cheyenne Commons and Canyon Ridge, partial
year recoveries from tenants of Laguna Village Phase I and the acquisition of
the remaining ownership interests in Laurentian Center. Recoveries from tenants
for 1996 represent 85.0% of property operating expenses and property taxes as
compared to 81.2% for 1995. This increase was due to the sale in 1995 of
Richardson Mall (which included residential units). Increases in vacant space
prior to this disposition decreased significantly the rate of recovery of
expenses relating to this property.
The Company recognized a gain of $501,000 in 1995 on the sale of the
Richardson Mall a mixed use residential property located in Hartford,
Connecticut. There was no comparable gain in 1996.
Property expenses include property operating expenses, property taxes and
property management fees. Property operating expenses for the year ended
December 31, 1996 increased to $5,070,000, an increase of $308,000 or 6.5%, from
$4,762,000 for the year ended December 31, 1995. This increase was primarily
attributable to a full year of ownership in 1996 of Cheyenne Commons, the
completion in 1996 of Laguna Village Phase I and Canyon Ridge and their
subsequent operations, as well as the acquisition of the ownership interests in
Laurentian Center. Property taxes increased by $263,000 or 13.3% to $2,244,000
for the year ended December 31, 1996, compared to $1,981,000 for the year ended
December 31, 1995. The increase in property taxes was primarily the result of a
full year of ownership of Cheyenne Commons, the completion of Laguna Village
Phase I and Canyon Ridge and their subsequent operations, and the acquisition of
the remaining ownership interests in Laurentian Center.
Depreciation and amortization increased by $905,000 or 14.3% to $7,245,000
from $6,340,000 primarily due to the 1996 acquisition and the full year effect
of the properties acquired or developed during 1995.
Interest expense for the year ended December 31, 1996 increased by
$2,409,000 or 19.6% to $14,671,000, as compared to $12,262,000 for the year
ended December 31, 1995, primarily as a result of the increase in mortgage loans
incurred to acquire Cheyenne Commons, to finance the development of Laguna
Village Phase I and Canyon Ridge and the loan assumed in the acquisition of the
ownership interests in Laurentian Center. Interest rates on variable rate debt
were relatively unchanged for 1996 as compared to 1995.
General and administrative expenses decreased by $392,000 or 10.8% for the
year ended December 31, 1996, compared to the year ended December 31, 1995,
primarily due to a reduction in payroll costs related to the relocation of the
Company's administrative offices in the spring of 1995. General and
administrative expenses as a percentage of total revenue decreased to 9.2%
during 1996 from 12.2% during 1995 as the Company was able to utilize its
personnel and other overhead costs over a greater revenue base.
Other expenses, net, consist primarily of loan guaranty fees, miscellaneous
income and expenses, and the write-off of capitalized leasing commissions and
tenant improvements. Other expenses amounted to
45
<PAGE>
$1,981,000 for the year ended December 31, 1996, an increase of $734,000 when
compared to other expenses of $1,247,000 for the year ended December 31, 1995.
The change resulted from (i) reduced interest income and (ii) increased
write-off of capitalized leasing commissions and tenant improvements in 1996
resulting from lease terminations in that year.
The following table compares the operating data for the Same Store
Properties that were owned and in operation for the entire year ended December
31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenue:
Rental....................................................... $ 22,094,000 $ 21,901,000
Recoveries from tenants...................................... 5,139,000 5,223,000
Income (loss) from uncombined partnerships................... 109,000 (32,000)
Other........................................................ 345,000 305,000
------------- -------------
27,687,000 27,397,000
Expenses:
Property operating, property taxes and property management
fees....................................................... 6,087,000 5,985,000
------------- -------------
Operating income............................................... $ 21,600,000 $ 21,412,000
------------- -------------
------------- -------------
</TABLE>
Operating income for the Same Store Properties for the year ended December
31, 1996 increased over the prior year by $188,000. This increase was
attributable to increased rental revenue due to increased occupancy levels at
Rosewood Village. In addition, a lease termination fee of approximately $171,000
was received at Tanasbourne Village. Also, Winterwood Pavilion had an increase
of approximately $56,000 in percentage rent. Operating expenses for these Same
Store Properties increased by $102,000 for the year ended December 31, 1996 over
the prior year primarily due to an increase in property tax expense of
approximately $50,000 at Olympia Square, increased center enhancement costs such
as painting, new awnings and signage at Sunset Square of approximately $30,000
and an increase in marketing, landscaping and general maintenance expenses at
Sahara Pavilion South of approximately $35,000.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
Total revenue increased by $2,987,000 or 11.2% to $29,735,000 for the year
ended December 31, 1995, compared to $26,748,000 for the year ended December 31,
1994.
Rental revenue increased by $2,310,000 or 10.9% to $23,469,000 for the year
ended December 31, 1995, compared to $21,159,000 for the year ended December 31,
1994. This increase resulted principally from a full year of rental revenue in
1995 from properties acquired in December 1994 (Arlington Courtyard, Laurentian
Center and Vineyard Village East) and partial year rental revenue from Cheyenne
Commons, which was acquired in September 1995. Rental revenue associated with
properties acquired added $1,425,000 to rental revenue in 1995.
Recoveries from tenants increased by $5,000 or 0.1% to $5,478,000 for the
year ended December 31, 1995, compared to $5,473,000 for the year ended December
31, 1994. Recoveries from tenants for 1995 represent 81.2% of property operating
expenses and property taxes as compared to 78.3% for 1994. This decrease was
principally due to the sale of Richardson Mall (which included residential
units) in 1995.
The Company recognized a gain of $501,000 in 1995 on the sale of the
Richardson Mall, a mixed use residential property located in Hartford,
Connecticut. There was no comparable gain in 1994.
Property expenses include property operating expenses, property taxes and
property management fees. Property operating expenses were $4,762,000 and
$4,774,000 for the years ended December 31, 1995 and 1994, respectively. The
increase was primarily attributable to the acquisition of the properties. The
46
<PAGE>
increase in property operating expenses from 1994 to 1995 resulting from a
property acquired in 1995 was approximately $157,000. In addition, property
operating expenses increased by $822,000 as a result of a full year of
operations for the properties acquired in 1994. Property taxes decreased by
$238,000 or 10.7% to $1,981,000 for the year ended December 31, 1995 compared to
$2,219,000 for the year ended December 31, 1994. This decrease was primarily the
result of the sale of Richardson Mall.
Depreciation and amortization expense for the year ended December 31, 1995
increased by $211,000 or 3.4% to $6,340,000 from $6,129,000 for the year ended
December 31, 1994 primarily due to the acquisition of Cheyenne Commons.
Interest expense for 1995 increased by $857,000 or 7.5% to $12,262,000
compared to $11,405,000 for 1994. The increase was primarily due to a full year
of interest on debt incurred in 1994, as well as the interest on $30,600,000 of
debt used to fund the acquisition of Cheyenne Commons in September, 1995. The
interest expense associated with the 1995 property acquisition debt was
approximately $664,000.
General and administrative expenses decreased by $109,000 or 2.9% in 1995
compared to 1994. This change resulted from decreases in miscellaneous general
and administrative expenses such as equipment lease and insurance costs. General
and administrative expenses as a percentage of total revenue decreased to 12.2%
during 1995 from 13.9% during 1994 as the Company was able to utilize its
personnel and the overhead costs over a quarter revenue base.
Other expenses, net, decreased by $345,000 to $1,247,000 for the year ended
December 31, 1995 as compared to $1,592,000 for the year ended December 31,
1994. The decrease in expenses was primarily attributable to greater interest
income on cash balances and notes receivable, offset in part by an increase in
1995 of loan guaranty fee expense.
PRO FORMA OPERATING RESULTS
COMPARISON OF PRO FORMA THREE MONTHS ENDED MARCH 31, 1997 TO HISTORICAL
THREE MONTHS ENDED MARCH 31, 1997.
On a pro forma basis, combined net income would have been $3,856,000 for the
three months ended March 31, 1997, compared to the historical net income of
$183,000 for the same period. The $3,673,000 increase in pro forma net income is
primarily the result of: (i) income associated with properties and notes
receivable acquired in 1997 that were assumed to have occurred on January 1,
1996; (ii) a reduction in interest expense based on the effects of using
approximately $144,000,000 from the Offering and the Formation Transactions to
repay mortgage debt; and (iii) the elimination of the $410,000 in management and
loan guaranty fees paid to Revenue Properties. Pro forma revenue increased by
$2,230,000 as a result of these acquisitions while expenses, other than
interest, increased by approximately $832,000 due to the acquired properties.
The net reduction in pro forma interest expense of $1,878,000, was due to the
reduction of debt resulting from the Formation Transactions, partially offset by
interest incurred on debt used to partially fund the acquisition of properties.
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO HISTORICAL YEAR
ENDED DECEMBER 31, 1996.
On a pro forma basis, combined net income would have been $16,361,000 for
the year ended December 31, 1996, compared to the historical net income of
$449,000 for the same period. The $15,912,000 increase in pro forma net income
was primarily the result of: (i) income associated with the acquisition of
properties and notes in 1997 that was assumed to have occurred on January 1,
1996; (ii) a reduction in interest expense based on the effects of using
approximately $144,000,000 from the Offering and the Formation Transactions to
repay mortgage debt; and (iii) the elimination of the $2,658,000 in management
and loan guarantee fees paid to Revenue Properties. Pro forma revenue increased
by $9,900,000 as a result of these acquisitions, while expenses, other than
interest, increased by approximately $3,732,000 due to the additional expenses
associated with the acquired properties. There was a net reduction in pro forma
interest expense of $7,558,000, due to to the reduction of debt resulting from
the
47
<PAGE>
Formation Transactions, partially offset by interest incurred on debt used to
partially fund the acquisition of properties.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes the Offering and the Formation Transactions will
improve its financial position through changes to its capital structure,
principally the substantial reduction in its overall debt and its debt-to-equity
ratio. In connection with the Formation Transactions, the Company will repay all
of its existing floating rate mortgage debt. As a result, the total principal
amount of outstanding secured debt after the Formation Transactions will be
reduced by approximately $146,000,000. This will result in a significant
reduction in annual mortgage interest expense as a percentage of total revenue
(16.5% on a pro forma basis as compared to 41.8% for the historical year ended
December 31, 1996). Thus, cash from operations required to fund debt service
requirements will decrease substantially. The market capitalization of the
Company, based on the initial public offering price of the issued and
outstanding shares of Common Stock and the debt outstanding at the completion of
the Offering is expected to be approximately $398,828,000 with total debt
(exclusive of accounts payable and accrued expenses) of approximately
$91,430,000. As a result, the Company's debt to total market capitalization
ratio will be approximately 22.9% (21.8% if the Underwriters' over-allotment
option is exercised in full). The Unsecured Credit Facility combined with this
lower leveraged capital structuring will enhance the Company's ability to take
advantage of acquisition opportunities as well as to provide funds for working
capital resources.
After the Offering, the Company expects to have approximately $150 million
available under the Unsecured Credit Facility. The Company anticipates that the
Unsecured Credit Facility will be used primarily to acquire additional
properties and for general working capital needs.
The Company's mortgage indebtedness expected to be outstanding after the
closing of the Offering will require balloon payments of $26,438,000, $4,004,000
and $52,748,000 in 2000, 2004 and 2007, respectively. It is likely that the
Company will not have sufficient funds on hand to repay these balloon amounts at
maturity. Therefore, the Company expects to to refinance such debt either
through additional debt financings secured by individual properties or groups of
properties, by unsecured private or public debt offerings or by additional
equity offerings. See "Risk Factors--Real Estate Financing Risks."
The Company expects to make distributions from cash available for
distributions, which the Company believes will exceed historical cash available
for distributions through the reduction in debt service expected to result from
the repayment of indebtedness described above. Amounts accumulated for
distribution will be invested by the Company primarily in short-term investments
such as collateralized securities of the United States government or its
agencies, high-grade commercial paper and bank deposits. See "Distribution
Policy."
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make distributions necessary to enable the Company to
continue to qualify as a REIT. The Company also believes that the foregoing
sources of liquidity will be sufficient to fund its short-term liquidity needs
for the foreseeable future.
The Company expects to meet certain long-term liquidity requirements such as
property acquisition and development, scheduled debt maturities, renovations,
expansions and other non-recurring capital improvements through long-term
secured and unsecured indebtedness and the issuance of additional equity or debt
securities. The Company also expects to use funds available under the Unsecured
Credit Facility to finance acquisition and development activities and capital
improvements on an interim basis.
In the past, PPD Properties received non-interest bearing advances from PPD
(which were advanced by PPD's parent, Revenue Properties) to meet short-term and
long-term liquidity requirements. These advances are to be repaid on demand. For
reasons discussed in the preceding two paragraphs, the Company does not
anticipate the need for such advances in the future.
48
<PAGE>
CASH FLOWS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 TO THE THREE MONTHS
ENDED MARCH 31, 1996.
Net cash provided by operating activities decreased by $1,007,000 to
$975,000 for the three months ended March 31, 1997, as compared to $1,982,000
for the three months ended March 31, 1996. The decrease was primarily the result
of a decrease in restricted cash. Net cash used in investing activities
increased by $11,058,000 to $20,831,000 for the three months ended March 31,
1997, compared to $9,773,000 for the three months ended March 31, 1996. The
increase was primarily the result of the acquisition of Chico Crossroads for
$20,593,000 in February 1997, compared to the lower cost of the acquisition of
the remaining ownership interests in Laurentian Center in 1996. Net cash
provided by financing activities increased by $8,421,000 to $14,735,000 for the
three months ended March 31, 1997, compared to $6,314,000 for the three months
ended March 31, 1996. The increase was primarily the result of a $12,660,000
increase in advances from parent due primarily to the acquisition of Chico
Crossroads in February 1997 offset by a $4,470,000 net decrease in indebtedness.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER
31, 1995. Net cash provided by operating activities increased by $589,000 to
$6,045,000 for the year ended December 31, 1996, compared to $5,456,000 for the
year ended December 31, 1995. The increase was primarily the result of an
increase in net income, an increase in accrued expenses and other liabilities
and a decrease in restricted cash. These increases were partially offset by a
decrease in accounts payable and an increase in accrued rent receivable. Net
cash used in investing activities decreased by $24,461,000 to $18,354,000 for
the year ended December 31, 1996, compared to $42,815,000 for the year ended
December 31, 1995. The decrease was primarily the result of the acquisition of
Cheyenne Commons in 1995 for approximately $36,000,000, partially offset by the
acquisition of the remaining interest in Laurentian Center, increased
construction activity at Laguna Village Phase I, and the collection of notes
receivable in 1996. Net cash provided by financing activities decreased by
$11,717,000 to $14,966,000 for the year ended December 31, 1996, compared to
$26,683,000 for the year ended December 31, 1995. The decrease was primarily the
result of a reduction in the indebtedness incurred in 1996, partially offset by
an increase in amounts advanced from parent in 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER
31, 1994. Net cash provided by operating activities increased by $3,512,000 to
$5,456,000 for the year ended December 31, 1995, compared to $1,944,000 for the
year ended December 31, 1994. The increase was primarily a result of a reduction
in the net loss, an increase in accounts payable and a decrease in prepaid
expenses, partially offset by a smaller increase in deferred lease commissions.
Net cash used in investing activities increased by $18,528,000 to $42,815,000
for the year ended December 31, 1995, compared to $24,287,000 for the year ended
December 31, 1994. The increase was primarily the result of an increase in
additions to operating properties and properties under development in 1995
partially offset by a smaller increase in notes receivable. Net cash provided by
financing activities decreased by $10,244,000 to $26,683,000 for the year ended
December 31, 1995, compared to $36,927,000 for the year ended December 31, 1994.
The decrease was primarily the result of a repayment of advances from parent in
1995 as compared to advances made by the parent in 1994 and a reduction in
indebtedness repaid, partially offset by an increase in indebtedness incurred.
49
<PAGE>
INFLATION
Substantially all of the leases provide for the recovery of real estate
taxes and operating expenses incurred by the Company. In addition, many of the
leases provide for fixed base rent increases or indexed escalations (based on
the CPI or other measures) and percentage rent. The Company believes that
inflationary increases in expenses will be substantially offset by the expense
reimbursements, contractual rent increases and percentage rent described above.
The Unsecured Credit Facility will bear interest at a variable rate, which
will be influenced by changes in short-term interest rates, and will be
sensitive to inflation.
IMPACT OF ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED BY THE COMPANY
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No.
128"), which establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock. Statement
No. 128 simplifies the standards for computing earnings per share previously
found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS.
The Company anticipates that the adoption of Statement No. 128 will not
result in disclosures that will be materially different from those presently
required under APB Opinion 15.
50
<PAGE>
OVERVIEW OF THE COMPANY'S FOUR KEY WESTERN U.S. MARKETS
GENERAL
The Company believes that the four key western U.S. regions in which most of
the Properties are located, Las Vegas, Nevada, Northern California, Southern
California and the Pacific Northwest, have been and will continue to be
excellent markets in which to own and operate shopping centers for long term
investment. The following discussions of the economic and demographic
characteristics of these four regions and the San Francisco Bay Area and
Riverside/San Bernardino submarkets where the Company has a concentration of
Properties is taken from the findings of Lesser set forth in the Lesser Market
Study referred to under the caption "Prospectus Summary--Overview of the
Company's Four Key Western U.S. Markets." The data below for Northern California
and Southern California is drawn from the major counties in those regions. The
data below for the Pacific Northwest separates the Seattle/Tacoma/ Bremerton
area and the Portland Area. In the graphs below the percentages reflect compound
annual growth rates. While the Company believes that Lesser's views of economic
trends are reasonable, there can be no assurance that these trends will in fact
continue.
POPULATION. For the periods from 1990 to 1996 and from 1996 to 2001, each
of the Company's western U.S. markets has experienced or is expected to
experience population growth and, in the case of Las Vegas, Nevada, substantial
growth. The Northern California and Southern California populations are among
the largest in the nation (and together constitute approximately 12% of the
nation's population) and Las Vegas is the fastest growing city in the U.S.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
POPULATION TRENDS
<S> <C> <C> <C> <C>
Total Population and Annual Growth Rates
1990 Population 1996 Population 2001 Population Increase (1990-1996)
millions millions millions (%)
Northern California 10.2 11.0 11.7 1.3%
Southern California 18.2 19.6 20.8 1.3%
Las Vegas 0.9 1.2 1.4 5.4%
Seattle 3.0 3.3 3.6 1.9%
Portland 1.3 1.4 1.6 2.0%
SOURCE: Claritas; Robert Charles Lesser & Co.
<CAPTION>
POPULATION TRENDS
<S> <C>
Total Population and Annual Growth Rates
Increase (1996-2001)
(%)
Northern California 1.2%
Southern California 1.2%
Las Vegas 4.2%
Seattle 1.6%
Portland 1.7%
SOURCE: Claritas; Robert Charles Lesser & Co.
</TABLE>
51
<PAGE>
EMPLOYMENT. For the periods from 1990 to 1996 and from 1996 to 2001, each
of the Company's western U.S. markets has experienced or is expected to
experience employment growth and, in the case of Las Vegas, Nevada, substantial
growth. Employment in each of these markets is expected to exceed the national
average.
EMPLOYMENT TRENDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL EMPLOYMENT AND ANNUAL GROWTH RATES
<S> <C> <C> <C> <C> <C>
Number of Jobs (millions)
1990 1996 2001
Northern California 5.077 5.260 0.6% 5.722 1.7%
Southern California 8.659 8.602 -0.1% 9.606 2.2%
Las Vegas 0.381 0.571 7.0% 0.782 6.5%
Seattle 1.480 1.594 1.6% 1.760 2.0%
Portland 0.882 1.068 3.2% 1.216 2.5%
</TABLE>
Of the 25 Properties, 19 are located within the 20 fastest growing
metropolitan statistical areas ("MSAs") in the United States measured by
employment growth rate and absolute growth in employment. For the 12 months
ended May 1997, certain of the Company's MSAs experienced a percentage
employment growth rate ranging from 3.2% to 7.5%. These growth rates exceed the
national average of 1.8%.
52
<PAGE>
MEDIAN HOUSEHOLD INCOME. For the periods from 1989 to 1996 and from 1996 to
2001, each of the Company's western U.S. markets has experienced or is expected
to experience median household income growth.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEDIAN HOUSEHOLD INCOME TRENDS
<S> <C> <C> <C> <C>
Median Household Income and Annual Growth Rates
1989 Income 1996 Income 2001 Income Increase (1990-1996)
($ thousands) ($ thousands) ($ thousands) (%)
Northern California 37.4 45.0 50.9 2.7%
Southern California 36.4 40.0 42.3 1.3%
Las Vegas 30.0 37.6 44.6 3.3%
Seattle 34.4 42.3 53 3.7%
Portland 30.9 40.4 48.9 3.9%
SOURCE: Claritas; Robert Charles Lesser & Co.
<CAPTION>
MEDIAN HOUSEHOLD INCOME TRENDS
<S> <C>
Median Household Income and Annual Growth Rates
Increase (1996-2001)
(%)
Northern California 2.5%
Southern California 1.1%
Las Vegas 3.5%
Seattle 3.8%
Portland 3.9%
SOURCE: Claritas; Robert Charles Lesser & Co.
</TABLE>
53
<PAGE>
RETAIL SALES. For the period from 1990 to 1995, each of the Company's
western U.S. markets has experienced retail sales growth and, in the case of Las
Vegas, Nevada, substantial retail sales growth except for Southern California
which has experienced a modest decline when measured from 1990 (most of which is
as a result of the deep recession in the early 1990's). Since 1993, Southern
California has again experienced retail sales growth indicating a recovery from
this recession. Aggregate retail sales in the Northern California and Southern
California markets are among the highest in the nation and together represent
more than 10% of the nation's retail sales.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETAIL SALES
<S> <C> <C> <C>
(Constant 1995 Dollars)
Retail Sales and Annual Growth Rate
1990 Retail Sales 1995 Retail Sales Increase
($ billions) ($ billions) (%)
Northern California 90.5 95.5 1.1%
Southern California(1) 157.4 151.5 -0.8%
Las Vegas 6.8 12.3 12.7%
Seattle 29.1 31.8 1.7%
Portland 13.2 15.4 3.2%
1) During 1993-1995 the annual growth rate was 2.0% for Southern
California.
SOURCE: Survey of Buying Power; Robert Charles Lesser & Co.
</TABLE>
54
<PAGE>
SELECTED SUBMARKETS
To illustrate the Company's strategy to acquire properties in selected
submarkets within its western U.S. markets, the following discussion focuses on
the San Francisco Bay Area where the Company has its largest concentration of
Properties in Northern California and the Riverside/San Bernardino area where it
has its greatest concentration of Properties in Southern California. In general,
each of these submarkets reflects stronger growth than the overall region.
POPULATION. For the periods from 1990 to 1996 and from 1996 to 2001, each
of the San Francisco Bay Area and the Riverside/San Bernardino submarkets has
experienced or is expected to experience population growth. The 1996 San
Francisco Bay Area population of approximately 6.4 million people represented
more than half the population of Northern California. The 1996 Riverside/San
Bernardino submarket population of approximately 3.0 million people represented
approximately 15% of the total population of Southern California. In addition,
this submarket's population growth exceeds and is expected to continue to exceed
the rate for Southern California and the nation.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
POPULATION TRENDS
<S> <C> <C> <C> <C>
Total Population and Annual Growth Rates
1990 Population 1996 Population 2001 Population Increase (1990-96)
(in millions) (in millions) (in millions) (%)
San Francisco Bay Area 6.0 6.4 6.8 1.1
Riverside/San Bernardino 2.6 3.0 3.4 2.6
SOURCE: Claritas; Robert Charles Lesser & Co.
<CAPTION>
POPULATION TRENDS
<S> <C>
Total Population and Annual Growth Rates
Increase (1996-2001)
(%)
San Francisco Bay Area 1.0
Riverside/San Bernardino 2.1
SOURCE: Claritas; Robert Charles Lesser & Co.
</TABLE>
55
<PAGE>
EMPLOYMENT. For the periods from 1990 to 1996 and from 1996 to 2001, each
of the San Francisco Bay Area and the Riverside/San Bernardino submarkets has
experienced and is expected to experience employment growth. Employment in the
San Francisco Bay Area is expected to increase during 1996 to 2001, with an
average annual growth rate of 2.0%, which is greater than the expected national
average annual growth rate of 1.2%. Employment in the Riverside/San Bernardino
submarket is expected to increase during 1996 to 2001, with an average annual
growth rate of 4.1%, more than three times the expected national average annual
growth rate of 1.2%.
EMPLOYMENT TRENDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL EMPLOYMENT AND ANNUAL GROWTH RATES
<S> <C> <C> <C> <C> <C>
1990 1996 2001
San Francisco Bay Area 2.92 3.05 0.7% 3.365 2.0%
Riverside/San Bernardino 0.689 0.801 2.5% 0.979 4.1%
SOURCE: Claritas; Robert Charles Lesser & Co.
</TABLE>
56
<PAGE>
MEDIAN HOUSEHOLD INCOME. For the period from 1989 to 1996 and from 1996 to
2001, each of the San Francisco Bay Area and the Riverside/San Bernardino
submarkets has experienced growth in median household income. The 1996 San
Francisco Bay Area median household income of $50,800 is among the highest of
any metropolitan statistical area in California. Both the 1996 Riverside/San
Bernardino area median household income of $35,000 and the expected growth trend
trail the corresponding Southern California statistics.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEDIAN HOUSEHOLD INCOME TRENDS
<S> <C> <C> <C> <C>
Median Household Income and Annual Growth Rates
1989 Income 1996 Income 2001 Income Increase (1990-1996)
($thousands) ($thousands) ($thousands) (%)
San Francisco 41.6 50.8 57.3 2.9%
Riverside/San Bernardino 33.3 35.5 36.3 0.9%
SOURCE: Claritas; Robert Charles Lesser & Co.
<CAPTION>
MEDIAN HOUSEHOLD INCOME TRENDS
<S> <C>
Median Household Income and Annual Growth Rates
Increase (1996-2001)
(%)
San Francisco 2.5%
Riverside/San Bernardino 0.5%
SOURCE: Claritas; Robert Charles Lesser & Co.
</TABLE>
57
<PAGE>
RETAIL SALES. For the period from 1990 to 1995, each of the San Francisco
Bay Area and the Riverside/San Bernardino submarkets has experienced growth in
retail sales. The 1995 San Francisco Bay Area retail sales of $59.1 billion
represented nearly 62% of the retail sales in the Northern California region.
The rate of retail sales growth, however, has been approximately one half
percent less than Northern California on an annual basis which reflects the
maturity of the San Francisco Bay Area market. The 1995 Riverside/San Bernardino
area retail sales of $21.6 billion represented more than 14% of the retail sales
in the Southern California region. More significantly, the rate of retail sales
growth in this submarket was significantly higher (2.5% growth versus a slight
decline) than that of Southern California.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETAIL SALES (CONSTANT 1995 DOLLARS)
<S> <C> <C> <C>
Retail Sales and Annual Growth Rates
1990 Retail Sales 1995 Retail Sales Increase (1990-1996)
(in billions) (in billions) (%)
San Francisco Bay Area 57.2 59.1 0.6%
Riverside/San Bernardino 19.1 21.6 2.5%
SOURCE: Survery of Buying Power; Robert Charles Lesser & Co.
</TABLE>
58
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Properties are well established community and neighborhood shopping
centers of which at least 80% are strategically located in densely populated,
middle and upper income markets and are conveniently located and easily
accessible from major transportation arterials. Of the 25 Properties, 23 have
been operating for at least four years. All of the Properties are located on or
within one mile of a major transportation arterial. The Properties, which
consist of an aggregate of over 3.6 million square feet of GLA (not including
611,472 square feet of anchor-owned space at the Properties) have an average age
of approximately seven years, and are primarily situated in four key western
U.S. markets: Northern California, Southern California, Las Vegas, Nevada and
the Pacific Northwest, each of which the Company believes has attractive
economic and demographic characteristics. The largest concentration of
Properties, consisting of 39.0% of the total GLA, is located in California,
which has the nation's largest population and is experiencing an economic
recovery (Properties consisting of 21.1% of the total GLA are located in
Northern California and Properties consisting of 17.9% of the total GLA are
located in Southern California). Properties consisting of 30.9% of the total GLA
are located in Las Vegas, Nevada, which is the fastest growing city in the U.S.
and where the Company believes it is one of the largest owners and operators of
community and neighborhood shopping centers based on square feet owned and
operated in the Las Vegas area. Properties consisting of 22.4% of the total GLA
are located in the Pacific Northwest primarily in the Seattle, Washington and
Portland, Oregon metropolitan areas, which have growing populations and are
currently experiencing steady economic growth. In addition, Properties
consisting of the remaining 7.7% of the total GLA are located in New Mexico,
Tennessee, Kentucky and Florida. As of March 31, 1997, 96.0% of the Properties'
total GLA was leased to 616 tenants, of which 256 were national tenants and 74
were regional tenants (together representing 83.0% of the total leased GLA),
such as Wal-Mart (9.1% of leased GLA), Ross Dress for Less (2.2%), PayLess Drugs
(2.1%), 24 Hour Fitness (1.7%) and United Artists Theatre (1.4%). Sixteen of the
Properties are anchored by national or regional supermarkets such as
Albertson's, Kroger, Food-4-Less, Vons, Lucky Stores and Safeway.
The following table sets forth certain information about each of the
Properties:
<TABLE>
<CAPTION>
TOTAL
NUMBER
YEAR TOTAL % LEASED OF TENANTS
PROPERTY AND COMPLETED/ GLA(1) AS OF AS OF
LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97
- -------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 1988/1994 267,735 99.6 17
CHICO, CA
Monterey Plaza(6) 1990 183,180 95.2 27
SAN JOSE, CA
Lakewood Shopping 1988 107,769 96.2 26
Center(6)
WINDSOR, CA
Fairmont Shopping 1988 104,281 100.0 29
Center(6)
PACIFICA, CA
Rosewood Village 1988 50,248 92.5 18
SANTA ROSA, CA
Laguna Village(7) 1996 48,183 100.0 1
SACRAMENTO, CA --------- ---
TOTAL/WEIGHTED AVERAGE 761,396 97.7 118
--------- ---
SOUTHERN CALIFORNIA
Chino Town 1987 337,001 96.1 51
Square(8)
CHINO, CA
Melrose Village 1990 132,674 90.8 27
Plaza(8)
VISTA, CA
Laurentian Center 1988 97,131 92.9 23
ONTARIO, CA
Vineyard Village 1992 45,200 100.0 4
East
ONTARIO, CA
Foothill Center(6) 1990 19,636 75.2 9
RIALTO, CA
Arlington 1991 12,221 100.0 6
Courtyard --------- ---
RIVERSIDE, CA
TOTAL/WEIGHTED AVERAGE 643,863 94.2 120
--------- ---
<CAPTION>
TOTAL BASE RENT ANNUALIZED BASE RENT
YEAR ENDED IN PLACE AT
12/31/96(2) 3/31/97(3)
--------------------------- ---------------------------
% OF ANN. BASE
PROPERTY AND BASE RENT PORTFOLIO ANN. BASE RENT/SQ. FT.
LOCATION ($) BASE RENT RENT(3)($) (4)($) MAJOR RETAILERS(5)
- -------------------- ------------ ------------- ------------ ------------ --------------------
<S> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 1,803,202 4.9 2,024,304 7.59 HomeBase,
CHICO, CA Food-4-Less, Barnes
& Noble, Office
Depot
Monterey Plaza(6) 2,380,864 6.5 2,439,660 13.99 Wal-Mart, Lucky(9),
SAN JOSE, CA Walgreens
Lakewood Shopping 756,034 2.1 978,756 9.44 Raley's, U.S. Post
Center(6) Office
WINDSOR, CA
Fairmont Shopping 1,156,767 3.1 1,194,792 11.46 Lucky, PayLess Drugs
Center(6)
PACIFICA, CA
Rosewood Village 681,392 1.9 731,013 15.73 Lad's Supermarket,
SANTA ROSA, CA Bradley Video
Laguna Village(7) 564,044 1.5 903,583 18.75 United Artists
SACRAMENTO, CA ------------ ----- ------------ Theatre
TOTAL/WEIGHTED AVERA 7,342,303 20.0 8,272,108 11.12
------------ ----- ------------
SOUTHERN CALIFORNIA
Chino Town 4,356,377 11.9 4,268,379 13.18 Target(9), Wal-Mart,
Square(8) Mervyn's(9),
CHINO, CA Nordstrom Rack, AMC
Theaters
Melrose Village 1,325,134 3.6 1,346,542 11.18 Lucky, Sav-On Drug
Plaza(8)
VISTA, CA
Laurentian Center 1,112,592 3.0 1,121,039 12.42 Pep Boys, 24 Hour
ONTARIO, CA Fitness, A-1
Hardware
Vineyard Village 362,771 1.0 366,945 8.12 Sears, Dunn Edwards
East
ONTARIO, CA
Foothill Center(6) 89,011 0.3 107,064 7.25 PIP Printing
RIALTO, CA
Arlington 150,826 0.4 150,082 12.28 Harvest Christian
Courtyard ------------ ----- ------------ Bookstore
RIVERSIDE, CA
TOTAL/WEIGHTED AVERA 7,396,711 20.2 7,360,051 12.13
------------ ----- ------------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
TOTAL
NUMBER
YEAR TOTAL % LEASED OF TENANTS
PROPERTY AND COMPLETED/ GLA(1) AS OF AS OF
LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97
- -------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
LAS VEGAS, NEVADA
Cheyenne Commons 1992 362,758 99.0 44
LAS VEGAS, NV
Sahara Pavilion 1989 333,679 94.9 66
North
LAS VEGAS, NV
Sahara Pavilion 1990 160,682 88.6 22
South
LAS VEGAS, NV
1990 130,553 98.4 36
Green Valley Town & Country(6)
HENDERSON, NV
Winterwood 1990 127,975 92.3 21
Pavilion --------- ---
LAS VEGAS, NV
TOTAL/WEIGHTED AVERAGE 1,115,647 95.4 189
--------- ---
PACIFIC NORTHWEST
Sunset Square 1989 352,523 93.9 39
BELLINGHAM, WA
Tanasbourne 1990 210,692 100.0 40
Village(8)
HILLSBORO, OR
Olympia Square 1988 164,521 96.1 37
OLYMPIA, WA
Canyon Ridge Plaza 1995 81,678 96.5 15
KENT, WA --------- ---
TOTAL/WEIGHTED AVERAGE 809,414 96.2 131
--------- ---
OTHER
Maysville 1991/1993 126,507 100.0 19
Marketsquare
MAYSVILLE, KY
Ocoee Plaza(10) 1990 52,242 90.7 11
OCOEE, FL
Sports Unlimited 1990 51,542 100.0 13
MEMPHIS, TN
Country Club 1988 46,850 92.1 15
Center --------- ---
ALBUQUERQUE, NM
TOTAL/WEIGHTED AVERAGE 277,141 96.9 58
--------- ---
PORTFOLIO
TOTAL/WEIGHTED AVERAGE 3,607,461 96.0 616
--------- ---
--------- ---
<CAPTION>
TOTAL BASE RENT ANNUALIZED BASE RENT
YEAR ENDED IN PLACE AT
12/31/96(2) 3/31/97(3)
--------------------------- ---------------------------
% OF ANN. BASE
PROPERTY AND BASE RENT PORTFOLIO ANN. BASE RENT/SQ. FT.
