<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
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
MARK W. SENECA BLAKE HORNICK
LATHAM & WATKINS PRYOR CASHMAN SHERMAN & FLYNN LLP
650 TOWN CENTER DRIVE, 20TH FLOOR 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 PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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 AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
per share................... 2,300,000 $22.50 $51,750,000 $15,224
==================================================================================================================
</TABLE>
(1) Includes 300,000 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> 2
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.
SUBJECT TO COMPLETION--DATED APRIL 15, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
2,000,000 Shares
PAN PACIFIC RETAIL PROPERTIES, INC.
Common Stock
- --------------------------------------------------------------------------------
Pan Pacific Retail Properties, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged in owning and
operating community and neighborhood shopping centers predominantly located in
four key western U.S. markets. Since its initial public offering in August 1997,
the Company has acquired 17 shopping centers encompassing over two million
square feet of gross leasable area ("GLA"). The Company currently owns 42
shopping centers (the "Properties"), of which 38 are located in the western
U.S., including 18 in California (9 in Northern California, 9 in Southern
California), 14 in the Pacific Northwest and 6 in Las Vegas, Nevada. The
Properties encompass over 5.7 million square feet of GLA, have an average age of
approximately eight years and, as of December 31, 1997, were 96.1% leased to a
diverse mix of over 900 tenants. In addition, the Company has entered into
letters of intent to acquire an additional shopping centers encompassing
square feet of GLA.
Pursuant to its participation rights in connection with issuances of common
stock of the Company, par value $.01 per share (the "Common Stock"), Pan Pacific
Development (U.S.) Inc., a Delaware corporation and an affiliate of the Company
("PPD"), will privately purchase 2,000,000 shares of Common Stock from the
Company, at the same price per share as the Price to Public set forth below,
concurrently with the completion of the offering of shares to the public (the
"Offering") as described in this Prospectus.
All of the shares of Common Stock offered hereby are being sold by the Company.
To assist the Company in complying with certain qualification requirements
applicable to REITs, the Company's charter provides that no stockholder may own
more than 6.25% of the outstanding Common Stock, subject to certain specified
exceptions. See "Description of Capital Stock--Restrictions on Ownership and
Transfer."
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "PNP." On April 8, 1998, the last reported sales price of the Common
Stock on the NYSE was $22.50 per share. See "Price Range of Common Stock and
Distribution History."
SEE "RISK FACTORS" ON PAGES 12 TO 22 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY, INCLUDING:
O Demand for shopping center space in the Company's markets may decrease;
the Company's ability to attract and retain tenants may be adversely
affected; economic and other conditions may adversely affect shopping
center property cash flows.
O The lack of operating history of newly acquired properties under the
management of the Company and the potential that these acquired properties
may not perform as well as expected or may have deficiencies currently
unknown to the Company.
O The influence on the Company of certain affiliates of the Company may not
be consistent with the interests of other stockholders.
O The possibility that the Company may be unable to refinance debt upon
maturity, that indebtedness might be financed or refinanced on less
favorable terms, and that interest rates may increase on variable rate
indebtedness; and the absence of limitations in the Company's
organizational documents on the amount of indebtedness that the Company
may incur.
O Taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes.
O Distribution requirements 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.
- --------------------------------------------------------------------------------
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>
<S> <C> <C> <C>
=======================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -----------------------------------------------------------------------------------------------------------------------
Per Share................................ $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3)(4).............................. $ $ $
=======================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $1.2
million.
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to 300,000 additional shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments. 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." In the event the Underwriters exercise the
option to purchase additional shares, it is expected that PPD will purchase
the same number of additional shares pursuant to its participation rights at
the same price as the Price to Public set forth above.
(4) Assuming the full exercise of PPD's participation rights, the additional
proceeds to the Company will be approximately $ million
(approximately $ million if the Underwriters' over-allotment option
is exercised in full and PPD exercises in full its additional participation
rights to purchase an equal number of additional shares). See "Use of
Proceeds."
- --------------------------------------------------------------------------------
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 through the facilities
of The Depository Trust Company, New York, New York, on or about May , 1998.
PRUDENTIAL SECURITIES INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
May , 1998
<PAGE> 3
[DESCRIPTION OF ARTWORK AND GRAPHICS. Inside Front Cover Page: Includes (i)
a map of Company's western U.S. markets and location of properties, (ii) a bar
graph showing the Company's historical portfolio growth since 1994 in terms of
number of properties and portfolio size in square feet, and (iii) tenant
diversification pie charts.
Fold-out pages: photos of all properties acquired since the Company's IPO
in August 1997.
Back cover page: Company logo and photo of one of its properties.]
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> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY......................... 1
The Company.............................. 1
Risk Factors............................. 2
Activities Since the Initial Public
Offering............................... 3
Completed Acquisitions................. 3
Potential Acquisitions................. 5
Development Activity................... 5
Leasing Activity....................... 5
Financing Activity..................... 5
Business and Growth Strategies........... 6
The Properties........................... 7
The Offering............................. 9
Distributions............................ 9
Tax Status of the Company................ 9
Summary Selected Consolidated Financial
Data................................... 10
RISK FACTORS............................... 12
Real Estate Investment Associated
Risks................................ 12
Lack of Operating History with Respect
to Recent and Future Acquisition
Activity............................. 14
Potential Inability to Refinance
Indebtedness on Favorable Terms;
Interest Rates May Rise.............. 14
Dependence on Key Management
Personnel............................ 15
Adverse Consequences of Failure to
Qualify as a REIT; Other Tax
Liabilities.......................... 15
Distributions to Stockholders Affected
by Many Factors...................... 16
Acquisition and Development Investments
May Not Perform as Expected.......... 17
Limitations on Control of
Partially-Owned Properties........... 17
Limitations on Control Over Future
Joint Ventures or Partnerships....... 18
The Properties May Be Subject to
Unknown Environmental Liabilities.... 18
No Limitation on Amount of Indebtedness
the Company May Incur................ 19
Conflicts of Interests in the Formation
Transactions and the Business of the
Company.............................. 19
Limits on Changes in Control and
Potential Anti-Takeover Effects...... 20
Certain Types of Losses May Exceed
Insurance Coverage................... 21
Effect on Common Stock Price of Shares
Eligible for Future Sale............. 21
Changes in Policies Without Stockholder
Approval............................. 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Effect of Market Interest Rates on
Price of Common Stock................ 22
Disposition of Properties with Built-In
Gain................................. 22
THE COMPANY................................ 23
General.................................. 23
History.................................. 24
BUSINESS AND GROWTH STRATEGIES............. 25
USE OF PROCEEDS............................ 28
PRICE RANGE OF COMMON STOCK AND
DISTRIBUTION HISTORY..................... 28
CAPITALIZATION............................. 30
SELECTED CONSOLIDATED FINANCIAL DATA....... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................... 33
Overview............................... 33
Results of Operations.................. 33
Pro Forma Operating Results............ 36
Funds from Operations.................. 36
Cash Flows............................. 37
Liquidity and Capital Resources........ 38
Inflation.............................. 39
Impact of Accounting Pronouncements
Issued but not Adopted by the
Company.............................. 39
BUSINESS AND PROPERTIES.................... 40
The Properties......................... 40
National, Regional and Local Tenant
Summary.............................. 42
Anchor, Non-Anchor Tenant Summary...... 43
Lease Expirations...................... 44
Historical Leasing Activity............ 45
Major Tenants.......................... 46
Capital Expenditures................... 46
Mortgage Indebtedness.................. 47
Unsecured Credit Facility.............. 47
Insurance.............................. 48
Management and Employees............... 48
Legal Proceedings...................... 48
Government Regulation.................. 48
MANAGEMENT................................. 50
Directors and Executive Officers....... 50
Committees of the Board of Directors... 52
Compensation of Directors.............. 53
Executive Compensation................. 53
Compensation Committee Interlocks and
Insider Participation................ 54
Employment Agreements.................. 54
</TABLE>
i
<PAGE> 5
<TABLE>
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PAGE
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<S> <C>
401(k) Plan............................ 55
Indemnification........................ 55
STRUCTURE AND FORMATION TRANSACTIONS OF THE
COMPANY.................................. 56
Formation Transactions................. 56
Benefits to Related and Other
Parties.............................. 56
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................. 58
Terms of Transfers..................... 58
Director Designation................... 58
Registration Rights.................... 58
Assignment of Lease.................... 58
Preemptive Rights...................... 58
Non-Competition Agreement.............. 58
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES............................... 58
Investment Policies.................... 58
Dispositions........................... 59
Financing Policies..................... 59
Working Capital Reserves............... 61
Conflict of Interest Policies.......... 61
Other Policies......................... 61
PRINCIPAL STOCKHOLDERS..................... 62
DESCRIPTION OF CAPITAL STOCK............... 63
General................................ 63
Common Stock........................... 63
Transfer Agent and Registrar........... 64
Preferred Stock........................ 64
Power to Issue Additional Shares of
Common Stock and Preferred Stock..... 64
Restrictions on Ownership and
Transfer............................. 64
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS......... 68
Board of Directors..................... 68
Removal of Directors................... 68
</TABLE>
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PAGE
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<S> <C>
Business Combinations.................. 68
Control Share Acquisitions............. 69
Amendment to the Charter and Bylaws.... 70
Meetings of Stockholders............... 70
Advance Notice of Director Nominations
and New Business..................... 70
Dissolution of the Company............. 70
Limitation of Liability and
Indemnification for Directors and
Officers............................. 70
SHARES ELIGIBLE FOR FUTURE SALE............ 72
Registration Rights.................... 73
Reinvestment and Share Purchase Plan... 73
FEDERAL INCOME TAX CONSEQUENCES............ 74
Taxation of the Company................ 74
Failure to Qualify..................... 80
Consequences of the Formation
Transactions on the Company's
Qualification as a REIT--Earnings and
Profits Distribution Requirement..... 80
Taxation of Taxable U.S. Stockholders
Generally............................ 81
Backup Withholding..................... 83
Taxation of Tax-Exempt Stockholders.... 83
Taxation of Non-U.S. Stockholders...... 84
Tax Risks Associated with
Partnerships......................... 87
Recently Proposed Legislation.......... 87
Other Tax Consequences................. 87
ERISA CONSIDERATIONS....................... 88
Fiduciary Considerations............... 88
Plan Assets Issue...................... 89
UNDERWRITING............................... 90
EXPERTS.................................... 91
LEGAL MATTERS.............................. 92
ADDITIONAL INFORMATION..................... 92
GLOSSARY................................... 93
</TABLE>
ii
<PAGE> 6
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 or incorporated by reference in this Prospectus.
Unless indicated otherwise, the information contained in this Prospectus assumes
that (i) the Underwriters' over-allotment option will not be exercised, (ii) the
public offering price for the Common Stock offered hereby will be $22.50, and
(iii) the Company has closed the acquisitions of the two properties referenced
herein that it does not currently own (namely, Creekside Center and Panther Lake
Shopping Center) which are expected to occur by April 30, 1998. 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;
all references to the average age of the properties are based on the age of each
property as measured from the date it was built or the date it was most recently
substantially renovated; and all references in this Prospectus to the activities
of the Company prior to August 13, 1997 refer to the activities of Pan Pacific
Development (U.S.) Inc. ("PPD") and its affiliates. See "Glossary" beginning on
page 93 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 ("REIT") engaged in owning, acquiring, managing, leasing and developing
community and neighborhood shopping centers predominantly located in four key
western U.S. markets. Since the closing of its initial public offering on August
13, 1997 (the "IPO"), the Company has invested $202.7 million in acquiring 17
additional community and neighborhood shopping center properties (collectively,
the "Acquired Properties"), increasing its portfolio of shopping center
properties from the initial 25 Properties (collectively, the "Initial
Properties") to 42 Properties (collectively, the "Properties").
The Properties are well established community and neighborhood shopping
centers which are generally strategically situated in densely populated, middle
and upper income markets, are conveniently located and easily accessible from
major transportation arterials. The Properties consist of an aggregate of over
5.7 million square feet of GLA (not including 955,180 square feet of
anchor-owned space at the Properties) and have an average age of approximately
eight years. Eighteen of the Properties (38.5% of the total GLA) are located in
California with nine Properties located in Northern California (20.9% of the
total GLA) and nine Properties located in Southern California (17.6% of the
total GLA). Fourteen of the Properties are located in the Pacific Northwest
(33.4% of the total GLA), with seven located in Washington (16.8% of the total
GLA), predominantly within the Seattle area, and seven located in Oregon (16.6%
of the total GLA), predominantly within the Portland area. Six of the Properties
are located in Las Vegas, Nevada (23.3% of the total GLA) and the remaining four
Properties (4.8% of the total GLA) are located in New Mexico, Tennessee,
Kentucky and Florida. As of December 31, 1997, the Properties were 96.1% leased
to 904 tenants, of which 83.0% was leased to national and regional retailers
(401 tenants and 104 tenants, respectively). Twenty-six of the Properties are
anchored by national or regional supermarkets such as Albertson's, Kroger,
Food-4-Less, Vons, Safeway, and Lucky Stores.
Management intends to continue its strategy of acquiring shopping centers
that are consistent with its existing portfolio in terms of quality, tenant
diversity and location, and that provide the opportunity to expand within the
Company's four key western U.S. markets or to establish a presence in targeted
markets with favorable economic and demographic characteristics. The Company has
entered into letters of intent to acquire an additional shopping
centers encompassing square feet of GLA (the "Potential
Acquisitions").
The Company operates from its Vista, California headquarters and four
regional offices located in Las Vegas, Nevada; Kent, Washington; Chino,
California; and Sacramento, California. The Company is a fully-integrated real
estate company with 71 employees, as of March 31, 1998, with in-house expertise
in property management, leasing, acquisitions, development, administration,
accounting services and architectural design.
1
<PAGE> 7
The nine members of the Company's senior management (including its five
executive officers) have an average of approximately 13 years of experience in
the real estate industry. See "Management--Directors and Executive Officers."
RISK FACTORS
An investment in the Common Stock involves various material risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to an investment in the Company. Such risks include, among
others:
O demand for shopping center space in the Company's markets may decrease;
the Company may be unable to re-let space upon lease expirations or to
pay renovation and reletting costs in connection therewith; economic and
other conditions may affect shopping center property cash flows and
values; tenants may be unable to make lease payments or may become
bankrupt; a property may not generate revenue sufficient to meet
operating expenses, including future debt service; and real estate
investments are generally illiquid. The foregoing may adversely affect
the Company's ability to make expected distributions to stockholders;
O properties acquired by the Company may not perform as well as expected;
these acquired properties may have characteristics or deficiencies
unknown to the Company affecting their valuation or revenue potential;
the cost of integrating these acquired properties into the Company's
existing management structure may be greater than expected;
O dependence on key management personnel, whose continued service is not
guaranteed;
O influence of certain affiliates of the Company (including PPD) on the
Company may not be consistent with the interests of other stockholders;
O real estate financing risks, including the possibility that the Company
may not be able to refinance outstanding indebtedness upon maturity
(including debt outstanding under the Company's $200 million unsecured
acquisition credit facility (the "Unsecured Credit Facility") which
matures in August 2000) 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;
O 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;
O if the Company is unable to close a significant number of potential
acquisitions or to locate additional available acquisitions after the
Offering, the Company's ability to increase distributable cash flow per
share could be adversely affected;
O distribution requirements of REITs under federal income tax laws may
limit the Company's ability to finance future acquisitions, developments
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 Common Stock and may limit cash available for
distribution;
O 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
affect the Company's financial condition, results of operations and cash
available for distribution;
O absence of a limitation in the organizational documents of the Company on
the amount of indebtedness that the Company may incur;
O potential anti-takeover effects of provisions generally limiting, subject
to certain exceptions, the actual or constructive ownership of capital
stock of the Company by any one person or entity to 6.25% of the
2
<PAGE> 8
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; and
O certain types of losses, such as from fire, earthquakes, and floods, may
be uninsured or may exceed the Company's insurance coverage.
ACTIVITIES SINCE THE INITIAL PUBLIC OFFERING
COMPLETED ACQUISITIONS
Since the completion of the IPO on August 13, 1997, the Company has
invested $202.7 million in acquiring the 17 Acquired Properties which encompass
approximately 2.1 million square feet of GLA (not including 330,556 square feet
of anchor-owned space) representing a 56.8% increase in the Company's total GLA.
Capitalizing on its regional infrastructure and industry contacts, the Company
has increased its presence in all of its key western U.S. markets, with a focus
on significantly increasing its presence in California and the Pacific Northwest
in order to balance and optimize the Company's overall geographic
diversification. Of the 17 Acquired Properties, 16 are located in California and
the Pacific Northwest (3 in Northern California, 3 in Southern California and 10
in the Pacific Northwest) and one property is located in Las Vegas, Nevada. As
of December 31, 1997, the Acquired Properties have an average age of
approximately nine years and were 94.3% leased to a diverse mix of 275 tenants.
The Company continues to focus on acquiring properties that are consistent
with its existing portfolio. The acquisitions are generally well-located in
demographically strong, densely populated markets and cater to the daily needs
of the surrounding communities. Thirteen of the Acquired Properties are
grocery-anchored. As of December 31, 1997, 82.2% of the total GLA at the
Acquired Properties was leased to a diverse mix of national and regional
retailers, and 63.6% was leased to anchor tenants generally pursuant to
long-term leases (only 36.4% of the anchor-leased GLA at the Acquired Properties
is scheduled to expire within the next 10 years).
3
<PAGE> 9
The following table sets forth certain information relating to each of the
Acquired Properties, all of which are 100% owned by the Company:
<TABLE>
<CAPTION>
GLA
---------------------------------
RETAILER ACQUISITION
DATE OWNED OWNED TOTAL PRICE
PROPERTY AND LOCATION ACQUIRED (SQ. FT.) (SQ. FT.) (SQ. FT.) ($000S)
--------------------- -------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Manteca Marketplace March 1998 172,435 -- 172,435 $ 15,600
Manteca, CA
Brookvale Shopping Center December 1997 128,224 -- 128,224 12,600
Fremont, CA
Creekside Center (1) 80,911 -- 80,911 6,000
Hayward, CA
SOUTHERN CALIFORNIA
San Dimas Marketplace January 1998 154,020 117,000 271,020 22,800
San Dimas, CA
Tustin Heights Shopping December 1997 131,518 -- 131,518 14,700
Center
Tustin, CA
Palmdale Shopping Center December 1997 81,050 -- 81,050 4,600
Palmdale, CA
PACIFIC NORTHWEST
Milwaukie Marketplace February 1998 266,928 -- 266,928 (3)
Milwaukie, OR
Bear Creek Plaza January 1998 183,998 -- 183,998 13,100
Medford, OR
Powell Valley Junction February 1998 100,583 -- 100,583 (3)
Gresham, OR
Pioneer Plaza February 1998 96,027 -- 96,027 (3)
Springfield, OR
Shute Park Plaza February 1998 58,560 -- 58,560 (3)
Hillsboro, OR
24 Hour Fitness April 1998 40,000 -- 40,000 (3)
Hillsboro, OR
Tacoma Central November 1997 134,868 165,519 300,387 (4)
Tacoma, WA
Claremont Village November 1997 88,706 -- 88,706 (4)
Everett, WA
Olympia West Center November 1997 69,212 3,800 73,012 (4)
Olympia, WA
Panther Lake Shopping Center (1) 69,090 44,237 113,327 7,800
Kent, WA
LAS VEGAS, NEVADA
Rainbow Promenade September 1997 228,279 -- 228,279 31,300
--------- -------- --------- --------
Las Vegas, NV
TOTAL.................................. 2,084,409 330,556 2,414,965 $202,700
========= ======== ========= ========
<CAPTION>
PROPERTY AND LOCATION MAJOR RETAILERS
--------------------- ---------------------------------------
<S> <C>
NORTHERN CALIFORNIA
Manteca Marketplace Save Mart Supermarket, Rite Aid, Sears,
Manteca, CA Stadium 10 Cinemas
Brookvale Shopping Center Lucky Stores, Longs Drugs
Fremont, CA
Creekside Center Lucky Stores, Longs Drugs
Hayward, CA
SOUTHERN CALIFORNIA
San Dimas Marketplace Target(2), Office Max, Ross Stores,
San Dimas, CA Petco, Trader Joe's, Super Crown Books
Tustin Heights Shopping Ralph's, Longs Drugs, Michael's Arts &
Center Crafts
Tustin, CA
Palmdale Shopping Center Smart & Final, Rite Aid, Pic N Save
Palmdale, CA
PACIFIC NORTHWEST
Milwaukie Marketplace Albertson's, Rite Aid, Jo-Ann Fabrics
Milwaukie, OR
Bear Creek Plaza Albertson's, Bi-Mart, T.J. Maxx, Value
Medford, OR Village
Powell Valley Junction Food 4 Less, Cascade Athletic Club
Gresham, OR
Pioneer Plaza Safeway Food & Drugs
Springfield, OR
Shute Park Plaza True Value Hardware
Hillsboro, OR
24 Hour Fitness 24 Hour Fitness
Hillsboro, OR
Tacoma Central Target(2), Top Food & Drug(2), Office
Tacoma, WA Depot, T.J. Maxx, Cineplex Odeon
Claremont Village QFC Supermarket
Everett, WA
Olympia West Center Barnes & Noble, Good Guys, Petco
Olympia, WA
Panther Lake Shopping Center Albertson's(2), Rite Aid
Kent, WA
LAS VEGAS, NEVADA
Rainbow Promenade United Artists Theatres, Linens N'
Things,
Las Vegas, NV OfficeMax, Cost Plus, Barnes & Noble,
Petco
TOTAL..................
</TABLE>
- ---------------
(1) Properties which the Company expects to close by April 30, 1998.
(2) Retailers that own their buildings.
(3) Properties that comprise The Oregon Portfolio which was acquired for a total
purchase price of $32.6 million.
(4) Properties that comprise The PNW Portfolio which was acquired for a total
purchase price of $41.6 million.
4
<PAGE> 10
The Company believes that its regional infrastructure as well as the depth
and experience of management has enabled it to quickly and efficiently integrate
the Acquired Properties into the portfolio. In addition, the Company intends to
aggressively pursue maximizing the cash flow from the Acquired Properties by
utilizing its in-house leasing programs to lease available space and to release
expiring space at higher rental rates as market conditions improve, and by
utilizing its regional property management infrastructure to reduce property
operating expenses through achieving economies of scale.
POTENTIAL ACQUISITIONS
The Company is continuing to focus on increasing its presence in California
and the Pacific Northwest. The Company has entered into letters of intent to
acquire the Potential Acquisitions (which include
grocery-anchored centers) encompassing square feet
of GLA for an aggregate purchase price of $ million.
The Company believes each of the Potential Acquisitions is situated in
demographically strong in-fill locations on or near major transportation
arterials. of the Potential Acquisitions are in Northern
California, are in Southern California, and are in
the Pacific Northwest. Each of the Potential Acquisitions is subject to the
completion of due diligence and satisfaction of other customary conditions.
There can be no assurance that any of the Potential Acquisitions will be
completed.
DEVELOPMENT ACTIVITY
Since the IPO, the Company has completed the development of Phase II of
Laguna Village which represents over 60,000 square feet of additional retail
space. The Company believes the rapid residential growth in the community of
Laguna Creek in southern Sacramento, California, where Laguna Village is
located, has created significant demand for local retail, services, restaurants
and entertainment. Therefore, the Company continues to pursue the development of
Laguna Village based on its belief that this market has an undersupply of
entertainment, recreation and food services. With the completion of Phase II,
Laguna Village now totals 108,203 square feet and as of December 31, 1997 was
91.5% leased to 10 tenants including United Artist Theatres and 24 Hour Fitness.
The Company is currently pursuing the development of Phase III of Laguna Village
which, upon completion, will encompass approximately 12,000 square feet of
retail space.
Including Phase III of Laguna Village, the Company has buildout and
expansion development opportunities at eight Properties within its current
portfolio, representing an aggregate of approximately 90,000 square feet of new
retail space. These development opportunities are mainly comprised of outparcel
sites. The Company pursues buildout and expansion opportunities when they are
substantially pre-leased and after management has considered other factors such
as market conditions and retailing trends. The Company is currently undertaking
development projects at Winterwood Pavilion, Canyon Ridge Plaza and Country Club
Center, which total approximately 32,500 square feet of new space and are
scheduled to be completed during 1998. Recently, the Company completed a 3,200
square foot building on an outparcel pad at each of Brookvale Shopping Center
and Olympia Square.
LEASING ACTIVITY
Capitalizing on its aggressive property management and in-house leasing
programs, as well as improving market conditions in its key western U.S.
markets, the Company has increased the occupancy of its portfolio from 95.9% at
December 31, 1996 to 96.1% at December 31, 1997. In addition, through its
leasing activities, the Company continues to achieve growth in rental rates on
new or renewed leases over the rental rates of expiring leases. In 1997, the
Company entered into 148 new and renewed leases aggregating 426,557 square feet
at an average annual base rent of $14.81 per square foot, an increase of 14.2%
over expiring rents.
FINANCING ACTIVITY
The Company's financing strategy is to maintain a conservative and flexible
capital structure in order to facilitate the Company's growth strategies and to
maximize long term stockholder value. Upon the completion of the Offering and
the exercise of PPD's participation rights, the Company will have a debt to
total market
5
<PAGE> 11
capitalization of 27.9% (27.4% if the Underwriters' over-allotment option is
exercised in full and PPD exercises its additional participation rights in full)
with debt comprised of approximately $107.6 million of fixed rate, long term
mortgage debt with an average interest rate of 8.07% and a weighted average
maturity of 7.4 years, and an estimated $74.0 million of variable rate debt
under the Unsecured Credit Facility. In addition, the Company has increased the
percentage of unencumbered Properties in its portfolio from 72.0% at the time of
the IPO (18 of 25 Properties) to 78.6% (33 of 42 Properties). For the quarter
ended December 31, 1997, the Company maintained a 3.9 to 1 interest coverage
ratio.
In March 1998, the Company obtained an increase to its Unsecured Credit
Facility from $150 million to $200 million and a reduction in the borrowing rate
thereunder from LIBOR plus 1.50% to LIBOR plus 1.375% (which rate spread is
reduced to 1.25% for as long as the Company's debt-to-book value ratio is .30 or
below). Upon the completion of the Offering and the exercise of PPD's
participation rights, the Company will have approximately $74.0 million
outstanding under the Unsecured Credit Facility with approximately $126.0
million available to fund future acquisitions. The Unsecured Credit Facility,
which matures in August 2000, is syndicated to a group of six banks including
Bank of America NT&SA (lead agent), U.S. Bank, KeyBank, Bank of Nova Scotia,
First Union Bank and Sanwa Bank California.
BUSINESS AND GROWTH STRATEGIES
The Company's business and growth strategies involve three fundamental
practices: (i) owning, operating, acquiring, expanding and developing 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.
The Company will continue to focus its acquisition activities primarily
within its four key markets (Northern California, Southern California, the
Pacific Northwest and Las Vegas, Nevada) each of which the Company believes
continues to exhibit attractive economic and demographic characteristics. 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 further believes it has
certain competitive advantages which enhance its ability to identify and
capitalize on acquisition opportunities, including: (i) long-standing
relationships with institutional and other owners of shopping center properties
in the Company's four primary regions; (ii) fully integrated real estate
operations which enable the Company to respond quickly to acquisition
opportunities and to capitalize on the resulting economies of scale; and (iii)
access to capital as a public company.
Although the Company believes that current market conditions generally
favor acquisitions, management intends to continue its practice of redeveloping
and expanding properties as market and retailing trends evolve. In addition, the
Company intends to continue developing quality shopping center properties when
it believes market conditions and tenant opportunities support favorable
risk-adjusted returns.
The Company also seeks to maximize the cash flow from its portfolio by
continuing to enhance the operating performance of each property through its
in-house leasing and property management programs. The Company aggressively
pursues: (i) the leasing of available space; (ii) the renewal or releasing of
expiring leases at higher rental rates; 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.
Management believes that maintaining high occupancy rates, renewing and
replacing tenants and increasing base rents are critical measures of management
and leasing performance. Since December 31, 1993, the Company has maintained a
year-end portfolio occupancy rate ranging from 92.8% to 96.1% for the Properties
owned at such dates. During the past three years, the Company has renewed or
released 1,148,218 square feet involving 369 lease transactions, and average
base rents per square foot from such leasing activity increased from $11.52 in
1994 to $13.09 in 1995, to $14.74 in 1996 and to $14.81 in 1997.
6
<PAGE> 12
THE PROPERTIES
The following table sets forth certain information regarding each of the
Properties:
<TABLE>
<CAPTION>
GLA
YEAR BUILT/ ---------------------------------- TOTAL
RENOVATED % NUMBER OF
----------- RETAILER LEASED TENANTS
YEAR OWNED OWNED TOTAL AS OF AS OF
PROPERTY AND LOCATION ACQUIRED (SQ. FT.) (SQ. FT.) (SQ. FT.) 12/31/97 12/31/97
--------------------- ----------- --------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 1988/1994 267,735 -- 267,735 100.0 18
---------
Chico, CA 1997
Monterey Plaza 1990 183,180 49,500 232,680 98.1 29
----
San Jose, CA 1997
Manteca Marketplace 1972/1988 172,435 -- 172,435 85.1 18
---------
Manteca, CA 1998
Brookvale Shopping Center 1968/1989 128,224 -- 128,224 96.6 16
---------
Fremont, CA 1997
Laguna Village 1996/1997 108,203 -- 108,203 91.5 10
---------
Sacramento, CA (5)
Lakewood Shopping Center 1988 107,769 -- 107,769 93.9 25
----
Windsor, CA 1997
Fairmont Shopping Center 1988 104,281 -- 104,281 98.2 28
----
Pacifica, CA 1997
Creekside Center 1968 80,911 -- 80,911 98.2 17
----
Hayward, CA (6)
Rosewood Village 1988 50,248 -- 50,248 95.8 19
--- ------ ------- ------ -----
Santa Rosa, CA (7)
TOTAL/WEIGHTED AVERAGE 1,202,986 49,500 1,252,486 95.5 180
------ ------- ------ -----
SOUTHERN CALIFORNIA
Chino Town Square(8) 1987 337,001 188,060 525,061 99.3 53
----
Chino, CA (7)
San Dimas Marketplace 1996/1997 154,020 117,000 271,020 90.4 20
---------
San Dimas, CA 1998
Melrose Village Plaza(8) 1990 132,674 -- 132,674 89.4 27
----
Vista, CA (7)
Tustin Heights Shopping Center 1983/1992 131,518 -- 131,518 91.0 15
---------
Tustin, CA 1997
Laurentian Center 1988 97,131 -- 97,131 98.7 24
----
Ontario, CA (5)
Palmdale Shopping Center 1975 81,050 -- 81,050 100.0 14
----
Palmdale, CA 1997
Vineyard Village East 1992 45,200 -- 45,200 100.0 4
----
Ontario, CA (5)
Foothill Center 1990 19,636 -- 19,636 44.0 5
----
Rialto, CA 1997
Arlington Courtyard 1991 12,221 -- 12,221 82.8 4
---- ------ ------- ------ -----
Riverside, CA (7)
TOTAL/WEIGHTED AVERAGE 1,010,451 305,060 1,315,511 94.3 166
------ ------- ------ -----
TOTAL CALIFORNIA 2,213,437 354,560 2,567,997 94.9 346
------ ------- ------ -----
PACIFIC NORTHWEST
Sunset Square 1989 352,523 11,943 364,466 97.5 39
----
Bellingham, WA (7)
Milwaukie Marketplace 1989 266,928 -- 266,928 93.8 24
----
Milwaukie, OR 1998
Tanasbourne Village 1990 210,692 1,209 211,901 100.0 40
----
Hillsboro, OR (7)
Bear Creek Plaza 1977/1996 183,998 -- 183,998 96.3 24
---------
Medford, OR 1998
Olympia Square 1988 167,721 -- 167,721 95.3 37
----
Olympia, WA (7)
Tacoma Central 1987/1994 134,868 165,519 300,387 98.5 20
---------
Tacoma, WA 1997
Powell Valley Junction 1990 100,583 -- 100,583 93.1 6
----
Gresham, OR 1998
Pioneer Plaza 1988 96,027 -- 96,027 96.4 21
----
Springfield, OR 1998
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT 12/31/97
-----------------------
ANNUALIZED ANN. BASE
BASE RENT/
RENT LEASED SQ.
PROPERTY AND LOCATION ($)(1) FT.(2) MAJOR RETAILERS
--------------------- ---------- ---------- -------------------------------------------
<S> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 2,045,405 7.64 HomeBase, Food-4-Less,
Chico, CA Barnes & Noble, Office Depot
Monterey Plaza 2,546,092 14.17 Walmart, Lucky Stores(4), Walgreens
San Jose, CA
Manteca Marketplace 1,500,920 10.22 Save Mart Supermarket, Rite Aid, Sears,
Manteca, CA Stadium 10 Cinemas
Brookvale Shopping Center 1,089,793 8.80 Lucky Stores, Longs Drugs
Fremont, CA
Laguna Village 1,659,031 16.75 United Artists Theatres, 24 Hour Fitness
Sacramento, CA
Lakewood Shopping Center 947,854 9.37 Raley's Supermarket, U.S. Postal Service
Windsor, CA
Fairmont Shopping Center 1,161,191 11.34 Lucky Stores, Rite Aid
Pacifica, CA
Creekside Center 662,580 8.34 Lucky Stores, Longs Drugs
Hayward, CA
Rosewood Village 745,697 15.49 Lad's Supermarket, Bradley Video
--------
Santa Rosa, CA
TOTAL/WEIGHTED AVERAGE 12,358,563 10.76
--------
SOUTHERN CALIFORNIA
Chino Town Square(8) 4,482,399 13.40 Target(4), Wal-Mart, Mervyn's(4),
Chino, CA Nordstrom's Rack, AMC Theatres
San Dimas Marketplace 2,065,485 14.84 Target(4), Office Max, Ross Stores, Petco,
San Dimas, CA Trader Joe's, Super Crown Books
Melrose Village Plaza(8) 1,322,585 11.14 Lucky Stores, Savon Drugs
Vista, CA
Tustin Heights Shopping Center 1,411,996 11.79 Ralph's, Longs Drugs, Michael's
Tustin, CA Arts & Crafts
Laurentian Center 1,176,423 12.28 Pep Boys, 24 Hour Fitness
Ontario, CA
Palmdale Shopping Center 505,317 6.23 Smart & Final, Rite Aid, Pic N Save
Palmdale, CA
Vineyard Village East 366,946 8.12 Sears, Dunn Edwards
Ontario, CA
Foothill Center 92,429 10.70 PIP Printing
Rialto, CA
Arlington Courtyard 124,129 12.27 Harvest Christian Bookstore
--------
Riverside, CA
TOTAL/WEIGHTED AVERAGE 11,547,709 12.12
--------
TOTAL CALIFORNIA 23,906,272 11.38
--------
PACIFIC NORTHWEST
Sunset Square 2,678,815 7.79 Kmart, Ennen's Food, Fabricland, Rite Aid
Bellingham, WA
Milwaukie Marketplace 1,545,790 6.18 Albertson's, Rite Aid,
Milwaukie, OR Jo-Ann Fabrics
Tanasbourne Village 2,576,071 12.23 Safeway, Rite Aid, Jo-Ann Fabrics,
Hillsboro, OR Pier 1 Imports
Bear Creek Plaza 1,206,753 6.81 Albertson's, Bi-Mart Drugs, T.J. Maxx,
Medford, OR Value Village
Olympia Square 1,938,000 12.12 Albertson's, Ross Dress for Less
Olympia, WA
Tacoma Central 2,059,654 15.50 Target(4), Top Food & Drugs (4), Office
Tacoma, WA Depot, T.J. Maxx, Cineplex Odeon
Powell Valley Junction 770,627 8.23 Food 4 Less, Cascade Athletic Club
Gresham, OR
Pioneer Plaza 803,132 8.68 Safeway Food & Drugs
Springfield, OR
</TABLE>
7
<PAGE> 13
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT 12/31/97
GLA -----------------------
YEAR BUILT/ ---------------------------------- TOTAL
RENOVATED % NUMBER OF ANNUALIZED ANN. BASE
----------- RETAILER LEASED TENANTS BASE RENT/
YEAR OWNED OWNED TOTAL AS OF AS OF RENT LEASED SQ.
PROPERTY AND LOCATION ACQUIRED (SQ. FT.) (SQ. FT.) (SQ. FT.) 12/31/97 12/31/97 ($)(1) FT.(2)
--------------------- ----------- --------- ---------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Claremont Village 1955/1994 88,706 -- 88,706 95.6 12 1,156,276 13.63
---------
Everett, WA 1997
Canyon Ridge Plaza 1995 81,678 181,300 262,978 92.7 14 778,924 10.29
----
Kent, WA (5)
Olympia West Center 1980/1995 69,212 3,800 73,012 100.0 6 1,254,611 18.13
---------
Olympia, WA 1997
Panther Lake Shopping Center 1989/1998 69,090 44,237 113,327 89.7 18 773,248 12.48
---------
Kent, WA (6)
Shute Park Plaza 1989 58,560 -- 58,560 79.5 18 459,733 9.70
----
Hillsboro, OR 1998
24 Hour Fitness(3) 1989/1998 40,000 -- 40,000 100.0 1 432,919 10.82
---------
------- ------- ------ ----- --------
Hillsboro, OR 1998
TOTAL/WEIGHTED AVERAGE 1,920,586 408,008 2,328,594 95.8 280 18,434,553 10.02
------- ------- ------ ----- --------
LAS VEGAS, NV
Cheyenne Commons 1992 362,758 -- 362,758 99.1 44 4,144,920 11.53
----
Las Vegas, NV 1995
Sahara Pavilion North 1989 333,679 -- 333,679 96.7 67 4,074,865 12.62
----
Las Vegas, NV (7)
Rainbow Promenade 1995 228,279 -- 228,279 99.0 25 3,210,448 14.21
----
Las Vegas, NV 1997
Sahara Pavilion South 1990 160,682 -- 160,682 98.7 22 2,197,275 13.86
----
Las Vegas, NV (7)
Green Valley Town & Country 1990 130,722 -- 130,722 100.0 37 1,759,456 13.46
----
Las Vegas, NV 1997
Winterwood Pavilion 1990 127,975 -- 127,975 94.8 23 1,050,119 8.66
---- ------ ------- ------ ----- --------
Las Vegas, NV (7)
TOTAL/WEIGHTED AVERAGE 1,344,095 -- 1,344,095 98.1 218 16,437,083 12.46
------ ------- ------ ----- --------
OTHER
Maysville Marketsquare 1991/1993 126,507 89,612 216,119 100.0 19 873,003 6.90
---------
Maysville, KY (7)
Ocoee Plaza 1990 52,242 -- 52,242 89.6 11 331,083 7.07
----
Ocoee, FL (7)
Sports Unlimited 1990 51,542 40,000 91,542 100.0 13 614,805 11.93
----
Memphis, TN (7)
Country Club Center 1988 46,850 63,000 109,850 100.0 17 563,172 12.02
---- ------ ------- ------ ----- --------
Albuquerque, NM (7)
TOTAL/WEIGHTED AVERAGE 277,141 192,612 469,753 98.0 60 2,382,063 8.77
------ ------- ------ ----- --------
PORTFOLIO TOTAL/
WEIGHTED AVERAGE 5,755,259 955,180 6,710,439 96.1 904 61,159,971 11.06
====== ======= ====== ===== ========
<CAPTION>
PROPERTY AND LOCATION MAJOR RETAILERS
--------------------- -------------------------------------------------
<S> <C>
Claremont Village QFC Supermarket
Everett, WA
Canyon Ridge Plaza Target(4), Top Food & Drug(4),
Kent, WA Ross Dress for Less
Olympia West Center Barnes & Noble, Good Guys, Petco
Olympia, WA
Panther Lake Shopping Center Albertson's(4), Rite Aid
Kent, WA
Shute Park Plaza True Value Hardware
Hillsboro, OR
24 Hour Fitness(3) 24 Hour Fitness
Hillsboro, OR
TOTAL/WEIGHTED AVERAGE
LAS VEGAS, NV
Cheyenne Commons Wal-Mart, 24 Hour Fitness,
Las Vegas, NV Ross Dress for Less
Sahara Pavilion North Von's, Longs Drugs, T.J. Maxx, Shepler's,
Las Vegas, NV Border Books
Rainbow Promenade United Artists Theatres, Linen N' Things,
Las Vegas, NV Office Max, Cost Plus
Sahara Pavilion South Sports Authority, Office Max,
Las Vegas, NV Michael's Arts and Crafts
Green Valley Town & Country Lucky/Savon Superstore
Las Vegas, NV
Winterwood Pavilion Von's, Heilig-Meyers
Las Vegas, NV Furniture
TOTAL/WEIGHTED AVERAGE
OTHER
Maysville Marketsquare Walmart(4), Kroger, J.C. Penney
Maysville, KY
Ocoee Plaza Food Lion, Rite Aid, Family Dollar
Ocoee, FL
Sports Unlimited Sports Unlimited(4), Rich-Well Bedding Co.,
Memphis, TN Hancock Fabrics
Country Club Center Fun's Foods(4), Rio Rancho Health & Fitness
Albuquerque, NM
TOTAL/WEIGHTED AVERAGE
PORTFOLIO TOTAL/
WEIGHTED AVERAGE
</TABLE>
- ---------------
(1) Annualized Base Rent for all leases in place in which tenants are in
occupancy at December 31, 1997, calculated as follows: total base rent,
calculated in accordance with generally accepted accounting principles
("GAAP"), to be received during the entire term of each lease, divided by
the terms in months of such leases, multiplied by 12.
(2) Annualized Base Rent divided by the GLA leased at December 31, 1997.
(3) Property which the Company acquired after December 31, 1997. Occupancy is
based upon an executed lease with 24 Hour Fitness which was signed in April
1998.
