<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PAN PACIFIC RETAIL PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
------------------------
1631-B SOUTH MELROSE DRIVE
VISTA, CALIFORNIA 92083
(760) 727-1002
(Address of Principal Executive Offices)
------------------------
STUART A. TANZ
1631-B SOUTH MELROSE DRIVE
VISTA, CALIFORNIA 92083
(760) 727-1002
(Name and Address of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
WILLIAM J. CERNIUS JONATHAN A. BERNSTEIN
LATHAM & WATKINS BLAKE HORNICK
650 TOWN CENTER DRIVE PRYOR, CASHMAN, SHERMAN & FLYNN
SUITE 2000 410 PARK AVENUE, 10TH FLOOR
COSTA MESA, CALIFORNIA 92626 NEW YORK, NEW YORK 10022
(714) 540-1235 (212) 421-4100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ---------------------------- .
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ---------------------------- .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE (2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share........... 7,590,000 $21.00 $159,390,000 $48,300
</TABLE>
(1) Includes 990,000 shares which the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION--DATED JUNE 6, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
6,600,000 Shares
PAN PACIFIC RETAIL PROPERTIES, INC.
Common Stock
- -----------------------------------------------------------------------------
Pan Pacific Retail Properties, Inc. (the "Company"), a self-administered and
self-managed real estate investment trust (a "REIT"), has been formed 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 strong 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 96.3% was leased to 620 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 % of all shares of Common Stock outstanding after consummation
of the Offering. Upon consummation of the Offering, PPD will own in excess of
50% 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 % of the then outstanding
Common Stock.
Prior to the Offering, there has been no public market for the Common Stock of
the Company. It is currently anticipated that the initial public offering price
will be between $19.00 and $21.00 per share. See "Underwriting" for a discussion
of the factors to be 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 " ," 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 18 TO 30 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY, INCLUDING:
- Risks generally associated with real estate investment, property
management and development.
- Dependence on demand for shopping center space in the markets in which the
Properties are located, thereby increasing the risk that the Company will
be materially adversely affected by general economic conditions in those
markets.
- The 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, thereby increasing the risk that
the aggregate market value of the Common Stock may exceed the value of the
Company's total assets.
- Risks generally associated with real estate financing, including the
possibility that the Company may not be able to refinance outstanding
indebtedness upon maturity or that such indebtedness might be refinanced
at higher interest rates or otherwise on terms less favorable to the
Company than existing indebtedness.
- Conflicts of interest with, material benefits to, and controlling
influence of PPD and other affiliates of the Company in connection with
the Formation Transactions, consummation of the Offering and the operation
of the Company's ongoing businesses.
- Risks associated with the acquisition and development of properties
generally.
- Taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes and the resulting reduction in net
earnings of the Company available for distribution to stockholders.
- The distribution requirements of REITs 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.
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Price to Underwriting
Public Discounts and Commissions(1)
<S> <C> <C>
Per Share................................................. $ $
Total(3).................................................. $ $
<CAPTION>
Proceeds to
Company(2)
<S> <C>
Per Share................................................. $
Total(3).................................................. $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 990,000 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
$ , the total Underwriting Discounts and Commissions will be
$ and the total Proceeds to Company will be $ . See
"Underwriting."
- --------------------------------------------------------------------------------
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 , 1997.
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
, 1997
<PAGE>
[KEEP SPACE OPEN FOR MAP, PHOTOS, ETC.]
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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY............................ 1
The Company................................... 1
Risk Factors.................................. 3
Growth Strategies............................. 5
The Properties................................ 7
Overview of the Company's Key Western U.S.
Markets...................................... 9
Financing Policies............................ 11
The Unsecured Credit Facility................. 11
Existing Mortgage Debt........................ 12
Structure and Formation Transactions of the
Company...................................... 12
The Offering.................................. 15
Distributions................................. 15
Restrictions on Transfer...................... 15
Restrictions on Ownership of Common Stock..... 16
Tax Status of the Company..................... 16
Summary Selected Combined Financial Data...... 16
RISK FACTORS.................................. 18
Real Estate Investment Risks.................. 18
Price to be Paid for Properties and Other
Assets May Exceed Their Fair Market Value.... 20
Real Estate Financing Risks................... 21
Conflicts of Interests in the Formation
Transactions and the Business of the
Company...................................... 22
Risks Associated with the Recent Acquisition
and Development of Properties; Lack of
Operating History............................ 23
Risk of Acquisition and Development
Activities................................... 23
Adverse Consequences of Failure to Qualify as
a REIT; Other Tax Liabilities................ 24
Insurance..................................... 24
No Limitation on Debt......................... 25
Dependence on Key Management Personnel........ 25
Limits on Changes in Control.................. 25
Historical Losses............................. 26
Possible Environmental Liabilities............ 26
Effect on Common Stock Price of Shares
Available for Future Sale.................... 28
Immediate and Substantial Dilution............ 28
Absence of Prior Public Market for Common
Stock........................................ 28
<CAPTION>
PAGE
---------
<S> <C>
Changes in Policies Without Stockholder
Approval..................................... 28
Effect of Market Interest Rates on Price of
Common Stock................................. 29
Disposition of Properties with Built-In
Gain......................................... 29
Distributions to Stockholders Affected by Many
Factors...................................... 29
Distribution Payout Percentage................ 30
THE COMPANY................................... 31
General....................................... 31
History....................................... 33
BUSINESS AND GROWTH STRATEGIES................ 34
Business Strategies........................... 34
Growth Strategies............................. 34
USE OF PROCEEDS............................... 37
DISTRIBUTION POLICY........................... 38
CAPITALIZATION................................ 42
DILUTION...................................... 43
SELECTED FINANCIAL DATA....................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 46
Overview...................................... 46
Results of Operations......................... 46
Pro Forma Operating Results................... 50
Liquidity and Capital Resources............... 51
Cash Flows.................................... 52
Inflation..................................... 52
Impact of Accounting Pronouncements Issued but
not Adopted by the Company................... 53
OVERVIEW OF THE COMPANY'S KEY WESTERN U.S.
MARKETS...................................... 54
General....................................... 54
Northern California (San Francisco Bay Area)
Market....................................... 54
Southern California (Riverside and San
Bernardino) Market........................... 54
Las Vegas, Nevada Market...................... 54
Pacific Northwest (Seattle and Portland)
Market....................................... 54
BUSINESS AND PROPERTIES....................... 60
General....................................... 60
Leasing Activity.............................. 62
National, Regional and Local Tenant Summary... 64
Anchor, Non-Anchor Tenant Summary............. 65
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Major Tenants................................. 66
Lease Expirations............................. 67
Capital Expenditures.......................... 68
Other Assets.................................. 68
Excluded Assets............................... 69
Debt Structure................................ 69
Unsecured Credit Facility..................... 70
Insurance..................................... 70
Management and Employees...................... 71
Legal Proceedings............................. 71
Government Regulation......................... 71
MANAGEMENT.................................... 73
Directors and Executive Officers.............. 73
Committees of the Board of Directors.......... 74
Compensation of Directors..................... 75
Executive Compensation........................ 75
Employment Agreements......................... 76
Stock Incentive Plan.......................... 76
401(k) Plan................................... 80
Indemnification............................... 80
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................. 81
Terms of Transfers............................ 81
Director Designation.......................... 81
Registration Rights........................... 81
Assignment of Lease........................... 81
Preemptive Rights Agreement................... 81
Non-Competition Agreement..................... 81
STRUCTURE AND FORMATION TRANSACTIONS OF THE
COMPANY...................................... 82
Formation Transactions........................ 82
Benefits to Certain Individuals............... 82
Determination and Valuation................... 83
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES... 84
Investment Policies........................... 84
Dispositions.................................. 85
Financing Policies............................ 85
Working Capital Reserves...................... 86
Conflict of Interest Policies................. 86
Other Policies................................ 86
PRINCIPAL STOCKHOLDERS........................ 88
DESCRIPTION OF CAPITAL STOCK.................. 89
General....................................... 89
Common Stock.................................. 89
Transfer Agent and Registrar.................. 90
Preferred Stock............................... 90
<CAPTION>
PAGE
---------
<S> <C>
Power to Issue Additional Shares of Common
Stock and Preferred Stock.................... 90
Restrictions on Ownership and Transfer........ 90
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS................. 94
Board of Directors............................ 94
Removal of Directors.......................... 94
Business Combinations......................... 95
Control Share Acquisitions.................... 95
Amendment to the Charter and Bylaws........... 96
Meetings of Stockholders...................... 96
Advance Notice of Director Nominations and New
Business..................................... 96
Dissolution of the Company.................... 97
Limitation of Directors' and Officers'
Liability.................................... 97
Indemnification Agreements.................... 97
SHARES AVAILABLE FOR FUTURE SALE.............. 99
General....................................... 99
Registration Rights........................... 100
Reinvestment and Share Purchase Plan.......... 100
FEDERAL INCOME TAX CONSEQUENCES............... 100
Taxation of the Company....................... 101
Failure to Qualify............................ 106
Consequences of the Formation Transactions on
the Company's Qualification as a REIT --
Earnings and Profits Distribution
Requirement.................................. 107
Taxation of Taxable U.S. Stockholders
Generally.................................... 107
Backup Withholding............................ 108
Taxation of Tax-Exempt Stockholders........... 109
Taxation of Non-U.S. Stockholders............. 109
Tax Risks Associated with Partnerships........ 112
Other Tax Consequences........................ 113
ERISA CONSIDERATIONS.......................... 113
Fiduciary Considerations...................... 114
Plan Assets Issue............................. 114
UNDERWRITING.................................. 116
EXPERTS....................................... 118
LEGAL MATTERS................................. 118
ADDITIONAL INFORMATION........................ 118
GLOSSARY...................................... 120
INDEX TO FINANCIAL STATEMENTS................. F-1
</TABLE>
ii
<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 123 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 generally well established community and neighborhood
shopping centers strategically located 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 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, 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. Since December 31, 1993, the Company
has maintained a year-end weighted average occupancy rate ranging from 94.3% to
96.3% for the Properties owned at such dates. As of March 31, 1997, 96.3% of the
Properties' total GLA was leased to 620 tenants, of which 341 were national and
regional tenants (83.5% of the total leased GLA), such as Wal-Mart, United
Artist Theatres, Nordstrom Rack, Old Navy Clothing Co., Circuit City, Barnes &
Noble and Ross Dress for Less. 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. For example,
for the 13 Properties in PPD's portfolio since April 1, 1992, when current
management acquired those properties, average occupancy rates increased from
85.6% as of July 1, 1992 to 95.0% as of March 31, 1997 and total rental revenue
(including recoveries from tenants) increased from $19.1 million for the
13-month period ended December 31, 1992 to $26.3 million for the year ended
December 31, 1996.
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 nearly every shopping center complemented by a
carefully planned mix of national, regional and local non-anchor tenants. At
March 31, 1997, 73.1% of the total leased GLA was leased to national tenants,
10.4% to regional tenants, and 16.5% 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 consumer price index ("CPI") adjustments from the prior
base rent. At March 31, 1997, anchor tenants leased 56.7% 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. For
example, during the year ended December 31, 1996, the Company renewed or leased
290,480 square feet of non-anchor GLA for an average base rent of $14.88 per
square foot as compared to an average base rent of $11.31 per square foot under
expiring leases.
Management intends to continue its strategy of enhancing the value of the
Company through the acquisition of shopping centers that provide an opportunity
for the Company to expand its presence within its existing markets or to
establish a presence in new 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. The Company's strategy for growth will also focus on the build-out of
existing and acquired undeveloped pad space, the expansion possibilities at
certain of its Properties and the maximization of cash flow through its in-house
leasing and property management programs. The Company intends to continue to
aggresively pursue: (i) the leasing of currently available space; (ii) the
renewal and releasing of space under expiring leases; and (iii) economies of
scale in the management and leasing of its portfolio that may be realized by
focusing its acquisition and development activities within its four primary
regions.
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
strong 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") which
has been approved by Bank of America NT&SA subject to definitive documentation.
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
2
<PAGE>
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 $
capital contribution by PPD to the Company in connection with the Formation
Transactions, Revenue Properties (through its 100% ownership of PPD) will own in
excess of 50% of the common stock of the Company, par value $.01 per share (the
"Common Stock"). See "Principal Stockholders." Mark Tanz, Stuart Tanz, Russell
Tanz 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 owned 25,000 shares of common stock of Revenue Properties and upon
the consummation of the Offering, he 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:
- risks generally associated with real estate investment and property
management, such as the need to renew leases or relet space upon lease
expirations and, at times, to pay renovation and reletting costs in
connection therewith, the effect of economic and other conditions on
shopping center property cash flows and values, the ability of tenants to
make lease payments, bankruptcy and financial condition of tenants,
restrictions 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"),
the ability of a property to generate revenue sufficient to meet operating
expenses, including future debt service, and the illiquidity of real
estate investments, all of which may adversely affect the Company's
ability to make expected distributions to stockholders;
- dependence by the Company on demand for shopping center space in the
markets in which the Properties are located, thereby increasing the risk
that the Company will be materially adversely affected by general economic
conditions in those markets;
- the 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, thereby increasing the risk that
the aggregate market value of the Common Stock may exceed the value of the
Company's total assets;
3
<PAGE>
- risks generally associated with real estate financing, 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;
- conflicts of interest in the transactions relating to the formation of the
Company and the acquisition and refinancing of the Properties in
connection with such formation, 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;
- risk that the influence of certain affiliates of the Company (including
Revenue Properties) on the Company may not be consistent with the
interests of other stockholders;
- risks associated with the acquisition and development of properties
generally, including the risk of acquiring properties which may have
characteristics or deficiencies unknown to the Company affecting their
valuation or revenue potential, the risk that newly acquired properties
will fail to perform in accordance with expectations, and the risk
associated with integrating such acquisitions into the Company's existing
management structure;
- 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;
- the 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;
- risks that certain types of losses, such as from fire, earthquakes, and
floods, may be uninsured or may exceed the Company's insurance coverage;
- absence of a limitation in the organizational documents of the Company on
the amount of indebtedness that the Company may incur;
- dependence on key management personnel;
- 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 % 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;
- 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;
- effect that future sales of Common Stock may have on the market price of
shares of Common Stock;
- risks associated with the 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;
4
<PAGE>
- risks associated with the 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;
- risks associated with the effect of market interest rates on the market
price of the Common Stock;
- risks that the disposition of certain properties with built-in gain may
subject the Company to additional taxes; and
- risks associated with the Company's ability to make distributions to
stockholders.
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 implement
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 strong 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 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 its four key 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) significant local market expertise and
relationships with retailers within each market; (ii) long-standing
relationships with institutional and other owners of shopping center properties
in the Company's four primary regions; (iii) fully integrated real estate
operations which enable the Company to respond quickly to acquisition
opportunities and to capitalize on the resulting economies of scale; (iv) access
to capital as a public company, including the Unsecured Credit Facility; and (v)
the Company's reputation as an experienced purchaser of retail properties with
the ability to efficiently close transactions.
Although the Company believes that current market conditions generally favor
acquisitions, management intends to continue its practice of redeveloping and/or
expanding its Properties and redeveloping or renovating properties it may
acquire 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.
5
<PAGE>
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 $83.2 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
(132,620 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
436,342 square feet of GLA for an average base rent of $14.62 per square foot as
compared to an average base rent of $11.37 per square foot under expiring
leases); and (iii) economies of scale in the management and leasing of
properties that may be realized by focusing its acquisition and development
activities within its four primary regions.
There can be no assurance, however, that the Company will acquire any
properties; expand any of its existing Properties or develop any existing pads;
redevelop, renovate or expand properties it may acquire in the future; develop
any new properties; lease available space; renew or release space relating to
leases scheduled to expire; enter into renewals or new leases on space relating
to leases scheduled to expire that reflect rental rates greater than or equal to
the rates in the expiring leases; or experience any economies of scale.