LOCATION ($) BASE RENT RENT(3)($) (4)($) MAJOR RETAILERS(5)
- -------------------- ------------ ------------- ------------ ------------ --------------------
<S> <C> <C> <C> <C> <C>
LAS VEGAS, NEVADA
Cheyenne Commons 4,042,473 11.0 4,088,434 11.38 Wal-Mart, 24 Hour
LAS VEGAS, NV Fitness, Ross Dress
For Less
Sahara Pavilion 3,731,658 10.2 4,029,508 12.72 Vons, Longs Drugs,
North TJMaxx, Shepler's,
LAS VEGAS, NV Border's Books
Sahara Pavilion 2,018,969 5.5 1,948,751 13.69 Sports Authority,
South Office Max,
LAS VEGAS, NV Michael's Arts &
Crafts
1,469,436 4.0 1,660,316 12.93 Lucky/Sav-On
Green Valley Town Superstore
HENDERSON, NV
Winterwood 919,868 2.5 975,212 8.26 Vons, Heilig-Meyers
Pavilion ------------ ----- ------------ Furniture
LAS VEGAS, NV
TOTAL/WEIGHTED AVERA 12,182,404 33.2 12,702,221 11.93
------------ ----- ------------
PACIFIC NORTHWEST
Sunset Square 2,595,503 7.1 2,593,765 7.83 Kmart, Ennen's Food,
BELLINGHAM, WA Fabricland, PayLess
Drugs
Tanasbourne 2,397,142 6.5 2,555,822 12.13 Safeway, PayLess
Village(8) Drugs, Jo-Ann
HILLSBORO, OR Fabrics, Pier 1
Imports
Olympia Square 1,808,273 4.9 1,861,866 11.78 Albertsons, Ross
OLYMPIA, WA Dress For Less
Canyon Ridge Plaza 681,091 1.9 839,669 10.65 Target(9), Top
KENT, WA ------------ ----- ------------ Foods(9), Ross Dress
For Less
TOTAL/WEIGHTED AVERA 7,482,009 20.4 7,851,122 10.08
------------ ----- ------------
OTHER
Maysville 851,604 2.3 $ 874,616 6.91 Wal-Mart(9), Kroger
Marketsquare Company, J.C. Penney
MAYSVILLE, KY
Ocoee Plaza(10) 336,345 0.9 339,452 7.16 Food Lion, Family
OCOEE, FL Dollar
Sports Unlimited 600,803 1.6 601,738 11.67 Sports Unlimited(9),
MEMPHIS, TN Rich-Well Bedding
Co., Hancock Fabrics
Country Club 500,245 1.4 488,871 11.33 Furr's Foods(9), Rio
Center ------------ ----- ------------ Rancho Health &
ALBUQUERQUE, NM Fitness
TOTAL/WEIGHTED AVERA 2,288,997 6.2 2,304,677 8.58
------------ ----- ------------
PORTFOLIO
TOTAL/WEIGHTED AVERA 36,692,424 100.0 38,490,179 11.12
------------ ----- ------------
------------ ----- ------------
</TABLE>
- ------------------------
(1) Represents GLA owned by the Company. Excludes 611,472 square feet of
anchor-owned GLA.
(2) Total base rent for the year ended December 31, 1996 calculated in
accordance with GAAP.
(3) Annualized base rent for all leases in place at March 31, 1997 calculated
as follows: total base rent, calculated in accordance with GAAP, to be
received during the entire term of each lease, divided by the terms in
months for such leases, multiplied by 12.
(4) Annualized base rent divided by the GLA leased at March 31, 1997.
(5) National and regional retailers that occupy significant space at the
referenced Property.
(6) Acquired by the Company after March 31, 1997.
(7) Excludes Phase II which encompasses 60,022 square feet and is currently
nearing completion of construction.
(8) The Company owns a 91% interest in Chino Town Square, a 50% interest in
Melrose Village Plaza and a 90% interest in Tanasbourne Village. Table
reflects 100% of Property data. See "Risk Factors--Risks Regarding
Partially-Owned Properties."
(9) These retailers own their space and are not tenants of the Company. The
Company, therefore, does not receive any rent from these retailers and does
not control their space. These retailers, therefore, could sell or sublease
their stores which could adversely affect the related property.
(10) Rite Aid Drugs has vacated its 6,720 square foot space but continues to be
obligated to pay rent under its lease, which is still in effect.
HISTORICAL LEASING ACTIVITY
Management believes that its approach to leasing has been instrumental in
its ability to maintain high occupancy rates and stable income. The Company's
primary leasing objective is to develop and maintain the optimum mix of
retailers providing day-to-day consumer necessities tailored to each Property's
specific market environment. As part of achieving this objective, the Company
generally enters into long-term leases (typically 15 to 20 years) with national
60
<PAGE>
and regional anchor tenants and enters into shorter term leases (typically three
to five years) with national, regional and local non-anchor tenants. The Company
believes the long-term anchor tenant leases promote stability and attract
non-anchor tenants, while the shorter term non-anchor leases enable the Company
to take advantage of improving market conditions and changing retail trends. The
Company's executive officers and in-house leasing professionals implement an
aggressive, hands-on approach involving: (i) continually analyzing market and
retailing trends; (ii) building close relationships with key national and
regional tenants; and (iii) actively reconfiguring centers and/or relocating
tenants as local market, retailing and tenant needs evolve. Management believes
that maintaining high occupancy rates, the renewal and replacement of tenants
and increasing base rents are critical measures of management and leasing
performance. Since December 31, 1993, the Company has maintained a year-end
weighted average occupancy rate ranging from 92.8% to 96.3% for the Properties
it owned at such dates. During the past three years, the Company has renewed or
released 979,230 square feet involving 298 lease transactions, and weighted
average base rents per square foot from this leasing activity increased from
$11.52 in 1994 to $13.09 in 1995, and to $14.74 in 1996.
The following table sets forth certain information regarding the Company's
leasing activities over the past three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31(1)
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- --------------------------------- --------------------
NON- NON- NON-
ANCHORS ANCHORS TOTAL ANCHORS ANCHORS TOTAL ANCHORS ANCHORS
--------- --------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEW LEASES
Number of leases signed............... 71 4 75 51 2 53 48 3
GLA leased (sq. ft.).................. 188,394 111,285 299,679 129,995 47,200 177,195 99,910 98,892
Base rent/sq. ft. ($/sq. ft.)(2)...... 13.44 13.13 13.32 12.78 8.24 11.57 13.53 7.25
Tenant improvements/sq. ft.
($/sq. ft.)(3)...................... 4.45 2.70 3.80 6.25 2.07 5.13 5.39 1.33
Leasing commissions/sq. ft.
($/sq. ft.)(4)...................... 2.94 2.46 2.76 2.53 1.27 2.19 3.66 0.98
Effective rent/sq. ft.
($/sq. ft.)(5)...................... 12.10 12.90 12.40 10.95 7.91 10.14 11.50 7.02
RENEWALS
Number of renewals signed............. 46 1 47 46 -- 46 25 1
GLA leased (sq. ft.).................. 105,631 34,577 140,208 104,579 -- 104,579 41,699 17,068
Base rent/sq. ft. ($/sq. ft.)(2)...... 17.95 17.23 17.77 15.67 NA 15.67 17.01 11.12
Tenant improvements/sq. ft.
($/sq. ft.)(3)...................... 1.17 -- 0.89 1.22 NA 1.22 1.09 --
Leasing commissions/sq. ft.
($/sq. ft.)(4)...................... 1.39 1.16 1.34 1.36 NA 1.36 1.23 2.00
Effective rent/sq. ft.
($/sq. ft.)(5)...................... 17.37 17.16 17.32 15.05 NA 15.05 16.48 10.72
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases
signed.............................. 117 5 122 97 2 99 73 4
GLA leased (sq. ft.).................. 294,025 145,862 439,887 234,574 47,200 281,774 141,609 115,960
Base rent/sq. ft. ($/sq. ft.)(2)...... 15.06 14.10 14.74 14.07 8.24 13.09 14.55 7.82
Tenant improvements/sq. ft.
($/sq. ft.)(3)...................... 3.28 2.06 2.87 4.01 2.07 3.68 4.13 1.14
Leasing commissions/sq. ft.
($/sq. ft.)(4)...................... 2.38 2.16 2.31 2.01 1.27 1.89 2.95 1.13
Effective rent/sq. ft.
($/sq. ft.)(5)...................... 13.99 13.91 13.97 12.78 7.91 11.96 12.96 7.56
<CAPTION>
TOTAL
---------
<S> <C>
NEW LEASES
Number of leases signed............... 51
GLA leased (sq. ft.).................. 198,802
Base rent/sq. ft. ($/sq. ft.)(2)...... 10.40
Tenant improvements/sq. ft.
($/sq. ft.)(3)...................... 3.37
Leasing commissions/sq. ft.
($/sq. ft.)(4)...................... 2.33
Effective rent/sq. ft.
($/sq. ft.)(5)...................... 9.27
RENEWALS
Number of renewals signed............. 26
GLA leased (sq. ft.).................. 58,767
Base rent/sq. ft. ($/sq. ft.)(2)...... 15.30
Tenant improvements/sq. ft.
($/sq. ft.)(3)...................... 0.78
Leasing commissions/sq. ft.
($/sq. ft.)(4)...................... 1.45
Effective rent/sq. ft.
($/sq. ft.)(5)...................... 14.81
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases
signed.............................. 77
GLA leased (sq. ft.).................. 257,569
Base rent/sq. ft. ($/sq. ft.)(2)...... 11.52
Tenant improvements/sq. ft.
($/sq. ft.)(3)...................... 2.78
Leasing commissions/sq. ft.
($/sq. ft.)(4)...................... 2.13
Effective rent/sq. ft.
($/sq. ft.)(5)...................... 10.53
</TABLE>
- ------------------------------
(1) Anchor defined as single tenants which lease 15,000 square feet or more;
non-anchors defined as tenants which lease less than 15,000 square feet.
(2) Equals total base rent, calculated in accordance with GAAP, to be received
during the entire term of all lease transactions executed during the
respective period, divided by the terms, in months, for such leases,
multiplied by 12, and divided by the total GLA under such leases.
(3) Tenant improvements are defined as capital costs incurred by the Company for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering.
(4) Leasing commissions are brokerage commission fees paid by the Company in
connection with new leases or lease renewals.
(5) Equals total base rent, calculated in accordance with GAAP, to be received
during the entire term of all lease transactions executed during the
respective period, minus all tenant improvements and leasing commissions
from such leases divided by the terms, in months, for such leases,
multiplied by 12, and divided by the total GLA under such leases.
61
<PAGE>
NATIONAL, REGIONAL AND LOCAL TENANT SUMMARY
The following table sets forth certain information regarding the Company's
national, regional and local tenants at each Property as of March 31, 1997:
<TABLE>
<CAPTION>
LOCAL
NATIONAL TENANTS(1) REGIONAL TENANTS(1) TENANTS(1)
-------------------------------- ---------------------------------- ---------------
% OF PROPERTY % OF PROPERTY
% OF PROPERTY ANN. % OF PROPERTY ANN. % OF PROPERTY
PROPERTY LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2) LEASED GLA
- --------------------------------------- --------------- --------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads..................... 99.0% 98.3% -- % -- % 1.0%
Monterey Plaza....................... 78.6 62.6 1.7 3.2 19.7
Lakewood Shopping Center............. 78.2 66.2 3.0 5.6 18.8
Fairmont Shopping Center............. 63.8 47.8 -- -- 36.2
Rosewood Village..................... 10.3 15.0 44.6 36.2 45.1
Laguna Village....................... 100.0 100.0 -- -- --
WEIGHTED AVERAGE....................... 80.9 69.5 3.6 4.8 15.5
SOUTHERN CALIFORNIA
Chino Town Square.................... 82.0 75.0 6.4 9.6 11.6
Melrose Village Plaza................ 75.1 67.6 1.1 1.1 23.8
Laurentian Center.................... 47.4 45.5 18.7 18.6 33.9
Vineyard Village East................ 57.5 42.5 42.5 57.5 --
Foothill Center...................... -- -- -- -- 100.0
Arlington Courtyard.................. 20.0 29.5 49.4 36.4 30.6
WEIGHTED AVERAGE....................... 70.4 65.5 10.6 12.2 19.0
LAS VEGAS, NEVADA
Cheyenne Commons..................... 90.6 83.6 0.7 1.4 8.7
Sahara Pavilion North................ 70.3 58.2 12.9 15.3 16.8
Sahara Pavilion South................ 76.9 70.0 8.0 9.3 15.1
Green Valley Town & Country.......... 49.9 40.2 3.7 5.9 46.4
Winterwood Pavilion.................. 71.3 64.3 14.2 10.8 14.5
WEIGHTED AVERAGE....................... 75.7 66.3 7.2 8.3 17.1
PACIFIC NORTHWEST
Sunset Square........................ 60.6 45.8 30.3 39.7 9.1
Tanasbourne Village.................. 62.4 51.4 12.3 18.0 25.3
Olympia Square....................... 69.9 58.2 15.1 22.9 15.0
Canyon Ridge Plaza................... 79.1 77.5 10.6 11.1 10.3
WEIGHTED AVERAGE....................... 64.8 54.0 20.4 25.6 14.8
OTHER
Maysville Marketsquare............... 87.8 85.2 4.1 4.3 8.1
Ocoee Plaza.......................... 85.4 82.0 -- -- 14.6
Sports Unlimited..................... 38.4 37.7 32.5 34.5 29.1
Country Club Center.................. 30.5 50.4 6.9 4.8 62.6
WEIGHTED AVERAGE....................... 68.7 64.9 9.3 11.7 22.0
PORTFOLIO WEIGHTED AVERAGE............. 72.9% 64.2% 10.1% 12.0% 17.0%
<CAPTION>
% OF PROPERTY
ANN.
PROPERTY BASE RENT(2)
- --------------------------------------- ---------------
<S> <C>
NORTHERN CALIFORNIA
Chico Crossroads..................... 1.7%
Monterey Plaza....................... 34.2
Lakewood Shopping Center............. 28.2
Fairmont Shopping Center............. 52.3
Rosewood Village..................... 48.8
Laguna Village....................... --
WEIGHTED AVERAGE....................... 25.7
SOUTHERN CALIFORNIA
Chino Town Square.................... 15.4
Melrose Village Plaza................ 31.3
Laurentian Center.................... 35.9
Vineyard Village East................ --
Foothill Center...................... 100.0
Arlington Courtyard.................. 34.1
WEIGHTED AVERAGE....................... 22.3
LAS VEGAS, NEVADA
Cheyenne Commons..................... 15.0
Sahara Pavilion North................ 26.5
Sahara Pavilion South................ 20.7
Green Valley Town & Country.......... 53.9
Winterwood Pavilion.................. 24.9
WEIGHTED AVERAGE....................... 25.3
PACIFIC NORTHWEST
Sunset Square........................ 14.5
Tanasbourne Village.................. 30.6
Olympia Square....................... 18.9
Canyon Ridge Plaza................... 11.4
WEIGHTED AVERAGE....................... 20.4
OTHER
Maysville Marketsquare............... 10.5
Ocoee Plaza.......................... 18.0
Sports Unlimited..................... 27.8
Country Club Center.................. 44.8
WEIGHTED AVERAGE....................... 23.4
PORTFOLIO WEIGHTED AVERAGE............. 23.7%
</TABLE>
- ------------------------------
(1) The Company defines national tenants as any tenant that operates in at least
four metropolitan areas located in more than one region (i.e. northwest,
northeast, midwest, southwest or southeast); regional tenants as any tenant
that operates in two or more metropolitan areas located within the same
region; local tenants as any tenant that operates stores only within the
same metropolitan area as the shopping center.
(2) Annualized base rent for all leases in place at March 31, 1997 calculated as
follows: total base rent, calculated in accordance with GAAP, to be received
during the entire term of each lease, divided by the terms in months for
such leases, multiplied by 12.
62
<PAGE>
ANCHOR, NON-ANCHOR TENANT SUMMARY
The following table sets forth certain information regarding anchor and
non-anchor tenants as of March 31, 1997:
<TABLE>
<CAPTION>
ANCHOR TENANTS(1) NON-ANCHOR TENANTS(1)
-------------------------------- --------------------------------
% OF % OF % OF
% OF PROPERTY PROPERTY ANN. PROPERTY LEASED PROPERTY ANN.
PROPERTY LEASED GLA BASE RENT(2) GLA BASE RENT(2)
- -------------------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads...................................... 85.5% 76.7% 14.5% 23.3%
Monterey Plaza........................................ 58.2 31.2 41.8 68.8
Lakewood Shopping Center.............................. 54.5 33.8 45.5 66.2
Fairmont Shopping Center.............................. 50.1 27.5 49.9 72.5
Rosewood Village...................................... -- -- 100.0 100.0
Laguna Village (3).................................... 100.0 100.0 -- --
WEIGHTED AVERAGE........................................ 65.4 46.9 34.6 53.1
SOUTHERN CALIFORNIA
Chino Town Square..................................... 63.5 54.5 36.5 45.5
Melrose Village Plaza................................. 57.2 43.7 42.8 56.3
Laurentian Center..................................... 22.6 16.8 77.4 83.2
Vineyard Village East................................. 57.5 42.5 42.5 57.5
Foothill Center....................................... -- -- 100.0 100.0
Arlington Courtyard................................... -- -- 100.0 100.0
WEIGHTED AVERAGE........................................ 52.9 44.3 47.1 55.7
LAS VEGAS NEVADA
Cheyenne Commons...................................... 68.2 47.7 31.8 52.3
Sahara Pavilion North................................. 50.8 31.5 49.2 68.5
Sahara Pavilion South................................. 54.8 32.7 45.2 67.3
Green Valley Town & Country........................... 38.2 22.6 61.8 77.4
Winterwood Pavilion................................... 57.4 36.8 42.6 63.2
WEIGHTED AVERAGE........................................ 56.4 36.1 43.6 63.9
PACIFIC NORTHWEST
Sunset Square......................................... 72.1 52.0 27.9 48.0
Tanasbourne Village................................... 47.7 31.4 52.3 68.6
Olympia Square........................................ 48.1 33.0 51.9 67.0
Canyon Ridge Plaza.................................... 34.5 22.2 65.5 77.8
WEIGHTED AVERAGE........................................ 56.8 37.6 43.2 62.4
OTHER
Maysville Marketsquare................................ 62.7 57.5 37.3 42.5
Ocoee Plaza........................................... 52.8 50.1 47.2 49.9
Sports Unlimited...................................... 29.6 31.7 70.4 68.3
Country Club Center................................... -- -- 100.0 100.0
WEIGHTED AVERAGE........................................ 44.5 37.5 55.5 62.5
PORTFOLIO WEIGHTED AVERAGE.............................. 56.9% 40.4% 43.1% 59.6%
</TABLE>
- ------------------------------
(1) Anchors defined as single tenants which lease 15,000 square feet or more;
non-anchors defined as tenants which lease less than 15,000 square feet.
(2) Annualized base rent for all leases in place at March 31, 1997 calculated as
follows: total base rent, calculated in accordance with GAAP, to be received
during the entire term of each lease, divided by the terms in months for
such leases, multiplied by 12.
(3) Includes Phase I only.
63
<PAGE>
MAJOR TENANTS
At March 31, 1997, 96.0% of the total GLA was leased to 616 tenants. The
Company's largest tenant, Wal-Mart, which leases space at three of the
Properties and owns a building at a fourth, accounted for approximately 7.4% of
the total annualized base rent in place at March 31, 1997. Including Wal-Mart,
all tenants which individually accounted for 1.0% or more of the annualized base
rent at March 31, 1997 collectively accounted for 26.3% of the total annualized
base rent and the 603 remaining tenants accounted for 73.7% of the total
annualized base rent.
The following table summarizes certain information regarding tenants which
individually accounted for 1.0% or more of the annualized base rent at March 31,
1997:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT 3/31/97
LEASED -------------------------------------------
NUMBER GLA AS OF ANN. % OF TOTAL
OF 3/31/97 % OF TOTAL TOTAL ANN. BASE RENT/ ANN.
TENANT LEASES (SQ. FT.) LEASED GLA BASE RENT(1) SQ.FT.(2) BASE RENT
- ---------------------------------------- ------- --------- ----------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Wal-Mart................................ 3 316,588 9.1 $ 2,836,372 $ 8.96 7.4
Lucky................................... 3 125,119 3.6 972,836 7.78 2.5
United Artists Theatre.................. 1 48,183 1.4 903,583 18.75 2.3
24 Hour Fitness......................... 3 58,860 1.7 875,537 14.87 2.3
Ennen's Foods........................... 1 67,070 1.9 589,855 8.79 1.5
Vons (3)................................ 2 94,737 2.8 583,779 6.16 1.5
HomeBase................................ 1 103,904 3.0 535,431 5.15 1.4
Ross Dress for Less..................... 3 72,487 2.1 513,327 7.08 1.3
PayLess Drugs........................... 3 74,562 2.2 512,586 6.87 1.3
Jumbo Sports............................ 1 72,000 2.1 505,877 7.03 1.3
Albertsons.............................. 1 54,736 1.6 479,469 8.76 1.3
Kroger Company.......................... 1 56,773 1.6 416,160 7.33 1.1
Safeway (3)............................. 1 53,000 1.5 406,209 7.66 1.1
--
--------- ----------- ------------ -----
TOTAL/WEIGHTED AVERAGE.................. 24 1,198,019 34.6 $ 10,131,021 $ 8.46 26.3
--
--
--------- ----------- ------------ -----
--------- ----------- ------------ -----
</TABLE>
- ------------------------------
(1) Annualized base rent for all leases in place at March 31, 1997 calculated as
follows: total base rent, calculated in accordance with GAAP, to be received
during the entire term of each lease, divided by the terms in months for
such leases, multiplied by 12.
(2) Annualized Base Rent divided by the GLA leased at March 31, 1997.
(3) In early 1997, Vons and Safeway merged.
64
<PAGE>
LEASE EXPIRATIONS
To promote stability and attract in-line, non-anchor tenants, the Company
generally enters into long-term leases (typically 15 to 20 years) with major or
anchor retailers which usually contain provisions permitting tenants to renew
and include fixed rent increases or CPI adjustments. At March 31, 1997, anchor
tenants leased approximately 56.9% of the total leased GLA and with only 30.9%
of anchor-leased GLA (17.5% of total leased GLA) scheduled to expire within the
next 10 years.
The following schedules set forth certain information regarding lease
expirations for the Properties for each of ten years beginning with 1997,
assuming that none of the tenants exercises renewal options or termination
rights:
ALL LEASES
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN
PLACE AT 3/31/97
SQUARE -------------------------
NUMBER FOOTAGE % OF TOTAL
OF UNDER % OF TOTAL PORTFOLIO
LEASE EXPIRATION LEASES EXPIRING PORTFOLIO TOTAL ANN. ANN.
YEAR YEAR EXPIRING LEASES EXPIRING GLA BASE RENT(1) BASE RENT
- ---------------------------------------- ---------------- -------- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1....................................... 4/1/97-12/31/97 52 94,969 2.7 $ 1,399,409 3.6
2....................................... 1998 91 236,513 6.8 2,967,028 7.7
3....................................... 1999 89 345,376 10.0 3,291,409 8.6
4....................................... 2000 115 301,836 8.7 4,300,041 11.2
5....................................... 2001 78 251,642 7.3 3,585,282 9.3
6....................................... 2002 67 217,503 6.3 3,069,810 8.0
7....................................... 2003 20 100,893 2.9 1,304,069 3.4
8....................................... 2004 10 73,990 2.1 848,811 2.2
9....................................... 2005 13 88,206 2.6 1,081,196 2.8
10...................................... 2006 16 220,977 6.4 2,584,792 6.7
11 and after............................ 2007 and after 65 1,530,709 44.2 14,058,332 36.5
--- --------- ----- ------------ -----
TOTAL/WEIGHTED AVERAGE 616 3,462,614 100.0 $ 38,490,179 100.0
--- --------- ----- ------------ -----
--- --------- ----- ------------ -----
<CAPTION>
ANN.
BASE RENT/
YEAR SQ. FT.(2)
- ---------------------------------------- ----------
<S> <C>
1....................................... $14.74
2....................................... 12.54
3....................................... 9.53
4....................................... 14.25
5....................................... 14.25
6....................................... 14.11
7....................................... 12.93
8....................................... 11.47
9....................................... 12.26
10...................................... 11.70
11 and after............................ 9.18
TOTAL/WEIGHTED AVERAGE $11.12
</TABLE>
ALL ANCHOR LEASES(3)
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN
PLACE AT 3/31/97
SQUARE -------------------------
FOOTAGE % OF TOTAL
NUMBER OF UNDER % OF TOTAL PORTFOLIO
LEASE EXPIRATION LEASES EXPIRING ANCHOR TOTAL ANN. ANN.
YEAR YEAR EXPIRING LEASES EXPIRING GLA BASE RENT(1) BASE RENT
- ---------------------------------------- ---------------- ----------- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1....................................... 4/1/97-12/31/97 -- -- -- -- --
2....................................... 1998 2 41,238 2.1 346,695 0.9
3....................................... 1999 4 167,505 8.5 663,923 1.7
4....................................... 2000 3 66,375 3.4 523,022 1.4
5....................................... 2001 2 59,641 3.0 510,130 1.3
6....................................... 2002 1 30,000 1.5 255,000 0.6
7....................................... 2003 1 24,000 1.2 192,000 0.5
8....................................... 2004 2 42,119 2.2 300,414 0.8
9....................................... 2005 1 27,683 1.4 218,055 0.6
10...................................... 2006 3 150,352 7.6 1,691,004 4.4
11 and after............................ 2007 and after 31 1,361,497 69.1 10,842,486 28.2
--
--------- ----- ------------ -----
TOTAL/WEIGHTED AVERAGE 50 1,970,410 100.0 $ 15,542,729 40.4
--
--
--------- ----- ------------ -----
--------- ----- ------------ -----
<CAPTION>
ANN.
BASE RENT/
YEAR SQ. FT.(2)
- ---------------------------------------- ----------
<S> <C>
1....................................... --
2....................................... $ 8.41
3....................................... 3.96
4....................................... 7.88
5....................................... 8.55
6....................................... 8.50
7....................................... 8.00
8....................................... 7.13
9....................................... 7.88
10...................................... 11.25
11 and after............................ 7.96
TOTAL/WEIGHTED AVERAGE $ 7.89
</TABLE>
65
<PAGE>
ALL NON-ANCHOR LEASES(3)
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT 3/31/97
SQUARE FOOTAGE -----------------------------------------
NUMBER OF UNDER % OF TOTAL % OF TOTAL
LEASES EXPIRING NON-ANCHOR TOTAL PORTFOLIO BASE RENT/
YEAR LEASE EXPIRATION YEAR EXPIRING LEASES EXPIRING GLA BASE RENT(1) BASE RENT SQ. FT.(2)
- ------------------- --------------------- ----------- -------------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1.................. 4/1/97-12/31/97 52 94,969 6.4 $ 1,399,409 3.6 $ 14.74
2.................. 1998 89 195,275 13.1 2,620,334 6.8 13.42
3.................. 1999 85 177,871 11.9 2,627,486 6.8 14.77
4.................. 2000 112 235,461 15.8 3,777,019 9.8 16.04
5.................. 2001 76 192,001 12.9 3,075,151 8.0 16.02
6.................. 2002 66 187,503 12.6 2,814,810 7.3 15.01
7.................. 2003 19 76,893 5.1 1,112,069 2.9 14.46
8.................. 2004 8 31,871 2.1 548,397 1.4 17.21
9.................. 2005 12 60,523 4.1 863,140 2.2 14.26
10................. 2006 13 70,625 4.7 893,788 2.3 12.66
11 and after....... 2007 and after 34 169,212 11.3 3,215,846 8.5 19.00
--- -------------- ----- --------------- -----
TOTAL/WEIGHTED AVERAGE.................... 566 1,492,204 100.0 $ 22,947,449 59.6 $ 15.38
--- -------------- ----- --------------- -----
--- -------------- ----- --------------- -----
</TABLE>
- ------------------------------
(1) Annualized Base Rent for all leases in place at March 31, 1997 calculated as
follows: total base rent, calculated in accordance with GAAP, to be received
during the entire term of each lease, divided by the terms in months for
such leases, multiplied by 12.
(2) Annualized Base Rent divided by the GLA leased at March 31, 1997.
(3) Anchors defined as single tenants which lease 15,000 square feet or more;
non-anchors defined as tenants which lease less than 15,000 square feet.
CAPITAL EXPENDITURES
The following table sets forth information relating to historical capital
expenditures of the Company's Properties:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total capital expenditures.............................................. $ 18,545 $ 7,082 $ 101,493
Average number of square feet(1)........................................ 2,770,216 2,446,630 2,147,136
Capital expenditures per square foot(2)................................. $ .007 $ .003 $ .047
Three year average capital expenditure per square foot.................. $ .019
</TABLE>
- ------------------------------
(1) Represents the average aggregate amount of square feet owned by the Company
during the year.
(2) For those Properties owned less than a full year, computes the per square
foot amount by annualizing the capital expenditures amount to a pro forma
full year cost.
OTHER ASSETS
NORTH COAST HEALTH CENTER. The Company owns a 50% interest in a general
partnership that owns an interest in a 93,400 square foot medical office complex
located in Encinitas, California.
NOTES RECEIVABLE. In connection with the acquisition of Monterey Plaza, the
Company acquired five notes receivable with a book value of $4,606,000. These
notes are secured by various deeds of trust and partnership interests or other
security on four shopping centers, all of which are located in Northern
California. The notes have a weighted monthly interest rate of approximately
8.16% and have maturity dates ranging from December 1997 to June 2000.
POTENTIAL ACQUISITION
STANFORD RANCH CROSSING. On June 30, 1997 the Company entered into a letter
of intent to purchase Stanford Ranch Crossing, located in Sacramento,
California, from Opus Southwest for $23.0 million. This
66
<PAGE>
189,834 square foot community shopping center is currently under construction.
The Company has proposed to close the purchase upon completion and full lease up
of the two phases of the property. The transaction is subject to numerous
substantial contingencies including the negotiation and execution of definitive
documentation and due diligence. As a result, there can be no assurance that the
transaction will occur.
EXCLUDED ASSETS
Certain existing properties and assets held by PPD, which management
determined are not appropriate for inclusion in the Company's portfolio will not
be transferred to the Company (the "Excluded Assets"). The Excluded Assets
consist of: (i) 100% of the stock of RPC Gaming, Inc. which has applied for a
gaming license in the state of Nevada; (ii) two properties located in Hartford,
Connecticut (a parking lot and a vacant building); and (iii) a 106-unit
residential development located in Vista, California which is managed by a third
party. The Excluded Assets will be overseen, after consummation of the Offering,
by PPD management independent of the Company.
DEBT STRUCTURE
The following table sets forth, as of March 31, 1997, existing debt (in
thousands) encumbering the Properties:
<TABLE>
<CAPTION>
DEBT TO BE
REPAID ON INTEREST RATE
COMPLETION BALANCE TO ON BALANCE
OF THE REMAIN REMAINING
TOTAL DEBT OFFERING OUTSTANDING OUTSTANDING MATURITY DATE
------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads(1)..................... $ 9,600 $ 9,600 $ -- -- --
Monterey Plaza.......................... 18,371 18,371 -- -- --
Lakewood Shopping Center................ -- -- -- -- --
Fairmont Shopping Center................ -- -- -- -- --
Rosewood Village........................ 4,492 -- 4,492 8.52% Jan. 2007
Laguna Village.......................... 4,747 4,747 -- -- --
SOUTHERN CALIFORNIA
Chino Town Square....................... 28,123 -- 28,123 8.00% Mar. 2000
Melrose Village Plaza................... 7,000 7,000 -- -- --
Laurentian Center....................... 4,712 -- 4,712 7.75% Mar. 2004
Vineyard Village East................... -- -- -- -- --
Foothill Center......................... -- -- -- --
Arlington Courtyard..................... -- -- -- -- --
LAS VEGAS, NEVADA
Cheyenne Commons........................ 26,926 26,926 -- -- --
Sahara Pavilion North................... 31,244 -- 31,244 8.17% Jan. 2007
Sahara Pavilion South................... 12,530 12,530 -- -- --
Green Valley Town & Country............. 11,153 11,153 -- -- --
Winterwood Pavilion..................... 6,158 6,158 -- -- --
PACIFIC NORTHWEST
Sunset Square........................... 22,382 22,382 -- -- --
Tanasbourne Village..................... 18,120 18,120 -- -- --
Olympia Square.......................... 14,175 -- 14,175 8.17% Jan. 2007
Canyon Ridge Plaza...................... 4,300 4,300 -- -- --
OTHER
Maysville Marketsquare.................. 5,390 -- 5,390 8.17% Jan. 2007
Ocoee Plaza............................. 2,000 2,000 -- --
Sports Unlimited........................ 2,533 2,533 -- -- --
Country Club Center..................... 3,294 -- 3,294 8.17% Jan. 2007
------------ ----------- -----------
TOTAL..................................... $ 237,250 $ 145,820 $ 91,430
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
- ------------------------------
(1) The Chico Crossroads borrowing occurred after March 31, 1997.