(4) Retailers that own their buildings.
(5) Property was developed by the Company or its management.
(6) The Company expects to close the acquisition of these Properties by April
30, 1998.
(7) Property was part of the portfolio acquired in 1992 with Revenue Properties'
acquisition of PPDC.
(8) The Company owns a 91% interest in Chino Town Square and a 50% interest in
Melrose Village Plaza. Table reflects 100% of Property data.
8
<PAGE> 14
THE OFFERING
Common Stock Offered Hereby........... 2,000,000 shares
Common Stock to be purchased by PPD
concurrently with the completion of
the Offering........................ 2,000,000 shares
Common Stock outstanding after the
Offering(1)........................... 20,814,012 shares
Use of Proceeds....................... The net proceeds from the Offering
and the proceeds from the exercise of
PPD's participation rights will be
used to repay $86.4 million
outstanding under the Unsecured
Credit Facility. See "Use of
Proceeds."
NYSE Symbol........................... PNP
- ---------------
(1) Includes shares of Common Stock to be issued in the Offering and 2,000,000
additional restricted shares to be privately issued to PPD concurrently with
the completion of the Offering pursuant to PPD's exercise of its
participation rights. Does not include up to 300,000 shares of Common Stock
subject to the Underwriters' over-allotment option, up to 300,000 additional
restricted shares to be issued to PPD in the event PPD exercises its
additional participation rights upon the Underwriters' exercise of their
over-allotment option, and 1,620,000 shares of Common Stock reserved for
issuance under the 1997 Stock Incentive Plan.
DISTRIBUTIONS
The Company currently pays regular quarterly distributions to holders of
the Common Stock. The first distribution, for the period from the completion of
the IPO through September 30, 1997, was $.2128 per share, which is equivalent to
a quarterly distribution rate of $.3625 per share and an annual distribution
rate of $1.45 per share. On January 19, 1998, the Company paid a distribution of
$.3625 per share for the fourth quarter of 1997 to stockholders of record on
December 29, 1997. On March 17, 1998, the Company declared an increased
distribution of $.38 per share for the first quarter of 1998, which is
equivalent to an annual distribution rate of $1.52 per share, payable on April
17, 1998 to stockholders of record on March 31, 1998. Future distributions by
the Company will be at the discretion of the Board of Directors and will depend
on the actual cash available for distribution, the Company's financial condition
and capital requirements, the annual distribution requirements under the REIT
provisions of the Code (see "Federal Income Tax Consequences--Taxation of the
Company"), economic conditions and such other factors as the Board of Directors
deems relevant. See "Risk Factors--Changes in Policies Without Stockholder
Approval."
TAX STATUS OF THE COMPANY
The Company will elect to be treated as a REIT under Section 856(c)(1) of
the Code commencing with its short taxable year ended December 31, 1997. Also,
commencing with its short taxable year ended December 31, 1997 and for all
taxable years thereafter, the Company has operated, and intends to continue to
operate, so as to qualify to be taxed as a REIT under Sections 856 through 860
of the Code. The Company believes its organization and proposed method of
operation will enable it to continue 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 REIT taxable income (determined without
regard to the dividends paid deduction and by excluding net capital gains) 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 four 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.
9
<PAGE> 15
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth summary selected consolidated financial and
operating information on a pro forma basis and on a consolidated historical
basis for the Company. The following information should be read in conjunction
with the historical and pro forma consolidated financial statements and notes
thereto of the Company included elsewhere in this Prospectus. The summary
selected consolidated historical financial and operating information of the
Company at December 31, 1997 and 1996, and for the years ended December 31,
1997, 1996 and 1995, has been derived from the historical consolidated financial
statements audited by KPMG Peat Marwick LLP, independent auditors, whose report
with respect thereto is included elsewhere in this Prospectus. The summary
selected consolidated historical financial and operating information at December
31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993 has
been derived from the Company's audited consolidated financial statements.
The unaudited summary selected pro forma consolidated statement of
operations and other data for the year ended December 31, 1997 is presented as
if: (i) the Formation Transactions (see "Structure and Formation Transactions of
the Company"); (ii) the acquisitions of Chico Crossroads, Monterey Plaza,
Fairmont Shopping Center, Lakewood Shopping Center, Green Valley Town & Country,
Rainbow Promenade, The PNW Portfolio, Palmdale Shopping Center, Tustin Heights
Shopping Center and Brookvale Shopping Center (collectively, the "1997
Acquisitions") and the secured notes receivable; (iii) the acquisitions of San
Dimas Marketplace, Bear Creek Plaza, The Oregon Portfolio, Manteca Marketplace,
Creekside Center and Panther Lake Shopping Center (collectively, the "1998
Acquisitions"); (iv) the IPO and the repayment of notes payable with the
proceeds of the IPO; and (v) the Offering, the exercise of PPD's participation
rights and the repayment of a portion of the Unsecured Credit Facility all had
occurred on January 1, 1997. The unaudited summary selected pro forma
consolidated balance sheet data as of December 31, 1997, is presented as if: (i)
the 1998 Acquisitions; and (ii) the Offering, the exercise of PPD's
participation rights and the repayment of a portion of the Unsecured Credit
Facility occurred on December 31, 1997. 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.
10
<PAGE> 16
THE COMPANY PRO FORMA AND HISTORICAL
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
PRO FORMA HISTORICAL(1)
--------- ----------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue:
Base rent................................................. $ 55,604 $ 36,839 $ 28,111 $ 23,315 $ 20,967 $ 20,834
Percentage rent........................................... 447 278 239 154 192 243
Recoveries from tenants..................................... 11,841 8,042 6,214 5,478 5,473 3,210
Gain on sales of real estate................................ -- -- -- 501 -- 3,945
Income (loss) from unconsolidated partnerships.............. 706 409 109 (32) (271) (108)
Other revenue............................................... 1,120 884 432 319 387 --
-------- -------- -------- -------- -------- --------
Total revenue............................................... 69,718 46,452 35,105 29,735 26,748 28,124
-------- -------- -------- -------- -------- --------
Property expenses(2)........................................ 14,080 9,329 7,365 6,789 7,152 7,450
Depreciation and amortization............................... 12,922 8,928 7,693 6,340 6,129 6,255
Interest expense............................................ 15,430 14,057 14,671 12,262 11,405 10,880
General and administrative expenses......................... 4,000 3,923 3,228 3,620 3,729 3,116
Other expenses.............................................. 441 687 1,533 1,247 1,592 274
-------- -------- -------- -------- -------- --------
Income (loss) before income tax expense, minority interest
and extraordinary item.................................... 22,845 9,528 615 (523) (3,259) 149
Income tax expense.......................................... -- (19) (122) (87) (7) --
Minority interest........................................... (249) (153) (44) (5) 50 9
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item..................... $ 22,596 $ 9,356 $ 449 $ (615) $ (3,216) $ 158
========
Extraordinary loss on early extinguishment of debt.......... $ (1,043) $ -- $ -- $ -- $ --
-------- -------- -------- -------- --------
Net income (loss)........................................... $ 8,313 $ 449 $ (615) $ (3,216) $ 158
======== ======== ======== ======== ========
Basic net income per share.................................. $ 1.09(3) $ .49 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Diluted net income per share................................ $ 1.08(3) $ .49 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
PRO FORMA HISTORICAL(1)
--------- ----------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Properties--net of accumulated depreciation and
amortization.............................................. $553,456 $455,514 $264,017 $251,423 $214,554 $168,280
Total assets................................................ 585,162 487,220 293,186 275,690 247,101 190,551
Notes payable............................................... 108,316 108,316 192,915 191,302 160,465 138,181
Line of credit payable...................................... 73,954 62,450 -- -- -- --
Total liabilities........................................... 196,148 184,644 229,839 212,984 183,754 142,955
Minority interest........................................... 1,521 1,521 1,539 1,347 1,373 (100)
Total owner's equity........................................ -- -- 61,808 61,359 61,974 47,696
Total stockholders' equity.................................. 387,493 301,055 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL(1)
--------- ---------------------------------
1997 1997 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(4).................................... $ 35,522 $ 18,288 $ 7,733 $ 5,290
Cash flows from:
Operating activities...................................... -- $ 15,242 $ 6,493 $ 5,456
Investing activities...................................... -- $(166,276) $ (18,802) $ (42,815)
Financing activities...................................... -- $ 142,799 $ 14,966 $ 26,683
Number of operating Properties (at end of year)............. 42 32 19 18
GLA (sq. ft.) (at end of year).............................. 5,715,259 4,532,707 2,794,307 2,737,577
Occupancy of Properties owned (at end of year).............. 96.1% 97.5% 95.8% 95.4%
</TABLE>
- ---------------
(1) See Note 1 to the Company's 1997 and 1996 consolidated financial statements
regarding the Company's organization and basis of presentation prior to the
IPO.
(2) Property expenses include property operating expenses, property taxes and
property management fees.
(3) Calculated as if the pro forma transactions occurred on January 1, 1997.
(4) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. The Company computes Funds from Operations
in accordance with standards established by the White Paper. The Company's
computation of Funds from Operations may, however, differ from methodology
for calculating Funds from Operations utilized by other equity REITs and,
therefore, may not be comparable to such other REITs. Funds from Operations
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance
or to cash flow from operating activities (determined in accordance with
GAAP) as a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
11
<PAGE> 17
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.
This Prospectus contains statements which constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
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 ASSOCIATED RISKS.
Real Estate Ownership Risks. Real property investments are subject to
varying degrees of risk. The yields available from equity investments in real
estate depend in large part on the amount of income generated and expenses
incurred. If the Properties do not generate revenue sufficient to meet operating
expenses, including debt service, tenant improvements, leasing commissions and
other capital expenditures, the Company may have to borrow additional amounts to
cover fixed costs, and the Company's cash flow and ability to make distributions
to its stockholders will be adversely affected.
The Company's revenue and the value of its Properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; changes in retail
expenditures by consumers; the perceptions of prospective tenants of the
attractiveness of the property; the ability of the Company to manage and
maintain the Properties and secure adequate insurance; and increased operating
costs (including real estate taxes and utilities). In addition, real estate
values and income from properties are also affected by such factors as
applicable laws, including tax laws, interest rate levels and the availability
of financing.
Potential Inability of Company to Retain Tenants and Relet Space. The
Company will be subject to the risks that upon expiration, leases may not be
renewed, the space may not be relet or the terms of renewal or reletting
(including the cost of required renovations) may be less favorable than current
lease terms. Leases covering a total of approximately 5.6% and 37.2% of the
leased GLA of the Properties will expire through the end of 1998 and 2002,
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.
Dependence on Market Conditions in the Geographic Regions. Nine Properties
are located in Northern California, nine Properties are located in Southern
California, fourteen are located in the Pacific Northwest
12
<PAGE> 18
and six are located in Las Vegas, Nevada. To the extent that general economic or
other relevant conditions in these regions decline and result in a decrease in
consumer demand in these regions, the Company's performance may be adversely
affected. The markets for certain Properties are also significantly dependent on
the financial results of major local employers and on industry concentrations.
Tenant Early Termination Rights. Certain leases at some of the Properties
have provisions which allow the lessee to terminate its lease prior to the end
of the original term thereof under certain conditions, including, for example,
the failure to achieve a stated minimum sales level, the failure to achieve or
maintain a stated minimum leasing level, or the closing of an anchor store and
its failure to reopen within a certain period of time. To the extent that any
tenants terminate their leases prior to the end of the original lease terms,
tenant occupancy may decrease. The failure of the Company to re-lease any of the
Company's space could materially affect the Company's revenues and its ability
to make distributions.
Potential Illiquidity of Real Estate. Equity real estate investments are
relatively illiquid. Such illiquidity will tend to limit the ability of the
Company to vary its portfolio promptly in response to changes in economic or
other conditions. In addition, the Code limits a REIT's ability to sell
properties held for fewer than four years, which may affect the Company's
ability to sell properties without adversely affecting returns to holders of
Common Stock.
Competition With Other Developers and Real Estate Companies. There are
numerous commercial developers and real estate companies that compete with the
Company in seeking land for development, properties for acquisition and tenants
for properties. There are numerous shopping facilities that compete with the
Properties in attracting retailers to lease space. In addition, retailers at the
Properties face increasing competition from outlet stores, discount shopping
clubs, and other forms of marketing of goods, such as direct mail, internet
advertising and telemarketing. Such competition may reduce the number of
properties available for acquisition or development, reduce percentage rents
payable to the Company and may, through the introduction of competition,
contribute to lease defaults or insolvency of tenants. Thus, competition could
materially affect the Company's ability to generate net income and to make
distributions to its stockholders.
Cost of Compliance With Changes in Laws. Because increases in income,
service or transfer taxes are generally not passed through to tenants under
leases, such increases may adversely affect the Company's cash flow and its
ability to make distributions to stockholders. The Properties are also subject
to various federal, state and local regulatory requirements, such as
requirements of the Americans with Disabilities Act of 1990 (the "ADA") and
state and local fire and life safety requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants. The Company believes that the
Properties are currently in substantial compliance with all such regulatory
requirements and the Company expects to maintain compliance with such regulatory
requirements. However, there can be no assurance that these requirements will
not be changed or that new 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 its
stockholders.
Bankruptcy and Financial Condition of Tenants. At any time, a tenant of the
Properties may seek the protection of bankruptcy laws, which could result in
rejection and termination of such tenant's lease and thereby cause a reduction
in cash flow available for distribution by the Company. Although the Company has
13
<PAGE> 19
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 commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective after January 1, 1991. Although management of the Company
believes that the Properties are substantially in compliance with the present
requirements of the ADA, the Company may incur additional costs in connection
with such compliance in the future. In addition, a number of additional federal,
state and local laws and regulations exist that may require modifications to the
Company's properties, or affect certain future renovations thereof, with respect
to access by disabled persons. Non-compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants, and also could
result in an order to correct any non-complying feature. Under certain of the
Company's leases, the tenant is responsible for ensuring that the property
complies with all laws and regulations, including the ADA. Notwithstanding the
foregoing, the Company may be required to make substantial capital expenditures
to comply with this law. In addition, provisions of the ADA may impose
limitations or restrictions on the completion of certain renovations and thus
may limit the overall returns on the Company's investments. Thus, costs of
compliance with the ADA could adversely impact the Company's expenses and,
therefore, affect its ability to make distributions.
LACK OF OPERATING HISTORY WITH RESPECT TO RECENT AND FUTURE ACQUISITION
ACTIVITY. Seventeen of the Properties have been acquired since the IPO and may
have characteristics or deficiencies currently unknown to the Company that may
affect their valuation or revenue potential, and it is also possible that the
operating performance of these Properties may decline under the Company's
management. No assurances can be given that the Company will be able to succeed
with such integration or to effectively manage additional properties or that
newly acquired properties will perform as expected.
POTENTIAL INABILITY TO REFINANCE INDEBTEDNESS ON FAVORABLE TERMS; INTEREST
RATES MAY RISE.
Debt Financing and Existing Debt Maturities. The Company will be subject to
risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of principal
and interest, the risk that existing indebtedness on the Properties (which in
all cases 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 the completion of the Offering and PPD's
exercise of its participation rights, the Company will have a debt to total
market capitalization of 27.9% (27.4% if the Underwriters' over-allotment option
is exercised in full and PPD exercises its additional participation rights in
full) with debt comprised of approximately $107.6 million of fixed rate, long
term mortgage debt with an average interest rate of 8.07% and a weighted average
maturity of 7.4 years, and approximately $74.0 million outstanding under the
Unsecured Credit Facility which bears interest at LIBOR plus 1.375% (which rate
spread is reduced to 1.25% for as long as the Company's debt-to-book value ratio
is .30 or below) and matures in August 2000. 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
14
<PAGE> 20
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 $107.6 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 $53.7 million on four Properties. If
the Company is unable to meet its obligations under the mortgage financing, the
Properties securing such debt could be foreclosed upon, which could have a
material adverse effect on the Company and its ability to make expected
distributions and could threaten the continued viability of the Company. See
"Policies With Respect to Certain Activities--Financing Policies."
Rising Interest Rates and Variable Rate Debt. Upon completion of the
Offering, the Company expects to have an outstanding balance of approximately
$74.0 million under its Unsecured Credit Facility which bears 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."
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 is
dependent in large part upon the efforts of such persons. Although the Company
has entered into employment agreements with certain of its executive officers
which provide for their continued employment with the Company for up to three
years and contain certain non-compete provisions, there can be no assurance that
these executive officers will remain in the employ of the Company,
notwithstanding their potential liability for damages to the Company if they
should terminate their employment. See "Management." In the event key management
personnel do not remain in the employ of the Company, the Company could be
adversely affected.
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 believes it is organized and has operated, and intends to continue to
operate, so as to qualify as a REIT under the Code, commencing with its taxable
year ended December 31, 1997. A REIT generally is not taxed at the corporate
level on income it currently distributes to shareholders so long as it satisfies
certain requirements. However, no assurance can be given that the Company is now
or will continue to be organized or operated in a manner so as to qualify as a
REIT 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 (determined without regard to
the dividends paid deduction and by 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.
15
<PAGE> 21
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."
Proposed Legislation. Certain recent federal budget proposals include a
number of provisions affecting REITs, which, if enacted as currently drafted,
may materially impede the ability of the Company to engage in third-party
management or similar activities. See "Federal Income Tax
Considerations--Proposed Legislation."
Other Tax Liabilities. Even if the Company qualifies for and maintains its
REIT status, it will be subject to certain federal, state and local taxes on its
income and property. If the Company has net income from a prohibited
transaction, such income will be subject to a 100% tax. See "Federal Income Tax
Consequences."
DISTRIBUTIONS TO STOCKHOLDERS AFFECTED BY MANY FACTORS. Distributions by
the Company to its stockholders will be based principally on cash available for
distribution from the Properties. Increases in base rent under the leases of the
Properties or the receipt of rental revenue in connection with future
acquisitions will increase the Company's cash available for distribution to
stockholders. However, in the event of a default or a lease termination by a
lessee, there could be a decrease or cessation of rental payments and thereby a
decrease in cash available for distribution. In addition, the amount available
to make distributions may decrease if properties acquired in the future yield
lower than expected returns.
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions and
expansions without additional debt or equity financing. If the Company incurs
additional indebtedness in the future, it will require additional funds to
service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company will also be dependent
on a number of other factors, including the Company's financial condition, any
decision to reinvest funds rather than to distribute such funds, capital
expenditures, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Company deems relevant. In addition, the
Company may issue from time to time additional shares of Common Stock in
connection with the acquisition of properties or in certain other circumstances.
No prediction can be made as to the number of such shares of Common Stock which
may be issued, if any, and, if issued, the effect on cash available for
distribution on a per share basis to holders of Common Stock. Such issuances, if
any, will have a dilutive effect on cash available for distribution on a per
share basis to holders of Common Stock. See "Business and Growth
Strategies--Growth Strategies."
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 does not
distribute 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 distributions paid (or deemed to be 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 has made and intends to continue to make distributions to its
stockholders so as 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
16
<PAGE> 22
require the Company to borrow funds on a short-term basis to meet the
distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT.
ACQUISITION AND DEVELOPMENT INVESTMENTS MAY NOT PERFORM AS EXPECTED. The
Company intends to continue acquiring, developing and redeveloping shopping
center properties. See "Business and Growth Strategies--Business Strategies."
Acquisitions of retail properties entail risks that investments will fail to
perform in accordance with expectations. Estimates of development costs and
costs of improvements to bring an acquired property up to standards established
for the market position intended for that property may prove inaccurate. In
addition, there are general investment risks associated with any new real estate
investment. In the event the investments do not perform in accordance with
expectations, the Company's cash flow and ability to make distributions could be
adversely affected.
The Company intends to expand or renovate its Properties from time to time.
Expansion and renovation projects generally require expenditure of capital as
well as various government and other approvals, the receipt of which cannot be
assured. While policies with respect to expansion and renovation activities are
intended to limit some of the risks otherwise associated with such activities,
the Company will nevertheless incur certain risks, including expenditures of
funds on, and devotion of management's time to, projects which may not be
completed.
The Company anticipates that future acquisitions, development and
renovations will be financed through a combination of advances under the
Unsecured Credit Facility, other lines of credit and other forms of secured or
unsecured financing. If new developments are financed through construction
loans, there is a risk that, upon completion of construction, permanent
financing for newly developed properties may not be available or may be
available only on disadvantageous terms.
It is possible that the Company will in the future expand its business to
new geographic markets. The Company will not initially possess the same level of
familiarity with new markets outside of the geographic areas in which the
Properties are currently located, which could adversely affect its ability to
acquire, develop, manage or lease properties in any new localities.
Changing market conditions, including competition from other purchasers of
shopping center properties, may diminish the Company's opportunities for
attractive additional acquisitions.
The Company also intends to develop and construct shopping centers in
accordance with the Company's development and business strategies. See "Business
and Growth Strategies." Risks associated with the Company's development and
construction activities may include: abandonment of development opportunities;
construction costs of a property exceeding original estimates, possibly making
the property uneconomical; occupancy rates and rents at a newly completed
property may not be sufficient to make the property profitable; financing may
not be available on favorable terms for development of a property; and
construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs. In addition, new
development activities, regardless of whether they would ultimately be
successful, typically require a substantial portion of management's time and
attention. Development activities would also be subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary zoning, land use,
building, occupancy, and other required governmental permits and authorizations.
LIMITATIONS ON CONTROL OF PARTIALLY-OWNED PROPERTIES. The Company owns a
91% partnership interest in the limited partnership that owns Chino Town Square
and a 50% managing general partnership interest in the limited partnership that
owns Melrose Village Plaza (the "Partially-Owned Properties"). 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. Nevertheless, the lack of control over
Partially-Owned Properties could materially affect the Company's ability to make
important decisions about its real estate investments.
17
<PAGE> 23
LIMITATIONS ON CONTROL OVER FUTURE JOINT VENTURES OR PARTNERSHIPS. 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.
THE PROPERTIES MAY BE SUBJECT TO UNKNOWN ENVIRONMENTAL LIABILITIES. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at such property and may be held liable to a governmental entity or to
third parties for property 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 conducted 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
18
<PAGE> 24
current environmental condition of the Properties will not be affected by
tenants, by the condition of land or operations in the vicinity of the
Properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company. The Company believes that the Properties are
in substantial compliance in all material respects with all federal, state and
local laws, ordinances and regulations regarding hazardous or toxic substances
or petroleum products. The Company has not been notified by any governmental
authority, and is not otherwise aware of any material noncompliance, liability
or claim relating to hazardous or toxic substances or petroleum products in
connection with any of its Properties.
NO LIMITATION ON AMOUNT OF INDEBTEDNESS THE COMPANY MAY INCUR. Upon the
completion of the Offering and PPD's exercise of its participation rights, the
Company will have a debt to total market capitalization of 27.9% (27.4% if the
Underwriters' over-allotment option is exercised in full and PPD exercises its
additional participation rights in full). Although 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, 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.
CONFLICTS OF INTERESTS IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF
THE COMPANY.
Benefits from Formation Transactions. In connection with the Formation
Transactions, PPD received 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 received
registration rights similar to those of PPD. See "Structure and Formation
Transactions of the Company--Benefits to Related and Other Individuals." As
such, these persons may have interests that conflict with the interests of
others that participated in 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 of the Company, through their and their families' ownership
interests in Revenue Properties Company Limited, a publicly-held Canadian real
estate company ("Revenue Properties"), and Revenue Properties' ownership of PPD,
will own or control approximately 51.1% 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, 51.6% of the total outstanding
shares) upon the completion of the Offering and PPD's exercise of its
participation rights. In addition, PPD has the right to nominate certain
directors of the Company. Under the terms of the Company's amended and restated
articles of incorporation (the "Charter"), no stockholder, subject to certain
exceptions, is permitted to own in excess of 6.25% of the Common Stock.
Consequently, although Mark Tanz, Stuart Tanz, Russell Tanz and other family
members (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, the Tanz Family, 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.
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<PAGE> 25
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.
LIMITS ON CHANGES IN CONTROL AND POTENTIAL ANTI-TAKEOVER EFFECTS. Certain
provisions of the Charter and bylaws of the Company (the "Bylaws") may have the
effect of delaying, deferring or preventing a third party from making an
acquisition proposal for the Company and may thereby inhibit a change in control
of the Company. For example, such provisions may (i) deter tender offers for the
Common Stock, which offers may be attractive to the stockholders, or (ii) deter
purchases of large blocks of Common Stock, thereby limiting the opportunity for
stockholders to receive a premium for their Common Stock over then-prevailing
market prices. See "Description of Capital Stock" and "Certain Provisions of
Maryland Law and the Company's Charter and Bylaws." These provisions include the
following:
Limits on Ownership of Common Stock. In order for the Company to maintain
its qualification as a REIT for federal income tax purposes, 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).
Furthermore, after the first taxable year for which a REIT election is made,
shares of the Company's Common Stock must be held by a minimum of 100 persons
for at least 335 days of a 12-month taxable year (or a proportionate part of a
short taxable year). 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 (the "Ownership Limit") limits actual or
constructive ownership (including through the ownership of stock of PPD or
Revenue Properties) of the outstanding shares of Common Stock by any single
stockholder to 6.25% (by value or by number of shares, whichever is more
restrictive) 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 Limit with respect to
PPD and certain affiliated entities and has permitted such entities to actually
or constructively own up to 55.0% of the outstanding Common Stock (the "PPD
Ownership Limit"). The Board of Directors has waived the Ownership Limit with
respect to the Tanz Family and has permitted such persons to actually or
constructively own (including through the ownership of stock of PPD or Revenue
Properties), in the aggregate, up to 24.0% of the outstanding Common Stock (the
"Tanz Family Ownership Limit"). Further, the Board of Directors has waived the
Ownership Limit with respect to Acktion Corporation, a publicly traded Canadian
corporation ("Acktion Corporation"), and certain entities affiliated with such
corporation, and has permitted such entity to actually or constructively own up
to 10.5% (by number of shares or value, whichever is more restrictive) of the
outstanding Common Stock (the "Acktion Ownership Limit"). Actual or constructive
ownership of shares of Common Stock in excess of the Ownership Limit, the PPD
Ownership Limit, the Tanz Family Ownership Limit or the Acktion Ownership Limit
will cause the violative transfer or ownership to be void with respect to the
transferee or owner as to that number of shares the ownership of which by such
owner or transferee results in such owner or transferee or any other person
violating any of the foregoing ownership limits (and can include, under certain
circumstances, the divestiture of shares of Common Stock owned by PPD, see
"Description of Capital Stock--Restrictions on Ownership and Transfer") and such
shares will be automatically transferred to a trust for the benefit of a
Qualified Charitable Organization. Such transferee or owner shall have no right
to vote such shares or be entitled to dividends or
20
<PAGE> 26
other distributions with respect to such shares. See "Description of Capital
Stock--Restrictions on Ownership and Transfer" for additional information
regarding the Ownership Limit.
Preferred Stock. The Charter authorizes the Board of Directors to cause the
Company to issue authorized but unissued shares of Common Stock or the preferred
stock of the Company, $.01 par value (the "Preferred Stock") and to classify or
reclassify any unissued shares of Preferred Stock and to set the preferences,
rights and other terms of such classified or unclassified shares. See
"Description of Capital Stock--Preferred Stock." Although the Board of Directors
has no such intention at the present time, it could establish a series of
Preferred Stock that could, depending on the terms of such series, delay, defer
or prevent a transaction or a change in control of the Company that might
involve a premium price for the Common Stock or otherwise be in the best
interest of the stockholders.
Special Meetings of Stockholders. The Company's Bylaws permit a special
meeting of stockholders to be called at the written request of the holders of
shares entitled to cast not less than a majority of all the votes entitled to be
cast at such meeting. Because PPD will continue to hold a majority of the shares
of Common Stock upon consummation of the Offering, other stockholders of the
Company will not be able to request a special meeting of stockholders without
the consent of PPD.
Staggered Board. The Company's Board of Directors is divided into three
classes of directors. The initial terms of the first, second and third classes
will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors
of each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even though a tender
offer or change in control might be in the best interest of the stockholders.
See "Certain Provisions of Maryland Law and the Company's Charter and
Bylaws--Board of Directors--Number, Classification, Vacancies."
CERTAIN TYPES OF LOSSES MAY EXCEED INSURANCE COVERAGE. The Company carries
comprehensive liability, public area liability, fire, earthquake, flood, boiler
and machinery, extended coverage and rental loss insurance which currently
covers all the Properties, and will be expanded to cover each of the Potential
Acquisitions which are acquired, 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, and the Potential
Acquisitions will be, 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, other than Creekside Center and
Palmdale Shopping Center, 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, however, that material losses in excess of insurance
proceeds will not occur in the future.
EFFECT ON COMMON STOCK PRICE OF SHARES ELIGIBLE FOR FUTURE SALE. Upon
completion of the Offering and PPD's purchase of 2,000,000 restricted shares
pursuant to its participation rights, the Company will have 20,814,012 shares of
Common Stock outstanding (21,414,012 shares if the Underwriters' over-allotment
option is exercised in full and assuming PPD exercises its additional
participation rights 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 connection with the Company's IPO, certain
individuals collectively received 130,000 shares of restricted Common Stock and
options to purchase 900,000 shares of Common Stock were granted to certain
officers, directors and employees of the Company. Since the IPO an additional
277,500 options to purchase shares of Common Stock were granted to certain
officers, directors and employees of the Company. See "Management--Compensation
of Directors," "Executive Compensation" and "--1997 Stock Incentive
21
<PAGE> 27
Plan." The executive officers and directors of the Company have agreed that they
will not, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any such shares of Common Stock or
other capital stock of the Company, or any securities convertible into or
exercisable or exchangeable for any shares of Common Stock or other capital
stock of the Company for a period of three years from the completion of the IPO
without the prior written consent of Prudential Securities Incorporated on
behalf of the Underwriters. PPD has agreed that it will be bound by similar
lock-up restrictions, subject to certain exceptions. See "Shares Eligible for
Future Sale." Prudential Securities Incorporated may, in its sole discretion, at
any time and without notice, release all or any portion of the shares of Common
Stock subject to such lock-up agreements. At the conclusion of the restrictive
period, all shares of Common Stock issued in connection with the formation of
the Company may be sold in the public market pursuant to registration rights or
available exemptions from registration. See "Shares Available for Future Sale."
In addition, 442,500 additional shares of Common Stock have been reserved for
issuance pursuant to the 1997 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. No prediction
can be made about the effect that future sales of Common Stock will have on the
market prices of shares.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL. The investment,
financing, borrowing and distribution policies of the Company and its policies
with respect to all other activities, including growth, debt, capitalization and
operations, will be determined by the Board of Directors. Although the Board of
Directors has no present intention to do so, these policies may be amended or
revised at any time and from time to time at the discretion of the Board of
Directors without a vote of the stockholders of the Company. A change in these
policies could adversely affect the Company's financial condition, results of
operations or the market price of the Common Stock. See "Policies with Respect
to Certain Activities."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the
factors that will influence the market price of the Common Stock in public
markets will be the annual distribution rate on the shares. Increasing market
interest rates may lead prospective purchasers of the Common Stock to demand a
higher annual distribution rate from future distributions. Such an increase in
the required distribution rate may adversely affect the market price of the
Common Stock.
DISPOSITION OF PROPERTIES WITH BUILT-IN GAIN. In connection with the
formation of the Company, certain subsidiaries taxable as "C" corporations were
merged either into the Company or into subsidiaries of the Company which will
qualify as "qualified REIT subsidiaries." See "Federal Income Tax
Consequences--Taxation of the Company--Ownership of Subsidiaries." Certain of
these subsidiaries held 13 of the Initial Properties with Built-In Gain (each, a
"Built-In Gain Property" and collectively, the "Built-In Gain Properties") 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 any Built-In Gain Property is sold within 10 years of the date
it was acquired by the Company or any of its subsidiaries, the Company will be
required to pay taxes on the built-in gain that would have been realized if the
merging "C" corporation that had owned such Built-In Gain Property immediately
prior to its merger 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 Built-In Gains,
and if it desires to do so at some future date, it may be subject to tax on the
built-in gain as a result of any disposition of these properties to the extent
the gain exceeds any available net operating loss carry forwards for any
property.
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<PAGE> 28
THE COMPANY
GENERAL
The Company is a self-administered and self-managed REIT engaged in owning,
acquiring, managing, leasing and developing community and neighborhood shopping
centers predominantly located in four key western U.S. markets. Since its IPO,
the Company has invested $202.7 million in acquiring 17 additional community and
neighborhood shopping center properties, increasing its portfolio of shopping
center properties from the 25 Initial Properties to 42 Properties. The
Properties are well established neighborhood and community shopping centers
generally strategically situated in densely populated, middle and upper income
markets and are conveniently located and easily accessible from major
transportation arterials. The Properties consist of an aggregate of over 5.7
million square feet of GLA (not including 955,180 square feet of anchor-owned
space at the Properties) and have an average age of approximately eight years.
As of December 31, 1997, the Properties were 96.1% leased to 904 tenants, of
which 83.0% was leased to national and regional retailers (401 tenants and 104
tenants, respectively). Twenty-six of the Properties are anchored by national or
regional supermarkets such as Albertson's, Kroger, Food-4-Less, Vons, Safeway,
and Lucky Stores.
The following table sets forth certain summary information regarding the
Properties:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT 12/31/97
TOTAL NO. ------------------------------------
NUMBER TOTAL % OF % LEASED OF TENANTS ANNUALIZED % OF ANN. BASE
OF GLA(1) PORTFOLIO AS OF AS OF BASE PORTFOLIO RENT/
REGION PROPERTIES (SQ. FT.) GLA 12/31/97 12/31/97 RENT(2) BASE RENT SQ. FT.(3)
------ ----------- --------- --------- -------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Northern California........ 9 1,202,986 20.9 95.5 180 $12,358,563 20.2 $10.76
Southern California........ 9 1,010,451 17.6 94.3 166 11,547,709 18.9 12.12
Pacific Northwest.......... 14 1,920,586 33.4 95.8 280 18,434,553 30.1 10.02
Las Vegas, Nevada.......... 6 1,344,095 23.3 98.1 218 16,437,083 26.9 12.46
Other...................... 4 277,141 4.8 98.0 60 2,382,063 3.9 8.77
-- --------- ------ --- ----------- -----
TOTAL...................... 42 5,755,259 100.0 96.1 904 $61,159,971 100.0 $11.06
== ========= ====== === =========== =====
</TABLE>
- ---------------
(1) Represents GLA owned by the Company. Excludes 955,180 square feet of
anchor-owned GLA.
(2) Annualized Base Rent for all leases in place at December 31, 1997 calculated
as follows: total base rent, calculated in accordance with GAAP, to be
received during the entire term of each lease, divided by the terms in
months for such leases, multiplied by 12.
(3) Annualized Base Rent at December 31, 1997 divided by the GLA.
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
headquarters. 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 headquarters to implement the Company's
policies and procedures.
As a result of management's in-house leasing programs, the Properties
benefit from a diversified merchandising mix, which includes having national or
regional anchor tenants in 41 of the 42 Properties complemented by a carefully
planned mix of national, regional and local non-anchor tenants. To promote
stability and attract non-anchor tenants, the Company generally enters into
long-term leases (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. 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.
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<PAGE> 29
The following table sets forth certain summary information regarding the
Company's tenant diversification:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT
12/31/97
% OF TOTAL ------------------------------------
NUMBER OF LEASED TOTAL ANNUALIZED
TOTAL LEASED TENANTS GLA ANNUALIZED % BASE RENT/
GLA AS OF AS OF BASE OF LEASED
TENANT TYPE (SQ. FT.) 12/31/97 12/31/97 RENT($)(3) TOTAL SQ. FT. ($)(4)
----------- ------------ --------- ---------- ---------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
National(1).............................. 4,012,803 401 72.5 39,755,279 65.0 9.91
Regional(1).............................. 580,588 104 10.5 7,607,956 12.4 13.10
Local(1)................................. 938,565 399 17.0 13,796,736 22.6 14.70
--------- --- ------ ---------- ------
TOTAL/WEIGHTED AVERAGE................... 5,531,956 904 100.00 61,159,971 100.0 11.06
========= === ====== ========== ======
Anchor(2)................................ 3,332,433 98 60.2 27,350,958 44.7 8.21
Non-Anchor(2)............................ 2,199,523 806 39.8 33,809,013 55.3 15.37
--------- --- ------ ---------- ------
TOTAL/WEIGHTED AVERAGE................... 5,531,956 904 100.0 61,159,971 100.00 11.06
========= === ====== ========== ======
</TABLE>
- ---------------
(1) The Company defines a national tenant as any tenant that operates in at
least four major metropolitan areas located in more than one region (i.e.,
northeast, midwest, southwest or southeast); a regional tenant as any tenant
that operates in two or more metropolitan areas located within the same
region; a local tenant as any tenant that operates stores only within the
same metropolitan area as the shopping center.
(2) The Company defines anchor tenants as tenants which lease 15,000 square feet
or more and non-anchor tenants as tenants which lease fewer than 15,000
square feet.
(3) Annualized Base Rent for all leases in place at December 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 December 31, 1997.
The Company operates from its Vista, California headquarters (1631-B South
Melrose Drive, Vista, California 92083; telephone (760) 727-1002; fax (760)
727-1430) and four regional offices located in Las Vegas, Nevada; Kent,
Washington; Chino, California; and Sacramento, California. The Company is a
fully-integrated real estate company with 71 employees, as of March 31, 1998,
with in-house expertise in property management, leasing, acquisitions,
development, administration, accounting services, maintenance and architectural
design. The nine members of the Company's senior management (including its five
executive officers) have an average of approximately 13 years of experience in
the real estate industry. See "Management--Directors and Executive Officers."
HISTORY
The Company's history in owning and operating retail properties dates back
to 1971 when Mark Tanz's real estate operations 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 is a director of Revenue Properties, and two of his
sons, Stuart Tanz and Russell Tanz, were formerly directors and executive
officers of Revenue Properties. Shares of Revenue Properties trade on the
Toronto Stock Exchange and on NASDAQ.
In 1992, Revenue Properties acquired a controlling interest in the
Company's predecessor entity, and acquired the remaining interest in 1993. From
1992 to the Company's IPO in August 1997, PPD was led by Stuart Tanz, the
Company's Chief Executive Officer and President, along with Jeffrey Stauffer,
the Company's Executive Vice President and Chief Operating Officer. In January
1995, David Adlard joined PPD and is currently the Company's Executive Vice
President and Chief Financial Officer. Although PPD was a wholly-owned
subsidiary of Revenue Properties from 1993 until the IPO, PPD 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. From 1992 to August 1997, PPD's management increased 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. The
24
<PAGE> 30
Company was incorporated as a Maryland corporation in April 1997 and in August
1997 completed its IPO and began trading on the NYSE under the symbol PNP. In
the eight months since its IPO, the Company has increased its portfolio from 25
properties to 42 properties encompassing over 5.7 million square feet,
representing a 56.8% increase in terms of GLA.
BUSINESS AND GROWTH STRATEGIES
The Company's business and growth strategies involve three fundamental
practices: (i) owning, operating, acquiring, expanding and developing 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.
The Company will continue to utilize its in-depth market knowledge within
its four key western 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 further believes it has certain competitive
advantages which enhance its ability to identify and capitalize on acquisition
opportunities, including: (i) long-standing relationships with institutional and
other owners of shopping center properties in the Company's four primary
regions; (ii) fully integrated real estate operations which enable the Company
to respond quickly to acquisition opportunities and to capitalize on the
resulting economies of scale; and (iii) access to capital as a public company.
The Company's management has extensive experience in implementing its
acquisition strategy. Since 1993, management has acquired 38 of the Properties
(including the 13 acquired when Revenue Properties acquired PPDC), of which 18
have been acquired during the past twelve months (April 1997 through March 1998)
encompassing over 2.3 million square feet for an aggregate purchase price of
$248.5 million.
25
<PAGE> 31
The following chart sets forth certain information regarding the growth in
the Company's portfolio since 1994:
<TABLE>
<CAPTION>
Number of
Properties Owned Total GLA Owned
---------------- ---------------
(sq. ft. in millions)
<S> <C> <C>
12/94 13 2.1
12/95 18 2.7
12/96 19 2.8
8/97 (IPO) 25 3.6
12/97 32 4.6
4/98 42 5.7
</TABLE>
Although the Company believes that current market conditions generally
favor acquisitions, management intends to continue its practice of redeveloping
and expanding properties as market and retailing trends evolve. In addition, the
Company intends to continue developing quality shopping center properties when
it believes market conditions and tenant opportunities support favorable
risk-adjusted returns.
Of the 42 Properties, four were developed by the Company. The Company's
most recent development is Laguna Village, a three-phased project with the first
two phases completed in 1996 and 1997. The Company believes the rapid
residential growth in the community of Laguna Creek in southern Sacramento,
California where Laguna Village is located, has created significant demand for
local retail, services, restaurants and entertainment. Therefore, the Company
continues to pursue the development of Laguna Village based on its belief that
this market has an undersupply of entertainment, recreation and food services.
With the completion of Phase II, Laguna Village now totals 108,203 square feet
and as of December 31, 1997, was 91.5% leased to 10 tenants including United
Artist Theatres and 24 Hour Fitness. The Company is currently pursuing the
development of Phase III of Laguna Village which, upon completion, will
encompass approximately 12,000 square feet of retail space.
Including Phase III of Laguna Village, the Company has buildout and
expansion development opportunities at eight Properties within its current
portfolio, representing an aggregate of approximately 90,000 square feet of new
retail space. These development opportunities are mainly comprised of outparcel
26
<PAGE> 32
sites. The Company pursues buildout and expansion opportunities when they are
substantially pre-leased and after management has considered other factors such
as market conditions and retailing trends. The Company is currently undertaking
development projects at Winterwood Pavilion, Canyon Ridge Plaza and Country Club
Center, which total approximately 32,500 square feet of new space and are
scheduled to be completed during 1998. Recently, the Company completed a 3,200
square foot building on an outparcel pad at each of Brookvale Shopping Center
and Olympia Square.