6
<PAGE>
THE PROPERTIES
The following table sets forth certain information about each of the
Properties:
<TABLE>
<CAPTION>
TOTAL BASE RENT YEAR ENDED
TOTAL 12/31/96(2)
NUMBER -----------------------------
YEAR TOTAL % LEASED OF TENANTS % OF
COMPLETED/ GLA(1) AS OF AS OF BASE PORTFOLIO
PROPERTY AND LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97 RENT ($) BASE RENT
- ------------------------------------ ----------- ---------- ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 1988/1994 267,735 99.7 18 1,803,243 4.9
CHICO, CA
Monterey Plaza(6) 1990 183,180 95.2 27 2,378,836 6.5
SAN JOSE, CA
Lakewood Shopping Center(6) 1988 107,769 94.8 25 734,311 2.0
WINDSOR, CA
Fairmont Shopping Center(6) 1988 104,281 100.0 29 1,155,768 3.2
PACIFICA, CA
Rosewood Village 1988 50,248 92.5 18 657,146 1.8
SANTA ROSA, CA
Laguna Village(7) 1996 48,183 100.0 1 564,044 1.5
SACRAMENTO, CA ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 761,396 97.5 118 7,293,348 19.9
---------- --- ------------ -----
SOUTHERN CALIFORNIA
Chino Town Square(8) 1987 337,001 98.8 52 4,228,811 11.6
CHINO, CA
Melrose Village Plaza(8) 1990 132,674 91.9 28 1,348,826 3.7
VISTA, CA
Laurentian Center 1988 97,131 94.0 24 1,112,592 3.0
ONTARIO, CA
Vineyard Village East 1992 45,200 100.0 4 362,771 1.0
ONTARIO, CA
Foothill Center(6) 1990 19,636 75.2 9 89,406 0.3
RIALTO, CA
Arlington Courtyard 1991 12,221 100.0 6 150,826 0.4
RIVERSIDE, CA ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 643,863 96.0 123 7,293,232 20.0
---------- --- ------------ -----
LAS VEGAS NEVADA
Cheyenne Commons 1992 362,758 99.0 44 4,038,876 11.0
LAS VEGAS, NV
Sahara Pavilion North 1989 333,679 94.6 65 3,719,131 10.2
LAS VEGAS, NV
Sahara Pavilion South 1990 160,682 88.6 22 2,018,969 5.5
LAS VEGAS, NV
Green Valley Town & Country(6) 1990 130,553 98.4 37 1,557,966 4.3
HENDERSON, NV
Winterwood Pavilion 1990 127,975 92.3 21 919,868 2.5
LAS VEGAS, NV ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 1,115,647 95.3 189 12,254,810 33.5
---------- --- ------------ -----
<CAPTION>
ANNUALIZED BASE RENT IN
PLACE AT 3/31/97(3)
----------------------------
ANN. BASE
ANN. BASE RENT/SQ. FT.
PROPERTY AND LOCATION RENT(3)($) (4)($) MAJOR RETAILERS(5)
- ------------------------------------ ------------- ------------- ------------------------------------
<S> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 2,024,345 7.58 HomeBase, Food-4-Less, Barnes &
CHICO, CA Noble, Office Depot
Monterey Plaza(6) 2,438,232 13.98 Wal-Mart, Lucky(9), Walgreens
SAN JOSE, CA
Lakewood Shopping Center(6) 916,020 8.96 Raley's, U.S. Post Office
WINDSOR, CA
Fairmont Shopping Center(6) 1,193,820 11.45 Lucky, PayLess Drugs
PACIFICA, CA
Rosewood Village 706,766 15.21 Lad's Supermarket, Bradley Video
SANTA ROSA, CA
Laguna Village(7) 903,583 18.75 United Artists Theatre
SACRAMENTO, CA -------------
TOTAL/WEIGHTED AVERAGE 8,182,766 11.02
-------------
SOUTHERN CALIFORNIA
Chino Town Square(8) 4,232,087 12.71 Target(9), Wal-Mart, Mervyn's(9),
CHINO, CA Nordstrom Rack, AMC Theaters
Melrose Village Plaza(8) 1,372,450 11.26 Lucky, Sav-On Drug
VISTA, CA
Laurentian Center 1,146,126 12.55 Pep Boys, 24 Hour Fitness, A-1
ONTARIO, CA Hardware
Vineyard Village East 366,945 8.12 Sears, Dunn Edwards
ONTARIO, CA
Foothill Center(6) 107,460 7.28 PIP Printing
RIALTO, CA
Arlington Courtyard 150,082 12.28 Harvest Crusade
RIVERSIDE, CA -------------
TOTAL/WEIGHTED AVERAGE 7,375,150 11.93
-------------
LAS VEGAS NEVADA
Cheyenne Commons 4,088,435 11.38 Wal-Mart, 24 Hour Fitness, Ross
LAS VEGAS, NV Dress For Less
Sahara Pavilion North 3,977,448 12.60 Vons, Longs Drugs, TJMaxx,
LAS VEGAS, NV Shepler's, Border's Books
Sahara Pavilion South 1,948,751 13.69 Sports Authority, Office Max,
LAS VEGAS, NV Michael's Arts & Crafts
Green Valley Town & Country(6) 1,750,092 13.63 Lucky/Sav-On Superstore
HENDERSON, NV
Winterwood Pavilion 975,212 8.26 Vons, Heilig-Meyers Furniture
LAS VEGAS, NV -------------
TOTAL/WEIGHTED AVERAGE 12,739,938 11.98
-------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
TOTAL BASE RENT YEAR ENDED
TOTAL 12/31/96(2)
NUMBER -----------------------------
YEAR TOTAL % LEASED OF TENANTS % OF
COMPLETED/ GLA(1) AS OF AS OF BASE PORTFOLIO
PROPERTY AND LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97 RENT ($) BASE RENT
- ------------------------------------ ----------- ---------- ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
PACIFIC NORTHWEST
Sunset Square 1989 352,523 93.9 39 2,586,635 7.1
BELLINGHAM, WA
Tanasbourne Village(8) 1990 210,692 100.0 40 2,396,751 6.6
HILLSBORO, OR
Olympia Square 1988 164,521 96.1 37 1,808,273 4.9
OLYMPIA, WA
Canyon Ridge Plaza 1995 81,678 96.5 15 681,074 1.9
KENT, WA ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 809,414 96.2 131 7,472,733 20.4
---------- --- ------------ -----
OTHER
Maysville Market Square 1991/1993 126,507 100.0 19 848,777 2.3
MAYSVILLE, KY
Ocoee Plaza 1990 52,242 96.3 12 320,592 0.9
OCOEE, FL
Sports Unlimited 1990 51,542 100.0 13 600,803 1.6
MEMPHIS, TN
Country Club Center 1988 46,850 92.1 15 495,085 1.4
ALBUQUERQUE, NM ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 277,141 98.0 59 2,265,257 6.2
---------- --- ------------ -----
PORTFOLIO
TOTAL/WEIGHTED AVERAGE 3,607,461 96.3 620 36,579,380 100.0
---------- --- ------------ -----
---------- --- ------------ -----
<CAPTION>
ANNUALIZED BASE RENT IN
PLACE AT 3/31/97(3)
----------------------------
ANN. BASE
ANN. BASE RENT/SQ. FT.
PROPERTY AND LOCATION RENT(3)($) (4)($) MAJOR RETAILERS(5)
- ------------------------------------ ------------- ------------- ------------------------------------
<S> <C> <C> <C>
PACIFIC NORTHWEST
Sunset Square 2,595,047 7.84 Kmart, Ennen's Food, Fabricland,
BELLINGHAM, WA PayLess Drugs
Tanasbourne Village(8) 2,555,236 12.13 Safeway, PayLess Drugs, Jo-Ann
HILLSBORO, OR Fabrics, Pier 1 Imports
Olympia Square 1,861,866 11.70 Albertsons, Ross Dress For Less
OLYMPIA, WA
Canyon Ridge Plaza 839,604 10.65 Target(9), Top Foods(9), Ross Dress
KENT, WA ------------- For Less
TOTAL/WEIGHTED AVERAGE 7,851,753 10.08
-------------
OTHER
Maysville Market Square $ 872,135 6.89 Wal-Mart(9), Kroger Company, J.C.
MAYSVILLE, KY Penney
Ocoee Plaza 347,136 6.90 Food Lion, Family Dollar
OCOEE, FL
Sports Unlimited 601,737 11.67 Sports Unlimited(9), Rich-Well
MEMPHIS, TN Bedding Co., Hancock Fabrics
Country Club Center 483,711 11.21 Furr's Foods(9), Rio Rancho Health &
ALBUQUERQUE, NM ------------- Fitness
TOTAL/WEIGHTED AVERAGE 2,304,719 8.49
-------------
PORTFOLIO
TOTAL/WEIGHTED AVERAGE 38,454,326 11.07
-------------
-------------
</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 currently under
development.
(8) The Company owns a 92% 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) Retailers that own their building.
8
<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, median household income and retail
sales) are key factors which indicate the strength of a market for owning and
operating shopping centers. 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 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 are 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 15%
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>
9
<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 are expected
to experience median household income growth. Median household income in each of
these markets exceeds and is expected to continue to exceed the national
average.
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>
10
<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>
SOURCE: Survey of Buying Power; Robert Charles Lesser & Co.
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 % of the total market
capitalization of the Company. All of the indebtedness will bear interest at
fixed rates with a weighted average rate of 8.31% at March 31, 1997. The Company
intends to utilize one or more sources of capital for future acquisitions,
capital improvements and development activities by borrowing under the Unsecured
Credit Facility and undistributed cash flow.
THE UNSECURED CREDIT FACILITY
Bank of America NT&SA has approved, subject to definitive documentation, 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
11
<PAGE>
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 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 $103.1 million of
secured debt encumbering eight of the 25 Properties. The weighted average fixed
interest rate of this debt was 8.31% 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 $ in cash to the Company (the "PPD
Contribution").
- The Company will sell shares of Common Stock in the Offering.
- Approximately $ million or % 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 60 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."
12
<PAGE>
The following diagram depicts the ownership structure of the Company upon
completion of the Offering and the other Formation Transactions:
[GRAPH]
- ------------------------
(1) Each of these companies is a single-asset, bankruptcy remote subsidiary
formed in connection with a securitized debt financing completed in December
1996.
BENEFITS TO RELATED PARTIES. Certain affiliates of the Company will realize
certain material benefits in connection with the Formation Transactions,
including the following:
- In exchange for their respective ownership interests in certain Properties
and certain PPD entities, PPD and certain of its subsidiaries will become
beneficial owners of a total of shares of Common Stock, with a
total value of approximately $ million based on the assumed initial
public offering price of the Common Stock, which compares to a book value
of such interests and assets of approximately $376.6 million as of March
31, 1997. 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 $136.9 million of indebtedness (excluding accrued interest)
secured by certain of the Properties will be repaid in the Formation
Transactions.
- Approximately $103.1 million of indebtedness secured by certain of the
Properties have been or will be assumed by the Company in the Formation
Transactions.
- Guarantees by PPD and Revenue Properties of certain indebtedness will be
released.
- 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.
13
<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.
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 Formation Transactions and the Business of the
Company--Benefits from Formation" 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 % of the outstanding Common Stock; and (ii) PPD will own in excess
of 50% of the outstanding Common Stock. See "Underwriting" 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 the Company
after the Offering is approximately $ million (based on an assumed initial
public offering price of $20.00). The aggregate book value of the interests and
assets to be owned by the Company after the Offering is approximately $376.6
million.
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."
14
<PAGE>
THE OFFERING
All of the shares of Common Stock being offered in the Offering are being
offered by the Company.
<TABLE>
<S> <C>
Common Stock Offered Hereby................. 6,600,000 shares
Common Stock Outstanding after the
Offering.................................. shares
Use of Proceeds............................. Together with the proceeds from the PPD
Contribution: (i) repayment of $136.9 million
mortgage debt on the Properties (excluding
accrued interest); (ii) repayment of $
million in certain transaction costs including
fees and expenses associated with the
Unsecured Credit Facility; 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."
Anticipated NYSE Symbol.....................
</TABLE>
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 $ per share for a full quarter. On an
annualized basis, this would be $ per share, or an annual distribution
rate of %, % of which may represent a return of capital for tax
purposes, based on the assumed initial public offering price per share of
$20.00. The Company intends initially to distribute annually approximately %
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 TRANSFER
Participants in the Formation Transactions are prohibited from transferring
their shares of Common Stock, except under certain limited circumstances. PPD,
Stuart Tanz and the other executive officers of the Company have agreed not to
sell any shares of Common Stock for a period of three years after the completion
of the Offering without the consent of Prudential Securities Incorporated
("Prudential Securities"). See "Underwriting."
15
<PAGE>
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 % 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 its affiliates and the Tanz Family and
has permitted PPD and its affiliates to actually or constructively own up to
% 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 % of the outstanding Common Stock. See
"Risk Factors--Limits on Changes in Control" and "Description of Capital
Stock--Restrictions on Ownership and Transfer."
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 ("PPD Properties").
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 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.
16
<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
----------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue................................ $ 9,552 $ 7,660 $ 6,927 $ 38,245 $ 29,977 $ 24,915 $ 21,613
Recoveries from tenants....................... 1,960 1,747 1,601 7,546 6,323 5,588 5,575
Gain (loss) on sales of real estate........... -- -- -- -- -- 501 --
Other revenue................................. 301 185 -- 860 411 314 362
----------- --------- --------- ----------- --------- --------- ---------
Total revenue................................. 11,813 9,592 8,528 46,651 36,711 31,318 27,550
----------- --------- --------- ----------- --------- --------- ---------
Property expenses(2).......................... 2,629 2,225 2,005 10,292 8,452 7,779 7,321
Depreciation and amortization................. 2,205 1,861 1,805 8,901 7,397 6,553 6,372
Interest expense.............................. 2,298 3,919 3,706 8,615 15,082 12,671 11,781
General and administrative expenses........... 835 918 867 3,340 3,228 3,620 3,729
Other expenses................................ 242 450 556 180 1,981 1,247 1,592
Provision for impairment...................... -- -- -- -- -- -- --
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) before income tax expense and
minority interest........................... 3,604 219 (411) 15,323 571 (552) (3,245)
Income tax expense............................ -- (29) (42) -- (122) (87) (7)
Minority interest............................. (7) (7) 5 -- -- 24 36
----------- --------- --------- ----------- --------- --------- ---------
Net income (loss)............................. $ 3,597 $ 183 $ (448) $ 15,323 $ 449 $ (615) $ (3,216)
----------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- ---------
Pro forma net income per share (3)............
----------- -----------
----------- -----------
<CAPTION>
1993 1992(1)
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue................................ $ 23,250 $ 22,285
Recoveries from tenants....................... 3,795 3,503
Gain (loss) on sales of real estate........... 3,945 (1,209)
Other revenue................................. -- 410
--------- ---------
Total revenue................................. 30,990 24,989
--------- ---------
Property expenses(2).......................... 8,185 8,437
Depreciation and amortization................. 6,743 7,517
Interest expense.............................. 12,514 12,408
General and administrative expenses........... 3,116 4,460
Other expenses................................ 274 545
Provision for impairment...................... -- 9,984
--------- ---------
Income (loss) before income tax expense and
minority interest........................... 158 (18,362)
Income tax expense............................ -- --
Minority interest............................. -- --
--------- ---------
Net income (loss)............................. $ 158 $ (18,362)
--------- ---------
--------- ---------
Pro forma net income per share (3)............
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31,
------------------------ ------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Properties--net of accumulated depreciation and
amortization................................... $ 353,763 $ 291,874 $ 272,054 $ 259,624 $ 222,722 $ 196,340
Total assets..................................... 376,638 312,840 298,984 281,850 253,434 209,316
Notes payable.................................... 103,122 196,314 198,646 197,320 166,483 156,563
Total liabilities................................ 201,087 203,608 202,554 179,191 161,520
Minority interest................................ 1,462 1,462 1,455 1,455 1,479 --
Total owner's equity............................. 110,291 93,921 77,841 72,764 47,796
<CAPTION>
1992
---------
<S> <C>
BALANCE SHEET DATA:
Properties--net of accumulated depreciation and
amortization................................... $ 201,374
Total assets..................................... 208,803
Notes payable.................................... 168,815
Total liabilities................................ 175,750
Minority interest................................ --
Total owner's equity............................. 33,053
</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 1994
----------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(4)................. $ 5,756 $ 1,998 $ 1,315 $ 24,050 $ 7,672 $ 5,229 $ 3,007
Cash flows from:
Operating activities................... -- $ 1,408 $ 1,346 -- $ 5,749 $ 6,584 $ 2,528
Investing activities................... -- $ (20,371) $ (9,903) -- $ (18,052) $ (42,950) $ (34,014)
Financing activities................... -- $ 14,190 $ 6,395 -- $ 14,531 $ 26,712 $ 46,179
Number of operating Properties (at end of
period)................................ 25 20 18 25 19 18 13(5)
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 2,145,708(5)
Occupancy of Properties owned (at end of
period)................................ 95.8% 96.4% 94.7% 95.9% 96.0% 95.5% 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 net income per share equals pro forma net income divided by
shares of Common Stock to be outstanding after the Offering.
(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. 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.
17
<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.
REAL ESTATE INVESTMENT RISKS.
GENERAL 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.
RETENTION OF TENANTS AND RELETTING 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 2.4% and 36.3% 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 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.
GEOGRAPHIC CONCENTRATION. 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
18
<PAGE>
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.
LIQUIDITY 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. 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.
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 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
19
<PAGE>
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.
RISKS REGARDING PARTIALLY-OWNED PROPERTIES. The Company owns a 92% managing
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, 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. 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.
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
20
<PAGE>
Formation. 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 offering price, however, was determined based on negotiations between
the Company and the Underwriters, and the factors considered in determining such
price included, 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 FINANCING RISKS.