(2) Amounts may change due to amortization.
67
<PAGE>
Aggregate future principal payments by year on the balance of indebtedness
with respect to the Properties to remain outstanding upon completion of the
Offerings are as follows (in thousands):
<TABLE>
<CAPTION>
SCHEDULED TOTAL
AMORTIZATION BALLOON SCHEDULED
YEAR PAYMENTS PAYMENTS PAYMENTS
- --------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
1997(1).................................................. $ 742 $ -- $ 742
1998..................................................... 1,088 -- 1,088
1999..................................................... 1,179 -- 1,179
2000..................................................... 707 26,438 27,145
2001..................................................... 665 -- 665
2002..................................................... 722 -- 722
2003..................................................... 790 -- 790
2004..................................................... 724 4,004 4,728
2005..................................................... 777 -- 777
2006..................................................... 846 -- 846
2007..................................................... -- 52,748 52,748
------ ----------- -----------
TOTAL.................................................... $ 8,240 $ 83,190 $ 91,430
------ ----------- -----------
------ ----------- -----------
</TABLE>
- ------------------------
(1) Represents payments from April 1, 1997 through December 31, 1997.
UNSECURED CREDIT FACILITY
The Company has entered into a commitment letter with Bank of America NT&SA,
subject to final documentation, for a $150 million variable rate unsecured
acquisition credit facility. The Unsecured Credit Facility will be used
primarily to finance acquisition of properties, and to the extent required, for
working capital purposes, which may include providing funds for expansion,
development, tenant improvements and capital expenditures. Borrowings under the
Unsecured Credit Facility will bear interest at 150 basis points over LIBOR. The
Unsecured Credit Facility will provide revolving credit for two years and will
require payment of principal in twelve equal monthly installments in the third
year. The Unsecured Credit Facility will be subject to customary conditions,
including, among other things, the payment of commitment and maintenance fees,
and will contain various financial and other covenants, such as a minimum net
worth requirement and a 50% maximum loan-to-value test.
INSURANCE
The Company carries comprehensive liability, public area liability, boiler
and machinery, fire, flood, earthquake, extended coverage and rental loss
insurance covering the Properties, with policy specifications and insured limits
which the Company believes are adequate and appropriate under the circumstances.
There are, however, certain types of losses that are not generally insured
because it is not economically feasible to insure against such losses. Should an
uninsured loss or a loss in excess of insured limits occur, the Company could
lose its capital invested in the Property, as well as the anticipated future
revenue from the Property and, in the case of debt which is with recourse to the
Company, would remain obligated for any mortgage debt or other financial
obligations related to the Property. Any such loss would adversely affect the
Company. The Company believes that the Properties are adequately insured. With
respect to the California Properties, in light of the California earthquake
risk, California building codes since the early 1970's have established
construction standards for all newly built and renovated buildings, including
shopping center structures. The Company believes that all of the Properties were
constructed in full compliance with the applicable construction standards
existing at the time of construction. All of the Properties located in
California have insurance coverage for earthquakes in an amount up to $20
million per annual occurrence, with a 10% deductible. No assurance can be given
that material losses in excess of insurance proceeds will not occur in the
future.
68
<PAGE>
MANAGEMENT AND EMPLOYEES
Upon consummation of the Offering and the Formation Transactions, the
Company will initially employ 59 persons, including four executive officers and
senior personnel in the areas of acquisition and business development, property
management, accounting services, administration, maintenance and architectural
design. The 59 persons were previously employed and compensated by PPD.
LEGAL PROCEEDINGS
As a result of its acquisition of the Properties, the Company will become a
successor party-in-interest to certain legal proceedings arising in the ordinary
course of business of PPD. The Company does not expect that these proceedings,
in the aggregate, will have a material adverse effect on the Company.
GOVERNMENT REGULATION
Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Under the ADA,
all places of public accommodation, effective beginning in 1992, are required to
meet certain federal requirements related to access and use by disabled persons.
Compliance with the ADA might require removal of structural barriers to
handicapped access in certain public areas where such removal is "readily
achievable." Noncompliance with the ADA could result in the imposition of fines
or an award of damages to private litigants. The Company believes that the
Properties are currently in substantial compliance with all such regulatory
requirements and the Company expects to maintain compliance with all regulatory
requirements. If required changes involve a greater amount of expenditures than
the Company currently anticipates or if the changes must be made on a more
accelerated schedule than the Company currently anticipates, the Company's
ability to make expected distributions to stockholders could be adversely
affected.
ENVIRONMENTAL MATTERS. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the owner
was responsible for, or even knew of, the presence of such hazardous or toxic
substances. The costs of investigation, removal or remediation of such
substances may be substantial and, the presence of such substances may adversely
affect the owner's ability to rent or sell the property or to borrow using such
property as collateral. In addition, the presence of such substances may expose
it to liability resulting from any release or exposure of such substances.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances at another location may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws impose liability for release of ACM into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with ACM and other hazardous or toxic substances. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, potentially liable for removal
or remediation costs, as well as certain other related costs, including
governmental penalties and injuries to persons and property.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware, of
any material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties.
69
<PAGE>
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants in connection with the
formation of the Company. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
None of the Company's environmental assessments of the Properties has revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability.
Nonetheless, it is possible that the Company's assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Moreover, there can be no assurance that (i)
future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability to
make expected distributions to stockholders could be adversely affected.
OTHER REGULATIONS. The Properties are also subject to various federal,
state and local regulatory requirements such as state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such regulatory requirements. However, if
requirements are changed or new requirements are imposed which would require
significant unanticipated expenditures by the Company such events could have an
adverse effect on the Company's funds from operations and expected
distributions.
Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations, other than
typical state and local laws affecting the development and operation of real
property, such as zoning laws. See "Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws," "Federal Income Tax Consequences" and "ERISA
Considerations."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon consummation of the Offering, the Board of Directors of the Company
will consist of five members including the proposed directors named below, each
of whom has been nominated for election and consented to serve. Upon election of
the proposed directors, there will be a majority of directors who are
independent directors. An independent director is an individual who is not (a)
an employee, officer or affiliate of the Company or a subsidiary or division
thereof or any entity directly or indirectly in control of the Company or any
subsidiary or division thereof, (b) a blood relative of any principal executive
officer of the Company, or (c) a stockholder, partner, director, officer, member
or employee of any person acting as advisor, consultant or legal counsel,
receiving compensation on a continuing basis from the Company in addition to
director's fees (an "Independent Director"). Pursuant to the Charter, the Board
of Directors is divided into three classes of directors and directors serve
until the election and qualification of their successor. The initial terms of
the first, second and third classes will expire in 1998, 1999 and 2000,
respectively. Beginning in 1998, directors of each class will be chosen for
three-year terms upon the expiration of their current terms and each year one
class of directors will be elected by the stockholders. The Company believes
that classification of the Board of Directors will help to assure the continuity
and stability of the Company's business strategies and policies as determined by
the Board of Directors. Holders of shares of Common Stock will have no right to
cumulative voting in the election of directors. Consequently, at each annual
meeting of stockholders, the holders of a majority of the shares of Common Stock
will be able to elect all of the successors of the class of directors whose
terms expire at that meeting. Subject to rights pursuant to any employment
agreements, officers of the Company serve at the pleasure of the Board of
Directors.
The following table sets forth certain information with respect to the
directors, proposed directors and executive officers of the Company:
<TABLE>
<CAPTION>
DIRECTOR
TERM
NAME AGE POSITION EXPIRES
- ------------------------ ----- ------------------------------------------------------------- -----------
<S> <C> <C> <C>
Stuart A. Tanz 38 Director, Chairman, Chief Executive Officer and President 2000
David L. Adlard 41 Executive Vice President, Chief Financial Officer, Treasurer N/A
and Secretary
Jeffrey S. Stauffer 36 Senior Vice President, Operations and Development N/A
Laurie A. Sneve 34 Vice President and Controller N/A
Russell E. Tanz 37 Director Nominee 2000
Mark J. Riedy 55 Director Nominee 1999
Bernard M. Feldman 47 Director Nominee 1999
Melvin S. Adess 53 Director Nominee 1998
</TABLE>
The following is a biographical summary of the experience of the directors,
proposed directors and executive officers of the Company:
STUART A. TANZ. Mr. Tanz has served as the Chairman, Chief Executive
Officer and President and as a director of the Company since its formation. He
has served as Chief Executive Officer of PPD since May 1996 and as director and
President since April 1992. Mr. Tanz served as a director, and as the President
and Chief Operating Officer of PPDC from 1992 to December 1996, when it was
amalgamated into Revenue Properties. He served as a director of Revenue
Properties from 1993 to present, and as Co-Chief Executive Officer of Revenue
Properties from May 1996 to present. From 1985 to 1992, Mr. Tanz served as
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<PAGE>
President of United Income Properties, Inc. where he developed property in
Southern California. He was involved in land acquisitions of Bramalea Ltd. from
1982 to 1985. He has been involved in the real estate business for the past 17
years. Mr. Tanz received his B.S. degree in Business Administration in 1980 from
the University of Southern California. Mr. Tanz will resign as a director and
officer of Revenue Properties, PPD and its subsidiaries upon consummation of the
Offering.
DAVID L. ADLARD. Mr. Adlard has served as Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company since its formation.
He is also the Executive Vice President and Chief Financial Officer and a
director of PPD, which position he has held since January 1995. Mr. Adlard is
responsible for a broad range of activities, including corporate finance,
capital management, accounting and financial reporting, management reporting and
controls and construction management. Prior to joining PPD, Mr. Adlard was
Director of Real Estate Consulting at Price Waterhouse from 1992 to 1995. He has
previously worked in the areas of acquisitions, research, project financing and
financial management, development, leasing and property management. Mr. Adlard
received his B.S. degree in Business Administration from California State
Polytechnic University and his J.D. degree from Case Western Reserve University.
Mr. Adlard will resign from all of his positions with PPD and its subsidiaries
upon consummation of the Offering.
JEFFREY S. STAUFFER. Mr. Stauffer has served as Senior Vice President,
Operations and Development of the Company since its formation. He is also the
Senior Vice President of Operations for PPD, which position he has held since
January 1993. Mr. Stauffer's responsibilities include overseeing all leasing and
property management functions for the Company's shopping center portfolio. He
also works closely with the President and Chief Financial Officer in the
acquisition and development of new centers and other business interests of the
Company. Mr. Stauffer has been employed in the shopping center industry since
1985. From 1985 to 1990 he was the Director of Commercial Property Management
for Realty Holding Group in Las Vegas, Nevada, whose property portfolio exceeded
1.5 million square feet. He was State Director for the International Council of
Shopping Centers from 1990 to 1993 and is also a Certified Shopping Center
Manager. Mr. Stauffer received both his B.B. degree in Economics and his M.A.
degree in Economics from Western Illinois University. Mr. Stauffer will resign
from his positions with PPD and its subsidiaries upon consummation of the
Offering.
LAURIE A. SNEVE. Ms. Sneve has served as Vice President and Controller of
the Company since its formation. She is also the Vice President and Corporate
Controller of PPD, which position she has held since March 6, 1995. Ms. Sneve is
responsible for all corporate and property accounting, financial and tax
reporting and management controls. Prior to joining PPD, Ms. Sneve was
Controller and Director of Accounting for The Hahn Company, where she worked for
over six years. Ms. Sneve became licensed as a CPA during her tenure with Arthur
Andersen & Company from 1985 to 1988 where she practiced in both the
Philadelphia and San Diego offices. She graduated from Pennsylvania State
University, earning her B.S. degree in Accounting. Ms. Sneve will resign from
all of her positions with PPD and its subsidiaries upon consummation of the
Offering.
RUSSELL E. TANZ. Mr. Tanz has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. He
served as a director of Revenue Properties from 1985 to August 1997. He also
served as President and Co-Chief Executive Officer of Revenue Properties from
May 1996 to August 1997. From 1992 through May 1996, he was President and Chief
Operating Officer and, from 1991 to 1992, Vice President of Shopping Centers of
Revenue Properties. In these positions, Mr. Tanz gained extensive experience in
the management of the Canadian real estate portfolio of Revenue Properties which
is comprised of retail, residential and office/commercial properties. He also
served as a director of Pan Pacific Development (U.S.) Inc. from May 1996 to
August 1997.
MARK J. RIEDY. Mr. Riedy has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. He
has been a professor of real estate finance at the University of San Diego since
1993. From July 1988 to July 1992, he served as President and Chief
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<PAGE>
Executive Officer of the National Council of Community Bankers. From July 1987
to July 1988, he served as President and Chief Operating Officer of the J.E.
Robert Companies, a real estate workout firm. From January 1985 to July 1986, he
served as President and Chief Operating Officer and a director of the Federal
National Mortgage Association. Dr. Riedy currently serves on the board of
directors of Continental Savings Bank, AccuBanc Mortgage Corporation and
Neighborhood Bancorp. He received a B.A. degree in Economics from Loras College,
an M.B.A. from Washington University and a Ph.D. in Business Economics from the
University of Michigan in Ann Arbor.
BERNARD M. FELDMAN. Mr. Feldman has agreed to serve as a member of the
Board of Directors of the Company commencing upon the consummation of the
Offering. He currently serves as the President and Chief Executive Officer of
ICW Group of insurance companies, a position he has held since 1987. Mr. Feldman
has also served as President and Chief Executive Officer of Western Insurance
Holding since 1991. From 1987 to present, he served as President and Chief
Executive Officer of Insurance Company of the West. From 1982 to 1985, Mr.
Feldman served as Vice President of Claims for the Insurance Company of the
West.
MELVIN S. ADESS. Mr. Adess has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. Since
January 1975, he has been a partner in the Chicago office of the law firm
Kirkland & Ellis, where he was an associate lawyer from 1969 to December 1974.
Mr. Adess serves on various of his firm's management committees. Additionally,
he has served on various taxation committees of the American Bar Association.
Mr. Adess received a B.S. degree from Northwestern University and a J.D. degree
from the University of Chicago. He is also an Illinois Certified Public
Accountant.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. Promptly following the consummation of the Offering, the
Board of Directors will establish an audit committee (the "Audit Committee").
The Audit Committee will be established to make recommendations concerning the
engagement of independent public accountants, review with the independent public
accountants the scope and results of the audit engagement, approve professional
services provided by the independent public accountants, review the independence
of the independent public accountants, consider the range of audit and non-audit
fees and review the adequacy of the Company's internal accounting controls. The
Audit Committee will initially consist of two or more Independent Directors.
CORPORATE GOVERNANCE COMMITTEE. Promptly following the consummation of the
Offering, the Board of Directors will establish a corporate governance committee
(the "Corporate Governance Committee") consisting solely of Corporate Governance
Directors. The Corporate Governance Committee will be responsible for providing
counsel to the Board of Directors with respect to (i) organization, membership
and function of the Board of Directors, (ii) structure and membership of the
committees of the Board of Directors and (iii) succession planning for the
executive management of the Company.
COMPENSATION COMMITTEE. Promptly following the consummation of the
Offering, the Board of Directors will establish an executive compensation
committee (the "Compensation Committee") to establish remuneration levels for
executive officers of the Company and implement the Company's Stock Incentive
Plan (described below) and any other incentive programs. The Compensation
Committee will initially consist of two or more Independent Directors.
The membership of the committees of the Board of Directors will be
established after the completion of the Formation Transactions and the Offering.
The Board of Directors may from time to time establish certain other committees
to facilitate the management of the Company.
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<PAGE>
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors annual compensation of
$10,000 for their services. In addition, Independent Directors will receive a
fee of $1,500 for each Board of Directors meeting attended ($750 for telephonic
attendance), a fee of $750 for each committee meeting attended on a day that
does not include a Board of Directors meeting ($500 for telephonic attendance)
and an additional fee of $250 for each committee meeting chaired by such
director whether or not a Board of Directors meeting occurred on the same day.
Independent Directors will also be reimbursed for reasonable expenses incurred
to attend director and committee meetings. Officers of the Company who are
directors will not be paid any directors' fees. Each Independent Director shall
receive, upon initial election to the Board of Directors, an option to purchase
10,000 shares of Common Stock, of which one third will vest immediately and the
remaining two thirds will vest pro rata in annual installments over two years.
All stock options will be issued pursuant to the Stock Incentive Plan at an
exercise price equal to or greater than the fair market value of the Common
Stock at the date of grant.
EXECUTIVE COMPENSATION
Prior to the Offering, the Company did not pay any compensation to its
officers. These officers were formerly employed and compensated by PPD. The
following table below sets forth the annual base salary rates and other
compensation expected to be paid in 1997 to the Company's Chief Executive
Officer and each of the Company's three other executive officers (the "Named
Executive Officers"). The Company has entered into employment agreements with
certain of its executive officers as described below. See
"Management--Employment Agreements."
<TABLE>
<CAPTION>
SHARES OF
1997 BASE OPTIONS RESTRICTED
NAME TITLE SALARY RATE ALLOCATED(1) STOCK(2)
- -------------------- ----------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stuart A. Tanz Chief Executive Officer and President $ 290,000 225,000 100,000
David L. Adlard Executive Vice President, Chief Financial Officer, 141,500 100,000 10,000
Treasurer and Secretary
Jeffrey S. Stauffer Senior Vice President, Operations and Development 139,140 100,000 10,000
Laurie A. Sneve Vice President and Controller 98,500 80,000 --
</TABLE>
- ------------------------------
(1) All options will be granted pursuant to the Company's Stock Incentive Plan,
will be exercisable at a price per share equal to the initial offering price
per share of Common Stock offered hereby and will vest 33 1/3% per year over
a three-year period.
(2) Restricted stock will be awarded concurrent with the consummation of the
Offering, will vest 33 1/3% per year over a three-year period.
EMPLOYMENT AGREEMENTS
Stuart Tanz, David Adlard, and Jeffrey Stauffer will each enter into
employment agreements with the Company which will be effective as of the
consummation of the Offering. Stuart Tanz's employment agreement will have an
initial term of three years and David Adlard's and Jeffrey Stauffer's employment
agreement will have initial terms of two years. All will be subject to automatic
one-year extensions following the expiration of the initial term. The agreements
will require each of these individuals to be employed full time by the Company
and will prohibit them from becoming directors, officers or employees of Revenue
Properties or PPD. Laurie Sneve has also agreed that she will not accept
employment with Revenue Properties or PPD for as long as she is employed by the
Company.
For the first year of the term, the employment agreements provide for an
initial annual base compensation in the amounts set forth in the Executive
Compensation table with the amount of any initial
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<PAGE>
bonus to be determined by the Compensation Committee. For subsequent years, both
the amount of the base compensation and any bonus will be determined by the
Compensation Committee.
The employment agreements entitle the executives to participate in the
Company's Stock Incentive Plan (each executive will initially be allocated the
number of stock options set forth in the Executive Compensation table) and to
receive certain other insurance and pension benefits. In addition, in the event
of a termination by the Company without "cause," a termination by the executive
for "good reason," or a termination pursuant to a "change in control" of the
Company (as such terms are defined in the employment agreements) (each, a
"Permitted Severance Event"), Stuart Tanz will be entitled to a single severance
payment equal to the sum of two times his annual base compensation for the most
recent 12 month period plus an amount equal to his most recent bonus. David
Adlard and Jeffrey Stauffer will be entitled to a single severance payment equal
to the sum of their respective annual base compensation for the most recent nine
month period (Mr. Stauffer) and six month period (Mr. Adlard); provided,
however, that for each full year of service with the Company, the number of
months of base compensation in the severance payment shall be increased by one
month (subject to an overall cap of 18 months). Each of Messrs. Tanz (for one
year), Adlard (for six months) and Stauffer (for one year) will be subject to a
non-competition covenant if their employment with the Company ceases for any
reason other than a Permitted Severance Event.
STOCK INCENTIVE PLAN
The Company has established the Stock Incentive Plan, which will be
qualified under Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), to enable executive officers, key employees and directors
of the Company to participate in the ownership of the Company. The Stock
Incentive Plan is designed to attract and retain executive officers, other key
employees and directors of the Company and to provide incentives to such persons
to maximize the Company's cash flow available for distribution. The Stock
Incentive Plan provides for the award to such executive officers and employees
of the Company (subject to the Ownership Limit, or such other limit as provided
in the Company's Charter or as otherwise permitted by the Board of Directors) of
a broad variety of stock-based compensation alternatives such as nonqualified
stock options, incentive stock options and restricted stock, and provides for
the grant to Independent Directors (subject to the Ownership Limit, or such
other limit as provided in the Company's Charter or as otherwise permitted by
the Board of Directors) of nonqualified stock options.
STOCK OPTIONS. Promptly after the closing of the Offering, the Company
expects to issue to certain officers, directors and key employees of the
Company, options to purchase (subject to the Ownership Limit, or such other
limit as provided in the Company's Charter or as otherwise permitted by the
Board of Directors) 900,000 shares of Common Stock pursuant to the Stock
Incentive Plan. The term of each such option will be seven years from the date
of grant. Each such option will vest 33 1/3% per year over three years and will
be exercisable at a price per share equal to the initial public offering price
per share of Common Stock in the Offering. The following table below sets forth
the expected allocation of the options to such persons.
<TABLE>
<CAPTION>
NAME OPTIONS
- ------------------------------------------------------------------------------------ ---------
<S> <C>
Stuart A. Tanz...................................................................... 225,000
David L. Adlard..................................................................... 100,000
Jeffrey S. Stauffer................................................................. 100,000
Laurie A. Sneve..................................................................... 80,000
Russell E. Tanz..................................................................... 10,000
Independent Directors (as a group).................................................. 30,000
Other employees (as a group)........................................................ 355,000
---------
Total............................................................................. 900,000
---------
---------
</TABLE>
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<PAGE>
An additional 720,000 shares of Common Stock will be reserved for issuance
under the Stock Incentive Plan. There is no limit on the number of awards that
may be granted to any one individual so long as the aggregate fair market value
(determined at the time of grant) of shares with respect to which an incentive
stock option is first exercisable by an optionee during any calendar year does
not exceed $100,000 and the grant does not violate the Ownership Limit or cause
the Company to fail to qualify as a REIT for federal income tax purposes. Under
the terms of the Stock Incentive Plan, the maximum number of shares of Common
Stock for which stock options may be issued during any calendar year to any
participant in the Stock Incentive Plan shall not exceed 300,000. See
"Description of Capital Stock--Restrictions on Ownership and Transfer."
RESTRICTED STOCK. Restricted stock may be sold to participants at various
prices (but not below par value) and made subject to such restrictions as may be
determined by the Compensation Committee. Restricted stock, typically, may be
repurchased by the Company at the original purchase price if the conditions or
restrictions are not met. In general, restricted stock may not be sold, or
otherwise transferred or hypothecated, until restrictions are removed or expire.
Purchasers of restricted stock will have voting rights and will receive
distributions prior to the time when the restrictions lapse. The Company will
issue 130,000 restricted shares of Common Stock reserved for issuance under the
Stock Incentive Plan, to Messrs. Tanz, Adlard, Stauffer and one other employee
upon consummation of the Offering.
ADMINISTRATION OF THE STOCK INCENTIVE PLAN. The Stock Incentive Plan is
administered by the Board of Directors and/or the Compensation Committee. No
person is eligible to serve on the Compensation Committee unless such person is
then a "disinterested person" within the meaning of paragraph (c)(2) of Rule
16b-3 and an "outside director" within the meaning of Section 162(m)(4)(C)(i) of
the Code. The Compensation Committee has complete discretion to determine
(subject to (a) the Ownership Limit contained in the Charter of the Company and
(b) a limit against granting options for more than 300,000 shares to any person
in any calendar year) which eligible individuals are to receive options or other
stock grants, the number of shares subject to each such grant, the status of any
granted option as either an incentive option or a non-qualified stock option
under the federal tax laws, the exercise schedule to be in effect for the grant,
the maximum term for which any granted option is to remain outstanding and,
subject to the specific terms of the Stock Incentive Plan, any other terms of
the grant.
ELIGIBILITY. All regular salaried employees of the Company may, at the
discretion of the Compensation Committee, be granted incentive and non-qualified
stock options to purchase shares of Common Stock at any exercise price not less
than 100% of the fair market value of such shares on the grant date. Directors
of the Company, consultants and other persons who are not regular salaried
employees of the Company are not eligible to receive incentive stock options,
but are eligible to receive non-qualified stock options.
NUMBER OF SHARES SUBJECT TO STOCK INCENTIVE PLAN. The Company has reserved
up to 1,750,000 shares of Common Stock for issuance pursuant to the Stock
Incentive Plan, 130,000 of which will be issued as restricted stock awards and
900,000 shares will be the subject of options which will be granted under the
Stock Incentive Plan upon the consummation of the Offering.
PURCHASE PRICE OF SHARES SUBJECT TO OPTIONS. The price of the shares of
Common Stock subject to each option shall be set by the Compensation Committee;
provided, however, that the price per share of an option shall not be less than
100% of the fair market value of such shares on the date such option is granted;
provided, further, that, in the case of an incentive stock option, the price per
share shall not be less than 110% of the fair market value of such shares on the
date such option is granted in the case of an individual then owning (within the
meaning of Section 424(d) of the Code) more than ten percent of the total
combined voting power of all classes of stock of the Company, any subsidiary or
any parent corporation ("greater than 10% stockholders").
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<PAGE>
NON-ASSIGNABILITY. Options may be transferred only by will or by the laws
of descent and distribution. During a participant's lifetime, options are
exercisable only by the participant.
TERMS AND EXERCISABILITY OF OPTIONS. Unless otherwise determined by the
Board of Directors or the Compensation Committee, all options granted under the
Stock Incentive Plan are subject to the following conditions: (i) options will
be exercisable in installments, on a cumulative basis, at the rate of 33 1/3%
each year beginning on the date of the grant of the option, until the options
expire or are terminated, and (ii) following an optionee's termination of
employment, the optionee shall have the right to exercise any outstanding vested
options for a specified period.
Options are not assignable or transferable by the optionee except by will or
the laws of inheritance following the optionee's death. The optionee has no
stockholder rights with respect to the shares subject to his or her outstanding
options until such options are exercised and the purchase price is paid for the
shares.
To the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the Code,
but without regard to Section 422(d) of the Code) are exercisable for the first
time by an optionee during any calendar year (under the Stock Incentive Plan and
all other incentive stock option plans of the Company, any subsidiary and any
parent corporation) exceeds $100,000, such options shall be taxed as
non-qualified stock options. The rule set forth in the preceding sentence shall
be applied by taking options into account in the order in which they were
granted. For this purpose, the fair market value of stock shall be determined as
of the time that the option with respect to such stock is granted.
Options are exercisable in whole or in part by written notice to the
Company, specifying the number of shares being purchased and accompanied by
payment of the purchase price for such shares. The option price may be paid: (i)
in cash or by certified or cashier's check payable to the order of the Company,
(ii) by cancellation of indebtedness owed by the Company to the optionee, (iii)
by delivery of shares of Common Stock of the Company already owned by, and in
the possession of, the optionee, (iv) if authorized by the Board of Directors or
the Compensation Committee or if specified in the option agreement for the
option being exercised, by a recourse promissory note made by the optionee in
favor of the Company or through installment payments to the Company, or (v) in
such other manner as the Board of Directors or the Compensation Committee may
specify in order to facilitate the exercise of options by the holders thereof,
including but not limited to a guarantee by the Company of a third party loan to
the optionee.
On the date the option price is to be paid, the optionee (or his or her
successor) must make full payment to the Company of all amounts that must be
withheld by the Company for federal, state or local tax purposes.
TERMINATION OF EMPLOYMENT; DEATH OR PERMANENT DISABILITY. If a holder of an
option ceases to be employed by the Company for any reason other than for
"cause" or the optionee's death or permanent disability, such optionee's stock
option shall expire three months after the date of such cessation of employment
unless by its terms it expires sooner; provided, however, that during such
period after cessation of employment, such stock option may be exercised only to
the extent it was exercisable according to such option's terms on the date of
cessation of employment. If an optionee dies or becomes permanently disabled
while the optionee is employed by the Company, such optionee's option shall
expire three months (or such other period as specified in such optionee's option
agreement) after the date of such optionee's death or permanent disability
unless by its terms it expires sooner. During such period after death, such
stock option may, to the extent it remains unexercised upon the date of such
death, be exercised by the person or persons to whom the optionee's rights under
such stock option are transferred under the laws of descent and distribution.
ACCELERATION OF EXERCISABILITY. In the event that the Company is acquired
by merger, consolidation or asset sale, each outstanding option which is not to
be assumed by the successor corporation or replaced
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<PAGE>
with a comparable option to purchase shares of the capital stock of the
successor corporation will, at the election of the Board of Directors (or if so
provided in an option or other agreement with an optionee), automatically
accelerate in full.
ADJUSTMENTS. In the event any change is made to the Common Stock issuable
under the Stock Incentive Plan by reason of any recapitalization, stock
dividend, stock split, combination of shares, exchange of shares or other change
in corporate structure effected without the Company's receipt of consideration,
appropriate adjustment will be made to (i) the maximum number and class of
shares issuable under the Stock Incentive Plan and (ii) the number and/or class
of shares and price per share in effect under each outstanding option.
AMENDMENTS TO THE STOCK INCENTIVE PLAN. The Board of Directors may at any
time suspend or terminate the Stock Incentive Plan. The Board of Directors or
Compensation Committee may also at any time amend or revise the terms of the
Stock Incentive Plan, provided that no such amendment or revision shall, unless
appropriate stockholder approval of such amendment or revision is obtained, (i)
increase the maximum number of shares which may be acquired pursuant to options
granted under the Stock Incentive Plan (except for adjustments as described in
the foregoing paragraph), (ii) change the minimum purchase price required under
the Stock Incentive Plan, (iii) increase the maximum term of options provided
under the Stock Incentive Plan or (iv) change the classes of persons eligible to
receive options under the Stock Incentive Plan.
TERMINATION. The Stock Incentive Plan will terminate ten years from the
date the Offering is consummated, unless sooner terminated by the Board of
Directors.
REGISTRATION STATEMENT ON FORM S-8. After the consummation of the Offering,
the Company expects to cause to be filed with the Commission a Registration
Statement on Form S-8 covering the restricted shares of Common Stock and the
shares of Common Stock underlying options granted under the Stock Incentive
Plan.
401(K) PLAN
As soon as administratively practicable after the consummation of the
Offering, the Company intends to establish the Company's Section 401(k)
Savings/Retirement Plan (the "Section 401(k) Plan") to cover eligible employees
of the Company and any designated affiliate.
The Section 401(k) Plan will permit eligible employees of the Company to
defer up to 15% of their annual compensation, subject to certain limitations
imposed by the Code. The employees' elective deferrals are immediately vested
and non-forfeitable upon contribution to the Section 401(k) Plan. The Company
currently intends to make matching contributions to the Section 401(k) Plan.
The Section 401(k) Plan is designed to qualify under Section 401 of the Code
so that contributions by employees or by the Company to the Section 401(k) Plan,
and income earned thereon, are not taxable to employees until withdrawn from the
Section 401(k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's officers and directors, see "Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws--Limitation of Liability and
Indemnification for Directors and Officers."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of the Company (or members of their
immediate families) and persons who will hold more than 5% of the outstanding
shares of Common Stock have direct or indirect interests in transactions which
have been or will be consummated by the Company, including the transfer of
certain Properties and entities owning Properties to the Company by PPD and the
repayment of certain indebtedness encumbering the Properties. See "Structure and
Formation Transactions of the Company."
TERMS OF TRANSFERS
The terms of the transfers of the Properties (or entities owning the
Properties) to the Company by PPD were not determined through arm's-length
negotiation. PPD had a substantial economic interest in the entities
transferring the Properties and the entities that will be merged into the
Company. See "Risk Factors--Conflicts of Interests in the Formation Transactions
and the Business of the Company" and "Management."
DIRECTOR DESIGNATION
PPD will have the right to nominate two persons for election to the Board of
Directors of the Company so long as PPD and its affiliates collectively
beneficially own at least 25% of the outstanding shares of Common Stock.
REGISTRATION RIGHTS
For a description of certain registration rights held by PPD and Stuart
Tanz, see "Shares Available for Future Sale--Registration Rights."
ASSIGNMENT OF LEASE
Concurrently with the completion of the Offering, PPD will assign the
Company all of its interest as a tenant in a lease covering the space currently
serving as the headquarters of PPD at Melrose Village Plaza in Vista,
California, in addition to other space currently leased to PPD at certain of the
Properties. The Company will occupy such space at rates which the Company
believes are equal to the fair rental value of the space.
PREEMPTIVE RIGHTS
PPD will have certain participation rights in connection with future
issuances of Common Stock by the company which will enable PPD to maintain its
overall percentage ownership of the Common Stock of the Company.
NON-COMPETITION AGREEMENT
PPD and Revenue Properties have agreed that they will not, without the
consent of the Company acting through its independent directors, acquire,
develop or manage any shopping centers in the United States and will refer all
such opportunities to the Company. These restrictions will lapse when PPD's
common stock ownership of the Company falls below 15%, calculated on a fully
diluted basis.