The Company also seeks to maximize the cash flow from its existing
portfolio 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; (ii) the renewal or releasing of expiring leases at higher
rental rates; 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. Management believes that maintaining
high occupancy rates, the renewal and replacement of tenants and increasing base
rents are critical measures of management and leasing performance. Since
December 31, 1993, the Company has maintained a year-end portfolio occupancy
rate (based on square footage) ranging from 92.8% to 96.1% for the Properties
owned at such dates. During the past three years, the Company has renewed or
released 1,148,218 square feet involving 369 lease transactions, and base rents
per square foot from such leasing activity increased from $11.52 in 1994 to
$13.09 in 1995, to $14.74 in 1996 and to $14.81 in 1997.
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,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Number of new and renewed leases signed during period...... 148 122 99
Square footage leased during period........................ 426,557 439,887 281,774
Base rent per square foot(1)............................... $ 14.81 $ 14.74 $ 13.09
Tenant improvements per square foot(2)..................... $ 3.76 $ 2.87 $ 3.68
Leasing commissions per square foot(3)..................... $ 2.19 $ 2.31 $ 1.89
Effective rent per square foot(4).......................... $ 13.82 $ 13.97 $ 11.96
</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 receiving
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 term, in months, for such leases, multiplied
by 12, and divided by the total GLA under such leases.
27
<PAGE> 33
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting the
underwriting discounts and commissions and estimated expenses of the Offering,
are estimated to be approximately $41.4 million (approximately $47.8 million if
the Underwriters' over-allotment option is exercised in full). The Company will
also receive an additional $45.0 million in connection with PPD's exercise of
its participation rights ($51.8 million if the Underwriters' over-allotment
option is exercised in full and PPD exercises its additional participation
rights in full). The Company intends to use all of the net proceeds from the
Offering and proceeds received from PPD to reduce indebtedness outstanding under
the Unsecured Credit Facility. Upon completion of the Offering and the
application of the net proceeds there will be approximately $74.0 million
outstanding under the Unsecured Credit Facility with approximately $126.0
million available to fund the Company's future acquisitions. Pending such uses,
the net proceeds will be invested in short-term, investment grade,
interest-bearing securities or guaranteed obligations of the U.S. government.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Company's Common Stock began trading on the NYSE on August 8, 1997,
under the symbol "PNP." The following table sets forth for the periods indicated
the high and low sales prices of the Common Stock as reported by the NYSE and
the distributions paid by the Company.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DISTRIBUTIONS
------------- -------- ------- -------------
<S> <C> <C> <C>
September 30, 1997 (from August 8, 1997)........... $ 20.75 $ 19.75 $.2128(1)
December 1997...................................... $ 22.00 $19.875 $.3625(2)
March 31, 1998..................................... $22.5625 $21.375 $ .38(3)
June 30, 1998 (through April 8, 1998).............. $ 22.75 $ 21.75 --
</TABLE>
On April 8, 1998, the last reported sales price per share of Common Stock
on the NYSE was $22.50. As of April 8, 1998, the Company had approximately 45
stockholders of record and approximately 2,778 beneficial owners.
- ---------------
(1) The Company paid a distribution of $.2128 per share of Common Stock on
October 31, 1997, to stockholders of record on October 22, 1997, for the
period from August 8, 1997 (the first day of trading of the Company's Common
Stock on the NYSE) through September 30, 1997, which is approximately
equivalent to a quarterly distribution of $.3625 and an annual distribution
rate of $1.45 per share of Common Stock.
(2) On December 15, 1997, the Company declared a distribution of $.3625 per
share of Common Stock for the fourth quarter of 1997 which was paid on
January 19, 1998 to stockholders of record on December 15, 1997.
(3) On March 17, 1998, the Company declared a distribution of $.38 per share of
Common Stock for the first quarter of 1998 payable on April 17, 1998 to
stockholders of record on March 31, 1998.
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 dividends generally will be treated as long-term capital gain.
Distributions in excess of the Company's current and accumulated earnings and
profits generally will be treated as a non-taxable reduction of the
stockholder's basis in the Common Stock to the extent thereof, and thereafter as
capital gain. Distributions treated as a non-taxable reduction in basis will
generally have the effect of deferring taxation until the sale of a
stockholder's Common Stock. The Company determined that for federal tax
purposes, approximately $.3938 per share of the $.5753 per share distributions
paid with respect to the 1997 tax year represented ordinary dividend income to
stockholders. No assurances can be given regarding what percent of future
dividends will constitute return of capital for federal income tax purposes. In
order to avoid corporate income taxation of the earnings that it distributes,
the Company must make annual distributions to stockholders of at least 95% of
its REIT taxable income (computed without regard to the dividends paid deduction
and the Company's net capital gain), which the Company anticipates will be less
than its share of cash available for distribution. Under certain circumstances,
the Company may be required to make distributions in excess of cash available
for distribution in order to meet such distribution requirements. In
28
<PAGE> 34
such a case, the Company may find it necessary to arrange for short-term (or
possibly long-term) borrowings or to raise funds through the issuance of
preferred shares or additional shares of Common Stock.
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the actual Funds from Operations of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Federal Income Tax
Considerations--Taxation of the Company"), economic conditions and such other
factors as the Board of Directors deems relevant. See "Risk Factors--Changes in
Policies Without Stockholder Approval."
29
<PAGE> 35
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 on a historical and an as adjusted basis to give effect to (i)
the Property acquisitions completed between December 31, 1997 and March 31, 1998
and related borrowings under the Unsecured Credit Facility; and (ii) completion
of the Offering and the sale of 2,000,000 restricted shares to PPD pursuant to
the exercise of its participation rights, including the application of the
estimated net proceeds therefrom. See "Use of Proceeds." The information set
forth in the table should be read in connection with the consolidated financial
statements of the Company and notes thereto, the pro forma financial information
of the Company and the notes thereto and the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Notes payable............................................. $108,316 $107,612(1)
Borrowings under Unsecured Credit Facility................ 62,450 73,954(2)
-------- --------
Total debt............................................. 170,766 181,566
-------- --------
Equity:
Preferred Stock, $.01 par value; 30,000,000 shares
authorized, none issued and outstanding................ -- --
Common Stock, $.01 par value; 100,000,00 shares
authorized; 16,814,012 issued and outstanding on a
historical basis; and 20,814,012(3) issued and
outstanding on an as adjusted basis.................... 168 208
Capital in excess of par value............................ 300,887 387,285
-------- --------
Total equity........................................... 301,055 387,493
-------- --------
Total capitalization.............................. $471,821 $569,059
======== ========
</TABLE>
- ---------------
(1) The Company estimates the total debt outstanding upon completion of the
Offering will be reduced to $107.6 million due to amortization.
(2) The amount of debt outstanding under the Unsecured Credit Facility
immediately prior to the closing date of the Offering is expected to be
approximately $160.4 million.
(3) Includes shares of Common Stock to be issued in the Offering, and 2,000,000
additional restricted shares of Common Stock to be issued to PPD
concurrently with the completion of the Offering pursuant to PPD's exercise
of its participation rights. Does not include up to 300,000 shares of Common
Stock subject to the Underwriters' over-allotment option, up to 300,000
additional restricted shares to be issued to PPD in the event PPD exercises
its additional participation rights upon the Underwriters' exercise of their
over-allotment option, and 1,620,000 shares of Common Stock reserved for
issuance under the 1997 Stock Incentive Plan.
30
<PAGE> 36
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth summary selected consolidated financial and
operating information on a pro forma basis and on a consolidated historical
basis for the Company. The following information should be read in conjunction
with the historical and pro forma consolidated financial statements and notes
thereto of the Company included elsewhere in this Prospectus. The summary
selected consolidated historical financial and operating information of the
Company at December 31, 1997 and 1996, and for the years ended December 31,
1997, 1996 and 1995, has been derived from the historical consolidated financial
statements audited by KPMG Peat Marwick LLP, independent auditors, whose report
with respect thereto is included elsewhere in this Prospectus. The summary
selected consolidated historical financial and operating information at December
31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993 has
been derived from the Company's audited consolidated financial statements.
The unaudited summary selected pro forma consolidated statement of
operations and other data for the year ended December 31, 1997 is presented as
if: (i) the Formation Transactions; (ii) the acquisitions of the 1997
Acquisitions and the secured notes receivable; (iii) the acquisitions of the
1988 Acquisitions; (iv) the IPO and the repayment of notes payable with the
proceeds of the IPO; and (v) the Offering, the exercise of PPD's participation
rights and the repayment of a portion of the Unsecured Credit Facility all had
occurred on January 1, 1997. The unaudited summary selected pro forma
consolidated balance sheet data as of December 31, 1997, is presented as if: (i)
the 1998 Acquisitions; and (ii) the Offering, the exercise of PPD's
participation rights and the repayment of a portion of the Unsecured Credit
Facility occurred on December 31, 1997. 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.
31
<PAGE> 37
THE COMPANY PRO FORMA AND HISTORICAL
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
PRO FORMA HISTORICAL(1)
--------- -----------------------------------------------
1997 1997 1996 1995 1994 1993
--------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue:
Base rent................................................. $55,604 $36,839 $28,111 $23,315 $20,967 $20,834
Percentage rent........................................... 447 278 239 154 192 243
Recoveries from tenants..................................... 11,841 8,042 6,214 5,478 5,473 3,210
Gain on sales of real estate................................ -- -- -- 501 -- 3,945
Income (loss) from unconsolidated partnerships.............. 706 409 109 (32) (271) (108)
Other revenue............................................... 1,120 884 432 319 387 --
------- ------- ------- ------- ------- -------
Total revenue............................................... 69,718 46,452 35,105 29,735 26,748 28,124
------- ------- ------- ------- ------- -------
Property expenses(2)........................................ 14,080 9,329 7,365 6,789 7,152 7,450
Depreciation and amortization............................... 12,922 8,928 7,693 6,340 6,129 6,255
Interest expense............................................ 15,430 14,057 14,671 12,262 11,405 10,880
General and administrative expenses......................... 4,000 3,923 3,228 3,620 3,729 3,116
Other expenses.............................................. 441 687 1,533 1,247 1,592 274
------- ------- ------- ------- ------- -------
Income (loss) before income tax expense, minority interest
and extraordinary item.................................... 22,845 9,528 615 (523) (3,259) 149
Income tax expense.......................................... -- (19) (122) (87) (7) --
Minority interest........................................... (249) (153) (44) (5) 50 9
------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item..................... $22,596 $ 9,356 $ 449 $ (615) $(3,216) $ 158
=======
Extraordinary loss on early extinguishment of debt.......... $(1,043) $ -- $ -- $ -- $ --
------- ------- ------- ------- -------
Net income (loss)........................................... $ 8,313 $ 449 $ (615) $(3,216) $ 158
======= ======= ======= ======= =======
Basic net income per share.................................. $ 1.09(3) $ .49 $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= =======
Diluted net income per share................................ $ 1.08(3) $ .49 $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
PRO FORMA HISTORICAL(1)
--------- ----------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Properties--net of accumulated depreciation and
amortization.............................................. $553,456 $455,514 $264,017 $251,423 $214,554 $168,280
Total assets................................................ 585,162 487,220 293,186 275,690 247,101 190,551
Notes payable............................................... 108,316 108,316 192,915 191,302 160,465 138,181
Line of credit payable...................................... 73,954 62,450 -- -- -- --
Total liabilities........................................... 196,148 184,644 229,839 212,984 183,754 142,955
Minority interest........................................... 1,521 1,521 1,539 1,347 1,373 (100)
Total owner's equity........................................ -- -- 61,808 61,359 61,974 47,696
Total stockholders' equity.................................. 387,493 301,055 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL(1)
--------- ------------------------------------
1997 1997 1996 1995
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(4).................................... $ 35,522 $ 18,288 $ 7,733 $ 5,290
Cash flows from:
Operating activities...................................... -- $ 15,242 $ 6,493 $ 5,456
Investing activities...................................... -- $ (166,276) $ (18,802) $ (42,815)
Financing activities...................................... -- $ 142,799 $ 14,966 $ 26,683
Number of operating Properties (at end of year)............. 42 32 19 18
GLA (sq. ft.) (at end of year).............................. 5,715,259 4,532,707 2,794,307 2,737,577
Occupancy of Properties owned (at end of year).............. 96.1% 97.5% 95.8% 95.4%
</TABLE>
- ---------------
(1) See Note 1 to the Company's 1997 and 1996 consolidated financial statements
regarding the Company's organization and basis of presentation prior to the
IPO.
(2) Property expenses include property operating expenses, property taxes and
property management fees.
(3) Calculated as if the pro forma transactions occurred on January 1, 1997.
(4) The White Paper defines Funds from Operations as net income (loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. Management considers Funds from Operations an appropriate
measure of performance of an equity REIT because it is predicated on cash
flow analyses. The Company computes Funds from Operations in accordance with
standards established by the White Paper. The Company's computation of Funds
from Operations may, however, differ from methodology for calculating Funds
from Operations utilized by other equity REITs and, therefore, may not be
comparable to such other REITs. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of the Company's financial performance or to cash flow
from operating activities (determined in accordance with GAAP) as a measure
of the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
32
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the consolidated financial statements of Pan
Pacific Retail Properties, Inc., and the 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 period to period, largely attributable to: (i)
the Acquired Properties; (ii) a property placed into operation during the
period; and (iii) the benefit of a full period of rental and other revenue from
a property placed into operation in the preceding period.
The Company believes that overhead costs as a percentage of revenue will
decrease as the Company achieves economies of scale through increases in the
revenue base of its portfolio. For example, during the year ended December 31,
1997, the Company owned properties comprising a weighted average GLA of
3,581,000 square feet. Total expenses, excluding interest, depreciation and
amortization for the year ended December 31, 1997 were $13,939,000 or $3.89 per
square foot. By comparison, during the year ended December 31, 1996, the Company
owned properties comprising a weighted average GLA of 2,770,000 square feet.
Total expenses, excluding interest, depreciation and amortization, for the year
ended December 31, 1996 were $12,126,000 or $4.38 per square foot.
The Company expects that the more significant part of its revenue growth in
the next year or two will come from additional acquisitions and rent increases
from re-leasing and re-tenanting initiatives.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1997 to the Year Ended December 31,
1996.
Total revenue increased by $11,347,000 or 32.3% to $46,452,000 for the year
ended December 31, 1997 as compared to $35,105,000 for the year ended December
31, 1996.
Rental revenue increased by $8,767,000 or 30.9% to $37,117,000 from
$28,350,000 for the year ended December 31, 1997, compared to the year ended
December 31, 1996. The increase in rental revenue resulted primarily from the
acquisition of the 1997 Acquisitions. In addition, the inclusion in operations
of Phase I of Laguna Village in May 1996 and Phase II of Laguna Village in the
third quarter of 1997 added to this increase. Rental revenue also increased as a
result of increased occupancy levels primarily at Canyon Ridge Plaza, Sahara
Pavilion North, Chino Town Square and Tanasbourne Village.
Recoveries from tenants increased by $1,828,000 or 29.4% to $8,042,000 for
the year ended December 31, 1997, as compared to $6,214,000 for the year ended
December 31, 1996. This increase resulted primarily from the 1997 Acquisitions.
In addition, 1997 included a full period of recoveries for Phase I of Laguna
Village. Recoveries from tenants were 87.4% of property operating expenses and
property taxes for the year ended December 31, 1997, compared to 85.0% of the
same expenses for the same period in 1996.
Property expenses include property operating expenses, property taxes and
property management fees. Property operating expenses increased by $946,000 or
18.7% to $6,016,000 for the year ended December 31, 1997, as compared to
$5,070,000 for the year ended December 31, 1996. The increase in property
operating expenses was primarily attributable to the 1997 Acquisitions. In
addition, 1997 included a full year of property operating expenses for Phase I
of Laguna Village and a full quarter of operating expenses for Phase II of
Laguna Village. Property taxes increased by $943,000 or 42.0% for the year ended
December 31, 1997, compared to the year ended December 31, 1996. The increase in
property taxes was primarily the result of the completion of Phase I of Laguna
Village in 1996, the transfer of Phase II of Laguna Village to operations at
September 30, 1997 and the 1997 Acquisitions.
Depreciation and amortization increased by $1,235,000 or 16.1% to
$8,928,000 for the year ended December 31, 1997, as compared to $7,693,000 for
the year ended December 31, 1996. This was primarily due
33
<PAGE> 39
to the completion of Phase I of Laguna Village in May 1996, the completion of
Phase II of Laguna Village in September 1997 and the 1997 Acquisitions.
Interest expense decreased by $614,000 or 4.2% to $14,057,000 for the year
ended December 31, 1997, as compared to $14,671,000 for the year ended December
31, 1996, primarily as a result of decreased interest expense relating to the
repayment of debt of approximately $134,000,000 in August 1997 in connection
with the IPO. This decrease was partially offset by interest expense related to
the debt assumed pursuant to the acquisition of Monterey Plaza in April 1997
which was subsequently repaid in August 1997, the interest expense associated
with the new Unsecured Credit Facility, the net impact of the December 1996
refinancing of variable rate debt to fixed rate debt and construction loan
interest related to the development of Phase I of Laguna Village.
General and administrative expenses increased by $695,000 or 21.5% to
$3,923,000 for the year ended December 31, 1997, as compared to $3,228,000 for
the year ended December 31, 1996. This increase was primarily attributable to
annual salary increases and costs associated with additional staffing
necessitated by the 1997 Acquisitions. Expenses for tax and audit services were
also increased as a result of new public reporting requirements. These increases
were partially offset by a decrease in the management fee paid to Revenue
Properties that is no longer incurred as of the completion of the IPO. As a
percentage of total revenue, general and administrative expenses were 8.4% and
9.2% for the years ended December 31, 1997 and 1996, respectively. The Company
expects that general and administrative expenses will continue to decrease as a
percentage of total revenue in future periods due to economies of scale which
the Company anticipates should be realized as additional properties are
acquired.
Other expenses, net, consist primarily of loan guaranty fees and the
expensing of due diligence costs for acquisitions that are not completed. Other
expenses decreased by $846,000 or 55.2% to $687,000 for the year ended December
31, 1997, as compared to $1,533,000 for the year ended December 31, 1996. The
decrease was primarily due to loan guaranty fees paid to Revenue Properties
which are no longer being charged as the debt which was guaranteed was paid off
in August 1997 in connection with the IPO. This decrease was partially offset by
the expensing of due diligence costs in 1997 related to potential acquisitions
which were not consummated.
As part of the Formation Transactions, $134,217,000 of notes payable were
repaid. In connection with the early repayment of these notes, an extraordinary
loss of $1,043,000 was recorded which includes prepayment penalties and the
write off of unamortized financing costs and a loan premium.
The following table compares the operating data for the properties ("Same
Store Properties") that were owned and in operation for the entirety of both
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Rental.................................................... $26,755,000 $26,088,000
Recoveries from tenants................................... 6,265,000 5,842,000
Income from unconsolidated partnerships................... 409,000 109,000
Other..................................................... 458,000 432,000
----------- -----------
33,887,000 32,471,000
Operating expenses:
Property operating, property taxes and property management
fees................................................... 6,420,000 6,138,000
----------- -----------
Operating income............................................ $27,467,000 $26,333,000
=========== ===========
</TABLE>
Operating income for the Same Store Properties for the year ended December
31, 1997 increased over the same period in the prior year by $1,134,000 or 4.3%.
This increase was attributable to increased rental revenue resulting from
increased occupancy levels primarily at Canyon Ridge Plaza, Cheyenne Commons,
Sahara Pavilion North, Chino Town Square and Tanasbourne Village. In addition,
there were approximately $153,000 of lease termination fees received at Canyon
Ridge Plaza and Sahara Pavilion North in 1997. Property operating expenses for
these Same Store Properties increased by $282,000 or 4.6% for the year ended
34
<PAGE> 40
December 31, 1997, over the same period in the prior year due primarily to
increased property tax expense and center enhancement costs such as painting,
new awnings, signage and landscaping at Cheyenne Commons as well as increased
bad debt expense at Sunset Square.
Comparison of the Year Ended December 31, 1996 to the Year Ended December 31,
1995.
Total revenue increased by $5,370,000 or 18.1% to $35,105,000 for the year
ended December 31, 1996, as compared to $29,735,000 for the year ended December
31, 1995.
Rental revenue increased $4,881,000 or 20.8% to $28,350,000 for the year
ended December 31, 1996, as compared to $23,469,000 for the year ended December
31, 1995. The increase in rental revenue resulted primarily from a full year of
rental revenue from Cheyenne Commons, which was acquired in September 1995, the
completion of Canyon Ridge in December 1995, the completion of Phase I of Laguna
Village in May 1996 and the acquisition of the remaining 98% ownership interest
in Laurentian Center effective January 1996.
Recoveries from tenants increased to $6,214,000 for the year ended December
31, 1996, an increase of $736,000 or 13.4%, as compared to $5,478,000 for the
year ended December 31, 1995. This increase resulted principally from a full
year of recoveries from tenants of Cheyenne Commons and Canyon Ridge, partial
year recoveries from the tenant in Phase I of Laguna Village and the acquisition
of the remaining ownership interests in Laurentian Center. Recoveries from
tenants for 1996 represent 85.0% of property operating expenses and property
taxes as compared to 81.2% for 1995. This increase was due to the sale in 1995
of the Richardson Mall, a mixed use residential property located in Hartford,
Connecticut. 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. There was no comparable gain in 1996.
Property expenses include property operating expenses, property taxes and
property management fees. Property operating expenses for the year ended
December 31, 1996 increased to $5,070,000, an increase of $308,000 or 6.5%, from
$4,762,000 for the year ended December 31, 1995. Property taxes increased by
$263,000 or 13.3% to $2,244,000 for the year ended December 31, 1996, as
compared to $1,981,000 for the year ended December 31, 1995. These increases in
property operating expenses and property taxes were primarily the result of a
full year of ownership in 1996 of Cheyenne Commons, the completion of Phase I of
Laguna Village and Canyon Ridge and their subsequent operations, and the
acquisition of the remaining ownership interests in Laurentian Center.
Depreciation and amortization increased by $1,353,000 or 21.3% to
$7,693,000 from $6,340,000 primarily due to the 1996 acquisition and the full
year effect of the properties acquired or developed during 1995.
Interest expense for the year ended December 31, 1996 increased by
$2,409,000 or 19.6% to $14,671,000, as compared to $12,262,000 for the year
ended December 31, 1995, primarily as a result of the increase in mortgage loans
incurred to acquire Cheyenne Commons, to finance the development of Phase I of
Laguna Village and Canyon Ridge and the loan assumed in the acquisition of the
remaining ownership interests in Laurentian Center. Interest rates on variable
rate debt were relatively unchanged for 1996 as compared to 1995.
General and administrative expenses decreased by $392,000 or 10.8% for the
year ended December 31, 1996, compared to the year ended December 31, 1995,
primarily due to a reduction in payroll costs related to the relocation of the
Company's administrative offices in the spring of 1995. General and
administrative expenses as a percentage of total revenue decreased to 9.2%
during 1996 from 12.2% during 1995 as the Company was able to utilize its
personnel and other overhead costs over a greater revenue base.
Other expenses, net, consist primarily of loan guaranty fees, miscellaneous
income and expenses, and the write off of capitalized leasing commissions and
tenant improvements. Other expenses amounted to $1,533,000 for the year ended
December 31, 1996, an increase of $286,000 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.
35
<PAGE> 41
The following table compares the operating data for Same Store Properties
owned and in operation for the entirety of both years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue:
Rental.................................................... $22,094,000 $21,901,000
Recoveries from tenants................................... 5,139,000 5,223,000
Income (loss) from uncombined partnerships................ 109,000 (32,000)
Other..................................................... 345,000 305,000
----------- -----------
27,687,000 27,397,000
Operating expenses:
Property operating, property taxes and property management
fees................................................... 6,087,000 5,985,000
----------- -----------
Operating income............................................ $21,600,000 $21,412,000
=========== ===========
</TABLE>
Operating income for the Same Store Properties for the year ended December
31, 1996 increased over the prior year by $188,000. This increase was
attributable to increased rental revenue due to increased occupancy levels at
Rosewood Village. In addition, a lease termination fee of approximately $171,000
was received at Tanasbourne Village. Also, Winterwood Pavilion had an increase
of approximately $56,000 in percentage rent. Operating expenses for these Same
Store Properties increased by $102,000 for the year ended December 31, 1996 over
the prior year primarily due to an increase in property tax expense of
approximately $50,000 at Olympia Square, increased center enhancement costs such
as painting, new awnings and signage at Sunset Square of approximately $30,000
and an increase in marketing, landscaping and general maintenance expenses at
Sahara Pavilion South of approximately $35,000.
PRO FORMA OPERATING RESULTS
Comparison of Pro Forma Year Ended December 31, 1997 to Historical Year
Ended December 31, 1997.
On a pro forma basis, consolidated net income would have been $22,596,000
for the year ended December 31, 1997, compared to the historical net income of
$8,313,000 for the same period. The $14,283,000 increase in pro forma net income
was primarily the result of: (i) income associated with the acquisition of
properties and notes receivable in 1997 and 1998 that was assumed to have
occurred on January 1, 1997, (ii) a reduction in interest expense based on the
effects of using the net proceeds of the IPO and the Offering to repay mortgage
debt and a portion of the Unsecured Credit Facility and (iii) the elimination of
$1,010,000 in management and loan guarantee fees paid to Revenue Properties. Pro
forma revenue increased by $23,266,000 primarily as a result of the properties
and notes receivable acquired in 1997 and 1998, while expenses, other than
interest, increased by approximately $8,576,000 due to the additional expenses
associated with these acquisitions. There was a net increase in pro forma
interest expense of $1,373,000 due to interest on debt incurred to fund property
acquisitions offset by a reduction in interest expense resulting from the
application of the IPO and net Offering proceeds.
FUNDS FROM OPERATIONS
The White Paper defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Management considers Funds from Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow analyses.
The Company computes Funds from Operations in accordance with standards
established by the White Paper. The Company's computation of Funds from
Operations may, however, differ from the methodology for calculating Funds from
Operations utilized by other equity REITs and, therefore, may not be comparable
to such other REITs. Funds from Operations should not be considered as an
alternative to net income (determined in accordance with GAAP) as 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.
36
<PAGE> 42
The following table presents the Company's actual and pro forma Funds from
Operations for the years ended December 31, 1997 and 1996 (see footnote 13 to
the consolidated financial statements located elsewhere in this Prospectus):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- -------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income..................... $ 8,313,000 $17,537,000 $ 449,000 $16,361,000
Add:
Extraordinary loss........... 1,043,000 -- -- --
Depreciation and
amortization.............. 8,928,000 9,484,000 7,693,000 8,738,000
Depreciation of
unconsolidated
partnerships.............. 208,000 208,000 214,000 214,000
Depreciation of non-real
estate corporate assets... (204,000) (204,000) (174,000) (174,000)
----------- ----------- ---------- -----------
Funds from Operations.......... $18,288,000 $27,025,000 $8,182,000 $25,139,000
=========== =========== ========== ===========
Weighted average number of
shares of common stock
outstanding (assuming
dilution).................... 16,866,173 -- -- --
Number of shares of common
stock assumed to be
outstanding.................. -- 16,814,012 -- 16,814,012
</TABLE>
CASH FLOWS
Comparison of the Year Ended December 31, 1997 to the Year Ended December 31,
1996.
Net cash provided by operating activities increased by $8,749,000 to
$15,242,000 for the year ended December 31, 1997, as compared to $6,493,000 for
the year ended December 31, 1996. The increase was primarily the result of an
increase in net income.
Net cash used in investing activities increased by $147,474,000 to
$166,276,000 for the year ended December 31, 1997, as compared to $18,802,000
for the year ended December 31, 1996. The increase was primarily the result of
additions to properties for the 1997 Acquisitions. The increase was also
attributable to contributions to unconsolidated partnerships. In the comparable
period in 1996, the use of cash for investing activities was primarily for the
purpose of acquiring the remaining ownership interests in Laurentian Center and
additions to property under development.
Net cash provided by financing activities increased by $127,833,000 to
$142,799,000 for the year ended December 31, 1997, as compared to $14,966,000
for the year ended December 31, 1996. The increase resulted from amounts drawn
on the Unsecured Credit Facility, net proceeds of the IPO including the full
exercise of the Underwriters' over-allotment option and increases in advances
from Revenue Properties (see footnote 1 to the consolidated financial statements
located elsewhere in this Prospectus) prior to the IPO for certain of the 1997
Acquisitions. These increases were partially offset by notes payable payments
reflecting the paydown of a significant amount of portfolio debt in connection
with the IPO.
Comparison of the Year Ended December 31, 1996 to the Year Ended December 31,
1995.
Net cash provided by operating activities increased by $1,037,000 to
$6,493,000 for the year ended December 31, 1996, as compared to $5,456,000 for
the year ended December 31, 1995. The increase was primarily the result of an
increase in net income, an increase in accrued expenses and other liabilities
and a decrease in restricted cash. These increases were partially offset by a
decrease in accounts payable and an increase in accrued rent receivable.
Net cash used in investing activities decreased by $24,013,000 to
$18,802,000 for the year ended December 31, 1996, as compared to $42,815,000 for
the year ended December 31, 1995. The decrease was primarily the result of the
acquisition of Cheyenne Commons in 1995 for approximately $36,000,000, partially
offset by the acquisition of the remaining ownership interests in Laurentian
Center, increased construction activity at Phase I of Laguna Village, and the
collection of notes receivable in 1996.
37
<PAGE> 43
Net cash provided by financing activities decreased by $11,717,000 to
$14,966,000 for the year ended December 31, 1996, as compared to $26,683,000 for
the year ended December 31, 1995. The decrease was primarily the result of a
reduction in the indebtedness incurred in 1996, partially offset by an increase
in amounts advanced from Revenue Properties in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes the IPO and the Formation Transactions that were
completed in August 1997 improved 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 repaid all of its existing floating rate mortgage debt. As a result, the
total principal amount of outstanding secured debt after the Formation
Transactions and the acquisition of Green Valley Town & Country was reduced by
approximately $146,000,000. This will result in a significant reduction in
interest expense as a percentage of total revenue (18.5% on a pro forma basis
for the year ended December 31, 1997 as compared to 30.3% actual for the year
ended December 31, 1997). Thus, cash from operations required to fund debt
service requirements will decrease substantially.
The total market capitalization of the Company at December 31, 1997, was
approximately $530,166,000, based on the market closing price at December 31,
1997 of $21.375 per share and the debt outstanding of approximately $170,766,000
(exclusive of accounts payable and accrued expenses). As a result, the Company's
debt to total market capitalization ratio was approximately 0.322 at December
31, 1997. The Company believes that its low leverage capital structure combined
with its Unsecured Credit Facility enhances the Company's ability to take
advantage of acquisition opportunities as well as to provide funds for general
corporate purposes.
The Company had approximately $87,550,000 available under the then
$150,000,000 Unsecured Credit Facility at December 31, 1997. The initial
borrowing under the Unsecured Credit Facility of $13,600,000 occurred when the
Rainbow Promenade asset was acquired on September 9, 1997 for approximately
$31,300,000. The balance of the purchase price was funded with available cash
provided by operations and the net proceeds from the full exercise of the
underwriters' over-allotment option in connection with the IPO. Subsequent
borrowings were made under the Unsecured Credit Facility in November and
December 1997 for the acquisitions of six additional properties. At the
Company's option, amounts borrowed under the Unsecured Credit Facility during
this period accrued interest at either LIBOR plus 1.50% or a reference rate. The
weighted average interest rate at December 31, 1997 was 7.68%. In March 1998,
the Company obtained an increase to the Unsecured Credit Facility from
$150,000,000 to $200,000,000 and a reduction in the borrowing rate thereunder to
LIBOR plus 1.375% (which rate spread is reduced to 1.25% for as long as the
Company's debt-to-book value ratio is .30 or below). The Company anticipates
that the Unsecured Credit Facility will continue to be used primarily to acquire
additional properties and for general corporate purposes.
The Company's mortgage indebtedness outstanding at December 31, 1997
requires balloon payments of $88,888,000 in 2000, $4,004,000 in 2004, $7,395,000
in 2005, $52,748,000 in 2007 and $2,697,000 in 2008 and subsequent years. The
balloon payment due in the year 2000 includes the balance drawn on the Unsecured
Credit Facility at December 31, 1997 of $62,450,000. 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 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. The Unsecured Credit Facility, which matures in August 2000,
is renewable.
The Company expects to make distributions from cash available for
distributions, which the Company believes will exceed historical cash available
for distributions due to the reduction in debt service resulting 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 or will be used to pay down
outstanding balances on the Unsecured Credit Facility, if any. On October 6,
1997, the Board of Directors of the Company declared the first dividend of
$.2128 per share paid on October 31, 1997 to stockholders of record on October
22, 1997. The dividend was for the prorated period from August 8, 1997 to
September 30,
38
<PAGE> 44
1997 and is equivalent to a quarterly distribution rate of $.3625 per share. On
December 5, 1997, the Board of Directors of the Company declared a dividend of
$.3625 per share for the fourth quarter 1997 paid on January 19, 1998 to
stockholders of record on December 29, 1997.
The Company expects to meet its short-term liquidity requirements generally
through its current 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 the 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.
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 consumer price index or other measures) and percentage rent. The Company
believes that inflationary increases in expenses will be substantially offset by
the expense reimbursements, contractual rent increases and percentage rent
described above.
The Unsecured Credit Facility bears 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 June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), was issued and is effective
for fiscal years beginning after December 15, 1997. This statement requires
companies to classify items of other comprehensive income by their nature in an
income statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
Also in June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), was issued and is effective for fiscal years beginning after December 15,
1997. This statement establishes standards for segment reporting in the
financial statements.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Retirement Benefits" ("SFAS No.
132"), was issued and is effective for fiscal years beginning after December 15,
1997. This statement standardizes disclosure requirements for pensions and other
post retirement benefits. It does not change the measurement or recognition
provisions for those benefit plans.
On March 19, 1998, the Financial Accounting Standards Board's Emerging
Issues Task Force reached a consensus on Issue No. 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisitions" ("EITF 97-11").
EITF 97-11 states that internal costs of preacquisition activities incurred in
connection with the acquisition of an operating property should be expensed as
incurred. EITF 97-11 is to be implemented on a prospective basis effective on
the date the consensus was reached.
The Company anticipates that the adoption of SFAS Nos. 130, 131 and 132
will not have a material effect on the financial position, results of operations
or liquidity of the Company, nor result in disclosures that will be materially
different from those presently included in its financial statements. The Company
has not yet determined the effect that EITF 97-11 will have on its financial
position, results of operations or liquidity.
39
<PAGE> 45
BUSINESS AND PROPERTIES
THE PROPERTIES
The following table sets forth certain information regarding each of the
Properties:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT 12/31/97
GLA -----------------------
YEAR BUILT/ ---------------------------------- TOTAL
RENOVATED % NUMBER OF ANNUALIZED ANN. BASE
----------- RETAILER LEASED TENANTS BASE RENT/
YEAR OWNED OWNED TOTAL AS OF AS OF RENT LEASED SQ.
PROPERTY AND LOCATION ACQUIRED (SQ. FT.) (SQ. FT.) (SQ. FT.) 12/31/97 12/31/97 ($)(1) FT.(2)
--------------------- ----------- --------- ---------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads 1988/1994 267,735 -- 267,735 100.0 18 2,045,405 7.64
----------
Chico, CA 1997
Monterey Plaza 1990 183,180 49,500 232,680 98.1 29 2,546,092 14.17
----
San Jose, CA 1997
Manteca Marketplace 1972/1988 172,435 -- 172,435 85.1 18 1,500,920 10.22
----------
Manteca, CA 1998
Brookvale Shopping Center 1968/1989 128,224 -- 128,224 96.6 16 1,089,793 8.80
----------
Fremont, CA 1997
Laguna Village 1996/1997 108,203 -- 108,203 91.5 10 1,659,031 16.75
----------
Sacramento, CA (5)
Lakewood Shopping Center 1988 107,769 -- 107,769 93.9 25 947,854 9.37
----
Windsor, CA 1997
Fairmont Shopping Center 1988 104,281 -- 104,281 98.2 28 1,161,191 11.34
----
Pacifica, CA 1997
Creekside Center 1968 80,911 -- 80,911 98.2 17 662,580 8.34
----
Hayward, CA (6)
Rosewood Village 1988 50,248 -- 50,248 95.8 19 745,697 15.49
---- ------- -------- ------- ----- ---------
Santa Rosa, CA (7)
TOTAL/WEIGHTED AVERAGE 1,202,986 49,500 1,252,486 95.5 180 12,358,563 10.76
------- -------- ------- ----- ---------
SOUTHERN CALIFORNIA
Chino Town Square(8) 1987 337,001 188,060 525,061 99.3 53 4,482,399 13.40
----
Chino, CA (7)
San Dimas Marketplace 1996/1997 154,020 117,000 271,020 90.4 20 2,065,485 14.84
----------
San Dimas, CA 1998
Melrose Village Plaza(8) 1990 132,674 -- 132,674 89.4 27 1,322,585 11.14
----------
Vista, CA (7)
Tustin Heights Shopping 1983/1992 131,518 -- 131,518 91.0 15 1,411,996 11.79
Center
----------
Tustin, CA 1997
Laurentian Center 1988 97,131 -- 97,131 98.7 24 1,176,423 12.28
----
Ontario, CA (5)
Palmdale Shopping Center 1975 81,050 -- 81,050 100.0 14 505,317 6.23
----
Palmdale, CA 1997
Vineyard Village East 1992 45,200 -- 45,200 100.0 4 366,946 8.12
----
Ontario, CA (5)
Foothill Center 1990 19,636 -- 19,636 44.0 5 92,429 10.70
----
Rialto, CA 1997
Arlington Courtyard 1991 12,221 -- 12,221 82.8 4 124,129 12.27
---- ------- -------- ------- ----- ---------
Riverside, CA (7)
TOTAL/WEIGHTED AVERAGE 1,010,451 305,060 1,315,511 94.3 166 11,547,709 12.12
------- -------- ------- ----- ---------
TOTAL CALIFORNIA 2,213,437 354,560 2,567,997 94.9 346 23,906,272 11.38
------- -------- ------- ----- ---------
PACIFIC NORTHWEST
Sunset Square 1989 352,523 11,943 364,466 97.5 39 2,678,815 7.79
----
Bellingham, WA (7)
Milwaukie Marketplace 1989 266,928 -- 266,928 93.8 24 1,545,790 6.18
----
Milwaukie, OR 1998
Tanasbourne Village 1990 210,692 1,209 211,901 100.0 40 2,576,071 12.23
----
Hillsboro, OR (7)
Bear Creek Plaza 1977/1996 183,998 -- 183,998 96.3 24 1,206,753 6.81
----------
Medford, OR 1998
Olympia Square 1988 167,721 -- 167,721 95.3 37 1,938,000 12.12
----
Olympia, WA (7)
<CAPTION>
PROPERTY AND LOCATION MAJOR RETAILERS
--------------------- -----------------------------
<S> <C>
NORTHERN CALIFORNIA
Chico Crossroads HomeBase, Food-4-Less,
Chico, CA Barnes & Noble, Office Depot
Monterey Plaza Walmart, Lucky Stores(4),
San Jose, CA Walgreens
Manteca Marketplace Save Mart Supermarket, Rite
Manteca, CA Aid, Sears, Stadium 10
Cinemas
Brookvale Shopping Center Lucky Stores, Longs Drugs
Fremont, CA
Laguna Village United Artists Theatres, 24
Sacramento, CA Hour Fitness
Lakewood Shopping Center Raley's Supermarket,
Windsor, CA U.S. Postal Service
Fairmont Shopping Center Lucky Stores, Rite Aid
Pacifica, CA
Creekside Center Lucky Stores, Longs Drugs
Hayward, CA
Rosewood Village Lad's Supermarket, Bradley
Santa Rosa, CA Video
TOTAL/WEIGHTED AVERAGE
SOUTHERN CALIFORNIA
Chino Town Square(8) Target(4), Wal-Mart,
Chino, CA Mervyn's(4), Nordstrom's
Rack, AMC Theatres
San Dimas Marketplace Target(4), Office Max,
San Dimas, CA Ross Stores, Petco, Trader
Joe's, Super Crown Books
Melrose Village Plaza(8) Lucky Stores, Savon Drugs
Vista, CA
Tustin Heights Shopping Ralph's, Longs Drugs,
Center
Tustin, CA Michael's Arts & Crafts
Laurentian Center Pep Boys, 24 Hour Fitness
Ontario, CA
Palmdale Shopping Center Smart & Final, Rite Aid,
Palmdale, CA Pic N Save
Vineyard Village East Sears, Dunn Edwards
Ontario, CA
Foothill Center PIP Printing
Rialto, CA
Arlington Courtyard Harvest Christian Bookstore
Riverside, CA
TOTAL/WEIGHTED AVERAGE
TOTAL CALIFORNIA
PACIFIC NORTHWEST
Sunset Square Kmart, Ennen's Food,
Bellingham, WA Fabricland, Rite Aid
Milwaukie Marketplace Albertson's, Rite Aid,
Milwaukie, OR Jo-Ann Fabrics
Tanasbourne Village Safeway, Rite Aid, Jo-Ann
Hillsboro, OR Fabrics, Pier 1 Imports
Bear Creek Plaza Albertson's, Bi-Mart Drugs,
Medford, OR T.J. Maxx, Value Village
Olympia Square Albertson's, Ross Dress for
Less
Olympia, WA
</TABLE>
40
<PAGE> 46
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT
IN PLACE AT 12/31/97
GLA -----------------------
YEAR BUILT/ ---------------------------------- TOTAL
RENOVATED % NUMBER OF ANNUALIZED ANN. BASE
----------- RETAILER LEASED TENANTS BASE RENT/
YEAR OWNED OWNED TOTAL AS OF AS OF RENT LEASED SQ.