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 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 $103.1 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 $103.1 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 $54.1 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."
RISK OF 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."
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PERFORMANCE GUARANTEES ON CERTAIN INDEBTEDNESS. Upon completion of the
Offering and the Formation Transactions, the Company will assume certain
guarantees by Revenue Properties and PPD in connection with loans secured by
several of the Properties. In addition, the Company will become liable for the
indemnification obligations under the loans and guarantees being assumed by the
Company.
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 in excess of 50% 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, % of the total outstanding shares). In addition, PPD
will have the right to designate 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 % 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.
REPAYMENT OF CERTAIN DEBT. Prudential Securities, the lead managing
underwriter for the Offering, will receive approximately $ million
( % of the net Offering proceeds) as repayment of indebtedness and related
interest expected to be outstanding upon consummation of the Offering.
Prudential Securities' interests as a lender may conflict with its role as lead
managing underwriter. To address this conflict, has agreed to act as a
"qualified independent underwriter" in recommending the maximum initial public
offering price for the shares of Common Stock offered hereby. See
"Underwriting".
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. If the Company should elect in the
future to pursue acquisitions in Canada it may approach Revenue Properties with
respect to its portfolio or selected properties.
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RISKS ASSOCIATED WITH THE RECENT ACQUISITION AND DEVELOPMENT OF PROPERTIES;
LACK OF OPERATING HISTORY. After giving effect to the Formation Transactions,
the Company will own 25 Properties, consisting of over 3.6 million square feet
of GLA. The most recently acquired Properties may have characteristics or
deficiencies unknown to the Company affecting their valuation or revenue
potential, and it is also possible that the operating performance of the most
recently acquired 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 effectively manage additional properties or
that newly acquired properties will perform as expected.
RISK OF ACQUISITION AND DEVELOPMENT ACTIVITIES. 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.
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.
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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, 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."
INSURANCE. 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 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.
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NO LIMITATION ON DEBT. Upon completion of the Offering and the Formation
Transactions, the Company's debt to total market capitalization ratio will be
approximately % ( % if the Underwriters' over-allotment option is
exercised in full). The Company 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.
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."
LIMITS ON CHANGES IN CONTROL.
Certain provisions of Maryland law and 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 Articles of
Incorporation 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
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the ownership of stock of PPD or Revenue Properties) ownership of the
outstanding shares of Common Stock by any single stockholder to % 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 % of the outstanding
Common Stock (the "PPD Ownership Limit"). The Board of Directors has also 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 % 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 in excess of any such ownership limits (or,
under certain circumstances, will result in 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.
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."
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.
POSSIBLE 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
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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 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,
except as noted above. 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.
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EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Upon
completion of the Offering, the Company will have shares of Common Stock
outstanding ( 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 own 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 who have received restricted shares will not be permitted to 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. 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
$ per share (based on an assumed initial public offering price of
$20.00) 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 will be resold at or above the initial public offering
price. The initial public offering price of the Common Stock has been 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 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."
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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.
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
29
<PAGE>
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.
DISTRIBUTION PAYOUT PERCENTAGE. The Company's expected annual distributions
for the 12 months following consummation of the Offering of $ per share
are expected to be approximately % of estimated cash available for
distribution. If cash available for distribution generated by the Company's
assets for such 12-month period is less than the Company's estimate, or if such
cash available for distribution decreases in future periods from expected
levels, the Company's ability to make the expected distributions would be
adversely affected. Any such failure to make expected distributions could result
in a decrease in the market price of the Common Stock. See "Distribution
Policy."
30
<PAGE>
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 generally well established community and neighborhood
shopping centers strategically located 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 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, 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, 96.3% of the Properties' total GLA was leased to 620 tenants,
of which 341 were national and regional tenants (83.5% of the total leased GLA),
such as Wal-Mart, United Artist Theatres, Nordstrom Rack, Old Navy Clothing Co.,
Circuit City, Barnes & Noble and Ross Dress for Less. 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 97.5 118 $ 7,293,348
Southern California................ 6 643,863 17.9 96.0 123 7,293,232
Las Vegas, Nevada.................. 5 1,115,647 30.9 95.3 189 12,254,810
Pacific Northwest.................. 4 809,414 22.4 96.2 131 7,472,733
Other.............................. 4 277,141 7.7 98.0 59 2,265,257
--
----------- ----- --- --- -------------
Total............................ 25 3,607,461 100.0 96.3 620 $ 36,579,380
--
--
----------- ----- --- --- -------------
----------- ----- --- --- -------------
<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................ 19.9 $ 8,182,766 $ 11.02
Southern California................ 20.0 7,375,150 11.93
Las Vegas, Nevada.................. 33.5 12,739,938 11.98
Pacific Northwest.................. 20.4 7,851,753 10.08
Other.............................. 6.2 2,304,719 8.49
----- ------------- -----------
Total............................ 100.0 $ 38,454,326 $ 11.07
----- ------------- -----------
----- ------------- -----------
</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.
31
<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 nearly every shopping center complemented by a
carefully planned mix of national, regional and local non-anchor tenants. At
March 31, 1997, 73.1% of the total leased GLA was leased to national tenants,
10.4% leased to regional tenants, and 16.5% 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 56.7% of the total leased GLA and
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)................................ 2,539,375 266 73.1 $ 24,670,046 64.2 $ 9.72
Regional(1)................................ 359,965 75 10.4 4,736,559 12.3 13.16
Local(1)................................... 575,501 279 16.5 9,047,721 23.5 15.72
------------ --- ----- ------------- -----
Total/Weighted Average................... 3,474,841 620 100.0 $ 38,454,326 100.0 $ 11.07
------------ --- ----- ------------- -----
------------ --- ----- ------------- -----
Anchor(2).................................. 1,970,410 50 56.7 $ 15,414,533 40.1 $ 7.82
Non-Anchor(2).............................. 1,504,431 570 43.3 $ 23,039,793 59.9 15.31
------------ --- ----- ------------- -----
Total/Weighted Average................... 3,474,841 620 100.0 $ 38,454,326 100.0 $ 11.07
------------ --- ----- ------------- -----
------------ --- ----- ------------- -----
</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.
32
<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, a predecessor of PPD in 1992. 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 in excess of 50% 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 owned 25,000 shares of common stock of Revenue
Properties and upon the consummation of the Offering, he 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.
33
<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 strong 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. 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) significant
local market expertise and relationships with retailers within each market; (ii)
long-standing relationships with institutional and other owners of shopping
center properties in the Company's four primary regions; (iii) fully integrated
real estate
34
<PAGE>
operations which enable the Company to respond quickly to acquisition
opportunities and to capitalize on the resulting economies of scale; (iv) access
to capital as a public company, including the Unsecured Credit Facility; and (v)
the Company's reputation as an experienced purchaser of retail properties with
the ability to efficiently close transactions.
Although the Company believes that current market conditions generally favor
acquisitions, management intends to continue its practice of redeveloping and/or
expanding its Properties and redeveloping or renovating properties it may
acquire, 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 $83.2 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 metro 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.
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 entitled for a total of 122,000 square feet of GLA.
Development of the Property was pursued by the Company based on management's
35
<PAGE>
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 currently constructing 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
(132,620 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
436,342 square feet of GLA for an average base rent of $14.62 per square foot as
compared to an average base rent of $11.37 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 weighted average occupancy rate ranging from 94.3% to 96.3% for the
Properties owned at such dates. During the past three years, the Company has
renewed or released 972,745 square feet involving 297 lease transactions, and
base rents per square foot from such leasing activity increased from $11.52 in
1994 to $13.15 in 1995, and to $14.62 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 98 77
Square footage leased during period....................................... 436,342 278,834 257,569
Base rent per sq. ft.(1).................................................. $ 14.62 $ 13.15 $ 11.52
Tenant improvements per sq. ft.(2)........................................ $ 2.90 $ 3.72 $ 2.78
Leasing commissions per sq. ft.(3)........................................ $ 2.33 $ 1.91 $ 2.13
Effective rent per sq. ft.(4)............................................. $ 13.84 $ 12.01 $ 10.57
Occupancy for Properties owned at period end(%)(5)........................ 96.0 95.5 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.
36
<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 $ million
(approximately $ million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $20.00 per
share. The Company intends to apply the net proceeds of the Offering along with
the $ proceeds of the PPD Contribution, as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN
THOUSANDS)
<S> <C>
Repayment of existing mortgage debt (net of discounts/premiums)................ $ 136,905
Estimated transaction costs including fees and expenses associated with the
Unsecured Credit Facility....................................................
Working capital................................................................
-------------
Total........................................................................ $
-------------
-------------
</TABLE>
An aggregate of approximately $ million of indebtedness was incurred
within the last year, of which $ was incurred by PPD to acquire ,
$ was incurred to finance tenant improvements, $ was used to
repay certain indebtedness, and approximately $ was used to pay property
taxes, loan costs, legal fees and other expenses. The remainder was contributed
to working capital.
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 7.69% and a weighted average remaining term to
maturity of approximately 4.7 years as of March 31, 1997.
<TABLE>
<CAPTION>
PROPERTY
- ------------------------------------------------------------------ EXPECTED BALANCE
AS OF THE DATE
THE OFFERING IS
CONSUMMATED(1)
----------------
(IN THOUSANDS)
<S> <C>
Chico Crossroads.................................................. $ 13,650
Monterey Plaza.................................................... 18,371
Laguna Village.................................................... 4,747
Melrose Village Plaza............................................. 7,000
Sahara Pavilion South............................................. 12,530
Cheyene Commons................................................... 26,926
Winterwood Pavilion............................................... 6,158
Sunset Square..................................................... 22,382
Canyon Ridge Plaza................................................ 4,300
Tanasbourne Village............................................... 16,308
Sports Unlimited.................................................. 2,533
Ocoee Plaza....................................................... 2,000
--------
$ 136,905
--------
--------
</TABLE>
- ------------------------------
(1) Amounts may change due to amortization.
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
37
<PAGE>
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.
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 $ per share, which is an amount approximately
equivalent to a quarterly distribution of $ per share (which, if
annualized, would equal $ per share), or an annual yield of % based
on an assumed initial public offering price per share of $20.00. 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 % 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 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."
38
<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 distribution:
<TABLE>
<CAPTION>
AMOUNTS
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
--------------
<S> <C>
Pro forma income before minority interest for year ended December 31, 1996........................ $ 15,323
Plus pro forma income before minority interest for the three months ended March 31, 1997.......... 3,604
Less pro forma income before minority interest for the three months ended March 31, 1996.......... (3,187)
-------
Pro forma income before minority interest for the 12 months ended March 31, 1997.................. 15,740
Plus pro forma depreciation for the 12 months ended March 31, 1997(1)........................... 6,419
Plus pro forma amortization for the 12 months ended March 31, 1997(2)........................... 2,506
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............................ 24,491
Adjustments:
Net increases from renewed leases(3)............................................................ 486
Net increases from new leases(4)................................................................ 3,619
Net effect of lease expirations, assuming no renewals(5)........................................ (2,434)
Net change in interest expense(6)............................................................... (336)
-------
Pro forma Funds from Operations for the 12 months ending July 31, 1998 25,826
Net effect of straight-line rents(7)............................................................ (957)
Estimated capitalized tenant improvements and leasing commissions(8)............................ (1,463)
Estimated capital expenditures(9)............................................................... (180)
Scheduled debt principal payments(10)........................................................... (1,284)
Non-real estate amortization(11)................................................................ 511
-------
Estimated cash available for distribution for the 12 months ending July 31, 1998.................. $ 22,453
-------
-------
Total estimated initial annual distributions......................................................
-------
-------
Estimated initial annual distributions per share..................................................
-------
-------
Payout ratio based on estimated cash available for distributions..................................
-------
-------
</TABLE>
- ------------------------
(1) Pro forma depreciation of $6,419,000 for the year ended December 31, 1996
plus $1,597,000 for the period ended March 31, 1997 less $1,597,000 for the
period ended March 31, 1996.
(2) Pro forma amortization of $2,482,000 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 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 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 fully
executed leases on 52,454 square feet at Laguna Phase II, which is currently
under development. Rental revenue in the 12 months ended July 31, 1998 under
new leases at Laguna Phase II totals $706,743. Also includes a decrease in
Funds from Operations for Foothill Center of $10,610, representing the
difference between
39
<PAGE>
interest income collected in the pro forma 12 months ended March 31, 1997 of
$90,500 and the contractual rental revenue from existing leases Foothill
Center 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 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 $ 3.72 $ 2.90 $ 3.10
LC per square foot leased in period.............................. $ 2.13 $ 1.91 $ 2.33 $ 2.15
Total weighted average TI and LC................................. $ 5.25
Average annual square feet of leased space expiring during the
three 12 month periods following the Offering:................. 278,446
Total estimated annual TI and LC................................. $ 1,463
</TABLE>
(9) 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.
(10) Calculations based on pro forma debt outstanding for the 12 months ending
July 31, 1998 and the principal payments related to such indebtedness.
(11) 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); (ii) the amortization of $201,000 in
financing costs associated with the debt to remain after consummation of the
Formation Transactions and the Offering; and (iii) the amortization of the
note payable premium, calculated in accordance with GAAP, associated with
the debt encumbering the Green Valley property of $144,000 for the 12 months
ending July 31, 1998.
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 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.
40
<PAGE>
Based on the estimated cash available for distribution set forth in the table
above, the Company believes that approximately % of distributions for the 12
months following consummation of the Offering would represent a return of
capital. If actual cash available for distribution or taxable income vary from
these amounts, the percentage of distributions which represent a return of
capital may be materially different. 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.
41
<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)........................................................................ $ 196,314 $ 103,122
Borrowings under Unsecured Credit Facility(2)........................................... -- --
---------- -----------
Total debt................................................................................ 196,314 103,122
---------- -----------
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, none issued or
outstanding(3)........................................................................ --
Capital in excess of par value.......................................................... --
Owner's equity.......................................................................... 110,291
----------
Total equity.............................................................................. 110,291
---------- -----------
Total capitalization...................................................................... $ 306,605 $
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) The amount of existing mortgage debt is expected to be approximately $239.1
million immediately prior to the closing date of the Offering.
(2) The Company is negotiating definitive 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 the Stock Incentive Plan. See "Management--Stock
Incentive Plan." Includes 130,000 restricted shares of Common Stock to be
issued to certain individuals.
42
<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 an assumed initial public offering price. At March 31, 1997, the Company
had a combined net tangible book value of approximately $ , or $ per
share of Common Stock. After giving effect to the sale of the shares of Common
Stock offered hereby at an assumed initial public offering price of $20.00 per
share of Common Stock, the deduction of underwriting discounts and commissions
and estimated Offering expenses and the receipt by the Company of approximately
$ in net proceeds from the Offering, the pro forma net tangible book value
at March 31, 1997 would have been , or $ per share of Common Stock.
This amount represents an immediate dilution in pro forma net tangible book
value of $ 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 per share..................... $ 20.00
Pro forma net tangible book value before the Offering(1)..........
Increase in pro forma net tangible book value attributable
to the Offering and Formation Transactions...................... $
---------
Pro forma net tangible book value after the Offering(2)............. $
---------
Dilution in pro forma net tangible book value to new investors(3)... $
---------
---------
</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 $ million
divided by 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 assumed 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 , 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) CONTRIBUTIONS AVERAGE PRICE
------------------------- -------------------------- PER
NUMBER PERCENT PERCENT SHARE
------------ ----------- AMOUNT ----------- -------------
-------------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
New investors................................ 6,600,000 % $ 132,000(2) % $ 20.00(4)
Shares issued in connection with the
Formation Transactions..................... % (3) % $
------------ ----------- ------------- -----------
Total................................ 100.00% $ 100%
------------ ----------- ------------- -----------
------------ ----------- ------------- -----------
</TABLE>
- ------------------------
(1) Reflects the shares of Common Stock offered hereby in exchange for assets
contributed in connection with the Formation Transactions.
(2) This amount is based on the assumed initial public offering price of $20.00.
(3) Based on the March 31, 1997 pro forma book value of the assets.
(4) Before deducting the Underwriter's discount and Offering expenses estimated
to be $10,560,000.
43
<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. 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 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.