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STRUCTURE AND FORMATION TRANSACTIONS OF THE COMPANY
FORMATION TRANSACTIONS
The Company was incorporated in the State of Maryland on April 16, 1997.
Concurrently with the consummation of the Offering, the Company and PPD will
engage in certain Formation Transactions. The Formation Transactions have been
designed to enable the Company to continue to expand the real estate operations
of PPD and to repay certain mortgage debt relating thereto, to facilitate the
Offering, to enable the Company to qualify as a REIT for federal income tax
purposes commencing with its taxable year ending December 31, 1997 and to
preserve certain tax advantages to PPD. The Formation Transactions are as
follows:
- Certain of the Properties have been or will be contributed by PPD entities
to the Company and certain PPD entities that own the remaining Properties
have been or will be merged into the Company.
- PPD will contribute $26,486,000 in cash to the Company.
- The Company will sell shares of Common Stock in the Offering.
- Approximately $148,933,000 or 98.7% of the estimated net proceeds of the
Offering and the PPD Contribution will be used by the Company to repay
certain mortgage debt secured by certain of the Properties and
indebtedness outstanding under lines of credit to be assumed by the
Company in the Formation Transactions and to pay transaction costs
including fees and expenses associated with the Unsecured Credit Facility.
See "Use of Proceeds."
- The Company will enter into the $150 million Unsecured Credit Facility.
- Fifty-nine of the 61 current employees of PPD will resign from PPD and
become employees of the Company, including Stuart Tanz, the Chairman,
President and Chief Executive Officer of PPD, three other officers of PPD
(David Adlard, Jeffrey Stauffer and Laurie Sneve) and other operating and
administrative employees including one in the area of acquisition and
business development, one design architect, 13 in accounting, three in
leasing, one in marketing, five in property management, 14 in
administration and 17 in maintenance.
Upon completion of the Formation Transactions, the Company will hold 100% of
the interests in all of the Properties, except for the Partially-Owned
Properties. See "Risk Factors--Risks Related to Partially-Owned Properties."
Based on the assumed initial public offering price of the Common Stock, (i) the
purchasers of Common Stock in the Offering will own approximately 44.4% of the
outstanding Common Stock and (ii) PPD will own approximately 54.8% of the
outstanding Common Stock. PPD and Stuart Tanz will have certain rights to have
the shares issued to them in the Formation Transactions registered for resale
and PPD will have certain preemptive rights regarding any future Common Stock
offerings by the Company. See "Shares Eligible for Future Sale--Registration
Rights." See "Underwriting" for certain transfer restrictions applicable to the
shares of Common Stock received in connection with the Formation Transactions.
BENEFITS TO RELATED AND OTHER PARTIES
Certain affiliates of the Company will realize certain material benefits in
connection with the Formation Transactions, including the following:
- In exchange for its ownership interests in certain Properties and certain
PPD entities, PPD will receive a total of 8,634,012 shares of Common
Stock, with a total value of approximately $168.4 million based on the
assumed initial public offering price of the Common Stock, which compares
to a net book value of such interests and assets of approximately $133.0
million as of March 31, 1997 (which does not include the $26.5 million PPD
Contribution). The Company does not believe that
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the book values of the interests and assets exchanged are equivalent to
the fair market values of such interests and assets.
- Approximately $145.3 million of indebtedness (excluding accrued interest)
of PPD secured by certain of the Properties will be repaid in the
Formation Transactions. See "Use of Proceeds."
- Approximately $91.4 million of indebtedness of PPD secured by certain of
the Properties have been or will be assumed by the Company in the
Formation Transactions. See "Business and Properties-- Debt Structure."
- Stuart Tanz will serve as a director and officer of the Company and will
each enter into an employment agreement providing for annual salary,
bonus, participation in the Company's Stock Incentive Plan and other
benefits for his services. See "Management--Employment Agreements," and
"Management--Stock Incentive Plan."
- David Adlard and Jeffrey Stauffer will serve as officers of the Company
and will enter into employment agreements providing for annual salary,
bonus, participation in the Company's Stock Incentive Plan and other
benefits for their services. See "Management--Employment Agreements," and
"Management--Stock Incentive Plan."
- PPD will have certain participation rights in connection with future
issuances of Common Stock by the Company which will enable PPD and its
affiliates to maintain their overall percentage ownership of the combined
equity of the Company. See "Certain Relationships and Related
Transactions--Preemptive Rights."
- PPD will have the right to nominate two persons for election to the Board
of Directors of the Company so long as PPD and its affiliates collectively
beneficially own at least 25% of the outstanding Common Stock. See
"Certain Relationships and Related Transactions--Director Desgination."
- PPD and Stuart Tanz will have certain registration rights with respect to
shares of Common Stock issued. See "Shares Available For Future
Sale--Registration Rights."
- PPD received a loan of $9.6 million from an affiliate of Prudential
Securities to finance the acquisition of one of the Properties. Such loan,
plus accrued interest, will be repaid to such affiliate at the
consummation of the Offering from the proceeds of the Offering. See "Risk
Factors-- Potential Conflict of Interests of Prudential Securities as
Lender and Underwriter."
DETERMINATION AND VALUATION
Based on the issuance of 15,764,012 shares of Common Stock in the Offering
upon completion of the Formation Transactions, PPD will hold approximately a
54.8% equity interest in the Company. If the Underwriters' over-allotment option
is exercised in full, PPD will hold approximately a 51.4% equity interest in the
Company.
In connection with the Offering and the Formation Transactions, the Company
did not obtain any independent valuations or appraisals of the Properties or
other assets that the Company will own immediately after consummation of the
Offering, nor did it obtain an opinion as to the fairness of the allocation of
shares to the purchasers in the Offering. The initial public offering price will
be determined based upon the estimated cash available for distribution and the
factors discussed under the caption "Underwriting," rather than a property by
property valuation based on historical cost or current market value. This
methodology has been used because management believes it is appropriate to value
the Company as an ongoing business rather than with a view to values that could
be obtained from a liquidation of the Company or of individual properties owned
by it.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The Company's policies with respect to the following activities have been
determined by the Board of Directors of the Company and may be amended or
revised from time to time at the discretion of the Board of Directors, without a
vote of the stockholders of the Company, if they determine in the future that
such a change is in the best interests of the Company and its stockholders.
INVESTMENT POLICIES
INVESTMENT IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The investment
objectives of the Company are to achieve stable cash flow available for
distributions and, over time, to increase cash flow and portfolio value by
actively managing the Properties, developing properties and acquiring additional
properties that, either as acquired or after value-added activities by the
Company (such as improved management and leasing services and renovations), will
produce additional cash flows. The Company's policy is to develop and acquire
properties primarily for generation of current income and appreciation of
long-term value.
The Company expects to pursue its investment objectives primarily through
the ownership of shopping center properties. The Properties will initially
consist of 25 shopping centers. Since the Company expects to hold its properties
for long-term investment, it will continue to emphasize an ongoing program of
regular maintenance, periodic renovation, capital management and expansion of
existing facilities. The Company currently contemplates developing and acquiring
additional shopping center properties in the western United States including
particularly its current geographic regions (Northern California, Southern
California, Las Vegas, Nevada and the Pacific Northwest), although future
investments could be made outside of these areas or in different property
categories if the Board of Directors determines that such acquisitions and
developments would be desirable. The Company will not have any limit on the
amount or percentage of its assets invested in any single property or group of
related properties. The Board of Directors may establish limitations as it deems
appropriate from time to time. No limitations have been set on the number of
properties in which the Company will seek to invest or on the concentration of
investments in any one geographic region.
The Company may develop, sell, trade, purchase or lease income-producing
properties or land for long-term investment and expand, improve or sell its
properties, in whole or in part, when circumstances warrant. The Company may
also participate with other entities and affiliates in property ownership
through joint ventures or other types of co-ownership. Equity investments by the
Company may be subject to existing or future mortgage financing and other
indebtedness which will have priority over the equity interests of the Company.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company will emphasize
equity real estate investments, the Company may, in its discretion, invest in
mortgages and other real estate interests consistent with the Company's
qualification as a REIT. The Company currently has investments in notes
receivable secured by deeds of trust and pledges of partnership interests
relating to certain shopping centers in Northern California. See "Business and
Properties--Other Assets--Notes Receivable." Investments in real estate
mortgages run the risk that one or more borrowers may default under such
mortgages and that the collateral securing such mortgages may not be sufficient
to enable the Company to recoup its full investment.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Subject to the percentage of ownership limitations
and gross income tests necessary for the Company to qualify and maintain its
status as a REIT, the Company may invest in securities of other entities engaged
in real estate activities or securities of other issuers. See "Federal Income
Tax Consequences--Taxation of the Company." The Company does not currently
intend to invest in the securities of other issuers except in connection with
acquisitions of indirect interests in properties (normally general or limited
partnership interests in special purpose partnerships owning properties) and in
connection with the acquisition of substantially all of the economic interest in
a real estate-related operating business where such investments
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would be consistent with the Company's investment policies. Investment in these
securities is also subject to the Company's policy not to be treated as an
investment company under the Investment Company Act of 1940.
DISPOSITIONS
The Company has no current intention to cause the disposition of any of the
Properties, although it reserves the right to do so if, after taking into
account the tax consequences of any disposition, including the Company's
continued ability to qualify as a REIT, it determines that such action would be
in its best interests. See "Risk Factors--Disposition of Properties with
Built-in Gain."
FINANCING POLICIES
The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. Upon completion of the Offering and the
Formation Transactions, the debt to total market capitalization ratio (i.e., the
total consolidated debt of the Company as a percentage of the market value of
the issued and outstanding shares of Common Stock plus total consolidated debt)
of the Company will be approximately 22.9%. This ratio will fluctuate with
changes in the price of the Common Stock (and the issuance of additional shares
of Common Stock) and differs from the debt-to-book capitalization ratio, which
is based upon book value. As the debt-to-book capitalization ratio may not
reflect the current income potential of a company's assets and operations, the
Company believes that the debt-to-total market capitalization ratio provides a
more appropriate indication of leverage for a company whose assets are primarily
income-producing real estate. The total market capitalization of the Company,
however, is more variable than book value, and does not necessarily reflect the
fair market value of the underlying assets of the Company at all times. Although
the Company will consider factors other than total market capitalization in
making decisions regarding the incurrence of indebtedness (such as the purchase
price of properties to be acquired with debt financing, the estimated market
value of such properties upon refinancing and the ability of particular
properties and the Company as a whole to generate cash flow to cover expected
debt service), there can be no assurance that the ratio of indebtedness to total
market capitalization (or to any other measure of asset value) will be
consistent with the expected level of distributions to the Company's
stockholders.
The Board of Directors has adopted a policy of limiting the Company's
indebtedness to approximately 50% of its total market capitalization, but the
organizational documents of the Company do not contain any limitation on the
amount or percentage of indebtedness, funded or otherwise, that the Company may
incur. In addition, the Company may from time to time modify its debt policy in
light of then current economic conditions, relative costs of debt and equity
capital, market values of its properties, general conditions in the market for
debt and equity securities, fluctuations in the market price of its Common
Stock, growth and acquisition opportunities, the Company's continued REIT
qualification requirements or other presently unknown factors which may arise in
the future which, in the judgment of the Board of Directors, require a revision
in such policy. Accordingly, the Company may increase or decrease its debt to
market capitalization ratio beyond the limits described above.
To the extent that the Board of Directors decides to obtain additional
capital, the Company may raise such capital through additional equity offerings
(including offerings of senior or convertible securities and preferred stock),
sales of investments, bank and other institutional borrowings, the issuance of
debt securities (which may be convertible into or exchangeable for shares of
Common Stock or be accompanied by warrants to purchase shares of Common Stock)
or retention of cash flow (subject to the requirements in the Code concerning
the distribution of REIT taxable income), or a combination of these methods. In
the event that the Board of Directors determines to raise additional equity
capital, the Board has the authority, without stockholder approval, to issue
additional shares of Common Stock or other capital stock (including securities
senior to the Common Stock) of the Company in any manner, and on such terms and
for such consideration, it deems appropriate, including in exchange for
property. Except for the preemptive rights
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in favor of PPD, existing stockholders would have no preemptive right to
purchase shares issued in any offering, and any such offering might cause a
dilution of a stockholder's investment in the Company.
Borrowings may be unsecured or may be secured by any or all of the assets of
the Company or any existing or new property-owning partnership and may have full
or limited recourse to all or any portion of the assets of the Company or any
existing or new property-owning partnership. Indebtedness incurred by the
Company may be in the form of bank borrowings, purchase money obligations to the
sellers of the properties, publicly or privately placed debt instruments or
financing from institutional investors or other lenders. There are no limits on
the number or amount of mortgages or interests which may be placed on any one
property. In addition, such indebtedness may be recourse to all or any part of
the property of the Company or may be limited to the particular property for
which the indebtedness relates. The proceeds from any borrowings by the Company
may be used for general corporate purposes including, among other things,
working capital, to refinance existing indebtedness, to finance the acquisition,
expansion, development or redevelopment of properties and for the payment of
distributions.
In the future, the Company may seek to extend, expand, reduce or renew the
Unsecured Credit Facility, or obtain new credit facilities or lines of credit,
subject to its general policy of debt capitalization. Future mortgage loans,
credit facilities and lines of credit may be used for the purpose of making
acquisitions or capital improvements, providing working capital or meeting the
distribution requirements for REITs under the Code if the Company has taxable
income without receipt of cash sufficient to enable the Company to meet such
distribution requirements.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts that the Board of Directors determines from
time to time to be adequate to meet normal contingencies in connection with the
operation of the Company's business and investments.
CONFLICT OF INTEREST POLICIES
Directors and officers of the Company may be subject to certain conflicts of
interests in fulfilling their responsibilities to the Company. The Company has
adopted certain policies designed to minimize potential conflicts of interest.
POLICIES APPLICABLE TO ALL DIRECTORS. Under the Company's Charter and
Maryland law, a contract or transaction between the Company and any of its
directors or between the Company and any other corporation, firm or other entity
in which any of its directors is a director, officer, stockholder, member or
partner or has a material financial interest is not void or voidable solely
because of such interest if (i) the contract or transaction is approved after
disclosure of the interest by the affirmative vote of a majority of the
disinterested directors, or by the affirmative vote of a majority of the votes
cast by disinterested stockholders, or (ii) the contract or transaction is
established to have been fair and reasonable to the Company.
The Company's Charter and Bylaws provide that a majority of the Company's
Board of Directors must be Independent Directors. See "Certain Provisions of
Maryland Law and of the Company's Charter and Bylaws--Board of Directors."
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OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
(i) to invest in the securities of other issuers for the purpose of exercising
control over such issuer (except to the extent described above in "--Investment
Policies"), (ii) to underwrite securities of other issuers or (iii) to trade
actively in loans or other investments.
The Company has authority to offer shares of Common Stock or other
securities and to repurchase or otherwise reacquire shares of Common Stock or
any other securities in the open market or otherwise and may engage in such
activities in the future. The Company may, under certain circumstances, purchase
shares of Common Stock in the open market, if such purchases are approved by the
Board of Directors. The Board of Directors has no present intention of causing
the Company to repurchase any of the shares of Common Stock, and any such action
would be taken only in conformity with applicable federal and state laws and the
requirements for qualifying as a REIT under the Code and the regulations of the
U.S. Department of Treasury under the Code (the "Treasury Regulations").
Although it may do so in the future, except in connection with the Formation
Transactions, the Company has not issued Common Stock or any other securities in
exchange for property, nor has it reacquired any of its Common Stock or any
other securities. The Company has not made loans to other entities or persons,
including its officers and directors. The Company may in the future make loans
to joint ventures in which it participates in order to meet working capital
needs. The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers, nor has the Company
invested in the securities of other issuers for the purposes of exercising
control, and does not intend to do so.
At all times, the Company intends to make investments in such a manner as to
be consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Board of Directors of the Company determines that it
is no longer in the best interests of the Company to qualify as a REIT and such
determination is approved by the affirmative vote of holders owning at least
two-thirds of the shares of the Company's capital stock outstanding and entitled
to vote thereon.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock immediately following the consummation of
the Offering and the Formation Transactions for (i) each person who is expected
to be the beneficial owner of 5% or more of the outstanding Common Stock
immediately following the consummation of the Offering, (ii) directors, proposed
directors and the executive officers of the Company, and (iii) directors,
proposed directors and executive officers of the Company as a group. This table
assumes that (i) the Formation Transactions and the Offering are completed and
(ii) the Underwriters' over-allotment option will not be exercised. Each person
named in the table has sole voting and investment power with respect to all of
the shares of Common Stock shown as beneficially owned by such person, except as
otherwise set forth in the notes to the table. Unless otherwise indicated, the
address of each named person is c/o Pan Pacific Retail Properties, Inc., 1631-B
South Melrose Drive, Vista, California 92083.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGES OF
COMMON STOCK OUTSTANDING SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF COMMON STOCK
- ----------------------------------------------------- ------------------- ---------------------
<S> <C> <C>
PPD.................................................. 8,634,012 54.8%
Stuart A. Tanz....................................... 100,000 *
David L. Adlard...................................... 10,000 *
Jeffrey S. Stauffer.................................. 10,000 *
Laurie A. Sneve...................................... -- --
Russell E. Tanz...................................... -- --
Mark J. Riedy (1).................................... 3,333 *
Bernard M. Feldman (1)............................... 3,333 *
Melvin S. Adess (1).................................. 3,333 *
All directors, proposed directors and executive
officers as a group (eight persons) 8,764,011 55.6%
</TABLE>
- ------------------------
* Less than one percent.
(1) Represents one third of the options granted upon initial election to the
Board of Directors and which vest immediately.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and Bylaws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
GENERAL
Under the Charter, the authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, par value $.01 per share, and 30,000,000
shares of Preferred Stock. Upon completion of the Offering and Formation
Transactions, there will be 15,764,012 shares of Common Stock issued and
outstanding (excluding the 1,050,000 shares which are subject to the
Underwriters' over-allotment option), and no shares of Preferred Stock will be
issued and outstanding. Under Maryland law, stockholders generally are not
liable for the corporation's obligations solely as a result of their status as
stockholders.
COMMON STOCK
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to stockholders for a vote, including the election of
directors, and, except as otherwise required by law and except as provided in
any resolution adopted by the Board of Directors with respect to any other class
or series of stock establishing the designation, powers, preferences and
relative, participating, optional or other special rights and powers of such
series, the holders of such shares will possess the exclusive voting power,
subject to the provisions of the Company's Charter regarding the ownership of
shares of Common Stock in excess of the Ownership Limit, or such other limit as
provided in the Company's Charter or as otherwise permitted by the Board of
Directors described below. Holders of shares of Common Stock will have no
preference, conversion, exchange, sinking fund, redemption or appraisal rights
and, with the exception of PPD's proportional purchase rights, have no
preemptive rights to subscribe for any securities of the Company or cumulative
voting rights in the election of directors. All shares of Common Stock to be
issued and outstanding following the consummation of the Offering will be duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any other shares or series of stock and to the provisions of the Charter
regarding ownership of shares of Common Stock in excess of the Ownership Limit,
or such other limit as provided in the Company's Charter or as otherwise
permitted by the Board of Directors described below, distributions may be paid
to the holders of shares of Common Stock if and when authorized and declared by
the Board of Directors of the Company out of funds legally available therefor.
The Company intends to make quarterly distributions, beginning with
distributions for the portion of the quarter from the consummation of the
Offering through September 30, 1997. See "Distribution Policy."
If the Company is liquidated, subject to the right of any holders of
Preferred Stock to receive preferential distributions, each outstanding share of
Common Stock will be entitled to participate pro rata in the assets remaining
after payment of, or adequate provision for, all known debts and liabilities of
the Company.
Subject to the provisions of the Charter regarding the ownership of shares
of Common Stock in excess of the Ownership Limit, or such other limit as
provided in the Company's Charter or as otherwise permitted by the Board of
Directors described below, all shares of Common Stock will have equal
distribution, liquidation and voting rights, and will have no preference or
exchange rights. See
"--Restrictions on Ownership and Transfer."
Under the Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter)
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is set forth in the corporation's charter (such a lower percentage (a majority)
is set forth in the Company's Charter). The phrase "substantially all of the
assets" is not defined in the MGCL and is, therefore, subject to interpretation
by courts applying Maryland law in the context of the facts and circumstances of
any particular case. The Charter of the Company provides that such actions need
only be approved by stockholders holding a majority of the shares entitled to
vote on the matter.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
such class or series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be The Bank of
New York.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. No Preferred Stock is currently issued or
outstanding. Prior to the issuance of shares of each series, the Board of
Directors is required by the MGCL and the Company's Charter to fix for each
series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption, as permitted by Maryland law. Because the Board of
Directors has the power to establish the preferences, powers and rights of each
series of Preferred Stock, it may afford the holders of any series of Preferred
Stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of shares of Common Stock. The issuance of Preferred Stock could have
the effect of delaying or preventing a change of control of the Company that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest. The Board of Directors has no present plans to issue any
Preferred Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common Stock and Preferred Stock
and thereafter to cause the Company to issue such classified or reclassified
shares of stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional classes or series, as well as the Common
Stock, will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board of Directors has no
intention at the present time of doing so, it could authorize the Company to
issue a class or series that could, depending upon the terms of such class or
series, delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, the Company cannot be
"closely held" (I.E., no more than 50% in value of the Company's outstanding
shares of stock may be owned, actually or constructively, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year (other than the first year for which an election to be
treated as a REIT has been made)). In addition, if the Company, or an owner of
10% or more of the Company, actually or constructively owns 10% or more of a
tenant of the Company (or a tenant of any partnership in which the
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Company is a partner), the rent received by the Company (either directly or
through any such partnership) from such tenant will not be qualifying income for
purposes of the REIT gross income tests of the Code. A REIT's stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of twelve months or during a proportionate part of a shorter taxable year
(other than the first year for which an election to be treated as a REIT has
been made).
Because the Company expects to qualify as a REIT, the Company's Charter
prohibits (i) any person from actually or constructively owning shares of stock
of the Company that would result in the Company being "closely held" under
Section 856(h) of the Code or otherwise cause the Company to fail to qualify as
a REIT, and (ii) any person from transferring shares of stock of the Company if
such transfer would result in shares of stock of the Company being owned by
fewer than 100 persons. The Charter contains restrictions on the ownership and
transfer of Common Stock which are intended to assist the Company in enforcing
these prohibitions. The Ownership Limit set forth in the Company's Charter
provides that, subject to certain specified exceptions, no person or entity may
own, or be deemed to own by virtue of the applicable constructive ownership
provisions of the Code, more than 6.25% (by number or value, whichever is more
restrictive) of the outstanding shares of Common Stock. The constructive
ownership rules of the Code are complex, and may cause shares of Common Stock
owned actually or constructively by a group of related individuals and/or
entities to be constructively owned by one individual or entity. As a result,
the acquisition of less than 6.25% of the shares of Common Stock (or the
acquisition of an interest in an entity, such as Revenue Properties, that owns,
actually or constructively, Common Stock) by an individual or entity, could,
nevertheless cause that individual or entity, or another individual or entity,
to own constructively in excess of 6.25% of the outstanding Common Stock and
thus violate the Ownership Limit, or such other limit as provided in the
Company's Charter or as otherwise permitted by the Board of Directors. For
example, an increase in the proportionate ownership interest in Revenue
Properties held by one or more members of the Tanz Family, or some other
individual or entity, could cause one or more members of the Tanz Family or such
other individual or entity to violate the Ownership Limit, or such other limit
as provided in the Company's Charter or as otherwise permitted by the Board of
Directors. The Board of Directors may, but in no event will be required to,
waive the Ownership Limit with respect to a particular stockholder if it
determines that such ownership will not jeopardize the Company's status as a
REIT and the Board of Directors otherwise decides such action would be in the
best interest of the Company. As a condition of such waiver, the Board of
Directors may require an opinion of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of the Company. The Board of Directors has obtained such
undertakings and representations from PPD and, as a result, has waived the
Ownership Limit with respect to PPD and its affiliates and has permitted PPD and
its affiliates to own up to 55.0% of the outstanding Common Stock. The Board of
Directors has also obtained such undertakings and representations from the Tanz
Family and, as a result, has waived the Ownership Limit with respect to the Tanz
Family and has permitted the Tanz Family to own, in the aggregate, actually or
constructively (including through the ownership of stock of PPD or Revenue
Properties), up to 24.0% (by number of shares or value, whichever is more
restrictive) of the outstanding Common Stock.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of stock of the Company (including by acquiring
shares of PPD or Revenue Properties) that will or may violate any of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of such
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to attempt
to qualify, or to continue to qualify, as a REIT. Except as otherwise described
above, any change in the Ownership Limit would require an amendment to the
Charter. Amendments to the Charter require the affirmative vote of a majority of
all votes entitled to be cast on that matter.
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Pursuant to the Charter, if any purported transfer of Common Stock of the
Company or any other event would otherwise result in any person violating the
Ownership Limit or such other limit as provided in the Charter or as otherwise
permitted by the Board of Directors (including, but not limited to, the PPD
Ownership Limit and Tanz Family Ownership Limit), then any such purported
transfer will be void and of no force or effect with respect to the purported
transferee (the "Prohibited Transferee") as to that number of shares in excess
of the Ownership Limit or such other limit (the "Excess Shares"), and the
Prohibited Transferee shall acquire no right or interest (or, in the case of any
event other than a purported transfer, the person or entity holding record title
to any such Excess Shares (the "Prohibited Owner") shall cease to own any right
or interest) in such Excess Shares. Furthermore, an increase in the actual or
constructive ownership of stock in Revenue Properties or PPD by one or more
members of the Tanz Family, or some other individual or entity, or the actual or
constructive acquisition by PPD of additional shares of Common Stock, could
result in the disqualification of the Company as a REIT (the "Violative Indirect
Transfer"). In such circumstances, pursuant to the Company's Charter, the
Company will treat PPD as a Prohibited Owner with respect to the number of
shares (the "Excess PPD Shares") of Common Stock owned by PPD which, if divested
from PPD, would permit the Company to continue to maintain its REIT status. Any
such Excess Shares or Excess PPD Shares described above will be transferred
automatically, by operation of law, to a trust, the beneficiary of which will be
a qualified charitable organization selected by the Company (the "Beneficiary").
Such automatic transfer shall be deemed to be effective as of the close of
business on the business day prior to the date of such violative transfer
(including any Violative Indirect Transfer). Within 20 days of receiving notice
from the Company of the transfer of shares to the trust, the trustee of the
trust (who shall be designated by the Company and be unaffiliated with the
Company and any Prohibited Transferee or Prohibited Owner) will be required to
sell such Excess Shares to a person or entity who could own such shares without
violating the Ownership Limit, or such other limit as provided in the Charter or
as otherwise permitted by the Board of Directors, and distribute to the
Prohibited Transferee or Prohibited Owner an amount equal to the lesser of the
price paid by the Prohibited Transferee or Prohibited Owner for such Excess
Shares or the sales proceeds received by the trust for such Excess Shares. In
the case of any Excess Shares resulting from any event other than a transfer
(such as a Violative Indirect Transfer), or from a transfer for no consideration
(such as a gift), the trustee will be required to sell such Excess Shares (or
Excess PPD Shares) to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value (as
defined in the Charter) of such Excess Shares (or Excess PPD Shares) as of the
date of such event (including the date of a Violative Indirect Transfer) or the
sales proceeds received by the trust for such Excess Shares (or Excess PPD
Shares). In either case, any proceeds in excess of the amount distributable to
the Prohibited Transferee or Prohibited Owner, as applicable, will be
distributed to the Beneficiary. Prior to a sale of any such Excess Shares (or
Excess PPD Shares) by the trust, the trustee will be entitled to receive, in
trust for the Beneficiary, all dividends and other distributions paid by the
Company with respect to such Excess Shares (or Excess PPD Shares), and also will
be entitled to exercise all voting rights with respect to such Excess Shares (or
Excess PPD Shares). Subject to Maryland law, effective as of the date that such
shares have been transferred to the trust, the trustee shall have the authority
(at the trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Transferee or Prohibited Owner, as applicable, prior to the discovery
by the Company that such shares have been transferred to the trust and (ii) to
recast such vote in accordance with the desires of the trustee acting for the
benefit of the Beneficiary. However, if the Company has already taken
irreversible corporate action, then the trustee shall not have the authority to
rescind and recast such vote. Any dividend or other distribution paid to the
Prohibited Transferee or Prohibited Owner (prior to the discovery by the Company
that such shares had been automatically transferred to a trust as described
above) will be required to be repaid to the trustee upon demand for distribution
to the Beneficiary. In the event that the transfer to the trust as described
above is not automatically effective (for any reason) to prevent violation of
the Ownership Limit or such other limit as provided in the Company's Charter or
as otherwise permitted by the Board of Directors, then the Charter provides that
the transfer of the Excess Shares will be void or, in the case of a Violative
Indirect Transfer,
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the Excess PPD Shares will be redeemable by the Company at its sole option at a
price equal to the fair market value of such shares at the time of the Violative
Indirect Transfer.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust (or, in the case of a devise, gift or
Violative Indirect Transfer, the fair market value at the time of such devise,
gift or transfer) and (ii) the fair market value on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the trustee has sold the shares of stock held in the trust. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall distribute the net proceeds of the sale to
the Prohibited Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Charter, every owner of a specified percentage (or more) of the
outstanding shares of Common Stock must file a completed questionnaire with the
Company containing information regarding their ownership of such shares, as set
forth in the Treasury Regulations. Under current Treasury Regulations, the
percentage will be set between 0.5% and 5.0%, depending upon the number of
record holders of the Company's shares. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership of Common Stock on the Company's
status as a REIT and to ensure compliance with the Ownership Limit, or such
other limit as provided in the Charter or as otherwise permitted by the Board of
Directors.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of the MGCL and the
Company's Charter and Bylaws. The summary does not purport to be complete and is
subject to and qualified in its entirety by reference to the MGCL and to the
Company's Charter and Bylaws, copies of which are exhibits to the Registration
Statement of which this Prospectus is a part.
BOARD OF DIRECTORS
The Company's Charter provides that the number of directors of the Company
shall be established by the Bylaws but shall not be less than the minimum number
required by the MGCL. Any vacancy (except for a vacancy caused by removal) will
be filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors or, in the case of a vacancy
resulting from an increase in the number of directors, by a majority of the
entire Board of Directors. A vacancy resulting from removal will be filled by
the stockholders at the next annual meeting of stockholders or at a special
meeting of the stockholders called for that purpose. The Charter and Bylaws
provide that a majority of the Board must be Independent Directors.
Pursuant to the Charter, the directors are divided into three classes as
nearly equal in size as practicable. One class will hold office initially for a
term expiring at the annual meeting of stockholders to be held in 1998, another
class will hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1999 and another class will hold office initially for
a term expiring at the annual meeting of stockholders to be held in 2000. As the
term of each class expires, directors in that class will be elected for a term
of three years and until their successors are duly elected and qualified and the
directors in the other two classes will continue in office. The Company believes
that classification of the Board of Directors will help to assure the continuity
and stability of the Company's business strategies and policies as determined by
the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of shares of Common Stock will have no right to cumulative voting for
the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of the shares of Common Stock will be able to elect
all of the successors of the class of directors whose term expires at that
meeting.
PPD will have the right to nominate two persons for election to the Board of
Directors of the Company so long as PPD and its affiliates collectively
beneficially own at least 25% of the outstanding shares of Common Stock.
REMOVAL OF DIRECTORS
While the MGCL and the Charter empower the stockholders to fill vacancies in
the Board of Directors that are caused by the removal of a director, the Charter
precludes stockholders from removing incumbent directors except for cause and
upon a substantial affirmative vote. Specifically, the Charter provides that a
director may be removed only for cause (as defined in the Charter) and only by
the affirmative vote of at least a majority of the votes entitled to be cast in
the election of directors. This provision, when coupled with the provision in
the Bylaws authorizing the Board of Directors to fill vacant directorships,
precludes stockholders from removing incumbent directors except for cause and a
substantial affirmative vote and filling the vacancies created by such removal
with their own nominees.
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BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and an
Interested Stockholder or an affiliate thereof are prohibited for five years
after the most recent date on which the person who beneficially owns 10% or more
of the voting power of the Company's then outstanding shares ("Interested
Stockholder") became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by holders
of outstanding shares of the Company's voting stock and (ii) two-thirds of the
votes entitled to be cast by holders of outstanding shares of the Company's
voting stock other than shares held by the Interested Stockholder with whom the
business combination is to be effected, unless, among other things, the
Company's stockholders receive a minimum price (as defined in the MGCL) for
their shares of stock and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the Board of Directors prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Company has opted
out of the business combinations provisions of the MGCL. Therefore, an
Interested Stockholder would be able to effect a "business combination" without
complying with the requirements set forth above. Stockholder approval is
required to opt back in to such provisions.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of the Company acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror or by officers or directors who are
employees of the Company. "Control shares" are voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third;
(ii) one-third or more but less than a majority; or (iii) a majority of all
voting power. Control shares do not include shares of stock the acquiring person
is then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider voting rights for the shares. If no
request for a meeting is made, the Company may itself present the question at
any stockholders' meeting.
If voting rights are not approved at the stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the Company may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders' meeting and the
acquiror becomes entitled to vote a majority of the shares of stock entitled to
vote, all other stockholders may exercise appraisal rights. The fair value of
the shares of stock as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control
share acquisition, and certain limitations and restrictions otherwise applicable
to the exercise of dissenters' rights do not apply in the context of a control
share acquisition.
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The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction, or to acquisitions approved or exempted by the Charter or Bylaws.
The Bylaws of the Company contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of the Company's
shares of stock. Such provision of the Bylaws may only be amended with
stockholder approval. There can be no assurance that such provision will not be
amended or eliminated at any time in the future. As a result of the Company's
decision to opt out of the "control share acquisition" provisions of the MGCL,
stockholders who acquire a substantial block of Common Stock are not precluded
from exercising full voting rights with respect to their shares on all matters
without first obtaining the approval of other stockholders entitled to vote.