PROPERTY AND LOCATION ACQUIRED (SQ. FT.) (SQ. FT.) (SQ. FT.) 12/31/97 12/31/97 ($)(1) FT.(2)
--------------------- ----------- --------- ---------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tacoma Central 1987/1994 134,868 165,519 300,387 98.5 20 2,059,654 15.50
----------
Tacoma, WA 1997
Powell Valley Junction 1990 100,583 -- 100,583 93.1 6 770,627 8.23
----
Gresham, OR 1998
Pioneer Plaza 1988 96,027 -- 96,027 96.4 21 803,132 8.68
----
Springfield, OR 1998
Claremont Village 1955/1994 88,706 -- 88,706 95.6 12 1,156,276 13.63
----------
Everett, WA 1997
Canyon Ridge Plaza 1995 81,678 181,300 262,978 92.7 14 778,924 10.29
----
Kent, WA (5)
Olympia West Center 1980/1995 69,212 3,800 73,012 100.0 6 1,254,611 18.13
----------
Olympia, WA 1997
Panther Lake Shopping Center 1989/1998 69,090 44,237 113,327 89.7 18 773,248 12.48
----------
Kent, WA (6)
Shute Park Plaza 1989 58,560 -- 58,560 79.5 18 459,733 9.70
----
Hillsboro, OR 1998
24 Hour Fitness(3) 1989/1998 40,000 -- 40,000 100.0 1 432,919 10.82
---------- ------- -------- ------- ----- ---------
Hillsboro, OR 1998
TOTAL/WEIGHTED AVERAGE 1,920,586 408,008 2,328,594 95.8 280 18,434,553 10.02
------- -------- ------- ----- ---------
LAS VEGAS, NV
Cheyenne Commons 1992 362,758 -- 362,758 99.1 44 4,144,920 11.53
----
Las Vegas, NV 1995
Sahara Pavilion North 1989 333,679 -- 333,679 96.7 67 4,074,865 12.62
----
Las Vegas, NV (7)
Rainbow Promenade 1995 228,279 -- 228,279 99.0 25 3,210,448 14.21
----
Las Vegas, NV 1997
Sahara Pavilion South 1990 160,682 -- 160,682 98.7 22 2,197,275 13.86
----
Las Vegas, NV (7)
Green Valley Town & Country 1990 130,722 -- 130,722 100.0 37 1,759,456 13.46
----
Las Vegas, NV 1997
Winterwood Pavilion 1990 127,975 -- 127,975 94.8 23 1,050,119 8.66
---- ------- -------- ------- ----- ---------
Las Vegas, NV (7)
TOTAL/WEIGHTED AVERAGE 1,344,095 -- 1,344,095 98.1 218 16,437,083 12.46
------- -------- ------- ----- ---------
OTHER
Maysville Marketsquare 1991/1993 126,507 89,612 216,119 100.0 19 873,003 6.90
----------
Maysville, KY (7)
Ocoee Plaza 1990 52,242 -- 52,242 89.6 11 331,083 7.07
----
Ocoee, FL (7)
Sports Unlimited 1990 51,542 40,000 91,542 100.0 13 614,805 11.93
----
Memphis, TN (7)
Country Club Center 1988 46,850 63,000 109,850 100.0 17 563,172 12.02
---- ------- -------- ------- ----- ---------
Albuquerque, NM (7)
TOTAL/WEIGHTED AVERAGE 277,141 192,612 469,753 98.0 60 2,382,063 8.77
------- -------- ------- ----- ---------
PORTFOLIO TOTAL/
WEIGHTED AVERAGE 5,755,259 955,180 6,710,439 96.1 904 61,159,971 11.06
======= ======== ======= ===== =========
<CAPTION>
PROPERTY AND LOCATION MAJOR RETAILERS
--------------------- -----------------------------
<S> <C>
Tacoma Central Target(4), Top Food &
Drugs(4),
Tacoma, WA Office Depot, T.J. Maxx,
Cineplex Odeon
Powell Valley Junction Food 4 Less, Cascade Athletic
Gresham, OR Club
Pioneer Plaza Safeway Food & Drugs
Springfield, OR
Claremont Village QFC Supermarket
Everett, WA
Canyon Ridge Plaza Target(4), Top Food &
Kent, WA Drug(4), Ross Dress for Less
Olympia West Center Barnes & Noble, Good Guys,
Olympia, WA Petco
Panther Lake Shopping Center Albertson's(4), Rite Aid
Kent, WA
Shute Park Plaza True Value Hardware
Hillsboro, OR
24 Hour Fitness(3) 24 Hour Fitness
Hillsboro, OR
TOTAL/WEIGHTED AVERAGE
LAS VEGAS, NV
Cheyenne Commons Wal-Mart, 24 Hour Fitness,
Las Vegas, NV Ross Dress for Less
Sahara Pavilion North Von's, Longs Drugs, T.J.
Las Vegas, NV Maxx, Shepler's, Border Books
Rainbow Promenade United Artists Theatres,
Linen N'
Las Vegas, NV Things, Office Max, Cost Plus
Sahara Pavilion South Sports Authority, Office Max,
Las Vegas, NV Michael's Arts and Crafts
Green Valley Town & Country Lucky/Savon Superstore
Las Vegas, NV
Winterwood Pavilion Von's, Heilig-Meyers
Las Vegas, NV Furniture
TOTAL/WEIGHTED AVERAGE
OTHER
Maysville Marketsquare Walmart(4), Kroger
Maysville, KY Company
Ocoee Plaza Food Lion, Rite Aid,
Ocoee, FL Family Dollar
Sports Unlimited Sports Unlimited(4), Rich-
Memphis, TN Well Bedding Co., Hancock
Fabrics
Country Club Center Fun's Foods(4), Rio Rancho
Albuquerque, NM Health & Fitness
TOTAL/WEIGHTED AVERAGE
PORTFOLIO TOTAL/
WEIGHTED AVERAGE
</TABLE>
- ---------------
(1) Annualized Base Rent for all leases in place in which tenants are in
occupancy at December 31, 1997, calculated as follows: total base rent,
calculated in accordance with generally accepted accounting principles
("GAAP"), to be received during the entire term of each lease, divided by
the terms in months of such leases, multiplied by 12.
(2) Annualized Base Rent divided by the GLA leased at December 31, 1997.
(3) Property which the Company acquired after December 31, 1997. Occupancy is
based upon an executed lease with 24 Hour Fitness which was signed in April
1998.
(4) Retailers that own their buildings.
(5) Property was developed by the Company or its management.
(6) The Company expects to close the acquisitions of these Properties by April
30, 1998.
(7) Property was part of the portfolio acquired in 1992 with Revenue Properties'
acquisition of PPDC.
(8) The Company owns a 91% interest in Chino Town Square and a 50% interest in
Melrose Village Plaza. Table reflects 100% of Property data.
41
<PAGE> 47
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 December 31, 1997:
<TABLE>
<CAPTION>
NATIONAL TENANTS(1) REGIONAL TENANTS(1) LOCAL TENANTS(1)
------------------------- ------------------------- -------------------------
% OF % OF % OF
% OF PROPERTY % OF PROPERTY % OF PROPERTY
PROPERTY ANN. PROPERTY ANN. PROPERTY ANN.
PROPERTY LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2)
-------- ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads......................... 98.62 97.67 -- -- 1.38 2.33
Monterey Plaza........................... 78.86 64.11 1.66 3.02 19.48 32.87
Manteca Marketplace...................... 30.80 28.04 59.42 58.30 9.78 13.66
Brookvale Shopping Center................ 88.46 78.31 -- -- 11.54 21.69
Laguna Village........................... 85.10 82.98 4.34 5.25 10.56 11.78
Lakewood Shopping Center................. 82.46 72.69 2.10 4.14 15.44 23.17
Fairmont Shopping Center................. 62.37 44.59 -- -- 37.63 55.41
Creekside Center......................... 76.90 58.64 -- -- 23.10 41.36
Rosewood Village......................... 9.97 14.68 43.02 35.54 47.01 49.78
WEIGHTED AVERAGE........................... 74.72 64.62 10.22 10.87 15.06 24.51
SOUTHERN CALIFORNIA
Chino Town Square........................ 82.61 75.65 6.22 9.33 11.17 15.02
San Dimas Marketplace.................... 90.75 87.10 1.85 2.39 7.40 10.51
Melrose Village Plaza.................... 79.43 72.36 1.13 1.56 19.44 26.08
Tustin Heights Shopping Center........... 82.37 70.49 6.31 7.38 11.33 22.13
Laurentian Center........................ 47.94 47.27 21.06 19.34 31.00 33.39
Palmdale Shopping Center................. 85.74 69.99 -- -- 14.26 30.01
Vineyard Village East.................... 57.52 42.51 42.48 57.49 -- --
Foothill Center.......................... -- -- -- -- 100.00 100.00
Arlington Courtyard...................... 12.12 21.27 50.89 37.44 36.99 41.29
WEIGHTED AVERAGE........................... 77.46 71.31 8.06 9.33 14.48 19.36
PACIFIC NORTHWEST
Sunset Square............................ 63.77 48.98 29.42 39.33 6.81 11.69
Milwaukie Marketplace.................... 60.87 51.91 12.52 7.72 26.61 40.37
Tanasbourne Village...................... 62.85 51.91 11.84 17.69 25.32 30.40
Bear Creek Plaza......................... 83.00 72.12 8.17 11.68 8.83 16.20
Olympia Square........................... 74.02 64.06 14.17 21.25 11.80 14.70
Tacoma Central........................... 67.76 50.47 25.92 41.91 6.32 7.62
Powell Valley Junction................... 64.11 61.29 -- -- 35.89 38.71
Panther Lake Shopping Center............. 58.33 48.17 8.88 8.90 32.79 42.93
Pioneer Plaza............................ 18.18 17.79 14.14 23.71 67.68 58.50
Claremont Village........................ 69.08 72.13 4.91 5.39 26.01 22.48
Canyon Ridge Plaza....................... 82.39 80.45 11.01 11.95 6.60 7.60
Olympia West Center...................... 71.95 75.13 28.05 24.87 -- --
Shute Park Plaza......................... 34.40 28.67 18.75 25.96 46.85 45.37
24 Hour Fitness.......................... 100.00 100.00 -- -- -- --
WEIGHTED AVERAGE........................... 65.19 57.28 15.67 21.11 19.14 21.62
LAS VEGAS, NEVADA
Cheyenne Commons......................... 89.76 81.68 0.69 1.47 9.55 16.84
Sahara Pavilion North.................... 70.18 58.61 10.82 12.02 19.00 29.37
Rainbow Promenade........................ 90.98 85.30 1.77 3.15 7.25 11.55
Sahara Pavilion South.................... 80.76 75.38 6.43 7.32 12.82 17.29
Green Valley Town & Country.............. 49.09 37.30 3.59 5.43 47.33 57.27
Winterwood Pavilion...................... 69.43 59.71 13.85 10.05 16.72 30.24
WEIGHTED AVERAGE........................... 78.19 69.67 5.54 6.17 16.27 24.16
OTHER
Maysville Marketsquare................... 88.81 86.63 4.11 4.30 7.08 9.07
Ocoee Plaza.............................. 86.44 84.57 -- -- 13.56 15.43
Sports Unlimited......................... 38.44 38.72 32.47 33.79 29.09 27.49
County Club Center....................... 28.07 44.38 6.40 6.72 65.53 48.90
WEIGHTED AVERAGE........................... 68.37 63.99 9.18 11.88 22.45 24.13
PORTFOLIO WEIGHTED AVERAGE................. 72.54 65.00 10.50 12.44 16.97 22.56
</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 December 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.
42
<PAGE> 48
ANCHOR, NON-ANCHOR TENANT SUMMARY
The following table sets forth certain information regarding anchor and
non-anchor tenants at each Property as of December 31, 1997:
<TABLE>
<CAPTION>
ANCHOR TENANTS(1) NON-ANCHOR TENANTS(1)
------------------------- -------------------------
% OF % OF
% OF PROPERTY % OF PROPERTY
PROPERTY ANN. PROPERTY ANN.
PROPERTY LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2)
-------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
NORTHERN CALIFORNIA
Chico Crossroads.......................................... 85.18 75.86 14.82 24.14
Monterey Plaza............................................ 56.48 29.90 43.52 70.10
Manteca Marketplace....................................... 65.74 59.87 34.26 40.13
Brookvale Shopping Center................................. 75.74 49.93 24.26 50.07
Laguna Village............................................ 84.05 81.89 15.95 18.11
Lakewood Shopping Center.................................. 55.82 35.79 44.18 64.21
Fairmont Shopping Center.................................. 51.02 28.31 48.98 71.69
Creekside Center.......................................... 66.24 27.92 33.76 72.08
Rosewood Village.......................................... -- -- 100.00 100.00
WEIGHTED AVERAGE............................................ 66.57 48.28 33.43 51.72
SOUTHERN CALIFORNIA
Chino Town Square......................................... 61.48 52.58 38.52 47.42
San Dimas Marketplace..................................... 51.88 43.66 48.12 56.34
Melrose Village Plaza..................................... 58.12 44.50 41.88 55.50
Tustin Heights Shopping Center............................ 68.50 46.97 31.50 53.03
Laurentian Center......................................... 37.98 32.61 62.02 67.39
Palmdale Shopping Center.................................. 75.79 47.63 24.21 52.37
Vineyard Village East..................................... 57.52 42.51 42.48 57.49
Foothill Center........................................... -- -- 100.00 100.00
Arlington Courtyard....................................... -- -- 100.00 100.00
WEIGHTED AVERAGE............................................ 58.00 45.82 42.00 54.18
PACIFIC NORTHWEST
Sunset Square............................................. 75.21 55.27 24.79 44.73
Milwaukie Marketplace..................................... 73.46 49.41 26.54 50.59
Tanasbourne Village....................................... 47.68 31.19 52.32 68.81
Bear Creek................................................ 70.39 51.88 29.61 48.12
Olympia Square............................................ 47.56 31.69 52.44 68.31
Tacoma Central............................................ 66.34 62.51 33.66 37.49
Powell Valley Junction.................................... 87.22 78.91 12.78 21.09
Panther Lake Shopping Center.............................. 37.73 21.90 62.27 78.10
Pioneer Plaza............................................. 50.81 38.18 49.19 61.82
Claremont Village......................................... 46.68 46.75 53.32 53.25
Canyon Ridge Plaza........................................ 35.94 23.97 64.06 76.03
Olympia West Center....................................... 56.65 61.20 43.35 38.80
Shute Park Plaza.......................................... -- -- 100.00 100.00
24 Hour Fitness........................................... 100.00 100.00 -- --
WEIGHTED AVERAGE............................................ 61.40 46.58 38.60 53.42
LAS VEGAS, NEVADA
Cheyenne Commons.......................................... 68.16 47.07 31.84 52.93
Sahara Pavilion North..................................... 49.83 31.16 50.17 68.84
Rainbow Promenade......................................... 65.78 56.62 34.22 43.38
Sahara Pavilion South..................................... 59.51 39.50 40.49 60.50
Green Valley Town & Country............................... 37.56 21.46 62.44 78.54
Winterwood Pavilion....................................... 55.90 34.14 44.10 65.86
WEIGHTED AVERAGE............................................ 58.07 40.41 41.93 59.59
OTHER
Maysville Marketsquare.................................... 62.72 57.58 37.28 42.42
Ocoee Plaza............................................... 53.42 51.35 46.58 48.65
Sports Unlimited.......................................... 29.56 31.02 70.44 68.98
County Club Center........................................ -- -- 100.00 100.00
WEIGHTED AVERAGE............................................ 44.01 36.24 55.99 63.76
PORTFOLIO WEIGHTED AVERAGE.................................. 60.24 44.72 39.76 55.28
</TABLE>
- ---------------
(1) The Company defines anchor tenants as tenants which lease 15,000 square feet
or more and non-anchor tenants as tenants which lease fewer than 15,000
square feet.
(2) Annualized Base Rent for all leases in place at December 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.
43
<PAGE> 49
LEASE EXPIRATIONS
The following schedules set forth certain information regarding lease
expirations for the Properties for each of ten years beginning with 1998,
assuming that none of the tenants exercises renewal options or termination
rights:
ALL LEASES
<TABLE>
<CAPTION>
SQUARE ANNUALIZED BASE RENT IN PLACE AT 12/31/97
NUMBER FOOTAGE -----------------------------------------
LEASE OF UNDER % OF TOTAL % OF TOTAL ANN.
EXPIRATION LEASES EXPIRING PORTFOLIO TOTAL ANN. PORTFOLIO ANN. BASE RENT/
YEAR YEAR EXPIRING LEASES EXPIRING GLA BASE RENT BASE RENT(1) SQ. FT.(2)
---- -------------- -------- --------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1............................. 1998 115 309,906 5.6 $ 3,698,204 6.0 $11.93
2............................. 1999 122 456,747 8.3 4,262,788 7.0 9.33
3............................. 2000 168 449,412 8.1 6,271,137 10.3 13.95
4............................. 2001 117 353,450 6.4 4,861,198 7.9 13.75
5............................. 2002 145 487,370 8.8 6,426,368 10.5 13.19
6............................. 2003 50 290,377 5.2 3,149,249 5.2 10.85
7............................. 2004 18 128,684 2.3 1,491,437 2.4 11.59
8............................. 2005 26 224,921 4.1 2,563,450 4.2 11.40
9............................. 2006 25 281,425 5.1 3,379,445 5.5 12.01
10............................. 2007 25 178,929 3.2 2,251,571 3.7 12.58
2008 and
11 and after................... after......... 93 2,370,735 42.9 22,805,124 37.3 9.62
--- --------- ------ ----------- ------
TOTAL/WEIGHTED AVERAGE......................... 904 5,531,956 100.00 $61,159,971 100.00 $11.06
=== ========= ====== =========== ======
</TABLE>
ANCHOR LEASES(3)
<TABLE>
<CAPTION>
SQUARE ANNUALIZED BASE RENT IN PLACE AT 12/31/97
NUMBER FOOTAGE -----------------------------------------
LEASE OF UNDER % OF TOTAL TOTAL ANN. % OF TOTAL ANN.
EXPIRATION LEASES EXPIRING PORTFOLIO BASE PORTFOLIO ANN. BASE RENT/
YEAR YEAR EXPIRING LEASES EXPIRING GLA RENT(1) BASE RENT SQ. FT.(2)
---- -------------- -------- --------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1............................. 1998 3 66,398 2.0 $ 522,814 0.8 $ 7.87
2............................. 1999 6 212,279 6.4 761,443 1.3 3.59
3............................. 2000 4 93,575 2.8 709,718 1.2 7.58
4............................. 2001 3 84,078 2.5 562,135 0.9 6.69
5............................. 2002 5 148,547 4.5 988,806 1.6 6.66
6............................. 2003 5 121,285 3.6 914,803 1.5 7.54
7............................. 2004 3 58,607 1.8 444,378 0.7 7.58
8............................. 2005 5 114,842 3.5 950,247 1.6 8.27
9............................. 2006 3 151,421 4.5 1,712,353 2.8 11.31
10............................. 2007 4 85,024 2.5 644,512 1.0 7.58
11 and after................... 2008 and after 57 2,196,377 65.9 19,139,749 31.3 8.71
--- --------- ------ ----------- ------
TOTAL/WEIGHTED AVERAGE......................... 98 3,332,433 100.00 $27,350,958 44.7 $ 8.21
=== ========= ====== =========== ======
</TABLE>
NON-ANCHOR LEASES(3)
<TABLE>
<CAPTION>
SQUARE ANNUALIZED BASE RENT IN PLACE AT 12/31/97
NUMBER FOOTAGE -----------------------------------------
LEASE OF UNDER % OF TOTAL TOTAL ANN. % OF TOTAL ANN.
EXPIRATION LEASES EXPIRING PORTFOLIO BASE PORTFOLIO ANN. BASE RENT/
YEAR YEAR EXPIRING LEASES EXPIRING GLA RENT(1) BASE RENT SQ. FT.(2)
---- -------------- -------- --------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1............................. 1998 112 243,508 11.1 $ 3,175,389 5.2 $13.04
2............................. 1999 116 244,468 11.1 3,501,345 5.7 14.32
3............................. 2000 164 355,837 16.2 5,561,419 9.1 15.63
4............................. 2001 114 269,372 12.2 4,299,064 7.0 15.96
5............................. 2002 140 338,823 15.4 5,437,562 9.0 16.05
6............................. 2003 45 169,092 7.7 2,234,447 3.7 13.21
7............................. 2004 15 70,077 3.2 1,047,058 1.7 14.94
8............................. 2005 21 110,079 5.0 1,613,202 2.6 14.65
9............................. 2006 22 130,004 5.9 1,667,092 2.7 12.82
10............................. 2007 21 93,905 4.3 1,607,060 2.6 17.11
11 and after................... 2008 and after 36 174,358 7.9 3,665,375 6.0 21.02
--- --------- ------ ----------- ------
TOTAL/WEIGHTED AVERAGE......................... 806 2,199,523 100.00 $33,809,013 55.3 $15.37
=== ========= ====== =========== ======
</TABLE>
- ---------------
(1) Annualized Base Rent for all leases in place at December 31, 1997 calculated
as follows: total base rent, calculated in accordance with GAAP, to be
received during the entire term of each lease, divided by the terms in
months for such leases, multiplied by 12.
(2) Annualized Base Rent divided by GLA at December 31, 1997.
(3) The Company defines anchor tenants as tenants which lease 15,000 square feet
or more and non-anchor tenants as tenants which lease fewer than 15,000
square feet.
44
<PAGE> 50
HISTORICAL LEASING ACTIVITY
The following table sets forth certain information regarding the Company's
leasing activities over the past three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
NON- NON- NON-
ANCHORS ANCHORS TOTAL ANCHORS ANCHORS TOTAL ANCHORS ANCHORS TOTAL
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NEW LEASES
Number of leases signed................. 76 3 79 71 4 75 51 2 53
GLA leased (sq. ft.).................... 184,419 71,236 255,655 188,394 111,285 299,679 129,995 47,200 177,195
Base rent/sq. ft. ($/sq. ft.)(2)........ 15.32 11.48 14.25 13.44 13.13 13.32 12.78 8.24 11.57
Tenant improvements/sq. ft. ($/sq.
ft.)(3)............................... 5.63 6.88 5.98 4.45 2.70 3.80 6.25 2.07 5.13
Leasing commissions/sq. ft. ($/sq.
ft.)(4)............................... 2.86 3.42 3.01 2.94 2.46 2.76 2.53 1.27 2.19
Effective rent/sq. ft. ($/sq. ft.)(5)... 13.73 10.53 12.84 12.10 12.90 12.40 10.95 7.91 10.14
RENEWALS
Number of renewals signed............... 68 1 69 46 1 47 46 -- 46
GLA leased (sq. ft.).................... 140,902 30,000 170,902 105,631 34,577 140,208 104,579 -- 104,579
Base rent/sq. ft. ($/sq. ft.)(2)........ 16.96 9.50 15.65 17.95 17.23 17.77 15.67 NA 15.67
Tenant improvements/sq. ft. ($/sq.
ft.)(3)............................... 0.55 -- 0.45 1.17 -- 0.89 1.22 NA 1.22
Leasing commissions/sq. ft. ($/sq.
ft.)(4)............................... 0.95 1.00 0.96 1.39 1.16 1.34 1.36 NA 1.36
Effective rent/sq. ft. ($/sq. ft.)(5)... 16.55 9.30 15.28 17.37 17.16 17.32 15.05 NA 15.05
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases
signed................................ 144 4 148 117 5 122 97 2 99
GLA leased (sq. ft.).................... 325,321 101,236 426,557 294,025 145,862 439,887 234,574 47,200 281,774
Base rent/sq. ft. ($/sq. ft.)(2)........ 16.03 10.89 14.81 15.06 14.10 14.74 14.07 8.24 13.09
Tenant improvements/sq. ft. ($/sq.
ft.)(3)............................... 3.43 4.84 3.76 3.28 2.06 2.87 4.01 2.07 3.68
Leasing commissions/sq. ft. ($/sq.
ft.)(4)............................... 2.03 2.70 2.19 2.38 2.16 2.31 2.01 1.27 1.89
Effective rent/sq. ft. ($/sq. ft.)(5)... 14.95 10.16 13.82 13.99 13.91 13.97 12.78 7.91 11.96
</TABLE>
- ---------------
(1) The Company defines anchor tenants as tenants which lease 15,000 square feet
or more and non-anchor tenants as tenants which lease fewer than 15,000
square feet.
(2) Equals total base rent, calculated in accordance with GAAP, to be received
during the entire term of all lease transactions executed during the
respective period, divided by the terms, in months, for such leases,
multiplied by 12, and divided by the total GLA under such leases.
(3) Tenant improvements are defined as capital costs incurred by the Company for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering.
(4) Leasing commissions are brokerage commission fees paid by the Company in
connection with new leases or lease renewals.
(5) Equals total base rent, calculated in accordance with GAAP, to be received
during the entire term of all lease transactions executed during the
respective period, minus all tenant improvements and leasing commissions
from such leases divided by the terms in months, for such leases, multiplied
by 12, and divided by the total GLA under such leases.
45
<PAGE> 51
MAJOR TENANTS
The following table summarizes certain information regarding tenants at the
Properties which individually accounted for 1.0% or more of the Annualized Base
Rent at December 31, 1997:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT 12/31/97
-------------------------------------------------
LEASED ANN.
GLA AS OF % OF TOTAL TOTAL BASE RENT/ % OF TOTAL
12/31/97 PORTFOLIO ANNUALIZED GLA PORTFOLIO ANN.
(SQ. FT.) LEASED GLA BASE RENT($)(1) ($/SQ. FT.)(2) BASE RENT
----------------- ---------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Wal-Mart..................... 316,588 7.0 $ 2,836,372 $ 8.96 4.6
24 Hour Fitness.............. 137,143 3.0 1,805,930 13.17 3.0
Lucky Stores................. 202,419 4.5 1,400,795 6.92 2.3
United Artists Theatre....... 88,196 1.9 1,361,109 15.43 2.2
Vons/Safeway................. 194,756 4.3 1,296,608 6.66 2.1
Rite Aid..................... 179,014 3.9 1,096,005 6.12 1.8
Barnes & Noble............... 70,573 1.6 999,250 14.16 1.6
Office Max, Inc.............. 81,050 1.8 928,212 11.45 1.5
Ross Dress for Less.......... 99,687 2.2 827,754 8.30 1.4
--------- ---- ----------- ----
TOTAL/WEIGHTED AVERAGE....... 1,369,426 30.2 $12,552,035 $ 9.17 20.5
========= ==== =========== ====
</TABLE>
- ---------------
(1) Annualized Base Rent for all leases in place at December 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 GLA at December 31, 1997.
CAPITAL EXPENDITURES
The following table sets forth information relating to historical capital
expenditures for the Properties:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Total capital expenditures (1)(2)...................... $ 12,956 $ 18,545 $ 7,082
Average number of square feet(3)....................... 3,581,287 2,770,216 2,446,630
Capital expenditures per square foot................... $ .004 $ .007 $ .003
Three year average capital expenditure per square
foot................................................. $ .005
</TABLE>
- ---------------
(1) Includes capital expenditures other than leasing commissions and tenant
improvements.
(2) The 1997 amount excludes approximately $110,000 incurred to renovate
Foothill Center.
(3) Represents the average aggregate amount of square feet owned by the Company
during the year.
46
<PAGE> 52
MORTGAGE INDEBTEDNESS
Of the 42 Properties, only 9 are encumbered with mortgage indebtedness. The
following table sets forth, as of December 31, 1997, existing mortgage
indebtedness (in thousands) encumbering the Properties:
<TABLE>
<CAPTION>
TOTAL DEBT(1) INTEREST RATE MATURITY DATE
------------- ------------- -------------
<S> <C> <C> <C>
Sahara Pavilion North............................ $ 31,089 8.17% January 2007
Chino Town Square................................ 27,726 8.00 March 2000
Olympia Square................................... 14,105 8.17 January 2007
Tacoma Central................................... 11,569 7.80 December 2005
Olympia West Center.............................. 6,061 7.88 February 2018
Maysville Marketsquare........................... 5,364 8.17 January 2007
Laurentian Center................................ 4,652 7.75 March 2004
Rosewood Village................................. 4,472 8.52 January 2007
Country Club Center.............................. 3,278 8.17 January 2007
--------
TOTAL/WEIGHTED AVERAGE........................... $108,316 8.07% 7.4 YEARS
========
</TABLE>
- ---------------
(1) The Company estimates the total debt outstanding upon completion of the
Offering will be approximately $107.6 million due to amortization.
Aggregate future principal payments by year on the balance of mortgage
indebtedness with respect to the Properties to remain outstanding upon
completion of the Offering are as follows (in thousands):
<TABLE>
<CAPTION>
SCHEDULED TOTAL
AMORTIZATION BALLOON SCHEDULED
YEAR PAYMENTS PAYMENTS PAYMENTS(1)
---- ------------ -------- ------------
<S> <C> <C> <C>
1998................................................. $ 1,685 -- $ 1,685
1999................................................. 1,825 -- 1,825
2000................................................. 1,405 26,438 27,843
2001................................................. 1,420 -- 1,420
2002................................................. 1,538 -- 1,538
2003................................................. 1,672 -- 1,672
2004................................................. 1,677 4,004 5,681
2005................................................. 1,748 7,395 9,143
2006................................................. 1,219 -- 1,219
2007................................................. 406 52,748 53,154
Thereafter........................................... 439 2,697 3,136
------- ------- --------
TOTAL................................................ $15,034 $93,282 $108,316
======= ======= ========
</TABLE>
- ---------------
(1) The Company estimates the total debt outstanding upon completion of the
Offering will be approximately $107.6 million due to amortization.
UNSECURED CREDIT FACILITY
Upon the completion of the IPO, the Company obtained a $150 million
unsecured acquisition credit facility with a variable interest rate of LIBOR
plus 1.50% (the "Unsecured Credit Facility"). In March 1998, the Company
obtained an increase to the Unsecured Credit Facility from $150 million to $200
million and a reduction in the borrowing rate thereunder to LIBOR plus 1.375%
(which rate spread is reduced to 1.25% as long as the Company's debt-to-book
value is .30 or below). At December 31, 1997, the amount outstanding under the
Unsecured Credit Facility was approximately $62.5 million with an interest rate
of 7.86%. Upon the completion of the Offering and the exercise of PPD's
participation rights, the Company will have approximately $74.0 million
outstanding under the Unsecured Credit Facility with approximately $126.0
million available to fund future acquisitions. The Unsecured Credit Facility,
which matures in August 2000, is syndicated to a group of six banks including
Bank of America NT&SA (lead agent), U.S. Bank, KeyBank, Bank of Nova Scotia,
First Union Bank and Sanwa Bank California.
47
<PAGE> 53
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 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. 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.
MANAGEMENT AND EMPLOYEES
As of March 31, 1998, the Company had 71 employees, including five
executive officers and senior personnel with expertise in property management,
leasing, acquisitions, accounting services and architectural design.
LEGAL PROCEEDINGS
The Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any litigation threatened against the Company, other
than routine litigation arising in the ordinary course of business, some of
which is expected to be covered by liability insurance and all of which
collectively is not expected to 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
48
<PAGE> 54
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.
Phase I Assessments or similar environmental assessments conducted by
independent environmental consultants have been obtained on all of the
Properties and will be obtained on all of the Potential Acquisitions prior to
their acquisition to identify potential sources of contamination for which the
Properties or Potential Acquisitions may be responsible and to assess the status
of environmental regulatory compliance. Phase I Assessments are intended to
discover information regarding, and to evaluate the environmental condition of,
the surveyed property and surrounding properties. Phase I Assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
None of the Company's environmental assessments of the Properties has revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability.
Nonetheless, it is possible that the Company's assessments do not reveal
all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability to
make expected distributions to stockholders could be adversely affected.
Other Regulations. The Properties are also subject to various federal,
state and local regulatory requirements such as state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such regulatory requirements. However, if
requirements are changed or new requirements are imposed which would require
significant unanticipated expenditures by the Company such events could have an
adverse effect on the Company's funds from operations and expected
distributions.
Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations other than
typical state and local laws affecting the development and operation of real
property such as zoning laws. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws," "Federal Income Tax Consequences" and "ERISA
Considerations."
49
<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors, executive officers and key management personnel of the Company
immediately following the consummation of this Offering:
<TABLE>
<CAPTION>
DIRECTOR
TERM
NAME AGE POSITION EXPIRES
---- --- -------- --------
<S> <C> <C> <C>
Executive Officers and Directors
Stuart A. Tanz 39 Director, Chairman, Chief Executive Officer 2000
and President
David L. Adlard 41 Executive Vice President, Chief Financial N/A
Officer, Treasurer and Secretary
Jeffrey S. Stauffer 36 Executive Vice President, Chief Operating N/A
Officer
Laurie A. Sneve 35 Vice President and Controller N/A
Michael B. Haines 36 Vice President, Corporate Accounting N/A
Russell E. Tanz 38 Director 2000
Mark J. Riedy 55 Director 1999
Bernard M. Feldman 48 Director 1999
Melvin S. Adess 53 Director 1998
Key Management Personnel
Steven A. Boss 35 Acquisitions Director N/A
Terence H. Bortnick 35 Senior Leasing Representative N/A
Steven W. Erhard 40 Senior Leasing Representative N/A
Carol M. Merriman 35 Investor Relations and Marketing Director N/A
</TABLE>
The following is a biographical summary of the experience of the executive
officers, directors and key management personnel of the Company:
Executive Officers and Directors
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 been involved in the real estate business for over 17 years. Mr. Tanz served
as Chief Executive Officer of PPD from May 1996 to August 1997 and as a director
and the President of PPD from April 1992 to August 1997. He 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 August 1997 and as Co-Chief Executive Officer
of Revenue Properties from May 1996 to August 1997. From 1985 to 1992, Mr. Tanz
served as President of United Income Properties, Inc. where he developed
property in Southern California. He was involved in land acquisitions of
Bramalea Ltd. from 1982 to 1985. Mr. Tanz received his B.S. degree in Business
Administration in 1980 from the University of Southern California.
DAVID L. ADLARD. Mr. Adlard has served as Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company since its formation.
He was the Executive Vice President and Chief Financial Officer and a director
of PPD from January 1995 to August 1997. 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.
JEFFREY S. STAUFFER. In March 1998, Mr. Stauffer was named Executive Vice
President and Chief Operating Officer of the Company. From the Company's
formation until such appointment, Mr. Stauffer served as Senior Vice President,
Operations and Development of the Company. He served as the Senior Vice
President of Operations for PPD from January 1993 to August 1997. Mr. Stauffer
has been involved in the
50
<PAGE> 56
shopping center industry for 13 years. From 1985 to 1990 he was the Director of
Commercial Property Management for Realty Holding Group in Las Vegas, Nevada. He
was State Director for the International Council of Shopping Centers from 1990
to 1993 and is also a Certified Shopping Center Manager. Mr. Stauffer received
both his B.A. degree in Economics and his M.A. degree in Economics from Western
Illinois University.
LAURIE A. SNEVE. Ms. Sneve has served as Vice President and Controller of
the Company since its formation. Ms. Sneve is responsible for all corporate and
property accounting, financial and tax reporting and management controls. From
March 1995 to August 1997, Ms. Sneve served as the Vice President and Corporate
Controller of PPD. 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 Certified Public Accountant 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.
MICHAEL B. HAINES. In September 1997, Mr. Haines was named Vice President,
Corporate Accounting of the Company. Prior to such appointment he served as
Corporate Assistant Controller of the Company and held the same position at PPD
from March 1995 to August 1997. Mr. Haines is responsible for corporate
financial reporting and management controls. Prior to joining PPD, Mr. Haines
was Director of Internal Audit for The Hahn Company from 1990 to 1995. Mr.
Haines became licensed as a Certified Public Accountant after his tenure with
Deloitte & Touche LLP in San Diego from 1989 to 1990. He graduated from San
Diego State University, earning his B.S. degree in Business Administration with
an emphasis in Accounting.
RUSSELL E. TANZ. Mr. Tanz has served as a member of the Board of Directors
of the Company since its inception as a public company in August 1997. He served
as a director of Revenue Properties from 1985 to August 1997. He also served as
President and Co-Chief Executive Officer of Revenue Properties from May 1996 to
August 1997. From 1992 through May 1996, Mr. Tanz was President and Chief
Operating Officer and, from 1991 to 1992, Vice President of Shopping Centers of
Revenue Properties. During his service in these positions, Mr. Tanz gained
extensive experience in the management of the Canadian real estate portfolio of
Revenue Properties which is comprised of retail, residential and
office/commercial properties. He also served as a director of PPD from May 1996
to August 1997.
MARK J. RIEDY. Mr. Riedy has served as a member of the Board of Directors
of the Company since its inception as a public company in August 1997. He has
been a professor of real estate finance at the University of San Diego since
1993. From July 1988 to July 1992, Mr. Riedy served as President and Chief
Executive Officer of the National Council of Community Bankers. From July 1987
to July 1988, he served as President and Chief Operating Officer of the J.E.
Robert Companies, a real estate workout firm. From January 1985 to July 1986, he
served as President and Chief Operating Officer and a director of the Federal
National Mortgage Association. Mr. Riedy currently serves on the board of
directors of Continental Savings Bank, AccuBanc Mortgage Corporation,
Neighborhood Bancorp and American Residential Investment Trust. He received a
B.A. degree in Economics from Loras College, an M.B.A. from Washington
University and a Ph.D. in Business Economics from the University of Michigan in
Ann Arbor.
BERNARD M. FELDMAN. Mr. Feldman has served as a member of the Board of
Directors of the Company since its inception as a public company in August 1997.
He currently serves as the President and Chief Executive Officer of ICW Group of
insurance companies, a position he has held since 1987. Mr. Feldman has also
served as President and Chief Executive Officer of Western Insurance Holding
since 1991. From 1987 to present, he served as President and Chief Executive
Officer of Insurance Company of the West. From 1982 to 1985, Mr. Feldman served
as Vice President of Claims for the Insurance Company of the West.
MELVIN S. ADESS. Mr. Adess has served as a member of the Board of Directors
of the Company since its inception as a public company in August 1997. Since
January 1975, he has been a partner in the Chicago office of the law firm
Kirkland & Ellis, where he was an associate lawyer from 1969 to December 1974.
Mr. Adess serves on various of his firm's management committees. Additionally,
he has served on various taxation committees of the American Bar Association.
Mr. Adess received a B.S. degree from Northwestern
51
<PAGE> 57
University and a J.D. degree from the University of Chicago. He is also an
Illinois Certified Public Accountant.
Key Management Personnel
STEVEN A. BOSS. Mr. Boss joined the Company as Acquisitions Director in May
1997. Prior to joining the Company, he was a real estate representative for
McDonald's Corporation in charge of dispositions and acquisitions in Los Angeles
from 1995 to 1997. Mr. Boss was employed by CB Commercial Real Estate Group in
Los Angeles from 1988 to 1995. He received his B.S. degree in Economics with an
emphasis in Finance in 1986 from the University of Southern California.
TERENCE H. BORTNICK. Mr. Bortnick has served as a Senior Leasing
Representative of the Company since its inception. He served as Senior Leasing
Representative of PPD from 1992 to 1997 and was a Leasing Representative for
United Income Properties from 1991 to 1992. Mr. Bortnick is responsible for
overseeing the Company's leasing efforts in Northern California and Southern
California. From 1988 to 1991 he was an investment consultant with the Hanes
Corporation, a commercial real estate brokerage company. Mr. Bortnick graduated
from the University of California at Riverside with a B.S. degree in
Administrative Studies with a minor in Economics.
STEVEN W. ERHARD. Mr. Erhard has served as a Senior Leasing Representative
of the Company since its inception. From 1992 to 1997 he served as Senior
Leasing Representative for PPD, the Company's predecessor. Mr. Erhard is
responsible for overseeing the Company's leasing efforts in Nevada and New
Mexico. Prior to his employment with PPD, Mr. Erhard was a Commercial Retail
Broker with TransPac International, Seattle, Washington and Project Leasing
Representative with The Vyzis Company, Belleview, Washington. Mr. Erhard
graduated from the University of Arizona in Tucson with a B.S. degree in
Business Administration with an emphasis in Economics.
CAROL M. MERRIMAN. Ms. Merriman has served as Investor Relations and
Marketing Director of the Company since its inception. She served as Director of
Marketing with PPD from May 1994 to August 1997. Ms. Merriman has been active in
retail marketing and advertising since 1987, working for Road Runner Sports,
Fernandez Entertainment, Pacific International Advertising Agency and Boston
Stores. She is a member of the Southern California Marketing Directors
Association. Ms. Merriman has a B.A. degree from the University of Southern
California in Journalism with an emphasis in Public Relations and Marketing.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Board of Directors has established an audit committee
(the "Audit Committee") to make recommendations concerning the engagement of
independent public accountants, review with the independent public accountants
the scope and results of the audit engagement, approve professional services
provided by the independent public accountants, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls. The Audit
Committee consists of Messrs. Adess, Feldman and Reidy, who are not employees,
officers or affiliates of the Company or a subsidiary or division thereof, or a
relative of a principal executive officer of the Company, or a 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 ("Independent Directors").
Corporate Governance Committee. The Board of Directors has established a
corporate governance committee (the "Corporate Governance Committee") consisting
of Independent Directors Messrs. Adess, Feldman and Reidy. The Corporate
Governance Committee is 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. The Board of Directors has established an executive
compensation committee (the "Compensation Committee") to establish remuneration
levels for executive officers of the Company
52
<PAGE> 58
and implement the 1997 Stock Incentive Plan and any other incentive programs.