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 HISTORICAL
PRO FORMA PRO FORMA COMBINED HISTORICAL
----------- -------------------- ----------- ------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993
----------- --------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue........................ $ 9,552 $ 7,660 $ 6,927 $ 38,245 $ 29,977 $ 24,915 $ 21,613 $ 23,250
Recoveries from tenants............... 1,960 1,747 1,601 7,546 6,323 5,588 5,575 3,795
Gain (loss) on sales of real estate... -- -- -- -- -- 501 -- 3,945
Other revenue......................... 301 185 -- 860 411 314 362 --
----------- --------- --------- ----------- --------- --------- --------- ---------
Total revenue......................... 11,813 9,592 8,528 46,651 36,711 31,318 27,550 30,990
----------- --------- --------- ----------- --------- --------- --------- ---------
Property expenses(2).................. 2,629 2,225 2,005 10,292 8,452 7,779 7,321 8,185
Depreciation and amortization......... 2,205 1,861 1,805 8,901 7,397 6,553 6,372 6,743
Interest expense...................... 2,298 3,919 3,706 8,615 15,082 12,671 11,781 12,514
General and administrative expenses... 835 918 867 3,340 3,228 3,620 3,729 3,116
Other expenses........................ 242 450 556 180 1,981 1,247 1,592 274
Provision for impairment.............. -- -- -- -- -- -- -- --
----------- --------- --------- ----------- --------- --------- --------- ---------
Income (loss) before income tax
expense and minority interest....... 3,604 219 (411) 15,323 571 (552) (3,245) 158
Income tax expense.................... -- (29) (42) -- (122) (87) (7) --
Minority interest..................... (7) (7) 5 -- -- 24 36 --
----------- --------- --------- ----------- --------- --------- --------- ---------
Net income (loss)..................... $ 3,597 $ 183 $ (448) $ 15,323 $ 449 $ (615) $ (3,216) $ 158
----------- --------- --------- ----------- --------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- --------- ---------
Pro forma net income per share(3).....
----------- -----------
----------- -----------
<CAPTION>
1992(1)
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue........................ $ 22,285
Recoveries from tenants............... 3,503
Gain (loss) on sales of real estate... (1,209)
Other revenue......................... 410
---------
Total revenue......................... 24,989
---------
Property expenses(2).................. 8,437
Depreciation and amortization......... 7,517
Interest expense...................... 12,408
General and administrative expenses... 4,460
Other expenses........................ 545
Provision for impairment.............. 9,984
---------
Income (loss) before income tax
expense and minority interest....... (18,362)
Income tax expense.................... --
Minority interest..................... --
---------
Net income (loss)..................... $ (18,362)
---------
---------
Pro forma net income per share(3).....
</TABLE>
44
<PAGE>
THE COMPANY (PRO FORMA) AND PPD PROPERTIES (COMBINED HISTORICAL)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
<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....... $ 353,763 $ 291,874 $ 272,054 $ 259,624 $ 222,722 $ 196,340 $ 201,374
Total assets.......................... 376,638 312,840 298,984 281,850 253,434 209,316 208,803
Notes payable......................... 103,122 196,314 198,646 197,320 166,483 156,563 168,815
Total liabilities..................... 201,087 203,608 202,554 179,191 161,520 175,750
Minority interest..................... 1,462 1,462 1,455 1,455 1,479 -- --
Total owner's equity.................. 110,291 93,921 77,841 72,764 47,796 33,053
</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)............... $ 5,756 $ 1,998 $ 1,315 $ 24,050 $ 7,672 $ 5,229 $ 3,007
Cash flows from:
Operating activities................. -- $ 1,408 $ 1,346 -- $ 5,749 $ 6,584 $ 2,528
Investing activities................. -- $ (20,371) $ (9,903) -- $ (18,052) $ (42,950) $ (34,014)
Financing activities................. -- $ 14,190 $ 6,395 -- $ 14,531 $ 26,712 $ 46,179
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)........................... 95.8% 96.4% 94.7% 95.9% 96.0% 95.5% 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 net income per share equals pro forma net income divided by
[ ] shares of Common Stock to be outstanding after the Offering.
(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. 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.
45
<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 $13,661,000 or $4.93 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 $12,646,000 or $5.36 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 $1,064,000 or 12.5% to $9,592,000 for the three
months ended March 31, 1997 as compared to $8,528,000 for the three months ended
March 31, 1996.
Rental revenue increased by $733,000 or 10.6% to $7,660,000 from $6,927,000
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 $146,000 or 9.1% to $1,747,000 for the
three months ended March 31, 1997, compared to $1,601,000, 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 79.0% of property operating expenses and property taxes for
the three months ended March 31, 1997 as compared to 80.3% 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 $1,511,000, and $1,434,000, 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
$140,000 or 25.0% for the three months ended March 31,
46
<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 $56,000 or 3.1% to $1,861,000 from $1,805,000, 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 $213,000 or 5.7% 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 9.6% from 10.2% 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.......................................................... $ 7,268,000 $ 6,927,000
Recoveries from tenants......................................... 1,635,000 1,601,000
Other........................................................... 151,000 --
------------ ------------
9,054,000 8,528,000
Expenses:
Property operating, property taxes and property management
fees.......................................................... 2,056,000 2,005,000
------------ ------------
Operating income.................................................. $ 6,998,000 $ 6,523,000
------------ ------------
------------ ------------
</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 $475,000.
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
$85,000 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 $23,000 at Tanasbourne Village. Property operating
expenses for these Same Store Properties increased by $51,000 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.
47
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Total revenue increased by $5,393,000 or 17.2% to $36,711,000 for the year
ended December 31, 1996, as compared to $31,318,000 for the year ended December
31, 1995.
Rental revenue increased $5,062,000 or 20.3% to $29,977,000 for the year
ended December 31, 1996, as compared to $24,915,000 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 $6,323,000 for the year ended December
31, 1996, an increase of $735,000 or 13.2%, as compared to $5,588,000 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 75.3% of property operating expenses and property taxes as
compared to 72.3% 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 $6,116,000, an increase of $391,000 or 6.8%, from
$5,725,000 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 $277,000 or 13.8% to $2,285,000
for the year ended December 31, 1996, compared to $2,008,000 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 $844,000 or 12.9% to $7,397,000
from $6,553,000 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
$2,411,000 or 19.0% to $15,082,000, as compared to $12,671,000 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 8.8%
during 1996 from 11.6% 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
48
<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....................................................... $ 23,721,000 $ 23,347,000
Recoveries from tenants...................................... 5,248,000 5,303,000
Other........................................................ 324,000 300,000
------------- -------------
29,293,000 28,950,000
Expenses:
Property operating, property taxes and property management
fees....................................................... 7,174,000 6,975,000
------------- -------------
Operating income............................................... $ 22,119,000 $ 21,975,000
------------- -------------
------------- -------------
</TABLE>
Operating income for the Same Store Properties for the year ended December
31, 1996 increased over the prior year by $144,000. This increase was
attributable to increased rental revenue due to increased occupancy levels at
North Coast Health Center and Rosewood Village. In addition, a lease termination
fee of approximately $154,000 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 $199,000 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, an increase in marketing, landscaping and
general maintenance expenses at Sahara Pavilion South of approximately $35,000
and an increase in leasehold rent of approximately $80,000 at North Coast Health
Center.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
Total revenue increased by $3,768,000 or 13.7% to $31,318,000 for the year
ended December 31, 1995, compared to $27,550,000 for the year ended December 31,
1994.
Rental revenue increased by $3,302,000 or 15.3% to $24,915,000 for the year
ended December 31, 1995, compared to $21,613,000 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 $2,476,000 to rental revenue in 1995.
Recoveries from tenants increased by $13,000 or 0.2% to $5,588,000 for the
year ended December 31, 1995, compared to $5,575,000 for the year ended December
31, 1994. Recoveries from tenants for 1995 represent 72.3% of property operating
expenses and property taxes as compared to 77.8% 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 $5,725,000 and
$4,884,000 for the years ended December 31, 1995
49
<PAGE>
and 1994, respectively. The increase was primarily attributable to the
acquisition of the properties. The 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 $270,000 or 11.9% to $2,008,000 for the year ended
December 31, 1995 compared to $2,278,000 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 $181,000 or 2.8% to $6,553,000 from $6,372,000 for the year ended
December 31, 1994 primarily due to the acquisition of Cheyenne Commons.
Interest expense for 1995 increased by $890,000 or 7.6% to $12,671,000
compared to $11,781,000 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.
This change resulted from decreases in miscellaneous general and
administrative expenses such as equipment lease and insurance costs. General and
administrative expenses decreased by $109,000 or 2.9% in 1995 compared to 1994.
General and administrative expenses as a percentage of total revenue decreased
to 11.6% during 1995 from 13.5% 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 $3,597,000 for the
three months ended March 31, 1997, compared to the historical net income of
$183,000 for the same period. The $3,414,000 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 $137,000,000 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
$2,221,000 as a result of these acquisitions while expenses, other than
interest, increased by approximately $800,000 due to the acquired properties.
The net reduction in pro forma interest expense of $1,621,000, 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 $15,323,000 for
the year ended December 31, 1996, compared to the historical net income of
$449,000 for the same period. The $14,874,000 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 $137,000,000 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 $9,940,000 as a result of these acquisitions, while expenses, other than
interest, increased by approximately $3,606,000 due to the additional expenses
associated with the acquired properties. There was a net
50
<PAGE>
reduction in pro forma interest expense of $6,467,000, due to 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.
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 $137,000,000. This will result in a significant
reduction in annual mortgage interest expense as a percentage of total revenue
(18.5% on a pro forma basis as compared to 41.1% 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 $ with total debt
(exclusive of accounts payable and accrued expenses) of approximately
$103,122,000. As a result, the Company's debt to total market capitalization
ratio will be approximately % ( % 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 $37,092,000, $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.
51
<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 increased by $62,000 to $1,408,000
for the three months ended March 31, 1997, as compared to $1,346,000 for the
three months ended March 31, 1996. The increase was primarily the result of an
increase in net income offset by a decrease in accounts payable, accrued
expenses and other liabilities. Net cash used in investing activities increased
by $10,468,000 to $20,371,000 for the three months ended March 31, 1997,
compared to $9,903,000 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 $7,795,000 to $14,190,000 for the three months ended
March 31, 1997, compared to $6,395,000 for the three months ended March 31,
1996. The increase was primarily the result of a $12,660,000 increase in
advances from parent offset by a $5,806,000 decrease in indebtedness.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER
31, 1995.
Net cash provided by operating activities decreased by $835,000 to
$5,749,000 for the year ended December 31, 1996, compared to $6,584,000 for the
year ended December 31, 1995. The decrease was primarily the result of a
decrease in accounts payable and an increase in accounts and accrued rent
receivable partially offset by an increase in net income. Net cash used in
investing activities decreased by $24,898,000 to $18,052,000 for the year ended
December 31, 1996, compared to $42,950,000 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 $12,181,000 to $14,531,000 for the
year ended December 31, 1996, compared to $26,712,000 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 $4,056,000 to
$6,584,000 for the year ended December 31, 1995, compared to $2,528,000 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 $8,936,000 to $42,950,000 for
the year ended December 31, 1995, compared to $34,014,000 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 $19,467,000 to $26,712,000 for the year ended
December 31, 1995, compared to $46,179,000 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.
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.
52
<PAGE>
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.
53
<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 are 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 15% 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>
54
<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 are expected
to experience median household income growth. Median household income in each of
these markets exceeds and is expected to continue to exceed the national
average.
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>
SOURCE: Claritas; Robert Charles Lesser & Co.
55
<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>
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 reflect stronger growth than the overall region.
56
<PAGE>
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 have
experienced or are 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. In addition, this
submarket's population growth exceeds and is expected to continue to exceed the
rate for Northern California and the nation. 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>
SOURCE: Claritas; Robert Charles Lesser & Co.
57
<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 have 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. Furthermore, this submarket's
growth in median household income has exceeded and is expected to exceed that of
Northern California. Both the 1996 Riverside/San Bernardino area median
household income of $35,000 and the expected growth trend trail the
corresponding Southern California statistics.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEDIAN HOUSEHOLD INCOME TRENDS
<S> <C> <C> <C> <C>
Median Household Income and Annual Growth Rates
1990 Income 1996 Income 2001 Income Increase (1990-1996)
($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>
58
<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>
SOURCE: Survey of Buying Power; Robert Charles Lesser & Co.
59
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Properties are generally well established community and neighborhood
shopping centers strategically located in densely populated, middle and upper
income markets and are conveniently located and easily accessible from major
transportation arterials. 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 strong 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, 96.3% of the Properties' total GLA was leased
to 620 tenants, of which 341 were national and regional tenants (83.5% of the
total leased GLA), such as Wal-Mart, United Artists Theatre, Nordstrom Rack, Old
Navy Clothing Co., Circuit City, Barnes & Noble and Ross Dress for Less. Sixteen
of the Properties are anchored by national or regional supermarkets such as
Albertson's, Kroger, Food-4-Less, Vons, Lucky Stores and Safeway.
60
<PAGE>
The following table sets forth certain information about each of the
Properties:
<TABLE>
<CAPTION>
TOTAL BASE RENT
YEAR ENDED
12/31/96(2)
TOTAL NUMBER ---------------------------
YEAR TOTAL % LEASED OF TENANTS % OF
COMPLETED/ GLA(1) AS OF AS OF BASE RENT PORTFOLIO
PROPERTY AND LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97 ($) BASE RENT
- ------------------------------------- ------------- ---------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 1988/1994 267,735 99.7 18 1,803,243 4.9
CHICO, CA
Monterey Plaza(6) 1990 183,180 95.2 27 2,378,836 6.5
SAN JOSE, CA
Lakewood Shopping Center(6) 1988 107,769 94.8 25 734,312 2.0
WINDSOR, CA
Fairmont Shopping Center(6) 1988 104,281 100.0 29 1,155,768 3.2
PACIFICA, CA
Rosewood Village 1988 50,248 92.5 18 657,146 1.8
SANTA ROSA, CA
Laguna Village(7) 1996 48,183 100.0 1 564,044 1.5
SACRAMENTO, CA ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 761,396 97.5 118 7,293,348 19.9
---------- --- ------------ -----
SOUTHERN CALIFORNIA
Chino Town Square(8) 1987 337,001 98.8 52 4,228,811 11.6
CHINO, CA
Melrose Village Plaza(8) 1990 132,674 91.9 28 1,348,826 3.7
VISTA, CA
Laurentian Center 1988 97,131 94.0 24 1,112,592 3.0
ONTARIO, CA
Vineyard Village East 1992 45,200 100.0 4 362,771 1.0
ONTARIO, CA
Foothill Center(6) 1990 19,636 75.2 9 89,407 0.3
RIALTO, CA
Arlington Courtyard 1991 12,221 100.0 6 150,826 0.4
RIVERSIDE, CA ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 643,863 96.0 123 7,293,232 20.0
---------- --- ------------ -----
LAS VEGAS NEVADA
Cheyenne Commons 1992 362,758 99.0 44 4,038,876 11.1
LAS VEGAS, NV
Sahara Pavilion North 1989 333,679 94.6 65 3,719,131 10.2
LAS VEGAS, NV
Sahara Pavilion South 1990 160,682 88.6 22 2,018,969 5.5
LAS VEGAS, NV
Green Valley Town & Country(6) 1990 130,553 98.4 37 1,557,966 4.3
HENDERSON, NV
Winterwood Pavilion 1990 127,975 92.3 21 919,868 2.5
LAS VEGAS, NV ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 1,115,647 95.3 189 12,254,810 33.5
---------- --- ------------ -----
PACIFIC NORTHWEST
Sunset Square 1989 352,523 93.9 39 2,586,635 7.1
BELLINGHAM, WA
Tanasbourne Village(8) 1990 210,692 100.0 40 2,396,751 6.6
HILLSBORO, OR
Olympia Square 1988 164,521 96.1 37 1,808,273 4.9
OLYMPIA, WA
Canyon Ridge Plaza 1995 81,678 96.5 15 681,074 1.9
KENT, WA ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 809,414 96.2 131 7,472,733 20.4
---------- --- ------------ -----
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT
3/31/97(3)
----------------------------
ANN. BASE
ANN. BASE RENT/SQ. FT.