This may have the effect of making it easier for any such control share
stockholder to effect a business combination with the Company. However, no
assurance can be given that any such business combination would be consummated
or, if consummated, would result in a purchase of shares of Common Stock from
any stockholder at a premium.
AMENDMENT TO THE CHARTER AND BYLAWS
The Charter provides that the Charter may be amended by the affirmative vote
of a majority of all votes entitled to be cast on the matter. The Company's
Bylaws may be amended by the affirmative vote of a majority of the Board of
Directors or the affirmative vote of the holders of not less than a majority of
the shares of the Company's stock entitled to vote thereon.
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide for annual meetings of stockholders, commencing
with the year 1998, to elect the Board of Directors and transact such other
business as may properly be brought before the meeting. Special meetings of
stockholders may be called by the President, the Chief Executive Officer or the
Board of Directors and shall be called at the request in writing of the holders
of shares entitled to cast not less than a majority of all the votes entitled to
be cast at such meeting.
The MGCL and the Bylaws provide that any action required or permitted to be
taken at a meeting of stockholders may be taken without a meeting by unanimous
written consent, if such consent sets forth such action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right to
dissent is signed by each stockholder entitled to notice of the meeting but not
entitled to vote at it.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Company's Bylaws provide that (i) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (a)
pursuant to the Company's notice of the meeting, (b) by or at the direction of
the Board of Directors or (c) by a stockholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in the
Bylaws, and (ii) with respect to special meetings of stockholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of stockholders, or provided that the Board of Directors has determined
that directors shall be elected at such meeting, nominations of persons for
election to the Board of Directors may be brought by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
The provisions in the Charter on classification of the Board of Directors
and the advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
of Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interests.
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DISSOLUTION OF THE COMPANY
Under the MGCL and the Charter, the voluntary dissolution of the Company
must be approved by (i) the affirmative vote of a majority of the entire Board
of Directors declaring such dissolution to be advisable and directing that the
proposed dissolution be submitted for consideration at any annual or special
meeting of stockholders, and (ii) upon proper notice, stockholder approval by
the affirmative vote of the holders of a majority of the total number of shares
of stock outstanding and entitled to vote thereon.
LIMITATION OF LIABILITY AND INDEMNIFICATION FOR DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by Maryland law.
The Charter of the Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her stature as a present or former director or
office of the Company. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made party to the proceeding by reason of his service in that capacity.
The Charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its directors and officers and certain other
parties against judgments, penalties, fines, settlements, and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other capacities
unless it is established that (i) the act or omission of the director or officer
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty, (ii) the
director or officer actually received an improper personal benefit in money,
property or services, or (iii) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission was
unlawful. However, under the MGCL, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct
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necessary for indemnification by the corporation and (b) a written statement by
or on his behalf to repay the amount paid or reimbursed by the corporation if it
shall ultimately be determined that the standard of conduct was not met. The
termination of any proceeding by conviction, or upon a plea of nolo contendere
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted. The
termination of any proceeding by judgment, order, or settlement does not create
a presumption that the director did not meet the requisite standard of conduct.
This provision does not limit the right of the Company or its stockholders
to obtain other relief, such as an injunction or rescission.
The Company will enter into indemnification agreements with each of its
executive officers and directors. The indemnification agreements will require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
indemnification agreements, the Company must also indemnify and advance all
expenses incurred by executive officers and directors seeking to enforce their
rights under the indemnification agreements and may cover executive officers and
directors under the Company's directors' and officers' liability insurance.
Although the form of indemnification agreement offers substantially the same
scope of coverage afforded by law, it provides greater assurance to directors
and executive officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or the stockholders to eliminate the rights it provides.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering, the Company will have outstanding
15,764,012 shares of Common Stock (16,814,012 shares if the Underwriters'
over-allotment option is exercised in full). The shares of Common Stock issued
in the Offering will be freely tradeable by persons other than "affiliates" of
the Company without restriction or further registration under the Securities
Act, subject to the limitations on ownership set forth in the Charter. See
"Description of Capital Stock--Restrictions on Ownership and Transfer." The
shares of Common Stock owned by PPD and Stuart Tanz and the other members of
senior management of the Company (the "Restricted Shares") will be "restricted"
securities under the meaning of Rule 144 promulgated under the Securities Act
("Rule 144") and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. As described below under "--Registration
Rights," the Company has granted certain holders registration rights with
respect to their shares of Common Stock.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. If two years have
elapsed since the date of acquisition of Restricted Shares from the Company or
from any "affiliate" of the Company, and the acquiror or subsequent holder
thereof is deemed not to have been an affiliate of the Company at any time
during the 90 days preceding a sale, such person is entitled to sell such shares
in the public market under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
Stuart Tanz and the other executive officers and directors of the Company
have agreed not to, directly or indirectly, without the prior written consent of
Prudential Securities, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of an option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock or
other capital stock of the Company, for a period of three years after the
consummation of the Offering. Prudential Securities may, at any time and without
notice, release all or any portion of the shares of Common Stock subject to such
lock-up agreements.
PPD and Revenue Properties have agreed not to, directly or indirectly,
without the prior written consent of Prudential Securities, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge (except as
contemplated below), grant any option to purchase or otherwise sell or dispose
(or announce any offer, sale, offer of sale, contract of sale, pledge, grant of
an option to purchase or other sale or disposition) of any shares of Common
Stock or other capital stock of the Company or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock or other capital
stock of the Company, for a period of three years after the consummation of the
Offering; provided, however, that PPD's lock-up agreement shall apply only to
2,932,802 shares of Common Stock owned by it (representing approximately 34% of
PPD's interest in the Company immediately following the consummation of the
Offering) and providing that a pledge by PPD of all of its shares of Common
Stock to an affiliate of Prudential Securities as security for a three year
margin loan shall be permitted and will be effectuated upon the consummation of
the Offering. PPD was willing to enter into a lock-up agreement for all of the
shares of Common Stock owned by it for a three year period, however, PPD's
lock-up is limited to
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2,932,802 shares due to certain potential tax considerations affecting the
Company. The proceeds of the margin loan to PPD will be utilized at the
consummation of the Offering to fund PPD's capital contribution to the Company
and to provide funds to PPD in the future for the exercise of its preemptive
rights. See "Certain Relationships and Related Transactions--Preemptive Rights
Agreement."
It should be noted that PPD shall at times be subject to the restrictions on
resale of Common Stock as promulgated by Rule 144 in that, barring the filing of
a registration statement in connection with the resale by PPD of the Common
Stock, PPD shall not resell shares of Common Stock until one year after the
consummation of the Offering, and the amount of such resale for each consecutive
three month period shall not exceed the greater of (i) 1% of the shares of
Common Stock outstanding or (ii) the average weekly trading volume in such
shares of Common Stock reported on all national securities exchanges and/ or
reported through the automated quotation system of a registered securities
association for the four calendar weeks specified in Rule 144 or (iii) the
average weekly trading volume in such shares of Common Stock reported an all
national securities exchanges and/or reported through the consolidated
transaction reporting system contemplated by Rule 11Aa3-1 under the Exchange Act
for the four calendar weeks specified in Rule 144, as long as PPD remains an
affiliate of the Company.
Neither the Company, Revenue Properties nor PPD will cause any shelf or
other registration statement for the resale of Common Stock of the Company owned
by Revenue Properties, PPD or any of their corporate affiliates to be filed with
the Commission for a period of three years from the date of completion of the
Offering without the prior written consent of Prudential Securities; provided,
however, that the filing of a registration statement to cover the resale of
Common Stock in connection with the exercise of remedies upon the occurrence of
an event of default pursuant to the pledge by Revenue Properties or PPD of all
of its respective shares of Common Stock to an affiliate of Prudential
Securities or its transferees shall be permitted, and the Company has agreed to
effectuate such filing on the one year anniversary of the consummation of the
Offering.
The Company will not, directly or indirectly, without the prior written
consent of Prudential Securities, on behalf of the Underwriters, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other capital stock of the Company or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock or other capital stock of the Company for a period of 180 days
after the date hereof, except (A) pursuant to the Underwriting Agreement, (B)
pursuant to a dividend reinvestment plan of the Company, (C) pursuant to the
Stock Incentive Plan, and (D) in connection with the acquisition by the Company
of real property or interests in entities holding real property, provided that
the recipient or transferee of such securities or interests agrees in writing to
be subject to the lock-up contained in this paragraph (without giving effect to
clauses (A), (B), (C) and (D)) for a period ending on the date that is 180 days
after the date hereof.
The Company has established the Stock Incentive Plan for the purpose of
attracting and retaining directors, executive officers and other key employees.
See "Management--Stock Incentive Plan" and "--Compensation of Directors." The
Company intends to issue options to purchase approximately 900,000 shares of
Common Stock to directors, executive officers and certain key employees prior to
the completion of the Offering, has awarded 130,000 shares of restricted stock
to members of senior management prior to the completion of the Offering, and has
reserved 720,000 additional shares for future issuance under the Stock Incentive
Plan.
Prior to the Offering, there has been no public market for the Common Stock.
Trading of the Common Stock on the NYSE is expected to commence immediately
following the completion of the Offering. No prediction can be made as to the
effect, if any, that future sales of shares of Common Stock (including sales
pursuant to Rule 144) or the availability of shares of Common Stock for future
sale will have on the market price prevailing from time to time. Sales of
substantial amounts of shares of Common
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Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices of the shares of Common Stock and impair the Company's
ability to obtain additional capital through the sale of equity securities. See
"Risk Factors--Absence of Prior Public Market for Common Stock" and "Risk
Factors--Effect on Common Stock Price of Shares Available for Future Sale." For
a description of certain restrictions on transfers of Common Stock held by
certain stockholders of the Company, see "Underwriting" and "Description of
Capital Stock--Restrictions on Ownership and Transfer."
REGISTRATION RIGHTS
In connection with the Formation Transactions, the Company has granted PPD
and Stuart Tanz certain registration rights (collectively, the "Registration
Rights") with respect to the shares of Common Stock received by them (the
"Registrable Shares"). The Company has agreed to file and generally keep
continuously effective, beginning three years after the completion of the
Offering, a registration statement covering the resale of shares of Common Stock
owned by PPD (subject to certain exceptions; See "Underwriting,") and Stuart
Tanz. In addition, the Company has granted PPD piggyback registration rights,
commencing in three years, with respect to shares of Common Stock acquired by
PPD by any means. The Company will bear expenses incident to its registration
obligations upon exercise of the Registration Rights, including the payment of
federal securities law and state Blue Sky registration fees, except that it will
not bear any underwriting discounts or commissions or transfer taxes relating to
registration of Registrable Shares.
REINVESTMENT AND SHARE PURCHASE PLAN
The Company is considering the adoption of a Distribution Reinvestment and
Share Purchase Plan that would allow stockholders to automatically reinvest cash
distributions on their outstanding shares of Common Stock to purchase additional
shares of Common Stock possibly at a discounted price and without the payment of
any brokerage commission or service charge. Stockholders would also have the
option of investing limited additional amounts by making cash payments. No
decision has been made yet by the Company whether or not to adopt such a plan
and there can be no assurance that such a plan will ever be adopted by the
Company.
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FEDERAL INCOME TAX CONSEQUENCES
The following summary of material federal income tax considerations
regarding the Company and the Offering is based on current law, is for general
information only and is not tax advice. The information set forth below, to the
extent that it constitutes matters of law, summaries of legal matters or legal
conclusions, is the opinion of Latham & Watkins, tax counsel to the Company, as
to the material federal income tax considerations relevant to purchasers of the
Common Stock. This discussion is based on the Code, existing and proposed
Treasury Regulations thereunder, judicial decisions and administrative rulings
and practice, all as of the date hereof and all of which are subject to change
at any time, possibly with retroactive effect. This discussion does not purport
to deal with all aspects of taxation that may be relevant to particular
stockholders in light of their personal investment or tax circumstances, or to
certain types of stockholders, including insurance companies, financial
institutions or broker-dealers, tax-exempt organizations (except to the extent
discussed under the heading "Taxation of Tax-Exempt Stockholders") foreign
corporations and persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "Taxation of Non-U.S.
Stockholders") subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL.
The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code commencing with its taxable year ending December 31,
1997. The Company believes that, commencing with its taxable year ending
December 31, 1997, it will be organized and will operate in such a manner so as
to qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner, but no assurance can be given that it will
continue to operate in such a manner so as to qualify or remain qualified.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof. Latham &
Watkins has acted as tax counsel to the Company in connection with the Offering
and the Company's election to be taxed as a REIT.
In the opinion of Latham & Watkins, commencing with the Company's taxable
year ending December 31, 1997, the Company will be organized in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code. It must be emphasized that this opinion is based on
various factual assumptions relating to the organization and operation of the
Company and is conditioned upon certain representations made by the Company as
to factual matters. In addition, this opinion is based upon the factual
representations of the Company concerning its business and properties as set
forth in this Prospectus and assumes that the actions described in this
Prospectus are completed in the manner described herein. Latham & Watkins is not
aware of any facts or circumstances that are inconsistent with these assumptions
and representations. Moreover, such qualification and taxation as a REIT depends
upon the Company's ability to meet (through actual annual operating results,
distribution levels and diversity of stock ownership) the various qualification
tests imposed under the Code discussed below, the results of which will not be
reviewed by Latham & Watkins. Accordingly, no assurance can be given that
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the actual results of the Company's operation for any particular taxable year
will satisfy such requirements. Further, the anticipated income tax treatment
described in this Prospectus may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time. See "--Failure to
Qualify" below.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: first, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (i.e., generally, property acquired by the
Company by foreclosure or otherwise upon default of a loan secured by the
property) which is held primarily for sale to customers in the ordinary course
of business or (ii) other nonqualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth, if
the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property, other than foreclosure
property, held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on an amount equal to (a) the gross income attributable to the greater of
the amount by which the Company fails the 75% or 95% test multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
years, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, with
respect to any asset (a "Built-In Gain Asset") acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
Built-In Gain Asset in the hands of the Company is determined by reference to
the basis of the asset in the hands of the C corporation (such as the mergers of
certain PPD subsidiaries into subsidiaries of the Company) and such basis is
less than the fair market value of such asset at the time of such acquisition
(with the excess of such fair market value over such basis amount being referred
to as the "Built-In Gain"), if the Company recognizes any Built-In Gain on the
disposition of such Built-In Gain Asset during the ten-year period (the
"Recognition Period") beginning on the date on which such asset was acquired by
the Company, then, such Built-In Gain will be subject to tax at the highest
regular corporate rate applicable pursuant to Treasury Regulations that have not
yet been promulgated. The results described above with respect to the
recognition of Built-In Gain assume that the Company will make an election
pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION.
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable as a domestic corporation, but
for Sections 856 through 859 of the Code; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, actually or constructively, by five or
fewer individuals (as defined in the Code to include certain entities); and
(vii) which meets certain other tests, described below, regarding the nature of
its income and assets and the level of its distributions. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year of
twelve months, or during a proportionate part of a taxable year of less than
twelve
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months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made to be taxed as a REIT. For purposes of
conditions (v) and (vi), pension funds and certain other tax-exempt entities are
treated as individuals, subject to a "look-through" exception in the case of
condition (vi).
The Company believes that it will have issued sufficient shares of Common
Stock with sufficient diversity of ownership pursuant to the Offering to allow
it to satisfy conditions (v) and (vi). In addition, the Company's Charter
provides for restrictions regarding the transfer and ownership of shares, which
restrictions are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (v) and (vi) above. Such ownership and
transfer restrictions are described in "Description of Capital
Stock--Restrictions on Ownership and Transfer." These restrictions may not
ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above. In particular, 54.8% of the Company's
stock will be owned by PPD, which is itself a wholly-owned subsidiary of Revenue
Properties. There are no ownership or transfer restrictions of the type
described above in effect with respect to Revenue Properties' stock, and 35.6%
of Revenue Properties' outstanding shares of common stock are currently owned by
the Tanz Family. If the ownership concentration of the Tanz Family (or some
other party) in Revenue Properties were to increase, then the Company might no
longer satisfy conditions (v) and (vi) above, and therefore, would no longer be
qualified as a REIT. See "--Failure to Qualify" below. However, the Company's
Charter permits the Company to cause the transfer of such number of shares of
Common Stock owned by PPD to a trust having a charitable beneficiary so as to
avoid REIT disqualification.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company will have a calendar taxable year.
OWNERSHIP OF PARTNERSHIP INTERESTS.
The Company also intends to own and operate one or more properties through
partnerships. In the case of a REIT which is a partner in a partnership,
Treasury Regulations provide that the REIT will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership shall
retain the same character in the hands of the REIT for purposes of Section 856
of the Code, including satisfying the gross income tests and the asset tests.
Thus, the Company's proportionate share of the assets and items of income of any
partnership in which the Company is a partner (including the partnership's share
of such items of any subsidiary partnerships) will be treated as assets and
items of income of the Company for purposes of applying the requirements
described herein. A discussion of some aspects of the federal income taxation of
partnerships and their partners is provided below in "--Tax Risks Associated
with Partnerships." The Company has direct control of all partnerships in which
it is a partner and intends to operate such partnerships in a manner consistent
with the requirements for qualification as a REIT.
OWNERSHIP OF SUBSIDIARIES.
In connection with the Formation Transactions, several of PPD's wholly-owned
subsidiaries have been merged with and into an equal number of newly formed,
wholly-owned, single-asset bankruptcy remote subsidiaries of the Company (each,
a "QRS") and one property has been transferred into a wholly-owned QRS. The
Company intends to own and operate a number of properties through the QRSs. The
Company will have owned 100% of the stock of each of the QRSs at all times that
each of the QRSs has been in existence. As a result, the QRSs will be treated as
"qualified REIT subsidiaries" under the Code. A corporation which is a qualified
REIT subsidiary shall not be treated as a separate corporation, and all assets,
liabilities and items of income, deduction and credit of a qualified REIT
subsidiary shall be treated as assets, liabilities and items of income,
deduction and credit (as the case may be) of the REIT for all purposes under the
Code (including all REIT qualification tests). Thus, in applying the
requirements described herein, the QRSs will be ignored, and all assets,
liabilities and items of income, deduction and
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credit of such QRSs will be treated as assets, liabilities and items of income,
deduction and credit the Company.
INCOME TESTS.
In order to maintain qualification as a REIT, the Company annually must
satisfy three gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue.
The REIT may, however, directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant" of the property. The
Company does not and will not (except as provided below), (i) charge rent for
any property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage of receipts or sales, as
described above), (ii) rent any property to a Related Party Tenant, (iii) derive
rental income attributable to personal property (other than personal property
leased in connection with the lease of real property, the amount of which is
less than 15% of the total rent received under the lease), or (iv) perform
services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue.
Notwithstanding the foregoing, the Company may take one or more of the actions
described in the preceding sentence if, based on the advice of counsel, the
Company determines that such action or actions will not have an adverse effect
on the Company's status as a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of
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its income to its federal income tax return, and any incorrect information on
the schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances the Company would be entitled to
the benefit of these relief provisions. For example, if the Company fails to
satisfy the gross income tests because nonqualifying income that the Company
intentionally incurs exceeds the limits on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable cause.
If these relief provisions are inapplicable to a particular set of circumstances
involving the Company, the Company will not qualify as a REIT. As discussed
above in "Taxation of the Company--General," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income. No similar
mitigation provision provides relief if the Company fails the 30% income test.
In such case, the Company would cease to qualify as a REIT.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including the Company's share of any such gain realized by
any partnership in which the Company is a partner) will be treated as income
from a prohibited transaction that is subject to a 100% tax. Such prohibited
transaction income may also have an adverse effect upon the Company's ability to
satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends on all
the facts and circumstances with respect to the particular transaction. The
Company intends to hold the Properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing, owning, and
operating the Properties (and other properties) and to make such occasional
sales of the Properties as are consistent with the Company's investment
objectives.
ASSET TESTS.
The Company, at the close of each quarter of its taxable year, must also
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets (including assets held by the Company's
qualified REIT subsidiaries and the Company's allocable share of the assets held
by partnerships in which the Company owns an interest) must be represented by
real estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and government securities.
Second, not more than 25% of the Company's total assets (including assets held
by the Company's qualified REIT subsidiaries and the Company's allocable share
of the assets held by partnerships in which the Company owns an interest) may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets (including assets held by the Company's qualified REIT subsidiaries
and the Company's allocable share of the assets held by partnerships in which
the Company owns an interest) and the Company may not own more than 10% of any
one issuer's outstanding voting securities.
The Company currently holds 100% of the stock of each of the QRSs. As set
forth above, the assets tests provide that a REIT may not own securities of any
one issuer which constitute more than 10% of such issuer's voting securities or
more than 5% of the value of the REIT's total assets. However, since the QRSs
are "qualified REIT subsidiaries" as defined in the Code, such subsidiaries will
not be treated as separate corporations for federal income tax purposes, and the
Company's ownership of the stock of the QRSs will not cause the Company to fail
the asset tests.
A REIT which meets the foregoing asset tests at the close of any quarter
will not lose its status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter (including as a result of the Company increasing
its interest in any partnership in which the Company is a partner), the failure
can be cured by disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of
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its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to cure
any noncompliance. If the Company fails to cure noncompliance with the asset
tests within such time period, the Company would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS.
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (a) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income. In
addition, if the Company disposes of any Built-In Gain Asset during its
Recognition Period, the Company will be required, pursuant to Treasury
Regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset (together with the preceding sentence, the "95% Distribution
Requirement"). Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax
on the undistributed amount at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy these annual distribution requirements and to avoid or
minimize the amount of any liability for corporate income or excise taxes.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company. In the event that such timing differences occur,
in order to meet the distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the 95% Distribution Requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest to the IRS based upon the
amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure to qualify as a REIT
would reduce the cash available for distribution by the Company to its
stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to stockholders will
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be taxable as ordinary income, to the extent of the Company's current and
accumulated earnings and profits, and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
CONSEQUENCES OF THE FORMATION TRANSACTIONS ON THE COMPANY'S QUALIFICATION AS A
REIT--EARNINGS AND PROFITS DISTRIBUTION REQUIREMENT
A REIT is not permitted to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first taxable
year in which it has non-REIT earnings and profits to distribute all such
earnings and profits (the "E&P Distribution Rule"). Failure to do so would
result in the loss of the Company's REIT status. See "--Failure to Qualify." In
a corporate reorganization qualifying as a tax-free reorganization, the acquired
corporation's earnings and profits may carry over to the surviving corporation.
Thus, any earnings and profits treated as having been acquired by a REIT through
such a transaction will be treated as accumulated earnings and profits of the
REIT attributable to non-REIT years.
As part of the Formation Transactions, certain of PPD's wholly-owned
subsidiaries (the "Merger Subsidiaries") will each be merged (the "Mergers")
with and into the Company or one of several newly formed QRSs of the Company.
Accordingly, any earnings and profits of such Merger Subsidiaries could carry
over to the Company. In addition, it is possible that certain of the other
Formation Transactions ("Other E&P Transactions") could be treated as tax-free
reorganizations which could result in the carry over of earnings and profits
from other wholly-owned PPD subsidiaries (collectively with the Merger
Subsidiaries, the "PPD Subsidiaries" and each such subsidiary individually, a
"PPD Subsidiary") to the Company. While not free from doubt, the Company
believes, and intends to take the position, that the earnings and profits of the
PPD Subsidiaries will remain with the PPD affiliated group and will not be
acquired by the Company in the Formation Transactions. For purposes of applying
the E&P Distribution Rule, however, the Company will assume that the earnings
and profits of the PPD Subsidiaries (the "PPD Earnings") would carry over to the
Company and therefore the Company will distribute (or be deemed to distribute)
any such earnings and profits prior to the end of 1997 (the year in which the
Mergers will occur) in order to avoid REIT disqualification for 1997.
The amount of earnings and profits that would be acquired by the Company
would be based on the PPD Earnings of each PPD Subsidiary immediately prior to
its acquisition by the Company. The Company will determine the amount of the PPD
Earnings through an earnings and profits study based upon the corporate tax
returns of PPD and its subsidiaries for the tax years beginning with PPD's and
each such subsidiary's date of incorporation through the dates of the Mergers
and Other E&P Transactions. The Company has requested that the accounting firm
of Arthur Andersen LLP determine the PPD Earnings for purposes of the E&P
Distribution Rule. Arthur Andersen LLP's determination will be based upon PPD's
and its subsidiaries' tax returns as filed with the IRS and other assumptions
and qualifications set forth in their determination. Based upon such
assumptions, Arthur Andersen LLP has determined that several of the PPD
Subsidiaries have earnings and profits, and that the aggregate amount of the
earnings and profits of such subsidiaries (I.E., the PPD Earnings) will not
exceed $350,000 as of the date each such corporation (or its assets) is acquired
by the Company or a QRS of the Company.
To determine the amount of distributions required to be made (or deemed to
be made) by the Company during 1997 to distribute the PPD Earnings, the Company
must determine the source of each of its distributions made during 1997. Only
those distributions that are sourced to the PPD Earnings will be treated as
reducing such earnings and profits. In determining the source of a distribution,
consideration should generally be given first, to the current earnings and
profits of the taxable year and second, to earnings and profits accumulated in
prior years. Accordingly, to distribute the PPD Earnings, the Company must
distribute (or be deemed to distribute) during 1997 the sum of (i) all current
year earnings and profits, and (ii) the amount of the PPD Earnings. Furthermore,
if annual distributions are made only in
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cash and are in excess of current year earnings and profits, then a
proportionate amount of each distribution will be treated as sourced from
current year earnings and profits. That portion of each such distribution that
is not sourced to current year earnings and profits will be sourced to earnings
and profits accumulated in prior years (including the PPD Earnings) that are
available at the time of the distributions. Accordingly, any distribution made
by the Company during 1997, but prior to the date of the acquisition of the
subsidiary or property which carried over PPD Earnings to the Company, will not
be treated as partially reducing the PPD Earnings.
Based on its expected 1997 distributions and earnings and profits, the
Company does not expect that it will be required to increase the distributions
it makes (or is deemed to make) during 1997 to distribute the PPD Earnings.
Accordingly, the Company may distribute the PPD Earnings through its normal
quarterly distributions. In addition, if the Company declares a distribution in
the last three months of 1997, payable to stockholders of record on a specified
date in any such month and such distribution is paid prior to January 31, 1998,
such distribution will be treated for federal income tax purposes as paid to the
Company stockholders on December 31, 1997 even though received by stockholders
after year-end. Accordingly, the Company may also distribute the PPD Earnings
through a distribution meeting such requirements and paid in January of 1998.
If, contrary to the Company's belief, the Company acquires the PPD Earnings as a
result of the Formation Transactions, Company stockholders will recognize
additional dividend income (and less return of capital) with respect to 1997 to
the extent of the PPD Earnings.
The calculation of the amount of PPD Earnings, and whether the PPD Earnings
were acquired by the Company in the Formation Transactions, are subject to
challenge by the IRS. The IRS may examine PPD's or its subsidiaries' prior
years' tax returns and propose adjustments which would have the effect of
increasing PPD's or its subsidiaries' taxable income. Because the earnings and
profits study used to calculate the amount of PPD Earnings is based upon these
returns, such adjustments could increase the amount of PPD Earnings required to
be distributed. However, the Company would be permitted, within 90 days of such
a determination by the IRS, to make a distribution of such additional earnings
and profits. The Company would also be required, in that event, to pay the IRS
an interest charge based upon 50% of the amount not previously distributed. If
such additional distribution and interest payment were made, the Company's
failure to distribute the required amount of earnings and profits would not
prevent the Company from qualifying as a REIT for years subsequent to 1997
(although the Company would fail to qualify as a REIT for 1997 notwithstanding
such distribution and payment). However, even if the IRS should challenge the
Company's calculation of the amount of PPD Earnings, the Company believes that
it will not have earnings and profits attributable to non-REIT years as of the
close of 1997 and therefore that the Company will qualify as a REIT for 1997.
See "--Failure to Qualify."
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) is a trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction in the case of U.S. Stockholders
that are corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to taxable
U.S. Stockholders as long-term capital gains (to the extent that they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which a U.S. Stockholder has held his or her shares of
Common Stock. U.S. Stockholders that are corporations may, however, be
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required to treat up to 20% of certain capital gain dividends as ordinary
income. To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in his or her shares of Common Stock for tax purposes by the
amount of such distribution (but not below zero). Distributions in excess of a
U.S. Stockholder's adjusted basis in his or her shares will be taxable as
capital gains (provided that the shares have been held as a capital asset).
Dividends declared by the Company in October, November, or December of any year
and payable to a stockholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year. Stockholders may
not include in their own income tax returns any net operating losses or capital
losses of the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
the Company (to the extent they do not constitute a return of capital) generally
will be treated as investment income for purposes of computing the investment
income limitation. Gain arising from the sale or other disposition of Common
Stock, however, will not be treated as investment income unless the U.S.
Stockholder elects to reduce the amount of such U.S. Stockholder's total net
capital gain eligible for the maximum capital gains rate by the amount of such
gain with respect to such Common Stock.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been held for more than one year. Notwithstanding the foregoing, any
loss recognized by a U.S. Stockholder upon the sale or other disposition of
shares of Common Stock that have been held for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss, to the extent of distributions received by such U.S. Stockholder from the
Company which were required to be treated as long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if any
with respect thereto. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Stockholder who does not provide the Company with his
or her correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any stockholders
who fail to certify their non-foreign status to the Company. See "--Taxation of
Non-U.S. Stockholders" below.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by
certain tax-exempt entities. Based on that ruling, provided that a tax-exempt
shareholder (except certain tax-exempt shareholders described below) has not
held its shares of Common Stock as "debt financed property" within the meaning
of the Code
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(generally shares of Common Stock, the acquisition of which was financed through
a borrowing by the tax-exempt shareholder) and such shares are not otherwise
used in a trade or business, the dividend income from the Company and gain on
the sales of shares of Common Stock will not be UBTI to such tax-exempt
shareholder.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 (the "1993 Act") provides that, effective for taxable years beginning in
1994, a portion of the dividends paid by a "pension held REIT" shall be treated
as UBTI as to any trust which (i) is described in Section 401(a) of the Code,
(ii) is tax-exempt under Section 501(a) of the Code, and (iii) holds more than
10% (by value) of the interests in the REIT. Tax-exempt pension funds that are
described in Section 401(a) of the Code are referred to below as "qualified
trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act)
provides that stock owned by qualified trusts shall be treated, for purposes of
the "not closely held" requirement, as owned by the beneficiaries of the trust
(rather than by the trust itself), and (ii) either (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, or
(b) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend treated
as UBTI is equal to the ratio of (i) the UBTI earned by the REIT (treating the
REIT as if it were a qualified trust and therefore subject to tax on UBTI) to
(ii) the total gross income of the REIT. A DE MINIMIS exception applies if the
percentage is less than 5% for any year. The provisions requiring qualified
trusts to treat a portion of REIT distributions as UBTI will not apply if the
REIT is able to satisfy the "not closely held" requirement without relying upon
the "look-through" exception with respect to qualified trusts.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Stockholder in light of its particular
circumstances, including, for example, if the investment in the Company is
connected to the conduct by a Non-U.S. Stockholder of a U.S. trade or business.
In addition, this discussion is based on current law, which is subject to
change, and assumes that the Company qualifies for taxation as a REIT.
Prospective Non-U.S. Stockholders should consult with their own tax advisers to
determine the impact of federal, state, local and foreign income tax laws with
regard to an investment in Common Stock, including any reporting requirements.
DISTRIBUTIONS.
Distributions by the Company to a Non-U.S. Stockholder that are neither
attributable to gain from sales or exchanges by the Company of United States
real property interests nor designated by the Company as capital gains dividends
will be treated as dividends, and thus as ordinary income, to the extent that
they are made out of current or accumulated earnings and profits of the Company.
Such distributions ordinarily will be subject to withholding of United States
federal income tax on a gross basis (that is, without allowance for deductions)
at a 30% rate or such lower rate as may be specified by an applicable
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income tax treaty, unless the dividends are treated as effectively connected
with the conduct by the Non-U.S. Stockholder of a United States trade or
business. Dividends that are effectively connected with such a United States
trade or business will be subject to tax on a net basis (that is, after
allowance for deductions) at graduated rates, in the same manner as U.S.
Stockholders are taxed with respect to such dividends and are generally not
subject to withholding. Any such dividends received by a Non-U.S. Stockholder
that is a corporation may also be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above. The Company
expects to withhold United States federal income tax at the rate of 30% on the
gross amount of any dividend paid to a Non-U.S. Stockholder unless (i) a lower
treaty rate applies and the required form evidencing eligibility for that
reduced rate is filed with the Company, or (ii) the Non-U.S. Stockholder files
an IRS Form 4224 with the Company claiming that the dividend is "effectively
connected" income.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
such excess distributions do not exceed the adjusted basis of the stockholder's
Common Stock, but rather will reduce the adjusted basis of such stock. If, at
the time of the distribution, the Company is not a "domestically-controlled
REIT," then the Common Stock will constitute a "United States real property
interest" and the distribution will therefore be subject to the Foreign
Investment in Real Property Tax Action of 1980 ("FIRPTA"). See "--Sale of Common
Stock" below. For FIRPTA withholding purposes (discussed below), such
distributions (i.e., distributions that are not made out of earnings and
profits) will be treated as consideration for the sale or exchange of shares of
Common Stock. To the extent that such distributions exceed the adjusted basis of
a Non-U.S. Stockholder's Common Stock, they will give rise to gain from the sale
or exchange of his or her stock, the tax treatment of which is described below.
If it cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the distribution will be treated as a dividend for withholding
purposes. However, amounts thus withheld are generally refundable from the IRS
if it is subsequently determined that such distribution was, in fact, in excess
of current and accumulated earnings and profits of the Company.
Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the Common Stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business, in which case the Non-U.S. Stockholder will be
subject to the same treatment as domestic stockholders with respect to such gain
(except that a Non-U.S. Stockholder that is a corporation may also be subject to
the 30% branch profits tax, as discussed above), or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Stockholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. A Non-U.S.
Stockholder would thus generally be entitled to offset its gross income by
allowable deductions and would
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pay tax on the resulting taxable income at the same rates applicable to domestic
stockholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals and without regard to whether such distribution is
designated as a capital gain dividend). Also, such gain may be subject to a 30%
branch profits tax in the hands of a corporate Non-U.S. Stockholder that is not
entitled to treaty relief or exemption. The Company is required to withhold tax
equal to 35% of the amount of any such distribution. That amount is creditable
against the Non-U.S. Stockholder's United States federal income tax liability.
To the extent that such withholding exceeds that actual tax owed by the Non-U.S.
Stockholder, the Non-U.S. Stockholder may claim a refund from the IRS.
The Company or any nominee (e.g., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the disposition
of United States real property interests. A domestic person who holds shares of
Common Stock on behalf of a Non-U.S. Stockholder will generally bear the burden
of withholding.
SALE OF COMMON STOCK.
Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of
shares of Common Stock generally will not be subject to United States taxation
unless such shares constitute a "United States real property interest" within
the meaning of FIRPTA. The Common Stock will not constitute a "United States
real property interest" so long as the Company is a "domestically controlled
REIT." A "domestically controlled REIT" is a REIT in which at all times during a
specified testing period less than 50% in value of its stock is held directly or
indirectly by Non-U.S. Stockholders. At the close of the Offering, it is
expected that in excess of 50% in value of the stock of the Company will be
owned by PPD, which is in turn 100% owned by Revenue Properties, a Canadian
corporation. It is not clear whether Revenue Properties' indirect ownership of
stock of the Company will prevent the Company from being a "domestically
controlled REIT." If the Company is a "domestically controlled REIT," the sale
of shares of Common Stock would not be subject to taxation under FIRPTA.
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock not otherwise subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) the Non-U.S. Stockholder is a nonresident alien individual
who is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, in which case the nonresident alien
individual will be subject to a 30% United States withholding tax on the amount
of such individual's gain, or (ii) the investment in Common Stock is effectively
connected with the non-U.S. Stockholder's United States trade or business, in
which case the Non-U.S. Stockholder will be subject to the same treatment as
domestic Stockholders (except that a 30% branch profits tax may also apply as
discussed above).
If the Company does not qualify as, or ceases to be, a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Stockholder of shares of Common Stock would be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest"
unless the shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the NYSE) and the
selling Non-U.S. Stockholder held no more than 5% (after applying certain
constructive ownership rules) of the shares of Common Stock during the shorter
of (i) the period during which the taxpayer held such shares, or (ii) the 5-year
period ending on the date of the disposition of such shares. If gain on the sale
or exchange of shares of Common Stock were subject to taxation under FIRPTA, the
Non-U.S. Stockholder would be subject to regular United States income tax with
respect to such gain in the same manner as a U.S. Stockholder (subject to any
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals and the possible application of the 30%
branch profits tax in the case of foreign corporations), and the purchaser of
the stock would be required to withhold and remit to the IRS 10% of the purchase
price.
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BACKUP WITHHOLDING TAX AND INFORMATION REPORTING.
Backup withholding tax (which generally is a withholding tax imposed at the
rate of 31% on certain payments to persons that fail to furnish certain
information under the United States information reporting requirements) and
information reporting will generally not apply to distributions paid to Non-U.S.
Stockholders outside the United States that are treated as (i) dividends subject
to the 30% (or lower treaty rate) withholding tax discussed above, (ii) capital
gains dividends or (iii) distributions attributable to gain from the sale or
exchange by the Company of United States real property interests. As a general
matter, backup withholding and information reporting will not apply to a payment
of the proceeds of a sale of Common Stock by or through a foreign office of a
foreign broker. Information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of Common Stock by a foreign
office of a broker that (a) is a United States person, (b) derives 50% or more
of its gross income for certain periods from the conduct of a trade or business
in the United States or (c) is a "controlled foreign corporation" (generally, a
foreign corporation controlled by United States stockholders) for United States
tax purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Stockholder and certain other conditions are met, or the
stockholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Common Stock is subject
to both backup withholding and information reporting unless the stockholder
certifies under penalty of perjury that the stockholder is a Non-U.S.
Stockholder, or otherwise establishes an exemption. Backup withholding is not an
additional tax. Any amounts withheld under the backup withholding rules will be
refunded or credited against the Non-U.S. Stockholder's United States federal
income tax liability, provided that the required information is furnished to the
IRS.
NEW PROPOSED REGULATIONS.
The United States Treasury has recently issued proposed Treasury Regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed Treasury Regulations do not alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify and modify reliance standards. If
finalized in their current form, the proposed Treasury Regulations would
generally be effective for payments made after December 31, 1997, subject to
certain transitional rules.
TAX RISKS ASSOCIATED WITH PARTNERSHIPS
The Company will own interests in four partnerships following the Offering,
and may own interests in additional partnerships in the future. The ownership of
an interest in a partnership involves special tax risks, including the possible
challenge by the IRS of (i) allocations of income and expense items, which could
affect the computation of taxable income of the Company, and (ii) the status of
a partnership as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. If a partnership were deemed to be
an association taxable as a corporation for federal income tax purposes, it
would be treated as a taxable entity. In such a situation, if the Company owned
more than 10% of the outstanding voting securities of such partnership, or if
the value of such securities exceeded 5% of the value of the Company's assets,
the Company would fail to satisfy the asset tests described above, and would
therefore fail to qualify as a REIT. Further, distributions from such
partnership to the Company would be treated as dividends that are not taken into
account in satisfying the 75% gross income test described above, which would
make it more difficult for the Company to satisfy that test. Moreover, the
interest in any such partnership held by the Company would not qualify as a
"real estate asset," which would make it more difficult for the Company to meet
75% asset test described above. In addition, the Company would not be able to
deduct its share of any losses generated by such a partnership in computing its
taxable income, which might adversely affect the Company's ability to comply
with the REIT distribution requirements. See "--Failure to Qualify" for a
discussion of the effect of the Company's failure to meet any one or more of
these tests for a taxable year.
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The Company believes that the partnerships in which it owns interests have
been and will continue to be treated as a partnerships (rather than as
associations taxable as corporations) for federal income tax purposes. The
Company's position in this respect is not binding on the IRS and no assurance
can be given that the IRS will not successfully challenge the status of any
partnership as a partnership for federal income tax purposes.
RECENTLY ENACTED LEGISLATION
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (H.R. 2014), which will have the effect of modifying certain
REIT-related Code provisions. Absent a line item veto by President Clinton,
which could be exercised with respect to certain of these provisions as late as
August 10, 1997, the REIT-related provisions of the Taxpayer Relief Act of 1997
will be effective for tax years beginning on or after January 1, 1998. Some or
all of the provisions could affect both the Company's operations and its ability
to maintain its REIT status for its taxable years beginning in 1998.
OTHER TAX CONSEQUENCES
As discussed above, the Company will acquire a number of properties through
the merger of the Merger Subsidiaries with and into the Company or the QRSs.
These transactions are intended to qualify as tax-free reorganizations under the
Code. One consequence of acquiring such properties in this manner will be that
the initial tax basis of the Company in the properties will equal the tax basis
the Merger Subsidiaries had in the properties. As a result, the Company's
initial tax basis in such properties will be less than the fair market value of
the properties at the time of acquisition. The lower tax basis will reduce the
amount of depreciation deductions the Company is permitted to take, and will
increase the amount of taxable gain (or reduce the amount of tax loss)
recognized by the Company on the disposition of such properties. In addition,
any net operating losses of such Merger Subsidiaries will carry over to the
Company and, subject to certain limitations, be available to the Company to
offset the taxable income, if any, of the Company. As a result, any such net
operating losses could reduce the amount of distributions to shareholders which
the Company is required to make.
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employment Retirement Income Security Act of 1974 ("ERISA") and the Code that
may be relevant to a prospective purchaser (including with respect to the
discussion contained in "Plan Assets Issue," to a prospective purchaser that is
not an employee benefit plan, another tax-qualified retirement plan, an
individual retirement account or an individual retirement annuity ("IRAs")).
This discussion does not propose to deal with all aspects of ERISA or the Code
or, to the extent not preempted, state law that may be relevant to particular
employee benefit plan shareholders (including plans subject to Title I of ERISA,
other employee benefit plans and IRAs subject to the prohibited transaction
provisions of the Code, and governmental plans and church plans that are exempt
from ERISA and prohibited transaction provisions of the Code but that may be
subject to state law requirements) in light of their particular circumstances.
THE FOLLOWING IS INTENDED TO BE A SUMMARY ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL PLANNING WITH A PROFESSIONAL.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF COMMON STOCK ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS A PLAN SUBJECT TO ERISA, A TAX-
QUALIFIED RETIREMENT PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN (COLLECTIVELY
"PLANS") IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC
CONSIDERATIONS ARISING UNDER ERISA, THE CODE AND (TO THE EXTENT NOT PREEMPTED)
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF SHARES OF COMMON
STOCK BY SUCH PLAN OR IRA. A fiduciary should also consider the entire
discussion under the heading "Federal Income Tax Consequences," as material
contained therein is relevant to any decision by an employee benefit plan,
tax-qualified retirement plan or IRA to purchase the Common Stock.
FIDUCIARY CONSIDERATIONS
Each fiduciary of a Plan subject to ERISA should carefully consider whether
an investment in shares of Common Stock is consistent with its fiduciary
responsibilities under ERISA. In particular, to the extent a Plan is subject to
ERISA, the fiduciary requirements of Part 4 of Title I of ERISA require (i) the
Plan's investments to be prudent and in the best interests of the Plan, its
participants and beneficiaries, (ii) the Plan's investments to be diversified in
order to reduce the risk of large losses, unless under the circumstances it is
clearly prudent not to do so and (iii) the Plan's investments to be authorized
under ERISA and the terms of the governing documents of the Plan. In determining
whether an investment in shares of Common Stock is prudent for purposes of
ERISA, the appropriate fiduciary of a Plan should consider all of the facts and
circumstances, including, without limitation, whether the investment is
reasonably designed, as a part of the Plan's portfolio for which the fiduciary
has investment responsibility, to meet the objectives of the Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow and funding requirements of the
Plan, and the liquidity and current return of the Plan's portfolio. A fiduciary
should also take into account the nature of the Company's business, the
management of the Company and the length of the Company's operating history and
other matters described under "Risk Factors."
In addition, provisions of ERISA and the Code prohibit certain transactions
in Plan assets that involve persons who have specified relationships with a
Plan. The consequences of such prohibited transactions include excise taxes,
disqualification of IRAs and other liabilities.
PLAN ASSETS ISSUE
A prohibited transaction may occur if the assets of the Company are deemed
to be Plan assets. In certain circumstances where a Plan holds an interest in an
entity, the assets of the entity are deemed to be Plan assets (the "look-through
rule"). Under such circumstances, any person that exercises authority or control
with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued regulations,
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effective March 13, 1987 (the "Regulations"), that outline the circumstances
under which a Plan's interest in an entity will be subject to the look-through
rule.
The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock of a REIT. However, the Regulations provide
an exception to the look-through rule for equity interests that are
"publicly-offered securities."
Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely held
and (iii) either (a) part of a class of securities that is registered under
section 12(b) or 12(g) of the Exchange Act or (b) sold to a Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and the class of securities of which such
security is a part is registered under the Exchange Act within 120 days (or such
longer period as may be allowed by the Commission) after the end of the fiscal
year of the issuer during which the offering of such securities to the public
occurred. Whether a security is considered "freely transferable" depends on the
facts and circumstances of each case. Generally, if the security is part of an
offering in which the minimum investment is $10,000 or less, any restriction on
or prohibition against any transfer or assignment of such security for the
purposes of preventing a termination or reclassification of the entity for
federal or state tax purposes will not of itself prevent the security from being
considered freely transferable. A class of securities is considered
"widely-held" only if it is a class of securities that is owned by 100 or more
investors independent of the issuer and of one another.
The Company anticipates that the Common Stock will meet the criteria of the
publicly-offered securities exception to the look-through rule. First, the
Company anticipates that the Common Stock will be considered to be freely
transferable, as the minimum investment will be less than $10,000 and the only
restrictions upon its transfer are those required under federal income tax laws
to maintain the Company's status as a REIT. Second, the Company believes that
the Common Stock will be held by 100 or more investors and that at least 100 or
more of these investors will be independent of the Company and of one another.
Third, the Common Stock will be part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act and
will be registered under the Exchange Act within 120 days after the end of the
fiscal year of the Company during which the offering of such securities to the
public occurs. Accordingly, the Company believes that if a Plan purchases the
Common Stock, the Company's assets should not be deemed to be Plan assets and,
therefore, that any person who exercises authority or control with respect to
the Company's assets should not be a Plan fiduciary.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities, Donaldson, Lufkin & Jenrette Securities Corporation and Smith Barney
Inc. are acting as representatives (collectively, the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated......................................................... 1,376,668
Donaldson, Lufkin & Jenrette Securities Corporation........................................ 1,376,666
Smith Barney Inc........................................................................... 1,376,666
Bear, Stearns & Co. Inc.................................................................... 140,000
Alex. Brown & Sons Incorporated............................................................ 140,000
Credit Lyonnais Securities (USA) Inc....................................................... 140,000
Credit Suisse First Boston Corporation..................................................... 140,000
A.G. Edwards & Sons, Inc................................................................... 140,000
EVEREN Securities, Inc..................................................................... 140,000
Legg Mason Wood Walker, Incorporated....................................................... 140,000
Lehman Brothers Inc........................................................................ 140,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated......................................... 140,000
J.P. Morgan Securities Inc................................................................. 140,000
Morgan Stanley & Co. Incorporated.......................................................... 140,000
Oppenheimer & Co., Inc..................................................................... 140,000
PaineWebber Incorporated................................................................... 140,000
Robertson, Stephens & Company LLC.......................................................... 140,000
CIBC Wood Gundy Securities Corp............................................................ 70,000
Crowell, Weedon & Co....................................................................... 70,000
Fahnestock & Co. Inc....................................................................... 70,000
Furman Selz LLC............................................................................ 70,000
Nesbitt Burns Securities Inc............................................................... 70,000
Principal Financial Securities, Inc........................................................ 70,000
Ragen MacKenzie Incorporated............................................................... 70,000
Raymond James & Associates, Inc............................................................ 70,000
Sutro & Co. Incorporated................................................................... 70,000
Tucker Anthony Incorporated................................................................ 70,000
HSBC Securities, Inc....................................................................... 35,000
Midland Walwyn Capital Inc................................................................. 35,000
Research Capital Corporation............................................................... 35,000
Sands Brothers & Co., Ltd.................................................................. 35,000
Toronto Dominion Securities (USA) Inc...................................................... 35,000
Van Kasper & Company....................................................................... 35,000
----------
Total.................................................................................. 7,000,000
----------
----------
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to certain selected dealers a concession of not in excess
of $0.70 per share, and that such dealers may re-allow a concession not in
excess of $0.10 per share
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to certain other dealers. After the initial public offering, the offering price
and the concessions may be changed by the Representative.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,050,000 additional shares
of Common Stock at the initial public offering price, less the aggregate
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of Common Stock as the number set
forth next to such Underwriter's name in the preceding table bears to 7,000,000.
The Company has agreed to indemnify the several Underwriters against or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act. The Company has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. Nevertheless, the
Underwriters may seek to enforce such indemnification and rights to contribution
which are expressly provided under the Act.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales of Common Stock to any accounts over
which they exercise discretionary authority.
The Company believes, and has been so informed by PPD and Revenue
Properties, that neither PPD nor Revenue Properties presently intends to sell or
otherwise transfer the Common Stock of the Company owned by PPD in the
foreseeable future following the consummation of the Offering.
Stuart Tanz and the other executive officers and directors of the Company
have agreed not to, directly or indirectly, without the prior written consent of
Prudential Securities, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of an option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock or
other capital stock of the Company, for a period of three years after the
consummation of the Offering. Prudential Securities may, at any time and without
notice, release all or any portion of the shares of Common Stock subject to such
lock-up agreements.
PPD and Revenue Properties have agreed not to, directly or indirectly,
without the prior written consent of Prudential Securities, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge (except as
contemplated below), grant any option to purchase or otherwise sell or dispose
(or announce any offer, sale, offer of sale, contract of sale, pledge, grant of
an option to purchase or other sale or disposition) of any shares of Common
Stock or other capital stock of the Company or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock or other capital
stock of the Company, for a period of three years after the consummation of the
Offering, except pursuant to the terms described in "Shares Eligible For Future
Sale."
The Company will not, directly or indirectly, without the prior written
consent of Prudential Securities, on behalf of the Underwriters, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other capital stock of the Company or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock or other capital stock of the Company for a period of 180 days
after the date hereof, except (A) pursuant to the Underwriting Agreement, (B)
pursuant to a dividend reinvestment plan of the Company, (C) pursuant to the
Stock Incentive Plan, and (D) in connection with the acquisition by the Company
of real property or interests in entities holding real property, provided that
the recipient or transferee of such securities or interests agrees in writing to
be subject to the lock-up contained in this paragraph (without giving effect to
clauses (A), (B), (C) and (D)) for a period ending on the date that is 180 days
after the date hereof.
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The shares of Common Stock have been approved for listing on the NYSE,
subject to official notice of issuance. In order to meet one of the requirements
for listing the shares of Common Stock on the NYSE, the Underwriters have
undertaken to sell (i) lots of 100 or more shares to a minimum of 2,000
beneficial holders, (ii) a minimum of 1.1 million shares and (iii) shares with a
minimum aggregate market value of $40.0 million.
Any offers of shares of Common Stock in Canada will be made only pursuant to
an exemption from the requirement to file a prospectus in the province in Canada
in which such offer is made.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price have been determined through negotiations
between the Company and the Representatives. Among the factors considered in
such determination are prevailing market conditions, dividend yields and
financial characteristics of publicly traded REITs that the Company and the
Representatives believe to be comparable to the Company, the present state of
the Company's financial and business operations, the Company's management,
estimates of the business and earnings potential of the Company and the
prospects for the industry in which the Company operates.
Upon consummation of the Offering, Prudential Securities will receive
approximately $9.6 million of the net proceeds from the Offering as repayment of
indebtedness, and related interest expected to be accrued and unpaid as of such
date. See "Use of Proceeds."
The Company will pay to Prudential Securities advisory fees equal, in the
aggregate, to 0.625% of the gross proceeds received by the Company in the
Offering, for financial advisory services relating to, among other things, the
structuring of the Formation Transactions and the Offering.
The Prudential Insurance Company of America, the parent of Prudential
Securities, in connection with the contemplated retirement at the closing of the
Offering of the debt on Monterey Plaza, obtained from the Company an agreement
granting The Prudential Insurance Company of America a right of first refusal on
all debt offerings, private or public, until December 31, 1998.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M promulgated by the Commission, pursuant to which
such persons may bid for or purchase Common Stock for the purpose of stabilizing
its market price. The Underwriters also may create a short position for the
account of the Underwriters by selling more Common Stock in connection with the
Offering than they are committed to purchase from the Company, and in such case
may purchase Common Stock in the open market following the closing of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 1,050,000 shares of
Common Stock, by exercising the Underwriters' over-allotment option referred to
above. In addition, Prudential Securities, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or selling group member
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
EXPERTS
The balance sheet of the Company as of April 16, 1997 (inception), the
combined financial statements and Schedule III of Pan Pacific Development
Properties as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, and the statements of revenue and
certain
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expenses for Chico Crossroads, Monterey Plaza, Fairmont Shopping Center, Green
Valley Town & Country and Lakewood Shopping Center for the year ended December
31, 1996, have been included herein and in the registration statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The reports on the statements of revenue and
certain expenses for Chico Crossroads, Monterey Plaza, Fairmont Shopping Center,
Green Valley Town & Country and Lakewood Shopping Center contain a paragraph
that states that the statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Commission, as
described in Note 1 to the statement of revenue and certain expenses. It is not
intended to be a complete presentation of Chico Crossroads', Monterey Plaza's,
Fairmont Shopping Center's, Green Valley Town & Country's or Lakewood Shopping
Center's revenue and expenses.
In addition, certain statistical information and analysis provided under the
captions "Prospectus Summary--Overview of the Company's Four Key Western U.S.
Markets" and "Overview of the Company's Four Key Western U.S. Markets" has been
prepared by Lesser and is included herein in reliance upon the authority of such
firm as expert in, among other things, real estate consulting and urban
economics.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Latham & Watkins and certain legal matters relating to
Maryland law, including the validity of the issuance of the shares of Common
Stock offered hereby, will be passed upon for the Company by Ballard Spahr
Andrews & Ingersoll. Certain legal matters will be passed upon for the
Underwriters by Pryor, Cashman, Sherman & Flynn, New York, New York. In
addition, the description of federal income tax consequences contained in this
Prospectus under "Federal Income Tax Consequences" is, to the extent that it
constitutes matters of law, summaries of legal matters or legal conclusions, the
opinion of Latham & Watkins, special tax counsel to the Company as to the
material federal income tax consequences of the Offering.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street N.W.,
Washington, D.C. 20599, a Registration Statement (of which this Prospectus is a
part) on Form S-11 under the Securities Act and the rules and regulations
promulgated thereunder with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and financial statements thereto, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference and the exhibits and schedules hereto. For
further information regarding the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, copies of which may be examined without charge at, or copies obtained
upon payment of prescribed fees from, the Public Reference Section of the
Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: 7 World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511, or by way of the
Commission's Internet address, http://www.sec.gov. In addition, the Common Stock
will be listed on the NYSE and similar information concerning the Company can be
inspected and copied at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
Following the consummation of the Offering, the Company will be required to
file reports and other information with the Commission pursuant to the Exchange
Act. In addition to applicable legal or NYSE requirements, if any, the Company
intends to furnish its stockholders with annual reports containing consolidated
audited financial statements with a report thereon by the Company's independent
certified public accountants.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"1993 ACT" means the Omnibus Budget Reconciliation Act of 1993.
"ACM" means asbestos-containing materials.
"ACQUIRED EARNINGS" means the earnings and profits acquired by the Company.
"ADA" means the Americans with Disabilities Act, enacted on July 26, 1990.
"ANNUALIZED BASE RENT" means total base rent, calculated in accordance with
GAAP, to be received during the entire term of each lease, divided by the terms
in months for such leases, multiplied by 12.
"AUDIT COMMITTEE" means an audit committee to be established by the Board of
Directors of the Company following the consummation of the Offering.
"BASE RENT" means gross rent excluding payments by tenants on account of
real estate taxes, operating expenses and utility expenses.
"BENEFICIARY" means a qualified charitable organization selected by the
Company to receive in trust any excess shares resulting from a transfer of
Common Stock in violation of the Ownership Limit or the Charter of the Company.
"BLUE SKY" means the securities laws and regulations of the states.
"BUILT-IN GAIN ASSET" means any asset acquired by the Company from a
corporation which is or has been a C corporation.
"BYLAWS" means the bylaws of the Company.
"CHARTER" means the amended and restated articles of incorporation of the
Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" means shares of the Company's common stock, par value $.01
per share.
"COMMISSION" means the Securities and Exchange Commission.
"COMPANY" means Pan Pacific Retail Properties, Inc., a Maryland corporation.
"COMPENSATION COMMITTEE" means a compensation committee to be established by
the Board of Directors of the Company following the consummation of the
Offering.
"CORPORATE GOVERNANCE COMMITTEE" means an independent committee to be
established by the Board of Directors of the Company following the consummation
of the Offering.
"CPI" means consumer price index.
"EPS" means earning per share.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"E&P DISTRIBUTION RULE" means the requirement that a REIT must distribute
non-REIT earnings and profits by the close of its first taxable year in which it
has non-REIT earnings and profits.
"EXCESS PPD SHARES" means those shares in excess of the PPD Ownership Limit
acquired in a Violative Indirect Transfer.
"EXCESS SHARES" means those shares, the number of which is in excess of the
Ownership Limit or such other limit.
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"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCLUDED ASSETS" means certain existing properties and assets held by PPD
which will not be transferred to the Company.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"FORMATION TRANSACTIONS" means those transactions relating to the
organization of the Company and its subsidiaries, including the transfer of the
Properties and other assets to the Company, as described under "Structure and
Formation Transactions of the Company-Formation Transactions."
"FUNDS FROM OPERATIONS" means, as defined by NAREIT, net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs).
"GAAP" means generally accepted accounting principles.
"GLA" means gross leasable area.
"ICSC" means International Council of Shopping Centers.
"INDEPENDENT DIRECTOR" means a director who is not an employee, officer or
affiliate of the Company or a subsidiary or division thereof, or a relative of a
principal executive officer, or who is not an individual member of an
organization acting as advisor, consultant or legal counsel, receiving
compensation on a continuing basis from the Company in addition to director's
fees.
"INTERESTED STOCKHOLDER" means any person who beneficially owns 10% or more
of the voting power of the Company's then outstanding shares.
"IRA" means individual retirement annuity.
"IRS" means the Internal Revenue Service.
"LC" means leasing commission costs.
"LEASING COMMISSIONS" means brokerage commission fees paid by the Company in
connection with new leases or lease renewals.
"LESSER" means Robert Charles Lesser & Co.
"LESSER MARKET STUDY" means the market study prepared by Lesser.
"LIBOR" means London Interbank Offered Rate.
"LOCAL TENANT" means any tenant that operates stores only within the same
metropolitan area as the shopping center.
"MARKET PRICE" means the market price for excess shares as defined in the
Company's Charter.
"MERGER" means the merger of the Merger Subsidiaries with and into the
Company or one of four newly formed qualified REIT subsidiaries of the Company.
"MERGER SUBSIDIARIES" means certain of PPD's wholly-owned subsidiaries.
"MGCL" means the Maryland General Corporation Law, as amended.
"MSA" means metropolitan statistical area.
"NAMED EXECUTIVE OFFICERS" means the Company's Chief Executive Officer and
the Company's three other most highly compensated officers.
"NAREIT" means the National Association of Real Estate Investment Trusts.
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"NASDAQ" means the National Association of Securities Dealers Automated
Quotations System.
"NATIONAL TENANT" means any tenant that operates in at least four
metropolitan areas located in more than one region.
"NCHC" means North Coast Health Center, a California general partnership.
"NON-U.S. STOCKHOLDERS" means persons who are not U.S. Stockholders.
"NYSE" means the New York Stock Exchange, Inc.
"OFFERING" means the Offering of shares of Common Stock of the Company
pursuant to and as described in this Prospectus.
"OTHER E&P TRANSACTIONS" means certain Formation Transactions which could be
treated as tax-free reorganizations.
"OWNERSHIP LIMIT" means the restriction contained in the Company's Charter
providing that, subject to certain exceptions, no holder may own, or be deemed
to own by virtue of the constructive ownership provisions of the Code, more than
6.25% (by number or value, whichever is more restrictive) of the outstanding
shares of Common Stock.
"PARTIALLY-OWNED PROPERTIES" means the following properties owned by
partnerships of which the Company owns a partnership interest: Chino Town
Square, Melrose Village Plaza and Tanasbourne Village.
"PERMITTED SEVERANCE EVENT" means a termination of employment (a) by the
Company without "cause," (b) by the executive for "good reason," or (c) pursuant
to a "change in control" of the Company.
"PHASE I ASSESSMENTS" means the Phase I Environmental Assessments conducted
by independent environmental consultants at the Properties.
"PLAN" means a tax-qualified retirement plan, an IRA or other employee
benefit plan.
"PPD" means Pan Pacific Development (U.S.) Inc., a Delaware corporation, and
its affiliates.
"PPDC" means Pan Pacific Development Corporation, the former sole
shareholder of PPD.
"PPD CONTRIBUTION" means the contribution in cash of $26.5 million to the
Company in connection with the Formation Transactions.
"PPD OWNERSHIP LIMIT" means 55.0% of the outstanding Common Stock, or the
maximum amount of such Common Stock which PPD and certain affiliated entities
may own.
"PPD PROPERTIES" means, collectively, the neighborhood and community
shopping centers of PPD.
"PPD SUBSIDIARIES" means the Merger Subsidiaries and other wholly-owned PPD
subsidiaries.
"PREFERRED STOCK" means the preferred stock of the Company, par value $.01
per share.
"PROHIBITED OWNER" means a person or entity holding record title to shares
in excess of the Ownership Limit.
"PROHIBITED TRANSFEREE" means any person to which any transfer of Common
Stock of the Company would result in the person violating the Ownership Limit.
"PROPERTIES" means the 25 shopping center properties referred to herein
which comprise the Company's portfolio.
"PRUDENTIAL SECURITIES" means Prudential Securities Incorporated, the lead
managing Underwriter for the Offering.
122
<PAGE>
"QRS" means a subsidiary of the Company.
"QUALIFIED CHARITABLE ORGANIZATION" means a non-profit organization of the
type described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.
"RECOGNITION PERIOD" means the ten-year period beginning on the date a
Built-In Gain Asset is acquired by the Company.
"REGIONAL TENANT" means any tenant that operates in two or more metropolitan
areas located within the same region.
"REGISTRABLE SHARES" means the shares of Common Stock granted to PPD and
Stuart Tanz in connection with the Formation Transactions.
"REGISTRATION RIGHTS" means those certain registration rights granted to PPD
and Stuart Tanz in connection with the Formation Transactions.
"REGULATIONS" means regulations issued by the United States Department of
Labor, effective March 13, 1987, that outline the circumstances under which a
Plan's interest in an entity will be subject to the look-through rule.
"REIT" means a real estate investment trust as defined in Section 856 of the
Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
"RELATED PARTY TENANT" means a tenant actually or constructively owned 10%
or more by the REIT or an owner of 10% or more of the REIT.
"REPRESENTATIVES" means, collectively, Prudential Securities, Donaldson,
Lufkin & Jenrette Securities Corporation and Smith Barney, Inc.
"RESTRICTED SHARES" means the shares of Common Stock owned by PPD and Stuart
Tanz.
"REVENUE PROPERTIES" means Revenue Properties Company Limited, a
publicly-held Canadian real estate company.
"RULE 144" means Rule 144 promulgated under the Securities Act.
"SAME STORE PROPERTIES" means those Properties that were owned by the
Company for the entirety of the corresponding periods being compared.
"SECTION 401(K) PLAN" means the Company's Section 401(k) Savings/Retirement
Plan, to be established.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STATEMENT NO. 128" means the Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," issued by the Financial Accounting Standards
Board in February 1997.
"STOCK INCENTIVE PLAN" means the 1997 Stock Incentive Plan of the Company.
"TANZ FAMILY" means Mark Tanz, Stuart Tanz, Russell Tanz and other family
members.
"TANZ FAMILY OWNERSHIP LIMIT" means 24% of the outstanding Common Stock, or
the maximum amount of such Common Stock which the Tanz Family may, in the
aggregate, actually or constructively own.
"TENANT IMPROVEMENTS" means capital costs insured by the Company for
leasehold improvements including costs for items such as HVAC, plumbing,
electrical upgades, interior walls, wall finishes, ceiling treatment and floor
coverings.
"TI" means tenant improvement costs.
123
<PAGE>
"TREASURY REGULATIONS" means regulations of the U.S. Department of the
Treasury under the Code.
"UBTI" means unrelated business taxable income.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement between the
Company and the Representative relating to the purchase of the Common Stock
offered hereby.
"UNDERWRITERS" means Prudential Securities, Donaldson, Lufkin & Jenrette
Securities Corporation and and Smith Barney, Inc.
"UNSECURED CREDIT FACILITY" means the Company's $150 million variable rate
unsecured acquisition credit facility which will mature in three years.
"U.S. STOCKHOLDER" means a holder of shares of Common Stock who (for United
States federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof, (iii) is an estate the income of which is subject to United States
federal income taxation regardless of its source, or (iv) is a trust, if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust.
"VIOLATIVE INDIRECT TRANSFER" means an increase in the actual or
constructive ownership of stock in Revenue Properties or PPD by one or more
members of the Tanz Family or some other individual or entity which could result
in the disqualification of the Company as a REIT.
"WHITE PAPER" means the White Paper on Funds from Operations approved by the
Board of Governors of the NAREIT in March of 1995.
124
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pan Pacific Retail Properties, Inc.:
Pro Forma Condensed Combined Financial Statements (Unaudited).......................................... F-2
Pro Forma Condensed Combined Balance Sheet as of March 31, 1997.................................... F-3
Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 1997..... F-4
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996.......... F-5
Notes to Pro Forma Condensed Combined Financial Statements......................................... F-6
Historical Financial Statement:
Independent Auditors' Report....................................................................... F-8
Balance Sheet as of April 16, 1997 (inception)..................................................... F-9
Notes to Balance Sheet............................................................................. F-10
Pan Pacific Development Properties Combined Financial Statements:
Independent Auditors' Report........................................................................... F-12
Combined Balance Sheets as of March 31, 1997 (Unaudited) and December 31, 1996 and 1995................ F-13
Combined Statements of Operations for the three months ended March 31, 1997 and 1996 (Unaudited) and
for the years ended December 31, 1996, 1995 and 1994.................................................. F-14
Combined Statements of Owner's Equity for the three months ended March 31, 1997 (Unaudited) and for the
years ended December 31, 1996, 1995 and 1994.......................................................... F-15
Combined Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (Unaudited) and
for the years ended December 31, 1996, 1995 and 1994.................................................. F-16
Notes to Combined Financial Statements................................................................. F-17
Supplemental Schedule--Schedule III--Properties and Accumulated Depreciation........................... F-26
Combining Schedule of Revenue and Certain Expenses of the Acquisition Properties
(Unaudited) for the three months ended March 31, 1997 and for the year ended
December 31, 1996...................................................................................... F-28
Chico Crossroads:
Independent Auditors' Report........................................................................... F-29
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-30
Notes to Statement of Revenue and Certain Expenses..................................................... F-31
Monterey Plaza:
Independent Auditors' Report........................................................................... F-33
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-34
Notes to Statement of Revenue and Certain Expenses..................................................... F-35
Fairmont Shopping Center:
Independent Auditors' Report........................................................................... F-37
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-38
Notes to Statement of Revenue and Certain Expenses..................................................... F-39
Green Valley Town & Country:
Independent Auditors' Report........................................................................... F-41
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-42
Notes to Statement of Revenue and Certain Expenses..................................................... F-43
Lakewood Shopping Center:
Independent Auditors' Report........................................................................... F-45
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-46
Notes to Statement of Revenue and Certain Expenses..................................................... F-47
</TABLE>
F-1
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma condensed combined balance sheet as of March 31,
1997 is presented as if the Formation Transactions (including the acquisitions
of Monterey Plaza, Fairmont Shopping Center, Lakewood Shopping Center and Green
Valley Town & Country and the secured notes receivable), the Offering and the
repayment of notes payable with the net proceeds of the Offering all had
occurred on March 31, 1997. The pro forma condensed combined statements of
operations for the three months ended March 31, 1997 and the year ended December
31, 1996 are presented as if the Formation Transactions (including the
acquisition of Chico Crossroads and the acquisitions listed above), the Offering
and the repayment of notes payable with the net proceeds of the Offering all had
occurred on January 1, 1996.