The Compensation Committee consists of Independent Directors Messrs. Adess,
Feldman and Reidy.
COMPENSATION OF DIRECTORS
The Company pays its Independent Directors annual compensation of $10,000
for their services. In addition, Independent Directors 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 are
also reimbursed for reasonable expenses incurred to attend director and
committee meetings. Officers of the Company who are directors are not paid any
directors' fees. Each Independent Director also received, upon his initial
election to the Board of Directors, options to purchase 10,000 shares of Common
Stock, of which one third vested immediately and the remaining two thirds vest
pro rata in annual installments over two years following the date of grant. All
stock options will be issued pursuant to the 1997 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 IPO the Company did not pay any compensation to its officers,
who were formerly employed and compensated by PPD, the Company's predecessor.
The following table sets forth the annual base salary rates and other
compensation paid during the period on and after August 13, 1997 through
December 31, 1997 (the "Initial Period") to the Company's Chief Executive
Officer and each of the Company's three other most highly compensated executive
officers whose annualized compensation in the Initial Period would have exceeded
$100,000 (the "Named Executive Officers"). The Company has entered into
employment agreements with certain of its executive officers as described below.
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------- ---------------------------------------------
RESTRICTED SECURITIES OTHER
FISCAL OTHER ANNUAL STOCK UNDERLYING COMPENSATION
NAME/TITLE YEAR SALARY(1) BONUS COMPENSATION(2) AWARDS(S)(3) OPTIONS/SARS(4) (5)
---------- ------ --------- ----- --------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stuart A. Tanz 1997 $89,833 -- $5,250 $1,950,000 225,000 $1,763
President and Chief Executive
Officer
David L. Adlard 1997 $43,041 -- $1,750 $ 195,000 100,000 $2,425
Executive Vice President and
Chief Financial Officer
Jeffrey S. Stauffer 1997 $41,983 -- $1,400 $ 195,000 100,000 $2,371
Executive Vice President, Chief
Operating Officer
Laurie A. Sneve 1997 $28,029 -- -- -- 80,000 $1,679
Vice President and Controller
</TABLE>
- ---------------
(1) Represents amounts earned during 1997 by Messrs. Stuart A. Tanz, David L.
Adlard, Jeffrey S. Stauffer and Ms. Laurie A. Sneve at annual salaries of
$290,000, $141,500, $139,140 and $98,500, respectively. Their employment by
the Company began on or about August 13, 1997 with the completion of the
Company's IPO.
(2) Represents car allowance compensation.
(3) Represents the value of restricted stock awarded at the completion of the
Company's IPO based on the initial public offering price of $19.50 per
share. Messrs. Stuart A. Tanz, David L. Adlard and Jeffrey S. Stauffer were
awarded 100,000, 10,000 and 10,000 shares of restricted stock, respectively.
The restricted stock vests 33 1/3% per year over a three-year period from
the date of grant. Dividends are paid on the restricted stock awards. Based
on the closing price of the Company's Common Stock of $21.375 at December
31, 1997, the value of the stock awards was $2,137,500, $213,750, and
$213,750, respectively.
(4) The Company has not, to date, granted any stock appreciation rights under
the 1997 Stock Incentive Plan.
(5) Represents 401(k) contributions by the Company.
53
<PAGE> 59
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information relating to the award of
stock options in 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE PRICE EXPIRATION GRANT DATE
NAME OPTIONS/SARS(1) FISCAL YEAR(2) PER SHARE DATE PRESENT VALUE(2)
---- --------------- ---------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Stuart A. Tanz............. 225,000 25.0% $19.50 Aug. 2004 $594,000
David L. Adlard............ 100,000 11.1% $19.50 Aug. 2004 $264,000
Jeffrey S. Stauffer........ 100,000 11.1% $19.50 Aug. 2004 $264,000
Laurie A. Sneve............ 80,000 8.9% $19.50 Aug. 2004 $211,000
</TABLE>
- ---------------
(1) All options granted in 1997 were granted in connection with the completion
of the IPO in August 1997, become exercisable in three equal installments
beginning on the first anniversary of the date of grant and have a term of 7
years subject to earlier termination in certain events related to
termination of employment.
(2) Based on the Black-Scholes options pricing model adapted for use in valuing
stock options. The following assumptions were used in determining the values
set forth in the table: (i) expected volatility of 22.05% calculated in
accordance with the provisions of SFAS No. 123; (ii) a risk-free rate of
return of 6.5% (which percentage represents the assumed yield on a United
States Government Zero Coupon bond with a 7-year maturity prevailing on or
about the date on which the respective options were granted); (iii) a
dividend yield of 6.75%; and (iv) an expected life of 5 years. No
adjustments were made for transferability or risk of forfeiture of the
options. The calculations were made using the option exercise price of
$19.50. The estimated present values in the table are not intended to
provide, nor should they be interpreted as providing, any indication or
assurance concerning future values of the shares of Common Stock.
AGGREGATE OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT 1997 IN-THE-MONEY OPTIONS
YEAR-END(1) AT 1997 YEAR END(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stuart A. Tanz.............. -- -- -- 225,000 -- $421,875
David L. Adlard............. -- -- -- 100,000 -- $187,500
Jeffrey S. Stauffer......... -- -- -- 100,000 -- $187,500
Laurie A. Sneve............. -- -- -- 80,000 -- $150,000
</TABLE>
- ---------------
(1) All options granted in 1997 were granted in connection with the completion
of the IPO in August 1997, become exercisable in three equal installments
beginning on the first anniversary of the date of grant and have a term of 7
years subject to earlier termination in certain events related to
termination of employment.
(2) Based on closing price of $21.375 per share of Common Stock on December 31,
1997, as reported by the NYSE.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, there were no Compensation Committee interlocks and no
officers or employees of the Company who participated on the Compensation
Committee.
EMPLOYMENT AGREEMENTS
Stuart Tanz, David Adlard, and Jeffrey Stauffer have each entered into
employment agreements with the Company. Stuart Tanz's employment agreement has
an initial term of three years and David Adlard's and Jeffrey Stauffer's
employment agreements each have initial terms of two years. All of these
employment agreements provide for automatic one-year extensions following the
expiration of the initial term. The employment agreements require each of these
individuals to be employed full time by the Company and prohibit them from
becoming directors, officers or employees of Revenue Properties or PPD. Laurie
Sneve has also agreed that she will not accept employment with Revenue
Properties or PPD for as long as she is employed by the Company.
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For the first year of the initial term, the employment agreements provide
for an initial annual base compensation in the amounts set forth in the footnote
(1) to the Summary 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 1997
Stock Incentive Plan (each executive was initially allocated the number of stock
options set forth in the Summary Compensation table) and to receive certain
other insurance and pension benefits. In addition, in the event of a termination
by the Company without "cause," a termination by the executive for "good
reason," or a termination pursuant to a "change in control" of the Company (as
such terms are defined in the employment agreements) (each, a "Permitted
Severance Event"), Stuart Tanz will be entitled to a single severance payment
equal to the sum of two times his annual base compensation for the most recent
12 month period plus an amount equal to his most recent bonus. David Adlard and
Jeffrey Stauffer will be entitled to a single severance payment equal to the sum
of their respective annual base compensation for the most recent nine month
period (Mr. Stauffer) and six month period (Mr. Adlard); provided, however, that
for each full year of service with the Company, the number of months of base
compensation in the severance payment shall be increased by one month (subject
to an overall cap of 18 months). Each of Messrs. Tanz (for one year), Adlard
(for six months) and Stauffer (for one year) will be subject to a
non-competition covenant if their employment with the Company ceases for any
reason other than a Permitted Severance Event.
401(K) PLAN
The Company established the Pan Pacific Retail Properties, Inc. 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 permits 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 makes matching contributions to the Section 401(k) Plan.
The Section 401(k) Plan is designed to qualify under Section 401 of the
Code so that contributions by employees or by the Company to the Section 401(k)
Plan, and income earned thereon, are not taxable to employees until withdrawn
from the Section 401(k) Plan, and so that contributions by the Company, if any,
will be deductible by the Company when made.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's officers and directors, see "Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws--Limitation of Liability and
Indemnification for Directors and Officers."
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<PAGE> 61
STRUCTURE AND FORMATION TRANSACTIONS OF THE COMPANY
FORMATION TRANSACTIONS
The Company was formed to continue and expand the real estate operations of
PPD. Prior to or simultaneously with the completion of the IPO, the Company and
PPD engaged in the transactions described below (the "Formation Transactions").
The Formation Transactions were designed to consolidate the ownership of the 25
Initial Properties in the Company and to repay certain mortgage debt relating
thereto, to facilitate the IPO, 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
included the following:
O The Company sold through the initial public offering 7,000,000 shares of
Common Stock and issued an additional 1,050,000 shares of Common Stock
pursuant to the Underwriters' exercise of their over-allotment option.
O Certain of the Initial Properties were contributed by PPD and its
subsidiaries to the Company and PPD entities that owned the remaining
Initial Properties were merged into the Company.
O PPD contributed $26,486,000 in cash to the Company (the "PPD
Contribution").
O The Company issued 8,634,012 restricted shares of Common Stock to PPD and
its subsidiaries in exchange for the ownership interests in the Initial
Properties and the PPD Contribution.
O Approximately $148,933,000 of the net proceeds of the IPO and the PPD
Contribution were used by the Company to repay certain mortgage debt
secured by certain of the Initial Properties and indebtedness outstanding
under lines of credit assumed by the Company in the Formation
Transactions and to pay transaction costs including fees and expenses
associated with the Unsecured Credit Facility.
O The Company entered into the then $150 million Unsecured Credit Facility.
O Fifty-nine of the 61 former employees of PPD resigned from PPD and become
employees of the Company, including Stuart Tanz, the former Chairman,
President and Chief Executive Officer of PPD, three other executive
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.
BENEFITS TO RELATED AND OTHER PARTIES
Certain affiliates of the Company realized certain material benefits in
connection with the Formation Transactions, including the following:
O In exchange for its ownership interests in certain of the Initial
Properties and certain PPD entities, PPD received a total of 8,634,012
shares of Common Stock, with a total value of approximately $168.4
million based on the IPO price of the Common Stock, compared to a net
book value of such interests and assets of approximately $133.0 million
as of March 31, 1997 (which does not include the $26.5 million PPD
Contribution). The Company does not believe that the book values of the
interests and assets exchanged are equivalent to the fair market values
of such interests and assets.
O Approximately $145.3 million of indebtedness (excluding accrued interest)
of PPD secured by certain of the Initial Properties was repaid in the
Formation Transactions. See "Use of Proceeds."
O Approximately $91.4 million of indebtedness of PPD secured by certain of
the Initial Properties was assumed by the Company in the Formation
Transactions.
O Stuart Tanz was elected as a director and appointed as an officer of the
Company and entered into an employment agreement providing for annual
salary, bonus, participation in the 1997 Stock Incentive Plan and other
benefits for his services.
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O David Adlard and Jeffrey Stauffer were appointed as officers of the
Company and each entered into employment agreements providing for annual
salary, bonus, participation in the 1997 Stock Incentive Plan and other
benefits for their services.
O PPD received 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.
O PPD was granted 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
Designation."
O PPD and Stuart Tanz received certain registration rights with respect to
shares of Common Stock issued. See "Shares Available For Future
Sale--Registration Rights."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Structure and Formation Transactions of the Company" for a summary of
certain related party transactions that were consummated prior to or
simultaneously with the completion of the IPO.
TERMS OF TRANSFERS
The terms of the transfers of the Initial Properties (or entities owning
the Initial 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 Initial Properties and the entities among certain of
the Initial Properties that were merged into the Company. See "Risk
Factors--Conflicts of Interests in the Formation Transactions and the Business
of the Company."
DIRECTOR DESIGNATION
PPD has the right to nominate two persons for election to the Board of
Directors of the Company so long as PPD and its affiliates collectively
beneficially own at least 25% of the outstanding shares of Common Stock.
REGISTRATION RIGHTS
For a description of certain registration rights held by PPD and Stuart
Tanz, see "Shares Available for Future Sale--Registration Rights."
ASSIGNMENT OF LEASE
Concurrently with the completion of the IPO, PPD assigned the Company all
of its interest as a tenant in a lease covering the space which previously
served as the headquarters of PPD at Melrose Village Plaza in Vista, California,
in addition to other space previously leased to PPD at certain of the Initial
Properties. The Company currently occupies such space at rates which the Company
believes are equal to the fair rental value of the space.
PREEMPTIVE RIGHTS
PPD has 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.
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.
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The Company pursues its investment objectives primarily through the
ownership of shopping center properties. 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 emphasizes 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. 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 asset and gross income tests which
the Company must satisfy 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 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, as amended.
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 customarily employed. Upon completion of the Offering and PPD's
exercise of its participation rights, the Company will have a 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 27.9% (27.4% if the Underwriter's over-
allotment option is exercised in full and PPD exercises its additional
participation rights in full). 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-
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book capitalization ratio may not reflect the current income potential of a
company's assets and operations, the Company believes that the debt-to-total
market capitalization ratio provides a more appropriate indication of leverage
for a company whose assets are primarily income-producing real estate. The total
market capitalization of the Company, however, is more variable than book value,
and does not necessarily reflect the fair market value of the underlying assets
of the Company at all times. Although the Company will consider factors other
than total market capitalization in making decisions regarding the incurrence of
indebtedness (such as the purchase price of properties to be acquired with debt
financing, the estimated market value of such properties upon refinancing and
the ability of particular properties and the Company as a whole to generate cash
flow to cover expected debt service), there can be no assurance that the ratio
of indebtedness to total market capitalization (or to any other measure of asset
value) will be consistent with the expected level of distributions to the
Company's stockholders.
The Board of Directors has adopted a policy of limiting the Company's
indebtedness to approximately 50% of its total market capitalization, but the
organizational documents of the Company do not contain any limitation on the
amount or percentage of indebtedness, funded or otherwise, that the Company may
incur. In addition, the Company may from time to time modify its debt policy in
light of then current economic conditions, relative costs of debt and equity
capital, market values of its properties, general conditions in the market for
debt and equity securities, fluctuations in the market price of its Common
Stock, growth and acquisition opportunities, the Company's continued REIT
qualification requirements or other presently unknown factors which may arise in
the future which, in the judgment of the Board of Directors, require a revision
in such policy. Accordingly, the Company may increase or decrease its debt to
market capitalization ratio beyond the limits described above.
To the extent that the Board of Directors decides to obtain additional
capital, the Company may raise such capital through additional equity offerings
(including offerings of senior or convertible securities and preferred stock),
sales of investments, bank and other institutional borrowings, the issuance of
debt securities (which may be convertible into or exchangeable for shares of
Common Stock or be accompanied by warrants to purchase shares of Common Stock)
or retention of cash flow (subject to the requirements in the Code concerning
the distribution of REIT taxable income), or a combination of these methods. In
the event that the Board of Directors determines to raise additional equity
capital, the Board has the authority, without stockholder approval, to issue
additional shares of Common Stock or other capital stock (including securities
senior to the Common Stock) of the Company in any manner, and on such terms and
for such consideration, it deems appropriate, including in exchange for
property. Except for the preemptive rights 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.
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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, as amended. The Company
does not intend (i) to invest in the securities of other issuers for the purpose
of exercising control over such issuer (except to the extent described above in
"--Investment Policies"), (ii) to underwrite securities of other issuers or
(iii) to trade actively in loans or other investments.
The Company has authority to offer shares of Common Stock or other
securities and to repurchase or otherwise reacquire shares of Common Stock or
any other securities in the open market or otherwise and may engage in such
activities in the future. The Company may, under certain circumstances, purchase
shares of Common Stock in the open market, if such purchases are approved by the
Board of Directors. The Board of Directors has no present intention of causing
the Company to repurchase any of the shares of Common Stock, and any such action
would be taken only in conformity with applicable federal and state laws and the
requirements for qualifying as a REIT under the Code and the 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 so
as to enable it to qualify as a REIT under the Code 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 prior to and immediately following the
consummation of the Offering for (i) each person known by the Company to be the
beneficial owner of 5% or more of the Company's outstanding Common Stock (ii)
each director and the officer of the Company, and (iii) the directors and
executive officers of the Company as a group. 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>
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK BENEFICIALLY OWNED IMMEDIATELY
BENEFICIALLY OWNED FOLLOWING THE OFFERING(1)
------------------------------- --------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OF CLASS NUMBER PERCENTAGE OF CLASS
------------------------ --------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C>
PPD(2)................................. 8,634,012 51.4% 10,634,012 51.1%
The Equitable Companies
Incorporated(3)...................... 1,146,300(4) 6.8% 1,146,300 5.5%
Stuart A. Tanz......................... 100,100 * 100,100 *
David L. Adlard........................ 10,100 * 10,100 *
Jeffrey S. Stauffer.................... 10,000 * 10,000 *
Michael B. Haines...................... 250 * 250 *
Laurie A. Sneve........................ 100 * 100 *
Russell E. Tanz........................ -- -- -- --
Mark J. Riedy.......................... 3,333(5) * 3,333 *
Bernard M. Feldman..................... 3,333(5) * 3,333 *
Melvin S. Adess........................ 3,333(5) * 3,333 *
All directors and executive officers as
a group (nine persons)............... 130,549 * 130,549 *
</TABLE>
- ---------------
* Less than one percent.
(1) All percentages are calculated assuming that PPD exercises its participation
rights in full.
(2) The address of PPD is the Colonnade, 131 Bloor Street West, Suite 300,
Toronto, Canada M5S 1R1.
(3) The address of The Equitable Companies Incorporated is 1290 Avenue of the
Americas, New York, New York 10104.
(4) According to a Schedule 13G filed with the SEC, the person has shared voting
power and sole dispositive power with respect to 1,145,300 of such shares,
and shared dispositive power with respect to 1,000 of such shares as of
December 31, 1997.
(5) Represents one third of the options granted upon initial election to the
Board of Directors which vested immediately.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and Bylaws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
GENERAL
Under the Charter, the authorized capital stock of the Company consists of
100,000,000 shares of Common Stock and 30,000,000 shares of Preferred Stock.
Upon completion of the Offering, there will be 20,814,012 shares of Common Stock
issued and outstanding 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 entitles 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 have no preference,
conversion, exchange, sinking fund, redemption or appraisal rights and, with the
exception of PPD's proportional participation 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 included those 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 are 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.
If the Company is liquidated, subject to the right of any holders of
Preferred Stock to receive preferential distributions, each outstanding share of
Common Stock will be entitled to participate pro rata in the assets remaining
after payment of, or adequate provision for, all known debts and liabilities of
the Company.
Subject to the provisions of the Charter regarding the ownership of shares
of Common Stock in excess of the Ownership Limit, or such other limit as
provided in the Company's Charter or as otherwise permitted by the Board of
Directors described below, all shares of Common Stock will have equal
distribution, liquidation and voting rights, and will have no preference or
exchange rights. See "--Restrictions on Ownership and Transfer."
Under the Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the corporation's charter (such a lower percentage (a majority) is set forth in
the Company's Charter). The phrase "substantially all of the assets" is not
defined in the MGCL and is, therefore, subject to interpretation by courts
applying Maryland law in the context of the facts and circumstances of any
particular case. The Charter of the Company provides that such actions need only
be approved by stockholders holding a majority of the shares entitled to vote on
the matter.
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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 is The Bank of New
York.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. No Preferred Stock is currently issued or
outstanding. Prior to the issuance of shares of each series, the Board of
Directors is required by the MGCL and the Company's Charter to fix for each
series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption, as permitted by Maryland law. Because the Board of
Directors has the power to establish the preferences, powers and rights of each
series of Preferred Stock, it may afford the holders of any series of Preferred
Stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of shares of Common Stock. The issuance of Preferred Stock could have
the effect of delaying or preventing a change of control of the Company that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest. The Board of Directors has no present plans to issue any
Preferred Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common Stock and Preferred Stock
and thereafter to cause the Company to issue such classified or reclassified
shares of stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional classes or series, as well as the Common
Stock, will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board of Directors has no
intention at the present time of doing so, it could authorize the Company to
issue a class or series that could, depending upon the terms of such class or
series, delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, 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) 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).
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
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than 100 persons. The Charter contains restrictions on the ownership and
transfer of Common Stock which are intended to assist the Company in enforcing
these prohibitions. The Ownership Limit set forth in the Company's Charter
provides that, subject to certain specified exceptions, no person or entity may
own, or be deemed to own by virtue of the applicable constructive ownership
provisions of the Code, more than 6.25% (by number or value, whichever is more
restrictive) of the outstanding shares of Common Stock. The constructive
ownership rules of the Code are complex, and may cause shares of Common Stock
owned actually or constructively by a group of related individuals and/or
entities to be constructively owned by one individual or entity. As a result,
the acquisition of less than 6.25% of the shares of Common Stock (or the
acquisition of an interest in an entity, such as Revenue Properties or Acktion
Corporation that owns, actually or constructively, Common Stock) by an
individual or entity, could, nevertheless cause that individual or entity, or
another individual or entity, to own constructively in excess of 6.25% of the
outstanding Common Stock and thus violate the Ownership Limit, or such other
limit as provided in the Company's Charter or as otherwise permitted by the
Board of Directors. For example, an increase in the proportionate ownership
interest in Revenue Properties held by one or more members of the Tanz Family,
or some other individual or entity, could cause one or more members of the Tanz
Family or such other individual or entity to violate the Ownership Limit, or
such other limit as provided in the Company's Charter or as otherwise permitted
by the Board of Directors. The Board of Directors may, but in no event will be
required to, waive the Ownership Limit with respect to a particular stockholder
if it determines that such ownership will not jeopardize the Company's status as
a REIT and the Board of Directors otherwise decides such action would be in the
best interest of the Company. As a condition of such waiver, the Board of
Directors may require an opinion of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of the Company. The Board of Directors has obtained such
undertakings and representations from PPD and, as a result, has waived the
Ownership Limit with respect to PPD and its affiliates and has permitted PPD to
own up to 55.0% of the outstanding Common Stock. The Board of Directors has also
obtained such undertakings and representations from the Tanz Family and, as a
result, has waived the Ownership Limit with respect to the Tanz Family and has
permitted the Tanz Family to own, in the aggregate, actually or constructively
(including through the ownership of stock of PPD or Revenue Properties), up to
24.0% (by number of shares or value, whichever is more restrictive) of the
outstanding Common Stock. Further, the Board of Directors has waived the
Ownership Limit with respect to Acktion Corporation and certain entities
affiliated with such corporation, and has permitted such entity to actually or
constructively own up to 10.5% (by number of shares or value, whichever is more
restrictive) of the outstanding Common Stock.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of stock of the Company (including by acquiring
shares of PPD or Revenue Properties) that will or may violate any of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of such
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to attempt
to qualify, or to continue to qualify, as a REIT. Except as otherwise described
above, any change in the Ownership Limit would require an amendment to the
Charter. Amendments to the Charter require the affirmative vote of a majority of
all votes entitled to be cast on that matter.
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, the Tanz Family Ownership Limit and the Acktion 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 acquisition or increase in the actual or constructive ownership
of stock in Revenue Properties, PPD or Acktion Corporation by one or more
members of the Tanz Family, or some other individual or entity, or the actual or
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constructive acquisition by PPD or Acktion Corporation 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 or Acktion Corporation, as applicable, as a
Prohibited Owner with respect to the number of shares (the "Excess PPD Shares")
of Common Stock owned by it which, if divested, would permit the Company to
continue to maintain its REIT status. Any such Excess Shares or Excess PPD
Shares described above will be transferred automatically, by operation of law,
to a trust, the beneficiary of which will be a qualified charitable organization
selected by the Company (the "Beneficiary"). Such automatic transfer shall be
deemed to be effective as of the close of business on the business day prior to
the date of such violative transfer (including any Violative Indirect Transfer).
Within 20 days of receiving notice from the Company of the transfer of shares to
the trust, the trustee of the trust (who shall be designated by the Company and
be unaffiliated with the Company and any Prohibited Transferee or Prohibited
Owner) will be required to sell such Excess Shares to a person or entity who
could own such shares without violating the Ownership Limit, or such other limit
as provided in the Charter or as otherwise permitted by the Board of Directors,
and distribute to the Prohibited Transferee or Prohibited Owner an amount equal
to the lesser of the price paid by the Prohibited Transferee or Prohibited Owner
for such Excess Shares or the sales proceeds received by the trust for such
Excess Shares. In the case of any Excess Shares resulting from any event other
than a transfer (such as a Violative Indirect Transfer), or from a transfer for
no consideration (such as a gift), the trustee will be required to sell such
Excess Shares (or Excess PPD Shares) to a qualified person or entity and
distribute to the Prohibited Owner an amount equal to the lesser of the fair
market value (as defined in the Charter) of such Excess Shares (or Excess PPD
Shares) as of the date of such event (including the date of a Violative Indirect
Transfer) or the sales proceeds received by the trust for such Excess Shares (or
Excess PPD Shares). In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such Excess
Shares (or Excess PPD Shares) by the trust, the trustee will be entitled to
receive, in trust for the Beneficiary, all dividends and other distributions
paid by the Company with respect to such Excess Shares (or Excess PPD Shares),
and also will be entitled to exercise all voting rights with respect to such
Excess Shares (or Excess PPD Shares). Subject to Maryland law, effective as of
the date that such shares have been transferred to the trust, the trustee shall
have the authority (at the trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Transferee or Prohibited Owner, as applicable, prior
to the discovery by the Company that such shares have been transferred to the
trust and (ii) to recast such vote in accordance with the desires of the trustee
acting for the benefit of the Beneficiary. However, if the Company has already
taken irreversible corporate action, then the trustee shall not have the
authority to rescind and recast such vote. Any dividend or other distribution
paid to the Prohibited Transferee or Prohibited Owner (prior to the discovery by
the Company that such shares had been automatically transferred to a trust as
described above) will be required to be repaid to the trustee upon demand for
distribution to the Beneficiary. In the event that the transfer to the trust as
described above is not automatically effective (for any reason) to prevent
violation of the Ownership Limit or such other limit as provided in the
Company's Charter or as otherwise permitted by the Board of Directors, then the
Charter provides that the transfer of the Excess Shares will be void or, in the
case of a Violative Indirect Transfer, 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.
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All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Charter, every owner of a specified percentage (or more) of the
outstanding shares of Common Stock must file a completed questionnaire with the
Company containing information regarding their ownership of such shares, as set
forth in the Treasury Regulations. Under current Treasury Regulations, the
percentage will be set between 0.5% and 5.0%, depending upon the number of
record holders of the Company's shares. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership of Common Stock on the Company's
status as a REIT and to ensure compliance with the Ownership Limit, or such
other limit as provided in the Charter or as otherwise permitted by the Board of
Directors.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of the MGCL and the
Company's Charter and Bylaws. The summary does not purport to be complete and is
subject to and qualified in its entirety by reference to the MGCL and to the
Company's Charter and Bylaws, copies of which are exhibits to the Registration
Statement of which this Prospectus is a part.
BOARD OF DIRECTORS
The Company's Charter provides that the number of directors of the Company
shall be established by the Bylaws but shall not be less than the minimum number
required by the MGCL. Any vacancy (except for a vacancy caused by removal) will
be filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors or, in the case of a vacancy
resulting from an increase in the number of directors, by a majority of the
entire Board of Directors. A vacancy resulting from removal will be filled by
the stockholders at the next annual meeting of stockholders or at a special
meeting of the stockholders called for that purpose. The Charter and Bylaws
provide that a majority of the Board must be Independent Directors.
Pursuant to the Charter, the directors are divided into three classes as
nearly equal in size as practicable. One class will hold office initially for a
term expiring at the annual meeting of stockholders to be held in 1998, another
class will hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1999 and another class will hold office initially for
a term expiring at the annual meeting of stockholders to be held in 2000. As the
term of each class expires, directors in that class will be elected for a term
of three years and until their successors are duly elected and qualified and the
directors in the other two classes will continue in office. The Company believes
that classification of the Board of Directors will help to assure the continuity
and stability of the Company's business strategies and policies as determined by
the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of shares of Common Stock will have no right to cumulative voting for
the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of the shares of Common Stock will be able to elect
all of the successors of the class of directors whose term expires at that
meeting.
PPD has the right to nominate two persons for election to the Board of
Directors of the Company so long as PPD and its affiliates collectively
beneficially own at least 25% of the outstanding shares of Common Stock.
REMOVAL OF DIRECTORS
While the MGCL and the Charter empower the stockholders to fill vacancies
in the Board of Directors that are caused by the removal of a director, the
Charter precludes stockholders from removing incumbent directors except for
cause and upon a substantial affirmative vote. Specifically, the Charter
provides that a director may be removed only for cause (as defined in the
Charter) and only by the affirmative vote of at least a majority of the votes
entitled to be cast in the election of directors. This provision, when coupled
with the provision in the Bylaws authorizing the Board of Directors to fill
vacant directorships, precludes stockholders from removing incumbent directors
except for cause and a substantial affirmative vote and filling the vacancies
created by such removal with their own nominees.
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
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recent date on which the person who beneficially owns 10% or more of the voting
power of the Company's then outstanding shares (an "Interested Stockholder")
became an Interested Stockholder. Thereafter, any such business combination must
be recommended by the Board of Directors and approved by the affirmative vote of
at least (i) 80% of the votes entitled to be cast by holders of outstanding
shares of the Company's voting stock and (ii) two-thirds of the votes entitled
to be cast by holders of outstanding shares of the Company's voting stock other
than shares held by the Interested Stockholder with whom the business
combination is to be effected, unless, among other things, the Company's
stockholders receive a minimum price (as defined in the MGCL) for their shares
of stock and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the Board of Directors prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Company has opted out of the
business combinations provisions of the MGCL. Therefore, an Interested
Stockholder would be able to effect a "business combination" without complying
with the requirements set forth above. Stockholder approval is required to opt
back in to such provisions.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of the Company acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror or by officers or directors who are
employees of the Company. "Control shares" are voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-
third; (ii) one-third or more but less than a majority; or (iii) a majority of
all voting power. Control shares do not include shares of stock the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider voting rights for the shares. If no
request for a meeting is made, the Company may itself present the question at
any stockholders' meeting.
If voting rights are not approved at the stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the Company may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders' meeting and the
acquiror becomes entitled to vote a majority of the shares of stock entitled to
vote, all other stockholders may exercise appraisal rights. The fair value of
the shares of stock as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control
share acquisition, and certain limitations and restrictions otherwise applicable
to the exercise of dissenters' rights do not apply in the context of a control
share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the Company is a party to the
transaction, or to acquisitions approved or exempted by the Charter or Bylaws.
The Bylaws of the Company contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of the Company's
shares of stock. Such provision of the Bylaws may only be amended with
stockholder approval. There can be no assurance that such provision will not be
amended or eliminated at any time in the future. As a result of the Company's
decision to opt out of the "control share acquisition" provisions of the MGCL,
stockholders who acquire a substantial block of Common Stock are not precluded
from exercising full voting rights with respect to their shares on all matters
without first obtaining the approval of other stockholders entitled to vote.
This may have the effect of making it easier for any such control share
stockholder to effect a business combination with the Company. However, no
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assurance can be given that any such business combination would be consummated
or, if consummated, would result in a purchase of shares of Common Stock from
any stockholder at a premium.
AMENDMENT TO THE CHARTER AND BYLAWS
The Charter provides that the Charter may be amended by the affirmative
vote of a majority of all votes entitled to be cast on the matter. The Company's
Bylaws may be amended by the affirmative vote of a majority of the Board of
Directors or the affirmative vote of the holders of not less than a majority of
the shares of the Company's stock entitled to vote thereon.
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide for annual meetings of stockholders,
commencing with the year 1998, to elect the Board of Directors and transact such
other business as may properly be brought before the meeting. Special meetings
of stockholders may be called by the President, the Chief Executive Officer or
the Board of Directors and shall be called at the request in writing of the
holders of shares entitled to cast not less than a majority of all the votes
entitled to be cast at such meeting.
The MGCL and the Bylaws provide that any action required or permitted to be
taken at a meeting of stockholders may be taken without a meeting by unanimous
written consent, if such consent sets forth such action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right to
dissent is signed by each stockholder entitled to notice of the meeting but not
entitled to vote at it.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Company's Bylaws provide that (i) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (a)
pursuant to the Company's notice of the meeting, (b) by or at the direction of
the Board of Directors or (c) by a stockholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in the
Bylaws, and (ii) with respect to special meetings of stockholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of stockholders, or provided that the Board of Directors has determined
that directors shall be elected at such meeting, nominations of persons for
election to the Board of Directors may be brought by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
The provisions in the Charter on classification of the Board of Directors
and the advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
of Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interests.
DISSOLUTION OF THE COMPANY
Under the MGCL and the Charter, the voluntary dissolution of the Company
must be approved by (i) the affirmative vote of a majority of the entire Board
of Directors declaring such dissolution to be advisable and directing that the
proposed dissolution be submitted for consideration at any annual or special
meeting of stockholders, and (ii) upon proper notice, stockholder approval by
the affirmative vote of the holders of a majority of the total number of shares
of stock outstanding and entitled to vote thereon.
LIMITATION OF LIABILITY AND INDEMNIFICATION FOR DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by Maryland law.
The Charter of the Company authorizes it, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to
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(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his or her stature as a present or
former director or office of the Company. The Bylaws of the Company obligate it,
to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual who,
while a director of the Company and at the request of the Company, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made party to the proceeding by reason of his service in that capacity.
The Charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its directors and officers and certain other
parties against judgments, penalties, fines, settlements, and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other capacities
unless it is established that (i) the act or omission of the director or officer
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty, (ii) the
director or officer actually received an improper personal benefit in money,
property or services, or (iii) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission was
unlawful. However, under the MGCL, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met. The termination of any proceeding by
conviction, or upon a plea of nolo contendere or its equivalent, or an entry of
any order of probation prior to judgment, creates a rebuttable presumption that
the director or officer did not meet the requisite standard of conduct required
for indemnification to be permitted. The termination of any proceeding by
judgment, order, or settlement does not create a presumption that the director
did not meet the requisite standard of conduct.
This provision does not limit the right of the Company or its stockholders
to obtain other relief, such as an injunction or rescission.
The Company has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require, among
other matters, that the Company indemnify its executive officers and directors
to the fullest extent permitted by law and advance to the executive officers and
directors all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. Under the indemnification
agreements, the Company must also indemnify and advance all expenses incurred by
executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors under
the Company's directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by law, it provides greater assurance to directors and executive
officers that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or the
stockholders to eliminate the rights it provides.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
20,814,012 shares of Common Stock (21,414,012 shares if the Underwriters'
over-allotment option is exercised in full and PPD exercises its additional
participation rights in full). The shares of Common Stock issued in the Offering
will be freely tradable by persons other than "affiliates" of the Company
without restriction or further registration under the Securities Act, subject to
the limitations on ownership set forth in the Charter. See "Description of
Capital Stock--Restrictions on Ownership and Transfer." The shares of Common
Stock owned by PPD and Stuart Tanz and the other members of senior management of
the Company (the "Restricted Shares") are "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.
The Company, Stuart Tanz and the other executive officers and directors of
the Company have agreed not to, directly or indirectly, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
underwriters in the IPO, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock of the Company or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock or other capital stock of the
Company, for a period of three years after the consummation of the IPO in August
1997. Prudential Securities Incorporated may, at any time and without notice,
release all or any portion of the shares of Common Stock subject to such lock-up
agreements.
PPD and Revenue Properties have agreed not to, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the underwriters in the IPO in August 1997, offer, sell, offer to
sell, contract to sell, pledge (except as contemplated below), grant any option
to purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of an option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the Company
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock or other capital stock of the Company, for a period of three
years after the consummation of the IPO; provided, however, that, due to certain
tax considerations affecting the Company, PPD's lock-up agreement applies only
to 4,162,702 shares of Common Stock owned by it (representing approximately
39.2% of PPD's interest in the Company immediately following the consummation of
the Offering and PPD's exercise of its participation rights) and permits PPD to
pledge of all of its shares of Common Stock to an affiliate of Prudential
Securities Incorporated as security for the three year margin loan effectuated
upon the consummation of the IPO which is expected to be modified in connection
with this Offering to facilitate PPD's exercise of its participation rights.
Although PPD was willing to enter into a lock-up agreement for all of the shares
of Common Stock owned by it for a three year period following the Offering,
PPD's lock-up is limited to 4,162,702 shares due to potential tax considerations
affecting the Company.
It should be noted that PPD shall at times be subject to the restrictions
on resale of Common Stock as promulgated by Rule 144 in that, barring the filing
of a registration statement in connection with the resale by
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PPD of the Common Stock, PPD shall not resell shares of Common Stock until
August 1998, and the amount of such resale for each consecutive three month
period shall not exceed the greater of (i) 1% of the shares of Common Stock
outstanding or (ii) the average weekly trading volume in such shares of Common
Stock reported on all national securities exchanges and/or reported through the
automated quotation system of a registered securities association for the four
calendar weeks specified in Rule 144 or (iii) the average weekly trading volume
in such shares of Common Stock reported an all national securities exchanges
and/or reported through the consolidated transaction reporting system
contemplated by Rule 11Aa3-1 under the Exchange Act of 1934, as amended (the
"Exchange Act") for the four calendar weeks specified in Rule 144, as long as
PPD remains an affiliate of the Company.
Neither the Company, Revenue Properties nor PPD will cause any shelf or
other registration statement for the resale of Common Stock of the Company owned
by Revenue Properties, PPD or any of their corporate affiliates to be filed with
the Commission for a period of three years from the date of completion of the
IPO in August 1997 without the prior written consent of Prudential Securities
Incorporated; provided, however, that the filing of a registration statement to
cover the resale of Common Stock in connection with the exercise of remedies
upon the occurrence of an event of default pursuant to the pledge by Revenue
Properties or PPD of all of its respective shares of Common Stock to an
affiliate of Prudential Securities Incorporated or its transferees shall be
permitted, and the Company has agreed to effectuate such filing on the one year
anniversary of the consummation of the IPO.
The Company has established the 1997 Stock Incentive Plan for the purpose
of attracting and retaining directors, executive officers and other key
employees. See "Management--1997 Stock Incentive Plan" and "--Compensation of
Directors." In connection with the IPO, the Company issued options to purchase
900,000 shares of Common Stock to directors, executive officers and certain key
employees and awarded 130,000 shares of restricted stock to members of senior
management. Since the IPO, the Company has issued options to purchase an
additional 277,500 shares of Common Stock to its directors, executive officers
and certain key employees.
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--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 IPO, the Company granted PPD and Stuart Tanz certain
registration rights (collectively, the "Registration Rights") with respect to
the shares of Common Stock received by them (the "Registrable Shares"). The
Company has agreed to file and generally keep continuously effective, beginning
three years after the completion of the IPO in August 1997, a registration
statement covering the resale of shares of Common Stock owned by PPD (subject to
certain exceptions; See "Underwriting,") and Stuart Tanz. In addition, the
Company has granted PPD piggyback registration rights, three years after
completion of the IPO, 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
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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 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.
In addition, the summary below does not consider the effect of any foreign,
state, local or other tax laws that may be applicable to a particular
stockholders.
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 has been organized and operates in such a manner so as to
qualify for taxation as a REIT under the Code, and the Company intends to
continue to operated in such a manner. However, no assurance can be given that
it has operated or will continue to operate in such a manner so as to qualify or
remain qualified.
These sections of the Code and the corresponding Treasury Regulations 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 has been organized and operated in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to continue 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,
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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. With respect to certain legal matters relating to Maryland law,
Latham & Watkins has relied upon the opinion of Ballard Spahr Andrews &
Ingersoll, LLP, counsel for the Company.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows. First, the Company will be taxed at regular
corporate rates on any undistributed "REIT taxable income," including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (i.e., generally, property acquired by the
Company by foreclosure or otherwise upon default of a loan secured by the
property) which is held primarily for sale to customers in the ordinary course
of business or (ii) other nonqualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth, if
the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property, other than foreclosure
property, held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on an amount equal to (a) the gross income attributable to the greater of
the amount by which the Company fails the 75% or 95% gross income tests
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 and that the availability or
nature of such election is not modified as proposed in President Clinton's 1999
Federal Budget Proposal.
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
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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 the conditions set forth in (i) through (vii)
above have been satisfied. The Company also believes that it has issued
sufficient shares of Common Stock with sufficient diversity of ownership
pursuant to the Offering to allow it to satisfy conditions (v) and (vi). In
addition, the Company's Charter provides for restrictions regarding the transfer
and ownership of shares, which restrictions are intended to assist the Company
in continuing to satisfy the share ownership requirements described in (v) and
(vi) above. Such ownership and transfer restrictions are described in
"Description of Capital Stock--Restrictions on Ownership and Transfer." These
restrictions, however, may not ensure that the Company will, in all cases, be
able to satisfy the share ownership requirements described above, in which case
the Company would no longer be qualified as a REIT; provided, however, beginning
January 1, 1998, if the Company complies with the rules contained in the
applicable Treasury Regulations (the "Stock Ownership Regulations") requiring
the Company to attempt to ascertain the actual ownership of its shares, and the
Company does not know, and would not have known through the exercise of
reasonable diligence, whether it failed to meet the requirement set forth in
condition (vi) above, the Company will be treated as having met such
requirement. In addition, upon completion of the Offering and the exercise of
PPD's participation rights, 51.1% of the Company's stock will be owned by PPD,
which is itself a wholly-owned subsidiary of Revenue Properties, and certain of
PPD's affiliates. There are no ownership or transfer restrictions of the type
described above in effect with respect to Revenue Properties' stock.
Approximately 34% of Revenue Properties' outstanding shares of common stock are
currently owned by the Tanz Family and approximately an additional 19.5% are
owned by Acktion Corporation. If the ownership concentration of the Tanz Family
or Acktion Corporation (or some other party) in Revenue Properties were to
increase, then the Company might no longer satisfy conditions (v) and (vi)
above, and therefore, might 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. From its inception, the Company has had a
calendar taxable year.