PROPERTY AND LOCATION RENT(3)($) (4)($) MAJOR RETAILERS(5)
- ------------------------------------- ------------- ------------- ------------------------------------
<S> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 2,024,345 7.58 HomeBase, Food-4-Less, Barnes &
CHICO, CA Noble, Office Depot
Monterey Plaza(6) 2,438,232 13.98 Wal-Mart, Lucky(9), Walgreens
SAN JOSE, CA
Lakewood Shopping Center(6) 916,020 8.96 Raley's, U.S. Post Office
WINDSOR, CA
Fairmont Shopping Center(6) 1,193,820 11.45 Lucky, PayLess Drugs
PACIFICA, CA
Rosewood Village 706,766 15.21 Lad's Supermarket, Bradley Video
SANTA ROSA, CA
Laguna Village(7) 903,583 18.75 United Artists Theatre
SACRAMENTO, CA -------------
TOTAL/WEIGHTED AVERAGE 8,182,766 11.02
-------------
SOUTHERN CALIFORNIA
Chino Town Square(8) 4,232,087 12.71 Target(9), Wal-Mart, Mervyn's(9),
CHINO, CA Nordstrom Rack, AMC Theaters
Melrose Village Plaza(8) 1,372,450 11.26 Lucky, Sav-On Drug
VISTA, CA
Laurentian Center 1,146,126 12.55 Pep Boys, 24 Hour Fitness, A-1
ONTARIO, CA Hardware
Vineyard Village East 366,945 8.12 Sears, Dunn Edwards
ONTARIO, CA
Foothill Center(6) 107,460 7.28 PIP Printing
RIALTO, CA
Arlington Courtyard 150,083 12.28 Harvest Crusade
RIVERSIDE, CA -------------
TOTAL/WEIGHTED AVERAGE 7,375,150 11.93
-------------
LAS VEGAS NEVADA
Cheyenne Commons 4,088,434 11.38 Wal-Mart, 24 Hour Fitness, Ross
LAS VEGAS, NV Dress For Less
Sahara Pavilion North 4,018,259 12.60 Vons, Longs Drugs, TJMaxx,
LAS VEGAS, NV Shepler's, Border's Books
Sahara Pavilion South 1,948,751 13.69 Sports Authority, Office Max,
LAS VEGAS, NV Michael's Arts & Crafts
Green Valley Town & Country(6) 1,750,092 13.63 Lucky/Sav-On Superstore
HENDERSON, NV
Winterwood Pavilion 975,212 8.26 Vons, Heilig-Meyers Furniture
LAS VEGAS, NV -------------
TOTAL/WEIGHTED AVERAGE 12,739,938 11.98
-------------
PACIFIC NORTHWEST
Sunset Square 2,595,047 7.84 Kmart, Ennen's Food, Fabricland,
BELLINGHAM, WA PayLess Drugs
Tanasbourne Village(8) 2,555,236 12.13 Safeway, PayLess Drugs, Jo-Ann
HILLSBORO, OR Fabrics, Pier 1 Imports
Olympia Square 1,861,866 11.78 Albertsons, Ross Dress For Less
OLYMPIA, WA
Canyon Ridge Plaza 839,604 10.65 Target(9), Top Foods(9), Ross Dress
KENT, WA ------------- For Less
TOTAL/WEIGHTED AVERAGE 7,851,753 10.08
-------------
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
TOTAL BASE RENT
YEAR ENDED
12/31/96(2)
TOTAL NUMBER ---------------------------
YEAR TOTAL % LEASED OF TENANTS % OF
COMPLETED/ GLA(1) AS OF AS OF BASE RENT PORTFOLIO
PROPERTY AND LOCATION EXPANDED (SQ. FT.) 3/31/97 3/31/97 ($) BASE RENT
- ------------------------------------- ------------- ---------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
OTHER
Maysville Market Square 1991/1993 126,507 100.0 19 848,777 2.3
MAYSVILLE, KY
Ocoee Plaza 1990 52,242 96.3 12 320,592 0.9
OCOEE, FL
Sports Unlimited 1990 51,542 100.0 13 600,803 1.6
MEMPHIS, TN
Country Club Center 1988 46,850 92.1 15 495,085 1.4
ALBUQUERQUE, NM ---------- --- ------------ -----
TOTAL/WEIGHTED AVERAGE 277,141 98.0 59 2,265,257 6.2
---------- --- ------------ -----
PORTFOLIO
TOTAL/WEIGHTED AVERAGE 3,607,461 96.3 620 6,579,380 100.0
---------- --- ------------ -----
---------- --- ------------ -----
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT
3/31/97(3)
----------------------------
ANN. BASE
ANN. BASE RENT/SQ. FT.
PROPERTY AND LOCATION RENT(3)($) (4)($) MAJOR RETAILERS(5)
- ------------------------------------- ------------- ------------- ------------------------------------
<S> <C> <C> <C>
OTHER
Maysville Market Square 872,135 6.89 Wal-Mart(9), Kroger Company, J.C.
MAYSVILLE, KY Penney
Ocoee Plaza 347,136 6.90 Food Lion, Family Dollar
OCOEE, FL
Sports Unlimited 601,737 11.67 Sports Unlimited(9), Rich-Well
MEMPHIS, TN Bedding Co., Hancock Fabrics
Country Club Center 483,711 11.21 Furr's Foods(9), Rio Rancho Health &
ALBUQUERQUE, NM ------------- Fitness
TOTAL/WEIGHTED AVERAGE 2,304,719 8.49
-------------
PORTFOLIO
TOTAL/WEIGHTED AVERAGE 8,454,326 11.07
-------------
-------------
</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
under development.
(8) The Company owns a 92% 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) Retailers that own their building.
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 with national and regional anchor tenants
and enters into shorter term leases 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
94.3% to 96.3% for the Properties it owned at such dates. During the past three
years, the Company has renewed or released 972,745 square feet involving 297
lease transactions, and weighted average base rents per square foot from this
leasing activity increased from $11.52 in 1994 to $13.15 in 1995, and to $14.62
in 1996.
62
<PAGE>
The following table sets forth certain information regarding the Company's
leasing activities over the past three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31(1)
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- --------------------------------- --------------------
NON- NON- NON-
ANCHORS ANCHORS TOTAL ANCHORS ANCHORS TOTAL ANCHORS ANCHORS
--------- --------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEW LEASES
Number of leases signed............... 71 4 75 51 2 53 48 3
GLA leased (sq. ft.).................. 188,394 111,285 299,679 129,995 47,200 177,195 99,910 98,892
Base rent/square foot
($/sq. ft.)(2)...................... 13.44 13.13 13.33 12.78 8.24 11.57 13.53 7.25
Tenant improvements/square foot
($/sq. ft.)(3)...................... 4.45 2.70 3.80 6.25 2.07 5.13 5.39 1.33
Leasing commissions/square foot
($/sq. ft.)(4)...................... 2.94 2.46 2.76 2.53 1.27 2.19 3.66 0.98
Effective rent/square foot
($/sq. ft.)(5)...................... 12.10 12.90 12.40 10.96 7.91 10.14 11.58 7.02
RENEWALS
Number of renewals signed............. 46 1 47 45 -- 45 25 1
GLA leased (sq. ft.).................. 102,086 34,577 136,663 101,639 -- 101,639 41,699 17,068
Base rent/square foot
($/sq. ft.)(2)...................... 17.53 17.23 17.45 15.89 NA 15.89 17.01 11.12
Tenant improvements/square foot
($/sq. ft.)(3)...................... 1.22 -- 0.91 1.25 NA 1.25 1.09 --
Leasing commissions/square foot
($/sq. ft.)(4)...................... 1.44 1.16 1.37 1.40 NA 1.40 1.23 2.00
Effective rent/square foot
($/sq. ft.)(5)...................... 16.92 17.16 16.98 15.25 NA 15.25 16.49 10.72
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases
signed.............................. 117 5 122 96 2 98 73 4
GLA leased (sq. ft.).................. 290,480 145,862 436,342 231,634 47,200 278,834 141,609 115,960
Base rent/square foot
($/sq. ft.)(2)...................... 14.88 14.10 14.62 14.15 8.24 13.15 14.55 7.82
Tenant improvements/square foot
($/sq. ft.)(3)...................... 3.32 2.06 2.90 4.06 2.07 3.72 4.13 1.14
Leasing commissions/square foot
($/sq. ft.)(4)...................... 2.41 2.16 2.33 2.03 1.27 1.91 2.95 1.13
Effective rent/square foot
($/sq. ft.)(5)...................... 13.80 13.91 13.84 12.84 7.91 12.01 13.03 7.56
<CAPTION>
TOTAL
---------
<S> <C>
NEW LEASES
Number of leases signed............... 51
GLA leased (sq. ft.).................. 198,802
Base rent/square foot
($/sq. ft.)(2)...................... 10.40
Tenant improvements/square foot
($/sq. ft.)(3)...................... 3.37
Leasing commissions/square foot
($/sq. ft.)(4)...................... 2.33
Effective rent/square foot
($/sq. ft.)(5)...................... 9.31
RENEWALS
Number of renewals signed............. 26
GLA leased (sq. ft.).................. 58,767
Base rent/square foot
($/sq. ft.)(2)...................... 15.30
Tenant improvements/square foot
($/sq. ft.)(3)...................... 0.78
Leasing commissions/square foot
($/sq. ft.)(4)...................... 1.45
Effective rent/square foot
($/sq. ft.)(5)...................... 14.81
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases
signed.............................. 77
GLA leased (sq. ft.).................. 257,569
Base rent/square foot
($/sq. ft.)(2)...................... 11.52
Tenant improvements/square foot
($/sq. ft.)(3)...................... 2.78
Leasing commissions/square foot
($/sq. ft.)(4)...................... 2.13
Effective rent/square foot
($/sq. ft.)(5)...................... 10.57
</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.
63
<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 61.5 1.7 3.8 19.7
Lakewood Shopping Center............. 79.4 70.2 3.0 6.0 17.6
Fairmont Shopping Center............. 63.8 47.6 -- -- 36.2
Rosewood Village..................... 10.3 15.5 44.6 37.5 45.1
Laguna Village....................... 100.0 100.0 -- -- --
WEIGHTED AVERAGE....................... 81.1 69.9 3.6 5.0 15.3
SOUTHERN CALIFORNIA
Chino Town Square.................... 79.8 72.6 9.0 11.8 11.2
Melrose Village Plaza................ 74.2 66.3 1.1 1.1 24.7
Laurentian Center.................... 46.8 44.5 18.5 18.2 34.7
Vineyard Village East................ 57.5 42.5 42.5 57.5 --
Foothill Center...................... 100.0 100.0 -- -- --
Arlington Courtyard.................. 20.0 29.5 49.4 36.4 30.6
WEIGHTED AVERAGE....................... 71.5 65.1 11.9 13.4 16.6
LAS VEGAS NEVADA
Cheyenne Commons..................... 90.6 83.6 0.7 1.4 8.7
Sahara Pavilion North................ 70.5 58.9 12.9 15.6 16.6
Sahara Pavilion South................ 76.9 70.0 8.0 9.3 15.1
Green Valley Town & Country.......... 49.9 38.0 3.7 5.6 46.4
Winterwood Pavilion.................. 71.3 64.3 14.2 10.8 14.5
WEIGHTED AVERAGE....................... 75.8 66.1 7.1 8.3 17.1
PACIFIC NORTHWEST
Sunset Square........................ 60.6 45.8 30.3 39.7 9.1
Tanasbourne Village.................. 62.4 51.5 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 Market Square.............. 87.8 85.5 4.1 4.3 8.1
Ocoee Plaza.......................... 80.4 80.2 -- -- 19.6
Sports Unlimited..................... 38.4 37.7 32.5 34.5 29.1
Country Club Center.................. 30.5 50.9 6.9 4.9 62.6
WEIGHTED AVERAGE....................... 67.9 64.9 9.2 11.7 22.9
PORTFOLIO WEIGHTED AVERAGE............. 73.1% 64.1% 10.4% 12.3% 16.5%
<CAPTION>
% OF PROPERTY
ANN.
PROPERTY BASE RENT(2)
- --------------------------------------- -----------------
<S> <C>
NORTHERN CALIFORNIA
Chico Crossroads..................... 1.7%
Monterey Plaza....................... 34.7
Lakewood Shopping Center............. 23.8
Fairmont Shopping Center............. 52.4
Rosewood Village..................... 47.0
Laguna Village....................... --
WEIGHTED AVERAGE....................... 25.1
SOUTHERN CALIFORNIA
Chino Town Square.................... 15.6
Melrose Village Plaza................ 32.6
Laurentian Center.................... 37.3
Vineyard Village East................ --
Foothill Center...................... --
Arlington Courtyard.................. 34.1
WEIGHTED AVERAGE....................... 21.5
LAS VEGAS NEVADA
Cheyenne Commons..................... 15.0
Sahara Pavilion North................ 25.5
Sahara Pavilion South................ 20.7
Green Valley Town & Country.......... 56.4
Winterwood Pavilion.................. 24.9
WEIGHTED AVERAGE....................... 25.6
PACIFIC NORTHWEST
Sunset Square........................ 14.5
Tanasbourne Village.................. 30.5
Olympia Square....................... 18.9
Canyon Ridge Plaza................... 11.4
WEIGHTED AVERAGE....................... 20.4
OTHER
Maysville Market Square.............. 10.2
Ocoee Plaza.......................... 19.8
Sports Unlimited..................... 27.8
Country Club Center.................. 44.2
WEIGHTED AVERAGE....................... 23.4
PORTFOLIO WEIGHTED AVERAGE............. 23.6%
</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.
64
<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...................................... 85.4% 76.6% 14.6% 23.4%
Monterey Plaza........................................ 58.2 31.2 41.8 68.8
Lakewood Shopping Center.............................. 55.3 36.1 44.7 63.9
Fairmont Shopping Center.............................. 50.1 27.6 49.9 72.4
Rosewood Village...................................... -- -- 100.0 100.0
Laguna Village........................................ 100.0 100.0 -- --
WEIGHTED AVERAGE........................................ 65.5 47.4 34.5 52.6
SOUTHERN CALIFORNIA
Chino Town Square..................................... 61.8 51.8 38.2 48.2
Melrose Village Plaza................................. 56.6 42.9 43.4 57.1
Laurentian Center..................................... 22.3 16.4 77.7 83.6
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........................................ 51.9 42.4 48.1 57.6
LAS VEGAS NEVADA
Cheyenne Commons...................................... 68.2 47.7 31.8 52.3
Sahara Pavilion North................................. 51.0 31.9 49.0 68.1
Sahara Pavilion South................................. 54.8 32.7 45.2 67.3
Green Valley Town & Country........................... 38.2 21.7 61.8 78.3
Winterwood Pavilion................................... 57.4 36.8 42.6 63.2
WEIGHTED AVERAGE........................................ 56.5 36.1 43.5 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 Market Square............................... 62.7 57.6 37.3 42.4
Ocoee Plaza........................................... 49.7 49.0 50.3 51.0
Sports Unlimited...................................... 29.6 31.7 70.4 68.3
Country Club Center................................... -- -- 100.0 100.0
WEIGHTED AVERAGE........................................ 44.0 37.5 56.0 62.5
PORTFOLIO WEIGHTED AVERAGE.............................. 56.7% 40.1% 43.3% 59.9%
</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.
65
<PAGE>
MAJOR TENANTS
At March 31, 1997, 96.3% of the total GLA was leased to 620 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 9.1% 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 26.0% of the total annualized
base rent and the remaining tenants accounted for 74.0% 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 $ 2,701,892 $ 8.53 7.0
Lucky................................... 3 125,119 3.6 978,368 7.82 2.5
United Artists Theatre.................. 1 48,183 1.4 903,583 18.75 2.4
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.................................... 2 94,737 2.7 583,779 6.16 1.5
HomeBase................................ 1 103,904 3.0 535,431 5.15 1.4
PayLess Drugs........................... 3 74,562 2.2 513,354 6.88 1.3
Ross Dress for Less..................... 3 72,487 2.1 513,327 7.08 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 1.6 416,143 7.33 1.1
Safeway................................. 1 53,000 1.5 406,209 7.66 1.1
--
--------- ----------- ------------ -----
TOTAL/WEIGHTED AVERAGE.................. 24 1,198,019 34.5 $ 10,002,825 $ 8.35 26.0
--
--
--------- ----------- ------------ -----
--------- ----------- ------------ -----
</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.
66
<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 56.7% 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 50 84,711 2.4 $ 1,259,661 3.3
2....................................... 1998 95 250,960 7.2 3,170,420 8.2
3....................................... 1999 86 356,830 10.3 3,406,691 8.9
4....................................... 2000 121 322,670 9.3 4,639,913 12.1
5....................................... 2001 77 247,712 7.1 3,442,846 9.0
6....................................... 2002 65 225,386 6.5 3,009,214 7.8
7....................................... 2003 20 88,420 2.5 1,211,489 3.1
8....................................... 2004 11 75,490 2.2 869,889 2.3
9....................................... 2005 14 92,221 2.7 1,114,157 2.9
10...................................... 2006 16 212,387 6.1 2,400,177 6.2
11 and after............................ 2007 and after 65 1,518,054 43.7 13,929,869 36.2
--- --------- ----- ------------ -----
TOTAL/WEIGHTED AVERAGE 620 3,474,841 100.0 $ 38,454,326 100.0
--- --------- ----- ------------ -----
--- --------- ----- ------------ -----
<CAPTION>
ANN.