The pro forma condensed combined financial statements should be read in
conjunction with the combined financial statements of Pan Pacific Development
Properties, including the notes thereto, included elsewhere in the Prospectus.
The pro forma condensed combined financial statements do not purport to
represent the Company's financial position as of March 31, 1997 or the results
of operations for the three months ended March 31, 1997 or for the year ended
December 31, 1996 that would actually have occurred had the Formation
Transactions (including the acquisitions listed above), the Offering and the
repayment of notes payable with the net proceeds of the Offering all been
completed on March 31, 1997 or at the beginning of the period presented, or to
project the Company's financial position or results of operations as of any
future date or for any future period.
F-2
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
<S> <C> <C> <C> <C> <C>
PAN PACIFIC ACQUISITION
DEVELOPMENT PROPERTIES
COMPANY PROPERTIES AND NOTES OTHER COMPANY
HISTORICAL HISTORICAL RECEIVABLE(A) ADJUSTMENTS PRO FORMA
----------- ------------ ------------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
ASSETS:
Operating properties, at cost, net...... $ -- $ 280,723 $ 61,499 $ -- $ 342,222
Property under development, at cost..... -- 3,146 -- -- 3,146
Investments in uncombined
partnerships.......................... -- 3,013 -- 7,000(C) 10,013
Cash and cash equivalents............... -- 4,234 (4,234) 122,047(B) 2,000
(145,820)(C)
(1,225)(D)
26,998(E)
Accounts and accrued rent receivable.... -- 7,115 -- -- 7,115
Notes receivable........................ -- 2,371 4,606 -- 6,977
Deferred charges, prepaid expenses and
other assets.......................... -- 7,012 -- 692(D) 7,704
----------- ------------ ------------- ----------- -----------
$ -- $ 307,614 $ 61,871 $ 9,692 $ 379,177
----------- ------------ ------------- ----------- -----------
----------- ------------ ------------- ----------- -----------
LIABILITIES AND OWNER'S EQUITY:
Notes payable........................... $ -- $ 191,126 $ 39,124 $(138,820)(C) $ 91,430
Advances from parent.................... -- 48,300 22,747 (71,047)(F) --
Accounts payable, accrued expenses and
other liabilities..................... -- 4,625 -- 138(D) 4,763
----------- ------------ ------------- ----------- -----------
Total liabilities..................... -- 244,051 61,871 (209,729) 96,193
Minority interest....................... -- 1,572 -- -- 1,572
Owner's equity.......................... -- 61,991 -- (61,991)(G) --
Common stock............................ -- -- -- 70(B) 158
15(E)
39(F)
34(G)
Additional paid-in capital.............. -- -- -- 121,977(B) 281,254
(671)(D)
26,983(E)
71,008(F)
61,957(G)
----------- ------------ ------------- ----------- -----------
$ -- $ 307,614 $ 61,871 $ 9,692 $ 379,177
----------- ------------ ------------- ----------- -----------
----------- ------------ ------------- ----------- -----------
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-3
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------
<S> <C> <C> <C> <C>
PAN PACIFIC ACQUISITION
DEVELOPMENT PROPERTIES
PROPERTIES AND NOTES OTHER COMPANY
HISTORICAL RECEIVABLE ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ------------
REVENUE:
Rental............................................... $ 7,297 $ 1,849(H) $ -- $ 9,146
Recoveries from tenants.............................. 1,689 265(H) -- 1,954
Income from uncombined partnerships.................. 55 -- 118(K) 173
Other................................................ 191 116(H) -- 307
------ ----------- ----------- ------------
9,232 2,230 118 11,580
------ ----------- ----------- ------------
EXPENSES:
Property operating................................... 1,254 211(H) -- 1,465
Property taxes....................................... 689 201(H) -- 890
Property management fees............................. 15 70(H) (70)(J) 15
Depreciation and amortization........................ 1,827 341(I) -- 2,168
Interest............................................. 3,836 723(H) (2,644)(K) 2,041
126(L)
General and administrative........................... 918 -- 112(M) 835
(195)(N)
Other expenses, net.................................. 450 9(H) (215)(O) 244
------ ----------- ----------- ------------
8,989 1,555 (2,886) 7,658
------ ----------- ----------- ------------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY
INTEREST............................................. 243 675 3,004 3,922
Income tax expense................................... (29) -- 29(P) --
Minority interest.................................... (31) -- (35)(K) (66)
------ ----------- ----------- ------------
NET INCOME............................................. $ 183 $ 675 $ 2,998 $ 3,856
------ ----------- ----------- ------------
------ ----------- ----------- ------------
Pro forma weighted average common shares outstanding
(Q)................................................ 15,764,012
------------
------------
Pro forma net income per share (Q)................... $ 0.24
------------
------------
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-4
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
<S> <C> <C> <C> <C>
PAN PACIFIC ACQUISITION
DEVELOPMENT PROPERTIES
PROPERTIES AND NOTES OTHER COMPANY
HISTORICAL RECEIVABLE ADJUSTMENTS PRO FORMA
----------- -------------- ----------- ---------
REVENUE:
Rental................................ $ 28,350 $8,059(H) $ -- $ 36,409
Recoveries from tenants............... 6,214 1,399(H) -- 7,613
Income from uncombined partnerships... 109 -- 554(K) 663
Other................................. 432 442(H) -- 874
----------- ------ ----------- ---------
35,105 9,900 554 45,559
----------- ------ ----------- ---------
EXPENSES:
Property operating.................... 5,070 953(H) -- 6,023
Property taxes........................ 2,244 888(H) -- 3,132
Property management fees.............. 51 298(H) (298)(J) 51
Depreciation and amortization......... 7,245 1,493(I) -- 8,738
Interest.............................. 14,671 2,908(H) (10,559)(K) 7,524
504(L)
General and administrative............ 3,228 -- 892(M) 3,340
(780)(N)
Other expenses, net................... 1,981 100(H) (1,878)(O) 203
----------- ------ ----------- ---------
34,490 6,640 (12,119) 29,011
----------- ------ ----------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST..................... 615 3,260 12,673 16,548
Income tax expense.................... (122) -- 122(P) --
Minority interest..................... (44) -- (143)(K) (187)
----------- ------ ----------- ---------
NET INCOME.............................. $ 449 $3,260 $ 12,652 $ 16,361
----------- ------ ----------- ---------
----------- ------ ----------- ---------
Pro forma weighted average common shares
outstanding (Q)....................... 15,764,012
---------
---------
Pro forma net income per share (Q)...... $ 1.04
---------
---------
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-5
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED BALANCE SHEET
The pro forma adjustments to the Pro Forma Condensed Combined Balance Sheet as
of March 31, 1997 are as follows:
<TABLE>
<S> <C> <C>
(A) Acquisition of Monterey Plaza, Fairmont Shopping Center, Lakewood Shopping Center and Green
Valley Town & Country and the secured notes receivable
Operating properties (acquired from unrelated third parties, recorded at cost):
Monterey Plaza (acquired 4/25/97)............................................................... $ 25,349
Fairmont Shopping Center (acquired 5/7/97)...................................................... 11,400
Lakewood Shopping Center (acquired 6/24/97)..................................................... 9,450
Green Valley Town & Country (not yet acquired).................................................. 15,300
---------
Total operating properties (including land costs of $17,212).................................... $ 61,499
---------
---------
Cash and cash equivalents....................................................................... $ (4,234)
Notes receivable................................................................................ $ 4,606
Notes payable................................................................................... $ 39,124
Advances from parent............................................................................ $ 22,747
(B) Sale of 7,000,000 shares of common stock in the Offering
Proceeds from the Offering...................................................................... $ 136,500
Costs associated with the Offering.............................................................. (12,053)
Prepayment penalties and other related costs resulting from the early repayment of notes
payable through proceeds from the Offering................................................... (2,400)
---------
Net proceeds.................................................................................... $ 122,047
---------
---------
Par value of common stock to be issued in the Offering.......................................... $ 70
Additional paid-in capital from the net proceeds of the Offering................................ 121,977
---------
$ 122,047
---------
---------
(C) Repayment of notes payable with net proceeds from the Offering and the additional contribution
of capital by PPD
Cash............................................................................................ $(145,820)
Additional investment in uncombined partnership............................................... $ 7,000
Notes payable................................................................................... $(138,820)
(D) Net increase in prepaid financing costs
Financing fees incurred related to the Unsecured Credit Facility (including $1,225 paid and
$138 accrued pursuant to the terms of the Unsecured Credit Facility agreement) (no amounts
are assumed to be drawn on the Unsecured Credit Facility pursuant to the Formation
Transactions)................................................................................ $ 1,363
Write-off of unamortized financing fees related to the repaid notes payable..................... (671)
---------
$ 692
---------
---------
(E) Contribution of capital by PPD
Cash............................................................................................ $ 26,998
Common stock.................................................................................... $ 15
Additional paid-in capital...................................................................... $ 26,983
(F) Issuance of shares to PPD to convert advances from PPD (which were advanced by PPD's parent,
Revenue Properties) to equity
Advances from parent............................................................................ $ (71,047)
Common stock.................................................................................... $ 39
Additional paid-in capital...................................................................... $ 71,008
(G) Conversion of owner's equity to additional paid in capital
Owner's equity.................................................................................. $ (61,991)
Common stock.................................................................................... $ 34
Additional paid-in capital...................................................................... $ 61,957
</TABLE>
F-6
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
2. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The pro forma adjustments to the Pro Forma Condensed Combined Statements of
Operations for the three months ended March 31, 1997 and the year ended December
31, 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C> <C>
(H) Acquisition of Chico Crossroads, Monterey Plaza, Fairmont Shopping Center, Lakewood
Shopping Center and Green Valley Town & Country and the secured notes receivable
(refer to p. F-28 for detailed information by property)
Rental revenue........................................................................ $ 1,849 $ 8,059
Recoveries from tenants............................................................... $ 265 $ 1,399
Other revenue......................................................................... $ 116 $ 442
Property operating expenses........................................................... $ 211 $ 953
Property taxes........................................................................ $ 201 $ 888
Property management fees.............................................................. $ 70 $ 298
Interest expense...................................................................... $ 723 $ 2,908
Other expenses........................................................................ $ 9 $ 100
(I) Increase in depreciation on buildings for Acquired Properties as follows:
Chico Crossroads...................................................................... $ 64 $ 386
Monterey Plaza........................................................................ 111 444
Fairmont Shopping Center.............................................................. 50 199
Lakewood Shopping Center.............................................................. 44 177
Green Valley Town & Country........................................................... 72 287
------- --------
$ 341 $ 1,493
------- --------
------- --------
(J) Elimination of property management fees paid to third parties related to the
properties acquired................................................................... $ (70) $ (298)
(K) Decrease in interest expense, including the amortization of deferred loan fees,
resulting from the repayment of notes payable as follows:
Income from uncombined partnerships................................................... $ 118 $ 554
Interest expense...................................................................... $ (2,644) $ (10,559)
Minority interest..................................................................... $ (35) $ (143)
(L) Increase in interest expense for the effect of the amortization of Unsecured Credit
Facility fees......................................................................... $ 126 $ 504
(M) Increase in general and administrative expenses for the incremental costs of operating
as a public REIT...................................................................... $ 112 $ 892
(N) Decrease in general and administrative expenses for management fees charged by Revenue
Properties............................................................................ $ (195) $ (780)
(O) Decrease in other expenses for loan guarantee fees charged by Revenue Properties...... $ (215) $ (1,878)
(P) Elimination of income tax expense as the Company expects to elect to be taxed as a
REIT.................................................................................. $ 29 $ 122
(Q) Pro forma weighted average common shares outstanding and pro forma net income per share are presented as if the Formation
Transactions (including the issuance of 130,000 shares of restricted stock) occurred on January 1, 1996. The incremental
effect on pro forma net income per share from the repayment of debt was $.34 and $1.37 for the three months ended March
31, 1997 and the year ended December 31, 1996, respectively. The incremental effect was calculated by dividing the pro
forma reduction in interest expense by the number of shares that would have to be issued at $18.18 (the assumed offering
price of $20 per share less the underwriting discounts and commissions) to repay $145.3 million of debt.
</TABLE>
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying balance sheet of Pan Pacific Retail
Properties, Inc. as of April 16, 1997 (inception). This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Pan Pacific Retail Properties, Inc.
as of April 16, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Diego, California
May 28, 1997, except for the last
paragraph of Note 5, as to which
the date is June 30, 1997
F-8
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
BALANCE SHEET
APRIL 16, 1997 (INCEPTION)
<TABLE>
<CAPTION>
<S> <C>
STOCKHOLDER'S EQUITY (NOTE 4)
Common Stock, $.01 par value, 1,000 shares authorized;
100 shares issued and outstanding................................................... $ 1
Additional paid-in capital.......................................................... 99
-----
100
Less--subscription receivable....................................................... (100)
Commitments and contingencies (Note 3)..............................................
-----
$ --
-----
-----
</TABLE>
See accompanying notes to balance sheet.
F-9
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO BALANCE SHEET
APRIL 16, 1997 (INCEPTION)
1. FORMATION OF THE COMPANY
Pan Pacific Realty Corporation was incorporated in the state of Maryland on
April 16, 1997. Pan Pacific Realty Corporation subsequently changed its name to
Pan Pacific Retail Properties, Inc. (the "Company"). The Company intends to file
a Registration Statement on Form S-11 with the Securities and Exchange
Commission with respect to a proposed public offering (the "Offering") of common
stock. The Company intends to be a self-administered and self-managed real
estate investment trust ("REIT") formed to continue to operate and expand the
shopping center business conducted by Pan Pacific Development (U.S.) Inc.
("PPD"). PPD is a wholly-owned subsidiary of Revenue Properties Company Limited
("Revenue Properties"). PPD is engaged in the ownership, management, leasing,
acquisition and development of properties located primarily in the western
United States. Certain of the Properties will be contributed by PPD entities to
the Company and certain PPD entities that own properties are to be merged with
and into the Company. Upon completion of certain formation transactions and the
Offering, the Company will own or control an initial portfolio primarily made up
of shopping center properties.
2. INCOME TAXES
It is the intent of the Company to elect the status of and qualify as a REIT
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
As a REIT, the Company will be permitted to deduct distributions paid to its
stockholders, eliminating the federal taxation of income represented by such
distributions at the Company level. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates.
3. OFFERING COSTS
In connection with the Offering, affiliates have or will incur legal,
accounting and related costs which will be reimbursed by the Company upon the
consummation of the Offering. These costs approximate $500,000 at May 28, 1997,
and will be deducted from the gross proceeds of the Offering.
4. STOCK INCENTIVE PLAN AND RESTRICTED STOCK GRANT
Prior to the consummation of the Offering, the Company intends to adopt and
have its shareholders approve a stock incentive plan for the purpose of
attracting and retaining executive officers, directors and employees.
5. SUBSEQUENT EVENTS
In April 1997, the Company purchased Monterey Plaza, a 183,180 square foot
shopping center located in San Jose, California. The purchase price of
approximately $25,350,000 was funded primarily by amounts advanced from Revenue
Properties and the assumption of a note payable of $18,371,000. As part of the
purchase agreement, the Company also acquired from the seller five notes
receivable for approximately $4,606,000 which were purchased for cash. This cash
was advanced to the Company by Revenue Properties. These notes are secured by
deeds of trust or partnership interests in four different shopping centers. All
of the properties are located in Northern California. Closing on these notes
occurred simultaneously with the closing of Monterey Plaza Shopping Center.
F-10
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO BALANCE SHEET
APRIL 16, 1997 (INCEPTION)
5. SUBSEQUENT EVENTS (CONTINUED)
In May 1997, the Company purchased Fairmont Shopping Center, a 104,281
square foot shopping center located in Pacifica, California, which is in the San
Francisco Bay area. The purchase was all cash of approximately $11,400,000,
which was advanced to the Company by Revenue Properties.
In May 1997, the Sahara Pavilion North, Maysville Marketsquare, Olympia
Square, Country Club Center and Rosewood properties were transferred by PPD to
individual wholly-owned subsidiaries of the Company. As these transfers were
between entities under common control, they were accounted for at historical
cost in a manner similar to a pooling-of-interests.
On June 30, 1997, the Company entered into a letter of intent to purchase
Stanford Ranch Crossing for $23,000,000. This community shopping center is
currently under construction. The letter of intent is subject to numerous
contingencies including the negotiation and execution of definitive
documentation and substantial due diligence. The Company believes, therefore,
that the acquisition of this property is not probable.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the combined balance sheets of Pan Pacific Development
Properties as of December 31, 1996 and 1995, and the related combined statements
of operations, owner's equity and cash flows for each of the years in the
three-year period ended December 31, 1996, as listed in the accompanying index
to financial statements. In connection with our audits of the combined financial
statements, we also have audited the financial statement schedule III listed in
the accompanying index to financial statements. These combined financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Pan Pacific
Development Properties as of December 31, 1996 and 1995, and the 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. Also in our opinion, the related financial statement schedule III,
when considered in relation to the basic combined financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
San Diego, California
June 2, 1997
F-12
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
MARCH 31, --------- ---------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Operating properties, at cost:
Land......................................................................... $ 86,366 82,792 78,061
Buildings and improvements (including related party development and
acquisition fees of $1,207, $1,182 and $1,082, respectively)............... 190,356 173,250 164,617
Tenant improvements.......................................................... 32,490 32,051 25,573
----------- --------- ---------
309,212 288,093 268,251
Less accumulated depreciation and amortization............................... (28,489) (26,857) (22,254)
----------- --------- ---------
280,723 261,236 245,997
Property under development, at cost............................................ 3,146 2,781 5,426
----------- --------- ---------
283,869 264,017 251,423
Investments in uncombined partnerships......................................... 3,013 2,502 2,103
Cash and cash equivalents...................................................... 3,114 8,235 5,578
Restricted cash................................................................ 1,120 697 1,326
Accounts receivable (less allowance for doubtful accounts of $41, $72 and $253,
respectively)................................................................ 973 1,074 1,432
Accrued rent receivable (less allowance for doubtful accounts of $682, $666 and
$477, respectively).......................................................... 6,142 5,995 4,368
Notes receivable............................................................... 2,371 3,457 5,283
Deferred lease commissions (including unamortized related party amounts of
$2,050, $2,275 and $2,115, respectively, and net of accumulated amortization
of $3,486, $3,368 and $2,807, respectively).................................. 2,545 2,399 2,241
Prepaid expenses............................................................... 3,270 3,283 1,528
Other assets................................................................... 1,197 1,527 408
----------- --------- ---------
$ 307,614 293,186 275,690
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND OWNER'S EQUITY:
Notes payable.................................................................. $ 191,126 192,915 191,302
Advances from parent........................................................... 48,300 32,113 16,482
Accounts payable (including related party amounts of $32, $79 and $53,
respectively)................................................................ 746 1,279 2,401
Accrued expenses and other liabilities (including related party amounts of
$451, $440 and $0, respectively)............................................. 3,879 3,532 2,799
Minority interest.............................................................. 1,572 1,539 1,347
Owner's equity................................................................. 61,991 61,808 61,359
----------- --------- ---------
$ 307,614 293,186 275,690
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-13
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
-------------- -------------------------
1997 1996 1996 1995 1994
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental................................ $7,297 $6,478 $28,350 $23,469 $21,159
Recoveries from tenants............... 1,689 1,528 6,214 5,478 5,473
Gain on sale of real estate........... -- -- -- 501 --
Income (loss) from uncombined
partnerships........................ 55 125 109 (32) (271)
Other................................. 191 -- 432 319 387
------ ------ ------- ------- -------
9,232 8,131 35,105 29,735 26,748
------ ------ ------- ------- -------
EXPENSES:
Property operating.................... 1,254 1,186 5,070 4,762 4,774
Property taxes........................ 689 550 2,244 1,981 2,219
Property management fees.............. 15 12 51 46 159
Depreciation and amortization......... 1,827 1,766 7,245 6,340 6,129
Interest.............................. 3,836 3,602 14,671 12,262 11,405
General and administrative............ 918 867 3,228 3,620 3,729
Other expenses, net................... 450 556 1,981 1,247 1,592
------ ------ ------- ------- -------
8,989 8,539 34,490 30,258 30,007
------ ------ ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST................. 243 (408) 615 (523) (3,259)
Income tax expense.................... (29) (42) (122) (87) (7)
Minority interest..................... (31) 2 (44) (5) 50
------ ------ ------- ------- -------
NET INCOME (LOSS)....................... $ 183 $ (448) $ 449 $ (615) $(3,216)
------ ------ ------- ------- -------
------ ------ ------- ------- -------
</TABLE>
See accompanying notes to combined financial statements.
F-14
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
COMBINED STATEMENTS OF OWNER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
FOR THE --------- --------- ---------
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Owner's equity at beginning of period........................... $ 61,808 $ 61,359 $ 61,974 $ 48,385
Issuance of common stock........................................ -- -- -- 16,805
Net income (loss)............................................... 183 449 (615) (3,216)
------- --------- --------- ---------
Owner's equity at end of period................................. $ 61,991 $ 61,808 $ 61,359 $ 61,974
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-15
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................... $ 183 $ (448) $ 449 $ (615) $ (3,216)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................ 1,827 1,766 7,245 6,340 6,129
Amortization of prepaid financing costs.................................. 87 59 264 174 156
Loss (income) from uncombined partnerships............................... (55) (125) (109) 32 271
Gain on sale of real estate.............................................. -- -- -- (501) --
Minority interest........................................................ 31 (2) 44 5 (50)
Changes in assets and liabilities:
Decrease (increase) in restricted cash................................. (423) 714 629 (1,070) (256)
Decrease (increase) in accounts receivable............................. 101 356 358 (293) 571
Increase in accrued rent receivable.................................... (147) 7 (1,627) (910) (413)
Increase in deferred lease commissions................................. (264) (242) (536) (101) (826)
Decrease (increase) in prepaid expenses................................ (74) (281) (575) 96 (631)
Increase in other assets............................................... (105) (67) (129) (244) (217)
Increase (decrease) in accounts payable................................ (533) (151) (701) 2,476 (915)
Increase in accrued expenses and other liabilities..................... 347 396 733 67 1,341
--------- --------- --------- --------- ---------
Net cash provided by operating activities............................ 975 1,982 6,045 5,456 1,944
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties.................................................. (21,154) (9,729) (12,412) (37,173) (21,123)
Additions to property under development.................................. (307) (1,755) (6,634) (5,033) (321)
Proceeds from sale of real estate........................................ -- -- -- 979 --
Increase (decrease) in construction accounts payable..................... -- (579) (579) (925) 3
Contributions to uncombined partnerships................................. (456) -- (290) (111) --
Distributions from uncombined partnerships............................... -- 111 -- -- --
Increase in other assets................................................. -- -- (265) -- --
Increase in notes receivable............................................. -- -- (608) (778) (4,731)
Collections of notes receivable.......................................... 1,086 2,179 2,434 226 1,885
--------- --------- --------- --------- ---------
Net cash used in investing activities................................ (20,831) (9,773) (18,354) (42,815) (24,287)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable proceeds................................................... -- 5,806 11,666 33,797 8,743
Notes payable payments................................................... (1,789) (3,125) (10,053) (2,960) (8,075)
Advances from (repayments to) parent..................................... 16,129 3,469 15,270 (4,031) 34,730
Prepaid financing costs.................................................. -- -- (1,170) (92) (276)
Refunds from (payments to) loan escrow................................... 393 -- (895) -- --
Contributions from minority interests.................................... 2 164 148 -- --
Distributions to minority interests...................................... -- -- -- (31) --
Issuance of capital stock................................................ -- -- -- -- 1,805
--------- --------- --------- --------- ---------
Net cash provided by financing activities............................ 14,735 6,314 14,966 26,683 36,927
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (5,121) (1,477) 2,657 (10,676) 14,584
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 8,235 5,578 5,578 16,254 1,670
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 3,114 4,101 8,235 5,578 16,254
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest (net of amounts capitalized of $0, $0,
$51, $211 and $92, respectively)....................................... $ 3,463 $ 3,680 $ 15,383 $ 28,547 $ 11,729
Income taxes paid........................................................ $ 2 $ 42 $ 222 $ 87 $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer from property under development to operating properties......... $ -- $ -- $ 9,327 $ 8,959 $ --
Transfer from property under development to prepaid financing costs...... $ -- $ -- $ 116 $ -- $ --
Transfer from property under development to deferred lease commissions... $ -- $ -- $ 197 $ -- $ --
Additions to properties from acquisition of controlling interest in
uncombined partnership................................................. $ -- $ -- $ -- $ -- $ 29,374
Additions to notes payable from acquisition of controlling interest in
uncombined partnership................................................. $ -- $ -- $ -- $ -- $ 29,374
Costs capitalized to property under development through advances from
parent................................................................. $ 58 $ 119 $ 361 $ 806 $ 568
Additions to loan fees and accounts payable.............................. $ -- $ -- $ 158 $ -- $ --
Issuance of shares in lieu of repayments of advances from parent
corporation............................................................ $ -- $ -- $ -- $ -- $ 15,000
</TABLE>
See accompanying notes to combined financial statements.
F-16
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include solely the accounts
of Pan Pacific Development (U.S.) Inc. ("PPD"), a wholly-owned subsidiary of
Revenue Properties Company Limited (the "Parent"), related to the ownership of
its neighborhood and community shopping centers, its medical office building and
the leasing and management activities of its portfolio (the "Company"). All of
the accounts of PPD unrelated to these activities have been excluded from these
combined financial statements. The shopping center portfolio is comprised of
approximately 2,800,000 square feet and is located primarily in the western
region of the United States.
These combined financial statements were prepared solely for the purpose of
filing an S-11 registration statement with the Securities and Exchange
Commission as a Real Estate Investment Trust ("REIT") to raise capital through
an initial public offering of common stock. The combined financial statements
include the properties that are to be contributed to or merged into the REIT.
All of these properties are wholly-owned by PPD either directly or indirectly
through wholly-owned subsidiaries, except for Chino Town Square and Tanasbourne
which are 92% and 90% owned, respectively. PPD also owns 50% general partner
interests in Melrose Village and North Coast Health Center, which are accounted
for using the equity method (Note 8).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Company
(Note 1). All material intercompany transactions and balances have been
eliminated.
(B) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, highly liquid investments with an
original maturity of three months or less are considered cash equivalents.
(C) INCOME RECOGNITION
Rental revenue is recognized on a straight-line basis over the terms of
the leases, less a general allowance for doubtful accounts relating to
accrued rent receivable for leases which may be terminated before the end of
the contracted term.
(D) CAPITALIZATION OF COSTS
The Company capitalizes direct carrying costs such as interest, property
taxes and other related costs to property under development.
F-17
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) DEPRECIATION AND AMORTIZATION
Depreciation on buildings and improvements is provided using a
forty-year straight-line basis. Tenant improvements and costs incurred in
obtaining leases are depreciated on a straight-line basis over the lives of
the respective leases.
Prepaid loan fees are amortized over the lives of the loans and the
related amortization expense is included as a component of interest expense.
(F) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that 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 of an asset to 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 exceed 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. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
(G) INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(H) CREDIT RISK
The Company predominantly operates in one industry segment, real estate
ownership, management and development. No single tenant accounts for 10% or
more of combined revenue. Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of
temporary cash investments and trade receivables. The Company places its
temporary cash investments with financial institutions which the Company
believes are of high credit quality. Concentration of credit risk with
respect to trade receivables are limited due to the large number of tenants
comprising the Company's customer base, and their dispersion across many
geographical areas. At December 31, 1996, the Company had no significant
concentration of credit risk.
F-18
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) NET INCOME PER SHARE
Since these combined financial statements report the activities of
partnerships and wholly-owned corporations, net income per share is not
relevant and is therefore not included.
(J) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the combined financial
statements and the reporting of revenue and expenses during the reporting
period to prepare these combined financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
(K) UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
The combined financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 and 1996 are unaudited. In the opinion of
management, such financial statements reflect all adjustments necessary for
a fair presentation of the results of the respective interim periods. All
such adjustments are of a normal, recurring nature.
3. PROPERTY UNDER DEVELOPMENT
At December 31, 1996 and 1995, property under development included the
construction of a shopping center located in Sacramento, California.
Construction commenced in 1995 for Phase I which consists of a twelve screen
theater of approximately 48,200 square feet. Phase I opened May 17, 1996. Phase
II is currently under development and will consist of approximately 60,000
square feet with an anticipated opening in the third quarter of 1997. Land
included in property under development was $1,342,323 and $3,406,482 at December
31, 1996 and 1995, respectively.
At December 31, 1996, there remained a commitment of $530,138 under the
original site development contract for work to be performed on Phase II in 1997.
In addition, a construction contract for the Phase II building was executed in
February 1997 in the amount of $2,670,609.
4. RESTRICTED CASH
Cash and cash equivalents balances at December 31, 1996 and 1995 include
$697,000 and $1,326,000, respectively, which is restricted by debt or joint
venture agreements and is not available to be used for the general purposes of
the Company.
F-19
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
5. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Notes payable consist of the following:
Bank notes payable, secured by deeds of trust, bearing interest at 8.17% with monthly
principal and interest payments of $404, due in January 2007 (a)........................ $ 54,185 $ --
Bank note payable, secured by a deed of trust, bearing interest at 8.00% with monthly
principal and interest payments of $230, due in March 2000.............................. 28,250 28,732
Bank note payable, secured by a deed of trust, bearing interest at 7.92% with monthly
principal and interest payments of $210, due in October 2005............................ 27,023 27,391
Bank note payable, secured by a deed of trust, bearing interest at 7.63% with monthly
principal and interest payments of $137, due in March 2006 (b).......................... 18,186 --
Bank note payable, secured by a deed of trust, bearing interest at 8.25% with monthly
principal and interest payments of $102, due in October 2005............................ 12,579 12,747
Bank notes payable, secured by deeds of trust, one note of $4,729 bearing interest at
7.75% with monthly principal and interest payments of $37, due in 2004, and one note of
$2,565 bearing interest at 7.88% with monthly principal and interest payments of $27,
due in 1999 (c)......................................................................... 7,294 2,785
Bank note payable, secured by a deed of trust, bearing interest at 8.52% with monthly
principal and interest payments of $34, due in January 2007 (a)......................... 4,499 --
Bank note payable, secured by a deed of trust, bearing interest at LIBOR +3.25% with fixed
principal payments of $131 and accrued interest on outstanding balances payable monthly,
due in 1997 (d)......................................................................... 1,313 2,888
Bank notes payable, one note for $4,300, secured by a deed of trust, and one note for
$4,746, secured by a construction deed of trust, bearing interest at LIBOR +2.00% with
interest only payments made monthly and quarterly, respectively, due in 1998 (d)........ 9,046 3,100
Bank notes payable, secured by deeds of trust, bearing interest at LIBOR +1.50% with
interest only payments made monthly, due in 1997 and 1998 (d)........................... 30,540 56,831
Bank notes payable, bearing interest at LIBOR +1.25% (d).................................. -- 25,294
Bank note payable, secured by a deed of trust, bearing interest at LIBOR +1.00% with
interest only payments made monthly, due in 1998 (d).................................... -- 31,437
Bank note payable, bearing interest at prime +1.50%....................................... -- 97
--------- ---------
$ 192,915 $ 191,302
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<S> <C>
Principal payments under these notes payable are due as follows:
1997...................................................................................... $ 9,432
1998...................................................................................... 30,833
1999...................................................................................... 9,220
2000...................................................................................... 28,223
2001...................................................................................... 1,835
2002 and subsequent....................................................................... 113,372
---------
$ 192,915
---------
---------
</TABLE>
- ------------------------------
(a) On December 20, 1996, a pool of five notes payable were refinanced whereby
approximately $60,513 of floating rate debt was refinanced with fixed rate
debt totalling $54,200 bearing interest at 8.17% and $4,500 bearing interest
at 8.52%. The new notes have an effective maturity date of January 2007.
F-20
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
5. NOTES PAYABLE (CONTINUED)
(b) On February 22, 1996, the note payable secured by the deed of trust on
Tanasbourne Village was refinanced from floating rate debt to fixed rate
debt bearing interest at 7.63%. This new loan matures in March 2006. As part
of the refinancing transaction, approximately $2,441 was paid down,
resulting in a new loan of $18,375.
(c) Effective January 1, 1996, the note payable for Laurentian Center is
reflected at 100%, as this property became wholly-owned through the
acquisition of 98% of the center from the other partners.
(d) The bank notes payable based on variable interest rates are carried under
negotiated LIBOR contracts for periods varying in length from 30 days to one
year. The effective interest rates vary depending on the term of the
respective contracts. At December 31, 1996, these interest rates ranged from
6.81% to 8.75%.