Ownership of Partnership Interests
The Company owns and operates one or more properties through partnerships
or limited liability companies (in the following discussion of Federal Income
Tax Consequences, references to partnerships and their partners shall include
limited liability companies and their members). 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
The Company owns and operates a number of properties through its
wholly-owned subsidiaries (each a "QRS"). 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
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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. A qualified REIT subsidiary will not be subject to federal income tax
and the Company's ownership of the voting stock of such a subsidiary will not
violate the restrictions against ownership of securities of any one issuer which
constitute more than 10% of such issuer's voting securities, nor will the
Company's ownership of 100% of such subsidiary's stock violate the restriction
against the Company's ownership of any one issuer's securities, the value of
which constitutes more than 5% of the value of the Company's total assets,
described below under "--Asset Tests."
Income Tests
In order to maintain qualification as a REIT, the Company annually must
satisfy three gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, for taxable years beginning prior to August 5, 1997,
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. The 30% gross income test has been repealed and will not apply
beginning with the Company's 1998 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 (subject
to a 1% de minimus exception applicable to the Company for its taxable year
beginning on or after January 1, 1998), 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. The Company has not derived
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and does not expect to derive any interest which would fail to qualify under the
75% and 95% gross income tests.
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 (which test, however, has been
repealed beginning with the Company's 1998 taxable year), in which case the
Company would cease to qualify as a REIT.
Any gain realized by the Company on the sale of any property held (or
deemed to be held) as inventory or other property held (or deemed to be 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 or any qualified REIT subsidiary of the Company) 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 (and in a manner so as to minimize the risk that
such sales would be treated as prohibited transactions subject to the 100%
penalty tax). There can be no assurance, however, that the IRS might not contend
that one or more of such sales should be treated as prohibited transactions
subject to the 100% penalty tax.
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, including (i) its allocable share of real estate assets held
by partnerships in which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (i.e., 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
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corporations for federal income tax purposes, and the Company's ownership of the
stock of the QRSs will not cause the Company to fail any of the foregoing asset
tests.
After initially meeting the foregoing asset tests at the close of any
quarter, the Company 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
has maintained and intends to continue 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 any 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 excess of the sum of certain items of
noncash income (i.e., income attributable to leveled stepped rents, original
issue discount or purchase money debt, or a like-kind exchange that is later
determined to be taxable) over 5% of the "REIT taxable income" as described in
clause (i)(a) above. In addition, if the Company disposes of any Built-In Gain
Asset during its Recognition Period, the Company will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at least
95% of the Built-In Gain (after tax), if any, recognized on the disposition of
such asset (together with the preceding sentence, the "95% distribution
requirement"). Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. Such distributions are taxable to
holders of Common Stock (other than tax-exempt entities, as discussed below) in
the year in which paid, even though such distributions relate to the prior year
for purposes of the Company's 95% distribution requirement. The amount
distributed must not be preferential (i.e., each holder of shares of Common
Stock must receive the same distribution per share). 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 (or
is not otherwise deemed to have distributed) during each calendar year (or, in
the case of distributions with dividend declaration and record dates falling in
the last three months of the calendar year, by the end of January immediately
following such 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. Any REIT taxable income and net capital gain on which this
excise tax is imposed for any year is treated as an amount distributed that year
for purposes of calculating such tax. The Company believes that it has made, and
intends to continue 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.
The Company's REIT taxable income has been and is expected to continue to
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.
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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 maintain its
qualification 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, President
Clinton's 1999 Federal Budget Proposal contains a provision 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 in
taxable years beginning after January 1, 1999, and thus could effectively
preclude the Company from re-electing to be taxed as a REIT following a loss of
REIT status.
CONSEQUENCES OF THE FORMATION TRANSACTIONS ON THE COMPANY'S QUALIFICATION AS A
REIT--EARNINGS AND PROFITS DISTRIBUTION REQUIREMENT
A REIT is not permitted to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first taxable
year in which it has non-REIT earnings and profits to distribute all such
earnings and profits (the "E&P Distribution Rule"). Failure to do so would
result in the loss of the Company's REIT status. See "--Failure to Qualify." In
a corporate reorganization qualifying as a tax-free reorganization, the acquired
corporation's earnings and profits may carryover 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") were merged (the "Mergers") with and
into the Company or one of several newly formed QRSs of the Company.
Accordingly, any earnings and profits of such Merger Subsidiaries could have
carried 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 have resulted in the carryover of earnings
and profits from other wholly-owned PPD subsidiaries (collectively with the
Merger Subsidiaries, the "PPD Subsidiaries" and each such subsidiary
individually, a "PPD Subsidiary") to the Company. While not free from doubt, the
Company believes, and intends to take the position, that the earnings and
profits of the PPD Subsidiaries remained with the PPD affiliated group and were
not acquired by the Company in the Formation Transactions. For purposes of
applying the E&P Distribution Rule, however, the Company has assumed that the
earnings and profits of the PPD Subsidiaries (the "PPD Earnings") did carry over
to the Company and therefore the Company had distributed (or had been deemed to
have distributed) any such earnings and profits prior to the end of 1997 (the
year in which the Mergers occurred) in order to avoid REIT disqualification for
1997.
The amount of earnings and profits acquired by the Company was based on the
PPD Earnings of each PPD Subsidiary immediately prior to its acquisition by the
Company. The Company has determined the amount of the PPD Earnings through an
earnings and profits study based upon the corporate tax returns of PPD and its
subsidiaries for the tax years beginning with PPD's and each such subsidiary's
date of incorporation through the dates of the Mergers and Other E&P
Transactions. The Company requested that the accounting firm of Arthur Andersen
LLP determine the PPD Earnings for purposes of the E&P Distribution Rule. Arthur
Andersen LLP's determination was based upon PPD's and its subsidiaries' tax
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returns as filed with the IRS and other assumptions and qualifications set forth
in their determination. Based on such assumptions, Arthur Andersen LLP
determined that several of the PPD Subsidiaries had earnings and profits, and
that the aggregate amount of the earnings and profits of such subsidiaries
(i.e., the PPD Earnings) did not exceed $350,000 as of the date each such
corporation (or its assets) was acquired by the Company or a QRS of the Company.
To determine the amount of distributions required to have been made (or
deemed to have been made) by the Company during 1997 to distribute the PPD
Earnings, the Company determined the source of each of its distributions made
during 1997. Only those distributions that were sourced to the PPD Earnings were
treated as reducing such earnings and profits. In determining the source of a
distribution, consideration was generally given first, to the current earnings
and profits of the taxable year and second, to earnings and profits accumulated
in prior years. Accordingly, to distribute the PPD Earnings, the Company was
required to distribute (or be deemed to distribute) during 1997 the sum of (i)
all 1997 earnings and profits, and (ii) the amount of the PPD Earnings.
Furthermore, with respect to annual distributions that were made only in cash
and were in excess of current year earnings and profits, only a proportionate
amount of each distribution was treated as sourced from current year earnings
and profits. That portion of each such distribution that was not sourced to
current year earnings and profits was sourced to earnings and profits
accumulated in prior years (including the PPD Earnings) that are available at
the time of the distributions. Accordingly, distributions made by the Company
during 1997, but prior to the date of the acquisition of the subsidiary or
property which carried over PPD Earnings to the Company, were not treated as
reducing the PPD Earnings. The Company believes that in 1997 it made (or was
deemed to have made) distributions sufficient to carry out all of the Company's
1997 earnings and profits and all PPD Earnings.
The calculation of the amount of PPD Earnings, and whether the PPD Earnings
were acquired by the Company in the Formation Transactions, are subject to
challenge by the IRS. The IRS may examine PPD's or its subsidiaries' prior
years' tax returns and propose adjustments which would have the effect of
increasing PPD's or its subsidiaries' taxable income. Because the earnings and
profits study used to calculate the amount of PPD Earnings is based upon these
returns, such adjustments could increase the amount of PPD Earnings required to
have been distributed. However, the Company would be permitted, within 90 days
of such a determination by the IRS, to make a distribution of such additional
earnings and profits. The Company would also be required, in that event, to pay
the IRS an interest charge based upon 50% of the amount not previously
distributed. If such additional distribution and interest payment were made, the
Company's failure to distribute the required amount of earnings and profits
would not prevent the Company from qualifying as a REIT for years subsequent to
1997 (although the Company would fail to qualify as a REIT for 1997
notwithstanding such distribution and payment). However, even if the IRS should
challenge the Company's calculation of the amount of PPD Earnings, the Company
believes that it will not have had earnings and profits attributable to non-REIT
years as of the close of 1997 and therefore that the Company will qualify as a
REIT for 1997. See "--Failure to Qualify."
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) is a trust, the administration of which is subject to the primary
supervision of a United States court and which has one or more United States
fiduciaries who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date, that elect to continue to be treated
as United States persons, shall also be considered U.S. Stockholders.
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
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Company that are properly designated by the Company as capital gain dividends
will be taxable to taxable U.S. Stockholders as gains (to the extent that they
do not exceed the Company's actual net capital gain for the taxable year) from
the sale or disposition of a capital asset. Depending upon the period of time
that the Company held the assets to which such gains were attributable and upon
certain designations, if any, which may be made by the Company, such gains will
be taxable to non-corporate U.S. Stockholders at a rate of either 20%, 25% or
28%. 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). With respect
to non-corporate U.S. Stockholders, amounts described as being treated as
capital gains in the preceding sentence will be taxable as long-term capital
gains if the shares to which such gains are attributable have been held for more
than eighteen months, mid-term capital gains if such shares have been held for
more than one year but not more than eighteen months, or short-term capital
gains if such shares have been held for one year or less. 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 interest limitation. Gain arising from the sale or other disposition
of Common Stock, however, will not be treated as investment income unless the
U.S. Stockholder elects to reduce the amount of such U.S. Stockholder's total
net capital gain eligible for the maximum capital gains rate by the amount of
such gain with respect to such Common Stock.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. The maximum rate of tax
applicable to corporate capital gains is 35%. In addition, to the extent
designated by the Company, a U.S. Stockholder generally would (i) include its
proportionate share of such undistributed long-term capital gains in computing
its long-term capital gains in its return for its taxable year in which the last
day of the Company's taxable year falls (subject to certain limitations as to
the amount so includible), (ii) be deemed to have paid the capital gains tax
imposed on the Company on the designated amounts included in such U.S.
Stockholder's long-term capital gains, (iii) receive a credit or refund for such
amount of tax deemed paid by it, (iv) increase the adjusted basis of its shares
by the difference between the amount of such includible gains and the tax deemed
to have been paid by it, and (v) in the case of a U.S. Stockholder that is a
corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations to be prescribed by the
IRS.
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. 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.
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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.
Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder who does not provide the Company with his or her correct
taxpayer identification number may also be subject to penalties imposed by the
IRS. Backup withholding is not an additional tax; 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 stockholders 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, dividend income from the Company and
gain on the sales of shares of Common Stock will not be UBTI to such tax-exempt
shareholder. Similarly, income from the sale of Common Stock will not constitute
UBTI unless such tax-exempt stockholder has held such shares as "debt financed
property" within the meaning of the Code or has used the shares in a trade or
business.
For tax-exempt stockholders that 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, 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 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.
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TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Stockholder in light of its particular
circumstances, including, for example, if the investment in the Company is
connected to the conduct by a Non-U.S. Stockholder of a U.S. trade or business.
In addition, this discussion is based on current law, which is subject to
change, and assumes that the Company qualifies for taxation as a REIT.
Prospective Non-U.S. Stockholders should consult with their own tax advisers to
determine the impact of federal, state, local and foreign income tax laws with
regard to an investment in Common Stock, including any reporting requirements.
Distributions.
Distributions by the Company to a Non-U.S. Stockholder that are neither
attributable to gain from sales or exchanges by the Company of United States
real property interests nor designated by the Company as capital gains dividends
will be treated as dividends of 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 of 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 or, if an income
tax treaty applies, as attributable to a United States permanent establishment
of the Non-U.S. stockholder. Dividends that are effectively connected with such
a United States trade or business (or, if an income tax treaty applies, that are
attributable to a United States permanent establishment of the Non-U.S.
Stockholder) will be subject to tax on a net basis (that is, after allowance of
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
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 and permanent establishment exemptions
discussed above.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
such excess distributions do not exceed the adjusted basis of the stockholder's
Common Stock, but rather will reduce the adjusted basis of such stock. If, at
the time of the distribution, the Company is not a "domestically-controlled
REIT," then the Common Stock will constitute a "United States real property
interest" and the distribution will therefore be subject to the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). See "--Sale of Common
Stock" below. For FIRPTA withholding purposes (discussed below), such
distributions (i.e., distributions that are not made out of earnings and
profits) will be treated as consideration for the sale or exchange of shares of
Common Stock. To the extent that such distributions exceed the adjusted basis of
a Non-U.S. Stockholder's Common Stock, they will give rise to gain from the sale
or exchange of his or her stock, the tax treatment of which is described below.
If it cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current or accumulated earnings and
profits, the distribution will generally be treated as a dividend for
withholding purposes. However, amounts thus withheld are generally refundable if
it is subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. A Non-U.S.
Stockholder may obtain such a refund by filing the appropriate claim for refund
with the IRS.
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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 (or, if an income tax treaty applies, is
attributable to a United States permanent \establishment of the Non-U.S.
Stockholder, 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
stockholder that is a foreign 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). Also, such gain may
be subject to a 30% branch profits tax in the hands of a Non-U.S. Stockholder
that is a corporation and is not entitled to treaty relief or exemption, as
discussed above. 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 the 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, provided that the Company has properly provided a required
notice and certain other requirements are met.
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 FIRPTA. The Common Stock will not constitute a "United States
real property interest" so long as the Company is a "domestically controlled
REIT." A "domestically controlled REIT" is a REIT in which at all times during a
specified testing period less than 50% in value of its stock is held directly or
indirectly by Non-U.S. Stockholders. At the close of the Offering, it is
expected that in excess of 50% in value of the stock of the Company will be
owned by PPD, which is in turn 100% owned by Revenue Properties, a Canadian
corporation. It is not clear whether Revenue Properties' indirect ownership of
stock of the Company will prevent the Company from being a "domestically
controlled REIT." If the Company is a "domestically controlled REIT," the sale
of shares of Common Stock would not be subject to taxation under FIRPTA.
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock not otherwise subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) the Non-U.S. Stockholder is a nonresident alien individual
who is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, in which case the nonresident alien
individual will be subject to a 30% United States withholding tax on the amount
of such individual's gain, or (ii) the investment in Common Stock is effectively
connected with the non-U.S. Stockholder's United States trade or business, in
which case the Non-U.S. Stockholder will be subject to the same treatment as
domestic stockholders (except that a 30% branch profits tax may also apply as
discussed above).
If the Company does not qualify as, or ceases to be, a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Stockholder of shares of Common Stock would be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest"
unless the shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the NYSE) and the
selling Non-U.S. Stockholder held no more than 5% (after applying certain
constructive
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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. The 10% withholding tax will not apply if the shares are "regularly
traded" on an established securities market.
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. A Non-U.S. Stockholder may obtain a refund of any amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the IRS.
New Withholding Regulations.
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were recently
promulgated. In general, the New Withholding Regulations do not significantly
alter the substantive withholding and information reporting requirements, but
unify current certification procedures and forms and clarify reliance standards.
For example, the New Withholding Regulations provide a certification rule under
which a foreign stockholder who wishes to claim the benefit of an applicable
treaty rate with respect to dividends received from a United States corporation
will be required to satisfy certain certification and other requirements. In
addition, the New Withholding Regulations require a corporation that is a REIT
to treat as a dividend the portion of a distribution that is not designated as a
capital gain dividend or return of basis and apply the 30% withholding tax
(subject to any applicable deduction or exemption) to such portion, and to apply
the FIRPTA withholding rules (discussed above) with respect to the portion of
the distribution designated by the REIT as capital gain dividend. The New
Withholding Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules.
THE DISCUSSION SET FORTH ABOVE IN "TAXATION OF NON-U.S. STOCKHOLDERS" DOES
NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S.
STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE NEW WITHHOLDING REGULATIONS.
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TAX RISKS ASSOCIATED WITH PARTNERSHIPS
The Company will own interests in several 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. This partnership
status risk should be diminished by Treasury Regulations that were issued on
December 17, 1996 and which are effective January 1, 1997. With respect to the
Company's existing partnership investments, these regulations provide that (1)
previously claimed partnership status, if supported by a reasonable basis for
classification, will generally be respected for all periods prior to January 1,
1997; and (2) previously claimed partnership status will generally be retained
after January 1, 1997, unless an entity elects to change its status by filing a
formal election. The Company believes that it has a reasonable basis for the
classification of the partnerships in which it owns interests as partnerships
for federal income tax purposes and has neither filed nor caused to be filed,
nor will it file (or cause to be filed), an election to be treated otherwise. If
a partnership elected to be treated as, or was otherwise deemed to be, an
association taxable as a corporation for federal income tax purposes, it would
be treated as a taxable entity. In such a situation, if the Company owned more
than 10% of the outstanding voting securities of such partnership, or if the
value of such securities exceeded 5% of the value of the Company's assets, the
Company would fail to satisfy the asset tests described above, and would
therefore fail to qualify as a REIT. Further, distributions from such
partnership to the Company would be treated as dividends that are not taken into
account in satisfying the 75% gross income test described above, which would
make it more difficult for the Company to satisfy that test. Moreover, the
interest in any such partnership held by the Company would not qualify as a
"real estate asset," which would make it more difficult for the Company to meet
75% asset test described above. In addition, the Company would not be able to
deduct its share of any losses generated by such a partnership in computing its
taxable income, which might adversely affect the Company's ability to comply
with the REIT distribution requirements. See "--Failure to Qualify" for a
discussion of the effect of the Company's failure to meet any one or more of
these tests for a taxable year.
The Company believes that the partnerships in which it owns interests have
been and will continue to be treated as a partnerships (rather than as
associations taxable as corporations) for federal income tax purposes. The
Company's position in this respect is not binding on the IRS and no assurance
can be given that the IRS will not successfully challenge the status of any
partnership as a partnership for federal income tax purposes.
RECENTLY PROPOSED LEGISLATION
As set forth above, upon completion of the offering, PPD, which is a
wholly-owned subsidiary of Revenue Properties, is expected to hold in excess of
50% of the voting power and value of the stock of the Company. President
Clinton's 1999 Federal Budget Proposal contains language which, if enacted in
its present form, would impose as an additional requirement for REIT
qualification that no person (defined to include certain entities such as
corporations) be permitted to own stock possessing more than 50 percent of the
total combined voting power of all classes of voting stock or more than 50
percent of the total value of shares of all classes of stock. It is not possible
to predict with certainty whether this portion of the President's Budget
Proposal will ultimately be enacted into law, the character and details of the
provisions which would be included in any legislation so enacted and whether and
to what extent such legislation would affect the Company and the stockholders or
whether any such effect would be adverse. Depending upon the final language of
any legislation actually enacted, it is possible that PPD could be required to
dispose of a sufficient number of shares of Common Stock to preserve the
Company's status as a REIT, or, pursuant to the Company's Charter, such shares
would be transferred to a trust for the benefit of a charitable beneficiary. See
"Description of Capital Stock--Restrictions on Ownership and Transfer."
OTHER TAX CONSEQUENCES
As discussed above, the Company acquired a number of properties through the
merger of the Merger Subsidiaries with and into the Company or the QRSs. These
transactions were intended to qualify as tax free reorganizations under the
Code. One consequence of having acquired such properties in this manner is that
the initial tax basis of the Company in the properties is equal to the tax basis
the Merger Subsidiaries had in the properties. As a result, the Company's
initial tax basis in such properties was less than the fair market value of the
properties at the time of acquisition. The lower tax basis reduces the amount of
depreciation
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deductions the Company is permitted to take, and will increase the amount of
taxable gain (or reduce the amount of tax loss) recognized by the Company on the
disposition of such properties. In addition, any net operating losses of such
Merger Subsidiaries carried over to the Company and, subject to certain
limitations, are 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 stockholders 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
Employee Retirement Income Security Act of 1974, as amended, ("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 stockholders (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 LEGAL ADVISOR.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF COMMON STOCK ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS A PLAN SUBJECT TO ERISA, A
TAX-QUALIFIED RETIREMENT PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN
(COLLECTIVELY "PLANS") IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, THE CODE AND (TO THE EXTENT NOT
PREEMPTED) STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF SHARES
OF COMMON STOCK BY SUCH PLAN OR IRA. A fiduciary should also consider the entire
discussion under the heading "--Federal Income Tax Consequences," as material
contained therein may be relevant to any decision by an employee benefit plan,
tax-qualified retirement plan or IRA to purchase shares of Common Stock.
FIDUCIARY CONSIDERATIONS
Each fiduciary of a Plan should carefully consider whether an investment in
shares of Common Stock is consistent with its fiduciary responsibilities under
ERISA or applicable state law. In particular, to the extent a Plan is subject to
ERISA, the fiduciary requirements of Part 4 of Title I, Subtitle B of ERISA
require (i) the Plan's investments to be prudent and in the best interests of
the Plan's 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 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
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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 prohibit certain transactions with a Plan
that involve persons who have specified relationships with a Plan. Provisions of
the Code impose excise taxes on persons who have specified relationships with a
Plan and engage in certain prohibited transactions with the 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") for purposes of ERISA and the prohibited transaction provisions of the
Code. Under such circumstances, any person that exercises authority or control
with respect to the management or disposition of such assets may be 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 shares of Common Stock of the Company. 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 the Plan as part
of an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and the class of securities of which such
security is a part is registered under the Exchange Act within 120 days (or such
longer period as may be allowed by the Commission) after the end of the fiscal
year of the issuer during which the offering of such securities to the public
occurred.
Whether a security is considered "freely transferable" depends on the facts
and circumstances of each case. Generally, if the security is part of an
offering in which the minimum investment is $10,000 or less, any restriction on
or prohibition against any transfer or assignment of such security for the
purposes of preventing a termination or reclassification of the entity for
federal or state tax purposes will not of itself prevent the security from being
considered "freely transferable." A class of securities is considered "widely
held" only if it is a class of securities that is owned by 100 or more investors
independent of the issuer and of one another.
The Company anticipates that the Common Stock will meet the criteria of the
"publicly-offered securities" exception to the look-through rule. First, the
Company anticipates that the Common Stock will be considered to be "freely
transferable," as the minimum investment will be less than $10,000 and the only
restrictions upon its transfer are those required under federal income tax laws
to maintain the Company's status as a REIT. Second, the Company believes that
the Common Stock will be held by 100 or more investors and that at least 100 or
more of these investors will be independent of the Company and of one another.
Third, the Common Stock will be part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act and
will be registered under the Exchange Act within 120 days after the end of the
fiscal year of the Company during which the offering of such securities to the
public occurs. Accordingly, the Company believes that if a Plan purchases the
Common Stock, the Company's assets should not be deemed to be Plan assets for
purposes of ERISA and the Code and, therefore, that any person who exercises
authority or control with respect to the Company's assets should not be a
fiduciary of a Plan by reason of such Plan's purchase of Common Stock.
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UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, BancAmerica Robertson Stephens, 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 (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..........................
BancAmerica Robertson Stephens..............................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Smith Barney Inc. ..........................................
---------
Total....................................................... 2,000,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the shares of Common Stock to the public initially at
the public offering price set forth on the cover page of this Prospectus; that
the Underwriters may allow to certain selected dealers a concession of not in
excess of $
per share, and that such dealers may re-allow a concession not in excess of
$ per share to certain other dealers. After the Offering, the public
offering price and the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 300,000 additional shares of
Common Stock at the public offering price, less the 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 2,000,000.
The Company has agreed to indemnify the several Underwriters against and
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
In connection with the IPO, Stuart Tanz and the other executive officers
and directors of the Company agreed not to, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
underwriters in the IPO in August 1997, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock of the Company or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or other capital stock
of the Company, for a period of three years after the consummation of the IPO.
Prudential Securities Incorporated may, at any time and without notice, release
all or any portion of the shares of Common Stock subject to such lock-up
agreements.
In connection with the IPO, PPD and Revenue Properties agreed not to,
directly or indirectly, without the prior written consent of Prudential
Securities Incorporated, on behalf of the underwriters in the IPO, offer, sell,
offer to sell, contract to sell, pledge (except as contemplated below), grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of an option to purchase or
other sale or disposition) of any shares of Common Stock or other capital stock
of the Company or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock or other capital stock of the Company,
for a period of three years after the consummation of the IPO, except pursuant
to the terms described in "Shares Eligible For Future Sale."
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The Company will not, directly or indirectly, without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the Company
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock or other capital stock of the Company for a period of 180 days
after the date hereof, except (A) pursuant to the Underwriting Agreement, (B)
pursuant to a dividend reinvestment plan of the Company, (C) pursuant to the
1997 Stock Incentive Plan, and (D) in connection with the acquisition by the
Company of real property or interests in entities holding real property,
provided that the recipient or transferee of such securities or interests agrees
in writing to be subject to the lock-up contained in this paragraph (without
giving effect to clauses (A), (B), (C) and (D)) for a period ending on the date
that is 180 days after the date hereof.
Any offers of shares of Common Stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province in
Canada in which such offer is made.
The Prudential Insurance Company of America, the parent of Prudential
Securities Incorporated, in connection with the contemplated retirement at the
completion of the IPO of the debt on Monterey Plaza, obtained from the Company
an agreement granting The Prudential Insurance Company of America a right of
first refusal on all debt offerings, private or public, until December 31, 1998.
Bank of America NT&SA, an affiliate of BankAmerica Corp., the parent
company of BancAmerica Robertson Stephens, is lead agent for the Company's
Unsecured Credit Facility which matures in August 2000.
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 completion 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 300,000 shares of
Common Stock, by exercising the Underwriters' over-allotment option referred to
above. In addition, Prudential Securities Incorporated, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or selling group member
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
EXPERTS
The consolidated financial statements and Schedule III of the Company as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997, and the statements of revenue and certain expenses for
The Oregon Portfolio and San Dimas Marketplace for the year ended December 31,
1997, 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 The Oregon Portfolio and San Dimas Marketplace 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 The Oregon
Portfolio's or San Dimas Marketplace's revenue and expenses.
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LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Latham & Watkins and certain legal matters relating to
Maryland law, including the validity of the issuance of the shares of Common
Stock offered hereby, will be passed upon for the Company by Ballard Spahr
Andrews & Ingersoll. Certain legal matters will be passed upon for the
Underwriters by Pryor, Cashman, Sherman & Flynn, New York, New York. In
addition, the description of federal income tax consequences contained in this
Prospectus under "Federal Income Tax Consequences" is, to the extent that it
constitutes matters of law, summaries of legal matters or legal conclusions, the
opinion of Latham & Watkins, special tax counsel to the Company as to the
material federal income tax consequences of the Offering.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street N.W.,
Washington, D.C. 20599, a Registration Statement (of which this Prospectus is a
part) on Form S-11 under the Securities Act and the rules and regulations
promulgated thereunder with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and financial statements thereto, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference and the exhibits and schedules hereto. For
further information regarding the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, copies of which may be examined without charge at, or copies obtained
upon payment of prescribed fees from, the Public Reference Section of the
Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: 7 World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511, or by way of the
Commission's Internet address, http://www.sec.gov. In addition, the Common Stock
is 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.
The Company is 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 stockholders of the Company will receive annual
reports containing consolidated audited financial statements with a report
thereon by the Company's independent certified public accountants, and quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus:
"1997 Acquisitions" means the acquisition of Monterey Plaza, Fairmont
Shopping Center, Lakewood Shopping Center, Green Valley Town & Country, the
secured notes receivable, Rainbow Promenade, The PNW Portfolio, Palmdale
Shopping Center, Tustin Heights Shopping Center and Brookvale Shopping Center.
"1997 Stock Incentive Plan" means the 1997 Stock Incentive Plan of the
Company.
"1998 Acquisitions" means the acquisition of San Dimas Marketplace, Bear
Creek Plaza, The Oregon Portfolio, Manteca Marketplace, Creekside Center and
Panther Lake Shopping Center.
"Acktion Corporation" means Acktion Corporation, a publicly traded Canadian
corporation.
"Acktion Ownership Limit" means the waiver by the Board of Directors of the
Ownership Limit with respect to Acktion Corporation and certain entities
affiliated with Acktion Corporation, permitting such entities to actually or
constructively own up to 10.5% (by number of shares or value, whichever is more
restrictive) of the outstanding Common Stock.
"ACM" means asbestos-containing materials.
"Acquired Properties" means the 17 community and neighborhood shopping
center properties acquired by the Company since the IPO.
"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 established by the Board of
Directors of the Company.
"Base Rent" means gross rent excluding payments by tenants on account of
real estate taxes, operating expenses and utility expenses.
"Beneficiary" means a qualified charitable organization selected by the
Company to receive in trust any excess shares resulting from a transfer of
Common Stock in violation of the Ownership Limit or the Charter of the Company.
"Blue Sky" means the securities laws and regulations of the states.
"Built-In Gain" means the amount by which the basis of a Built-In Gain
Asset is less than the fair market value of such asset at the time of its
acquisition by the Company.
"Built-In Gain Asset" means any asset acquired by the Company from a
corporation which is or has been a C corporation in a transaction in which the
basis of such asset in the hands of the Company is determined by reference to
the basis of the asset in the hands of the 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 the executive compensation committee of the
Company established by the Board of Directors.
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"Corporate Governance Committee" means the corporate governance committee
of the Company established by the Board of Directors.
"CPI" means consumer price index.
"EITF 97-11" means the Financial Accounting Standards Board's Emerging
Issues Task Force consensus on Issue No. 97-11 "Accounting for Internal Costs
Relating to Real Estate Property Acquisitions".
"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.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Formation Transactions" means the transactions described herein under the
heading "Structure and Formation Transactions of the Company--Formation
Transactions" which were consummated in connection with the Company's formation
and IPO in August 1997.
"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.
"HVAC" means heating, ventilation and air conditioning.
"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.
"Initial Properties" means the 25 Properties owned by the Company at the
time of the IPO.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of the Company's then outstanding shares.
"IPO" means the initial public offering of the Company completed in August
1997.
"IRA" means individual retirement annuity.
"IRS" means the Internal Revenue Service.
"LIBOR" means London Interbank Offered Rate.
"Local Tenant" means any tenant that operates stores only within the same
metropolitan area as the shopping center.
"Merger" means the merger of the Merger Subsidiaries with and into the
Company or one of four newly formed qualified REIT subsidiaries of the Company.
"Merger Subsidiaries" means certain of PPD's wholly-owned subsidiaries.
"MGCL" means the Maryland General Corporation Law, as amended.
94
<PAGE> 100
"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.
"National Tenant" means any tenant that operates in at least four
metropolitan areas located in more than one region.
"New Withholding Regulations" means final regulations dealing with
withholding tax on income paid to foreign persons and related matters.
"Non-U.S. Stockholders" means persons who are not U.S. Stockholders.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the Offering of shares of Common Stock of the Company
pursuant to and as described in this Prospectus.
"Other E&P Transactions" means certain Formation Transactions which could
be treated as tax-free reorganizations.
"Ownership Limit" means the restriction contained in the Company's Charter
providing that, subject to certain exceptions, no holder may own, or be deemed
to own by virtue of the constructive ownership provisions of the Code, more than
6.25% (by number or value, whichever is more restrictive) of the outstanding
shares of Common Stock.
"Partially-Owned Properties" means the following properties owned by
partnerships of which the Company owns a partnership interest: Chino Town Square
and Melrose Village Plaza.
"Permitted Severance Event" means a termination of employment (a) by the
Company without "cause," (b) by the executive for "good reason," or (c) pursuant
to a "change in control" of the Company.
"Phase I Assessments" means the Phase I Environmental Assessments conducted
by independent environmental consultants at the Properties.
"Plan" means a tax-qualified retirement plan, an IRA or other employee
benefit plan.
"Potential Acquisitions" means those properties which the Company has
entered into letters of intent to acquire.
"PPD" means Pan Pacific Development (U.S.) Inc., a Delaware corporation.
"PPDC" means Pan Pacific Development Corporation, the former sole
shareholder of PPD.
"PPD Contribution" means the contribution in cash of $26.5 million to the
Company in connection with the Formation Transactions.
"PPD Earnings" means the earnings and profits of the PPD Subsidiaries.
"PPD Ownership Limit" means the waiver by the Board of Directors of the
Ownership Limit with respect to PPD and certain entities affiliated with PPD,
permitting such entities to actually or constructively own up to 55.0% (by
number of shares or value, whichever is more restrictive) of the outstanding
Common Stock.
"PPD Properties" means, collectively, the neighborhood and community
shopping centers of PPD.
"PPD Subsidiaries" means the Merger Subsidiaries and other wholly-owned PPD
subsidiaries.
"Preferred Stock" means the preferred stock of the Company, par value $.01
per share.
"Prohibited Owner" means a person or entity holding record title to shares
in excess of the Ownership Limit.
95
<PAGE> 101
"Prohibited Transferee" means any person to which any transfer of Common
Stock of the Company would result in the person violating the Ownership Limit or
any waiver of the Ownership Limit relating to that person.
"Properties" means the 42 shopping center properties referred to herein
which comprise the Company's portfolio.
"QRS" means a subsidiary of the Company.
"Qualified Charitable Organization" means a non-profit organization of the
type described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.
"Recognition Period" means the ten-year period beginning on the date a
Built-In Gain Asset is acquired by the Company.
"Regional Tenant" means any tenant that operates in two or more
metropolitan areas located within the same region.
"Registrable Shares" means the shares of Common Stock granted to PPD and
Stuart Tanz in connection with the Formation Transactions.
"Registration Rights" means those certain registration rights granted to
PPD and Stuart Tanz in connection with the Formation Transactions.
"Regulations" means regulations issued by the United States Department of
Labor, effective March 13, 1987, that outline the circumstances under which a
Plan's interest in an entity will be subject to the look-through rule.
"REIT" means a real estate investment trust as defined in Section 856 of
the Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
"Related Party Tenant" means a tenant actually or constructively owned 10%
or more by the REIT or an owner of 10% or more of the REIT.
"Representatives" means, collectively, Prudential Securities Incorporated,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities
Corporation and Smith Barney Inc.
"Restricted Shares" means the shares of Common Stock owned by PPD and
Stuart Tanz.
"Revenue Properties" means Revenue Properties Company Limited, a
publicly-held Canadian real estate company.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Same Store Properties" means those Properties that were owned by the
Company for the entirety of the corresponding periods being compared.
"Section 401(k) Plan" means the Company's Section 401(k) Savings/Retirement
Plan.
"Securities Act" means the Securities Act of 1933, as amended.
"SFAS No. 130" means Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income".
"SFAS No. 131" means Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
"SFAS No. 132" means Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Retirement Benefits".
"Tanz Family" means Mark Tanz, Stuart Tanz, Russell Tanz and other family
members.
"Tanz Family Ownership Limit" means the waiver by the Board of Directors of
the Ownership Limit with respect to the Tanz Family, permitting the Tanz Family
to actually or constructively own (including
96
<PAGE> 102
through the ownership of stock of PPD or Revenue Properties), in the aggregate,
up to 24.0% (by number of shares or value, whichever is more restrictive) of the
outstanding Common Stock.
"The Oregon Portfolio" means Milwaukie Marketplace, Pioneer Plaza, Shute
Park Plaza, Powell Valley Junction and 24 Hour Fitness.
"The PNW Portfolio" means Claremont Village, Olympia West Center and Tacoma
Central.
"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 Representatives relating to the purchase of the Common Stock
offered hereby.
"Underwriters" means Prudential Securities Incorporated, BancAmerica
Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation and
Smith Barney Inc.
"Unsecured Credit Facility" means the Company's $200 million variable rate
unsecured acquisition credit facility which will mature in August 2000.
"U.S. Stockholder" means a holder of shares of Common Stock who (for United
States federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof, (iii) is an estate the income of which is subject to United States
federal income taxation regardless of its source, or (iv) is a trust, if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust.
"Violative Indirect Transfer" means an increase in the actual or
constructive ownership of stock in Revenue Properties or PPD by one or more
members of the Tanz Family or some other individual or entity which could result
in the disqualification of the Company as a REIT.
"White Paper" means the White Paper on Funds from Operations approved by
the Board of Governors of the NAREIT in March of 1995.
97
<PAGE> 103
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Condensed Consolidated Financial Statements
(Unaudited)............................................... F-2
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1997...................................... F-3
Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1997................... F-4
Notes to Pro Forma Condensed Consolidated Financial
Statements............................................. F-5
Pan Pacific Retail Properties, Inc. Consolidated Financial
Statements:
Independent Auditors' Report.............................. F-8
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-9
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... F-10
Consolidated Statements of Equity for the years ended
December 31, 1997, 1996 and 1995....................... F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................... F-12
Notes to Consolidated Financial Statements................ F-13
Schedule III--Properties and Accumulated Depreciation..... F-25
Combining Schedule of Revenue and Certain Expenses of the
1997 Acquisition Properties and Notes Receivable for
the year ended December 31, 1997....................... F-27
Combining Schedule of Revenue and Certain Expenses of the
1998 Acquisition Properties for the year ended December
31, 1997............................................... F-28
San Dimas Marketplace:
Independent Auditors' Report.............................. F-29
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-30
Notes to Statement of Revenue and Certain Expenses........ F-31
The Oregon Portfolio:
Independent Auditors' Report.............................. F-32
Combined Statement of Revenue and Certain Expenses for the
year ended December 31, 1997........................... F-33
Notes to Combined Statement of Revenue and Certain
Expenses............................................... F-34
</TABLE>
F-1
<PAGE> 104
PAN PACIFIC RETAIL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed consolidated balance sheet as
of December 31, 1997 is presented as if: (i) the acquisitions of Bear Creek
Plaza, San Dimas Marketplace, The Oregon Portfolio, Manteca Marketplace,
Creekside Center and Panther Lake Shopping Center (collectively the "1998
Acquisitions"); and (ii) this offering ("Offering"), the exercise of PPD's
participation rights and the repayment of a portion of the Unsecured Credit
Facility all had occurred on December 31, 1997. The pro forma condensed
statement of operations for the year ended December 31, 1997 is presented as if:
(i) the Formation Transactions; (ii) the acquisitions of Chico Crossroads,
Monterey Plaza, Fairmont Shopping Center, Lakewood Shopping Center, Green Valley
Town & Country, Rainbow Promenade, The PNW Portfolio, Palmdale Shopping Center,
Tustin Heights Shopping Center and Brookvale Shopping Center (collectively, the
"1997 Acquisitions") and the secured notes receivable; (iii) the 1998
Acquisitions; (iv) the IPO and related repayment of notes payable; and (v) the
Offering, the exercise of PPD's participation rights and related repayment of a
portion of the Unsecured Credit Facility all had occurred on January 1, 1997.