BASE RENT/
YEAR SQ. FT.(2)
- ---------------------------------------- ----------
<S> <C>
1....................................... $14.87
2....................................... 12.63
3....................................... 9.55
4....................................... 14.38
5....................................... 13.90
6....................................... 13.35
7....................................... 13.70
8....................................... 11.52
9....................................... 12.08
10...................................... 11.30
11 and after............................ 9.18
TOTAL/WEIGHTED AVERAGE $11.07
</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 2.1 346,694 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 0.7
7....................................... 2003 1 24,000 1.2 192,000 0.5
8....................................... 2004 2 42,119 2.1 300,414 0.8
9....................................... 2005 1 27,683 1.5 218,057 0.6
10...................................... 2006 3 150,352 7.6 1,556,524 4.0
11 and after............................ 2007 and after 31 1,361,497 69.1 10,848,769 28.2
--
--------- ----- ------------ -----
TOTAL/WEIGHTED AVERAGE 50 1,970,410 100.0 $ 15,414,533 40.1
--
--
--------- ----- ------------ -----
--------- ----- ------------ -----
<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...................................... 10.35
11 and after............................ 7.97
TOTAL/WEIGHTED AVERAGE $ 7.82
</TABLE>
67
<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 50 84,711 5.6 $ 1,259,661 3.3 $ 14.87
2.................... 1998 93 209,722 13.9 2,823,726 7.3 13.46
3.................... 1999 82 189,325 12.6 2,742,768 7.1 14.49
4.................... 2000 118 256,295 17.0 4,116,890 10.7 16.06
5.................... 2001 75 188,071 12.6 2,932,716 7.6 15.59
6.................... 2002 64 195,386 13.0 2,754,214 7.2 14.10
7.................... 2003 19 64,420 4.3 1,019,489 2.7 15.83
8.................... 2004 9 33,371 2.2 569,475 1.5 17.06
9.................... 2005 13 64,538 4.3 896,102 2.3 13.88
10................... 2006 13 62,035 4.2 843,653 2.2 13.60
11 and after......... 2007 and after 34 156,557 10.4 3,081,099 8.0 19.68
--- -------------- ----- ------------- -----
TOTAL/WEIGHTED AVERAGE...................... 570 1,504,431 100.0 $ 23,039,793 59.9 $ 15.31
--- -------------- ----- ------------- -----
--- -------------- ----- ------------- -----
</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.
68
<PAGE>
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)..................... $ 13,650 $ 13,650 -- -- --
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............. 11,692 -- 11,692 9.875% Oct. 2000
Winterwood Pavilion..................... 6,158 6,158 -- -- --
PACIFIC NORTHWEST
Sunset Square........................... 22,382 22,382 -- -- --
Tanasbourne Village..................... 16,308 16,308 -- -- --
Olympia Square.......................... 14,175 -- 14,175 8.17% Jan. 2007
Canyon Ridge Plaza...................... 4,300 4,300 -- -- --
OTHER
Maysville Market Square................. 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..................................... $ 240,027 $ 136,905 $ 103,122
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
- ------------------------------
(1) Represents amount expected to be outstanding immediately prior to the
consummation of the Offering.
69
<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)................................................. $ 940 -- $ 940
1998.................................................... 1,372 -- 1,372
1999.................................................... 1,488 -- 1,488
2000.................................................... 955 $ 37,092 38,047
2001.................................................... 665 -- 665
2002.................................................... 722 -- 722
2003.................................................... 790 -- 790
2004.................................................... 724 4,004 4,728
2005.................................................... 777 -- 777
2006.................................................... 845 -- 845
2007.................................................... -- 52,748 52,748
------ ----------- ----------
TOTAL................................................... $ 9,278 $ 93,844 $ 103,122
------ ----------- ----------
------ ----------- ----------
</TABLE>
- ------------------------
(1) Represents payments from April 1, 1997 through December 31, 1997.
UNSECURED CREDIT FACILITY
Bank of America NT&SA has approved, subject to definitive documentation, 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.
70
<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.
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.
71
<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 Articles of Incorporation and Bylaws," "Federal Income Tax
Consequences" and "ERISA Considerations."
72
<PAGE>
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 not
employees, officers or affiliates of the Company or a subsidiary or division
thereof, or relatives of a principal executive officer, or who are not
individual members of an organization or organizations acting as advisor,
consultant or legal counsel, receiving compensation on a continuing basis from
the Company in addition to director's fees (the "Independent Directors").
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 40 Executive Vice President, Chief Financial Officer, Treasurer N/A
and Secretary
Jeffrey S. Stauffer 35 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
</TABLE>
The Company will select three additional independent directors.
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
President of United Income Properties, Ltd. 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.
73
<PAGE>
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 ("ICSC") 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
has served as a director of Revenue Properties since 1985. He has been President
and Co-Chief Executive Officer of Revenue Properties since May 1996. 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 has also served as a
director of Pan Pacific Development (U.S.) Inc. since May 1996.
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
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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.
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 which will vest pro rata in annual installments
over three 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. 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
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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 or officers 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 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. 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, Adlard and Stauffer will be subject to a one year
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,
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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 Articles of Incorporation 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 Articles of Incorporation 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 Articles of Incorporation 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>
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
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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 Articles of
Incorporation 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").
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.
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<PAGE>
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 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.
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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
Effective upon 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 Directors' and Officers'
Liability" and "--Indemnification Agreements."
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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. The
directors designated by PPD shall be elected into the class of directors whose
initial term expires in 2000.
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 AGREEMENT
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 $ in cash to the Company.
- The Company will sell shares of Common Stock in the Offering.
- Approximately $ million or % 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 60 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 % of the outstanding
Common Stock and (ii) PPD will own in excess of 50% 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 CERTAIN INDIVIDUALS
Certain affiliates of the Company will realize certain material benefits in
connection with the Formation Transactions, including the following:
- In exchange for their respective ownership interests in certain Properties
and certain PPD entities, PPD and certain of its subsidiaries will become
beneficial owners of a total of shares of Common Stock, with a total
value of approximately $ million based on the assumed initial
public offering price of the Common Stock, which compares to a book value
of such interests and assets of approximately $376 million as of March 31,
1997. 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 $136.9 million of indebtedness (excluding accrued interest)
secured by certain of the Properties will be repaid in the Formation
Transactions. See "Use of Proceeds."
- Approximately $103.1 million of indebtedness 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."
- The Company will assume certain guarantees by Revenue Properties and PPD
in connection with loans secured by several of the properties. In
addition, the Company will become liable for the indemnification
obligations under the loans and guarantees being assumed by the Company.
- 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 Agreement."
- 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."
DETERMINATION AND VALUATION
Based on the issuance of shares of Common Stock in the Offering upon
completion of the Formation Transactions, PPD will hold approximately a %
equity interest in the Company. If the Underwriters' over-allotment option is
exercised in full, PPD will hold approximately a % 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 % (assuming an initial public offering
price of $20.00 per share of Common Stock). 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
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consideration, it deems appropriate, including in exchange for property. Except
for the preemptive rights 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."
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
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"--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>
PERCENTAGES OF
NUMBER OF SHARES OF OUTSTANDING SHARES
NAME OF BENEFICIAL OWNER COMMON STOCK OF COMMON STOCK
- ----------------------------------------------------- ------------------- -------------------------
<S> <C> <C>
PPD..................................................
Stuart A. Tanz....................................... (1)
David L. Adlard...................................... 10,000 *
Jeffrey S. Stauffer.................................. 10,000 *
Laurie A. Sneve...................................... --
Russell E. Tanz...................................... (2)
All directors, proposed directors and executive
officers as a group ( persons)
</TABLE>
- ------------------------
* Less than one percent.
(1) Includes the shares owned by PPD and 100,000 shares of restricted stock
awarded to Mr. Stuart Tanz under the Stock Incentive Plan.
(2) Includes the shares owned by PPD, which is wholly-owned by Revenue
Properties of which Mr. Russell Tanz is Chief Executive Officer and a
director.
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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 shares of Common Stock issued and outstanding
(excluding the 990,000 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 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) is set forth in the corporation's charter. Under the
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MGCL, the term "substantially all of the Company's assets" is not defined and
is, therefore, subject to Maryland common law and to judicial interpretation and
review in the context of the unique facts and circumstances of any particular
transaction. 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 .
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 Company is a
partner), the rent received by the Company (either directly or through any such
partnership)
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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 % (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 % 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 % 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 % 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 % (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 holders
owning at least a majority of the shares of the Company's capital stock
outstanding and entitled to vote thereon.
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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 Articles of
Incorporation 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
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Indirect Transfer, 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 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, which in the case of the Company is one. Subsequent to the
Offering, the Bylaws will provide that the Board of Directors will consist of
not fewer than five nor more than 15 members. 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 Charter and the MGCL 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 upon a
substantial affirmative vote. Specifically, the Charter provides that a director
may be removed only for cause and only by the affirmative vote of at least a
majority of the votes entitled to be cast in the election of directors. Under
the MGCL, the term "cause" is not defined and is, therefore, subject to Maryland
common law and to judicial interpretation and review in the context of the
unique facts and circumstances of any particular situation. This provision, when
coupled with the provision
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in the Bylaws authorizing the Board of Directors to fill vacant directorships,
precludes stockholders from removing incumbent directors except upon a
substantial affirmative vote and filling the vacancies created by such removal
with their own nominees.
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 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's Board of Directors has resolved to opt 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.
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
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restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a control share acquisition.
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. 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 the shares of capital stock entitled to vote on the matter
voting together as a single class. The Company's Bylaws may be amended by the
vote of a majority of the Board of Directors or the shares of the Company's
capital 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 Board of Directors or the
Chairman of the Board and shall be called at the request in writing of the
holders of 50% or more of the outstanding stock of the Company entitled to vote.
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, the Company may be dissolved 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 capital stock outstanding and entitled
to vote thereon voting as a single class.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
The Company's officers and directors are and will be indemnified under
Maryland law and the Charter against certain liabilities. The Charter and Bylaws
require the Company to indemnify its directors and officers to the fullest
extent permitted from time to time by the laws of Maryland.
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. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one brought by or in the right of the corporation, indemnification may not be
made with respect to any proceeding in which the director or officer has been
adjudged to be liable to the corporation. In addition, a director or officer may
not be indemnified with respect to any proceeding charging improper personal
benefit to the director or officer in which the director or officer was adjudged
to be liable on the basis that personal benefit was received. 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 MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions, and the Charter contains this provision. The law does not,
however, permit the liability of directors and officers to the corporation or
its stockholders to be limited to the extent that (i) it is proved that the
person actually received an improper personal benefit in money, property or
services, (ii) a judgment or other final adjudication is entered in a proceeding
based on a finding that the person's action, or failure to act, was committed in
bad faith or was the result of active and deliberate dishonesty and was material
to the cause of action adjudicated in the proceeding or (iii) in the case of any
criminal proceeding, the director had reasonable cause to believe that the act
or failure to act was unlawful. This provision does not limit the ability of the
Company or its stockholders to obtain other relief, such as an injunction or
rescission.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
INDEMNIFICATION AGREEMENTS
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
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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
shares of Common Stock ( 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 Mr. 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.
PPD, Stuart Tanz and the other executive officers of the Company have agreed
not to, 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 shares of Common Stock or other
capital stock of the Company, or any securities convertible or exercisable or
exchangeable for any shares of Common Stock or other capital stock for a period
of three years from the date of this Prospectus, and the Company has agreed not
to 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 (other than pursuant to the Stock Incentive Plan) shares of
Common Stock or other capital stock of the Company, or any securities
convertible or exercisable or exchangeable for any shares of Common Stock or
other capital stock of the Company, for a period of 180 days from the date of
this Prospectus, in each case without the prior written consent of Prudential
Securities, on behalf of the Underwriters, subject to certain limited
exceptions. 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 agreements.
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.
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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 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 one year after the completion of the Offering,
a registration statement covering the resale of shares of Common Stock owned by
PPD and Stuart Tanz. In addition, the Company has granted PPD piggyback
registration rights 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.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain 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.
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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 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
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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.
A recent federal budget proposal contains language which, if enacted in its
present form, would require the Company to recognize the net built-in gain (the
excess of aggregate gains over aggregate losses) of any PPD subsidiary merged
into the Company or a subsidiary of the Company at the time of such merger,
unless such merger is completed prior to January 1, 1998 and the Company's REIT
election is effective for a taxable year beginning on or prior to January 1,
1998.
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 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 Articles of
Incorporation provide 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
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ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above. In particular, % 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, four of PPD's wholly-owned
subsidiaries have been merged with and into four 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 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
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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 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.
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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 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
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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 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. In addition, a recent federal budget proposal
contains language which, if enacted in its present form, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT for taxable years beginning after
January 1, 1998, and thus may effectively preclude the Company from re-electing
REIT status following a termination of its REIT qualification.
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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 generally 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 four 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") to the Company. For purposes of applying
the E&P Distribution Rule, the Company will assume that the earnings and profits
of the PPD Subsidiaries could 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 acquired by the Company (the "Acquired
Earnings") will be based on the earnings and profits of the PPD Subsidiaries
immediately prior to the Mergers. The Company will determine the amount of the
Acquired Earnings through an earnings and profits study based upon the corporate
tax returns of PPD for the tax years beginning with PPD's date of incorporation
through the date of the Mergers. The Company has requested that the accounting
firm of Arthur Andersen LLP determine the earnings and profits of the PPD
Subsidiaries for purposes of the earnings and profits distribution requirement.
Arthur Andersen LLP's determination will be based upon PPD's 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 the none of the PPD Subsidiaries will have earnings and profits as of the
date of the Mergers.
The calculation of the amount of Acquired Earnings is subject to challenge
by the IRS. The IRS may examine PPD's prior years' tax returns and propose
adjustments which would have the effect of increasing PPD's taxable income.
Because the earnings and profits study used to calculate the amount of Acquired
Earnings is based upon these returns, such adjustments could increase the amount
of Acquired 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 Acquired
Earnings, the Company believes that none of the PPD subsidiaries will have
earnings and profits as of the date of the Mergers and Other E&P Transactions
and therefore 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
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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 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 28% 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
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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 (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,
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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 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 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.
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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 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 the Foreign Investment in Real Property Tax Action of 1980
("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
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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.
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 three 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
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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.
The Company believes that the partnership in which it owns an interest has
been and will continue to be treated as a partnership (rather than as an
association taxable as a corporation) 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.
OTHER TAX CONSEQUENCES
As discussed above, the Company will acquire a number of properties through
the merger of certain PPD subsidiaries with and into 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
PPD 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 PPD 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.
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
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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, 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.
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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...............................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
Smith Barney Inc.................................................................
----------
Total............................................................................ 6,600,000
----------
----------
</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 $ per share, and that such dealers may re-allow a concession not in
excess of $ per share 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 990,000 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 6,600,000.
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.
PPD, Stuart Tanz and the other executive officers of the Company have agreed
not to, 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 shares of Common Stock or other
capital stock of the Company, or any securities convertible or exercisable or
exchangeable for any shares of Common Stock or other capital stock for a period
of three years from the date of this Prospectus, and the Company has agreed not
to 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
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sale or disposition) of any (other than pursuant to the Stock Incentive Plan)
shares of Common Stock or other capital stock of the Company, or any securities
convertible or exercisable or exchangeable for any shares of Common Stock or
other capital stock of the Company, for a period of 180 days from the date of
this Prospectus, in each case without the prior written consent of Prudential
Securities, on behalf of the Underwriters, subject to certain limited
exceptions. Prudential Securities may, in its sole discretion, at any time
without notice, release all or any portion of the shares of Common Stock subject
to such agreement.
It is anticipated that the shares of Common Stock will be 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.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined through negotiations
between the Company and the Representatives. Among the factors to be 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 $ million of the net proceeds from the Offering as
repayment of indebtedness, fees and related interest expected to be accrued and
unpaid as of such date. See "Use of Proceeds."
Prudential Securities will be paid a fee of $ for financial advisory
services to the Company upon the consummation of the Offering.
Although the Conduct Rules of the National Association of Securities
Dealers, Inc. exempt REITs from the conflict of interest provisions thereof,
because an affiliate of Prudential Securities will receive more than 10% of the
net proceeds of the Offering in repayment of currently outstanding indebtedness,
the Underwriters have determined to conduct the Offering in accordance with the
applicable provisions of Rule 2710(c)(8) of the Conduct Rules. In accordance
with these requirements, (the "Independent Underwriter") is assuming the
responsibilities of acting as "qualified independent underwriter" and will
recommend the maximum initial public offering price for the shares of Common
Stock in compliance with the requirements of the Conduct Rules. In connection
with the Offering, the Independent Underwriter will perform due diligence
investigations and will review and participate in the preparation of this
Prospectus and the Registration Statement of which this Prospectus forms a part.
The initial public offering price of the Common Stock will not be higher than
the price recommended by the Independent Underwriter.
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 990,000 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
117
<PAGE>
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 expenses for Chico Crossroads, Monterey Plaza and Fairmont 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 and Fairmont 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 or Fairmont
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
118
<PAGE>
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.
119
<PAGE>
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 Articles of
Incorporation 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.
"CPI" means consumer price index.
"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.
"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.
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<PAGE>
"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.
"GOVERNANCE COMMITTEE" means an independent committee to be established by
the Board of Directors of the Company following the consummation of the
Offering.
"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.
"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 Articles of Incorporation.