6. INCOME TAXES
The Company's income tax expense consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- ----- -----
Current income taxes:
Federal................................................................. $ 49 $ 49 $ --
State................................................................... 73 38 7
--------- --- ---
$ 122 $ 87 $ 7
--------- --- ---
--------- --- ---
</TABLE>
The differences between income tax expense computed using statutory income
tax rates and the Company's effective income tax rate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Federal income taxes............................................... $ 194 $ (188) $ (1,103)
State income taxes, net of federal benefit......................... 34 (33) (195)
Increase (decrease) in valuation allowance......................... (228) 221 1,298
Other.............................................................. 122 87 7
--------- --------- ---------
$ 122 $ 87 $ 7
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1996 and 1995, gross deferred tax assets were $31,279,000
and $29,859,000, respectively, and gross deferred tax liabilities were
$8,490,000 and $6,842,000, respectively. Deferred tax assets at December 31,
1996 and 1995 are primarily related to differences between financial and tax
bases of properties ($6,363,000 and $4,535,000, respectively) and net operating
losses carried forward ($24,916,000 and $25,324,000, respectively). Deferred tax
liabilities at December 31, 1996 and 1995 are primarily related to differences
between financial and income tax reporting of depreciation ($6,433,000 and
$5,363,000, respectively) and the recognition of rental revenue ($2,057,000 and
$1,479,000, respectively).
F-21
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
6. INCOME TAXES (CONTINUED)
The Company has recorded a valuation allowance of $22,789,000 and
$23,017,000 at December 31, 1996 and 1995, respectively, which represents
deferred tax assets which are not deemed more likely than not to be realized.
During the years ended December 31, 1996 and 1995, the Company recorded a
decrease in the valuation allowance of $228,000 and an increase of $221,000,
respectively.
At December 31, 1996, the Company had unused net operating losses carried
forward for federal and state income tax purposes of $62,860,000 and
$37,111,000, respectively. The ultimate parent of the Company went through a
change in control during 1992 which significantly restricts the use of the
Company's net operating losses carried forward in future years. The net
operating losses carried forward expire at various times through 2010.
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
i) Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses and other liabilities
The carrying amounts approximate fair values because of the short maturity
of these instruments.
ii) Advances from parent
It was not practicable to estimate the fair value of advances from parent
due to the uncertainty of the timing of repayment.
iii) Notes payable
The fair value of notes payable is estimated based on the current rates
offered for notes payable of similar risk and the same remaining maturities.
The estimated fair value of the notes payable at December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Notes payable................................ $ 192,915 $ 195,446 $ 191,302 $ 192,821
</TABLE>
8. INVESTMENTS IN UNCOMBINED PARTNERSHIPS
The accompanying combined financial statements include investments in two
partnerships in which the Company does not own a controlling interest. The
Company owns 50% general partner interests in Melrose Village and North Coast
Health Center. These investments are reported using the equity method.
F-22
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
8. INVESTMENTS IN UNCOMBINED PARTNERSHIPS (CONTINUED)
Summarized combined financial information for the partnerships is presented
below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
<S> <C> <C>
1996 1995
--------- ---------
Properties.............................................................. $ 19,706 $ 20,178
Other assets............................................................ 806 408
--------- ---------
Total assets............................................................ $ 20,512 $ 20,586
--------- ---------
--------- ---------
Notes payable........................................................... $ 15,100 $ 16,200
Other liabilities....................................................... 568 386
Equity.................................................................. 4,844 4,000
--------- ---------
$ 20,512 $ 20,586
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Revenue.............................................................. $ 4,064 $ 3,726 $ 1,676
Expenses............................................................. 3,846 3,790 2,218
--------- --------- ---------
Net income (loss).................................................... $ 218 $ (64) $ (542)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company acquired its interest in North Coast Health Center on December
31, 1994.
9. FUTURE LEASE REVENUE
Total future minimum lease receipts under noncancellable operating tenant
leases in effect at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 27,802
1998.............................................................. 25,988
1999.............................................................. 23,399
2000.............................................................. 20,753
2001.............................................................. 17,448
2002 and subsequent............................................... 110,971
---------
$ 226,361
---------
---------
</TABLE>
Total percentage rents for 1996, 1995 and 1994 are $239,339, $154,164 and
$192,255, respectively, and are included in rental revenue.
10. RELATED PARTY TRANSACTIONS
(a) Included in general and administrative expenses are management fees totaling
$780,000, $780,000 and $690,000 in 1996, 1995, and 1994, respectively, which
are a reimbursement by the Company of costs
F-23
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
incurred by the Parent for managing the development of the Company's
properties, directing corporate strategy, and consulting on operations.
(b) The Company paid a consulting fee of $420,000, $360,000 and $300,000 in
1996, 1995, and 1994, respectively, to a sole proprietorship owned by a
director of an affiliate of the Company.
(c) The Company incurred $1,878,000, $1,763,000 and $1,406,000 in 1996, 1995 and
1994, respectively, of loan guaranty fees charged by the Parent.
(d) The Company incurred an acquisition related consulting fee of $0, $965,000
and $0 in 1996, 1995 and 1994, respectively, charged by its parent
corporation related to the acquisition of Cheyenne Commons, a shopping
center located in Nevada.
(e) The Company earned $0, $43,000 and $169,000 in 1996, 1995 and 1994,
respectively, in management fees and interest charged to affiliates of the
Company.
(f) The Company paid development related fees of $12,850, $40,000 and $0 in
1996, 1995 and 1994, respectively, to a former director of the Parent as
compensation for the director's services in obtaining an anchor tenant for
the Laguna Village development.
(g) The Company received and repaid net advances from parent of $15,270,000 and
$4,033,000 in 1996 and 1995, respectively. These advances are due on demand
and are non-interest bearing.
(h) On January 1, 1996 the Company acquired the remaining 98% of Laurentian
Center from an affiliate and a related party. As a result of this
transaction, the Company has a note and related accrued interest payable to
the related party of $440,034 at December 31, 1996.
11. COMMITMENTS AND CONTINGENCIES
(a) The Company leases certain real estate and office equipment under operating
leases expiring at various dates through 2002. Rental expense was $618,018,
$646,318 and $106,090 for the years ended December 31, 1996, 1995 and 1994,
respectively. Minimum rentals under noncancellable leases in effect at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
MINIMUM RENTALS
------------------------
<S> <C> <C>
REAL
EQUIPMENT ESTATE
------------- ---------
1997.................................................................... $ 5 $ 615
1998.................................................................... 5 604
1999.................................................................... 3 565
2000.................................................................... 1 565
2001.................................................................... -- 565
2002.................................................................... -- 235
--- ---------
$ 14 $ 3,149
--- ---------
--- ---------
</TABLE>
F-24
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(TABULAR AMOUNTS ARE IN THOUSANDS)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(b) Various claims and legal proceedings arise in the ordinary course of
business. The ultimate amount of liability from all claims and actions cannot be
determined with certainty, but in the opinion of management, the ultimate
liability from all pending and threatened legal claims will not materially
affect the combined financial statements taken as a whole.
12. SUBSEQUENT EVENTS
In February 1997, the Company entered into an agreement to purchase Chico
Crossroads, a 267,735 square foot shopping center located in Chico, California.
The cash purchase price of $20,593,000 was advanced by the Parent and closing
occurred on February 27, 1997.
In March 1997, the Company entered into an agreement to purchase Green
Valley Town & Country, a 130,553 square foot shopping center located in
Henderson, Nevada, a suburban community near Las Vegas. The purchase price is
expected to be approximately $15,300,000 including approximately $11,100,000 of
debt anticipated to be assumed. Closing is expected to take place on or about
August 15, 1997.
In March 1997, the Company entered into an agreement to purchase Lakewood
Shopping Center, a 107,769 square foot shopping center located in Windsor,
California. The purchase price is expected to be approximately $9,450,000 cash
and closing is expected to take place on or about June 15, 1997.
In April 1997, the Company took back the deed on a shopping center property
in lieu of foreclosure related to a non-performing note receivable. The note
receivable was stated at $1,258,000 at December 31, 1996. It was determined that
there was no impairment on the note and the property will be recorded at that
amount which was deemed to be the fair market value of the property.
In May 1997, the Sahara Pavilion North, Maysville Marketsquare, Olympia
Square, Country Club Center and Rosewood properties were transferred to
individual wholly-owned subsidiaries of Pan Pacific Retail Properties, Inc., an
affiliate of the Company.
F-25
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
INITIAL COSTS SUBSEQUENT TO TOTAL COSTS
-------------------------- ACQUISITION ------------------------
BUILDINGS -------------------------- BUILDINGS
AND CARRYING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS LAND IMPROVEMENTS
- ----------------------------------- ------------- --------- --------------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES:
Arlington Courtyard
Riverside, CA...................... $ -- $ 401 $ 753 $ 94 $ 0 $ 401 $ 847
Canyon Ridge Plaza
Kent, WA........................... 4,300 2,457 -- 6,765 1,275 2,641 7,856
Cheyenne Commons
Las Vegas, NV...................... 28,336 8,540 26,810 1,078 0 8,540 27,888
Chino Town Square
Chino, CA.......................... 28,250 8,801 10,297 25,431 0 21,328 23,201
Country Club Center
Rio Rancho, NM..................... 3,299 561 2,742 27 0 561 2,769
Laguna Village Phase I
Sacramento, CA..................... 4,746 1,968 -- 7,553 938 2,064 8,395
Laguna Village Phase II
Sacramento, CA..................... -- 1,258 -- 1,181 342 1,342 1,439
Laurentian Center
Ontario, CA........................ 4,729 2,767 6,445 591 -- 2,767 7,036
Maysville Marketsquare
Maysville, KY...................... 5,398 3,454 2,046 3,717 79 3,302 5,994
Ocoee Plaza
Ocoee, FL.......................... 2,000 651 2,956 292 -- 651 3,248
Olympia Square
Olympia, WA........................ 14,196 3,737 12,063 652 -- 3,737 12,715
Rosewood Village
Santa Rosa, CA..................... 4,499 2,180 5,217 102 -- 2,180 5,319
Sahara Pavilion North
Las Vegas, NV...................... 31,292 11,920 29,040 381 -- 11,920 29,421
Sahara Pavilion South
Las Vegas, NV...................... 12,579 4,833 13,080 730 -- 4,833 13,810
Sports Unlimited
Memphis, TN........................ 2,565 1,204 3,819 313 -- 1,204 4,132
Sunset Square
Bellingham, WA..................... 22,382 6,100 19,564 347 -- 6,100 19,911
Tanasbourne Village
Hillsboro, OR...................... 18,186 5,341 15,344 816 -- 5,341 16,160
Vineyard Village
Ontario, CA........................ -- 649 2,716 135 -- 649 2,851
Winterwood Pavilion
Las Vegas, NV...................... 6,158 4,573 13,270 478 -- 4,573 13,748
------------- --------- --------------- ------------- ----------- --------- -------------
$ 192,915 $ 71,395 $ 166,162 $ 50,683 $ 2,634 $ 84,134 $ 206,740
------------- --------- --------------- ------------- ----------- --------- -------------
------------- --------- --------------- ------------- ----------- --------- -------------
<CAPTION>
ACCUMULATED DATE OF
DEPRECIATION ACQUIS.(A)
DESCRIPTION TOTAL(1)(2) (2) CONSTR.(C)
- ----------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
PROPERTIES:
Arlington Courtyard
Riverside, CA...................... $ 1,248 $ 145 1994(A)
Canyon Ridge Plaza
Kent, WA........................... 10,497 293 1992(A)
1995(C)
Cheyenne Commons
Las Vegas, NV...................... 36,428 1,319 1995(A)
Chino Town Square
Chino, CA.......................... 44,529 623 1992(A)
Country Club Center
Rio Rancho, NM..................... 3,330 876 1992(A)
Laguna Village Phase I
Sacramento, CA..................... 10,459 151 1992(A)
1996(C)
Laguna Village Phase II
Sacramento, CA..................... 2,781 -- 1992(A)
1996(C)
Laurentian Center
Ontario, CA........................ 9,803 450 1994/96(A)
Maysville Marketsquare
Maysville, KY...................... 9,296 755 1992(A)
1993(C)
Ocoee Plaza
Ocoee, FL.......................... 3,899 443 1992(A)
Olympia Square
Olympia, WA........................ 16,452 2,905 1992(A)
Rosewood Village
Santa Rosa, CA..................... 7,499 1,107 1992(A)
Sahara Pavilion North
Las Vegas, NV...................... 41,341 3,917 1992(A)
Sahara Pavilion South
Las Vegas, NV...................... 18,643 2,019 1992(A)
Sports Unlimited
Memphis, TN........................ 5,336 829 1992(A)
Sunset Square
Bellingham, WA..................... 26,011 4,399 1992(A)
Tanasbourne Village
Hillsboro, OR...................... 21,501 3,824 1992(A)
Vineyard Village
Ontario, CA........................ 3,500 228 1994(A)
Winterwood Pavilion
Las Vegas, NV...................... 18,321 2,574 1992(A)
----------- ------------
$ 290,874 $ 26,857
----------- ------------
----------- ------------
</TABLE>
F-26
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
NOTES:
(1) The aggregate gross cost of the Pan Pacific Development Properties for
federal income tax purposes, approximated $298,726 as of December 31, 1996.
(2) The following table reconciles the historical cost of the Pan Pacific
Development Properties from January 1, 1994 to December 31, 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Balance, beginning of period....................................... $ 273,677 $ 232,176 $ 181,708
Additions during period (acquisition, improvements, etc.)........ 18,733 42,206 50,818
Interest capitalized............................................. 361 806 568
Deductions during period (write-off of tenant improvements and
cost of real estate sold)...................................... (1,897) (1,511) (918)
---------- ---------- ----------
Balance, close of period........................................... $ 290,874 $ 273,677 $ 232,176
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table reconciles the accumulated depreciation and amortization
of the Pan Pacific Development Properties from January 1, 1994 to December 31,
1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Balance, beginning of period........................................... $ 22,254 $ 17,622 $ 13,428
Additions during period (depreciation and amortization expense)...... 6,500 5,665 5,112
Deductions during period (write-off of accumulated depreciation of
tenant improvements and real estate sold).......................... (1,897) (1,033) (918)
--------- --------- ---------
Balance, close of period............................................... $ 26,857 $ 22,254 $ 17,622
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-27
<PAGE>
PAN PACIFIC RETAIL PROPERTIES, INC.
COMBINING SCHEDULE OF REVENUE AND CERTAIN EXPENSES OF THE ACQUISITION
PROPERTIES AND NOTES RECEIVABLE
FOR THE THREE MONTHS ENDED MARCH 31, 1997(1)
(UNAUDITED)
<TABLE>
<CAPTION>
GREEN
FAIRMONT VALLEY LAKEWOOD
CHICO MONTEREY SHOPPING TOWN & SHOPPING NOTES
CROSSROADS PLAZA CENTER COUNTRY CENTER RECEIVABLE TOTAL
----------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rent.............................. $ 349,208 $ 590,486 $ 289,605 $ 409,321 $ 210,275 $ -- $ 1,848,895
Recoveries from tenants........... 25,458 96,028 59,314 42,895 41,757 -- 265,452
Other............................. -- -- 1,423 33 631 113,546 115,633
----------- ---------- ---------- ---------- ---------- ---------- ------------
374,666 686,514 350,342 452,249 252,663 113,546 2,229,980
----------- ---------- ---------- ---------- ---------- ---------- ------------
Certain expenses:
Interest.......................... -- 447,088 -- 275,580 -- -- 722,668
Property taxes.................... 46,964 87,501 21,042 22,812 23,106 -- 201,425
Property operating................ 23,634 65,476 30,326 49,443 41,904 -- 210,783
Management fees................... 6,500 22,985 11,925 18,089 10,322 -- 69,821
Other............................. 2,934 -- 940 1,997 3,098 -- 8,969
----------- ---------- ---------- ---------- ---------- ---------- ------------
80,032 623,050 64,233 367,921 78,430 -- 1,213,666
----------- ---------- ---------- ---------- ---------- ---------- ------------
Revenue in excess of certain
expenses.......................... $ 294,634 $ 63,464 $ 286,109 $ 84,328 $ 174,233 $ 113,546 $ 1,016,314
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
</TABLE>
- ------------------------
(1) With respect to Chico Crossroads, operations are included for the period
prior to its being acquired by the Company (January 1, 1997 through February
27, 1997).
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GREEN
FAIRMONT VALLEY LAKEWOOD
CHICO MONTEREY SHOPPING TOWN & SHOPPING NOTES
CROSSROADS PLAZA CENTER COUNTRY CENTER RECEIVABLE TOTAL
------------ ------------ ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rent...................... $ 2,103,771 $ 2,433,276 $ 1,141,744 $ 1,555,036 $ 824,816 $ -- $ 8,058,643
Recoveries from tenants... 325,144 471,830 222,152 171,582 207,874 -- 1,398,582
Other..................... -- -- 6,110 424 2,898 432,865 442,297
------------ ------------ ------------ ------------ ---------- ---------- ------------
2,428,915 2,905,106 1,370,006 1,727,042 1,035,588 432,865 9,899,522
------------ ------------ ------------ ------------ ---------- ---------- ------------
Certain expenses:
Interest.................. -- 1,798,012 -- 1,109,676 -- -- 2,907,688
Property taxes............ 281,782 339,747 84,166 89,571 93,065 -- 888,331
Property operating........ 81,109 339,445 139,170 222,131 171,636 -- 953,491
Management fees........... 39,000 97,638 47,950 70,205 43,225 -- 298,018
Other..................... 37,909 13,691 10,743 8,213 29,607 -- 100,163
------------ ------------ ------------ ------------ ---------- ---------- ------------
439,800 2,588,533 282,029 1,499,796 337,533 -- 5,147,691
------------ ------------ ------------ ------------ ---------- ---------- ------------
Revenue in excess of certain
expenses.................. $ 1,989,115 $ 316,573 $ 1,087,977 $ 227,246 $ 698,055 $ 432,865 $ 4,751,831
------------ ------------ ------------ ------------ ---------- ---------- ------------
------------ ------------ ------------ ------------ ---------- ---------- ------------
</TABLE>
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying statement of revenue and certain expenses
of Chico Crossroads for the year ended December 31, 1996. This statement is the
responsibility of Pan Pacific Retail Properties, Inc.'s management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the statement.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of Pan Pacific Retail Properties, Inc., as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Chico Crossroads' revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Chico Crossroads for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
March 27, 1997
F-29
<PAGE>
CHICO CROSSROADS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent (notes 3 and 4).......................................................... $2,103,771
Recoveries from tenants....................................................... 325,144
---------
2,428,915
---------
Certain expenses:
Property taxes................................................................ 281,782
Repairs and maintenance....................................................... 48,635
Management fees............................................................... 39,000
Utilities..................................................................... 32,474
Other......................................................................... 37,909
---------
439,800
---------
Revenue in excess of certain expenses....................................... $1,989,115
---------
---------
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-30
<PAGE>
CHICO CROSSROADS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Chico Crossroads (the "Property"), a 267,735 square-foot community
shopping center located in Chico, California. The Property was purchased by Pan
Pacific Development (Chico) LLC (the "Owner"), an affiliate of Pan Pacific
Retail Properties, Inc. (the "Company") for $20,593,000 in cash on February 27,
1997.
The accompanying statement of revenue and certain expenses has been prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission and accordingly, is not representative of the actual
results of operations of Chico Crossroads for the year ended December 31, 1996
due to the exclusion of the following expenses, which may not be comparable to
the proposed future operations of the Property:
- Depreciation and amortization
- Interest on mortgage which was not assumed by the Owner
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting and disclosure of revenue and certain expenses during the reporting
period to prepare the statement of revenue and certain expenses in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(3) RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from three to 20 years. The leases generally provide for minimum rent
and reimbursement of real estate taxes, common area maintenance and certain
other operating expenses. Certain leases also contain provisions for percentage
rent. Percentage rent earned for the year ended December 31, 1996 was $59,087.
F-31
<PAGE>
CHICO CROSSROADS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(3) RENT REVENUE (CONTINUED)
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 2,073,231
1998........................................................................... 2,027,151
1999........................................................................... 1,996,812
2000........................................................................... 1,957,129
2001........................................................................... 1,954,715
Thereafter..................................................................... 16,756,475
-------------
$ 26,765,513
-------------
-------------
</TABLE>
(4) CONCENTRATION OF CREDIT RISK
At December 31, 1996, three tenants individually accounted for more than 10%
of total revenue. Rent revenue earned, including recoveries and percentage
rents, from these tenants for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Waban Corporation (Home Base)..................................................... $ 627,532
Netco Foods (Food4Less)........................................................... $ 506,926
Circuit City...................................................................... $ 306,336
</TABLE>
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying statement of revenue and certain expenses
of Monterey Plaza for the year ended December 31, 1996. This statement is the
responsibility of Pan Pacific Retail Properties, Inc.'s management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the statement.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of Pan Pacific Retail Properties, Inc., as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Monterey Plaza's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Monterey Plaza for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
April 10, 1997, except for Note 6,
as to which the date is April 25, 1997
F-33
<PAGE>
MONTEREY PLAZA
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent (notes 4 and 5).......................................................... $2,433,276
Recoveries from tenants....................................................... 471,830
---------
2,905,106
---------
Certain expenses:
Interest (note 3)............................................................. 1,798,012
Property taxes................................................................ 339,747
Repairs and maintenance....................................................... 114,667
Management fees............................................................... 97,638
Bad debt...................................................................... 62,235
Other......................................................................... 176,234
---------
2,588,533
---------
Revenue in excess of certain expenses....................................... $ 316,573
---------
---------
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-34
<PAGE>
MONTEREY PLAZA
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Monterey Plaza (the "Property"), a 183,180 square-foot community
shopping center located in San Jose, California. Pan Pacific Development (U.S.)
Inc. ("Pan Pacific"), an affiliate of Pan Pacific Retail Properties, Inc. (the
"Company"), intends to acquire the Property and assume the related mortgage note
payable (see Note 6).
The accompanying statement of revenue and certain expenses has been prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission and accordingly, is not representative of the actual
results of operations of Monterey Plaza for the year ended December 31, 1996 due
to the exclusion of the following expenses, which may not be comparable to the
proposed future operations of the Property:
- Depreciation and amortization
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting and disclosure of revenue and certain expenses during the reporting
period to prepare the statement of revenue and certain expenses in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(3) MORTGAGE NOTE PAYABLE
A loan in the amount of $19,000,000, secured by a first trust deed and an
assignment of rents, was executed by the current owners of the Property on April
11, 1991. Pan Pacific intends to assume the loan as part of its acquisition of
the Property. The loan bears interest at an annual rate of 9.72%, with principal
and interest payments of $162,821 due monthly through February 2000, at which
time the outstanding principal balance (expected to be approximately
$17,843,000) and any accrued interest thereon is due. The principal balance of
the loan at December 31, 1996 was $18,425,971.
(4) RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from three to 20 years. The leases generally provide for minimum rent
and reimbursement of real estate taxes, common area maintenance and certain
other operating expenses. Certain leases also contain provisions for percentage
rent. No percentage rent was earned for the year ended December 31, 1996.
F-35
<PAGE>
MONTEREY PLAZA
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(4) RENT REVENUE (CONTINUED)
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 2,038,409
1998........................................................................... 1,962,166
1999........................................................................... 1,778,658
2000........................................................................... 1,686,149
2001........................................................................... 1,399,006
Thereafter..................................................................... 6,903,309
-------------
$ 15,767,697
-------------
-------------
</TABLE>
The above table excludes Walgreen's as they have a month-to-month lease.
(5) CONCENTRATION OF CREDIT RISK
At December 31, 1996, one tenant, Waban Corporation (Home Base),
individually accounted for more than 10% of total revenue. Rent revenue earned,
including recoveries, from this tenant for the year ended December 31, 1996 was
$1,109,170. In January 1997, Waban Corporation (Home Base) was replaced as a
tenant by Wal-Mart.
(6) SUBSEQUENT EVENT
On April 25, 1997, the Company purchased the Property for $6,585,973 in cash
and an assumption of the related mortgage note payable with an outstanding
balance of $18,371,027. Upon purchase of the property and assumption of the
loan, the Company incurred a broker fee and a transfer fee of $300,000 and
$91,855, respectively.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying statement of revenue and certain expenses
of the Fairmont Shopping Center for the year ended December 31, 1996. This
statement is the responsibility of Pan Pacific Retail Properties, Inc.'s
management. Our responsibility is to express an opinion on this statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the statement.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of Pan Pacific Retail Properties, Inc., as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of the Fairmont Shopping Center's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
the Fairmont Shopping Center for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
April 30, 1997, except for Note 5,
as to which the date is May 7, 1997
F-37
<PAGE>
FAIRMONT SHOPPING CENTER
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent (notes 3 and 4).......................................................... $1,141,744
Recoveries from tenants....................................................... 222,152
Other......................................................................... 6,110
---------
1,370,006
---------
Certain expenses:
Property taxes................................................................ 84,166
Repairs and maintenance....................................................... 53,038
Management fees............................................................... 47,950
Insurance..................................................................... 38,654
Security service.............................................................. 25,733
Utilities..................................................................... 21,745
Other......................................................................... 10,743
---------
282,029
---------
Revenue in excess of certain expenses....................................... $1,087,977
---------
---------
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-38
<PAGE>
FAIRMONT SHOPPING CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of the Fairmont Shopping Center (the "Property"), a 104,281
square-foot community shopping center located in Pacifica, California. Pan
Pacific Retail Properties, Inc. (the "Company"), intends to acquire the Property
(see Note 5).
The accompanying statement of revenue and certain expenses has been prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission and accordingly, is not representative of the actual
results of operations of the Fairmont Shopping Center for the year ended
December 31, 1996 due to the exclusion of the following expenses, which may not
be comparable to the proposed future operations of the Property:
- Depreciation and amortization
- Interest on mortgage note which will not be assumed by the Company
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting and disclosure of revenue and certain expenses during the reporting
period to prepare the statement of revenue and certain expenses in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(3) RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from one to 25 years. The leases generally provide for minimum rent and
reimbursement of real estate taxes, common area maintenance and certain other
operating expenses. Certain leases also contain provisions for percentage rent.
Percentage rent earned for the year ended December 31, 1996 was $20,096.
F-39
<PAGE>
FAIRMONT SHOPPING CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 998,482
1998............................................................................ 861,124
1999............................................................................ 759,573
2000............................................................................ 745,102
2001............................................................................ 636,714
Thereafter...................................................................... 3,228,873
------------
$ 7,229,868
------------
------------
</TABLE>
(4) CONCENTRATION OF CREDIT RISK
At December 31, 1996, two tenants individually accounted for more than 10%
of total revenue. Rent revenue earned, including recoveries and percentage
rents, from these tenants for the year ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Payless Drug...................................................... $ 165,088
Lucky............................................................. $ 215,706
</TABLE>
(5) SUBSEQUENT EVENT
On May 7, 1997, the Company purchased the Property for $11,400,000 in cash.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying statement of revenue and certain expenses
of Green Valley Town & Country for the year ended December 31, 1996. This
statement is the responsibility of Pan Pacific Retail Properties, Inc.'s
management. Our responsibility is to express an opinion on this statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the statement.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of Pan Pacific Retail Properties, Inc. as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Green Valley Town & Country's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Green Valley Town & Country for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
August 1, 1997
F-41
<PAGE>
GREEN VALLEY TOWN & COUNTRY
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent (notes 4 and 5).......................................... $1,555,036
Recoveries from tenants....................................... 171,582
Other......................................................... 424
---------
1,727,042
Certain expenses:
Interest (note 3)............................................. 1,109,676
Utilities..................................................... 96,987
Property taxes................................................ 89,571
Repairs and maintenance....................................... 76,641
Management fees paid to a related party....................... 70,205
Insurance..................................................... 48,503
Other......................................................... 8,213
---------
1,499,796
---------
Revenue in excess of certain expenses................... $ 227,246
---------
---------
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-42
<PAGE>
GREEN VALLEY TOWN & COUNTRY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Green Valley Town & Country (the "Property"), a 130,553
square-foot community shopping center located in Henderson, Nevada. Pan Pacific
Retail Properties, Inc. (the "Company") intends to acquire the Property and
assume the related mortgage note payable.
The accompanying statement of revenue and certain expenses has been prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission and accordingly, is not representative of the actual
results of operations of Green Valley Town & Country for the year ended December
31, 1996 due to the exclusion of the following expenses, which may not be
comparable to the proposed future operations of the Property:
- Depreciation and amortization
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
(2) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting and disclosure of revenue and certain expenses during the reporting
period to prepare the statement of revenue and certain expenses in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(3) MORTGAGE NOTE PAYABLE
A loan in the amount of $11,500,000, secured by a first trust deed and an
assignment of rents, was executed by the current owners of the Property on
September 14, 1990. The Company intends to assume the loan as part of its
acquisition of the Property. The loan bears interest at an annual rate of
9.875%, with principal and interest payments of $101,789 due monthly through
September 2000, at which time the outstanding principal balance (expected to be
approximately $10,653,000) and any accrued interest thereon is due. Principal
balance of the loan at December 31, 1996 was $11,182,381.
(4) RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from 1 to 20 years. The leases generally provide for minimum rent and
reimbursement of real estate taxes, common area maintenance and certain other
operating expenses. Certain leases also contain provisions for percentage rent.
No percentage rent was earned for the year ended December 31, 1996.
F-43
<PAGE>
GREEN VALLEY TOWN & COUNTRY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
- --------------------------------------------------------------------- -------------
<S> <C>
1997................................................................. $ 1,626,543
1998................................................................. 1,551,505
1999................................................................. 1,388,342
2000................................................................. 1,077,964
2001................................................................. 792,986
Thereafter........................................................... 3,646,402
-------------
$ 10,083,742
-------------
-------------
</TABLE>
(5) CONCENTRATION OF CREDIT RISK
At December 31, 1996, one tenant, Lucky/Sav-On, individually accounted for
more than 10% of total revenue. Total revenue earned from this tenant for the
year ended December 31, 1996 was $373,370.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying statement of revenue and certain expenses
of Lakewood Shopping Center for the year ended December 31, 1996. This statement
is the responsibility of Pan Pacific Retail Properties, Inc.'s management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the statement.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of Pan Pacific Retail Properties, Inc. as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Lakewood Shopping Center's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Lakewood Shopping Center for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
June 11, 1997, except for Note 5,
as to which the date is June 24, 1997
F-45
<PAGE>
LAKEWOOD SHOPPING CENTER
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent (notes 3 and 4).......................................... $ 824,816
Recoveries from tenants....................................... 207,874
Other......................................................... 2,898
---------
1,035,588
---------
Certain expenses:
Property taxes................................................ 93,065
Utilities..................................................... 78,813
Repairs and maintenance....................................... 72,902
Management fees............................................... 43,225
Other......................................................... 49,528
---------
337,533
---------
Revenue in excess of certain expenses................... $ 698,055
---------
---------
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-46
<PAGE>
LAKEWOOD SHOPPING CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of the Lakewood Shopping Center (the "Property"), a 107,769
square-foot community shopping center located in Windsor, California. Pan
Pacific Retail Properties, Inc. (the "Company") intends to acquire the Property
(see Note 5).
The accompanying statement of revenue and certain expenses has been prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission and accordingly, is not representative of the actual
results of operations of the Lakewood Shopping Center for the year ended
December 31, 1996 due to the exclusion of the following expenses, which may not
be comparable to the proposed future operations of the Property:
- Depreciation and amortization
- Interest on mortgage which was not assumed by the Company
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting and disclosure of revenue and certain expenses during the reporting
period to prepare the statement of revenue and certain expenses in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(3) RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from 3 to 30 years. The leases generally provide for minimum rent and
reimbursement of real estate taxes, common area maintenance and certain other
operating expenses. Certain leases also contain provisions for percentage rent.
No percentage rent was earned for the year ended December 31, 1996.
F-47
<PAGE>
LAKEWOOD SHOPPING CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(3) RENT REVENUE (CONTINUED)
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 786,353
1998............................................................................ 716,986
1999............................................................................ 643,166
2000............................................................................ 591,480
2001............................................................................ 537,384
Thereafter...................................................................... 3,718,611
------------
$ 6,993,980
------------
------------
</TABLE>
(4) CONCENTRATION OF CREDIT RISK
At December 31, 1996, one tenant, Raley's, individually accounted for more
than 10% of total revenue. Rent revenue earned, including recoveries, from this
tenant for the year ended December 31, 1996 was $427,443.
(5) SUBSEQUENT EVENT
On June 24, 1997, the Company purchased the Property for $9,450,000 in cash.
F-48
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL SEPTEMBER 1, 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................................... 1
Risk Factors................................................. 15
The Company.................................................. 28
Business and Growth Strategies............................... 31
Use of Proceeds.............................................. 34
Distribution Policy.......................................... 35
Capitalization............................................... 39
Dilution..................................................... 40
Selected Combined Financial Data............................. 41
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 43
Overview of the Company's Four Key Western U.S. Markets...... 51
Business and Properties...................................... 59
Management................................................... 71
Certain Relationships and Related Transactions............... 79
Structure and Formation Transactions of the Company.......... 80
Policies with Respect to Certain Activities.................. 82
Principal Stockholders....................................... 86
Description of Capital Stock................................. 87
Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws......................................... 92
Shares Eligible for Future Sale.............................. 97
Federal Income Tax Consequences.............................. 100
ERISA Considerations......................................... 114
Underwriting................................................. 116
Experts...................................................... 118
Legal Matters................................................ 119
Additional Information....................................... 119
Glossary..................................................... 120
Index to Financial Statements................................ F-1
</TABLE>
7,000,000 Shares
[LOGO]
Common Stock
---------------------
P R O S P E C T U S
---------------------
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
August 7, 1997
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