The pro forma condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of Pan Pacific Retail
Properties, Inc., including the notes thereto, included elsewhere in this
Prospectus. The pro forma condensed consolidated financial statements do not
purport to represent the Company's financial position as of December 31, 1997 or
the results of operations for the year ended December 31, 1997 that would
actually have occurred had the Formation Transactions, the 1997 Acquisitions,
the 1998 Acquisitions, the IPO, the exercise of PPD's participation rights, the
Offering and the related repayment of notes payable and a portion of the
Unsecured Credit Facility with the net proceeds all been completed on December
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> 105
PAN PACIFIC RETAIL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
1998
COMPANY ACQUISITION PRO FORMA COMPANY
HISTORICAL PROPERTIES(A) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Operating properties, at cost, net....... $455,514 $97,942 -- $553,456
Investments in unconsolidated
partnerships.......................... 9,921 -- -- 9,921
Cash and cash equivalents................ 661 -- 86,438(B) 661
(86,438)(C)
Receivables.............................. 12,227 -- 12,227
Deferred charges, prepaid expenses and
other assets.......................... 8,897 -- -- 8,897
-------- ------- -------- --------
$487,220 $97,942 $ 0 $585,162
======== ======= ======== ========
LIABILITIES AND EQUITY:
Notes payable............................ $108,316 $ -- $ -- $108,316
Line of credit payable................... 62,450 97,942 (86,438)(C) 73,954
Accounts payable, accrued expenses and
other liabilities..................... 13,878 -- -- 13,878
-------- ------- -------- --------
Total Liabilities................ 184,644 97,942 (86,438) 196,148
Minority interest........................ 1,521 -- -- 1,521
Common stock............................. 168 -- 40(B) 208
Paid-in capital in excess of par......... 395,313 -- 86,398(B) 481,711
Accumulated deficit...................... (94,426) -- -- (94,426)
-------- ------- -------- --------
$487,220 $97,942 $ 0 $585,162
======== ======= ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
F-3
<PAGE> 106
PAN PACIFIC RETAIL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
1997 1998
ACQUISITION ACQUISITION
PROPERTIES PROPERTIES
AND OTHER AND OFFERING
COMPANY PRO FORMA PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental................................. $36,839 $10,512(D) $ 8,253(M) $ 55,604
Percentage rent........................ 278 127(D) 42(M) 447
Recoveries from tenants................ 8,042 2,145(D) 1,654(M) 11,841
Income from unconsolidated
partnerships........................ 409 297(G) 706
Other.................................. 884 207(D) 29(M) 1,120
------- ------- ------- -----------
46,452 13,288 9,978 69,718
------- ------- ------- -----------
EXPENSES:
Property operating..................... 6,016 1,400(D) 1,326(M) 8,742
Property taxes......................... 3,187 1,126(D) 899(M) 5,212
Property management fees............... 126 497(D) 350(M) 126
(497)(F) (350)(O)
Depreciation and amortization.......... 8,928 2,200(E) 1,794(N) 12,922
Interest............................... 14,057 2,506(D) (6,137)(P) 15,430
4,400(G)
604(H)
Administrative......................... 3,923 558(I) 4,000
(481)(J)
Other income and expense............... 687 155(D) 128(M) 441
(529)(K)
------- ------- ------- -----------
36,924 11,939 (1,990) 46,873
------- ------- ------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST...................... 9,528 1,349 11,968 22,845
Income tax expense..................... (19) 19(L) -- --
Minority interest...................... (153) (96)(G) -- (249)
------- ------- ------- -----------
NET INCOME BEFORE EXTRAORDINARY ITEM..... $ 9,356 $ 1,272 $11,968 $ 22,596
======= ======= ======= ===========
Pro forma basic weighted average common
shares outstanding.................. 20,814,012
===========
Pro forma diluted weighted average
common shares outstanding........... 20,937,193
===========
Pro forma basic earnings per share..... $ 1.09
===========
Pro forma diluted earnings per share... $ 1.08
===========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
F-4
<PAGE> 107
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. ADJUSTMENTS TO THE PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The pro forma adjustments to the Pro Forma Condensed Consolidated Balance
Sheet as of December 31, 1997 are as follows:
<TABLE>
<S> <C> <C>
(A) Acquisition of Bear Creek Plaza, San Dimas Marketplace, The
Oregon Portfolio, Manteca Marketplace, Creekside Center, and
Panther Lake Shopping Center
Operating properties recorded at cost (acquired from
unrelated third parties, through borrowings under the
Unsecured Credit Facility):
Bear Creek Plaza (acquired 1/20/98).................. $ 13,100
San Dimas Marketplace (acquired 1/22/98)............. 22,800
The Oregon Portfolio (acquired 2/18/98 and 4/7/98)... 32,625
Manteca Marketplace (acquired 3/19/98)............... 15,617
Creekside Center (not yet acquired).................. 6,000
Panther Lake Shopping Center (not yet acquired)...... 7,800
--------
Total operating properties (including land costs
of $24,485)..................................... $ 97,942
========
Line of credit payable.................................... $ 97,942
(B) Sale of 2,000,000 shares of common stock in the Offering and
2,000,000 shares purchased by PPD pursuant to its
participation rights
Proceeds from the sale of shares.......................... $ 90,000
Costs associated with the sale of shares.................. (3,562)
--------
Net proceeds................................................ $ 86,438
========
Par value of common stock to be issued in the sale of
shares................................................. $ 40
Additional paid-in capital from the net proceeds of the
sale of shares......................................... 86,398
--------
$ 86,438
========
(C) Repayment of line of credit payable with net proceeds from
the sale of shares
Cash...................................................... $(86,438)
Line of credit payable.................................... $(86,438)
</TABLE>
F-5
<PAGE> 108
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
2. ADJUSTMENTS TO THE PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma adjustments to the Pro Forma Condensed Consolidated Statement
of Operations for the year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C> <C>
(D) Acquisition of Chico Crossroads, Monterey Plaza, Fairmont
Shopping Center, Lakewood Shopping Center, Green Valley Town
& Country, the secured notes receivable, Rainbow Promenade,
The PNW Portfolio, Palmdale Shopping Center, Tustin Heights
Shopping Center and Brookvale Shopping Center (refer to p.
F-27 for detailed information by property)
Rental revenue............................................ $ 10,512
Percentage rent........................................... 127
Recoveries from tenants................................... 2,145
Other revenue............................................. 207
Property operating expenses............................... 1,400
Property taxes............................................ 1,126
Property management fees.................................. 497
Interest.................................................. 2,506
Other expenses............................................ 155
(E) Increase in depreciation on buildings for the 1997
Acquisitions as follows:
Chico Crossroads.......................................... $ 71
Monterey Plaza............................................ 141
Fairmont Shopping Center.................................. 69
Lakewood Shopping Center.................................. 86
Green Valley Town & Country............................... 189
Rainbow Promenade......................................... 374
The PNW Portfolio......................................... 671
Palmdale Shopping Center.................................. 86
Tustin Heights Shopping Center............................ 276
Brookvale Shopping Center................................. 237
--------
$ 2,200
========
(F) Elimination of property management fees paid to third
parties related to the 1997 Acquisitions.................... $ (497)
(G) Net increase in interest expense, resulting from the
repayment of notes payable with the proceeds from the IPO
and the impact of borrowings under the Unsecured Credit
Facility as follows:
Income from unconsolidated partnerships................... 297
Interest.................................................. 4,400
Minority interest......................................... (96)
(H) Increase in interest expense for the effect of the
amortization of Unsecured Credit Facility fees.............. $ 604
</TABLE>
F-6
<PAGE> 109
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C> <C>
(I) Increase in general and administrative expenses for the
incremental costs of operating as a public REIT............. $ 558
(J) Decrease in general and administrative expenses for
management fees charged by Revenue Properties............... $ (481)
(K) Decrease in other expenses for loan guarantee fees charged
by Revenue Properties....................................... $ (529)
(L) Elimination of income tax expense as the Company expects to
be taxed as a REIT.......................................... $ 19
(M) Acquisition of Bear Creek Plaza, San Dimas Marketplace, The
Oregon Portfolio, Manteca Marketplace, Creekside Center and
Panther Lake Shopping Center (refer to p. F-28 for detailed
information by property)
Rental revenue............................................ $ 8,253
Percentage rent........................................... 42
Recoveries from tenants................................... 1,654
Other revenue............................................. 29
Property operating........................................ 1,326
Property taxes............................................ 899
Property management fees.................................. 350
Other expenses............................................ 128
(N) Increase in depreciation on buildings for the 1998
Acquisitions as follows:
Bear Creek Plaza.......................................... $ 246
San Dimas Marketplace..................................... 427
The Oregon Portfolio...................................... 569
Manteca Marketplace....................................... 293
Creekside Center.......................................... 113
Panther Lake Shopping Center.............................. 146
--------
$ 1,794
========
(O) Elimination of property management fees paid to third
parties related to the 1998 Acquisitions.................... $ (350)
(P) Decrease in interest expense resulting from the repayment of
a portion of the Unsecured Credit Facility.................. $ (6,137)
</TABLE>
F-7
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Pan Pacific
Retail Properties, Inc. and subsidiaries (see Note 1) as of December 31, 1997
and 1996, and the related consolidated statements of operations, equity and cash
flows for each of the years in the three-year period ended December 31, 1997. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule III. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pan Pacific
Retail Properties, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule III, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
San Diego, California
February 12, 1998, except as to Note 15(d), which is
as of February 18, 1998, and as to Notes 15(e) and (f),
which are as of March 17, 1998
F-8
<PAGE> 111
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(NOTE 1)
<S> <C> <C>
ASSETS:
Operating properties, at cost:
Land...................................................... $139,959 $ 82,792
Buildings and improvements (including related party
development and acquisition fees of $1,235 and $1,182,
respectively).......................................... 313,483 173,250
Tenant improvements....................................... 32,148 32,051
-------- --------
485,590 288,093
Less accumulated depreciation and amortization............ (30,076) (26,857)
-------- --------
455,514 261,236
Property under development, at cost......................... -- 2,781
-------- --------
455,514 264,017
Investments in unconsolidated partnerships.................. 9,921 2,502
Cash and cash equivalents................................... -- 8,235
Restricted cash............................................. 661 697
Accounts receivable (net of allowance for doubtful accounts
of $125 and $72, respectively)............................ 1,626 1,074
Accrued rent receivable (net of allowance for doubtful
accounts of $847 and $666, respectively).................. 7,620 5,995
Notes receivable............................................ 2,981 3,457
Deferred lease commissions (including unamortized related
party amounts of $2,236 and $2,275, respectively, and net
of accumulated amortization of $2,023 and $3,368,
respectively)............................................. 2,683 2,399
Prepaid expenses............................................ 3,860 3,283
Other assets................................................ 2,354 1,527
-------- --------
$487,220 $293,186
======== ========
LIABILITIES AND EQUITY:
Notes payable............................................... $108,316 $192,915
Line of credit payable...................................... 62,450 --
Advances from related party................................. -- 32,113
Accounts payable (including related party amounts of $11 and
$79, respectively)........................................ 2,183 1,279
Accrued expenses and other liabilities (including related
party amounts of $3,822 and $440, respectively)........... 5,600 3,532
Dividends payable........................................... 6,095 --
-------- --------
184,644 229,839
Minority interest........................................... 1,521 1,539
-------- --------
Shareholders' equity:
Common stock par value $.01 per share, 100,000,000
authorized shares, 16,814,012 shares issued and
outstanding at December 31, 1997....................... 168 --
Paid in capital in excess of par value.................... 395,313 --
Accumulated deficit....................................... (94,426) --
-------- --------
301,055 --
Owner's equity.............................................. -- 61,808
-------- --------
$487,220 $293,186
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 112
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUE:
Base rent................................................. $36,839 $28,111 $23,315
Percentage rent........................................... 278 239 154
Recoveries from tenants................................... 8,042 6,214 5,478
Gain on sale of real estate............................... -- -- 501
Income (loss) from unconsolidated partnerships............ 409 109 (32)
Other..................................................... 884 432 319
------- ------- -------
46,452 35,105 29,735
------- ------- -------
EXPENSES:
Property operating........................................ 6,016 5,070 4,762
Property taxes............................................ 3,187 2,244 1,981
Property management fees.................................. 126 51 46
Depreciation and amortization............................. 8,928 7,693 6,340
Interest.................................................. 14,057 14,671 12,262
General and administrative................................ 3,923 3,228 3,620
Other expenses, net....................................... 687 1,533 1,247
------- ------- -------
36,924 34,490 30,258
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE, MINORITY INTEREST
AND EXTRAORDINARY ITEM.................................... 9,528 615 (523)
Income tax expense..................................... (19) (122) (87)
Minority interest...................................... (153) (44) (5)
------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 9,356 449 (615)
Extraordinary loss on early extinguishment of debt..... (1,043) -- --
------- ------- -------
NET INCOME (LOSS)........................................... $ 8,313 $ 449 $ (615)
======= ======= =======
Basic earnings per share:
Income before extraordinary item.......................... $ 0.56 $ -- $ --
Extraordinary item........................................ $ (0.06) $ -- $ --
Net income................................................ $ 0.49 $ -- $ --
Diluted earnings per share:
Income before extraordinary item.......................... $ 0.55 $ -- $ --
Extraordinary item........................................ $ (0.06) $ -- $ --
Net income................................................ $ 0.49 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 113
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY (NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
OWNER'S -------------------- PAID-IN (ACCUMULATED
EQUITY SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------- ----------- ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... $61,974 -- $ -- $ -- $ -- $ 61,974
Net loss......................... (615) -- -- -- -- (615)
------- ----------- ---- -------- -------- --------
Balance at December 31, 1995..... 61,359 -- -- -- -- 61,359
Net income....................... 449 -- -- -- -- 449
------- ----------- ---- -------- -------- --------
Balance at December 31, 1996..... 61,808 -- -- -- -- 61,808
Net proceeds from the initial
public offering................ -- 8,050,000 80 143,204 -- 143,284
Capital contribution from PPD
(note 1)....................... (61,808) 8,764,012 88 252,109 (93,066) 97,323
Net income....................... -- -- -- -- 8,313 8,313
Cash dividends paid and
declared....................... -- -- -- -- (9,673) (9,673)
------- ----------- ---- -------- -------- --------
Balance at December 31, 1997..... $ -- 16,814,012 $168 $395,313 $(94,426) $301,055
======= =========== ==== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 114
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 8,313 $ 449 $ (615)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 8,928 7,693 6,340
Amortization of prepaid financing costs................... 453 264 174
Extraordinary loss on early extinguishment of debt........ 1,043 -- --
Loss (income) from unconsolidated partnerships............ (409) (109) 32
Gain on sale of real estate............................... -- -- (501)
Minority interests........................................ 153 44 5
Changes in assets and liabilities:
Decrease (increase) in restricted cash.................. 36 629 (1,070)
Decrease (increase) in accounts receivable.............. (552) 358 (293)
Increase in accrued rent receivable..................... (1,625) (1,627) (910)
Increase in deferred lease commissions.................. (906) (536) (101)
Decrease (increase) in prepaid expenses................. (823) (575) 96
Increase in other assets................................ (1,424) (129) (244)
Increase (decrease) in accounts payable................. 904 (701) 2,476
Increase in accrued expenses and other liabilities...... 1,151 733 67
--------- -------- --------
Net cash provided by operating activities........... 15,242 6,493 5,456
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and additions to operating properties..... (157,650) (12,860) (37,173)
Additions to property under development................... (3,245) (6,634) (5,033)
Proceeds from sale of real estate......................... -- -- 979
Increase (decrease) in construction accounts payable...... 917 (579) (925)
Contributions to unconsolidated partnerships.............. (7,010) (290) (111)
Increase in other assets.................................. -- (265) --
Acquisitions of and increases in notes receivable......... (4,651) (608) (778)
Collections of notes receivable........................... 5,363 2,434 226
--------- -------- --------
Net cash used in investing activities............... (166,276) (18,802) (42,815)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds................................... 62,450 -- --
Notes payable proceeds.................................... -- 11,666 33,797
Notes payable payments.................................... (123,539) (10,053) (2,960)
Advances from (repayments to) related party............... 65,210 15,270 (4,031)
Prepaid financing costs................................... (216) (1,170) (92)
Acquisition of minority interest.......................... (170) -- --
Contributions from minority interest...................... -- 148 --
Distributions to minority interest........................ -- -- (31)
Payment of prepayment penalties........................... (1,035) -- --
Net proceeds from initial public offering................. 143,284 -- --
Refunds from (payments to) loan escrow.................... 393 (895) --
Dividends paid............................................ (3,578) -- --
--------- -------- --------
Net cash provided by financing activities........... 142,799 14,966 26,683
--------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (8,235) 2,657 (10,676)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 8,235 5,578 16,254
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ -- $ 8,235 $ 5,578
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized of
$229, $412 and $1,017, respectively).................... $ 14,206 $ 15,744 $ 29,353
Income taxes paid......................................... $ 19 $ 222 $ 87
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Transfer from property under development to operating
properties.............................................. $ 5,907 $ 9,327 $ 8,959
Transfer from property under development to prepaid
financing costs......................................... $ -- $ 116 $ --
Transfer from property under development to deferred lease
commissions............................................. $ 119 $ 197 $ --
Notes payable assumed upon acquisition of operating
properties.............................................. $ 37,421 $ -- $ --
Wrap-around note receivable and note payable assumed...... $ 1,519 $ -- $ --
Transfer of notes receivable to operating properties
through a deed in lieu of foreclosure................... $ 1,283 $ -- $ --
Additions to loan fees and accounts payable............... $ -- $ 158 $ --
Reclassification of advances from related party to
shareholders' equity.................................... $ 97,323 $ -- $ --
Dividends payable......................................... $ 6,095 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 115
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
Pan Pacific Realty Corporation was incorporated in the state of Maryland on
April 16, 1997 (inception) and subsequently changed its name to Pan Pacific
Retail Properties, Inc. (together with its subsidiaries, the "Company"). The
Company was formed to continue to operate and expand the shopping center
business conducted by Pan Pacific Development (U.S.) Inc. ("PPD"), a
wholly-owned subsidiary of Revenue Properties Company Limited ("Revenue
Properties"), and its subsidiaries related to the ownership, leasing and
management of its neighborhood and community shopping centers and a medical
office building ("Pan Pacific Development Properties"). All of the accounts of
PPD unrelated to these activities have been excluded from these consolidated
financial statements. As of December 31, 1997, the Company owned a portfolio
comprised of 33 properties located primarily in the western region of the United
States. Commencing with its taxable year ended December 31, 1997, the Company
believes it qualifies as a real estate investment trust ("REIT") under Sections
856 through 860 of the Internal Revenue Code.
On August 13, 1997, the Company completed an initial public offering of
8,050,000 shares of common stock at $19.50 per share (including 1,050,000 shares
issued as a result of the full exercise of the over-allotment option by the
underwriters on September 8, 1997) (the "IPO"). The aggregate proceeds to the
Company, net of underwriters' discount, advisory fee and offering costs were
approximately $143,284,000.
The following transactions occurred simultaneously with the completion of
the IPO (collectively, the "Formation Transactions"):
O Certain properties were transferred by PPD entities to the Company and
certain PPD entities were merged with and into the Company.
O PPD advanced cash of $26,486,000 to the Company (the "PPD Contribution").
O The Company obtained a $150,000,000 unsecured credit facility (the
"Unsecured Credit Facility") which has been and is expected to be used to
finance additional shopping center acquisitions and for other corporate
purposes.
O A portion of the estimated net proceeds of the IPO and the PPD
Contribution were used by the Company to repay indebtedness of the
Company and to pay transaction costs, including fees and expenses
associated with the Unsecured Credit Facility.
The transfer of certain properties and the merger of certain PPD entities
with and into the Company was accounted for as a combination of affiliated
entities under common control in a manner similar to a pooling-of-interests.
Under this method, the assets, liabilities and equity were carried over at their
historical book values and their operations have been recorded on a combined
historical basis. A deficit of $93,066,000 was accumulated by Pan Pacific
Development Properties prior to the Formation Transactions. The pooling-of-
interests method of accounting also requires the reporting of results of
operations, for the period in which the combination occurred, as though the
entities had been combined as of either the beginning of the period or
inception. Accordingly, the results of operations for the year ended December
31, 1997 comprise those of the combined entities from August 13, 1997 through
December 31, 1997. Prior to the combination, the Company had no significant
operations; therefore, the combined operations for the periods prior to August
13, 1997 represent primarily the operations of Pan Pacific Development
Properties. The combination did not require any material adjustments to conform
to accounting policies of the separate entities.
F-13
<PAGE> 116
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries (Note 1). All material intercompany
transactions and balances have been eliminated. At December 31, 1997, the
Company consolidated Chino Town Square of which the Company's ownership interest
is 91.5%. The Company has recorded a minority interest for the portion not owned
by the Company. In August 1997, the Company acquired the remaining 10% minority
interest in Tanasbourne Village.
(B) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, highly liquid investments with an
original maturity of three months or less are considered cash equivalents.
(C) INCOME RECOGNITION
Rental revenue is recognized on a straight-line basis over the terms of the
leases, less a general allowance for doubtful accounts relating to accrued rent
receivable for leases which may be terminated before the end of the contracted
term.
(D) CAPITALIZATION OF COSTS
The Company capitalizes direct carrying costs such as interest, property
taxes and other related costs to property under development. The Company also
capitalizes certain acquisition related costs to the carrying costs of the
property acquired. These costs are being depreciated over the estimated useful
lives of the properties. The capitalized costs associated with unsuccessful
acquisitions are charged to expense when the acquisition is abandoned.
(E) DEPRECIATION AND AMORTIZATION
Depreciation on buildings and improvements is provided using a forty-year
straight-line basis. Tenant improvements and costs incurred in obtaining leases
are depreciated on a straight-line basis over the lives of the respective
leases.
Prepaid loan fees are amortized over the lives of the loans and the related
amortization expense is included as a component of interest expense.
(F) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles
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.
F-14
<PAGE> 117
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
(G) INCOME TAXES
As of April 16, 1997, the Company elected to be taxed as a REIT pursuant to
the Internal Revenue Code, as amended. In general, a corporation that
distributes at least 95% of its REIT taxable income to shareholders in any
taxable year and complies with certain other requirements (relating primarily to
the nature of its assets and the sources of its revenue) is not subject to
federal income taxation to the extent of the income which it distributes.
Management believes that the Company has qualified and intends for it to
continue to qualify as a REIT in the future. As discussed more fully in Note 8,
management also does not expect that the Company will pay income taxes on
"built-in gains" on certain of its assets. Based on these considerations,
management does not believe that the Company will be liable for income taxes at
the federal level or in most of the states in which it operates in future years.
Where required, deferred income taxes are accounted for using the asset and
liability method. Under this method, deferred income taxes are recognized for
temporary differences between the financial reporting bases of assets and
liabilities and their respective tax bases and for operating loss and tax credit
carryforwards based on enacted tax rates expected to be in effect when such
amounts are realized or settled. However, deferred tax assets are recognized
only to the extent that it is more likely than not that they will be realized
based on consideration of available evidence, including tax planning strategies
and other factors.
(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 rental revenue. Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of temporary cash
investments and 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 receivables is limited due
to the large number of tenants comprising the Company's customer base, and their
dispersion across many geographical areas. At December 31, 1997 and 1996, the
Company had no significant concentration of credit risk.
(I) NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128") effective for the year ended December 31,
1997. SFAS No. 128 simplifies the standards for computing earnings per share
("EPS") and makes them comparable to international earnings per share standards.
Basic EPS is computed by dividing earnings available to common stockholders
during the period by the weighted average number of common shares outstanding
during each period. Diluted EPS is computed by dividing the amount of earnings
for the period available to common stockholders during the period by the
weighted average number of shares that would have been outstanding assuming the
issuance of common shares for all dilutive potential common shares outstanding
during the reporting period, net of shares assumed to be repurchased using the
treasury stock method.
F-15
<PAGE> 118
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
The following is a reconciliation of the denominator for the basic EPS
computation to the denominator of the diluted EPS computation (all net income is
available to common stockholders for the period presented):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1997
------------------
<S> <C>
Weighted average shares used for the basic EPS computation
(deemed outstanding the entire year)...................... 16,814,012
Incremental shares from the assumed exercise of dilutive
stock options............................................. 52,161
----------
Weighted average shares used for the diluted EPS
computation............................................... 16,866,173
==========
</TABLE>
Earnings per share calculations for 1996 and 1995 are not applicable as
there were no shares outstanding during these years.
(J) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the annual pro forma disclosures
required by SFAS No. 123.
(K) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting of revenue and expenses during the reporting period to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(L) RECLASSIFICATIONS
Certain reclassifications of 1996 amounts have been made in order to
conform to 1997 presentation.
3. PROPERTY UNDER DEVELOPMENT
At December 31, 1996, property under development included the construction
of Laguna Village Phase II, a shopping center located in Sacramento, California,
of which $1,342,323 was land.
Laguna Village Phase II was substantially completed and transferred from
property under development to operating properties during the third quarter of
1997.
F-16
<PAGE> 119
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
4. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
The accompanying consolidated financial statements include investments in
two partnerships in which the Company does not own a controlling interest. The
Company owns 50% general partner interests in Melrose Village Plaza and North
Coast Health Center. These investments are reported using the equity method.
Summarized combined financial information for the partnerships is presented
below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Properties.................................................. $19,364 $19,706
Other assets................................................ 550 806
------- -------
Total assets.............................................. $19,914 $20,512
======= =======
Notes payable............................................... $ -- $15,100
Other liabilities........................................... 72 568
Equity.................................................... 19,842 4,844
------- -------
$19,914 $20,512
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenue.................................................. $4,046 $4,064 $3,726
Expenses................................................. 3,228 3,846 3,790
------ ------ ------
Net income (loss)........................................ $ 818 $ 218 $ (64)
====== ====== ======
</TABLE>
5. NOTES PAYABLE AND LINE OF CREDIT
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Bank notes payable, secured by a mortgage and deeds of
trust, bearing interest at 8.17% with monthly principal
and interest payments of $404, due in
January 2007.............................................. $ 53,836 $ 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....................... 27,726 28,250
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(a).................. -- 27,023
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(a).................... -- 18,186
Bank note payable, secured by a deed of trust, bearing
interest at 8.25% with monthly principal and interest
payments of $102, due in October 2005(a).................. -- 12,579
Bank note payable, secured by a deed of trust, bearing
interest at 7.75% with monthly principal and interest
payments of $37, due in 2004.............................. 4,652 4,729
Bank note payable, secured by a deed of trust, bearing
interest at 7.88% with monthly principal and interest
payments of $27, due in 1999(a)........................... -- 2,565
Bank note payable, secured by a deed of trust, bearing
interest at 8.52% with monthly principal and interest
payments of $35, due in January 2007...................... 4,472 4,499
</TABLE>
F-17
<PAGE> 120
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Bank note payable, secured by a deed of trust, bearing
interest at LIBOR plus 3.25% with fixed principal payments
of $131 and accrued interest on outstanding balances
payable monthly, due and paid in 1997(a).................. -- 1,313
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 plus
2.00% with interest only payments made monthly and
quarterly, respectively, due in 1998(a)................... -- 9,046
Bank notes payable, secured by deeds of trust, bearing
interest at LIBOR plus 1.50% with interest only payments
made monthly, due and paid in 1997 and 1998(a)............ -- 30,540
Bank notes payable, secured by deeds of trust, bearing
interest at 7.80% with monthly principal and interest
payments of $107, due in December 2005(b)................. 11,569 --
Bank notes payable, secured by deeds of trust, bearing
interest at 7.88% with monthly principal and interest
payments of $56, due in February 2018(b).................. 6,061 --
-------- --------
$108,316 $192,915
======== ========
</TABLE>
Principal payments under these notes payable are due as follows:
<TABLE>
<S> <C>
1998.............................................. $ 1,685
1999.............................................. 1,825
2000.............................................. 27,843
2001.............................................. 1,420
2002.............................................. 1,538
2003 and subsequent............................... 74,005
--------
$108,316
========
</TABLE>
(a) Note payable retired in connection with the Company's initial public
offering (see Note 1).
(b) Note payable assumed upon acquisition of property.
As part of the Formation Transactions, $134,217,000 of notes payable were
repaid. In connection with the early pay off of these notes, an extraordinary
loss of $1,043,000 was recorded which includes prepayment penalties, unamortized
financing costs and loan premium.
The Company also has a $150,000,000 Unsecured Credit Facility which bears
interest, at the Company's option, at either LIBOR plus 1.50% or a reference
rate and expires in August 2000. At December 31, 1997, the amount drawn on this
line of credit was $62,450,000 and the interest rate was 7.68%. The credit
facility requires a quarterly fee of .25% per annum on the unused amount of the
available commitment if less than half of the commitment has been used. The
quarterly unused fee decreases to .125% per annum once more than half of the
commitment has been drawn.
6. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair value
of each class of financial instruments:
(i) Cash and cash equivalents, restricted cash, accounts receivable, a
note receivable, accounts payable and accrued expenses and other
liabilities
F-18
<PAGE> 121
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
The carrying amounts approximate fair values because of the short
maturity of these instruments.
(ii) A note receivable and advances from related party
It was not practicable to estimate the fair value of these
instruments due to the uncertainty of the timing of repayment.
(iii) Notes receivable
The fair value of the notes receivable approximates the carrying
amount based on market rates for the same or other instruments with
similar risk, security and remaining maturities.
(iv) Notes and line of credit payable
The fair value of notes payable and the line of credit payable is
estimated based on the current rates offered for notes and lines of
credit payable of similar risk and the same remaining maturities.
The estimated fair value of the notes and line of credit payable at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------- -------- --------- --------
<S> <C> <C> <C>
$170,766 $170,742 $192,915 $195,446
</TABLE>
7. STOCK OPTION PLAN
In August 1997, the Company established the 1997 Stock Option and Incentive
Plan (the "Plan") pursuant to which the Company's Board of Directors may grant
stock options to officers and key employees. The plan authorizes grants of
options to purchase up to 1,620,000 shares of authorized but unissued common
stock. Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant. At the time of the IPO, the Company
issued to certain officers, directors and key employees, 900,000 common stock
options pursuant to the Plan. The stock options were granted with an exercise
price of $19.50, equal to the stock's fair market value at the date of grant.
The stock options have seven year terms and vest 33 1/3% per year over three
years from the date of grant, except for the options granted to the independent
directors which vested 33 1/3% immediately, with the remainder vesting ratably
over two years.
At December 31, 1997, there were 720,000 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1997 was $2.64 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: expected
dividend yield of 6.75%, risk-free interest rate of 6.5%, expected volatility of
22.05%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997
----------------------------
AS
REPORTED PRO FORMA
--------- ----------------
<S> <C> <C>
Net income.................................. $ 8,313 $8,012
Diluted earnings per share.................. $ 0.49 $ 0.48
</TABLE>
F-19
<PAGE> 122
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
Pro forma net income reflects options granted since adoption of the Plan.
Stock option activity during the period is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1996........................ -- --
Granted............................................. 900,000 $19.50
Exercised........................................... -- --
Forfeited........................................... -- --
Expired............................................. -- --
-------
Balance at December 31, 1997........................ 900,000
=======
</TABLE>
At December 31, 1997, the exercise price and weighted-average remaining
contractual life of outstanding options was $19.50 and 6.60 years, respectively.
At December 31, 1997, 13,336 of the options were exercisable.
8. INCOME TAXES
The Company's income tax expense consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Current income taxes:
Federal.................................................. $-- $ 49 $49
State.................................................... 19 73 38
--- ----- ---
$19 $ 122 $87
=== ===== ===
</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,
---------------------
1997 1996 1995
------ ---- -----
<S> <C> <C> <C>
Federal income taxes................................... $3,188 $194 $(188)
State income taxes, net of federal benefit............. 572 34 (33)
Increase (decrease) in valuation allowance............. (2,519) (228) 221
Dividends paid deduction............................... (1,222) -- --
Other.................................................. -- 122 87
------ ---- -----
$ 19 $122 $ 87
====== ==== =====
</TABLE>
At December 31, 1996, gross deferred tax assets were $31,279,000 and gross
deferred tax liabilities were $8,490,000. Deferred tax assets at December 31,
1996 are primarily related to differences between financial and tax bases of
properties ($6,363,000) and net operating losses carried forward ($24,916,000).
Deferred tax liabilities at December 31, 1996 are primarily related to
differences between financial and income tax reporting of depreciation
($6,433,000) and the recognition of rental revenue ($2,057,000).
The Company has recorded a valuation allowance of $22,789,000 at December
31, 1996, which represents deferred tax assets which are not deemed more likely
than not to be realized. During the year ended December 31, 1996, the Company
recorded a decrease in the valuation allowance of $228,000.
F-20
<PAGE> 123
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
At December 31, 1997, the Company had unused net operating losses carried
forward for federal income tax purposes of approximately $12,000,000. The
Company went through a change in control for tax purposes during 1997 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.
As discussed in Note 2(g), the Company elected to be taxed as a REIT,
effective April 16, 1997. Management believes that the Company qualified and
will continue to qualify as a REIT and therefore does not expect the Company
will be liable for income taxes on "built-in gains" on its assets at the federal
level or in most states in future years. Accordingly, for the year ended
December 31, 1997, no provision was recorded for federal or substantially all
state income taxes.
In connection with the Company's incorporation and the IPO, certain
non-taxable mergers were consummated with PPD whereby several wholly owned
subsidiaries of PPD merged with and into the Company. To the extent the excess
fair value of the assets at the date of merger exceeded the aggregate adjusted
tax bases of those assets, a net unrecognized built-in gain was created for
income tax purposes.
In connection with its election to be taxed as a REIT, the Company will
also elect to be subject to the "built-in gain" rules. Under these rules, taxes
may be payable at the time and to the extent that the net unrealized gains on
the Company's assets at the date of conversion to REIT status are recognized in
taxable dispositions of such assets in the ten-year period following conversion.
Such net unrealized gains were approximately $50,000,000 at December 31, 1997.
Management believes that the Company will not be required to make payments of
income taxes on built-in gains during the ten-year period due to the
availability of its net operating loss carryforward to offset built-in gains
which might be recognized, the potential for the Company to make nontaxable
dispositions, if necessary (e.g., like-kind exchanges of properties) and the
intent and ability of the Company to defer asset dispositions to periods when
related gains will not be subject to the built-in gains income taxes. However,
it may be necessary to recognize a liability for such income taxes in the future
if management's plans and intentions with respect to asset dispositions, or the
related tax laws, change.
9. FUTURE LEASE REVENUE
Total future minimum lease receipts under noncancellable operating tenant
leases in effect at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................. $ 48,244
1999.............................................. 45,462
2000.............................................. 42,156
2001.............................................. 37,070
2002.............................................. 32,658
2003 and subsequent............................... 201,491
--------
$407,081
========
</TABLE>
10. RELATED PARTY TRANSACTIONS
(a) Included in general and administrative expenses are management fees
totaling $481,000, $780,000 and $780,000 for the years ended December 31, 1997,
1996 and 1995, respectively, which are a reimbursement of costs incurred by
Revenue Properties for managing the development of the properties, directing
corporate strategy, and consulting on operations. Effective August 13, 1997, at
the closing of the IPO, these fees are no longer being incurred by the Company.
F-21
<PAGE> 124
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
(b) The Company paid a consulting fee of $259,000, $420,000 and $360,000
for the years ended December 31, 1997, 1996 and 1995, respectively, to a sole
proprietorship owned by a director of Revenue Properties. Effective August 13,
1997, at the closing of the IPO, these fees are no longer being incurred by the
Company.
(c) The Company incurred $529,000, $1,878,000 and $1,763,000 for the years
ended December 31, 1997, 1996 and 1995, respectively, for loan guaranty fees
charged by Revenue Properties. These fees are recorded as a component of other
expenses, net. Effective August 13, 1997, at the closing of the IPO, these fees
are no longer being incurred by the Company.
(d) Pursuant to the IPO, the Company issued shares of common stock in lieu
of repayment of net advances from Revenue Properties of $97,323,000 at August
13, 1997. Subsequent to this date, no advances were received from Revenue
Properties. The Company received net advances from Revenue Properties of
$15,270,000 for the year ended December 31, 1996.
(e) Dividends paid to PPD during 1997 were $1,837,000. At December 31,
1997, $3,130,000 of dividends were payable to PPD.
11. EMPLOYEE BENEFIT PLAN
The Company implemented an employee benefit plan in March, 1997. All
employees of the Company who meet certain minimum age and period of service
requirements are eligible to participate in a Section 401(k) plan as defined by
the Internal Revenue Code. The employee benefit plan allows eligible employees
to defer up to 15 percent of their annual compensation. The amounts contributed
by employees are immediately vested and non-forfeitable. The Company, at
management's discretion, may match employee contributions. This cost is accrued
as incurred. The Company's cost for the year ended December 31, 1997 was
approximately $63,000.
12. 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
$636,958, $618,018 and 646,318 for the years ended December 31, 1997, 1996 and
1995, respectively. Minimum rentals under noncancellable leases in effect at
December 31, 1997 were as follows:
<TABLE>
<S> <C>
1998................................................ $ 620
1999................................................ 568
2000................................................ 566
2001................................................ 565
2002................................................ 235
------
$2,554
======
</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 consolidated financial statements taken as a whole.
F-22
<PAGE> 125
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
13. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma information for the years ended
December 31, 1997 and 1996 are presented as if the Formation Transactions
(including the acquisition of Chico Crossroads, Monterey Plaza, Fairmont
Shopping Center, Lakewood Shopping Center, Green Valley Town & Country and
secured notes receivable), the IPO described in Note 1 to the financial
statements and the repayment of notes payable pursuant to the IPO had all
occurred on January 1, 1996. Such pro forma information is based upon the
historical financial statements of the Company and should be read in connection
with the financial statements and the notes thereto.
This unaudited pro forma condensed information does not purport to
represent what the actual results of operations of the Company would have been
assuming such transactions had been completed as set forth above, nor do they
purport to predict the results of operations for future periods.
PRO FORMA CONDENSED INCOME STATEMENT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Total revenue........................................ $50,358 $45,559
Net income........................................... $17,537 $16,361
Basic and diluted earnings per share................. $ 1.04 $ 0.97(a)
</TABLE>
- ---------------
(a) assuming 16,814,012 shares outstanding
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes the condensed quarterly financial information for
the Company:
<TABLE>
<CAPTION>
QUARTERS ENDED 1997
-----------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Revenue..................................... $14,516 $12,105 $10,599 $9,232
Expenses.................................... 9,366 8,876 9,805 9,049
------- ------- ------- ------
Income before extraordinary item............ 5,150 3,229 794 183
Extraordinary loss on early extinguishment
of debt................................... -- 1,043 -- --
------- ------- ------- ------
Net income.................................. $ 5,150 $ 2,186 $ 794 $ 183
======= ======= ======= ======
Basic earnings per share:
Income before extraordinary item.......... $ 0.31 $ 0.19 $ 0.05 $ 0.01
Net income................................ $ 0.31 $ 0.13 $ 0.05 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED 1996
-----------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Revenue...................................... $9,682 $8,725 $8,567 $8,131
Expenses..................................... 9,404 8,440 8,233 8,579
------ ------ ------ ------
Net income (loss)............................ $ 278 $ 285 $ 334 $ (448)
====== ====== ====== ======
</TABLE>
F-23
<PAGE> 126
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
15. SUBSEQUENT EVENTS
(a) On January 15, 1998, the Company commenced foreclosure proceedings
related to a non-performing note receivable with a book value of approximately
$610,000. Management expects resolution to this matter in May, 1998.
(b) On January 20, 1998, the Company purchased Bear Creek Plaza, a shopping
center located in Medford, Oregon. The purchase price was $13,100,000. The
purchase was financed primarily by a draw under the Company's line of credit.
(c) On January 21, 1998, the Company purchased San Dimas Marketplace, a
shopping center located in San Dimas, California. The purchase price was
$22,800,000. The purchase was financed primarily by a draw under the Company's
line of credit.
(d) On February 18, 1998, the Company purchased a four-property portfolio,
including Milwaukie Marketplace, Pioneer Plaza, Powell Valley Junction and Shute
Park Plaza, all located in the state of Oregon. The purchase prices of Milwaukie
Marketplace, Pioneer Plaza, Powell Valley Junction and Shute Park Plaza were
$12,735,000, $7,455,000, $6,185,000 and $3,975,000, respectively. This four
property portfolio was financed primarily by a draw under the Company's line of
credit.
(e) During the period January 1, 1998 through March 17, 1998, the Company
borrowed an additional $69,100,000 under the line of credit to acquire the
properties noted above.
(f) On March 17, 1998, the Company's Board of Directors declared a dividend
of $0.38 per share for the first quarter 1998 to be paid on April 17, 1998 to
shareholders of record on March 31, 1998.
F-24
<PAGE> 127
PAN PACIFIC RETAIL PROPERTIES, INC.
SCHEDULE III PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COSTS ACQUISITION
-------------------------- --------------------------
BUILDINGS
AND CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS(2) IMPROVEMENTS(2) COSTS
----------- ------------ -------- --------------- --------------- --------
<S> <C> <C> <C> <C> <C>
PROPERTIES:
Arlington Courtyard
Riverside, CA............... $ -- $ 401 $ 753 $ 89 $ --
Brookvale Shopping Center
Fremont, CA................. -- 9,492 3,164 -- --
Canyon Ridge Plaza
Kent, WA.................... -- 2,457 -- 6,705 1,275
Cheyenne Commons
Las Vegas, NV............... -- 8,540 26,810 1,175 --
Chico Crossroads
Chico, CA................... -- 3,600 17,063 -- --
Chino Town Square
Chino, CA................... 27,726 8,801 10,297 25,547 --
Claremont Village
Everett, WA................. -- 2,320 6,987 -- --
Country Club Center
Rio Rancho, NM.............. 3,278 566 2,514 38 --
Fairmont Shopping Center
Fairmont, CA................ -- 3,420 8,003 -- --
Foothill Center
Rialto, CA.................. -- 314 1,078 -- --
Green Valley Town & Country
Henderson, NV............... -- 4,096 12,333 -- --
Laguna Village
Sacramento, CA.............. -- 3,226 -- 14,214 1,644
Lakewood Shopping Center
Lakewood, CA................ -- 2,363 7,125 -- --
Laurentian Center
Ontario, CA................. 4,652 2,767 6,445 650 --
Maysville Marketsquare
Maysville, KY............... 5,364 3,454 2,001 3,771 79
Monterey Plaza
San Jose, CA................ -- 7,688 18,761 -- --
Ocoee Plaza
Ocoee, FL................... -- 651 2,911 278 --
Olympia Square
Olympia, WA................. 14,105 3,737 11,580 1,237 --
Olympia West Center
Olympia, WA................. 6,061 2,735 8,295 -- --
Palmdale Shopping Center
Palmdale, CA................ -- 1,150 3,454 -- --
Rainbow Promenade
Las Vegas, NV............... -- 9,390 21,774 -- --
Rosewood Village
Santa Rosa, CA.............. 4,472 2,180 4,958 167 --
Sahara Pavilion North
Las Vegas, NV............... 31,089 11,920 28,554 549 --
Sahara Pavilion South
Las Vegas, NV............... -- 4,833 12,988 1,116 --
Sports Unlimited
Memphis, TN................. -- 1,204 3,780 322 --
Sunset Square
Bellingham, WA.............. -- 6,100 18,647 393 --
Tacoma Central
Tacoma, WA.................. 11,569 5,314 16,288 -- --
Tanasbourne Village
Ontario, CA................. -- 5,573 13,861 1,574 --
Tustin Heights Shopping
Center
Tustin, CA.................. -- 3,675 10,776 -- --
Vineyard Village East
Ontario, CA................. -- 649 2,716 135 --
Winterwood Pavilion
Las Vegas, NV............... -- 4,573 13,015 512 --
-------- -------- -------- ------- ------
$108,316 $127,189 $296,931 $58,472 $2,998
======== ======== ======== ======= ======
<CAPTION>
TOTAL COSTS
-----------------------------------
BUILDINGS ACCUMULATED DATE OF
AND TOTAL DEPRECIATION ACQUISITION(A)
DESCRIPTION LAND IMPROVEMENTS (1)(2)(3) (2)(3) CONSTR.(C)
----------- -------- ------------ --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
PROPERTIES:
Arlington Courtyard
Riverside, CA............... $ 401 $ 842 $ 1,243 $ 167 1994(A)
Brookvale Shopping Center
Fremont, CA................. 9,492 3,164 12,656 -- 1997(A)
Canyon Ridge Plaza
Kent, WA.................... 2,641 7,796 10,437 554 1995(C)
1992(A)
Cheyenne Commons
Las Vegas, NV............... 8,540 27,985 36,525 2,042 1995(A)
Chico Crossroads
Chico, CA................... 3,600 17,063 20,663 362 1997(A)
Chino Town Square
Chino, CA................... 21,320 23,325 44,645 1,315 1992(A)
Claremont Village
Everett, WA................. 2,320 6,987 9,307 29 1997(A)
Country Club Center
Rio Rancho, NM.............. 566 2,552 3,118 729 1992(A)
Fairmont Shopping Center
Fairmont, CA................ 3,420 8,003 11,423 136 1997(A)
Foothill Center
Rialto, CA.................. 314 1,078 1,392 21 1997(A)
Green Valley Town & Country
Henderson, NV............... 4,096 12,333 16,429 117 1997(A)
Laguna Village
Sacramento, CA.............. 3,448 15,636 19,084 507 1992(A)
1996/97(C)
Lakewood Shopping Center
Lakewood, CA................ 2,363 7,125 9,488 96 1997(A)
Laurentian Center
Ontario, CA................. 2,767 7,095 9,862 799 1994/96(A)
Maysville Marketsquare
Maysville, KY............... 3,299 6,006 9,305 906 1992(A)
1993(C)
Monterey Plaza
San Jose, CA................ 7,688 18,761 26,449 315 1997(A)
Ocoee Plaza
Ocoee, FL................... 651 3,189 3,840 447 1992(A)
Olympia Square
Olympia, WA................. 3,737 12,817 16,554 2,818 1992(A)
Olympia West Center
Olympia, WA................. 2,735 8,295 11,030 35 1997(A)
Palmdale Shopping Center
Palmdale, CA................ 1,150 3,454 4,604 -- 1997(A)
Rainbow Promenade
Las Vegas, NV............... 9,390 21,774 31,164 162 1997(A)
Rosewood Village
Santa Rosa, CA.............. 2,180 5,125 7,305 1,002 1992(A)
Sahara Pavilion North
Las Vegas, NV............... 11,920 29,103 41,023 4,367 1992(A)
Sahara Pavilion South
Las Vegas, NV............... 4,833 14,104 18,937 2,373 1992(A)
Sports Unlimited
Memphis, TN................. 1,204 4,102 5,306 883 1992(A)
Sunset Square
Bellingham, WA.............. 6,100 19,040 25,140 4,048 1992(A)
Tacoma Central
Tacoma, WA.................. 5,314 16,288 21,602 68 1997(A)
Tanasbourne Village
Ontario, CA................. 5,573 15,435 21,008 2,692 1992(A)
Tustin Heights Shopping
Center
Tustin, CA.................. 3,675 10,776 14,451 -- 1997(A)
Vineyard Village East
Ontario, CA................. 649 2,851 3,500 309 1994(A)
Winterwood Pavilion
Las Vegas, NV............... 4,573 13,527 18,100 2,777 1992(A)
-------- -------- -------- -------
$139,959 $345,631 $485,590 $30,076
======== ======== ======== =======
</TABLE>
F-25
<PAGE> 128
PAN PACIFIC RETAIL PROPERTIES, INC.