"MERGER" means the merger of the Merger Subsidiaries with and into the
Company or one of [five] 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.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotations System.
121
<PAGE>
"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 that are, for purposes of United
States federal income taxation, nonresident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts, collectively.
"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 can be
treated as tax-free reorganizations.
"OWNERSHIP LIMIT" means the restriction contained in the Company's Articles
of Incorporation 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 % (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.
"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, a predecessor of PPD.
"PPD CONTRIBUTION" means the contribution in cash of $ to the
Company in connection with the Formation Transactions.
"PPD OWNERSHIP LIMIT" means % of the outstanding Common Stock, or the
maximum amount of such Common Stock which PPD and certain affiliated entities
may own.
"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.
"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.
122
<PAGE>
"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.
"REPRESENTATIVE" means Prudential Securities Incorporated, as representative
of the Underwriters.
"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 .
"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.
"STOCK INCENTIVE PLAN" means the 199 Stock Incentive Plan of the Company.
"TANZ FAMILY" means Mark Tanz, Stuart Tanz, Russell Tanz and other family
members.
"TANZ FAMILY OWNERSHIP LIMIT" means % of the outstanding Common Stock, or
the maximum amount of such Common Stock which the Tanz Family may, in the
aggregate, 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.
"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.
123
<PAGE>
"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 the actual or constructive acquisition
by PPD of additional shares of Common Stock 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-11
Combined Balance Sheets as of March 31, 1997 (Unaudited) and December 31, 1996 and 1995................ F-12
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-13
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-14
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-15
Notes to Combined Financial Statements................................................................. F-16
Supplemental Schedule--Schedule III--Properties and Accumulated Depreciation........................... F-25
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-27
Chico Crossroads:
Independent Auditors' Report........................................................................... F-28
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-29
Notes to Statement of Revenue and Certain Expenses..................................................... F-30
Monterey Plaza:
Independent Auditors' Report........................................................................... F-32
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-33
Notes to Statement of Revenue and Certain Expenses..................................................... F-34
Fairmont Shopping Center:
Independent Auditors' Report........................................................................... F-36
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................... F-37
Notes to Statement of Revenue and Certain Expenses..................................................... F-38
</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 at the beginning of the period presented.
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...... -- 288,728 61,889 -- 350,617
Property under development, at cost..... -- 3,146 -- -- 3,146
Cash and cash equivalents............... -- 4,389 (4,389) 121,440(B) 1,000
(136,905)(C)
(1,363)(D)
17,828(E)
Accounts and accrued rent receivable.... -- 7,174 -- -- 7,174
Notes receivable........................ -- 2,371 4,606 -- 6,977
Deferred charges, prepaid expenses and
other assets.......................... -- 7,032 -- 692(D) 7,724
----------- ------------ ------------- ----------- -----------
$ -- $ 312,840 $ 62,106 $ 1,692 $ 376,638
----------- ------------ ------------- ----------- -----------
----------- ------------ ------------- ----------- -----------
LIABILITIES AND OWNER'S EQUITY:
Notes payable........................... $ -- $ 196,314 $ 43,713 $(136,905)(C) $ 103,122
Advances from parent.................... -- 48,300 18,393 (66,693)(F) --
Accounts payable, accrued expenses and
other liabilities..................... -- 4,773 -- -- 4,773
----------- ------------ ------------- ----------- -----------
Total liabilities..................... -- 249,387 62,106 (203,598) 107,895
Minority interest....................... -- 1,462 -- -- 1,462
Owner's equity.......................... -- 61,991 -- (61,991)(G) --
Common stock............................ -- -- -- 66(B) 66
Additional paid-in capital.............. -- -- -- 121,374(B) 267,215
66,693(F)
(671)(D)
61,991(G)
17,828(E)
----------- ------------ ------------- ----------- -----------
$ -- $ 312,840 $ 62,106 $ 1,692 $ 376,638
----------- ------------ ------------- ----------- -----------
----------- ------------ ------------- ----------- -----------
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
<S> <C> <C> <C> <C>
PAN PACIFIC ACQUISITION
DEVELOPMENT PROPERTIES
PROPERTIES AND NOTES OTHER COMPANY
HISTORICAL RECEIVABLE(H) ADJUSTMENTS PRO FORMA
------------- ------------- ----------- -----------
REVENUE:
Rental............................................ $ 7,660 $ 1,892 $ -- $ 9,552
Recoveries from tenants........................... 1,747 213 -- 1,960
Other............................................. 185 116 -- 301
------ ------ ----------- -----------
9,592 2,221 -- 11,813
------ ------ ----------- -----------
EXPENSES:
Property operating................................ 1,511 203 -- 1,714
Property taxes.................................... 699 201 -- 900
Property management fees.......................... 15 40 (40)(I) 15
Depreciation and amortization..................... 1,861 344 -- 2,205
Interest.......................................... 3,919 752 (2,465)(J) 2,298
(34)(K)
126(L)
General and administrative........................ 918 -- 112(M) 835
(195)(N)
Other expenses, net............................... 450 7 (215)(O) 242
------ ------ ----------- -----------
9,373 1,547 (2,711) 8,209
------ ------ ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY
INTEREST.......................................... 219 674 2,711 3,604
Income tax expense................................ (29) -- 29(P) --
Minority interest................................. (7) -- -- (7)
------ ------ ----------- -----------
NET INCOME.......................................... $ 183 $ 674 $ 2,740 $ 3,597
------ ------ ----------- -----------
------ ------ ----------- -----------
Pro forma weighted average common shares
outstanding..................................... --
-----------
-----------
Pro forma net income per share.................... --
-----------
-----------
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
<S> <C> <C> <C> <C>
PAN PACIFIC ACQUISITION
DEVELOPMENT PROPERTIES
PROPERTIES AND NOTES OTHER COMPANY
HISTORICAL RECEIVABLE(H) ADJUSTMENTS PRO FORMA
----------- -------------- ----------- ---------
REVENUE:
Rental................................ $ 29,977 $8,268 $ -- $38,245
Recoveries from tenants............... 6,323 1,223 -- 7,546
Other................................. 411 449 -- 860
----------- ------ ----------- ---------
36,711 9,940 -- 46,651
----------- ------ ----------- ---------
EXPENSES:
Property operating.................... 6,116 952 -- 7,068
Property taxes........................ 2,285 888 -- 3,173
Property management fees.............. 51 185 (185)(I) 51
Depreciation and amortization......... 7,397 1,504 -- 8,901
Interest.............................. 15,082 3,019 (9,860)(J) 8,615
(130)(K)
504(L)
General and administrative............ 3,228 -- 892(M) 3,340
(780)(N)
Other expenses, net................... 1,981 77 (1,878)(O) 180
----------- ------ ----------- ---------
36,140 6,625 (11,437) 31,328
----------- ------ ----------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST..................... 571 3,315 11,437 15,323
Income tax expense.................... (122) -- 122(P) --
Minority interest..................... -- -- -- --
----------- ------ ----------- ---------
NET INCOME.............................. $ 449 $3,315 $ 11,559 $15,323
----------- ------ ----------- ---------
----------- ------ ----------- ---------
Pro forma weighted average common shares
outstanding........................... --
---------
---------
Pro forma net income per share.......... $ --
---------
---------
</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............................................................... $ 61,889
Cash and cash equivalents.......................................................... $ (4,389)
Notes receivable................................................................... $ 4,606
Notes payable...................................................................... $ 43,713
Advances from parent............................................................... $ 18,393
(B) Sale of 6,600,000 shares of common stock in the Offering
Proceeds from the Offering......................................................... $ 132,000
Costs associated with the Offering................................................. (10,560)
----------
Net proceeds....................................................................... $ 121,440
----------
----------
Par value of common stock to be issued in the Offering............................. $ 66
Additional paid-in capital from the net proceeds of the Offering................... 121,374
----------
$ 121,440
----------
----------
(C) Repayment of notes payable with net proceeds from the Offering and the additional
contribution of capital by PPD
Cash............................................................................... $ (136,905)
Notes payable...................................................................... $ (136,905)
(D) Net increase in prepaid financing costs
Financing fees paid related to the Unsecured Credit Facility....................... $ 1,363
Write-off of unamortized financing fees related to the repaid notes payable........ (671)
----------
$ 692
----------
----------
(E) Contribution of capital by PPD
Cash............................................................................... $ 17,828
Additional paid-in capital......................................................... $ 17,828
(F) Issuance of shares to PPD to convert advances from parent to equity
Advances from parent............................................................... $ (66,693)
Additional paid-in capital......................................................... $ 66,693
(G) Conversion of owner's equity to additional paid in capital
Owner's equity..................................................................... $ (61,991)
Additional paid-in capital......................................................... $ 61,991
----------
----------
</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
Rental revenue......................................................... $ 1,892 $ 8,268
Recoveries from tenants................................................ $ 213 $ 1,223
Other revenue.......................................................... $ 116 $ 449
Property operating expenses............................................ $ 203 $ 952
Property taxes......................................................... $ 201 $ 888
Property management fees............................................... $ 40 $ 185
Depreciation and amortization.......................................... $ 344 $ 1,504
Interest expense....................................................... $ 752 $ 3,019
Other expenses......................................................... $ 7 $ 77
(I) Elimination of property management fees paid to third parties related
to the properties acquired............................................. $ (40) $ (185)
(J) Decrease in interest expense, including the amortization of deferred
loan fees, resulting from the repayment of notes payable............... $ (2,465) $ (9,860)
(K) Decrease in interest expense for the above market interest rate on the
note payable to be assumed in connection with the acquisition of Green
Valley Town & Country.................................................. $ (34) $ (130)
(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
</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
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 engaged in the ownership, management, leasing, acquisition and
development of properties located primarily in the western United States. 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 was
approximately $25,200,000 with a note payable of $18,371,000 assumed upon
purchase. 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. 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.
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. This purchase was an all cash transaction for approximately
$11,400,000.
F-10
<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-11
<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...................................................................... $ 89,898 $ 86,324 $ 81,593
Buildings and improvements (including related party development and
acquisition fees of $1,207, $1,182 and $1,082, respectively)............ 195,668 178,559 169,909
Tenant improvements....................................................... 32,606 32,166 25,759
----------- ---------- ----------
318,172 297,049 277,261
Less accumulated depreciation and amortization............................ (29,444) (27,776) (23,063)
----------- ---------- ----------
288,728 269,273 254,198
Property under development, at cost......................................... 3,146 2,781 5,426
----------- ---------- ----------
291,874 272,054 259,624
Cash and cash equivalents................................................... 4,389 9,162 6,934
Accounts receivable (less allowance for doubtful accounts of $63, $93 and
$265, respectively)....................................................... 976 1,061 1,437
Accrued rent receivable (less allowance for doubtful accounts of $689, $672
and $484, respectively)................................................... 6,198 6,050 4,352
Notes receivable............................................................ 2,371 3,457 5,283
Deferred lease commissions (including unamortized related party amounts of
$2,079, $2,293 and $2,148, respectively, and net of accumulated
amortization of $3,636, $3,518 and $2,943, respectively).................. 2,569 2,414 2,270
Prepaid expenses............................................................ 3,266 3,259 1,542
Other assets................................................................ 1,197 1,527 408
----------- ---------- ----------
$ 312,840 $ 298,984 $ 281,850
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND OWNER'S EQUITY:
Notes payable............................................................... $ 196,314 $ 198,646 $ 197,320
Advances from parent........................................................ 48,300 32,113 16,482
Accounts payable (including related party amounts of $32, $79 and $53,
respectively)............................................................. 744 1,270 2,423
Accrued expenses and other liabilities (including related party amounts of
$451, $440 and $0, respectively).......................................... 4,029 3,692 2,811
Minority interest........................................................... 1,462 1,455 1,455
Owner's equity.............................................................. 61,991 61,808 61,359
----------- ---------- ----------
$ 312,840 $ 298,984 $ 281,850
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-12
<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................................ $7,660 $6,927 $29,977 $24,915 $21,613
Recoveries from tenants............... 1,747 1,601 6,323 5,588 5,575
Gain on sale of real estate........... -- -- -- 501 --
Other................................. 185 -- 411 314 362
------ ------ ------- ------- -------
9,592 8,528 36,711 31,318 27,550
------ ------ ------- ------- -------
EXPENSES:
Property operating.................... 1,511 1,434 6,116 5,725 4,884
Property taxes........................ 699 559 2,285 2,008 2,278
Property management fees.............. 15 12 51 46 159
Depreciation and amortization......... 1,861 1,805 7,397 6,553 6,372
Interest.............................. 3,919 3,706 15,082 12,671 11,781
General and administrative............ 918 867 3,228 3,620 3,729
Other expenses, net................... 450 556 1,981 1,247 1,592
------ ------ ------- ------- -------
9,373 8,939 36,140 31,870 30,795
------ ------ ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST................. 219 (411) 571 (552) (3,245)
Income tax expense.................... (29) (42) (122) (87) (7)
Minority interest..................... (7) 5 -- 24 36
------ ------ ------- ------- -------
NET INCOME (LOSS)....................... $ 183 $ (448) $ 449 $ (615) $(3,216)
------ ------ ------- ------- -------
------ ------ ------- ------- -------
</TABLE>
See accompanying notes to combined financial statements.
F-13
<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-14
<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.......................................... 1,861 1,805 7,397 6,553 6,372
Amortization of prepaid financing costs................................ 87 59 264 175 156
Gain on sale of real estate............................................ -- -- -- (501) --
Minority interest...................................................... 7 (5) -- (24) (36)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable........................... 85 360 376 (282) 538
Increase in accrued rent receivable.................................. (148) (74) (1,698) (887) (371)
Increase in deferred lease commissions............................... (273) (241) (522) (57) (736)
Decrease (increase) in prepaid expenses.............................. (94) (272) (537) 96 (429)
Increase in other assets............................................. (111) (67) (129) (244) (97)
Increase (decrease) in accounts payable.............................. (526) (161) (732) 2,365 (867)
Increase in accrued expenses and other liabilities................... 337 390 881 5 1,214
--------- --------- --------- --------- ---------
Net cash provided by operating activities.......................... 1,408 1,346 5,749 6,584 2,528
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties................................................ (21,150) (9,748) (12,400) (37,419) (30,850)
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
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.............................. (20,371) (9,903) (18,052) (42,950) (34,014)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable proceeds................................................... -- 5,806 11,666 33,797 17,995
Notes payable payments................................................... (2,332) (2,880) (10,340) (2,960) (8,075)
Advances from (repayments to) parent..................................... 16,129 3,469 15,270 (4,033) 34,730
Prepaid financing costs.................................................. -- -- (1,170) (92) (276)
Refunds from (payments to) loan escrow................................... 393 -- (895) -- --
Issuance of capital stock................................................ -- -- -- -- 1,805
--------- --------- --------- --------- ---------
Net cash provided by financing activities.......................... 14,190 6,395 14,531 26,712 46,179
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... (4,773) (2,162) 2,228 (9,654) 14,693
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 9,162 6,934 6,934 16,588 1,895
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 4,389 $ 4,772 $ 9,162 $ 6,934 $ 16,588
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest (net of amounts capitalized of $0, $0,
$51, $211 and $92, respectively)..................................... $ 3,563 $ 3,786 $ 15,681 $ 13,479 $ 12,079
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 $ -- $ --
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-15
<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 the accounts of Pan
Pacific Development (U.S.) Inc. and its related ownership of nineteen
neighborhood and community shopping centers, one medical office building and its
leasing and management of the portfolio (the "Company"). All of the accounts of
Pan Pacific Development (U.S.) Inc. 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 to raise capital through an initial
public offering of common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Company
(Note 1), together with the Company's proportionate share of the assets,
liabilities, revenue and expenses of its unincorporated joint ventures (Note
8). 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 valuation provision 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.
(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-16
<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)
(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.
(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
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)
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 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
$927,000 and $1,356,000, 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-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)
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).......................... 16,367 --
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).................................. -- 23,212
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).................................... 7,550 39,537
Bank note payable, bearing interest at prime +1.50%....................................... -- 97
--------- ---------
$ 198,646 $ 197,320
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<S> <C>
Principal payments under these notes payable are due as follows:
1997...................................................................................... $ 9,405
1998...................................................................................... 38,354
1999...................................................................................... 9,189
2000...................................................................................... 28,189
2001...................................................................................... 1,798
2002 and subsequent....................................................................... 111,711
---------
$ 198,646
---------
---------
</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-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 (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 $2,197 was paid down,
resulting in a new loan of $16,537.
(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-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)
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................................ $ 198,646 $ 201,159 $ 197,320 $ 198,827
</TABLE>
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)
8. JOINT VENTURE OPERATIONS
The condensed, combined balance sheets and statements of operations of the
Company's joint ventures and the Company's proportionate share of assets,
liabilities, equity, revenue and expenses are summarized as follows:
<TABLE>
<CAPTION>
COMBINED PROPORTIONATE SHARE
AS OF DECEMBER 31, AS OF DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
--------- --------- --------- ---------
Properties............................................................ $ 37,715 $ 47,638 $ 26,061 $ 26,971
Other assets.......................................................... 1,678 1,753 1,209 1,151
--------- --------- --------- ---------
Total assets.......................................................... $ 39,393 $ 49,391 $ 27,270 $ 28,122
--------- --------- --------- ---------
--------- --------- --------- ---------
Notes payable......................................................... $ 33,286 $ 41,816 $ 23,917 $ 26,930
Other liabilities..................................................... 865 3,513 539 499
Equity................................................................ 5,242 4,062 2,814 693
--------- --------- --------- ---------
$ 39,393 $ 49,391 $ 27,270 $ 28,122
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
COMBINED PROPORTIONATE SHARE
FOR THE YEARS ENDED DECEMBER FOR THE YEARS ENDED DECEMBER
31, 31,
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- ---------
Revenue......................................................... $ 7,151 $ 8,016 $ 4,696 $ 4,824 $ 4,655 $ 3,583
Expenses........................................................ 6,731 7,627 5,358 4,495 4,527 3,933
--------- --------- --------- --------- --------- ---------
Net income (loss)............................................... $ 420 $ 389 $ (662) $ 329 $ 128 $ (350)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The Company includes in its combined financial statements its proportionate
share of its interests in the assets, liabilities, equity, revenue and expenses
of the following ventures:
<TABLE>
<S> <C>
Tanasbourne Village 1% General and 89% Limited Partner
Melrose Village 50% General Partner
North Coast Health Center 50% General Partner
</TABLE>
The Company acquired a 2% limited partnership interest in Laurentian Center
on December 31, 1994. In 1996, the Company acquired the remaining interests in
Laurentian Center and included these amounts in the 1996 combined financial
statements.
The Company is contingently liable for the other participants' portion of
the liabilities of these joint ventures. This contingent liability is
approximately $9,695,000 and $17,900,000 at December 31, 1996 and 1995,
respectively. Against this contingent liability, the Company has recourse to all
of the assets of the participants to the extent the Company is required to pay
liabilities in excess of its proportionate share.
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)
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.............................................................. $ 29,090
1998.............................................................. 27,178
1999.............................................................. 24,426
2000.............................................................. 21,565
2001.............................................................. 18,199
2002 and subsequent............................................... 117,074
---------
$ 237,532
---------
---------
</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 incurred by its parent
corporation 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 its parent corporation.
(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
corporation 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 have no fixed
terms of repayment 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.
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)
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>
(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 was $20,593,000 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 will
be approximately $15,300,000. Approximately $11,100,000 of debt is anticipated
to be assumed and closing is expected to take place on or about June 30, 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 will be approximately $9,500,000 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.
F-24
<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
Melrose Village Plaza
Vista, CA.......................... 7,550 2,887 6,273 641 -- 2,887 6,914
North Coast Health Center
San Diego, CA...................... -- 1,179 -- 126 -- 1,179 126
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...................... 16,367 4,807 13,810 734 -- 4,807 14,544
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
------------- --------- --------------- ------------- ----------- --------- -------------
$ 198,646 $ 74,927 $ 170,901 $ 51,368 $ 2,634 $ 87,666 $ 212,164
------------- --------- --------------- ------------- ----------- --------- -------------
------------- --------- --------------- ------------- ----------- --------- -------------
<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)
Melrose Village Plaza
Vista, CA.......................... 9,801 1,299 1992(A)
North Coast Health Center
San Diego, CA...................... 1,305 4 1994(A)
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...................... 19,351 3,440 1992(A)
Vineyard Village
Ontario, CA........................ 3,500 228 1992(A)
Winterwood Pavilion
Las Vegas, NV...................... 18,321 2,574 1992(A)
----------- ------------
$ 299,830 $ 27,776
----------- ------------
----------- ------------
</TABLE>
F-25
<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 $305,770 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....................................... $ 282,687 $ 241,048 $ 210,491
Additions during period (acquisition, improvements, etc.)........ 18,721 42,452 31,171
Interest capitalized............................................. 361 806 568
Deductions during period (write-off of tenant improvements and
cost of real estate sold)...................................... (1,939) (1,619) (1,182)
---------- ---------- ----------
Balance, close of period........................................... $ 299,830 $ 282,687 $ 241,048
---------- ---------- ----------
---------- ---------- ----------
</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........................................... $ 23,063 $ 18,326 $ 14,153
Additions during period (depreciation and amortization expense)...... 6,652 5,878 5,355
Deductions during period (write-off of accumulated depreciation and
amortization of tenant improvements and real estate sold).......... (1,939) (1,141) (1,182)
--------- --------- ---------
Balance, close of period............................................... $ 27,776 $ 23,063 $ 18,326
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-26
<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 $ 452,216 $ 210,275 $ -- $ 1,891,791
Recoveries from tenants........... 25,458 96,028 49,699 -- 41,757 -- 212,941
Other............................. -- -- 1,423 33 631 113,546 115,633
----------- ---------- ---------- ---------- ---------- ---------- ------------
374,666 686,514 340,727 452,249 252,663 113,546 2,220,365
----------- ---------- ---------- ---------- ---------- ---------- ------------
Certain expenses:
Interest.......................... -- 447,088 -- 305,367 -- -- 752,455
Property taxes.................... 46,964 87,501 21,042 22,812 23,106 -- 201,425
Property operating................ 23,634 65,476 20,662 51,430 41,904 -- 203,106
Management fees................... 6,500 22,985 -- -- 10,322 -- 39,807
Other............................. 2,934 -- 940 -- 3,098 -- 6,972
----------- ---------- ---------- ---------- ---------- ---------- ------------
80,032 623,050 42,644 379,609 78,430 -- 1,203,765
----------- ---------- ---------- ---------- ---------- ---------- ------------
Revenue in excess of certain
expenses.......................... $ 294,634 $ 63,464 $ 298,083 $ 72,640 $ 174,233 $ 113,546 $ 1,016,600
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
</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 $ 1,748,096 $ 841,273 $ -- $ 8,268,160
Recoveries from tenants... 325,144 471,830 222,152 -- 204,205 -- 1,223,331
Other..................... -- -- 6,110 7,441 2,898 432,865 449,314
------------ ------------ ------------ ------------ ---------- ---------- ------------
2,428,915 2,905,106 1,370,006 1,755,537 1,048,376 432,865 9,940,805
------------ ------------ ------------ ------------ ---------- ---------- ------------
Certain expenses:
Interest.................. -- 1,798,012 -- 1,221,468 -- -- 3,019,480
Property taxes............ 281,782 339,747 84,166 89,571 93,065 -- 888,331
Property operating........ 81,109 339,445 139,170 224,693 167,708 -- 952,125
Management fees........... 39,000 97,638 47,950 -- -- -- 184,588
Other..................... 37,909 13,691 10,743 -- 14,488 -- 76,831
------------ ------------ ------------ ------------ ---------- ---------- ------------
439,800 2,588,533 282,029 1,535,732 275,261 -- 5,121,355
------------ ------------ ------------ ------------ ---------- ---------- ------------
Revenue in excess of certain
expenses.................. $ 1,989,115 $ 316,573 $ 1,087,977 $ 219,805 $ 773,115 $ 432,865 $ 4,819,450
------------ ------------ ------------ ------------ ---------- ---------- ------------
------------ ------------ ------------ ------------ ---------- ---------- ------------
</TABLE>
F-27
<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-28
<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-29
<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 of the Company 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-30
<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-31
<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-32
<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-33
<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 of the Company 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-34
<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 $5,735,973 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-35
<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-36
<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-37
<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 which note will 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 of the Company 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-38
<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-39
<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 IN 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 , 1997 (25 DAYS AFTER COMMENCEMENT OF THIS 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................................................. 18
The Company.................................................. 31
Business and Growth Strategies............................... 34
Use of Proceeds.............................................. 37
Distribution Policy.......................................... 38
Capitalization............................................... 42
Dilution..................................................... 43
Selected Financial Data...................................... 44
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 46
Overview of the Company's Key Western U.S. Markets........... 54
Business and Properties...................................... 60
Management................................................... 73
Certain Relationships and Related Transactions............... 81
Structure and Formation Transactions of the Company.......... 82
Policies with Respect to Certain Activities.................. 84
Principal Stockholders....................................... 88
Description of Capital Stock................................. 89
Certain Provisions of Maryland Law and of the Company's
Articles of Incorporation and Bylaws....................... 94
Shares Available for Future Sale............................. 99
Federal Income Tax Consequences.............................. 100
ERISA Considerations......................................... 113
Underwriting................................................. 116
Experts...................................................... 118
Legal Matters................................................ 118
Additional Information....................................... 118
Glossary..................................................... 120
Index to Financial Statements................................ F-1
</TABLE>
6,600,000 Shares
PAN PACIFIC RETAIL
PROPERTIES, INC.
Common Stock
---------------------
P R O S P E C T U S
---------------------
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
, 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee--Securities and Exchange Commission.............. $ 48,300
NASD Fee.......................................................... $ 16,439
New York Stock Exchange Listing Fee............................... *
Transfer Agent and Registrar's Fees............................... *
Printing and Engraving Expenses................................... *
Legal Fees and Expenses (other than Blue Sky)..................... *
Accounting Fees and Expenses...................................... *
Blue Sky Fees and Expenses........................................ *
Miscellaneous Expenses............................................ *
---------
Total......................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be completed by Amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
As part of the Formation Transactions and in exchange for their respective
ownership interests in certain Properties and certain PPD entities, PPD and
certain of its subsidiaries will become beneficial owners of a total of
shares of Common Stock, with a total value of approximately $
million based upon the assumed initial public offering price of the Common
Stock.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's officers and directors are and will be indemnified under
Maryland law and the Charter of the Company against certain liabilities. The
Charter and Bylaws require the Company to indemnify its directors and officers
to the fullest extent permitted from time to time by the laws of Maryland.
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. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the corporation, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the corporation. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that personal benefit was received. 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.
II-1
<PAGE>
The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions, and the Charter of the Company contains this provision. The law
does not, however, permit the liability of directors and officers to the
corporation or its stockholders to be limited to the extent that (i) it is
proved that the person actually received an improper personal benefit in money,
property or services, (ii) a judgment or other final adjudication is entered in
a proceeding based on a finding that the person's action, or failure to act, was
committed in bad faith or was the result of active and deliberate dishonesty and
was material to the cause of action adjudicated in the proceeding or (iii) in
the case of any criminal proceeding, the director had reasonable cause to
believe that the act or failure to act was unlawful. This provision does not
limit the ability of the Company or its stockholders to obtain other relief,
such as an injunction or rescission.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Also, 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.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
PAN PACIFIC RETAIL PROPERTIES, INC.
Pro Forma Condensed Combined Financial Statements (Unaudited):
Pro Forma Condensed Combined Balance Sheet as of March 31, 1997
Pro Forma Condensed Combined Statement of Operations for the three
months ended March 31, 1997
Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1996
Notes to Pro Forma Condensed Combined Financial Statements
Historical Financial Statement:
Independent Auditors' Report
Balance Sheet as of April 16, 1997 (inception)
Notes to Balance Sheet
II-2
<PAGE>
PAN PACIFIC DEVELOPMENT PROPERTIES
Combined Financial Statements:
Independent Auditors' Report
Combined Balance Sheets as of March 31, 1997 (Unaudited) and
December 31, 1996 and 1995
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
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
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
Notes to Combined Financial Statements
Supplemental Schedule--Schedule III--Properties and Accumulated
Depreciation
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
Chico Crossroads:
Independent Auditors' Report
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
Monterey Plaza:
Independent Auditors' Report
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
Fairmont Shopping Center:
Independent Auditors' Report
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
II-3
<PAGE>
(b) Exhibits.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement between the Company and the Representatives
3.1* Amended and Restated Articles of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
3.3* Certificate of Common Stock
5.1* Opinion of Ballard, Spahr, Ingersoll & Andrews regarding the validity of
the securities being registered
8.1* Opinion of Latham & Watkins regarding tax matters
10.1* Stock Incentive Plan
10.2* Form of Officers and Directors Indemnification Agreement
10.3* Unsecured Credit Facility Agreement
10.4* Employment Agreement between the Company and Mr. Stuart A. Tanz
10.5* Employment Agreement between the Company and Mr. David L. Adlard
10.6* Employment Agreement between the Company and Mr. Jeffrey S. Stauffer
10.7* Miscellaneous Rights Agreement
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Robert Charles Lesser & Co.
23.3* Consent of Latham & Watkins (contained in Exhibits 5.1 and 8.1)
23.4* Consent of Russell E. Tanz
23.5* Consent of Ballard, Spahr, Ingersoll & Andrews
24. Power of Attorney (see Page II-6)
27.* Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 39. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 33 above, or otherwise, 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. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a Director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
Director, Officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether
II-4
<PAGE>
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue. The
undersigned Company hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-11 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Vista, State of California on the sixth day of June, 1997.
PAN PACIFIC RETAIL PROPERTIES, INC.
By: /s/ STUART A. TANZ
-----------------------------------------
Stuart A. Tanz
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Stuart A. Tanz or David L. Adlard or any one of
them, his or her attorneys-in-fact and agents, each with full power of
substitution and resubstitution for him or her in any and all capacities, to
sign any or all amendments or post-effective amendments to this Registration
Statement or a Registration Statement prepared in accordance with Rule 462 of
the Securities Act, and to file the same, with exhibits thereto and other
documents in connection herewith or in connection with the registration of the
Common Stock under the Securities Exchange Act of 1934, as amended, with the
Securities and Exchange Commission, granting unto each of such attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities
indicated on June 6, 1997.
TITLE
--------------------------
/s/ STUART A. TANZ
- ------------------------------ Director, Chief Executive
Stuart A. Tanz Officer and President
/s/ DAVID L. ADLARD Executive Vice President,
- ------------------------------ Chief Financial Officer,
David L. Adlard Treasurer and Secretary
/s/ LAURIE A. SNEVE
- ------------------------------ Vice President and
Laurie A. Sneve Controller
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. NUMBERED PAGE
- --------- -----------------
<C> <S> <C>
1.1* Form of Underwriting Agreement between the Company and the Representatives
3.1* Amended and Restated Articles of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
3.3* Certificate of Common Stock
5.1* Opinion of Ballard, Spahr, Ingersoll & Andrews regarding the validity of the securities
being registered
8.1* Opinion of Latham & Watkins regarding tax matters
10.1* Stock Incentive Plan
10.2* Form of Officers and Directors Indemnification Agreement
10.3* Unsecured Credit Facility Agreement
10.4* Employment Agreement between the Company and Mr. Stuart A. Tanz
10.5* Employment Agreement between the Company and Mr. David L. Adlard
10.6* Employment Agreement between the Company and Mr. Jeffrey S. Stauffer
10.7* Miscellaneous Rights Agreement
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Robert Charles Lesser & Co.
23.3* Consent of Latham & Watkins (contained in Exhibits 5.1 and 8.1)
23.4* Consent of Russell E. Tanz
23.5* Consent of Ballard, Spahr, Ingersoll & Andrews
24. Power of Attorney (see Page II-6)
27. Financial Data Schedule
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We consent to the use of our reports included herein and to the references
to our firm under the headings "Summary Selected Combined Financial Data,"
"Selected Combined Financial Data" and "Experts" in the prospectus. The reports
on the statements of revenue and certain expenses for Chico Crossroads, Monterey
Plaza and Fairmont 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 Securities and Exchange
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 or Fairmont Shopping Center's revenue and expenses.
KPMG Peat Marwick LLP
San Diego, California
June 5, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ROBERT CHARLES LESSER & CO.
We hereby consent to the use of our name and the references to the "Lesser
Market Study" wherever appearing in this Registration Statement filed by Pan
Pacific Retail Properties, Inc. on Form S-11 and the related Prospectus and any
amendments thereto, including but not limited to the references to our company
under the headings "Prospectus Summary--Overview of the Company's Key Western
U.S. Markets," "Overview of the Company's Key Western U.S. Markets" and
"Experts" in the Prospectus.
Dated: June 6, 1997
Robert Charles Lesser & Co.
By: /s/ WILLIAM G. TURNER
--------------------------------------
William G. Turner
VICE PRESIDENT
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 9,162 4,389
<SECURITIES> 0 0
<RECEIVABLES> 11,333 10,297
<ALLOWANCES> 765 752
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 299,830 321,318
<DEPRECIATION> 27,776 29,444
<TOTAL-ASSETS> 298,984 312,840
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 61,808 61,991
<TOTAL-LIABILITY-AND-EQUITY> 298,984 312,840
<SALES> 0 0
<TOTAL-REVENUES> 36,711 9,592
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 21,058 5,454
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,082 3,919
<INCOME-PRETAX> 571 219
<INCOME-TAX> 122 29
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 449 183
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