SCHEDULE III PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
NOTES:
(1) The aggregate gross cost of the properties owned by Pan Pacific Retail
Properties, Inc. for federal income tax purposes, approximated $507,923 as of
December 31, 1997.
(2) Net of write offs of fully depreciated assets.
(3) The following table reconciles the historical cost and related
accumulated depreciation and amortization of Pan Pacific Retail Properties, Inc.
from January 1, 1995 through December 31, 1997:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
COST
- -----------------------------------------------------------
Balance, beginning of period............................... $290,874 $273,677 $232,176
Additions during period (acquisition, improvements,
etc.)................................................. 199,251 18,682 41,995
Interest capitalized..................................... 229 412 1,017
Deductions during period (write off of tenant
improvements and cost of real estate sold)............ (4,764) (1,897) (1,511)
-------- -------- --------
Balance, close of period................................... $485,590 $290,874 $273,677
======== ======== ========
ACCUMULATED DEPRECIATION AND AMORTIZATION
- -----------------------------------------------------------
Balance, beginning of period............................... $ 26,857 $ 22,254 $ 17,622
Additions during period (depreciation and amortization
expense).............................................. 7,983 6,500 5,665
Deductions during period (write off of accumulated
depreciation of tenant improvements and real estate
sold)................................................. (4,764) (1,897) (1,033)
-------- -------- --------
Balance, close of period................................... $ 30,076 $ 26,857 $ 22,254
======== ======== ========
</TABLE>
F-26
<PAGE> 129
PAN PACIFIC RETAIL PROPERTIES, INC.
COMBINING SCHEDULE OF REVENUE AND CERTAIN EXPENSES OF THE
1997 ACQUISITION PROPERTIES AND NOTES RECEIVABLE
FOR THE YEAR ENDED DECEMBER 31, 1997(1)
(UNAUDITED)
<TABLE>
<CAPTION>
CHICO MONTEREY FAIRMONT GREEN VALLEY LAKEWOOD NOTES
CROSSROADS PLAZA SHOPPING CENTER TOWN & COUNTRY SHOPPING CENTER RECEIVABLE
---------- -------- --------------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rent........................ $349,208 $746,219 $404,174 $1,016,555 $404,375 $ --
Percentage rents............ -- -- -- -- -- --
Recoveries from tenants..... 25,458 121,354 82,779 106,530 80,302 --
Other....................... -- -- 1,986 82 1,213 143,492
-------- -------- -------- ---------- -------- --------
374,666 867,573 488,939 1,123,167 485,890 143,492
-------- -------- -------- ---------- -------- --------
Certain Expenses:
Property operating.......... 23,634 82,744 42,323 122,793 80,585 --
Property taxes.............. 46,964 110,578 29,366 56,654 44,435 --
Management fees............. 6,500 29,047 16,643 44,924 19,850 --
Interest.................... -- 565,001 -- 684,407 -- --
Other....................... 2,934 -- 1,312 4,960 5,958 --
-------- -------- -------- ---------- -------- --------
80,032 787,370 89,644 913,738 150,828 --
-------- -------- -------- ---------- -------- --------
Revenue in excess of certain
expenses.................... $294,634 $ 80,203 $399,295 $ 209,429 $335,062 $143,492
======== ======== ======== ========== ======== ========
<CAPTION>
RAINBOW THE PNW PALMDALE TUSTIN HEIGHTS BROOKVALE
PROMENADE PORTFOLIO SHOPPING CENTER SHOPPING CENTER SHOPPING CENTER TOTAL
---------- ---------- --------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rent........................ $1,450,319 $3,568,281 $427,660 $1,228,648 $ 916,856 $10,512,295
Percentage rents............ -- 20,348 -- -- 106,415 126,763
Recoveries from tenants..... 230,031 847,958 160,100 170,322 320,372 2,145,206
Other....................... 3,992 1,368 2,789 8,584 43,061 206,567
---------- ---------- -------- ---------- ---------- -----------
1,684,342 4,437,955 590,549 1,407,554 1,386,704 12,990,831
---------- ---------- -------- ---------- ---------- -----------
Certain Expenses:
Property operating.......... 126,684 475,486 106,819 153,840 185,590 1,400,498
Property taxes.............. 169,637 371,546 20,727 112,056 163,970 1,125,933
Management fees............. 34,527 168,892 13,867 90,497 72,463 497,210
Interest.................... -- 1,256,882 -- -- -- 2,506,290
Other....................... 14,313 18,137 58,196 38,168 11,413 155,391
---------- ---------- -------- ---------- ---------- -----------
345,161 2,290,943 199,609 394,561 433,436 5,685,322
---------- ---------- -------- ---------- ---------- -----------
Revenue in excess of certain
expenses.................... $1,339,181 $2,147,012 $390,940 $1,012,993 $ 953,268 $ 7,305,509
========== ========== ======== ========== ========== ===========
</TABLE>
- ---------------
(1) Amounts shown reflect operating results for the period during 1997 that the
assets were not owned by the Company.
F-27
<PAGE> 130
PAN PACIFIC RETAIL PROPERTIES, INC.
COMBINING SCHEDULE OF REVENUE AND CERTAIN EXPENSES OF THE
1998 ACQUISITION PROPERTIES
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
BEAR CREEK SAN DIMAS THE OREGON MANTECA CREEKSIDE PANTHER LAKE
PLAZA MARKETPLACE PORTFOLIO MARKETPLACE CENTER SHOPPING CENTER TOTAL
---------- ----------- ---------- ----------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rent.................. $1,179,184 $1,408,238 $3,438,981 $ 861,593 $630,763 $734,445 $8,253,204
Percentage rents...... 11,692 -- 30,589 -- -- -- 42,281
Recoveries from
tenants............. 259,347 168,280 710,016 143,395 183,460 189,615 1,654,113
Other................. 2,570 -- 19,381 2,730 380 4,092 29,153
---------- ---------- ---------- ---------- -------- -------- ----------
1,452,793 1,576,518 4,198,967 1,007,718 814,603 928,152 9,978,751
---------- ---------- ---------- ---------- -------- -------- ----------
Expenses:
Property operating.... 97,938 62,592 511,527 207,312 344,015 102,980 1,326,364
Property taxes........ 146,246 120,541 347,347 90,067 81,788 112,902 898,891
Management fees....... 30,122 39,643 162,182 50,400 39,720 27,761 349,828
Other................. 15,508 21,500 64,020 3,408 10,591 12,584 127,611
---------- ---------- ---------- ---------- -------- -------- ----------
289,814 244,276 1,085,076 351,187 476,114 256,227 2,702,694
---------- ---------- ---------- ---------- -------- -------- ----------
Revenue in excess of
certain expenses...... $1,162,979 $1,332,242 $3,113,891 $ 656,531 $338,489 $671,925 $7,276,057
========== ========== ========== ========== ======== ======== ==========
</TABLE>
F-28
<PAGE> 131
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying statement of revenue and certain expenses
of San Dimas Marketplace for the year ended December 31, 1997. 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 San Dimas Marketplace'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
San Dimas Marketplace for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
April 2, 1998
F-29
<PAGE> 132
SAN DIMAS MARKETPLACE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Rent (notes 3 and 4)...................................... $1,408,238
Recoveries from tenants................................... 168,280
----------
1,576,518
----------
Certain expenses:
Property taxes............................................ 120,541
Repairs and maintenance................................... 22,374
Management fees--related party............................ 39,643
Utilities................................................. 40,218
Other..................................................... 21,500
----------
244,276
----------
Revenue in excess of certain expenses.................. $1,332,242
==========
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-30
<PAGE> 133
SAN DIMAS MARKETPLACE
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
(1) BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of San Dimas Marketplace (the "Property"), a community shopping
center located in San Dimas, California. Construction of the Property was
completed in phases during the current and prior year, and tenants began
occupying their units upon the completion of construction as provided in their
leases. The Property was purchased by Pan Pacific Retail Properties, Inc. (the
"Company") for $22,481,740 in cash on January 22, 1998.
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 San Dimas Marketplace for the year ended
December 31, 1997 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 construction loan which was not assumed by the Company
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of estimates
Management has made a number of estimates and assumptions relating to the
reporting and disclosure of revenue and certain expenses during the reporting
period to prepare the statement of revenue and certain expenses in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(3) RENT REVENUE
Retail space is leased to tenants under various operating leases with terms
ranging from 3 to 15 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.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998.................................................... $ 2,087,854
1999.................................................... 2,225,374
2000.................................................... 2,188,316
2001.................................................... 2,137,909
2002.................................................... 2,103,422
Thereafter.............................................. 11,545,472
-----------
$22,288,347
===========
</TABLE>
(4) CONCENTRATION OF CREDIT RISK
At December 31, 1997, five tenants individually accounted for more than 10%
of total revenue. Rent revenue earned, including recoveries, from these tenants
for the year ended December 31, 1997 were as follows:
<TABLE>
<S> <C>
Office Max................................................ $475,555
Ross Dress for Less....................................... $276,335
Petco Animal Supplies..................................... $237,454
Crown Books............................................... $184,454
Hollywood Video........................................... $160,177
</TABLE>
F-31
<PAGE> 134
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pan Pacific Retail Properties, Inc.:
We have audited the accompanying combined statement of revenue and certain
expenses of The Oregon Portfolio for the year ended December 31, 1997. This
combined statement is the responsibility of management. Our responsibility is to
express an opinion on this combined 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 combined 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 combined
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 combined statement. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying combined 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 combined statement of revenue and certain expenses. It is not
intended to be a complete presentation of The Oregon Portfolio's combined
revenue and expenses.
In our opinion, the combined statement referred to above presents fairly,
in all material respects, the combined revenue and certain expenses, as
described in Note 1, of The Oregon Portfolio for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
April 3, 1998, except as to note 1,
which is as of April 7, 1998
F-32
<PAGE> 135
THE OREGON PORTFOLIO
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Rent (notes 3 and 5)...................................... $3,438,981
Percentage rent........................................... 30,589
Recoveries from tenants................................... 710,016
Other..................................................... 19,381
----------
4,198,967
----------
Certain expenses:
Property taxes............................................ 347,347
Repairs and maintenance................................... 207,171
Management fees--related party............................ 162,182
Ground lease (note 4)..................................... 148,895
Utilities................................................. 123,279
Insurance................................................. 32,182
Other..................................................... 64,020
----------
1,085,076
----------
Revenue in excess of certain expenses.................. $3,113,891
==========
</TABLE>
See accompanying notes to combined statement of revenue and certain expenses.
F-33
<PAGE> 136
THE OREGON PORTFOLIO
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
(1) BASIS OF PRESENTATION
The accompanying combined statement of revenue and certain expenses relates
to the operations of The Oregon Portfolio (the "Properties"), consisting of the
following:
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION
------------- --------
<S> <C>
Powell Valley Junction............ Gresham, Oregon
Pioneer Plaza..................... Springfield, Oregon
Milwaukie Marketplace............. Milwaukie, Oregon
Shute Park Plaza.................. Hillsboro, Oregon
Smith Building (24 Hour Hillsboro, Oregon
Fitness)........................
</TABLE>
On February 18, 1998, Pan Pacific Retail Properties, Inc. (the "Company")
purchased Powell Valley Junction, Pioneer Plaza, Milwaukie Marketplace and Shute
Park Plaza in a single transaction with an unrelated seller for $30,350,000 in
cash. On April 7, 1998, the Company purchased the Smith Building from the same
seller for $2,275,000 in cash.
The accompanying combined 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 Oregon Portfolio for the year ended December
31, 1997 due to the exclusion of the following expenses, which may not be
comparable to the proposed future operations of the Properties:
- Depreciation and amortization
- Interest on mortgages which were not assumed by the Company
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Properties
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Rent revenue is recognized on a straight-line basis over the term of the
individual leases.
Use of estimates
Management has made a number of estimates and assumptions relating to the
reporting and disclosure of revenue and certain expenses during the reporting
period to prepare the combined 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 month-to-month 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.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<S> <C>
YEARS ENDING DECEMBER 31,
1998.................................................. $3,319,334
1999.................................................. 3,207,834
2000.................................................. 2,583,118
2001.................................................. 2,364,881
2002.................................................. 2,277,936
Thereafter............................................ 14,878,235
-----------
$28,631,338
===========
</TABLE>
F-34
<PAGE> 137
THE OREGON PORTFOLIO
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(4) GROUND LEASE
Milwaukie Marketplace contains six parcels which are owned by and leased
from an unrelated third-party. The lease term is for 35 years and expires in
March 2023. Lease payments are due monthly and totaled $148,895 for the year
ended December 31, 1997. Future minimum rentals under the terms of the ground
lease are as follows:
<TABLE>
<S> <C>
YEARS ENDING DECEMBER 31,
1998.................................................. $156,728
1999.................................................. 160,344
2000.................................................. 160,344
2001.................................................. 160,344
2002.................................................. 160,344
Thereafter............................................ 3,583,176
-----------
$4,381,280
===========
</TABLE>
(5) CONCENTRATION OF CREDIT RISK
For the year ended December 31, 1997, one tenant, Food 4 Less, individually
accounted for more than 10% of total combined revenue. Rent revenue earned from
this tenant, including recoveries, was $499,816 for the year ended December 31,
1997.
F-35
<PAGE> 138
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN A JURISDICTION IN WHICH SUCH 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.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................... 1
Risk Factors.......................................... 12
The Company........................................... 23
Business and Growth Strategies........................ 25
Use of Proceeds....................................... 28
Price Range of Common Stock and Distribution History.. 28
Capitalization........................................ 30
Selected Consolidated Financial Data.................. 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 33
Business and Properties............................... 40
Management............................................ 50
Structure and Formation Transactions of the Company... 56
Certain Relationships and Related Transactions........ 58
Policies with Respect to Certain Activities........... 58
Principal Stockholders................................ 62
Description of Capital Stock.......................... 63
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws........................ 68
Shares Eligible for Future Sale....................... 72
Federal Income Tax Consequences....................... 74
ERISA Considerations.................................. 88
Underwriting.......................................... 90
Experts............................................... 91
Legal Matters......................................... 92
Additional Information................................ 92
Glossary.............................................. 93
Index to Financial Statements......................... F-1
</TABLE>
============================================================
============================================================
2,000,000 Shares
PAN PACIFIC
RETAIL PROPERTIES, INC.
Common Stock
-------------------------
PROSPECTUS
-------------------------
PRUDENTIAL SECURITIES INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
May , 1998
============================================================
<PAGE> 139
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fee--Securities and Exchange Commission........ $ 15,224
NASD Fee.................................................... 5,500
New York Stock Exchange Listing Fee......................... 16,100
Transfer Agent and Registrar's Fees......................... 2,000
Printing and Engraving Expenses............................. 300,000
Legal Fees and Expenses (other than Blue Sky)............... 405,000
Accounting Fees and Expenses................................ 90,000
Miscellaneous Expenses...................................... 366,176
----------
Total............................................. $1,200,000
==========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
As part of the Formation Transactions and in exchange for their respective
ownership interests in certain of the Initial Properties and certain PPD
entities, 8,634,012 restricted shares of Common Stock were issued PPD and
certain of its subsidiaries. Concurrently with the consummation of the Company's
IPO, 130,000 restricted shares of Common Stock were issued to certain members of
senior management of the Company. In connection with this Offering and the
exercise by PPD of its participation rights with respect to issuances of Common
Stock by the Company, 2,000,000 restricted shares of Common Stock will be issued
to PPD. Each of the aforementioned issuances of Common Stock were, or will be,
made in reliance upon an exemption from registration under Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
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.
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,
II-1
<PAGE> 140
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 rising 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.
Pro Forma Condensed Consolidated Financial Statements (Unaudited)
Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1997
Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997
Notes to Pro Forma Condensed Consolidated Financial Statements
Pan Pacific Retail Properties, Inc. Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Equity for the years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Schedule III--Properties and Accumulated Depreciation
Combining Schedule of Revenue and Certain Expenses of the 1997 Acquisition
Properties and Notes Receivable for the year ended December 31, 1997
Combining Schedule of Revenue and Certain Expenses of the 1998 Acquisition
Properties for the year ended December 31, 1997
San Dimas Marketplace:
Independent Auditors' Report
Statement of Revenue and Certain Expenses for the year ended December 31, 1997
II-2
<PAGE> 141
Notes to Statement of Revenue and Certain Expenses
The Oregon Portfolio:
Independent Auditors' Report
Combined Statement of Revenue and Certain Expenses for the year ended December
31, 1997
Notes to Combined Statement of Revenue and Certain Expenses
(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* Form of Certificate of Common Stock
5.1+ Form of Opinion of Ballard Spahr Andrews & Ingersoll
regarding the validity of the securities being registered
8.1+ Opinion of Latham & Watkins regarding tax matters
10.1* 1997 Stock Incentive Plan
10.2* Form of Officers and Directors Indemnification Agreement
10.3 Unsecured Credit Facility Agreement with Bank of America
NT&SA
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
10.8* Form of Non-Competition Agreement
21.1* Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
23.2+ Consent of Ballard Spahr Andrews & Ingersoll (contained in
Exhibit 5.1)
23.3* Consent of Latham & Watkins (contained in Exhibit 8.1)
24 Power of Attorney (see Page II-5)
</TABLE>
- ---------------
* Filed as an exhibit to Registration Statement on Form S-11 (No. 333-28715)
declared effective on August 7, 1997 and incorporated herein by reference.
+ To be filed by amendment.
ITEM 37. 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 such indemnifica-
II-3
<PAGE> 142
tion by it 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-4
<PAGE> 143
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 thirteenth day of
April, 1998.
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 attorneys-in-fact and agents, each with full power of
substitution and resubstitution for him 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 April 13, 1998.
<TABLE>
<CAPTION>
TITLE
-----
<S> <C>
/s/ STUART A. TANZ Director, Chief Executive Officer and
- --------------------------------------------- President
Stuart A. Tanz
/s/ DAVID L. ADLARD Executive Vice President, Chief Financial
- --------------------------------------------- Officer, Treasurer and Secretary
David L. Adlard
/s/ LAURIE A. SNEVE Vice President and Controller
- ---------------------------------------------
Laurie A. Sneve
/s/ RUSSELL TANZ Director
- ---------------------------------------------
Russell Tanz
/s/ MARK J. RIEDY Director
- ---------------------------------------------
Mark J. Riedy
/s/ BERNARD M. FELDMAN Director
- ---------------------------------------------
Bernard M. Feldman
/s/ MELVIN S. ADESS Director
- ---------------------------------------------
Melvin S. Adess
</TABLE>
II-5
<PAGE> 144
EXHIBIT INDEX
<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* Form of Certificate of Common Stock
5.1+ Form of Opinion of Ballard Spahr Andrews & Ingersoll
regarding the validity of the securities being registered
8.1+ Opinion of Latham & Watkins regarding tax matters
10.1* 1997 Stock Incentive Plan
10.2* Form of Officers and Directors Indemnification Agreement
10.3 Unsecured Credit Facility Agreement with Bank of America
NT&SA
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
10.8* Form of Non-Competition Agreement
21.1* Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
23.2+ Consent of Ballard Spahr Andrews & Ingersoll (contained in
Exhibit 5.1)
23.3* Consent of Latham & Watkins (contained in Exhibit 8.1)
24 Power of Attorney (see Page II-5)
</TABLE>
- ---------------
* Filed as an exhibit to Registration Statement on Form S-11 (No. 333-28715)
declared effective on August 7, 1997 and incorporated herein by reference.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 10.3
MODIFICATION AGREEMENT
This Modification Agreement ("Agreement") is made as of March 19,
1998, by Pan Pacific Retail Properties, Inc., a Maryland corporation, each of
the "Banks" (as defined in the Credit Agreement described below), and Bank of
America National Trust and Savings Association, a national banking association,
as the Agent.
FACTUAL BACKGROUND
------------------
A. Reference is hereby made to that certain Credit Agreement
dated as of August 13, 1997 (the "Credit Agreement") by and among Pan Pacific
Retail Properties, Inc., a Maryland corporation (the "Company"), Bank of America
National Trust and Savings Association, a national banking association ("BofA"),
U.S. Bank National Association (FKA First Bank National Association) ("U.S.
Bank"), KeyBank National Association ("KeyBank"), The Bank of Nova Scotia ("Bank
of Nova Scotia"), First Union National Bank (as successor to Signet Bank under
the Credit Agreement) ("First Union"), and Sanwa Bank California, a California
corporation ("Sanwa Bank") (collectively, the "Banks") and Bank of America
National Trust and Savings Association, as the Agent ("Agent"). Capitalized
terms used but not otherwise defined herein shall have the meanings used and
defined in the Credit Agreement.
B. Pursuant to the Credit Agreement the Banks agreed, subject to
the terms, conditions, and limitations specified therein, to provide certain
credit facilities to the Company in a Total Aggregate Commitment of not to
exceed $150,000,000. The Company, the Banks and the Agent now wish to increase
the Total Aggregate Commitment under the Credit Agreement to $200,000,000
(allocated between the Banks as provided below), and to otherwise modify the
Credit Agreement as set forth below.
AGREEMENT
---------
Therefore, the Company, the Banks and the Agent agree as follows:
1. Reaffirmation of Loan Documents. The Company hereby reaffirms
all of its obligations under the Loan Documents, and the Company acknowledges
that it has no claims, offsets or defenses with respect to the payment of sums
due under any Note or any other Loan Document.
2. Modification of Credit Agreement. The Credit Agreement is
hereby amended as follows:
-1-
<PAGE> 2
a. The Total Aggregate Commitment is hereby increased from
$150,000,000 to $200,000,000. In light of the foregoing,
in each place that "$150,000,000" appears in the Credit
Agreement (and in any other Loan Document), whether in
verbal or numeric form, "$200,000,000" is hereby inserted
in its place and stead (including on the face page of the
Credit Agreement, and in the definitions of "Loan
Proceeds," "Note," and "Total Aggregate Commitment" set
forth in Section 1.1 of the Credit Agreement).
b. The following additional amendments are hereby made to
Section 1.1 (the definitions section) of the Credit
Agreement:
i. The existing definition of "Commitment" is
hereby deleted in its entirety and is hereby
replaced with the following:
"Commitment" means, with respect to the Loans, the following percentage
obligations and aggregate dollar amounts as to each of the following
Banks:
<TABLE>
<CAPTION>
Percentage Aggregate Dollar
Bank Obligation Amount
---- ---------- ------
<S> <C> <C>
1. BofA 25.0 $50,000,000
2. U.S. Bank 17.5 $35,000,000
3. KeyBank 17.5 $35,000,000
4. Bank of Nova Scotia 17.5 $35,000,000
5. First Union Bank 12.5 $25,000,000
6. Sanwa Bank 10.0 $20,000,000
</TABLE>
As Banks are added to this Agreement, or withdraw from this Agreement,
and assignments are made by the Banks in accordance with Section 11.6
hereof, the amount of each Bank's Commitment shall change in accordance
with that Bank's Pro Rata Share of the Total Aggregate Commitments. The
Assignment and Acceptances executed by the Banks, and the records
maintained by the Agent, shall be presumptive evidence of each Bank's
Commitment, as each such Bank's Commitment may change from time to time
in accordance with the terms of this Agreement.
ii. The existing definition of "LIBOR Rate Spread"
is hereby deleted in its entirety and is hereby
replaced with the following:
"LIBOR Rate Spread" means the additional component of interest,
expressed as a percentage per annum, to be added to the LIBOR Rate in
determining the applicable rate of interest for LIBOR Borrowings. The
applicable LIBOR Rate Spread shall be based on
-2-
<PAGE> 3
the Company's current senior long term debt ratings (or lack thereof) as
published by Standard & Poors or Moody's Investor Services as determined
by the following pricing grid and the Leverage Ratio as set forth below:
S&P/Moody's Senior Debt Rating Applicable LIBOR Rate Spread
------------------------------ ----------------------------
BBB/Baa2 (or better) 1.00%
BBB-/Baa3 1.15%
Less than BBB-/Baa3 1.375% if Leverage (or not
rated) Ratio is .30 to
1.0 or greater; and
1.25% if Leverage
Ratio is less than .30
to 1.0.
In the event of a difference in rating between Standard & Poors
and Moody's Investor Services, the lower rating shall prevail for purposes of
determining the applicable LIBOR Rate Spread. For purposes of determining the
LIBOR Rate Spread, the Leverage Ratio shall be tested quarterly as of the last
day of the last month of each calendar quarter. If the Leverage Ratio is
significant in determining the applicable LIBOR Rate Spread in accordance with
the foregoing provisions of this definition (i.e., the senior debt rating is
less than BBB-/Baa3, or not rated), any change in the applicable LIBOR Rate
Spread following a change in the Leverage Ratio which would cause a change in
the applicable LIBOR Rate Spread in accordance with the foregoing provisions,
shall be effective on the first day of the third month of each calendar quarter.
For example, if the Leverage Ratio tested as of September 30, 1998 was .35 to 1,
and changed to .28 to 1 as of December 31, 1998, the lower applicable LIBOR Rate
Spread would become effective as of March 1, 1999.
iii. In each place in the definition of "Treasury
Rate" that "10 year" appears "7 year" is hereby
inserted in its place and stead.
c. The following new definitions are hereby added to
Section 1.1. of the Credit Agreement in their proper
alphabetical order:
i. "Total Unsecured Debt Service" means, for each
period of four consecutive calendar quarters, the
Actual Debt Service for such period that is
attributable to Unsecured Indebtedness.
ii. "Unencumbered Assets NOI" means, for each
period of four consecutive calendar quarters, the
aggregate Net Operating Income for such period from
all Unencumbered Assets of the Company. In
calculating Unencumbered Assets NOI, if, with
respect to Unencumbered Assets owned by the Company
less than one quarter, the Company cannot present
operating statements
-3-
<PAGE> 4
satisfactory to the Agent which would allow the
Agent to calculate an annualized Net Operating
Income for such Assets (as contemplated within the
definition of Net Operating Income set forth in
Section 1.1 hereof), the Agent shall calculate an
annualized Net Operating Income for such Assets
based on the Company's "proforma" reports submitted
to Agent, and such additional information and
documentation as the Agent shall require, subject
to such adjustments as the Agent deems appropriate
in its sole discretion to accurately reflect actual
annual operating results for the period.
iii. "Unsecured Indebtedness" means all
Indebtedness that is not secured by real property.
d. Section 3.1(e) of the Credit Agreement is hereby
amended by replacing the word "five (5)" which appears
therein with the word "seven (7)".
e. Section 3.5(b)(i) of the Credit Agreement is hereby
amended by replacing the words "assuming interest at a per
annum rate equal to the greater of (1) 2.5% per annum plus
the Treasury Rate, or (2) 9%" which appears therein, with
the words "assuming interest at a per annum rate equal to
the greater of (1) 2% per annum plus the Treasury Rate or
(2) 8.5%".
f. Section 8.2 of the Credit Agreement is hereby amended
in its entirety to provide as follows:
"8.2 Debt Service Coverage Ratio. The Company shall
not permit, for any calendar quarter, the ratio of
(a) Adjusted EBITDA to (b) Actual Debt Service to
be less than 2.0 to 1.0.
g. By way of clarification, each of the covenants set
forth in Sections 8.1 through 8.5, inclusive, of the
Credit Agreement, shall be tested quarterly as of the end
of each calendar quarter.
h. A new Section 8.33 is hereby added to the Credit
Agreement which shall provide as follows:
"8.33 Unencumbered Assets NOI to Total Unsecured
Debt Service. The Company shall not, at any time,
permit the ratio of Unencumbered Assets NOI to
Total Unsecured Debt Service to be less than 2.0 to
1.0. This covenant shall be tested quarterly as of
-4-
<PAGE> 5
the last day of each calendar quarter, for each
period consisting of four consecutive calendar
quarters (i.e., it shall be tested on a rolling
four calendar quarter basis as of the last day of
each such quarter)."
i. A new Section 7.18 is hereby added to the Credit
Agreement which shall provide as follows:
"7.18 Year 2000 Compliance. The Company has
conducted a comprehensive review and assessment of
the Company's computer applications with respect to
the "year 2000 problem" (that is, the risk that
computer applications may not be able to properly
perform date-sensitive functions after December 31,
1999) and, based on that review and inquiry, the
Company does not believe the year 2000 problem will
result in a material adverse change in the
Company's business conditions (financial or
otherwise), operations, properties or prospects, or
ability to repay the credit."
3. Modification of Notes. The following Notes are hereby modified
as follows:
a. The Note in favor of BofA is hereby amended by
replacing "$35,000,000" (whether in verbal or numeric
form) wherever it appears in the Note with "$50,000,000"
(to reflect the increased Commitment of BofA).
b. The Note in favor of U.S. Bank is hereby amended by
replacing "$25,000,000" (whether in verbal or numeric
form) wherever it appears in the Note with "$35,000,000"
(to reflect the increased Commitment of U.S. Bank).
c. The Note in favor of KeyBank is hereby amended by
replacing "$25,000,000" (whether in verbal or numeric
form) wherever it appears in the Note with "$35,000,000"
(to reflect the increased Commitment of KeyBank).
d. The Note in favor of Bank of Nova Scotia is hereby
amended by replacing "$25,000,000" (whether in verbal or
numeric form) wherever it appears in the Note with
"$35,000,000" (to reflect the increased Commitment of Bank
of Nova Scotia).
e. The Note in favor of First Union Bank (as successor to
Signet Bank) is hereby amended by replacing "$20,000,000"
(whether in verbal
-5-
<PAGE> 6
or numeric form) wherever it appears in the Note with
"$25,000,000" (to reflect the increased Commitment of
First Union Bank).
f. The Note in favor of Sanwa Bank shall remain unmodified
(because Sanwa Bank has not increased its Commitment).
4. Continuing Effectiveness of Loan Documents. Except as
specifically provided in paragraphs 2 and 3 above of this Agreement, the Loan
Documents shall remain unmodified and in full force and effect.
5. Additional Fees. In addition to the fees payable by the
Company under the Credit Agreement and the Fee Letter Agreement described
therein, the Company shall pay to BofA certain commitment fees and other fees
and compensation (collectively, the "Additional Fees")as consideration for
BofA's arranging the increase in the Total Aggregate Commitment described in
this Agreement, and for other consideration, as more fully set forth in the side
letter agreement dated as of the same date as this Agreement between BofA and
the Company (the "Additional Fees Letter Agreement"). The Company covenants and
agrees to pay such Additional Fees at the times and in the manner set forth in
the Additional Fees Letter Agreement. The Additional Fees shall belong solely to
BofA, and BofA shall not be required to share any such Additional Fees or other
compensation specified in the Additional Fees Letter Agreement with any of the
other Banks.
6. Conditions Precedent. Agent may condition the effectiveness of
this Agreement and each Bank's obligations hereunder on all of the following
conditions having been satisfied in a manner acceptable to Agent in the exercise
of Agent's sole judgment (any of which may be waived in writing by Agent in its
sole discretion):
a. Agent shall have received fully executed originals of
this Agreement, the Additional Fees Letter, Resolutions of
the Company authorizing this Agreement and the
modifications specified herein, and any other documents
which Agent may require or request in accordance with this
Agreement or the other Loan Documents.
b. BofA shall have received any Additional Fees then due
and payable to BofA under the Additional Fees Letter
Agreement.
c. The Company shall have provided to the Agent such
additional documents and information as Agent shall
reasonably request.
7. Company's Representations and Warranties. The Company
represents and warrants to the Agent and the Banks as follows:
a. All representations and warranties made and given by
the Company in the Loan Documents are and remain true,
accurate and correct.
-6-
<PAGE> 7
b. No Event of Default, or event that with the giving of
notice and/or the passage of time would constitute an
Event of Default, has occurred and is continuing.
c. The Company is a corporation which is duly organized
and validly existing under the laws of the State of
Maryland. There have been no changes in the organization
or formation documents of the Company since the date the
Credit Agreement was first entered into.
8. Incorporation. This Agreement shall form a part of each Loan
Document, and all references to a given Loan Document shall mean that document
as hereby modified. This Agreement shall be deemed to be a Loan Document for all
purposes (including without limitation for purposes of declaring an Event of
Default should any covenant or agreement set forth herein to be performed by the
Company not be performed as agreed).
9. No Prejudice; Reservation Rights. This Agreement shall not
prejudice any rights or remedies of the Agent or the Banks under the Loan
Documents.
10. Integration. The Loan Documents, including this Agreement:
(a) integrate all the terms and conditions mentioned in or incidental to the
Loan Documents; (b) supersede all oral negotiations and prior and other writings
with respect to their subject matter; and (c) are intended by the parties as the
final expression of the agreement with respect to the terms and conditions set
forth in those documents and as the complete and exclusive statement of the
terms agreed to by the parties. If there is any conflict between the terms,
conditions and provisions of this Agreement and those of any other agreement or
instrument, including any of the other Loan Documents, the terms, conditions and
provisions of this Agreement shall prevail.
11. Miscellaneous. This Agreement and any attached consents or
exhibits requiring signatures may be executed in counterparts, and all
counterparts shall constitute but one and the same document. If any court of
competent jurisdiction determines any provision of this Agreement or any of the
other Loan Documents to be invalid, illegal or unenforceable, that portion shall
be deemed severed from the rest, which shall remain in full force and effect as
thought the invalid, illegal or unenforceable portion had never been a part of
the Loan Documents. This Agreement shall be government by the laws of the State
of California, without regard to the choice of law rules of that State. As used
herein, the word "include(s)" means "include(s), without limitation," and the
word "including" means "including, but not limited to."
-7-
<PAGE> 8
Dated: March 19, 1998
THE COMPANY:
------------
PAN PACIFIC RETAIL PROPERTIES, INC., A MARYLAND
CORPORATION
By: /s/ STUART A. TANZ
-------------------------------------------
Stuart A. Tanz, Director Chairman, Chief
Executive Officer and President
By: /s/ DAVID L. ADLARD
-------------------------------------------
David L. Adlard, Executive Vice President
and Chief Financial Officer
Address for notices:
Pan Pacific Retail Properties, Inc.
1631-B South Melrose Drive
Vista, California 92083
Attention: Mr. Stuart Tanz
Telephone: (760) 727-1002
Telecopier: (760) 727-1430
-8-
<PAGE> 9
THE BANKS:
----------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, A NATIONAL BANKING ASSOCIATION
By: /s/ THOMAS C. FARRELL
-------------------------------------------
Thomas C. Farrell, Vice President
Address for Notices:
Bank of America National
Trust and Savings Association
450 B Street, Suite 680
San Diego, California 92101
Attention: Mr. Ron Montoro
Telephone: (619) 515-5913
Telecopier: (619) 515-5917
LIBOR Lending Office:
---------------------
Bank of America National
Trust and Savings Association
5 Park Plaza, Suite 500
Irvine, California 92614-8525
Attention: Ms. Kathryn Oliver
Telephone: (714) 260-5864
Telecopier: (714) 260-5637
-9-
<PAGE> 10
U.S. BANK NATIONAL ASSOCIATION,
(FKA: FIRST BANK NATIONAL ASSOCIATION)
By: /s/ PETER M. BROCKELMAN
-------------------------------------------
Peter M. Brockelman,
Assistant Vice President
Address for Notices:
U.S. Bank National Association,
(FKA: First Bank National Association)
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Peter M. Brockelman
Telephone: (612) 973-1158
Telecopier: (612) 973-0830
LIBOR Lending Office:
---------------------
U.S. Bank National Association,
(FKA: First Bank National Association)
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Greg Fiedorow
Telephone: (612) 973-1158
Telecopier: (612) 973-0830
-10-
<PAGE> 11
KEYBANK NATIONAL ASSOCIATION
By: /s/ LAIRD FAIRCHILD
-------------------------------------------
Laird Fairchild, Vice President
Address for Notices:
KeyBank National Association
127 Public Square
OH-01-27-0603
Cleveland, Ohio 44114
Attention: Laird Fairchild
Telephone: (216) 689-4998
Telecopier: (216) 689-4997
LIBOR Lending Office:
---------------------
KeyBank National Association
127 Public Square
OH-01-27-0603
Cleveland, Ohio 44114
Attention: Julie Lewis
Telephone: (216) 689-0219
Telecopier: (216) 689-3566
-11-
<PAGE> 12
THE BANK OF NOVA SCOTIA
By: /s/ BRUCE GANONG
-------------------------------------------
Bruce Ganong, Relationship Manager
Address for Notices:
The Bank of Nova Scotia
580 California Street, 21st Floor
San Francisco, California 94119
Attention: Bruce Ganong
Telephone: (415) 986-1100
Telecopier: (415) 397-0791
LIBOR Lending Office:
---------------------
The Bank of Nova Scotia
600 Peachtree Street N.E., Suite 2700
Atlanta, Georgia 30308
Attention: Marianne Veiker
Telephone: (404) 877-1525
Telecopier: (404) 888-8998
-12-
<PAGE> 13
FIRST UNION NATIONAL BANK (AS SUCCESSOR TO
SIGNET BANK)
By: /s/ JOHN SCHISSEL
-------------------------------------------
John Schissel, Relationship Manager
Address for Notices:
First Union National Bank
One First Union Center, NC 0166
Charlotte, North Carolina 28288
Attention: John Schissel,
Relationship Manager
Telephone: ( )
---------------------------------
Telecopier: (704) 383-7989
LIBOR Lending Office:
---------------------
First Union National Bank
-----------------------------------------------
-----------------------------------------------
Attention:
-----------------------------------
Telephone: ( )
-----------------------------------
Telecopier: ( )
-----------------------------------
-13-
<PAGE> 14
SANWA BANK CALIFORNIA, A CALIFORNIA CORPORATION
By: /s/ MICHAEL P. WHITE
-------------------------------------------
Michael P. White, Vice President
Address for Notices:
Sanwa Bank California
4041 MacArthur Boulevard, Suite 100
Newport Beach, California 92660
Attention: Michael P. White
Telephone: (714) 622-6020
Telecopier: (714) 852-1510
LIBOR Lending Office:
---------------------
Sanwa Bank California
4041 MacArthur Boulevard, Suite 100
Newport Beach, California 92660
Attention: Betty Myers
Telephone: (714) 622-6020
Telecopier: (714) 852-1510
-14-
<PAGE> 15
THE AGENT:
----------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, A NATIONAL BANKING ASSOCIATION,
AS AGENT
By: /s/ THOMAS C. FARRELL
-------------------------------------------
Thomas C. Farrell, Vice President
Address for Notices:
(Agent's Payment Office)
Bank of America National
Trust and Savings Association
5 Park Plaza, Suite 500
Irvine, California 92614-8525
Attention: Ms. Kathryn Oliver
Telephone: (714) 260-5864
Telecopier: (714) 260-5644
-15-
<PAGE> 1
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 Consolidated Financial Data,"
"Selected Consolidated Financial Data" and "Experts" in the prospectus. The
reports on the statements of revenue and certain expenses for The Oregon
Portfolio and San Dimas Marketplace each contain a paragraph indicating 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 The Oregon
Portfolio's and San Dimas Marketplace's revenue and expenses.
/s/ KPMG Peat Marwick LLP
San Diego, California
April 14, 1998
